Saturday, September 18, 2010

Future History: What Will Is Look Like As Economic Reality Sets In?


Fear and uncertainty create patterns, paths of their own. And societies are again in a mosaic of uncertainty — and resultant fear — over the fate and durability of the social and security frameworks once taken for granted. Mass reaction to these fears will trigger transformative change. But there will be opportunities to seize and command change.
Almost all societies in the world have gone beyond the stage where they expect stability and linear progressions of the past to long endure. Some societies — almost en bloc — anticipate the end of their security; others anticipate the end of their suffering. Few expect insulation from change. That change, however, need not be entirely inscrutable if we look at global patterns and at historical human behaviour.
Economic Patterns: What we now call “economics” determines power and conflict patterns because wealth, or the deprivation of it, determines survival, and, for those who survive, “economics” determines the relative control they may have over individual and societal destiny. Thus social behavior determines economic viability, and the failure or success of economic patterns determines social corrective or compounding action.
We are about to see an acceleration of social reaction to economic failure - a reaction to the inflexibility of policies which have failed to adjust to changing circumstances.
Many finance ministers are speaking, still, as though their national economies can perform well with just minor adjustment to old patterns. This may not be so, particularly in the West, where the rapid growth in state revenues since the end of the Cold War pushed governments down the path of highly capital-intensive programs in areas which absolutely do not contribute to national productivity in essential manufactures or primary industry, and in many cases actually constrain productivity rises. As wealth grew, and tax revenues rose commensurately, the logical approaches of governments in market economies should have been to reduce taxation and further stimulate investment.
This occurred only rarely and incompletely. Taxpayers, also benefiting from rising wealth, themselves did not demand that governments constrain their spending. The situation thus created massive state sector positions in the Western economies. When recession strikes, industry and private citizens scale back and pay the price, but governments are less flexible. Unions and state workers make themselves immune to cuts and to the realities of the “real world”.
In countries such as Greece, France, Spain, Portugal, and so on (and now the US, UK, Australia, etc.), those in the private sector who have come to rely on state handouts — and therefore become “agents” for statism, and by default are opposed to market freedom — compound the entrenched political class’ view that the state should not undergo the kind of profound self-analysis and restructuring which the private sector must embrace.
The US, Australia, Greece, and so on, as just a few examples, are undergoing per capita productivity declines just at the time when they need to be developing a strategic buffer of internally-balanced economies and the ability to better compete internationally. And there is a fear that if wasteful government spending on huge capital projects ceases, then economies will collapse.
This fearful, selfish, and ignorant intellectual process within governments has been caused by the hubris generated by unfettered control of great wealth, and the presses which print the money. But governments only have the ability, in real terms, to dominate the non-productive — or, at best, productivity-enabling infrastructure — spending. Only by returning spending power to the innovative sections of society (in other words, the people) can economies become nimble and productive.
This is unlikely to happen, so we should expect sudden contractions in buying power in many Western states over the coming few years.
We are also already witnessing the contraction of some aspects of multinational mechanisms to amass and deploy capital wherever the market determines it can profitably be invested. Part of this contraction derives from the situation in which the world is entering a period where it may soon be without a viable global reserve currency. This in turn leads to the point where trade becomes more bilateral; investment scope becomes limited in some respects; and nationalism — and with it, protectionism — revives out of economic necessity.
There have been many factors leading to the revival of nationalism since the collapse of the brief (45 year) bipolar global strategic framework in 1990-91, and these were touched upon (certainly by this writer) from 1990 onward. So the seeming uncertainty in which we now find ourselves did not emerge suddenly or without understandable cause.
Perhaps, then, our “uncertainty” is not so uncertain?
Strategic Patterns: What clarity is emerging?
• Western economies will continue to decline, in real and strategic terms (if not in nominal accounting terms), unless truly radical re-structuring occurs, including the rapid and massive reduction of the size of government intervention in economies. This means an end to the era of entitlement welfare. However,
• No democratically-elected government will dare face voters if it reduces “bread for the masses”, that method of cheaply buying votes. So most governments will continue to jeopardize their nations — by continuing the bribery of the electorate — in order to remain in office. Change, then, should only be expected through the appearance of massive threat, or national collapse, enabling the emergence of decisive leadership not based on the popular vote.
• Those states which abandon forms of taxation (such as those based on carbon emissions) which curb productivity will fare better than those which do not.
The immediate future, then, will be commanded not by electoral “democracies”, but by decisive non-populist leaders who truly return productivity to the marketplace.
Russia and the People’s Republic of China are thus favored.
By. Gregory Copley

