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Concrete Market-Based Evidence That the US' AAA-Debt Rating is Unraveling
By Rocky Vega
10/14/10 Stockholm, Sweden – Traders in the credit default swaps market are no longer showing the same faith in the USA that major credit rating agencies show. This past quarter, the price paid to insure against a US sovereign debt default recently jumped up nearly 30 percent. That spike in cost made the US the third worst performing nation in the derivatives market, after only Ireland and Portugal. Not exactly good company to be in.
According to Fortune:
"The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm [CMA] said.
"That puts the United States' third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.
"What's more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory.
"Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody's. But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam [...] The rising price of insuring against a default on U.S. government debt is of a piece with these moves and suggests the full tab for the profligacy of the past decade has yet to be presented."
On the other hand, the article goes on to highlight that the absolute cost of insuring US debt is still much lower than Ireland, a tenth of that price, and Portugal, an eighth. So, the run up in percent increase isn't the entire story. Yet, the trend line still looks ugly. Ireland and Portugal are at least implementing austerity measures, while the US, on the other end of the spectrum, is on the verge of quantitative easing round two. It's hard to say how long Moody's and S&P can ignore the reality of the situation… they'll have to consider what the CDS market is saying — that the US currently has an "implied rating of double-A-plus" — during their next rounds of debt rating deliberation.
You can more details in Fortune's coverage of how the debt market has stripped the US of its triple-A rating.
Best,
Rocky Vega,
The Daily Reckoning
http://dailyreckoning.com/concrete-market-based-evidence-that-the-us-aaa-debt-rating-is-unraveling/
Global Currency Meltdown
by: John Browne October 15, 2010
As the recession and resultant stimulus packages add to higher unemployment and increasing public-sector deficits, the government is seeking to boost the value of overseas earnings that are accrued by US corporations. To aid in this effort, the Fed is being pressured to erode the value of the US dollar, thereby making foreign sales more lucrative in nominal terms. But this form of stealth protectionism will fail just as surely as more overt trade barriers.
Like all commodities, the relative value of currencies is influenced by reward, risk, and future expectations.
The interest rate earned by holding a particular currency represents the 'reward' end of the equation. Assuming similar risk profiles, money tends to flow towards the currencies with higher interest rates.
Relative risk is in the eye of the beholder and often is difficult to quantify. In the main, investors view a nation's balance of payments deficit as a major risk factor in evaluating the relative value of its currency.
Another long-term measure of risk is government debt as a percentage of Gross Domestic Product (GDP). If a large national trade deficit is accompanied by a relatively large debt-to-GDP ratio, the level of risk is increased.
Given the current state of the global economy, it should be clear to all that the US dollar is being priced higher than is warranted and the Chinese yuan is priced lower.
For over a decade, China has exported into an American market that was open and receptive to cheap products. In response to the demand for these new products, the Chinese yuan should have risen sharply against the US dollar to balance the massive Chinese trade surpluses.
However, the Chinese have pegged the yuan to the dollar, preventing a natural rebalancing of the two currencies from taking place. Not only has this generated a politically dangerous and economically unsound trade imbalance, but it has made the dollar appear stronger than it should, given the frail state of the American economy.
Left alone, internal pressures and common sense would have driven the Chinese government to eliminate the peg. To understand why, consider this: even if China didn't accept one more dollar, any attempt to spend its massive reserves would cause the dollar to drop like a stone. How long should we expect them to keep digging themselves into this hole?
Unfortunately and quite predictably, Washington isn't allowing the market to naturally correct. Instead, the Fed is attempting to devalue the currency by the printing press. Now we can expect not only the deluge of foreign exchange reserves to flood our economy, but also additional dollar tsunamis emanating from our own central bank. This makes a tragic situation worse, and risks instigating a full-blown trade war between the world's largest consumer and its largest producer.
Meanwhile, other countries whose economies are heavily dependent on trade, such as Japan, Switzerland, and South Korea, are finding their exports hit hard by the simultaneous devaluations of the US dollar and the Chinese yuan.
On October 2nd, the Financial Times (FT) headline was: "France Pushes for Currency Accord". It was reported that even China was supportive of the French initiative. Then, on October 5th, the FT headline was: "Call for Global Currencies Agreement". This time the call was from a group of some 420 of the world's leading bankers. Finally, on October 6th, the FT headline was: "IMF Chief Warns on Exchange Rate Wars". Clearly, certain government leaders and bankers are aware of the risks of competitive currency devaluations. The question is whether parliamentary politicians will support currency stability in the face of increasing recession. The two most influential central banks - the Fed and People's Bank of China - certainly aren't setting a good example for the rest.
Only when currencies are allowed to float freely will trade imbalances be corrected. Washington's attempt to force the issue is only doing harm to the world economy by introducing uncertainty and punishing the prudent. The Fed has gone radioactive, setting off a global currency meltdown. Perhaps only gold can truly shield investors from the fallout.
http://seekingalpha.com/article/230180-global-currency-meltdown?source=email
US Debt on the Shoulders of 90 Million People
By The Mogambo Guru
10/13/10 Tampa, Florida – Now that the federal government's fiscal year ended on September 30 and they had to "square up" their accounting, we find some very interesting things, if you will forgive the use of the phrase "very interesting" when I should have used the more descriptive Poop In Your Pants Scary (PIYPS).
One of these PIYPS things is that the one-year increase in the national debt, thanks to the unbelievable fiscal insanity of the deficit-spending Obama administration and the corrupt and moronic Congress, which is not to mention the monstrous monetary insanity of the loathsome Federal Reserve creating so much new money for them to borrow that inflation in prices will destroy us all. It is now revealed that in FY 2010, the national debt rose $1.72 trillion! In one year!
The government, of course, only counts $1.3 trillion of this as "deficit spending," but nevertheless, $420 billion more debt somehow appeared from somewhere to equal the $1.72 trillion increase in the national debt in one year.
The sheer staggering size of this incredibly enormous $1.72 trillion in borrowed money spent by the federal government is more than all the $1.3 trillion the government collected in personal and corporate taxes!
And remember that this $1.72 trillion is just the deficit-spending, and we are not even including the gigantic $3.5 trillion federal budget for 2010! Gaaaahhhh! We're Freaking Doomed (WFD)!
If you are thinking that we are NOT doomed by astonishing long-term Congressional fiscal irresponsibility and Federal Reserve monetary treachery, then perhaps you will change your mind if I came over there, hauled you up out of that seat and slapped your face repeatedly until you got some smarts, which usually happens to most people pretty fast, usually about the time I reach out and grab them by the throat so that I can keep their heads from moving around while I am administering a therapeutic dose of Mister Slappy.
There are, of course, a lot of logistical problems associated with my kind, generous Mr. Slappy offer, not the least of which is that, after awhile, my hands would get really sore from the slap, slap, slapping. Ow!
This is why I am going to try to achieve the same "get smart" effect by using my new Mogambo Pedantic Method (MPM) of using real, "it's going to happen to you" horror to terrorize and shock you into a huge fight-or-flight response, flooding your system with enough adrenaline and other save-your-butt biological hormones and doodads to make your central nervous system more receptive to threatening stimuli.
What threatening stimuli? Well, just the federal budget deficit – alone! – means that each, each, EACH of the 90 million American private-sector workers in the Whole Freaking Country (WFC) must produce enough profit by their labors (as they are the only workers who can actually make a profit from their labors) to pay down another $18,889 in federal debt accumulated over the last year!
And this crushing new debt burden comes on top of these sad, selfsame, sorry 90 million private-economy workers making enough to pay the painful principal-and-interest payments to support their $150,000 share of the $13.5 trillion national debt already in existence!
And this staggering load of debt is, with only some exaggeration, barely enough to even Scratch The Surface (STS) of all the debt that is owed, where $60 trillion is the total of all private debts on top of the national debt, and (staggeringly) all of it relying totally on these same few 90 million people being so immensely productive and profitable that everyone, literally, benefits.
The kicker is that they are supposed to do this on an average household income of $54,000 a year! Hahahaha!
If you are, like me, already raging from an overload of adrenaline in your system generated by the sheer, mortal horror of all of this, then leave it to the Mighty, Mighty Mogambo (MMM) to administer a sedative that will make you smile: Buy gold, silver and oil!
With them you will protect yourself from the federal government's apparent plan to destroy you by turning the dollar into worthless crap, and it's so easy to do that you, too, will rejoice as do I, shouting loud huzzahs to the beautiful, blue sky, specifically, "Whee! This investing stuff is easy!"
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/us-debt-on-the-shoulders-of-90-million-people/
Will the US Economy Ever Again See Full Employment?
By Bill Bonner
10/12/10 Buenos Aires, Argentina – How are things on the pampas?
Tolerably fair, it appears…
We just got here. Too soon to rush to judgment. From what we can tell, though, the poor Argentines seem to be shooting themselves in the foot…and the leg…and everywhere else. They're going to be taking out buckshot for years…
It should be a great time for the pampas. They have some of the richest, flattest, best-watered farmland in the world. Farm prices are high. Other prices are fairly low.
But leave it to the politicians to mess things up. Argentine beef – which ought to be the country's most prized export – is losing market share, especially to the Uruguayans. How come? Because the Argentines taxed beef exports in order to keep prices low at home. You see, the gauchos can manage an economy too!
What was the result? Farmers switched from raising cattle to raising soybeans. And wouldn't you know it, then, they had a disastrous drought.
More on that story as we find out more…
In the meantime, let's look at the hottest market in the world – the gold market.
Gold is so hot it's hard to believe it won't melt down. Watch out.
And remember, the bull market in gold is a distraction. The big story now is still the Great Correction. It's here. It continues. And it will take years to sort out.
Consumer credit went down $3.3 billion in August – the 7th month in a row of decline. Just what you'd expect in a correction.
If this is not a Great Correction, it's doing a good impression of one.
The New York Times:
In the one-two punch long feared by many economists, hiring by businesses has slowed while government jobs are disappearing at a record pace.
Companies added just 64,000 jobs last month, a slowdown from 93,000 jobs in August and 117,000 in July, the Labor Department reported Friday. But over all, the economy lost 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs at all levels. Local governments in particular cut workers at the fastest rate in almost 30 years.
"We need to wake up to the fact that the end of the stimulus has really hit hard on local governments," said Andrew Stettner, deputy director of the National Employment Law Project. "There is much more of a slide in the job market than what we really need to clearly turn around."
With the waning of the $787 billion Recovery Act passed in 2009 and credited with increasing employment by millions of jobs, finding new policies potent enough to speed up the recovery has proved difficult.
Meanwhile, Investors' Business Daily has more bad news. At the present rate it will take another 10 years to get those jobs back:
The US economy lost 95,000 jobs in September, far worse than expectations for no change in employment. More Census-related temp jobs ended, as expected, but state and local governments slashed staff far more than predicted.
So far in 2010, the US has added just 613,000 jobs – for a monthly average of 68,111.
Employment bottomed in December 2009 at 129.588 million – two years after peaking at 137.951 million. At this year's pace, the US won't recoup all those 8.36 million lost jobs until March 2020 – 147 months after the December 2007 high.
That would obliterate the old post-World War II record of 47 months set in the wake of the 2001 recession.
The current jobs slump also is the deepest of any in the post-war era, with payrolls down as much as 6.1%. They are still 5.6% below their December 2007 level.
With state and local governments likely to shed workers for at least the next year or two as budget woes continue, the hiring burden will fall entirely on the private sector.
Private employers did add 64,000 workers last month, but that was a little less than consensus forecasts and far below what's needed.
The US needs to create 125,000-150,000 jobs each month just to absorb new workers and prevent unemployment from rising. So returning to the old peak employment a decade later would hardly suggest a healthy labor market.
It is worth pausing a minute to think about that last paragraph. It's not enough just to get back the 8.36 million jobs that were lost in the crisis. The US also needs to create about 15 million MORE jobs over the next 10 years in order to stay even with population growth and return to full employment. That's about 23 million all together.
Well, guess how many jobs were created during the last 4 months. None. Instead, the economy LOST nearly 400,000 jobs. So you could say that at the present rate, Hell will freeze before we recover those 8.36 million jobs…and it be even longer before the economy is back at full employment.
Does that sound like a correction to you? It does to us.
What happens to people in a correction? They get poorer. And here's the evidence… For the first time in 70 years, New York residents are earning less money than they did the year before. This report from Reuters:
The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released Tuesday. Paychecks or net earnings tumbled 5.4 percent, while dividends, interest and rent slid 8.4 percent, to a grand total of nearly $908 billion, the state comptroller's report said.
Not only did New Yorkers' personal incomes fall "almost twice" as much as they did in the nation as a whole, but they have yet to recover to pre-recession levels, Comptroller Thomas DiNapoli said.
The drop occurred even though the job-destroying recession was milder in New York than in the rest of the country.
One reason for the hit to New Yorker's pocketbooks is Wall Street's dominance among the state's employers; pay and job security are often highly volatile in the securities industry.
Regards,
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/will-the-us-economy-ever-again-see-full-employment/
Wasn't BW supposed to be back by now? eom
BD,
This is why I think this will not matter in the end.
Just replace "too big to fail" with "too big to arrest."
Such great lessons and legacy we're leaving our children.
- fuge
How Important Are Wages in Today's Economy?
by: Sudden Debt October 10, 2010
Economists are forever trying to come up with theories to explain unemployment and wages. It is always a "hot" topic and the Bureau of Labor Statistics' (BLS) monthly release on the employment situation is arguably the statistic which can - and does - move markets most.
I won't go into the various economic theories on how wages, unemployment and inflation all come together to shape (or "clear"), the labor market. I have a more fundamental question, instead: How important are wages in today's economy, overall?
The following chart shows that wages and salaries as a percentage of GDP have been dropping steadily for 40 years, from a high of 54% of GDP in 1970 to a low of 43.5% this year. Simply put, working people are getting a smaller slice of the economic pie.
click to enlarge
You Can't Eat The Pie You Don't Have
Including other forms of compensation like pension and medical benefits does not alter the picture appreciably: Total compensation of employees went from 60% of GDP in 1970 to 54% this year.
This is as major of a transformation of the economy as it gets, but it is almost never discussed by academic economists who are forever trying to figure out how to model unemployment, or interest rates, or whatever econometric datum strikes their fancy. It's like pondering the price of candle oil while Rome burns. And they get Nobel prizes for it, too!
(Little known fact about the Nobel Prize for economics: It was not part of Alfred Nobel's will in 1895. It was instituted and funded much later, in 1969, by Sweden's central bank; it is formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Considering its provenance in the depths of Money Central, there's no way a more "radical" economist is going to ever get one of those.)
Anyway, what's going on with the people's slice of the pie?
http://seekingalpha.com/article/229261-how-important-are-wages-in-today-s-economy?source=email
GS does not predict rate hikes, they are informed of them months in advance...eom
October 2010: I've Got a Bad Feeling About This
by: Charles Smith October 08, 2010
As the Star Wars guys always said just before the bottom dropped out: "I've got a bad feeling about this..."
Take one part schizophrenia and another part propaganda, mix well, and you get a nasty little cocktail called "October 2010." For a bit of absurdist, schizophrenia-tinted humor, consider these two stories in the Wall Street Journal of October 7, 2010:
Middle Class Slams Brakes on Spending
Retailers' Solid September Sales Raise Holiday Hopes
Uh, right. Which one is it, because you can't have both a middle class slamming on the brakes of discretionary spending AND have a Holiday season of blow-out retail sales.
The propaganda about the "recovery" has gone beyond the merely unbelievable and the surreal all the way to psychosis.
Frequent contributor U. Doran forwarded this analysis of Fed Chairman Ben Bernanke's recent speech in which he outlined the fiscal train wreck just ahead--never mentioning his own part in loosening all those rails so the train will have no choice but to derail.
Is this merely surreal, or is it yet more evidence that the Chairman's propaganda is veering into a state of disassociation akin to late-stage mental disorders?
The truly pernicious aspect of this crazy-making propaganda-schizophrenia cocktail is that it is masked by the econo-speak of Bernanke and the other shills. If Bernanke mentioned that the delightfully helpful inhabitants of Planet X were coming to save the economy with a spaceship full of quatloos, then we would understand the tragedy of his situation and the unfortunate schizophrenia which arises when basically decent people must do the bidding of an Evil System and its global Empire.
As correspondent David D. (M.D.) recently noted in an email to me, "this is now the norm: decent people in a most indecent system."
The whole "recovery" facade is falling apart, and the market knows it. Take a look at this chart of the Dow Jones Industrial Average, and imagine large ravenous rats fleeing a sinking ship while media shills are cajoling retail investors to jump on board while the tickets are still cheap: (Click to enlarge)
Look at the anemic volume. Who's buying to hold longer than a few minutes or perhaps days? Nobody. Insiders are selling at an unprecendented ratio of a gazillion-to-one (slight imprecision in the data) of shares sold versus shares bought.
The scurrying of little desperate feet is becoming louder. The powers that be had to pummel the U.S. dollar mercilessly for the past two weeks to keep the equity rally going, and now they're encountering push-back on multiple fronts.
Every propaganda and manipulative tool has been pushed to the limit. All the levers have been pulled and the wheels are all hard over; the engines are straining and the crew knows we're not going to miss the iceberg, but there is still a reservoir of magical thinking, a terribly misplaced hope that "it won't be too bad."
By pushing every button, yanking every lever and maxing out every propaganda ploy, the Power Elites managed to pump the DJIA up to the resistance offered by the 200-day moving average around 10,900. They'd hoped to blast through this barrier, just to show the doubters that the "recovery" was indeed "real," but unfortunately their glass slippers are turning to dust and their grand bejeweled carriage is taking on the unmistakable shape of a large pumpkin.
I've got a bad feeling about this market. I was pointing out the technical reasons to be long all summer, but those have vanished. Now there is the stink of fear in the air, the whiff of desperate men (and a very few women) trying futilely to maintain the illusion that "everything's normal now" and most absurdly, "this recovery is tracking previous recoveries." Yeah, if you turn the charts upside down so "down" becomes "up."
After revving the engines to the redline and devoting every shred of energy to ceaseless propaganda, all they managed was this sordid little rally back to key resistance. Claiming the "recovery" is "not bad" is like saying the rip below the Titanic's waterline is only 300 feet long--it could have been worse. True, but the end result is pretty much the same: this ship is going down and the rats sense it.
MACD has been declining since January, and the stochastic is overbought and looking ready to roll over. All the pumping, all the unprecedented QE and stimulus, all the goosing of profits and propaganda about forward Price-Earnings ratios proving that stocks are "cheap" (ignore the frantic rats and the list to starboard) have had this meager result: a wheezing little rally on declining volume.
I just have a feeling that something is going to trigger a decline so sharp and "unexpected" that the mainstream media shills will be gulping for "answers" when the reality has been staring them in the face all year: the recovery is nothing but manipulation and those who believed it were simply delusional.
Maybe they will manage a few more manipulated rallies (pump it up before the market opens and then lock it down, the old "ramp and camp" which has proven so resilient), but this is like the passengers being herded back inside to listen to the band while the ship lists deeper into the water. You can only jam a market with no volume for so long, and then the whole thing comes apart. We are close to that moment.
It is sad, really, how the propaganda-schizophrenia cocktail was designed to lure the retail investor back to equities; but that Mickey Finn failed to daze the wary "little guy," who has continued pulling billions of dollars out of equity funds and pouring hundreds of billions into Treasuries and other bonds.