ECB Initiates New Program of Quantitative Easing (Monetization of Eurozone Debt)

If the Eurozone Central Bank is so "confident" of growth as they say, then why would this be necessary at all? These are not the actions of confidence, but of desperation!


So much for phasing out the bond purchasing programme. The latest weekly ECB data suggest that the ECB bought €237m worth sovereign bonds last week, the highest since the middle of August, according to the FT. Still small in absolute size, the paper notes, it is a sign of continuing problems in eurozone bond markets. Irish traders last week reported that the ECB had been in the market to support Irish bonds, whose yield spread to German bunds rose to new record levels. The article suggested that the ECB was also buying Greek and Portuguese bonds.

About that ECB’s exit strategy
Ralph Atkins and David Oakley have an excellent analysis in the FT about the change in the ECB’s exit strategy. While a year ago it was the conventional wisdom inside the ECB that the banking support policy would have to be phased out, and only then could interest rates rise. That is no longer so. As banks have become dependent on generous ECB liquidity support, it is possible that the monetary tightening occurs while the liquidity policies are still in place.

European Commission optimistic about eurozone
The European Commission published its autumn forecast and, as ever, the news coverage is taking a national angle on this. El Pais is worrying about increasing growth divergences in the eurozone, with Spain falling far behind Germany with its 3.4% growth rate. The Portuguese newspaper Negocios didn’t even bother to report about any other country but Portugal, reporting that the European Commission said that Portugal has “an opportunity to recover” but that it must “intensify consolidation”.    For the eurozone as a whole GDP is forecasted to rise 1.7% this year (rather than  a previously projected 0.9%). La Repubblica picks on the Commission’s warning that labour market dynamics are still fragile.

The Economics of Mass Destruction, Part II

by Jeff Harding at Daily Capitalist blog:

The Fallout of Economic Conformity

The logical conclusion of these failed policies is economic stagnation. Here is what massive government spending and taxation has done to our economy:
  1. Total government (federal, state, and local) share of the economy has exceeded the tipping point, estimated to be between 15% and 20%, which is the point when it hinders economic growth. Presently total government spending for 2010 is estimated to be about 47% of the economy.
  2. Taxation must rise substantially in order to pay for government debt, health and welfare entitlements, and other fixed government costs. The 2010 estimate of federal, state, and local taxes amount to about 30.4% of GDP (about $4.480 trillion).
  3. Our total government debt (federal, state, and local) is estimated to be $16.635 trillion for 2010, approximately at 114% of our GDP (2010 E$14.623 trillion). Of total government debt, federal debt is estimated to be $13.787 trillion in 2010.

f=federal govt.; s=state govt.; l=local govt.
The larger the share of governments’ take of capital out the economy, the less money there is available for businesses and consumers. The less capital available for the private economy, the less it will expand, and the result will be a decline in GDP.
While progressive utopians believe that taxation of the “rich” is acceptable to fund social benefits, mathematics, demographics, and the laws of economics prove them wrong. Progressives have yet to understand that government produces nothing.
The table, below, shows tax rates of many major economies as a share of their GDP. The welfare states have taxes approaching 50% of their economies, with the median in the high 30th percentile. The U.S.’s tax burden on the economy of 30.4% is less than most of these countries. While we ramp up our welfare state which assures higher taxes, Europe’s welfare state services are crumbling and face drastic shortfalls as their GDP falls, as their populations age, and as their companies find better conditions abroad.