The cliche is that the little guy is "always wrong" and thus equities are set to explode higher without them, but that line is wearing thin after months of listening to the cheerleaders hype the market while the ship sank lower in the water.
Keep your eye on the rats (insiders); they know what the bridge crew doesn't want you to know.
Disclosure: I am short the market via the QID. This is not advice, just a disclosure; please read the entire HUGE GIANT BIG FAT DISCLAIMER below.
HUGE GIANT BIG FAT DISCLAIMER: Nothing in this post should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).
http://seekingalpha.com/article/229170-october-2010-i-ve-got-a-bad-feeling-about-this?source=email
Gonzalo Lira On The Coming Middle-Class Anarchy
Submitted by Tyler Durden on 10/09/2010 09:17 -0500
Submitted by Gonzalo Lira
The Coming Middle-Class Anarchy
True story: A retired couple I know, Brian and Ilsa, own a home in the Southwest. It's a pretty house, right on the manicured golf course of their gated community (they're crazy about golf).
The only problem is, they bought the house near the top of the market in 2005, and now find themselves underwater.
They've never missed a mortgage payment—Brian and Ilsa are the kind upright, not to say uptight 60-ish white semi-upper-middle-class couple who follow every rule, fill out every form, comply with every norm. In short, they are the backbone of America.
Even after the Global Financial Crisis had seriously hurt their retirement nest egg—and therefore their monthly income—and even fully aware that they would probably not live to see their house regain the value it has lost since they bought it, they kept up the mortgage payments. The idea of them strategically defaulting is as absurd as them sprouting wings.
When HAMP—the Home Affordable Modification Program—was unveiled, they applied, because they qualified: Every single one of the conditions applied to them, so there was no question that they would be approved—at least in theory.
Applying for HAMP was quite a struggle: Go here, go there, talk to this person, that person, et cetera, et cetera, et cetera. "It's like they didn't want us to qualify," Ilsa told me, as she recounted their mind-numbing travails.
It was a months-long struggle—but finally, they were approved for HAMP: Their mortgage period was extended, and the interest rate was lowered. Even though their home was still underwater, and even though they still owed the same principal to their bank, Brian and Ilsa were very happy: Their mortgage payments had gone down by 40%. This was equivalent to about 15% of their retirement income. So of course they were happy.
However, three months later, out of the blue, they got a letter from their bank, Wells Fargo: It said that, after further review, Brian and Ilsa had in fact not qualified for HAMP. Therefore, their mortgage would go back to the old rate. Not only that, they now owed the difference for the three months when they had paid the lowered mortgage—and to add insult to injury, they were assessed a "penalty for non-payment".
Brian and Ilsa were furious—a fury which soon turned to dour depression: They tried contacting Wells Fargo, to straighten this out. Of course, they were given the run-around once again.
They kept insisting that they qualified—they qualified! But of course, that didn't help at all—like a football, they were punted around the inner working of the Mortgage Mess, with no answers and no accountability.
Finally, exhausted, Brian and Ilsa sat down, looked at the last letter—which had no signature, and no contact name or number—and wondered what to do.
On television, the news was talking about "robo-signatures" and "foreclosure mills", and rank illegalities—illegalities which it seemed everyone was getting away with. To top it off, foreclosures have been suspended by the largest of the banks for 90 days—which to Brian and Ilsa meant that people who weren't paying their mortgages got to live rent free for another quarter, while they were being squeezed out of a stimulus program that had been designed—tailor made—precisely for them.
Brian and Ilsa are salt-of-the-earth people: They put four kids through college, they always paid their taxes. The last time Brian broke the law was in 1998: An illegal U-turn on a suburban street.
"We've done everything right, we've always paid on time, and this program is supposed to help us," said Brian. "We follow the rules—but people who bought homes they couldn't afford get to squat in those McMansions rent free. It would have been smarter if we'd been crooks."
Now, up to this point, this is just another sob story of the Mortgage Mess—and as sob stories go, up to this point, it's no big deal.
But here's where the story gets ominous—here's where the Jaws soundtrack kicks in:
Brian and Ilsa—the nice upper-middle-class retired couple, who always follow the rules, and never ever break the law—who don't even cheat on their golf scores—even when they're playing alone ("Because if you cheat at golf, you're only cheating yourself")—have decided to give their bank the middle finger.
They have essentially said, Fuckit.
They haven't defaulted—not yet. They're paying the lower mortgage rate. That they're making payments is because of Brian: He is insisting that they pay something—Ilsa is of the opinion that they should forget about paying the mortgage at all.
"We follow the rules, and look where that's gotten us?" she says, furious and depressed. "Nowhere. They run us around, like lab rats in a cage. This HAMP business was supposed to help us. I bet the bank went along with the program for three months, so that they could tell the government that they had complied—and when the government got off their backs, they turned around and raised the mortgage back up again!"
"And charged us a penalty," Brian chimes in. The non-payment penalty was only $84—but it might as well been $84 million, for all the outrage they feel. "A penalty for non-payment!"
Nevertheless, Brian is insisting that they continue paying the mortgage—albeit the lower monthly payment—because he's still under the atavistic sway of his law-abiding-ness.
But Ilsa is quietly, constantly insisting that they stop paying the mortgage altogether: "Everybody else is doing it—so why shouldn't we?"
A terrible sentence, when a law-abiding citizen speaks it: Everybody else is doing it—so why don't we?
I'm like Wayne Gretsky: I don't concern myself with where the puck has been—I look for where the puck is going to be.
Right now, people are having a little hissy-fit over the robo-signing scandal, and the double-booking scandal (where the same mortgage was signed over to two different bonds), and the little fights between junior tranches and senior tranches and the servicer, in the MBS mess.
But none of that shit is important.
What's really important is Brian and Ilsa: What's really important is that law-abiding middle-class citizens are deciding that playing by the rules is nothing but a sucker's game.
Just like the poker player who's been fleeced by all the other players, and gets one mean attitude once he finally wakes up to the con? I'm betting that more and more of the solid American middle-class will begin saying what Brian and Ilsa said: Fuckit.
Fuck the rules. Fuck playing the game the banksters want you to play. Fuck being the good citizen. Fuck filling out every form, fuck paying every tax. Fuck the government, fuck the banks who own them. Fuck the free-loaders, living rent-free while we pay. Fuck the legal process, a game which only works if you've got the money to pay for the parasite lawyers. Fuck being a chump. Fuck being a stooge. Fuck trying to do the right thing—what good does that get you? What good is coming your way?
Fuckit.
When the backbone of a country starts thinking that laws and rules are not worth following, it's just a hop, skip and a jump to anarchy.
TV has given us the illusion that anarchy is people rioting in the streets, smashing car windows and looting every store in sight. But there's also the polite, quiet, far deadlier anarchy of the core citizenry—the upright citizenry—throwing in the towel and deciding it's just not worth it anymore.
If a big enough proportion of the populace—not even a majority, just a largish chunk—decides that it's just not worth following the rules anymore, then that society's days are numbered: Not even a police-state with an armed Marine at every corner with Shoot-to-Kill orders can stop such middle-class anarchy.
Brian and Ilsa are such anarchists—grey-haired, well-dressed, golf-loving, well-to-do, exceedingly polite anarchists: But anarchists nevertheless. They are not important, or powerful, or influential: They are average—that's why they're so deadly: Their numbers are millions. And they are slowly, painfully coming to the conclusion that it's just not worth it anymore.
Once enough of these J. Crew Anarchists decide they no longer give a fuck, it's over for America—because they are America.
Update I:
The Center for Public Integrity has a story, written by Michael Hudson this past August 6, that shines a light on the issue of perverse incentives of the HAMP program. These perverse incentives came to light because of a whistleblower, a former employee of Fannie Mae, filing a lawsuit. Fannie Mae was so keen on being perceived as a money-maker, after the Federal government bailout, that the aid programs passed by the Congress and signed by the President were turned into profit centers.
The former executive, Caroline Herron, recounts:
"It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs – even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs," she claims in the lawsuit.
Herron alleges that Fannie Mae officials terminated her $200-an-hour consulting work in January because she raised questions about how it was administering the federal government's push to help homeowners avoid foreclosure, known as the Home Affordable Modification Program, or HAMP.
Herron further alleged that "trial mods" were implemented regardless of eligibility of applicants, so that Fannie Mae would be eligible for Federal government bonuses.
Ms. Herron's testimony in fact proves Ilsa's suspicion that there was a scam at bottom. As Mr. Hudson writes, "Herron charges that Fannie Mae continued in headlong pursuit of `trial mods' even though it knew that many had little chance of becoming permanent. [. . .] Fannie preferred doing trials, Herron alleges, because it was eligible to receive incentive payments from the Treasury Department."
So in the pursuit of these perverse incentives, people who did not qualify for HAMP were enrolled in the program. And when their "trial mods" were up after 90 days, they would be notified that they didn't qualify—regardless of whether they in fact did qualify, as in the case of Brian and Ilsa.
All so as to be perceived as a profitable operation, worth having been bailed out. All so as to be perceived as "returning America's money".
As of February, 2010, of the over one million homeowners' mortgages under HAMP auspices, 83% were "trial mods". One would assume that those 850,000 homeowners would also be assessed an $84 penalty for non-payment.
$84 times over 850,000? You do the math.
http://www.zerohedge.com/article/guest-post-coming-middle-class-anarchy
Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks
by CalculatedRisk on 10/08/2010 09:50:00 AM
Here are a few more graphs based on the employment report ...
Percent Job Losses During Recessions, aligned at Bottom
Click on graph for larger image.
This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the bottom of the recession (Both the 1991 and 2001 recessions were flat at the bottom, so the choice was a little arbitrary).
The dotted line shows the impact of Census hiring. As of the end of September, there were only 6,000 temporary 2010 Census workers still on the payroll. So the gap between the solid and dashed red lines is almost completely gone.
Part Time for Economic Reasons
From the BLS report:
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose by 612,000 over the month to 9.5 million. Over the past 2 months, the number of such workers has increased by 943,000. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) was at 9.472 million in September, up sharply from August.
This is a new record high, and is obviously bad news.
These workers are included in the alternate measure of labor underutilization (U-6) that increased to 17.1% in September from 16.7% in August. The high for U-6 was 17.4% in October 2009. Grim.
Employment-Population Ratio
The Employment-Population ratio was steady at 58.5% in September (the same as in August).
This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.
Note: the graph doesn't start at zero to better show the change.
The Labor Force Participation Rate was also steady at 64.7% in September. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.
When the employment picture eventually improves, people will return to the labor force and the participation rate will increase from these very low levels. And that will put upward pressure on the unemployment rate.
Unemployed over 26 Weeks
The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.
According to the BLS, there are 6.123 million workers who have been unemployed for more than 26 weeks and still want a job. This is 4.0% of the civilian workforce. It appears the number of long term unemployed has peaked ... Although this may be because people are giving up.
The number of long term unemployed is staggering - still over 6 million people who are looking for a job.
Summary
The underlying details of the employment report were grim. The number of private sector jobs increased modestly by 64,000, otherwise ...
The negatives include the loss of 18,000 jobs ex-Census, the sharp increase in part time workers for economic reasons (and jump in U-6 unemployment rate), hours worked were flat (down for manufacturing workers), the employment-population ratio and labor force participation were flat at very low levels, and the unemployment rate was flat at a very high level.
Overall this was a weak report.
http://www.calculatedriskblog.com/2010/10/employment-population-ratio-part-time.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29&utm_content=My+Yahoo
Thursday: Through the Roof or Smashed into a Thousand Pieces?
Through the Roof or Smashed into a Thousand Pieces?
By Phil at Phil's Stock World
GRANDPA JOE: But this roof is made of glass. It’ll shatter into a thousand pieces. We’ll be cut to ribbons!
WILLY WONKA: Probably.
Is today going to be the day? After pressing against our breakout levels all week, today do we should finally have the gas to get over the top or will our 7.5% levels keep acting like a solid barrier? Oddly enough, I was asking the same question (with the same title post) on August 5th, when we were trying to break out over our 5% lines of Dow 10,710, S&P 1,123, Nas 2,310, NYSE 7,140 and Russell 666. At the time I concluded that the only way we were going to do that was if the Fed gave us more Quantitative Easing.
We were, at the time, at the top of a very bogus-looking, low-volume rally that had taken us up 10% from 9,700 in early July to 10,680 on August 4th. The Dow and the Nasdaq were our leaders but the Russell kept flashing warning signs as it failed to hold it’s satanic 666 target and, on Aug 2nd, just like on October 5th, we had a big, silly jump up to what we were pretty sure was a blow-off top. Despite being dead right to call a top at the time - it took the market another week to drop but we fell off a cliff on Wednesday, August 10th and we were back at 10,200 on the 11th so better a week early than a week late with these calls.
Willy Wonka understood stock market physics, there had to be enough power to get through that overhead resistance or it was going to be a very painful test of the top (like the one we had in August). Since our last dip, we’ve come back for another try but the volume has been substantially lower than it was in Aug, leading us to believe it is only TradeBots, and not Oompa Loompas, who are buying this market. Can TradeBots alone give us enough "thrust" to break through this time? It shouldn’t be THAT hard, in April we had highs of Dow 11,258 (5.6% higher than 10,680), S&P 1,219 (7.5% higher), Nas 2,535 (9.2%), NYSE 7,743 (7.2%) and Russell 745 (11.1%) so it’s not like we’re asking for a lot with our little breakouts, are we?
SOX were 404, now 345 (down 14.6%), Transports were 2,279, now 2,291 (up 0.5%) and have been our leader so we’re watching them closely but what an odd discrepancy with the SOX, who have generally been reporting good earnings (although Samsung’s guidance today was disturbing). Internationally, the Hang Seng is off 4.6% (from 24,000), 12.3% on the Shanghai (3,026), 15.1% on the Nikkei (11,408) but the BSE is UP 11.7% - leading all global markets (except Mexico) at 18,172! Not far behind India is Germany’s DAX, are down just 1% this morning at 6,275 vs April’s high of 6,341. The FTSE is more in line with other indices, down 2.5% from 5,833 and the CAC is also down 7.6% from 4,086. As I mentioned yesterday, the Dollar is down 13% (and still falling) since June while Copper is up 32% (and way over the early April high of $3.68 at $3.76), gold is 22.7% above April’s close (and we shorted it now) at $1,360 and oil went wild yesterday (another short - see post, Member Chat) and finished the day $1 over our $82.50 upside target, but still 4.5% below April’s ridiculous close. Mixed signals to say the least!.
Today we have Jobless claims and tomorrow we get the Non-Farm Payroll Report. Less than 450,000 jobs lost and more than 100.000 net jobs gained can give us the push we need to break up and out as QE2 now seems to be in the bag, regardless of any short-term improvements in the economy. India is through the roof and breaking the bounds of market gravity and the Nikkei, the World’s lagging index, made the biggest gain this week (up 4.5%) but STILL 47% off the Feb 2007 high of 18,215. We expected this run on Yentervention and I suggested playing the EWJ Apr $10 calls at .40 in my Sept 10th post. Those have now hit goal at .60 (up 50%) so be very careful here!
I’ve already sent out a Morning Alert to Members with a chart that indicates a very disturbing divergence between the S&P and interest rates. The last time we had this much of a gap between the 10-year rates and the SPY was 2008 - and that was not a year that ended very well! From the "Phil’s Favorites" section of our web site, Graham Summers points out that the ONLY reason stocks have rallied this month is courtesy of BILLIONS of dollars of cash the Fed has been pumping into Wall Street - TIMED SPECIFICALLY TO COINCIDE WITH OPTIONS EXPIRATIONS WEEKS. How much? Well try $31Bn on April 15th, $10Bn on May 13th, $12Bn on June 17th and $8.6Bn on July 15th (we don’t have the Aug numbers yet). April held us up until the flash crash (as you would think $31Bn would) and we got a little pop from May and June was enough to keep us going until that Friday but, by July, it was getting expensive to maintain 10,400 and $8.6Bn was just not enough and that failed with a huge expiration day sell-off. August expirations were also weak as the Fed was winding down QE1 so it’s no wonder that they announced QE2 in September and even less wonder that that rallied the markets, right?
Mike Snyder points out why you will never hear this stuff from the MSM, as pretty much everything you see, hear or read is controlled by 6 corporations - down from 50 in 1983, before Reagan deregulated the media to "foster competition." What you will hear today is BUYBUYBUY with Jim Cramer coming on the Today Show to spread the madness and an 8:30 drop in jobless claims to "just" 445,000 jobs lost last week, which was 10,000 (2%) less than expected and that was enough to pop the Dow futures 60 points, with the S&P futures back at the 1,160 mark.
We are not going to fight the tape, or the Fed, here. We went to cash so we could play either way. We already have our bearish bets and there are lots of nice, upside trades we can take (we looked at several in yesterday’s Member Chat). Retail Sales have been coming in generally well but TGT missed by a lot (up 1.3% vs 2.2% expected) and GPS was down 2% vs up 0.2% expected. M was strong at +4.8% and we already knew COST was going to beat (up 5% vs. 4.5% expected) and ZUMZ is the most impressive specialty retailer, up 17% this Q with LTD getting honorable mention, up 12%. PEP earnings came in on target at $1.22 for Q3 and it’s the same old success story with International Sales driving growth and US sales forcing a cut to guidance. They fell to $66 pre-market and I like them there for a long-term play.
Normally, strong retail sales would give us a stronger dollar (more demand for dollars makes them more valuable) but this market is not normal and expectations are being ratcheted up daily for how much Global Quantitative Easing we will get. That is driving the dollar to new lows and we have to guard against the possibility of this causing an inflation shock. It does look like we went short too early but we’re not going to whine about it - we just need to find some upside covers to take advantage of the move up.
We expect at least a pop back to Nas 2,400 this morning - anything less than that and we stay bearish. A very simple way to play for additional upside is something like the XLF Nov $14/15 bull call spread at .60, selling the $15 puts for .65 so that’s a nickel credit on the $1 spread that’s currently .80 in the money. That’s why we don’t fear a break up, we can make a 2,000% profit in a month if this rally is real - all they have to do is sustain this BS through earnings!
Let’s take a look at the big picture on our multi-charts. As I mentioned, the BSE is off to the races and the Nikkei is clearly lagging. Why? Well, India’s economy is tiny and Asia is booming so they are getting a lot of benefit from that, as well as the continued outsourcing of US jobs (how do you think all these corporations are growing without hiring?). Interestingly, no one is actually shipping anything and the Baltic Dry Index is floundering at the breakdown line of 2,500. The Shanghai finishes their vacation today and if we have a green day, then FXI ($44.23) should get a nice pop tomorrow as China’s junior index plays catch-up.
We can’t be comfortable if SOME of our global indexes look good. We need to see France get over the 3,800 mark on the CAC and the FTSE and DAX need to break their April highs as well. We’re close - but let’s not break out the cigars just yet! Turning to our US set, it’s obvious we have a lot of work to do. The SOX are especially weak and Samsung didn’t help today so we’ll have to see what earnings season brings us. The transports are leading the Dow higher, which is strange with the BDI still struggling but I guess everyone is using PCLN to book their next trip so expectations are high, high, high:
It’s going to be a lot of work for the markets to catch up to gold. A nice 4,000% upside play on the markets doing well for another month is similar to the XLF play, using SSO (ultra-long S&P) with a Nov $39/43 bull call spread at $2.10, selling the $40 puts for $2 so it’s net .10 to make up to $4 if SSO rises to $43 by November expirations. SSO is currently at $40.68 so this trade starts out over 1,500% in the money - again, we do not fear the upside - we just don’t trust it yet!
So we continue to walk the difficult, bearish path for the moment and we’ll likely find some nice downside plays on the weeklies today but there’s no way to be sure until after the bell so stay tuned in Member Chat!
And - be careful out there!
http://ilene.typepad.com/ourfavorites/2010/10/thursday-through-the-roof-or-smashed-into-a-thousand-pieces.html
Lessons Not Learned - No Failure Too Great to Admit It
Hoping to reverse a clear slowing of the Japanese economy, Japan Cabinet OKs $61 Billion Economic Stimulus
Japan's Cabinet on Friday approved a 5.05 trillion yen ($61 billion) stimulus package aimed at boosting the country's flagging economic recovery.
The package, to be submitted this month to parliament for approval, follows 915 billion yen ($11 billion) in measures that Prime Minister Naoto Kan's government has already approved.
The latest package includes measures to boost employment, help small and medium sized businesses, and support regional economies. It also calls for ongoing support of programs to boost sales of environmentally friendly products to consumers.
Tokyo has recently made several major moves to bolster its economy. Earlier this week Japan's central bank cut its key interest rate to virtually zero, and last month it intervened in currency markets to weaken the yen.
A couple of charts is all it takes to show just how ineffective Japan's currency intervention was.
Yen Daily Chart Shows "One Day Wonder"
Yen Weekly Chart
The weekly chart helps put the size of that daily intervention "One Day Wonder" in proper perspective.
Except in the short-term I have yet to see any of these intervention measures stick.
Japan Throws in the Towel?
Japan's finance minister has all but thrown in the towel on large-scale interventions, at least if you believe what he is saying. Please consider Noda Signals Japan to Avoid Return to Large-Scale Intervention
Japan’s finance minister signaled that while his government is ready to sell yen in market if needed, the country doesn’t intend to return to the long-term, large scale intervention campaigns of the past.
“The intervention we conducted on Sept. 15 was to rein in excessive movements,” Yoshihiko Noda told reporters today in Tokyo before departing for a Washington meeting of Group of Seven finance authorities. “It has a different character from one seeking a certain level with large scale, long-term intervention.”
Japan conducted the intervention to "rein in excessive movements". The results are shown above. I fail to see Japan accomplished anything.
Given that interventions don't work, It's a good thing Japan "doesn’t intend to return to the long-term, large scale intervention campaigns of the past."
The question at hand is "Do you believe that?" I don't.
China Unloads Japanese Debt, Japan Complains
Add government bond purchases to the list of things Japan and China are openly feuding about. Bloomberg highlights the story in China Sold Most Japan Debt on Record in August
China sold a record amount of Japanese debt in August, snapping a seventh-straight month of purchases.
China sold a net 2.02 trillion yen ($24.5 billion) of Japanese debt in August, the Ministry of Finance said today in Tokyo. That was the biggest monthly sale in data going back to 2005. It sold 2.03 trillion yen in short-term debt and bought 10.3 billion yen in long-term securities, ministry data showed.
Japanese Finance Minister Yoshihiko Noda suggested at a meeting last month that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.
“I feel strange that China can buy Japanese government bonds while Japan can’t buy theirs,” Noda said in answering lawmakers’ questions at a hearing on the economy on Sept. 9.
Japan's Economy Slows, Trade Surplus Shrinks
Wrapping up this spotlight on Japan, please consider Japan Current-Account Surplus Narrows as Exports Slow
Japan’s current-account surplus narrowed in August as export growth slowed, adding to signs the country’s economic recovery is moderating.
The gap contracted 5.8 percent from a year earlier to 1.114 trillion yen ($13 billion), the Ministry of Finance said in Tokyo today.
“There’s no doubt the economy is slowing,” said Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. On top of demand that’s slowing in China and other trading partners, “we’ll begin to see the strong yen’s impact on exports very soon,” he said.
Governor Masaaki Shirakawa’s board this week unexpectedly cut the central banks’ benchmark interest rate, pledged to keep borrowing costs at “virtually zero” until price stability returns and established a 5 trillion-yen asset-purchasing fund. Japan’s ruling party proposed an economic stimulus in excess of 4.8 trillion yen that would help local governments and small businesses create jobs.
No Failure Too Great to Admit It
Japan is in debt to the tune of 200% of GDP, which is all it has to show for all its Keynesian and Monetarist stimuli over the past decade. So what does Japan do but toss another $61 billion into the fire, fresh on the heels of an $11 billion stimulus plan.
$72 billion total may not sound like much these days, but it is a sizable chunk of money for Japan's economy. Supposedly these stimuli will "boost employment, help small and medium sized businesses, and support regional economies".
It will do no such thing. If these stimulus efforts worked, there would be results to show for it.
Yet the only conclusion of the Keynesian and Monetarist clowns is that Japan did not do enough!
This should be a lesson for the US, but it won't.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Beware the Big Bank Blow-Up
Dear Reader,
I know that you are inundated with bad news and apologize for making my own contributions to the incoming.
As I’ve tried to communicate, it’s not that I dwell on this stuff. I really don’t.
Yet in my role as a provider of what I hope is useful information, it would be insincere and counterproductive if I insisted on wearing rose-colored glasses when viewing the world we are now living in.
It’s not that Pollyanna doesn’t have a role to play, too; it’s never a bad idea to look for the good and beautiful, even when times are bad.
But for far too long, government minions, corporate quislings, and the clueless media have been donning cute little gingham dresses, ribboning their hair into perky pigtails, and skipping about while singing happy ditties about an economic recovery and a perfect world that exists just over the horizon.
In my opinion, depending on how they view these happy antics, the majority of citizens of the United States can be divided into five general groups:
Mostly skeptical. A recent Rasmussen poll showed that 58% of Americans believe that tax cuts are good for the economy, and 53% think that cutting government spending is helpful. Of course, this flies in the face of the actions and intentions of the government, which is preparing to raise taxes (directly, and indirectly through massive new bodies of regulation) and to unleash a money storm of up to $2 trillion in a new round of quantitative easing. This large category can include people from all sides of the political spectrum, but would probably skew Republican.
Useful idiots. The term “useful idiots” was used by the Soviet leadership to describe the misinformed and misguided Western intelligentsia who championed their deeply dysfunctional policies even as the iron grip of the state began to close around the windpipes of the proletariat. In the U.S. context, the U.I.s believe the path to economic salvation is paved with good intentions that, should the deniers and obstructionists just get out of the way, can be expressed by a loving and activist government armed with newly created money for all who need it.
And that’s just for starters, because in the perfect world that’s within our grasp, if we’ll just embrace it, lays an energy-efficient, reduced-carbon, child-safe, leveled-wealth, no-mortgage-foreclosures future. It’s so easy, they intone with the blank-faced cheerfulness of the Hare Krishna. Until, of course, you ask them where the money for all this largess is going to come from. At which point a bitter note creeps into their voice as they parrot dark fictions about the need for the haves to pay more in taxes so that the have-nots, have more. This is a sizable group, probably well over 25% of Americans, and skews almost 100% toward the Democrats.
Blissfully unaware. This group cuts across all the social classes, though most would likely have a job. They have grown up with certain expectations about America and go along to get along. They might not trust politicians, but neither do they worry overly much about such things either. As long as they have a roof over their head, three meals a day, and a working car, they’re good.
Down and desperate. Today’s unemployment numbers show yet another 95,000 workers hitting the streets, joining 15 million unemployed, of which 6.1 million have been out of work for over 27 weeks… and those compete for work with a record 9.5 million part-time workers who want to work full time. At this point, most are trying to cling to the hope that the government is going to “do something.” Or actually can do something. They are not happy with government, yet most persist in the belief that their problems will be best solved by government action.
The hardcore skeptics. This category is not a crowded space, because entry requires coming to the realization that the government is not the solution to pretty much anything, but quite the opposite.
Despite the bad rap, it wasn’t the free markets that brought the economy to its knees. I say that because no business can force you to buy its product or otherwise part you from the fruits of your labor. And no business can force you to hire staff, accountants, and lawyers to fill out an endless number of compliance forms and otherwise jump through regulatory hoops. (That is, unless those businesses are working hand in hand with a coercive bureaucracy.) Businesses don’t start wars or spend money they don’t first earn by offering a good or service that people are willing to buy. By contrast, the government can do all those things – and more – including knocking your door down in the middle of the night or locking you away without trial.
In my personal view, not trusting the state or its henchmen is just common sense. And when I hear that the government is rolling out some new program, no matter how well intentioned it might sound, I examine it with squinted eyes – trying to assess the damage it’s likely to do me and mine, in order that I may then calculate how to limit the damage. Perhaps by making an offsetting investment.
In other words, while much of what we discuss could be considered “gloomy,” I believe it’s more accurate to call it “realistic.” It is governments that start wars, levy taxes, and steadily increase the rules and regulations that make doing business so unnecessarily challenging. And then, once their myriad policies have caused business and the economy to become all balled up, they set about trying to fix what they have wrought… by doing yet more of the same.
With that long introduction, I want to share with you a must-watch video of institutional money manager Chris Whalen discussing the dire state of the big banks.
Click the link below, then skip to minute 1:07 when he starts discussing the actual situation with the nation’s banks – which is in stark contrast to the delightful little duet being sung by Bernanke and Geithner. The link to the video is here.
What’s important in this diatribe is that there is no one in this world who is going to look after you but you, and maybe your family.
As a consequence, it has rarely been more important to be a hardcore skeptic, because being blissfully unaware, or even mostly skeptical, could very well lead you to joining the ranks of the down and desperate.
As for the useful idiots, I’m sorry to say that they are going to get the government they deserve, good and hard. And so will you, if you let them take you down with them.
Speaking of banks and real estate, the situation is quickly becoming positively Alice in Wonderland-like. The latest development being that the president has vetoed a bill updating acceptance of cross-state and electronic notarizations, compounding the challenges the banks are having in foreclosing on non-performing loans.
Forget that people took out mortgages, fully aware they had to meet the terms of the loans in order to avoid foreclosure, but have stopped making payments anyway. There’s no question that economic realities have changed for many, but even so, the game today is, “I’m not going to pay, and I’m not going away.”
Of course it’s a horrible thing to lose a home, and sure, the banks and others involved in securitization of millions of mortgages during the housing bubble have made a proper mess of the paperwork and the process. But do we really think we can come out of this crisis with the financial institutions stuck with something like 16 million mortgages that are either currently in the foreclosure process or that will be by the time this is over, having lately largely become frozen in place by legislative and judicial fiat?
As Chris Whalen explains so well in the video I link to above, despite the government transferring well over a trillion dollars in taxpayer funds and obligations to the banks, they are still sliding toward collapse. Freezing the foreclosure process for political advantage – and a number of members of Congress want to make the freeze semi-permanent – only assures that collapse.
Don’t get me wrong, if a bank should fail and the bond and equity holders are wiped out, so be it. But, of course, when the big banks start to tumble down, it’s a certainty the government will again bail them out… taking us even more quickly down the path to hyperinflation.
The writing is on the wall, all I can do is point to it and hope you get the message.
On this general topic, I wanted to mention that I had a brief chat yesterday with Andy Miller, our “go to” guy on what’s really going on in real estate and mortgage markets. Andy has agreed to sit for an interview providing readers with a quick update. I didn’t have time to get it done today, but will definitely present it as a special edition of Casey’s Daily Dispatch at some point next week – probably Wednesday.
The End of Cash – a Straw in the Wind
Lately I have discussed the possibility that we will become a cashless society, allowing the government all manner of new controls, including data matching to assure everyone’s expenses line up with reported income… monitoring a newly instituted VAT… doing away with the “black” economy, and perhaps setting the stage for gold confiscation (once cash is eliminated, then it becomes an easy target for its usefulness to the criminal classes in transacting business).
Not to get all paranoid, but Casey Research Washington Correspondent Donald Grove sent along the following Visa card advertisement, which ran on the inside cover of the Congressional Quarterly. Of course, Visa would be among those with the most to gain from going to a cashless society and, from the looks of it, is lobbying hard to make that happen.
Commodities on a Tear
Not only has gold bounced back from the latest quick sell-off, but other commodities are jumping as well, including oil, which is again trading near $83 per barrel. And that’s only for starters. This just in from Bud Conrad…
Corn is lock limit up 30 cents. Oats up limit 20 cents. Wheat up 55 cents. Rice up 46 cents. Beans up 70 cents. This is truly a huge move.
A USDA report affected the market. These are inflationary levels. This will affect all of us, especially the lower income bracket.
I've been ignoring food based on good U.S. crop conditions. The bomb shell that I found was cutting the yield per acre for corn so that 496 million fewer bushels will be produced. That was not telegraphed in the crop conditions, so it was a surprise, and it looks screwy. Traders won't like the USDA doing shocking things like this.
Bud
Contract (Symbol)
Month
Last
Change
Chg %
Open
High
Low
Time
CORN (ZC Z0)
Dec'10
528'2
30'0
6.02
497'6
528'2
496'0
11:13:50
MINI CORN (YC Z0)
Dec'10
528'2
30'0
6.02
528'2
528'2
528'2
11:03:20
DENATURED FUEL ETHANOL (AC X0)
Nov'10
1.988 y
--
--
--
--
--
15:53:09
HARD RED SPRING WHEAT (QMW Z0)
Dec'10
759'0
52'4
7.43
706'4
766'4
705'4
11:13:51
HARD RED WINTER WHEAT INDEX (IH V0)
Oct'10
562'0 y
--
--
--
--
--
13:52:25
MILLING WHEAT #2 (EBM X0-ENC)
Nov'10
223.25
15.25
7.33
208.25
229.25
207.75
18:08:57
OATS (ZO Z0)
Dec'10
369'4
20'0
5.72
350'4
369'4
345'4
11:15:23
RAPESEED (ECO X0-ENC)
Nov'10
383.75
8.75
2.33
375.75
388.75
374.75
18:07:01
RAPESEED (CANOLA) (RS X0-WC)
Nov'10
491.10
17.80
3.76
475.90
500.00
473.90
11:15:26
ROUGH RICE (ZR X0)
Nov'10
1,325.50
46.00
3.60
1,279.50
1,329.50
1,265.00
11:14:52
SOYBEAN MEAL (ZM V0)
Oct'10
313.50
21.50
7.36
292.40
327.00
292.40
11:13:45
SOYBEAN OIL (ZL V0)
Oct'10
46.43
2.64
6.03
46.33
47.10
46.33
10:43:31
SOYBEANS (ZS X0)
Nov'10
1135'0
70'0
6.57
1064'0
1135'0
1062'0
11:15:46
WHEAT (ZW Z0)
Dec'10
714'6
55'4
8.42
660'6
719'2
657'0
11:15:40
MINI WHEAT (YW Z0)
Dec'10
710'6
51'4
7.81
719'2
719'2
710'6
11:00:04
...
As an aside, Bud is on his way to give the keynote presentation at a large investment event in the Philippines before joining up with Doug, Louis James, and myself at the La Estancia de Cafayate Sights & Sounds Celebration, October 20 – 24 in Cafayate, Argentina. The event is almost sold out, and it’s growing late to make your arrangements if you wish to participate. For more info, at this point the best move is to drop Dave Norden a note at: dnorden@lec.com.ar. See you there?
The March Toward 1984 Continues
As we have discussed on several occasions in the past, it appears that George Orwell really understood the collective psyche of the English people and used that knowledge to his great advantage in writing 1984.
He must have had true insights, because it seems that almost never a day goes by without the English taking another long step towards the dystopian future Orwell imagined.
I was tipped to the latest by one dear UK friend and correspondent. It revolves around a new census initiative, administered by U.S. defense contractor Lockheed-Martin and scheduled for March of 2011.
The census is 32 pages long, with 56 questions about all the stuff you usually expect, including work, education, health, marital status, and so on.
But then it goes on to ask you about your sexual orientation and requires you to disclose which passports you hold. You are also required to provide details on the names, sex, and birthdates of any overnight guests you may have had in your house.
While some Brits might be tempted to slam the door in the face of census workers, that’s not an option. In fact, a failure to complete the census form, or to include false information, could result in a £1,000 fine or even imprisonment.
Here’s a story on the census from the Telegraph.
And this from a census office.
As I have remarked before, as much as I love the British sense of humor, the beer, and the snooker, if I lived in that country today, it would only be for long enough to pack my bags and otherwise settle my affairs in order that I might vote with my feet.
The 10:10 Murder Video
At the Gold & Resource Summit, I played the advertisement by the 10:10 environmental group that showed a teacher executing students who didn’t buy into their carbon-cutting scheme, by pushing a button and blowing them up in a gore-splattered scene. Chris Wood, filling in for me with this missive, showed the same video – and it has received a fair amount of attention since.
Trying to cover their tracks, 10:10 pulled the video, and even the enviro-alarmist movement reluctantly condemned the video, expressing that it was just a matter of humor done poorly, and that no one in the environmental movement could condone such a tasteless and disturbing depiction of child murder.
Well, Anthony Watts, who manages the award-winning blog WattsUpWithThat.com, reveals the disingenuous nature of those claims by running a collection of just some of the horrific ad campaigns the environmentalists have unleashed on the public in recent years.
As you will see when you follow the link below, not only do they depict killing kids and drowning babies, but have chimps hanging themselves and kangaroos throwing themselves in front of trains in despair over humankind’s degradation of their habitats.
I don’t know what sort of warped psychology you have to have to want to be associated with these sorts of campaigns, but as this is the sort of sociopath now guiding environmental policy around the world, you should be afraid. Very afraid.
Here’s the link.
Friday Funnies
After that, I need a laugh. The following came to me from a dear reader and friend, Ron in Hawaii – mahalo!
The economy is so bad that…
I got a pre-declined credit card in the mail.
I ordered a burger at McDonald's, and the kid behind the counter asked, "Can you afford fries with that?"
CEOs are now playing miniature golf.
If the bank returns your check marked "Insufficient Funds," you have to call them and ask if they mean you or them.
Hot Wheels and Matchbox stocks are trading higher than GM.
Parents in Beverly Hills and Malibu are firing their nannies and learning their children's names.
A truckload of Americans were caught sneaking into Mexico.
Motel Six won't leave the light on anymore.
The Mafia is laying off judges.
BP Oil laid off 25 congressmen.
Congress says they are looking into the Bernard Madoff scandal. Oh great! The guy who made $50 billion disappear is being investigated by the people who made $1.5 trillion disappear!
And with that, I will bid you farewell for the week, thanking you for reading and for being a subscriber as I head for the door.
Until Monday…
David Galland
Managing Director
Casey Research
http://www.caseyresearch.com/displayCdd.php?id=556
Central Bankers: The REAL Rogue Traders
By Bill Bonner
10/07/10 Paris, France – Frankie looked up at the judge
Judge, what will be my fine?
And the judge looked down at Frankie…
Girl, you got 99
– Frankie and Johnny
We feel sorry for . Such a good-looking young man. With such a promising future. He was the trader with Société Générale who lost 4.9 billion euros in unauthorized trading.