The Economics of Mass Destruction
The Organisation For Economic Co-Operation And Development (OECD) is an economic think tank put together by 33 countries of which the U.S. is a member (see above chart for members). Most members are economic powers. China and India are not members. It generates a lot of data, but very little useful research. It is located in Paris and has 2,500 international staff members. They take a rather hard Keynesian line. One need only look at their logo to see where they stand:
The OECD just came out with their Interim Economic Assessment, “Recovery slowing amid increased uncertainty said the headline. They, like the Obama Administration are realizing that their Keynesian policies are failing.
The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around 1½ per cent on an annualized basis in the second half of 2010 compared with the previous estimate of around 2½ per cent in the OECD’s May Economic Outlook.
The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. …
If the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of quantitative easing and commitment to close-to-zero policy interest rates for a long period,” the OECD said. “Where public finances permit, planned fiscal consolidation could be delayed. [my emphasis]
It is clear that the OECD does not understand what is happening. Otherwise they wouldn’t need to suggest more fiscal and monetary stimulus if they really believed the “loss of momentum in the recovery” was only “temporary.”
Its announcement sounds almost as if the Fed had written it. Here’s what Chairman Bernanke said on August 27, 2010:
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.  …
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.
The Obama Administration is proposing more government fiscal stimulus spending to boost the economy.
The only thing these policies have achieved is the destruction of capital.
The Fed and other central banks have been printing money to pump liquidity into their economies. These policies aren’t working. Credit is declining, money supply is declining, and the creation of fiat money is destroying capital by devaluing currencies.
Massive government spending on politically favored projects adds nothing to the economy and destroys more capital. One need only look at U.S. stimulus spending at to see where the billions are going. If it worked the economy would be growing and unemployment would be declining. The opposite is happening.
How does repairing a highway in Ohio lead to economic growth? The answer is that it won’t; once the money is spent, the repair jobs go away and the capital is gone.
Is it possible that the private economy would find better things to do with that capital? We need to ask what the person whose capital was taxed away by the government was going to do with it. I am sure that the answer would be that it would be preserved or used for new economically viable businesses. Only savings, not spending, creates capital for renewed growth by private enterprise.
Eventually governments run out of capital if they dominate their economies long enough. High taxes and a welfare state lead to lower incentives to produce and lower incentives to save. Most of these countries are still spending the capital earned in former, freer market economic times. If they destroy enough capital they will go bankrupt and plunge their economies into serious depressions.
The outcomes of policies that destroy capital will vary from country to country, but none of them will be good. In the U.S. we can look forward to stagflation: years of high unemployment, low productivity, and rising inflation. Japan will continue its 20-years of low productivity and deflation. China will experience capital destructive boom-bust cycles. Germany may be the sanest of all by ignoring the conventional Keynesian wisdom by cutting government spending.
A sobering thought is that these capital destroying policies are being exported to developing countries as well. As these economies emerge from controlled economies to freer systems, they need time to amass capital to drive their growth. Most advanced economies experienced a century or more of rather hands-off capitalism before they turned into welfare states and regulated economies. China cannot morph into a dynamic capitalistic economy by burning up capital of its entrepreneurs through graft, wasteful spending, and harsh regulations.
There is no refuge from the world’s plunge into massive capital destruction. At one time in history you could flee to countries with freedom and free markets, such as America. With the globalization of Neo-Keynesian economics, there is no refuge. Watch out for EMDs: the economics of mass destruction is here.