Now, the poor fellow has faced the music. Trouble was, it wasn’t a tune he wanted to hear. And it seemed a little inappropriate to the occasion to us too. More below…
The news yesterday was mixed. Unemployment increased in September. The dollar and US bond yields hit new lows. And China said that trying to force it to revalue its currency would be a “disaster for the world.”
Hmmm…
Stocks rose 22 points on the Dow. Gold went up another $7.
Gold must be ready for a correction. Or else we really have reached the final stage…the runaway stage in the great bull market.
Back to Kerviel…
Kerviel drew a five-year sentence (two years suspended.) Plus, he’s supposed to repay 4.9 billion euros…
“By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part and whose future was threatened,” said the judge.
Well, we’re sure he didn’t do it intentionally. We mean, he didn’t intend to bring down the bank.
Besides, a lot of other people made authorized trades that were much bigger…which also put their banks in jeopardy. In fact, some of the CEOs of the world’s largest banks also put their institutions in harm’s way. And then, when the banks ran into the ditch, these guys didn’t get five years and a $7 billion fine. Instead, they got a $50 million bonus!
Kerviel recalled a card trick at a corporate party:
“Ladies and gentlemen, it’s up to you and our clients to find the margin. It has disappeared. Where’s it gone? Not here. Not there. Aha! Here it is, in my pocket!”
It didn’t go into Kerviel’s pocket. He’s penniless. The fine is about $6.7 billion. The man is said to earn about $3,000 a month. Talk about debt repayment! Let’s see, if he saves half his money each month. And he puts it all to paying off his debt to Société Générale… that’s $36,000 per year.
Hmm… If the poor man lives for 200,000 years…he’ll still be paying.
But wait. Suppose this quantitative easing thing takes off….
Yes, dear reader, central bankers are probably the biggest rogue traders of all. Remember Alan Greenspan? He has an opinion in The Financial Times today. We read it twice. Neither time did we discover anything new. He says the problem is fear. Until the fear diminishes…don’t expect businesses to start many new projects or hire many new employees. Thanks a lot for that insight, Alan.
Alan Greenspan is probably more to blame than any other human being for today’s financial crisis. He made a huge bet and put the whole world economy at risk. He bet that he knew better than the market. He put the Fed’s key lending rate below the rate of consumer price inflation…and left it there for four years. Over $12 trillion was lost – in America alone. Where’s the jail cell waiting for him? Where’s the $12 trillion fine?
And now central bankers are betting big again…BIG…and they risk not only putting the 140,000 employees of Société Générale out of work…but hundreds of millions of other people all over the world.
Central bankers are betting that they can add billions in QE money to the world’s money supply, without causing a calamity. Maybe they can. Maybe they can’t. It’s never been done before.
But every previous experiment with paper money has ended in disaster. Paper money never survived an entire credit cycle. When credit was expanding, people were happy to take the paper. When it shrank, they became fearful of the paper and wanted something more substantial. Paper money always ends up worthless.
Kerviel’s bets went well as long as credit was expanding. He was up more than $1 billion at one point. Then, when the markets began going down, so did his gambles.
Will it be any different for the central banks? Will their bets go bad too – perhaps in a spectacular blow-off in which the dollar itself becomes almost worthless. Remember, if the dollar loses just the equivalent of 5% of its 1900 value – there’s nothing left. It will be completely worthless.
Could it happen? Central bankers risk a full-blown currency calamity, worldwide, with full knowledge aforethought… This is premeditated currency assassination, in other words.
Where’s the jail cell waiting for Bernanke? Who’s going to fine him $10 trillion? How’s he going to pay?
So cheer up, Jerome. You might be able to pay your debt to society with a postage stamp… We have in our wallet a 10 trillion dollar note from Zimbabwe. Why not a 10 trillion dollar note from the US? We’re not predicting it…we’re just trying to keep the young man’s hopes up. And you never know…
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/central-bankers-the-real-rogue-traders/
Has the Consumer Recovered From the Last Bust?
by: Cullen Roche October 07, 2010
There are more than a handful of notable economists and investors who believe that the current credit crisis is really just an extension of a much larger bust that was set in motion more than a decade ago. In essence, the 90Œs created a mentality that everything was different. American net worth exploded and the world appeared to be permanently altered for the better. Specifically, assets to liabilities soared (click to enlarge images):
Then the Nasdaq bubble burst and the paper wealth went up in flames. Alan Greenspanfs approach was simple. If we could simply reflate the consumer balance sheet through asset reflation everything would be resolved. So, the consumer was encouraged to continue taking on excess debt without the underlying income to sustain this debt. In essence, Americans were trying to sustain the lifestyle that they had become accustomed to in the 90Œs and the Federal Reserve and Treasury did everything in their power to maintain that lifestyle.
As the housing bubble grew Americans once again felt the invincibility of paper wealth. Of course, just like the Nasdaq bubble none of this was actually supported by the underlying fundamentals. And as the housing bubble wealth effect dissipated in 2005 so did the ability of the consumer to sustain its 25 year spending spree:
The surge in household wealth due to the double bubbles proved to be nothing more than paper gains that were not supported by the underlying fundamentals. Assets were higher than they otherwise should have been. Itfs clear, in retrospect, that Americans never really recovered from the excesses of the 90Œs. The governmentfs response to this bubble era has done little to help create the foundation for a sustained recovery.
This past weekend, Brian Sack admitted that the Fedfs recovery plan is largely dependent on propping up asset prices that would gotherwise be lowerh. The U.S. government hopes they can reflate assets and sustain a supposedly capitalist market without having any losers. They just canft come to grips with the fact that there are decades of excesses that have yet to be resolved and that perhaps we need lower asset prices in order to create the foundation for a sustained recovery. Propping up assets is not a recipe for economic recovery. This reflation plan didnft work the first time around. I am not sure why anyone thinks this reflation recovery would ever work this time.
http://seekingalpha.com/article/228840-has-the-consumer-recovered-from-the-last-bust?source=email
The Incredible Two-Day Jump in US Treasure Debt
By The Mogambo Guru
10/06/10 Tampa, Florida – Things are getting so, so, so weird that I was locked inside the Mogambo Bunker Of Panic (MBOP), looking through the periscope to keep a vigilant watch for the social explosion outside that was coming, I figured, so, so soon, with my finger on the trigger of something fully loaded and reassuringly .45 caliber, and a slice of yummy pizza in my one free hand to keep my energy level up via the universal Magic Of The Pepperoni (MOTP).
To show you that I am not over-reacting like the hyper-excitable, gun-nut, gold-bug, Austrian school of economics kind of weird guy that I actually am, here is an example of the corrupt, game-playing crap going on with the Federal Reserve and the Treasury: On Wednesday, 9/29/10, the national debt was $13.466 trillion. The next day, 9/30, it goes to $13.561 trillion. Again, "the next day," 10/1, the start of the new federal fiscal year, it rises to $13.610 trillion!
This $144 billion is a staggering lot of borrowing that, somehow, happened in Two Freaking Days (TFD)! This is $72 billion per day! This is the government borrowing – per day! – almost $240 for every man, woman and child in the Whole Freaking Country (WFC)! Gaaaahhhh!
The scream at the end of the previous paragraph is Secret Mogambo Code (SMC) to alert all Junior Mogambo Rangers (JMRs) to buy more gold, silver and oil as fast as they can, because of this kind of monstrous liquidity injection by governmental deficit-spending, made possible by a crazily irresponsible Federal Reserve literally creating the money necessary, and then, committing a central-banking sin known as "monetizing the debt," the Fed used the money to buy the debt that the government wanted to sell!! Gaaaahhhh!
As many have deciphered by now, the concluding "Gaaaahhh!" of the previous paragraph, combined with the double exclamation points of the previous sentence, is surely more Secret Mogambo Code (SMC), available only to Junior Mogambo Rangers (JMRs), although you can probably figure out what is Freaking Me Out (FMO), which is always the same thing FMO, making that whole Secret Mogambo Code (SMC) thing just another piece of Stupid Mogambo Crap (SMC), as implied by their identical acronyms.
Anyway, this $144 billion in additional federal debt, accumulated in Two Freaking Days (TFD), is, annualized at this astounding rate for each of the government's roughly 250 working days per year, an outrageous $18 trillion a year! This incomprehensible sum is about $5 trillion more than the entire GDP of America! And more than half of GDP is already composed of government spending right now! We're Freaking Doomed (WFD)!
We are doomed for allowing the Federal Reserve to create so much more fiat money, which creates inflation in prices, which is why I probably noticed, in Barron's, that the new Gross Domestic Product Deflator for the second quarter of 2010 is a laughably-low 1.9%, which is almost double the previous quarter's also-laughably-low 1.0% inflation!
By this rude disrespect and outright loathing I mean inflation – by the most conservative of estimates of inflation that can be cooked up – is still growing by 90% in one quarter! Inflation is growing at 1,303% a year, compounded? Yikes! Yikes! Yikes!
Okay, I admit I am being stupidly simplistic, overly dramatic and acting irresponsibly in every sense of the word, in that I am writing this Stupid Mogambo Crap (SMC) at my desk when I should be working, but I am surely going to get fired anyway, so what's the point, ya know what I mean?
Obviously I am wasting my time, and your time, in being silly, especially in light of everyone else thinking that 2% inflation is OK, it certainly seems OK with Congress and with most egghead academic economists, while I am the only guy who is freaked out by it.
And I haven't heard much of a gasp from any of them about Ben Bernanke, chairman of the Federal Reserve, now "targeting" monetary policy to achieve a suicidal 5% inflation in prices! Insane!
So, here at the end, here at the "bust" part of the boom-bust cycle, it looks like it will be a race! How exciting!
So which will it be? Will the price of gold go so high so quickly that I can tell my boss that I quit, and how I am thrilled to wash my hands of this stupid company, its stupid employees and stupid customers always calling me hurtful names like "incompetent bonehead," with which I totally disagree, and "lazy, gold-bug moron," which is a little nearer the truth.
And as a lazy, gold-bug moron, all I do is simply buy gold, silver and oil when the Federal Reserve is acting so insanely irresponsible, especially so that the federal government can desperately deficit-spend, and doubly-especially when the money concerned is around 10% of GDP!
With horrifying facts like that screaming at you, "We're freaking doomed!" buying gold, silver and oil is, "Whee! This investing stuff is easy!" in all its glorious action! Whee!
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/the-incredible-two-day-jump-in-us-treasure-debt/
Gallup Finds U.S. Unemployment at 10.1% in September
http://www.gallup.com/poll/143426/Gallup-Finds-Unemployment-September.aspx
Lotsa good stuff lately Dan.
No hope to fix this country until we clean house...
How a Financial Crisis Morphs Into a Currency War
by: Edward Harrison October 06, 2010
In a synchronized global economic downturn, the temptation for policy makers is to view economic growth as a zero-sum game and to take policies that, while favourable to domestic constituents, end up ‘stealing’ growth from elsewhere. The thinking goes: "If I can’t get the economy to grow quickly, I’ll have to depend on exports to do the heavy lifting until things stabilise." But what’s good for the goose is good for the gander and once we head down the path of today’s neologisms of quantitative easing, fiscal austerity, and competitive currency devaluations, the die is cast; there will be no domestic growth except that which comes at the expense of others.
This time last year, I wrote a piece called The recession is over but the depression has just begun, the basic premise of which was that the initial downside shock of the financial crisis would fade due to unprecedented policy stimulus, but that political constraints would eventually lead to a second more severe dip and depression. While I wrote the piece in declarative sentences, my hope really has been to see indications that policy makers were avoiding ‘escalation’. Unfortunately, policy makers, trapped in the zero-sum game mind-set, are indeed escalating. And chances are they will escalate further.
Here’s how we got here. In a future post, I will focus on where I believe we could be headed.
Unbalanced global economy
Leading up to the credit crisis, the global economy was dominated by a number of countries with large external imbalances, some on the surplus side like China, Japan and Germany and others on the deficit side like the United States, the UK, and Spain. When the credit bubble popped after the US sub-prime trigger, aggregate demand in bubble economies cratered, causing the imbalances to shrink dramatically. The result was a huge shortfall in demand in both the countries with large external deficits and in those countries with surpluses as their economies had become inter-dependent. For example, external surplus Germany and Japan suffered steeper falls in GDP peak to trough than did the US or the UK. The economies in the external-deficit Baltics cratered when capital flows from Scandinavia reversed. Even China suffered a huge downswing in GDP on a rolling quarter-to-quarter basis that was masked by their year-on-year reporting standard.
As a result, policy makers around the world went on a massive policy stimulus campaign in order to avoid another Great Depression. We saw massive fiscal stimulus in China, Germany, Japan, the UK, the US and everywhere in between. Short-term interest rates plummeted to 1% or below everywhere in the US, Western Europe and Japan. A number of countries ‘provided liquidity’ into the crippled financial sector by lending to banks for next to nothing or buying assets off of those financial institutions in return for cold hard cash freshly printed by government.
Competitive Currency Devaluation starts
Massive liquidity is supposed to stimulate the economy but it is also a weapon of choice for bringing the currency down and exporting one’s way out of malaise. David Rosenberg recently wrote a piece on the competitive currency devaluations, demonstrating that we have witnessed a Rolling Bear Market in Various Currencies Since 2007 with each country doing whatever it can to depreciate its currency’s value against the others.
click to enlarge
Interest rate reductions are one way. This helped precipitate a huge fall in the Australian and New Zealand dollars that started in the period leading up to the Lehman crisis despite high inflation. Quantitative easing is another way. QE is just a more elegant way of saying ‘printing money’. The US started this process after the Lehman bankruptcy, causing Treasury yields to go below zero briefly in 2008. Soon the Japanese and the British were at it. By March 2009, the Swiss decided to go QE as well.
Uneven Recovery
The result of the policy stimulus was a stabilization of the global economy. Corporate debt and stock prices soared. Nevertheless, all is not well. Unemployment in the eurozone and in the US is 10%. House prices are still falling in Ireland and Spain and have likely resumed a downward path in the US and the UK. Commercial Property is still on a downward path. Mind you, some economies are doing better than others. The German economy has done particularly well with unemployment at the lowest level since 1992 and growth at the highest since 1987. But this was exactly the problem leading up to the crisis – external imbalances; Germany first suffered disproportionately as the economy went down but is now benefitting in equal measure as the economy has stabilized due its export orientation. Domestic demand growth remains weak.
Competitive Currency Devaluation continues post-Dubai
If everyone was seeing the improvements that Germany or China is seeing, all would be well. But this is not the case. All of this started to come to a head in November 2009 when the Dubai crisis turned into a sovereign debt crisis. Dubai brought home that governments were creating a massive risk transfer from specific private sector agents to the public sector in order to stave off the crisis in 2008 and 2009. Ireland has been one of the worst of the lot, with this year’s public sector deficit set to hit 32% of GDP due to the bailout of the Irish banking system.
At the time Dubai started us on this path last year, I wrote:
the Dubai World events underline the unpredictability of exogenous shocks. All of these potential crisis situations — dollar carry trade unwind, debt crisis in the Baltics, oil price spike, an unexpected surge in interest rates, war in the Middle East — are still there lurking in the background. We don’t see coverage in the press on them everyday, but they are still there
I have been optimistic about the near-term prospects for the global economy in large part due to the myriad pro-cyclical effects of recovery. Longer-term, however, there are some serious obstacles to a sustainable recovery. This is not a garden-variety recession and recovery. It is a recession within a longer-term depression. And while we are in a technical recovery, I believe much of the fundamental problems which triggered this downturn are still there, lurking. The debt troubles at Dubai World bring this point home.
And indeed they have. Eventually, this led to the crisis in Greece, the solution to which was to ‘provide liquidity’ to those countries suffering most. The result, predictably, was another flashpoint in the race to the bottom on currencies. By this time, the friction had started to mount. As the U.S. economy started to roll over in the face of a still undervalued Chinese currency and a now plummeting Euro, people started talking about a double dip recession in the US.
That’s when the talk of QE2 began.
This is the Federal Reserve Bank of St. Louis piece by James Bullard that everyone is talking about.
Here’s the money quote:
Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.
Translation: The helicopters are at the ready – very much in line with what I said I anticipate earlier today.
My view is that central banks and governments will always act to maintain the asset-based economic model of asset price growth and excess consumption. But they will be constrained during periods of growth, withdrawing stimulus at the behest of deficit and inflation hawks. When they do withdraw stimulus, the economy will lapse back into depression before they can act. At which point, they will respond aggressively.
Because of the deterioration in U.S. growth, stocks still got hammered in the U.S.; August was horrible. But, as the Bullard point of view gained traction, the probability of QE2 and a Bernanke put increased. The US dollar plunged and stocks came roaring back in September (in dollar terms).
The following two charts on U.S. August stock returns gives you a sense of this (hat tip Alberto Artero). In chart #1 you see the monster 71-year best for the S&P 500.
But if you take the same S&P rally in Euros, the chart looks like this:
Tensions are mounting
Friction is building within the EU, between China and the US, between China and Japan, between emerging markets like Brazil and the G7. At issue is the zero-sum mentality of competitive currency devaluation. This is a game that has been going on for some time but has only started to enter the main stream press.
The critical event bringing this onto front pages was the Brazilian finance minsters angry intervention last week.
The last post by Win Thin demonstrates that Emerging market countries that are doing the best in this difficult economic environment are feeling serious currency pressure. Brazil is looking for a way to deal with the volatility associated with hot money flows its strong economy has attracted. We are in the midst of what I call twenty-first century competitive currency devaluations.
Guido Mantega, the Brazilian finance minister is calling it "an international trade war" in which every nation attempts to gain the upper hand via some sort of currency depreciation to pick up some extra demand at everyone else’s expense. This is beggar thy neighbour pure and simple. And it causing countries like Brazil to institute capital controls.
The FT reports:
Mr. Mantega, who has made increasingly aggressive comments recently about the need to control Brazil’s currency, said governments around the world were trying to weaken their currencies to promote competitiveness.
“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he said, according to Reuters.
The US dollar has fallen by about 25 per cent against the real since the beginning of last year, making the real the strongest performing currency in the world, according to Bloomberg.
In spite of Mr. Mantega’s strong words, however, Brazil has so far held back from taking any action other than intervening in the local currency spot market.
How long will they continue to do so?
The answer is not long at all. In fact, as Win Thin , Brown Brother Harriman’s Head of Emerging Markets Strategy, reported Tuesday, not only is Brazil responding with currency controls but so is South Korea.
No big surprise from Brazil’s decision to boost the IOF tax on fixed income foreign investment to 4% from 2% previously. This is a pretty strong statement from the authorities that 1.70 is the line in the sand, and if USD/BRL continues to grind lower below that level, we would expect further measures (IOF adjustments, FX intervention, possible lock-up period)…
And it’s not just Brazil in the news today. Bank of Korea said it will conduct audits of commercial bank FX derivative positions in conjunction with the Financial Supervisory Service. Audits will be conducted between Oct 19 and Nov 5 and are meant to ensure that banks are complying with measures announced June 13 requiring banks to reduce FX derivatives holdings over the next two years (after a 3 month grace period). Those measures were ostensibly taken to reduce KRW volatility but were widely interpreted by the markets as an attempt to limit currency strength.
South Korea and Brazil are two countries which have best weathered the financial crisis. What their moves tell us is that they are feeling the effects of beggar-thy-neighbour policies elsewhere and are prepared to act to thwart this threat to growth.
Conclusions
Policy makers are in a cul-de-sac. At first, it was shock and awe stimulus to prevent depression. For extra measure, we have added monetary stimulus, which has the side of effect of reducing currency’s value. In a world of rising global demand and economic strength, large countries can get away with this beggar thy neighbour response to domestic economic weakness. This is what Japan has done for nearly two decades, exporting their flood of money to create bubbles elsewhere in the global economy.
But in a world awash in excess capacity and suffering extreme shortfalls in demand, this strategy suffers from a fallacy of composition. Improving your external balance is a winning strategy if aggregate demand is weak and political resistance to deficit spending rises because of high public debt. However, everyone cannot improve its external balance simultaneously. Someone invariably gets stuck with the old maid.
Don’t expect any country to take this without a fight. Every political leader will fight to keep its country out of economic Depression. Every political leader will assuage domestic concerns that foreigners are getting the better of them. Currency controls are now a legitimate policy option everywhere as Willem Buiter predicted they would be. Expect more of this, especially from emerging market countries worried about the flood of money coming from the G7 as policy makers there try to improve competitiveness with beggar thy neighbour policies. Eventually, this will escalate into tariffs. I will talk about what to expect as a result of tariffs in an upcoming post.
In the meantime, expect more money printing and more currency debasement. As an investor, this is a situation in which you have to be cautious about fixed income investments. On the other hand, equities do not necessarily suffer. But gold and other precious metals do very well.
http://seekingalpha.com/article/228624-how-a-financial-crisis-morphs-into-a-currency-war?source=email
The Fed Huffs and It Puffs and…
by: The Inflation Trader October 06, 2010
The world’s central bankers seem to be aware, suddenly, that the global economy isn’t doing great. Where they’ve been for the last year is hard to tell, but abruptly they seem to be getting religion on the topic of sluggish economic growth. It is ironic that this happens right after the NBER declared the end of the recession, but better late than never I suppose.
This comes as signs of an imminent second dip (if you want to call it that), that were epidemic early in August, have faded. If I were inclined to be generous, I might suppose that the recent acceleration in talk about further monetary stimulus is related to the fact that it has only recently become apparent that not only is no fiscal stimulus is riding to the rescue any time soon, there is also a chilling wind of fiscal restraint starting to blow.
The tenor of comments has recently begun to tilt decidedly in favor of further monetary action, to the point where it almost seems as if the intervening data over the next month or two won’t matter unless it is really, really strong. Last night, minutes after I posted my commentary, the Nikkei reported that the Bank of Japan is considering buying securities backed by small business lending, and increase purchases of government bonds. I have said before that Japan’s experience with persistent deflation is more to a lack of will than to a lack of a solution (see my comment here). Maybe they’ve decided to step up the dosage.
At the same time, we are getting increasingly convergent comments from Fed speakers. Yesterday, Chicago Fed President Evans, in an interview with the Wall Street Journal (link) said that unemployment is not falling “as quickly as it should” and the Fed should deploy “much more” monetary accommodation. Evans’ argument, by now becoming familiar, is that the Fed needs to push inflation expectations higher so that real rates can be lower than zero while nominal rates are bounded by zero. (The Fisher equation says nominal rates ˜ real rates + expected inflation, so if nominal rates are at zero the only way for real rates to become more negative is to raise expected inflation.) Now, ideally the Fed could push inflation expectations higher without actually pushing inflation higher, but because the Fed is transparent and investors (and consumers) can read, they stand no chance of fooling the market by simply talking up expectations. They need to take concrete steps to force inflation higher; this will also raise inflation expectations.
Ordinarily, the Fed would have difficulty doing this because pushing inflation higher is normally against one of the Fed’s mandates-in-twain. When the Fed pushes, growth goes higher but inflation goes higher; when the Fed pulls, growth and inflation go lower. But in this case, with inflation lower than the level the Fed considers is consistent with “stable prices,” they can pursue an accommodative policy single-mindedly without worrying that one of their mandates is being sacrificed to the other. (To be sure, this is mostly semantics. The FOMC would love to overshoot the 1.5%-2.0% target right now, but if inflation gets away a little bit it must appear to be accidental).
Unfortunately, buying more securities in QE2 is unlikely to push prices much higher as the program is currently constructed, because the continuation of payment of interest on excess reserves (IOER) will cause the reserves to mostly stay on the balance sheets of banks and Fed speakers have barely mentioned IOER. At the margin, some money will flow into the economy, but this delta is indeterminate and surely a small fraction of the amount of the purchases.
Still, the inflation risks are clearly to the upside, especially since (aside from housing) prices are already rising at a 2-3% pace, and forewarned is forearmed. Inflation markets themselves do not yet fully believe it, but the trend is improving. The chart below (Source: Enduring Investments) shows the front of the inflation swaps curve, where we would expect QE to be most effective. The inflation swap curve has been steadily upward sloping, so over the last year the lowest projected inflation has been for the ensuing year, with slightly higher inflation in year 2 and inflation higher still (but still low!) in year 3).
Inflation expectations are rising, but not exactly spiking.
You can see that the recent talk about QE2 has lent a weak bid to the inflation market, but even 2-3 years out – the top line covers inflation from October 2012-October 2013 and is only a smidge above 1.5%. While longer-dated inflation has risen a bit (10y CPI swaps are 30bps above their lows), this is evidently not coming as much from the front end as I would expect, and that means it isn’t a pure response to the reasonably quick-hitting nature of QE2. Perhaps investors are seeking to add inflation duration while they still can do so at reasonable prices.
Now, if you’re a retail investor you can’t invest in inflation swaps and so add pure inflation duration. At this time, the universe of financial products – especially retail financial products – that can be plausibly claimed to be inflation-linked is scandalously small. After a number of TIPS mutual funds (around 40 by my count), most of the other products can best be described, and generously at that, as somewhat inflation-related. Included in this latter list are physical commodity ETFs, commodity indices, residential real estate, commercial real estate, REITs, Timber, and infrastructure, as well as some products in the mutual fund space that are generally mostly equities: HAP, GDX, MOO, and so on.
Here is why it matters. Let’s suppose that you want to invest in a floating-rate note tied to LIBOR, on the theory that short rates are highly correlated with inflation (as they are, in fact) and so should provide some inflation protection. The chart below shows the results of a little simulation I did to illustrate this point. I simulated a path for inflation and a path for LIBOR consistent with a correlation of 0.8 between LIBOR and CPI and several other assumptions that aren’t strictly important for understanding the result. For each of 250 simulations, I calculated the IRR of a 10-year floating-rate bond that pays L+100 and the IRR of a 10-year TIPS-style bond that has a 1.5% real coupon. The chart below shows the scatterplot of inflation-linked bond returns (ILB IRR) versus LIBOR-based bond returns (LIBOR Bond IRR), along with the R2 of 0.6 which confirms that the resultant correlation is approximately 0.8 (the square root of 0.6 being about 0.77). This would seem to suggest that a LIBOR-based bond is a reasonable substitute for an inflation-linked bond if the correlation between short rates and inflation is reasonably high.
However, this would not be entirely correct! The nominal return is not, strictly speaking, what I care about as an investor. I want to maximize my real return, not my nominal return. And performing the same exercise with real IRRs gives a very different picture. In real space, the volatility of the real return of a held-to-maturity TIPS-style bond is approximately zero, as you earn the stated yield (in this case, the 1.5% coupon on the original par) regardless of the inflation outcome. But the ex-post real return of the LIBOR-based bond is still quite variable as long as the correlation between inflation and LIBOR is not 1.0.
The implication is that investments which merely proxy for inflation and do not explicitly return CPI like inflation-linked bonds and swaps do will provide significantly more real volatility than do inflation-linked bonds and, consequently, must offer significantly more prospective yield to be viable alternatives.
This doesn’t mean that TIPS at -0.5% real yield are a great investment, but it means we need to be cognizant that the extra risk we are adding when we go to an investment that isn’t explicitly indexed is a lot higher than we might think, if we just look at nominal correlations.
And this takes us to equities, commodities, and all of the other supposedly inflation-related markets that blasted off today (along with TIPS) given the appearance of central bank synchronicity around the issue of quantitative easing. Stocks ripped 2.1% higher, on improved volume for a change. Crude oil, corn, sugar, gold, silver, coffee, beans, and wheat were all up more than 1.5%. The dollar was weaker, even against the yen. This latter point makes little sense: inflation which is idiosyncratically ours, or profligate monetary policy executed by our central bank compared to other central banks, ought to weaken the dollar. But concerted profligacy or broad global inflation shouldn’t affect the unit, should it? The dollar, especially, looks like a knee-jerk response, and other markets are probably also overreacting.
In other news, following up on Friday’s comment: the Treasury today reported that while they made a cool $1bln on the Citi (C) sale, they expect to lose money on the housing programs and auto rescues within TARP but expect net TARP losses to be about $50bln. The table below, from page two of the Treasury’s report gives the breakdown.
Now, the Treasury also goes on to say that they expect “substantial losses” on Fannie Mae and Freddie Mac, although those stem from decisions made before the conservatorship rather than after. The report attempts to offset this against the “substantial gains” made by the Fed from their purchase of $200bln mortgage securities; of course, those gains (how much is of course highly variable and dependent on continued low rates and a downside surprise in default experience) are only gains if the securities are marked at the current market price rather than their expected sale price! But the bottom, bottom line remains: the government will have bled away hundreds of billions of dollars to keep the unemployment rate down around 10%.
In economic news, the Non-Manufacturing ISM today came out roughly on expectations. The Prices subcomponent was roughly unchanged from the prior month, around 60, in contrast to the sharp rise in the ISM Prices subindex. So, the jump in the latter is either something particular to manufacturing, or it is largely spurious. I expect the latter.
And finally, lest you think that you have problems: Jerome Kerviel, the “trader” who circumvented internal controls at Soc Gen to run huge (and money-losing) positions, was ordered by a French court to repay the bank €4.9 billion. It will be hard for him to earn the money during the next three years, as he will be in prison. I’ll bet Kerviel is thankful for low rates, since even at a 1% interest rate he would be on the hook for €49mm in interest every year.
Today, the ADP Employment Index (Consensus: 20k vs -10k) is expected to show a tiny uptick in jobs. Because of the Census additions and now subtractions, this report has gotten less and less airtime but it is worth keeping an eye on – the market will react to outliers.
http://seekingalpha.com/article/228677-the-fed-huffs-and-it-puffs-and?source=email
Tomgram: Andy Kroll, The Face of An American Lost Generation
Posted by Andy Kroll at 10:01am, October 5, 2010.
One strangeness of our moment is that any U.S. Army commander going into an Afghan village can directly pay locals to, say, fix some part of that country’s destroyed infrastructure. That’s considered a winning-hearts-and-minds counterinsurgency strategy. On the other hand, here in the U.S., it's other hearts and minds that are targeted. Our government has proven itself adept at handing untold sums over to failing banks, investment outfits, insurance firms, and auto companies, but remains allergic to handing significant dollars directly to out-of-work Americans, New Deal-style, to go back to work and help our aging infrastructure.
With the backing of the Nation Institute’s superb Investigative Fund, TomDispatch has sent its associate editor Andy Kroll on the road to confront the reality of the meteoric growth of long-term unemployment, of what joblessness really means to hearts and minds in our country. This is the first result of his journalistic labors. To catch him discussing the jobs crisis on Timothy MacBain's latest TomCast audio interview, click here or, to download it to your iPod, here. Tom
Unemployed
Stranded on the Sidelines of a Jobs Crisis
By Andy Kroll
[Research support for this story was provided by the Investigative Fund at the Nation Institute.]
Sometime in early June -- he's not exactly sure which day -- Rick Rembold joined history. That he doesn't remember comes as little surprise: Who wants their name etched into the record books for not having a job?
For Rembold, that day in June marked six months since he'd last pulled a steady paycheck, at which point his name joined the rapidly growing list of American workers deemed "long-term unemployed" by the Department of Labor. In the worst jobs crisis in generations, the ranks of Rembolds, stranded on the sidelines, have exploded by over 400% -- from 1.3 million in December 2007, when the recession began, to 6.8 million this June. The extraordinary growth of this jobless underclass is a harbinger of prolonged pain for the American economy.
This summer, I set out to explore just why long-term unemployment had risen to historic levels -- and stumbled across Rembold. A 56-year-old resident of Mishawaka, Indiana, he caught the unnerving mix of frustration, anger, and helplessness voiced by so many other unemployed workers I'd spoken to. "I lie awake at night with acid indigestion worrying about how I’m going to survive," he said in a brief bio kept by the National Employment Law Project, which is how I found him. I called him up, and we talked about his languishing career, as well as his childhood and family. But a few phone calls, I realized, weren't enough. In early August I hopped a plane to northern Indiana.
In job terms, my timing couldn't have been better. I arrived around lunchtime, and was driving through downtown South Bend, an unremarkable cluster of buildings awash in gray and brown and brick, when my cell phone rang. Rembold's breathless voice was on the other end. "Sorry I didn't pick up earlier, man, but a friend just called and tipped me off about a place up near the airport. I'm fillin' up my bike and headin' up there right now." I told him I'd meet him there, hung a sharp U-turn, and sped north.
Twenty minutes later, I pulled into the parking lot of a modest-sized aircraft parts manufacturer tucked into a quiet business park. Ford and Chevy trucks filled the lot, most backed in. Rembold roared up soon after on his '99 Suzuki motorcycle. Barrel-chested with a thick neck, his short black hair was flecked with gray, and he was deeply tanned from long motorcycle rides with his girlfriend Terri. "They didn't even advertise this job," he told me after a hearty handshake. Not unless you count the inconspicuous sign out front, a jobless man's oasis in the blinding heat: "NOW HIRING: Bench Inspector."
His black leather portfolio in hand, Rembold took a two-sided application from a woman who greeted us inside the tiny lobby. He filled it out in minutes, the phone numbers, names, dates, and addresses committed to memory, handed it to the secretary, and in a polite but firm tone asked to speak with someone from management. While we waited, he pointed out the old Studebaker factories in a black-and-white sketch of nineteenth century South Bend on the wall, launching into a Cliffs Notes history of industry in this once-bustling corner of the Midwest.
A manager finally emerges with Rembold's application in hand. Rembold rushes to explain away the three jobs he had listed in the “previous employers” section -- stints at a woodworking company, motorcycle shop, and local payday lender. They’re not, he assures the man, indicative of his skills; they're not who he is. You see, he rushes to add, he's been in manufacturing practically his entire life, a hard and loyal worker who made his way up from the shop floor to salecs and then to management. That kind of experience won't fit in three blank spots on a one-page form. Unswayed, the manager thanks him formulaically for applying.
If the company's interested, the manager says -- and it feels like a kiss-off even to me -- they'll be in touch, and before we know it we’re back out in the smothering heat of an Indiana summer. Rembold tucks his portfolio into one of the Suzuki's leather saddlebags. "Well, that's pretty standard," he says, his tone remarkably matter-of-fact. "At least I got to talk to somebody. You're lucky to get that anymore."
A Perfect Storm Hits American Labor
The numbers tell so much of the story. The 6.76 million Americans -- or 46% of the entire unemployed labor force -- counted as long-term unemployed in June were the most since 1948, when the statistic was first recorded, and more than double the previous record of 3 million in the recession of the early 1980s. (The numbers have since dipped slightly, with a total of 6.2 million long-term unemployed in August.) These are people who, despite dozens of rejections, leave phone messages, send emails, tweak their cover letters, and toy with resume templates in Microsoft Word, all in the search for a job.
Not counted in this figure are so-called "discouraged workers," including plenty of former searchers who have remained on the unemployment sidelines for six months or more. In August of this year, 1.1 million Americans had simply stopped looking and so officially dropped out of the workforce. They are essentially not considered worth counting when the subject of unemployment comes up. Nonetheless, that 1.1 million figure represents an increase of 352,000 since 2009. In effect, the real long-term unemployment figure now may be closer to 7.5 million Americans.
So who are these unfortunate or unlucky people? Long-term unemployment, research shows, doesn't discriminate: no age, race, ethnicity, or educational level is immune. According to federal data, however, the hardest hit when it comes to long-term unemployment are older workers -- middle aged and beyond, folks like Rick Rembold who can see retirement on the horizon but planned on another decade or more of work. Given the increasing claims of age discrimination in this recession, older Americans suffering longer bouts of joblessness may not in itself be so surprising. That education seemingly works against anyone in this older cohort is. Nearly half of the long-term unemployed who are 45 or older have "some college," a bachelor's degree, or more. By contrast, those with no education at all make up just 15% of this older category. In other words, if you're older and well educated, the outlook is truly grim.
As for the causes of long-term unemployment, there's the obvious answer: there simply aren't enough jobs. Before the Great Recession, there were 1.5 workers in the U.S. for every job slot; today, that ratio is 4.8 to one. Put another way, with normal growth instead of a recession, we’d have 10 million more jobs than we currently do. Closing that gap would require adding 300,000 jobs every month for the next five years. In August 2010, the economy shed 54,000 jobs. You do the math.
Worse yet, if you imagine five workers queued up for that single position, the longer you're unemployed, the further back you stand. Economists have found that long-term unemployment dims a worker’s prospects with each passing day. "This pattern suggests that the very-long-term unemployed will be the last group to benefit from an economic recovery," Michael Reich, an economist at the University of California-Berkeley, told Congress in June.
But when you consider the plight of the long-term unemployed, don’t just think jobs. The 2008 recession was a housing-driven crisis, thanks to the rise of subprime mortgage lending, government policy, and greed. As a result, 11 million borrowers -- or nearly 23% of all homeowners with a mortgage -- now find themselves "underwater": that is, owing more on their mortgages than their houses are worth. Negative equity at those levels creates what Harvard economist Lawrence Katz calls a "geographic lock-in effect," stifling jobs recovery. Typically, American workers are a mobile bunch, willing to bounce from one city to the next for new jobs, but not when homeowners are staying put to avoid selling their underwater houses for a loss.
Another factor in the explosion of long-term unemployment lies in a shift away from temporary layoffs. In the recessions of 1975, 1980, and 1982, 20% of unemployed workers had been only temporarily laid off; as of August of this year, just 10% had. In their heyday, automakers and steel companies laid off workers as demand dipped, but backstopped by powerful labor unions, those workers were regularly recalled as demand and production revved up again. No more. Now, if you’re long-term unemployed, you’re undoubtedly trying to find a new job with a new employer, a more daunting process. Add it all up and you have Rick Rembold.
"Feast or Famine" in RV Land
Rembold calls himself a Democrat -- "not the peace sign, hit-the-bong type," he hastens to add, but "a tear-off-your-head-and-shit-down-your-neck Democrat." He can't stomach Glenn Beck or talk radio here in the Land of Limbaugh, and with equal zeal he watches MSNBC's Rachel Maddow and FX's "Sons of Anarchy," a gritty, violent series about outlaw motorcycle gangs.
It was a Friday morning, and we were in Rembold's kitchen, drinking coffee and talking politics. He wore jeans and a black polo shirt, and paced as he spoke. Ideas and frustrations poured out of him like water from an open spigot; the man had a lot on his mind. The night before, I had asked him to show me around the area, especially the economic engine that sustains it: the recreational vehicle, or RV, industry. Once the coffee ran dry, we piled into my car and set off.