Shadow Banking System Is Collapsing, Credit Contracting

from Zero Hedge:

Continuing the analysis of today's Z.1 report, we next focus on recent developments in the shadow banking system. And it's a bloodbath: total shadow bank liabilities dropped by $680 billion in Q2, and a massive $2.1 trillion YTD. If one wonders why Ben Bernanke (yes, it's technically TurboTim) continues to print trillions and trillions of debt, and it is still doing nothing (yet) to stimulate the system, here is your answer.
As credit will only exist if i) it is needed and ii) there are cash paying assets (or at least the myth thereof) to support its existence, the latest plunge in the shadow banking system is merely the most recent confirmation that the deleveraging in America is only just beginning. In fact, from the peak of the credit bubble in Q2 2008, through Q2, total bank liabilities (shadow and traditional) have plunged by $2.6 trillion, from $32.1 trillion to $29.5 trillion. Yet it is the collapse in shadow banking that was responsible, with shadow liabilities falling by a stunning 20% from $21 trillion to $17 trillion in just over two years even as banks have benefitted from the transfer of cheap government cheap on their traditional lending books (think Fed intervention and QE, leading to record low interest rates).
What this means is very clear: the shadow banking system is collapsing, period. Yes, the rate of collapse is slower than in Q1, but the total plunge was still a whopping $4.2 trillion annualized for 2010. And the delta between Shadow Banking and Traditional liabilities has collapsed from $10.7 trillion at the peak in March 2008, down to under $4 trillion. This is a record amount of "money" being removed from the system, and explains why, for now at least, the velocity of money is nothing faster than a crawl.
That said, if and when this indicator plateaus and recommences climbing, will be a very "sensitive" moment for all deflationists and inflationists as it will mark the inflection point from credit contraction to renewed credit creation. Alternatively, the Fed can merely force credit into traditional bank liabilities, which banks can then proceed to use and purchase stocks and commodities, at a zero cost of debt. What that will do to select asset prices, we leave to our readers' imagination.
Chart 1: Total sub-components of the shadow banking system

Chart 2: Comparison of shadow banking and traditional commercial bank liabilities

Chart 3: Consolidated shadow and commercial bank liabilities and sequential change

Friday, September 17, 2010

More and Growing Group of TARP Deadbeats

from WSJ:

NEW YORK (TheStreet) -- The list of TARP deadbeats continued to climb over the past few months, with 115 banks skipping dividend payments on $3.6 billion worth of borrowings from the U.S. Treasury Department.
The number has climbed from 91 payment deferrals in the previous Treasury report on the Troubled Asset Relief Program, in May, and 74 deferrals in the report in February. According to an analysis by SNL Financial, 15 companies have skipped payments five times while seven have deferred on six occasions. After half a dozen delinquencies, the Treasury holds the right to elect two directors to a bank's board, as it did with American International Group (AIG) last spring.

Household Net Worth Plunges Even While Government Debt Soars

This metric is going in precisely the wrong direction!

from Zero Hedge:

Arguably the most useful report to come out each quarter out of the Federal Reserve is the Z.1, or the Flow of Funds report, which was released minutes ago. And it's a doozy: household net worth (assets less liabilities) in Q2 2010 plunged by $1.5 trillion, almost exclusively due to a plunge in Corporate Equities ($0.9 trillion) and Pension Fund holdings ($0.7 trillion). In other words, the net wealth of the US household continues to track the performance of the stock market tick for tick. And one wonders why the Fed, per Alan Greenspan's admission, is only focused on ramping stocks up to all time highs. Total household financial assets declined by $1.7 trillion to $43.7 trillion, which was the biggest swing factor, as the tangible assets, or housing, was kept flat at $23.7 trillion. Incidentally, to assume that Real Estate value increased in Q2 from $18.7 trillion to $18.8 trillion in Q2, is one of the dumbest things to ever come out of the Fed: we expect that this number will plunge soon after it is realized that the double dip in housing is here, forcing another major contraction in household net worth. On the other side of the balance sheet, liabilities were also flat at $13.9 trillion sequentially. And possibly the most important data point: the change in borrowings, confirmed that everyone is deleveraging except for the government... whose borrowing surged at a 24.4% SAAR, the second highest ever, after the 28.9% surge in Q2 2009. In other words, Keynesianism is alive an well in the US, and any talk of austerity in the US is nothing less than not that funny stand up comedy.
Chart showing total financial asset breakdown: at $43.7 trillion, US consumers are now back to the same net worth levels they had in Q3 of 2009.