Cities such as Elkhart and Middlebury and Mishawaka and Wakarusa are the cradle of the RV industry. Headquartered here are major manufacturers like Jayco and Forest River. At its peak, northern Indiana churned out three-quarters of all RVs on the road -- motor homes and fifth-wheels, pop-up campers, travel trailers, and toy haulers. Producing them was grueling work, but you could fashion a middle-class lifestyle out of what it paid. "Workin' in the RV industry, they'll work you to death," Rembold said. "People would literally be sprintin' from one place to the next with power tools in their hands."
Then came "the Panic of '08," as one RV salesman put it to me. Teetering banks choked off consumer lending as credit markets froze. The downturn pummeled the industry. In 2009, sales of fifth-wheels, a smaller trailer you hitch to a truck or SUV, plummeted by 30%, travel trailers by 23.5%, campers by 28%. Manufacturers like Jayco, Monaco Coach, and others collectively laid off thousands, and the region's unemployment rate spiked by more than 10% in a year. When a newly elected Barack Obama arrived in Elkhart in February 2009 to tout his stimulus plan, the jobless rate was 15.3%; a month later, it reached 18.9%, more than twice the national rate. At one point, Elkhart County, with a population of 200,000, was shedding 95 jobs a day.
In the 1990s and first years of the new century, RV manufacturers couldn't hire enough workers. They ran ads in regional and national newspapers looking for more bodies. "We couldn't even get people to drive over from South Bend to work in Elkhart," a sales rep for Jayco told me.
By the time I arrived, though, the industry had left its feast years, hit the famine ones fast, and was showing the first signs of crawling back. Driving through Middlebury, a town of 3,200 east of Elkhart, I saw a few carrier trucks hustling in or out of plants, some full employee parking lots, and rows of gleaming new RVs dotting the green landscape like herds of boxy cattle.
Whether the industry will ever fully recover, however, is unclear. The manufacturers I spoke to were optimistic about future sales. "Despite the logic of what's going on in the economy, the buyers are still there," said Jerimiah Borkowski, a spokesman for Thor Motor Coach. But a 2009 analysis by Indiana University's Business Research Center projected that by 2013 annual RV shipments still won't have returned to their 2006 peak. "I personally don't think it'll ever rebound to pre-2008 levels," says Bill Dawson, vice president and general manager of Clean Seal Inc., a South Bend-based supplier of parts to the RV industry. Dawson points to industry contractions -- Thor's $209 million acquisition of Heartland RV, the Damon Motor Coach-Four Winds merger, as well as numerous factory closings -- and says, "Fewer players mean fewer units and fewer people making them."
Rembold knows the RV industry's ebb and flow all too well. He's lived in its shadow for the majority of his working career, including 18 years with Architectural Wood Company (AWC), an Elkhart-based manufacturer of wood products used to outfit RVs and conversion vans. He's made handcrafted tables, faceplates, valences, and overhead consoles, usually from oak or maple, finishing them with the gloss that gives Kimball grand pianos and Fender guitars their shine.
But by the 1990s and 2000s, his line of work looked to be headed the way of the 8-track tape. The conversion van industry was sinking. RV manufacturers had begun replacing wood with cheaper plastics and vinyl-wrapped plywood. (At an RV show we visited, Rembold could step inside a vehicle and determine by smell alone if the manufacturer used the real thing or not.) Orders plummeted at AWC. By early 2006, the company's financial health was so dire that the owner, a good friend of Rembold's, let him go. A few years later, the company itself folded.
Rembold then caromed from one job to the next: selling used cars and motorcycles, driving a semi truck, working behind six inches of bulletproof glass as a teller at Check$mart. He briefly ended up back in RVs, supervising employees sewing tents for campers, and then, last winter, temped at a struggling wood shop. That was his last job. After the holidays, he was never called back.
Like millions in his predicament, Rembold knows his chances of finding a decent-paying job doing what he loves decrease with each temporary, non-manufacturing job he’s taken. What doesn't fit on a resume -- and so frustrates him most -- is his adaptability, if only he could convince an employer of it. College degree or not, certification or not, he insists, he's always adapted to new settings. "Could I do construction? Hell, yeah, I could do it. I could measure in metric, in standard; I'd correct cutting mistakes, do it all. I just can't get anyone to let me do it."
As we talked, the RV plants gave way to lush farmland and we found ourselves driving through Amish country, sharing quiet two-lane roads with horse-drawn buggies. By early afternoon we rolled into the town of Topeka (pop. 1,200), past the Seed and Stove store and the Do-It Better hardware shop. Then Rembold's cell phone buzzed, a rare break in the conversation. It was his daughter, Angie, 28, the youngest of his three kids.
He listened, then yanked off his sunglasses. "You what?"
Angie managed the Check$mart in Goshen, the check-cashing outfit Rembold once worked for, and she was good at her job, Rembold had told me earlier. Now she was agitated, talking so loudly that I caught bits and pieces of the conversation over the din of the radio. Something about a bonus owed that she didn't receive. When Rembold abruptly hung up, he muttered, "Jesus H. Christ."
Later, over lunch at what looked to be Topeka's lone diner, he explained that Angie planned to quit her job over the unpaid bonus. After a full morning telling me about the nightmare of being out of work, he looked stunned. "You'd think she'd have learned from my situation. I don't think she realizes how her life is going to change."
The Trauma of Long-Term Unemployment
It’s hard, even for the long-term unemployed, to grasp just how drastically life can change without work. Studying past recessions to discover just what does happen, researchers often focus on the collapse of the steel industry in Pennsylvania in the late 1970s that would turn a once-thriving region into a landscape of shuttered factories and ghost towns. Eighty thousand people worked in steel in the 1940s; by 1987, 4,000 remained.
In one study, male Pennsylvania workers with high seniority experienced a 50% to 100% spike in mortality rate in the first year after job loss. The life expectancies of those laid off after age 40 decreased by one to one-and-a-half years. In the long run, these laid-off Pennsylvanians suffered a 15% to 20% reduction in earnings. Those hardest hit in terms of lifelong earnings, economists found, were not low-skilled laborers or highly skilled wealthy elites, but workers who had managed to forge a middle-class lifestyle.
Suicide rates also increase, researchers have found, when unemployment rises. (In Elkhart County, near where Rembold lives, suicides exceeded the annual average by 40% last year.)
The 1980s recession in Pennsylvania was no outlier either, economic researchers have discovered, and the effects of long-term unemployment spread well beyond directly afflicted workers. In the short run, for instance, a child whose parent loses his or her job is 15% more likely to repeat a grade year in school, according to University of California-Davis economists Ann Huff Stevens and Jessamyn Schaller. This is especially true for children with less-educated parents.
Over their lifetime, the children of jobless fathers earn, on average, 9% less each year than similar children without laid-off dads, and are more likely to receive unemployment insurance and social welfare support at some point in their lifetimes. New research also suggests that the children of laid-off parents may have lower homeownership rates and higher divorce rates.
"I'm Not Competing With Some College Kid"
In the early evening, Rembold and I holed up in his office, a small room off the main hallway with a computer, two desks, and countless framed photos. Rembold clicked open a folder on his Internet browser labeled "Careers" and walked me through his daily online job-hunting routine. He checks half-a-dozen job boards regularly, though openings tend to pay only in the $8- to $10-an-hour range. He rejects most of those out of hand.
"Wouldn’t that be better than no job at all?" I ask.
Rembold gnaws on the question. "I can't afford my home at $8 or $10 an hour," he finally replies. Right now, he’s getting by on unemployment checks, a small inheritance from his mother that's rapidly dwindling, and loans from family members. Still, he'd rather keep trolling the job boards in the hopes of finding something offering a living wage. "I've got a mortgage to pay, for Christ's sake," he told me. The few openings he sees with good pay, however, involve odd hours, dusk-to-dawn shifts that would mean he'd almost never see Terri, whose schedule at an aluminum company in Elkhart is early morning to mid-afternoon.
And then, under the dollar signs lurks something else: self-respect. Unlike his father, Rembold never went to college, and doesn't consider himself too good for service-sector jobs. But he visibly agonizes over the fact that, as a 56-year-old man with decades of experience, he's competing with people half his age for low-wage jobs. After all, as a machine operator fresh out of high school at White Farm Equipment, he earned $8.64 an hour. That was 1976. Adjusted for inflation, that's equivalent to $42.42 today. No wonder the man's reluctant to flip burgers or trim hedges for $9 an hour.
His friends have suggested selling his house and moving somewhere smaller and cheaper, maybe renting for a while, but that's the last thing he wants. It’s that self-respect again. He's already sold off one motorcycle and various musical instruments, and he and Terri now skip the big vacations that were part of their past life. Which isn't to say that Rembold currently lives like a monk. He still has the big screen in the basement, the DVD collection, the video-game systems for when the grandkids visit, a life's worth of possessions from decades of earning good money. "Why should you have to give up your home?" he wanted to know. "It's so unbelievable to me that I don't even want to think about it. I'm in denial."
A Lost Generation?
What's to be done for people like Rick Rembold? As in most economic debates, the answer to this question divides economists and policymakers. On the left are those who lobby for more aid to jobless Americans, including another extension of unemployment insurance beyond the present cut-off date of 99 weeks. (In normal times, laid-off workers once got 26 weeks of unemployment insurance.) Some Democrats in the Senate had hoped to extend unemployment insurance by another 20 weeks up to 119 weeks, an effort spearheaded by Senator Debbie Stabenow (D-Mich.) that ultimately failed last week in the face of Republican opposition. That same camp supports a one-time “reemployment bonus,” a lump-sum payment that unemployed workers would receive to reward them for finding a new job and leaving the unemployment rolls.
Another idea gaining traction in policy circles is "wage insurance," in which the government would supplement the income of workers rehired at lower-paying jobs. Consider Rembold who, in his prime, earned $25 an hour. He says can't live on a $10-an-hour job, but if that were to become $12 or $15 an hour, thanks to a government subsidy, he'd be much more interested.
More conservative voices believe cutting jobless benefits -- a bitter pill, to be sure -- will force people back into the workforce. The Rembolds of America will then scramble harder and take those low-wage jobs faster. Of course, those who can't find work at all will be left adrift with no safety net. What's more, the cost of such cuts to taxpayers might actually prove higher, economists note, because without those benefits the jobless might instead apply for disability or other support programs and give up the search altogether.
Ideally, of course, employers and governments should avoid widespread layoffs altogether. One option sometimes suggested would be a "work-share" program. Imagine a factory of 100 workers with a boss looking to cut costs. Instead of laying off 25 workers, he would reduce all of his workers' hours by 25%. The government would then step in to fill the earnings gap. Think of it as the equivalent of collecting unemployment before you're laid off, a preventive measure to avoid the trauma -- to income, health, family -- of job loss.
None of this is likely to happen soon which is little consolation for the long-term unemployed like Rembold. Unfortunately, there are few proven solutions to their situation. Job retraining programs for unemployed workers are all the rage these days, touted by Education Secretary Arne Duncan, Treasury Secretary Tim Geithner, and President Obama as a transition to a new line of work. But a 2008 study commissioned by the Labor Department found minimal-to-no gains for 160,000 workers who went through retraining, concluding that the "ultimate gains from participation are small or nonexistent."
In the end, facing an economy that may never again generate in such quantity the sorts of "middle class" jobs Rembold was used to, what we may be seeing is the creation of a graying class of permanently unemployed (or underemployed) Americans, a genuine lost generation who will never recover from the recession of 2008. As Mike Konczal and Arjun Jayadev of the Roosevelt Institute, a left-leaning think tank, recently wrote, unemployed workers today are more likely to abandon the workforce than find work -- something never before seen in four decades' worth of labor data. "These workers need targeted intervention," they concluded, "before they become completely lost to the normal labor market."
"All I Need Is One Chance"
I first noticed Rembold’s tic on Sunday, my last day in Indiana. Out of nowhere, without provocation, he'd suddenly say things like "Man, I just need a job," or "All I need is a chance," or "I wanna work, make stuff with my hands." He’d been filling the lulls in our conversations with these little outbursts, symptoms, I assumed, of the worry and anxiety that never left his side. Which is why I called a few weeks after my visit, hoping for good news.
And there was, after a fashion. Angie, his daughter, had ended up sticking with Check$mart, much to his relief. But for him, the leads were sparser than ever. "There's this neighbor here,” he said, “her son's a shift manager at the Walmart, so he's gonna see what they might have." He also mentioned an electronic wire and cable manufacturer with openings in Bremen, a half-hour south. He'd recently applied there for the third time this year. This time around, he went on, he planned to march in and demand the interview he’d never gotten. "I mean, what's it take to get in to see someone there?" he asked me.
Rembold doesn't have time on his side. Unlike the now-famous "99ers," the folks who received nearly two years' worth of unemployment benefits, his will expire sometime this winter, short of the 99-week mark. He's not sure what he'll do by then if he can't find work. Maybe take one of those $8-an-hour jobs after all. For now, though, he's just checking the job boards each morning, shipping off resumes and cover letters, firing up the Suzuki, chasing leads.
I asked if he still had any hope left that something good would happen. "I don't know," he replied. " 'Course if ya don't go, ya don't know."
Andy Kroll is a reporter in the D.C. bureau of Mother Jones magazine and an associate editor at TomDispatch. He's always looking for new stories in this economic downturn, and you can email him at akroll (at) motherjones (dot) com. To catch him discussing the jobs crisis on Timothy MacBain's latest TomCast audio interview, click here or, to download it to your iPod, here. This story was written with research support from the Investigative Fund at the Nation Institute.
Copyright 2010 Andy Kroll
http://www.tomdispatch.com/archive/175304/
When Gas Hits $4, Main Street Is Going To Wake Up To Bernanke's Pro-Inflation Madness
Bruce Krasting | Oct. 5, 2010, 9:20 PM | 2,911
Bruce Krasting
Jon Hilsenrath (WSJ) has yet another article on Fed propaganda to ease the way to QE-2. Today it was Chicago Fed boss Charles Evans doing the talking. He is in love with the Fed stuffing its balance sheet further.
He favors "much more [monetary] accommodation than we've put in place."
It’s hard to imaging being more accommodative than the Fed is today. We have ZIRP. We have nearly daily POMO. Rates have never been this low. Ever. We have broken some golden rules on monetization. And Evans thinks we need “much more”?
The Fed might aim to overshoot its informal 2% target for a time to make up for lost ground, Mr. Evans said. "That is a potentially useful policy tool at this point and I definitely think we should study it more,".
All the Fed heads are talking about the need for more inflation. This is nuts. The Fed is in a tiny box and saying, “Deflation is BAD”. If that is true then the opposite, “Inflation is GOOD” must be true. That logic is going to backfire.
There is possible bright side to this. Judging how quickly markets adjust I think there is a possibility that in a relatively short period of time, say the next four months, we have a shake out in oil. It would not take much. All the pieces are there. There is economic growth globally and the dollar is being trashed by the Fed on a daily basis.
I don’t think the average American gives a damn about the dollar. But they care very much about the cost of gas. If we get a price break and the pump says $4.00 and heating oil is $3.00 there will be a backlash. On a broad basis people will be angry. The economy will suffer. Our trade balance and current account will deteriorate. GDP will decline.
At that point the MSM will look for answers. They won’t have far to look. They can blame Mr. Evans or Mr. Bernanke. $120 oil and $4 gas will be brought to you by the Fed. From Hilsenrath’s article, the understatement of the year:
It could be a challenge for the Fed to explain such a strategy, and to convince the public that it wouldn't allow inflation to get completely out of hand.
I can’t wait for Fed officials to explain to Congress and the American people why trashing the dollar and raising the price of energy is good policy. They won’t be able to.
http://www.businessinsider.com/when-gas-hits-4-main-street-is-going-to-wake-up-to-bernankes-pro-inflation-madness-2010-10#ixzz11XSpZoNI
Welcome to the P.B.R. Stock Market
23:59 by Administrator. Filed under: Whatever
By John Galt
October 5, 2010
And knowing the degenerates that I know, everyone probably thought I meant this:
No, not that PBR but it would be appropriate for what is going to happen next or should I say eventually as there is no telling with this nutty manipulated mess we call our equity and commodity markets. If not the beer then which PBR am I referring?
P arabolic
B lowoff
R eversal
When you review the charts with me tonight, you’ll understand why I am concerned about what is going to happen next.
The Dow Jones Industrial Average shall be first and the vivid display of the parabolic 10%+ move:
Notice that in the period following the bottom on February 8, 2010 the market moved sharply well over 10% without a correction. Then May 6th rolled around and we entered a period of another massive move where new lows for the year were established:
The cratering we saw from the Flash Crash forward was a hint as to what is coming. The action for the year though tells the tale of what has happened with the last arrow describing my call for the future, just not sure of the timing at this moment since we are finishing another parabolic blowoff move upwards:
The recent action in the S&P 500 in February through April is almost identical:
And the mirror image chart from the end of the Flash Crash summer until yesterday:
The charts for the NASDAQ and Russell 2000 are almost identical to those above. Thus I see a massive correction, 20% to 40% coming and faster than anyone could imagine as the rally is not based on any technical or fundamental reason but on the deliberate dilution of and depreciation of the U.S. Dollar. The Euro will not remain this strong for long and is long overdue a correction itself so as the U.S. Dollar rallies against the Euro and continues to deteriorate against the Yen the move in equities will be equally as violent to the downside.
The precious metals are in a similar PBR move which has been in parallel to the recent moves in equity markets as you can see with the recent charts as expressed in the GLD and SLV ETF’s:
The difference though between the DJIA, S&P 500, etc. and the precious metals though can be discovered in the one year charts where you can see strong support levels for GLD:
And even more dramatically in the SLV (Silver) ETF:
Thus when this move completes in equities, currencies, and commodities if the economic conditions confirm the “slowdown” scenario instead of the re-validation of a persistent recessionary condition then a new reflationary (Translation: Print til we die) rally in every market should begin in Q2 of next year. Unfortunately for the permabulls it will result in a massive metals rally and further destruction of fiat currencies along with the re-introduction of commodity inflation which will not only impact consumers, but destroy those producers who are over-leveraged and can not afford the increases in raw materials to compete. In other words the next real estate crisis, in addition to the residential and commercial ones, will begin in earnest:
The Agricultural Real Estate Crash.
That is when the end game really is in play and all parties involved will engage in absurd actions and legislation to “save” America. Buckle up, it could get UGLY.
http://johngaltfla.com/blog3/2010/10/05/welcome-to-the-p-b-r-stock-market/
How the Housing Crisis Will End the U.S.A. as We Know It
04:25 by Administrator. Filed under: Whatever
By John Galt
October 5, 2010
I know that a lot of fans of my writings are expecting another ¡°get in yur bunker and clutch them thar guns and Bibles¡± type of story but this is, in my humble opinion, a reasonably well thought out picture of America just one to two years from now unless a massive if not tectonic shift in government and the apathy of the citizens occurs within the next ninety days. There will be readers from the lunatic left who will blame the events about to occur in our nation on those evil capitalists and bankers who were unwilling to work with the poor, downtrodden citizens and help them to save their homes, their property, and their standard of living. On the other hand the RINO right will blame excessive government meddling, insensitivity to the needs of the ¡°system¡± to operate as it was with less regulation, and of course, the current administration for the upcoming disaster.