More Big Bank Bad News Coming?

from CNBCBig US banks are nearing the end of another disappointing quarter for their trading businesses that has deepened fears over job losses on Wall Street.

The first two weeks of September failed to deliver a meaningful pick-up in trading activity on markets, hitting bank profits at a time when they are already under pressure from a sluggish economy. Trading desks remain the critical source of revenue at investment banks Goldman Sachs and Morgan Stanley, and can still make or break a quarter at big lenders such as JPMorgan Chase and Bank of America.

Is Ireland Considering Defaulting On Debt?

TAOISEACH Brian Cowen last night insisted he would fight on -- but his economic woes deepened as a major new report warned the country was perilously close to calling in outside help from the EU or the IMF.
After a disastrous three days, Mr Cowen offered little comfort to disgruntled Fianna Fail backbenchers as he failed to outline what changes he would make to his leadership, communications and lifestyle as a result of his 'Morning Ireland' interview debacle.
But the persistent grumbling over his leadership was overshadowed last night by two new economic blows.
The cost of borrowing for the country moved higher again on international bond markets, after falling back following last week's government decision to split Anglo Irish Bank.
And a report from Barclays, one of Europe's largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.

Quite a Reversal on Soured Sentiment

Worst consumer confidence in a year!

Consumer sentiment has soured and disappointed the market this morning, turning the stock market red. This is amazing, given that last night, the Dow was up nearly 100 points. Now, we've given up all those gains and are now in the red. Wow!

And thus QE2 is right back on the table... Sigh. The prior print was 68.9, and it was hoped it would move higher to 70.0. No such luck as we get the lowest print since August 2009.
  • Expectations: 59.1 vs. Exp. 64.2 (Prev. 62.9)
  • Conditions: 78.4 vs. Exp. 79.0 (Prev. 78.3)
  • 5-year Inflation: 2.8% vs. Prev. 2.8%
  • 1-year Inflation: 2.2% vs. Prev. 2.7%

Repeat After Me: "There Is No Inflation!" "There Is No Inflation!"

Sugar daily chart

Cotton daily chart
If/when these bubbles pop, they will fall hard!

New Sugar High Too?

Cotton Marches Higher

Corn Blasts Higher After $5 Handle

How Mundane! New Record High for Gold

Thursday, September 16, 2010

Corn breaches $5/Bushel

PPI Surprises, Up 4.1%

U.S. producer prices rose slightly more than expected in August as energy prices recorded their first increase since March, government data showed on Thursday, calming fears of deflation for now.
The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate increased 0.4%, the largest increase in five months, after gaining 0.2% in July.
Analysts polled by Reuters had expected producer prices to rise 0.3% last month. In the 12 months to August, producer prices increased 3.1%, slowing from the prior month's 4.2% increase.
Producer prices last month were bumped up by a 2.2% jump in energy costs. Gasoline prices surged 7.5%, the largest increase since January, after falling 2.2% in July. Food prices fell 0.3% after rising 0.7% in July.

Economics of Mass Destruction, Part I

Extremely well done from Daily Capitalist blog:

The Power of Capital

The most valuable economic substance in the world is capital. It is not “money” if we define money as pieces of green paper. Governments cannot create wealth by printing money. If they could we wouldn’t have to work.
The formation of capital plus a culture of entrepreneurship is the only way to create economic well being. When government policies destroy capital it diminishes everyone’s economic well being.
Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital. Ditto with your labor. If you spend all of your wages, you’ve saved none of the wealth created from the goods you made and you have no capital.
It takes societies a long time to create and amass capital. In the U.S. we have a dynamic financial infrastructure to generate wealth/capital. It started with the rights guaranteed by the Constitution, but it took about a century to create our wealth-creating financial infrastructure. While you can criticize it all you want, wealth is widely distributed in America when one compares our standard of living to elsewhere.
This financial infrastructure is called capitalism.
Our current economic policies are destroying capital and our well being. These policies are now globalized. They are the Economics of Mass Destruction.