In reality it is you and I who are responsible for what is about to happen, because we voted for and trusted people into these positions within the economic and political realm to act as responsible caretakers of the power assigned to them, becoming too lazy to engage in oversight, too busy getting ¡°more¡± in our homes and driveways if not more of a home than to participate and reject the policies and changes which have been inserted into our nation¡¯s economic and political systems over the last eighty years.
Thus the question arises, how does the collapse of the housing system created by a closet Socialist in the person of one Franklin Delano Roosevelt, create the very power vacuum he and his ilk attempted to fill by packing the Supreme Court and creating legislative nightmares of which some still haunt us today? The system as envisioned with shared government oversight and participation within a system of banking and commerce has run full circle as many warned it would during the 1930¡äs. The insertion of the government as a participant in the marketplace all but guaranteed new standards for home lending on an almost annual basis initially, and an almost quarterly basis in the current era.
The Road Map History has Provided
¡°We stand at Armageddon, and we battle for the Lord.¡±
-Theodore Roosevelt, August 6, 1912 final line from the speech ¡°A Confession of Faith¡± before the National Progressive Party convention
To understand where we are going as a society it is not necessary to rehash the goals of this administration nor the leftist elites who have been drifting our society towards a Statist form of government since 1893. The quote from the 1880¡äs book by Professor Richard Ely¡¯s book An Introduction to Political Economy, Chapter V is still appropriate to this discussion:
¡°The danger to freedom appears to be a very real one. It is frankly admitted that up to a certain point there is a tendency on the part of government to improve as its functions increase. But would this hold with the indefinite extension of the sphere of government? Let us admit that our livelihood would depend on the efficiency of government all the force and energy which now go into private services would be turned into public channels. But what would happen if, in spite of all precautions, some unscrupulous combination should secure the control of government?¡±
The entirety of the socialist experiment is summed up in the statement above as I surmised in my piece of May 2009 titled ¡°Blame Wisconsin¡± where I outlined how the Marxist/Progressive movement evolved from a test tube case environment in Wisconsin into a national ideal under Theodore Roosevelt. Fast forward to FDR, Truman, Kennedy, Johnson, Nixon, etc. and the evolution of our modern housing finance system should not be shocking nor as disturbing once you pause and reflect on a little history. The plan all along was to insure a universal standard of living for the lower 90% of the population where income distribution was approximately equal and the mercantile class with the cooperation of the banking system and Federal government would insure the economy would function adequately to provide equilibrium of opportunity while providing the mask of capitalism to cover for their exercise of power and oversight.
Fast forward to the era where we are in which began shortly after the Long-Term Capital Management (LTCM) which almost destroyed the financial system due to the Russian debt default in 1998 and has now culminated in the greatest era of financial strife for the U.S. economy since the Great Depression. The danger is this time that there is no safety net other than the threat of hyperinflation from the Federal Reserve and the guarantee that our government (aka, Taxpayers) will undertake any and all actions to preserve the system¡¯s status quo, shaky as that is. Thus to preserve a standard of living being eroded by the very powers entrusted to oversee and manage the economy now lies with the ability or gullibility of the average citizen to accept the ideas about to be presented for the ¡°common good.¡±
The Average American¡¯s Perilous Addiction To Things
The conversion that evolved with the moral revolution of the 1960¡äs from a ¡°Greatest Generation¡± economic model where saving and frugality were usurped by the Baby Boomers consumerism model of owning ¡°stuff¡± including one or two homes, several cars, televisions, etc., even if the financial means were unavailable at that moment to acquire the goods desired. The economic theory of housing during this evolution included the false impression provided that real estate in the form of a home was an ¡°investment¡± and that this item should be used not just as a home, but to build a nest egg for the future and if possible use it during the good times to leverage up and acquire more items or investments of any type.
As the past two decades have demonstrated, the average American citizen has become addicted to the art of acquisition, even if they can not afford the items in question by using leverage to spread the payments of months, years, or in the case of a home, decades. The model worked well with modest inflation from the post-Volcker era until the late 1990¡äs but when LTCM imploded, the managers of America¡¯s and Europe¡¯s financial system realized that the stakes needed to be raised and the accelerated use of credit by the citizenry was a necessity if the bankers were to recover their losses from both the Savings and Loan disaster coupled with the ill advised ventures within the developing world. Hence the creation of new investing instruments for average citizens to participate with plus the evolution of creative financing for real estate purchases or investing were developed. The creation of the first bubble worked beyond their wildest dreams as the tech bubble demonstrated in the late 1990¡äs, inflating equity markets in many nations to levels that were only dreamed of during that era. The popping of that bubble and the wealth destruction in conjunction with the terror attacks of September 11, 2001 only increased the desperation of the political and financial class, which helped to enhance the evolution of the ¡°ownership society¡± President Bush envisioned and the bankers salivated over so profits could be as leveraged as much as their balance sheets.
The American citizen¡¯s additional credit card guaranteed by GSE¡¯s like Fannie and Freddie enabled many to take advantage of Greenspan¡¯s new bubble in the last decade and instead of saving to plan for a second or retirement home, the first home was refinanced at a very low rate and the equity extracted to buy ¡°things.¡± Some of those ¡°things¡± Americans purchased were courtesy of the belief that this was the ground floor for a real estate boom and you had to get into it now as ¡°real estate always goes up¡± and this was the time to lock in a mortgage for that budding vacation home, time share, or future retirement home now. I believe that part of the boom was the famous myth propagated by both Realtors and bankers alike was that real estate always goes up in price so you had best get your slice of the American Dream now. This belief fueled speculation not just by professional real estate investors but by middle class citizens who viewed home equity extraction as an excuse to acquire those things their years of hard work had left them ¡°due¡± and an opportunity to join the upper strata of society without having to work as hard to obtain that distinction. These middle class ¡°investors¡± figured out the house flipping game at the very end of the bubble, just as they had discovered again the joys of using home equity to purchase stocks and other diverse investments in the 2005-2008 era.
Those beliefs along with the total destruction of housing values and retirements for three generations of Americans co-existing in our society now provides the formula for a national will to accept new ideas to preserve what they believe they have always deserved. Thus one of those dangerous intersections in history is upon us again and the next ninety days will do more to determine the course than any action we have seen since the fateful events of 1859 and 1860.
Preserving the Status Quo With Change
The crisis we face tonight and through the first crisp winter days of the new year will move with dazzling speed and keep historians busy for decades writing about it. The news from Monday was bleak, between the crisis of the ¡°robo-signers¡± in the processing of foreclosures at the various major institutions to the continuing deterioration of home purchases as report after report is issued by the government and the National Association of Realtors. The most disturbing report was from Amherst Securities, LLC in an article on DNSNews.com October 4th ( Amherst: One of Five Borrowers Could Lose Their Homes ) where they postulate:
If governmental policy on foreclosure prevention does not change, 11.5 million borrowers are in danger of losing their homes, according to the analysts at Amherst Securities Group LP.
The staggering figure put forth by the mortgage investment brokerage equates to one out of every five borrowers ¨C an astronomical 20 percent default rate that Amherst says ¡°politically cannot happen.¡±
1 in 5 gang, let that sink in. If you think that a change in policy will not occur to stop such an event, you, the reader are on crack. The United States government for all of its flaws, devious or not, is not ignorant nor are the political and banking elites of whom we have given charge to manage the economy. The first course of action that will be undertaken has already been rumored with the idea that spread like wildfire throughout the financial system today of a ninety day mortgage moratorium would be imposed by the Federal Government to allow the system to clean up the mess created by the back log of fraudulent and erroneous paper trails. Unfortunately for the government, this does nothing but forestall the day of reckoning as the loss of valuation for many of the distressed homeowners speculated on in the Amherst report above is so grave that even if the homeowners wore able to work out a ¡°sponsored¡± refinancing program, they would not have any equity for twenty years if housing prices resumed their normal pace of price appreciation.
This means that more creative solutions will have to be engaged in and that is the danger I foresee in our immediate future. Thus ¡°change¡± to preserve the status quo or to prevent millions more citizens from losing their homes and accompanying crashing of a large portion of the financial system will be the order of the day. What does that sort of action entail beyond the prior solutions postulated like forced forbearance, government loan modifications, or worse?
The ¡°Or Worse¡± Solutions to Repair the Housing Crisis and Start of Our National Nightmare
Everything in this section is pure speculation on my part as the author, but when you look at some of the proposals of this administration and the financial community it is not that far fetched. The bottom line is that the American system used to finance and purchase homes is irrevocably broken. The blame can be spread to both political parties, the Wall Street Ponzi game, and the irresponsible behavior of the banking community which was initiated under the Gramm-Leach-Bliley Act and culminated with the then CEO of Goldman Sachs, one Hank Paulson the U.S. Treasury Secretary to be, persuading the government to release the limitations on leverage which allowed the mortgage and debt securitization industry to explode in less than two years. This expansion of the credit bubble did not lift all ships equally so the Congress stuck its nose under the tent and accelerated the reduction in standards which allowed totally unqualified buyers to purchase homes who now in turn are abandoning them or part of the problem by the millions.
Thus the solutions become quite obvious and palatable to the members of the financial community because their losses will be minimized if not eliminated and the future liabilities the responsibility of others. The first proposal I look for is a massive expansion of the Fannie Mae and Freddie Mac system under the auspices of a Republican House with strong support from the banking system and the administration to either merge the agencies and create a super housing authority or new GSE (Government Sponsored Enterprise). Within this newly chartered instrument, the government will buy upwards of ninety-five percent of all mortgages, securitized or not, on the market at no less than ninety cents on the dollar plus assume the role for one hundred percent of origination for all mortgages under $750,000 nationally. This would still leave the banking system with the ¡°appearance¡± of having some private role in the mortgage origination business, while in reality less than 2% of all mortgages created would be their responsibility and they would have the ability to manage the qualifications as they used to, on a case by base basis with strict fiduciary oversight.
Once this super GSE is in place, the mortgages for all delinquent homeowners could be purchased using the power of the taxpayer and the process of selective forbearance begun. This is not only a process which relieves the banking system of the stress of mortgage servicing (unless they wish to act as a contractor to the government, which they would have to initially as the system is created) and the torrid pace of default, but installs a program where jobs are created for former employees who specialize in mortgage finance and accounting, this time though as a government employee. The process of forbearance would be relatively straightforward and the homeowner would be forced into an obligation of thirty to sixty years refinancing based on income, age, and geographical criteria. If the homeowner declines the terms, the government would foreclose then seize the property in question and using a newly expanded Internal Revenue Service have the ability to collect deficiency payments for upwards of a decade to recoup some of their lost investment. This might sound insane but this is the type of radical solution you should be looking for as the alternative is worse than the collapse of late 2008.
That is only the precursor of our national nightmare however.
Imagine a world where you must report to a government official in a bank or other financial institution, maybe even a government office building to apply for a mortgage. Think about the new ¡°green¡± wave of regulatory bureaucracy plus OSHA style ergonomic designs which will be instituted to ¡°protect¡± the government¡¯s investment in you the homeowner. For example if a husband and wife of eight years with two children walked into a home that they felt they could afford, the government regulatory regime could determine that this particular home is not ergonomically friendly enough for their children and the transportation costs in carbon would be excessive as the husband and/or wife would live too far from their place of employment. Sound insane? Review the stories emanating from the Mother Country of Jolly Old England regarding absurd regulations and government meddling in their citizen¡¯s daily affairs.
Take this one example then consider the consequences of Kelo v. City of New London decision which could force a homeowner who are current with their payments out of their homes as the Federal Government owns all of the properties within a subdivision and their presence disrupts the ideal of economic diversity because they did not need nor want a government mortgage and their inhabiting of that property could make the new residents feel inferior, thus causing emotional distress. Or worse, if the one homeowner refuses to sell to a potential government sponsored buyer because the seller feels the price is inferior to market conditions the government could force the price to meet the standards of the bureaucratically established level of financing to match the price or use eminent domain to seize the property at the price level some beanie head feels is ¡°just¡± for the GSE to pay.
This goes far beyond the concepts of financing, buying, and selling homes however. The entire real estate industry will end up subservient to a government master in Washington, D.C. Want to build a new subdivision? Better submit the homes to a standardized review to the Department of Housing Development team. Want to modify your GSE financed home by building a tool shed in the back? Fill out GSE form 4417-E/109.1367 available at your local bank¡¯s GSE department or Federal office building and pray they approve it before the apocalypse. Want to sell to the family that wants to pay cash for the home instead of waiting for the minority who has the fifty year mortgage financing that is offering you 4% less? Nope, that would be discrimination and you no longer have control over property which technically belongs to the people.
See where this is leading?
Once the bankers and government elect to divert full control of the residential real estate market, or at least a majority of it, to Federal control, all private property rights cease in the United States. Want to grow a garden? Apply at the appropriate Federal agencies like the Department of Agriculture. Want to add a pool or a patio? Better hope the EPA carbon impact study doesn¡¯t prevent that from happening. The U.S. will not only have legal physical control of your property outside of the home, but the inside where smart electrical grid systems will become mandatory, ten ounce water conserving slow flush toilets, twenty second showers, and those stupid General Electric Chi-Com manufactured mercury loaded curly bulbs being the only ones permitted. You will comply or the government will penalize you for abusing their home and regulations.
The final straw will expand control into the areas of landlord and property management which shall be regulated via the government buying up those property¡¯s loans and lastly small scale commercial real estate enterprises as the community banking system will implode without direct government intervention and soon. In the end this probably leaves less than twenty percent of all domestic real estate concerns either invested in or owned outright by private entities. With the preservation of the banking system, pension funds invested in REITs, plus the potential ¡°Municide¡± or collapse of the municipal bond system (as I¡¯ve been warning about since 2008) as a result of the housing collapse, there is little doubt in my mind that this devious yet effective plan to usurp private property rights will be sold as the only solution to the banking and housing crisis without allowing the entire economy to fail and reset. This new initiative will be reinforced with a bailout of the municipal bond system and states which are teetering on default so as to sell support for the program proposed and both political parties will be involved in the process to give it that ¡°bi-partisan¡± appearance. Knowing the average American¡¯s desire to obtain and keep ¡°things¡± including their future retirement or home be it ten months or ten years out, look for the political and financial elites to act in a Machiavellian manner which leaves those freedoms God gave us and our Founding Fathers codified as a distant memory to those of us pining for the good old days.
http://johngaltfla.com/blog3/2010/10/05/how-the-housing-crisis-will-end-the-u-s-a-as-we-know-it/
Is the Fed Better… as the Devil You Know?
By Rocky Vega
10/04/10 Stockholm, Sweden – If Dr. Ron Paul is one of few voices of reason in Congress, then Thomas Hoenig may be the Fed’s Ron Paul. As president of the Federal Reserve Bank of Kansas City and voting member of the Federal Open Market Committee, he’s been the lone vote of dissent against the Fed’s ultra low-interest rates –six times.
Here’s how Bloomberg describes Hoening in a recent profile:
“This is Tom Hoenig’s moment, and it’s a strange one. In Washington, he is the burr in Fed Chairman Bernanke’s saddle: the rogue heartland banker who keeps dissenting alone — for the sixth straight time on Sept. 21 — to protest the Fed’s rock- bottom interest-rate policy. Hoenig warns that the Bernanke majority is setting the country up for an as-yet-unknown asset bubble: the next dot-com or subprime craze. He can’t tell yet where the boom-and-bust will materialize, but he can feel it coming, like a Missouri wheat farmer senses in his bones the storm that’s just over the horizon.”
Yet, even with un-Fed-like views — enough so to serve as a Tea Party speaker in the clip below — he articulates well a few points against ending the Fed in a hurry. Here’s a sample of his reasoning…
“I know many of you are very strong supporters of end the fed, and I respect that, the Congress can end up changing it. But, you better have something else in mind. If you have the gold standard in mind, that’s fine, but it’s not going to end crises. And, remember the populist movement was about ending the gold standard, because it was a very strict requirement on debitors who happened to be in agriculture at the time. So, know what it is you want. And, if you’re gonna end the Fed, and you think you’re going to do it, make sure that what you’re going to end up with isn’t a more centralized institution, located in Washington or on Wall Street.”
Check out the actual video of his talk below, which came to our attention via a Daily bail post on Fed President Thomas Hoenig’s speech to the Tea Party on Bernanke’s QE insanity.
http://dailyreckoning.com/is-the-fed-better-as-the-devil-you-know/
Government Workers: The New Upper Crust?
By Bill Bonner
10/01/10 Baltimore, Maryland – We’re on zombie watch…
They’re everywhere…but especially here in the Washington metropolitan area.
Zombies get their money from the government – directly or indirectly. Or some other perk…some edge…some benefit.
Just open The Washington Post. Skip the international news, which is nothing but humbug and claptrap…usually having to do with Iraq, Afghanistan or Israel.
Go to the local news.
Let’s see…how about this: a little item. Martena Clinton made the news after her car was towed by the Secret Service and then lost. She had parked in a handicapped section. But wait…what’s this? Ms. Clinton isn’t handicapped. She’s not a half-wit. She’s not lame. In fact, in the photo, she looks pretty good.
So what’s she doing in the gimpy parking section? Well, her husband is said to be mobility challenged.
Special parking spaces seemed like a nice gesture when they were originally introduced. But the zombies quickly took advantage of them. Now, they’re used by friends and families of an invalid…often passed down from one generation to the next after the cripple dies.
That’s how zombies do it. They take advantage of an easily-corruptible system. Government salaries and benefits, for example, are typically about 30% better than those in the private sector.
You can see the difference here in Bethesda. The houses are all tarted up. The cars are all new and expensive. The streets and restaurants are full. Everything is modern, rich….
The editor of US News & World Report talks of a “great divide” in the US…those who have government salaries…and the rest of us. People who work for government – or otherwise are supported by the government – have made steady income gains over the last 30 years. Others have not. Government employee labor unions have grown while others have declined.
Being a zombie pays. And it’s likely to pay even better in the future. Because now zombies control the White House (it was the zombie states…those that owed the most money…and those that get most money from the government) that elected Barack Obama. They control the Congress too. Zombies have the time (what else do they have to do?) and the resources (often, direct contact with the government itself) to get involved in elections. They have a motive too – they can pass legislation putting more money in zombie hands. Military contractors, tax lawyers, “educators” and the handicapped – all have a keen interest in elections. The rest of us have our work, business, families, careers to attend to. Not that every tax lawyer is a chiseler, every military contractor is a cheat, and every person who can’t walk is a malingerer – far from it. But they have to be doubly honest and independent to avoid the corrupting gravity of Planet Zombie.
Regards,
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/government-workers-the-new-upper-crust/
Things Will Unravel Faster Than You Think
by: Chris Martenson October 04, 2010
By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future. Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.
My work centers on figuring out which macro trends are in play and then helping people to adjust accordingly. Based on trends in fiscal and monetary policy, I began advising accumulation of gold and silver in 2003 and 2004. I shorted homebuilder stocks beginning in 2006 and ending in 2008. These were not ‘great' calls; they were simply spotting trends in play, one beginning and one certain to end, and then taking appropriate actions based on those trends.
We happen to live in a non-linear world; a core concept of the Crash Course. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world does not always cooperate, and my concern rests on the observation that we still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living.
Three such trends (out of the many I track) that will shape our immediate future are:
Peak Oil
Sovereign insolvency
Currency debasement
Individually, these worry me quite a bit; collectively, they have my full attention.
History suggests that instead of a nice smooth line heading either up or down, markets have a pronounced habit of jolting rather suddenly into a new orbit, either higher or lower. Social moods are steady for long periods, and then they shift. This is what we should train ourselves to expect.
No smooth lines between points A and B; instead, long periods of quiet, followed by short bursts of reformation and volatility. Periods of market equilibrium, followed by Minsky moments. In the language of the evolutionary biologist Stephen Jay Gould, we live in a system governed by the rules of "punctuated equilibrium."
Complex Systems
Our economy is a complex system. The key feature of such systems is that they are inherently unpredictable with respect to the timing and severity of specific events. For the uninitiated, they can look enormously fragile and prone to flying apart at any minute; for the seasoned observer, there is an appreciation that the immense inertia of the economic system will almost always delay and dampen the eventual adjustments.
Like everybody else, I have no idea exactly what’s going to happen, or precisely when. Anybody who says they do know should be greeted with a furrowed brow and a frown of suspicion. As my long-time readers know, I prefer to assess the risks and then take steps to mitigate those risks based on likelihood and impact.
Which means that although we cannot predict the size (exactly how much) or the timing (precisely when) of economic shifts or world-changing events, we can certainly understand the risks and the dimensions of whatmight happen. Just as we cannot predict when an avalanche will release from steep slope, or even where or how big it will be, we can readily predict that constant snowfall coupled with the right temperature conditions will lead to an avalanche sooner or later, and more likely in this gully than that one. Given certain conditions, we might expect one that is larger or smaller than normal. Although we don't know exactly when or how much, we do know that when snow accumulates, so do the risks of more frequent and/or larger avalanches.
Such is the nature of complex systems. While inherently unpredictable, they can still be described. The most important description of any complex system is that it owes its order and complexity to the constant flow of energy through it. Complex systems require inputs. This is one way in which we can understand them.
Given this view, one easy "prediction" is that an economy without increasing energy flows running through it will stagnate. To take this further, an economy that is being starved of energy becomes simpler in the process -- meaning fewer jobs, less items produced, and a reduced capacity to support extraneous functions.
Accepting "What Is"
The most important part of this story is getting our minds to accept reality without our passionate beliefs interfering. By ‘beliefs’ I mean statements like these:
“Things always get better and are never as bad as they seem.”
“If Peak Oil were ‘real,’ I would be hearing about it from my trusted sources.”
“Dwelling on the negative is self-fulfilling.”
While each of these things might be true, they also might be false and therefore misleading, especially during periods of transition. Our job is to remain as dispassionate and logical as possible.
Let's now examine more closely the three main events that are converging -- Peak Oil, sovereign insolvency, and currency debasement -- using as much logic as we can muster.
Peak Oil
Peak Oil is now a matter of open inquiry and debate at the highest levels of industry and government. Recent reports by Lloyd's of London, the US Department of Defense, the UK industry taskforce on Peak Oil, Honda (HMC), and the German military are evidence of this. But when I say “debate,” I am not referring to disagreement over whether or not Peak Oil is real, only when it will finally arrive. The emerging consensus is that oil demand will outstrip supplies “soon,” within the next five years and maybe as soon as two. So the correct questions are no longer, "Is Peak Oil real?" and "Are governments aware?” but instead, "When will demand outstrip supply?" and “What implications does this have for me?”
It doesn't really matter when the actual peak arrives; we can leave that to the ivory-tower types and those with a bent for analytical precision. What matters is when we hit “peak exports.” My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product "for future generations" or some other rationale (such as, "get a higher price"), which will rather suddenly create a price spiral the likes of which we have not yet seen.
What matters is an equal mixture of actual oil availability and market perception. As soon as the scarcity meme gets going, things will change very rapidly.
In short, it is time to accept that Peak Oil is real - and plan accordingly.
Sovereign Insolvency
Once we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight. Why? Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume. Without additional supplies of oil, such growth will not be possible; in fact, we’ll be doing really, really well if we can prevent the economy from backsliding.
Virtually every single OECD country, due to outlandish pension and entitlement programs, has total debt and liability loads that Arnaud Mares (of Morgan Stanley) pointed out have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Spain, Ireland, and Greece. And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the 'low' end to well over 1,500% of GDP for Greece.
Such shortfalls cannot possibly be funded out of anything other than a very, very bright economic future. Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude? None that I am aware of.
In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real (i.e., “accrual” or “unofficial”) deficit by perhaps another $20 to $30 trillion, once we account for growth in liabilities. This is, without question, an unsustainable trend.
It’s time to admit the obvious: Debts of these sorts cannot be serviced, now or in the future. Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool’s game. It is little different than doubling down after receiving a bad hand in poker.
The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future. Due to their interconnected borrowings and lendings, one may topple the next like dominoes.
However, it is when we consider the impact of the widespread realization of Peak Oil on the story of growth that the whole idea of sovereign insolvency really assumes a much higher level of probability. More on that later.
For now we should accept that there's almost no chance of growing out from under these mountains of debts and other obligations. We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults.
Currency Wars
We could trot out a lot of charts here, examine much of history, and make a very solid case that once a country breaches the 300% debt/liability to GDP ratio, there's no recovery, only a future containing some form of default (printing or outright).
In a recent post to my enrolled members, I wrote:
The currency wars have begun, and the implications to world stability and wealth could not be more profound. Fortunately, all of my long-time enrolled members are prepared for this outcome, which we've been predicting here for some time.
When pressed, the most predictable decision in all of history is to print, print, print. So I can't take credit for a 'prediction' that was just slightly bolder than 'predicting' which way a dropped anvil will travel; down or up?
The only problem is, widespread currency debasements will further destabilize an already rickety global financial system where tens of trillions of fiat dollars flow daily on the currency exchanges.
You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: Everybody cannot simultaneously have a weaker currency. Nor can everybody have a positive trade balance.
If a country or government cannot grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure. It is the "easy way out" and has lots of political support in the home country. Besides the fact that it has already started, we should consider a global program of currency debasement to be a guaranteed feature of our economic future.
Conclusion (to Part I)
Three unsustainable trends or events have been identified here. They are not independent, but they are interlocked to a very high degree. At present I can find no support for the idea that the economy can expand like it has in the past without increasing energy flows, especially oil. All of the indications point to Peak Oil, or at least "peak exports," happening within five years.
At that point, it will become widely recognized that most sovereign debts and liabilities will not be able to be serviced by the miracle of economic growth. Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice.
Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.
By mentally accepting that this proposition is not only possible, but probable, we are free to make different choices and take actions that can preserve and protect our wealth and mitigate our risks.
What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are 'locks' for the future?
I explore these questions in greater depth in Part II of this report (enrollment required).
Disclosure: Long gold & silver
http://seekingalpha.com/article/228222-things-will-unravel-faster-than-you-think?source=email
The Time of Hype and Hope Is Ending (Beware the Collapse to Come)
by: Graham Summers October 04, 2010
With the exception of the usual Fed POMO-induced ramp jobs, stocks did next to nothing last week, spending most of their time in a six point trading range. Indeed, the only really significant items to note were the test of support (1,134) and the breakout to a new high (1,156) for the rally started in September:
However, Thursday and Friday’s action does appear to have set-up a triangle pattern. Because we entered this pattern from the top, we should see a breakout to the downside. We’ve certainly tested the upward sloping trend line enough times in the last two trading sessions for it to be deemed a significant line of support for this latest leg up.
Indeed, this bottom trend line actually extends back to the week of September 20: the week that stocks broke the upward momentum that carried the rally for most of the month (see black line in the chart below). As you can see, this trend line guided most of the market rally for the month of September.
Then in the week of September 20th we broke down below this trend line. Even more importantly, the Fed POMO-induced ramp job on Friday September 24 was REJECTED by this line, revealing that former support was then acting as resistance: a very bearish development.
Since that time, stocks have been stuck in a consolidation period between 1,140 and 1,150 on the S&P 500. This consolidation period now appears to be ending in the triangle pattern I mentioned before (I’ve drawn it in blue on the above chart).
Now, this triangle pattern does allow for a breakout to the upside. I’m not talking about anything huge, maybe a spike back to 1,156 or 1,160. However, I believe that based on technicals and fundamentals, the rally is VERY close to completion and that we are heading for a massive collapse very shortly.
For starters, this entire rally has been largely the result of two things:
QE 2 expectations (Hype and Hope)
The Fed juicing the market and killing the shorts.
Regarding #1, the whole notion of QE 2 hitting soon is nothing but pure “Hype and Hope” propaganda being promoted by the investment banks with the help of the mindless mainstream media.
After all, with the Fed pumping the market to the tune of $10-20 billion per week, we might as well say QE 1 never ended. So if we DO announce QE 2 anytime soon, the US Dollar is going to plunge and inflation or possibly even hyper inflation will hit the US as foreign banks and others flee the Dollar for real assets or stronger currencies (Swiss Franc, Gold, etc).
Moreover, there is clear dissent among Fed officials regarding additional QE measures. Indeed, one could easily make the claim that several of last week’s stock plunges were the result of various Fed presidents issuing more hawkish statements regarding more QE.
In plain terms, QE 2 is not a sure thing. And the fact the market has bet so heavily on it is EXTREMELY dangerous. It’s actually quite similar to the 2008 market action in which everyone operated under the belief that “the Fed will save the system” right up until the whole system collapsed. The fact this psychology is dominating market action again now should give you an idea of what’s coming.
Which brings us to the second reason stocks are rallying: the Fed is juicing the market and killing the shorts. Put another way, the Fed is devaluing the US Dollar in order to prop up stocks.
Indeed, the fuel for this entire rally can be attributed to Dollar devaluation as the S&P 500 and US Dollar are now trading once again at a near perfect inverse correlation:
The result of this is that Dollar bearishness is now at record levels and stocks have just posted one of the ugliest market rallies I’ve ever seen in my career. We’ve had no less than six gap ups in the month of September. And as we all know, gaps ALWAYS end up getting filled.
So let’s review all of this:
Stocks have primarily rallied on Fed juice/ Dollar devaluation.
The inflation trade (Dollar down, risk assets up) is now HEAVILY lopsided with Dollar bearishness at record levels
The stock market rally of September has broken giving way to a consolidation period that will break out soon
The investment world is operating entirely based on the mantra that “the Fed will supply more juice”
This sure sounds like a perfect set up for a reversal to me. On that note, I expect this week we’ll probably see a final impulse high on stocks, but that stocks will end the week down, creating a reversal week.
This in turn I believe will be the beginning of a larger, VIOLENT collapse that will take stocks back to 1,040 on the S&P 500 in a matter of weeks. And ultimately I believe we're heading to 875 by year-end.
In plain terms, the time of hype and hope is ending, and reality is going to start setting in. As it does, stocks will come "back to earth" which means the S&P 500 falling 10-30% within the next few months.
There are already multiple signs of this coming from the markets. Indeed, the similarities between recent action and that which occurred in April 2010 are STRIKING (I’ll detail them in an upcoming essay).
http://seekingalpha.com/article/228210-the-time-of-hype-and-hope-is-ending-beware-the-collapse-to-come?source=email
IMF admits that the West is stuck in near depression
If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.
By Ambrose Evans-Pritchard
Published: 8:00PM BST 03 Oct 2010
Spain, trapped in EMU at overvalued exchange rates, had a general strike last week
The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.
Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.
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Fiscal ruin of the Western world beckons
"Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".
The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.
"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.
Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.
But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".
Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.
Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.
Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. "Economic policy will be maintained," she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc.
Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter.
The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.
We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.
The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.
Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.
The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal "carry trade" for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.
One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU's €440bn rescue fund. That is courting fate.
Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html
Saudi Crude Output Falls 11.3% In 2009 Vs '08 -Ctrl Bk
Sunday, Sep 26, 2010
RIYADH (Zawya Dow Jones)-Saudi Arabia's crude production fell 11.3% to 2.9 billion barrels in 2009 from 3.4 billion barrels in the year earlier, while exports fell 14.4% to 2.3 billion barrels, the country's central bank said Sunday.
Proven oil reserves at the world's top energy exporter were steady at 264.6 billion barrels at the end of last year, while proven reserves of natural gas rose 4.6% to 279.7 trillion standard cubic feet versus last year, the Saudi Arabian Monetary Agency, or SAMA, said in its annual report posted on its website.
Total domestic consumption of refined products, crude oil and natural gas rose by 3.7% to 1.2 billion barrels in 2009, compared with 1.1 million barrels a year ago due to a 6.4% increase in public consumption and a 16% fall in the oil industry consumption, the report said.
SAMA's governor, Muhammad Al Jasser said Saturday that the kingdom's consumption of oil and natural gas is growing at a high rate compared with the growth in the kingdom's population and economy, according to state-run Saudi Press Agency, or SPA.
Average local consumption of oil and gas grew 5.9% in the past five years, the governor said.
"Domestic consumption of oil and gas is posting continuing growth and at high rates...this requires looking into the reasons behind the increase in oil and gas consumption and working on rationing it," Jasser added.
Saudi Arabia, like the other members of the Organization of the Petroleum Exporting Countries, or OPEC, subject to output limits, saw its crude output fall after the cartel announced supply curbs of 4.2 million barrels per day in December 2008.
It pumped 8.25 million barrels per day in August, according to a Dow Jones survey.
-By Summer Said, Dow Jones Newswires; +966-546-842373; summer.said@dowjones.com
Copyright (c) 2010 Dow Jones & Co.
(END) Dow Jones Newswires
26-09-10 1244GMT
http://www.zawya.com/story.cfm/sidZW20100926000059/Saudi%20Crude%20Output%20Falls%2011.3%25%20In%202009%20Vs%20'08%20-Ctrl%20Bk/#ZW20100926000059
BW, don't give up the fight.
Many are with you and in the end it is you who are needed...
We all notice how well the last eight years worked out?
And thank you very much for not calling me an economist. Given their recent track record I find that the professions of fortune teller or carney are in higher regard currently...
Regulators shut banks in Florida, Washington state
Regulators shut small banks in Florida, Washington to bring US bank failures this year to 127
Marcy Gordon, AP Business Writer, On Friday September 24, 2010, 10:59 pm
WASHINGTON (AP) -- Regulators on Friday shut down small banks in Florida and Washington state, bringing to 127 the number of U.S. bank failures this year on a wave of loan defaults and economic distress.
The Federal Deposit Insurance Corp. took over Haven Trust Bank Florida of Ponte Vedra Beach, Fla., with $148.6 million in assets and $133.6 million in deposits, and North County Bank, based in Arlington, Wash., with $288.8 million in assets and $276.1 million in deposits.
First Southern Bank, based in Boca Raton, Fla., agreed to assume the assets and deposits of Haven Trust Bank Florida. In addition, the FDIC and First Southern Bank agreed to share losses on $127.3 million of Haven Trust Bank Florida's loans and other assets.
Whidbey Island Bank, based in Coupeville, Wash., is acquiring the assets and deposits of North County Bank. The FDIC and Whidbey Island Bank agreed to share losses on $221.9 million of North County Bank's assets.
The failure of North County Bank is expected to cost the deposit insurance fund $72.8 million.
The failure of Haven Trust Bank Florida is expected to cost the fund $31.9 million. It was the 24th bank in Florida to fail this year.
Florida is among the hardest hit states for bank collapses, as the meltdown in the real estate market brought an avalanche of soured mortgage loans. Also high on the list of failure-heavy states are California, Georgia and Illinois.
With 127 closures nationwide so far this year, the pace of bank failures exceeds that of 2009, which was already a brisk year for shutdowns. By this time last year, regulators had closed 95 banks.
The pace has accelerated as banks' losses mount on loans made for commercial property and development. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans. That has brought delinquent loan payments and defaults by commercial developers.
The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007.
The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of June 30.
The number of banks on the FDIC's confidential "problem" list jumped to 829 in the second quarter from 775 three months earlier, even as the industry as a whole had its best quarter since 2007, making $21.6 billion in net income. Banks with more than $10 billion in assets -- only 1.3 percent of the industry -- accounted for $19.9 billion of the total earnings.
The FDIC expects the cost of resolving failed banks to total around $60 billion from 2010 through 2014.
The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.
Depositors' money -- insured up to $250,000 per account -- is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul law enacted in July.
http://finance.yahoo.com/news/Regulators-shut-banks-in-apf-3859081907.html?x=0&sec=topStories&pos=2&asset=&ccode=
Gov't seizes 3 failing wholesale credit unions
Gov't seizes 3 failing wholesale credit unions; will resell $50 B of toxic mortgage bonds
Daniel Wagner, AP Business Writer, On Friday September 24, 2010, 6:51 pm EDT
WASHINGTON (AP) -- Federal regulators took over three key lenders to U.S. credit unions, after losses on mortgage investments threatened to topple them. The move was a reminder that parts of the financial system are still burdened by the toxic assets two years after the financial crisis peaked.
The National Credit Union Administration voted Friday to place into conservatorship three corporate credit unions: Members United Corporate Federal Credit Union of Warrenville, Ill; Southwest Corporate Federal Credit Union of Plano, Texas; and Constitution Corporate Federal Credit Union of Wallingford, Conn.
Conservatorship allows the government to run financial companies while keeping them open. The government will replace the companies' executives and boards. The companies will be shuttered, and their parts sold off to recoup losses.
Corporate credit unions provide wholesale financing and investment services for the more than 7,000 U.S. credit unions. They do not offer retail services to consumers. Most retail credit unions remain healthy, and will continue operating as normal.
Corporate credit unions made big bets on commercial and residential mortgage investments before the housing market collapsed. The bonds lost much of their value, leaving corporate credit unions with too little cash to cover unexpected losses. Regulators decided they could not be saved.
The government will repackage $50 billion worth of toxic bonds from the companies it seized. New investments worth about $35 billion will be sold to private buyers. The government will guarantee them against losses.
Officials said the plan will not cost taxpayers any money. The losses will be repaid with fees collected from credit unions, they said.
The NCUA has borrowed billions from the Treasury to stabilize corporate credit unions. Treasury agreed to extend that loan through June 30, 2021, the NCUA said. That gives retail credit unions more time to spread out the cost of repaying.
The NCUA has taken over five of the largest wholesale credit unions since March 2009. They account for 70 percent of the total assets of corporate credit unions, and 98 percent of the assets that lost value.
The two largest companies were taken over last year. The three seized Friday also suffered big losses during the global credit collapse. Officials said they were kept open because of their importance to retail credit unions.
"They weren't just out there operating," said Deborah Matz, chairman of the NCUA. "We were working very, very closely with their management to monitor their activities."
http://finance.yahoo.com/news/Govt-seizes-3-failing-apf-2215921552.html?x=0&sec=topStories&pos=5&asset=&ccode=
Notice how everything that involves reducing spending is either a study or committee- no action.
All the things that involve new spending- implemented immediately.
I know it is tough when spending cuts involve "must haves" or are wrapped in safety, defense or saving the children but increasing spending when you're broke is stupid.
I'd keep them as no amount of worthless paper is equal in value to silver or gold.
I would agree if O had done even one thing to change our direction.
I would replace "slow" with "non" ...eom
That certainly is a valid concern skono....eom