International Coordination of Economic Policy

I have a folder entitled “Supranational” in which I keep research related to international regulation of the world’s economy. As I anticipated, after the Crash nations joined together to coordinate economic policies and  the regulation of financial activities.
The conformance of economic policies was rather automatic. Most of the world’s economic ministers, especially those of the G-20 countries, have adopted familiar Neo-Keynesian/Neoclassical policies of fiscal and monetary stimulus. In most countries the results of these policies have been as disappointing as ours.
Monetary Stimulus
Look at monetary stimulus. It is no coincidence that central bank interest rates of advanced economies are historically low; they all are trying to create massive monetary stimulus to revive their economies. Higher interest rate countries such as the BRICs with less stable economies either have more trouble selling sovereign bonds on the international markets or are attempting to thwart rising prices.
Central Bank Interest Rates

Fiscal Stimulus
Almost all these countries engaged in fiscal stimulus as well. The Bush Administration committed about $700 billion to the various bailout schemes. Then the Obama Administration came up with a massive Keynesian spending program (initially $787 billion). Other countries followed:
Type of Stimulus as a Percentage of GDP
Note this subsidies chart doesn’t reflect the U.S. TARP and related bailouts. Source the OECD
Financial Regulation
The last piece of the globalization of economic policy was to increase regulation over financial activities. The post-Crash drive to coordinate financial regulation was unified by the theory that the cause of the Crash was Wall Street: the investment banks, investment companies, hedge funds, the big “banksters,” and insurance companies. Not to mention greed and overpaid executives. If governments admit any fault it is that they failed to adequately exercise their existing regulatory powers.
Which means that many of the laws passed here are or will be similar to those enacted in other major countries. For example, the Dodd-Frank financial overhaul act contains many rules that had been discussed with G-20 counterparts. “Forum shopping” or the “you can run but you can’t hide” policy, was a major factor. The new bank capitalization rules of Basel III are an outcome of the Crash. No treaties are required to accomplish most of this legal conformation; meetings between economics ministers and their regulatory staffs were all that was needed and individual governments did the rest.
The Failure of Regulation
Unfortunately our new laws (Dodd-Frank) fail to address the primary cause of the Crash: the Federal Reserve itself. Its years of easy money policy kicked off the massive credit boom that landed on the housing market because of U.S. government policies that encouraged capital to flow into residential real estate. The boom ended when the Fed raised rates.
I don’t mean to spare Wall Street in my criticism; they failed in many ways, primarily their faulty risk models. But, while they pushed the scheme forward, they didn’t cause the boom or the bust. History shows us that cheap money from central banks, or from banks or sovereigns pre-existing central banks, always have caused these boom-bust cycles. Just because the Fed took over doesn’t mean that bad banking theories changed.

The Globalization of Failed Economic Policies

The purpose of this article is not meant to be an exposé of an international conspiracy or secret cabal to control the world. These policies are the logical conclusion of theories of economics and political organization that have been taught in our universities before our oldest citizens were college freshmen. Some of these ideas even trace back to Ancient Rome. Sub sole nihil novi est.* These ideas were developed in Europe, but took root and flowered in our best universities. Because of the stature of America’s academic institutions, which stature is founded on capitalism’s prosperity, it is no surprise that these Neo-Keynesian ideas have spread throughout the world.
*There is nothing new under the sun.
You may believe this regulatory coordination and conformation is a good thing because it gives enterprise a more stable regulatory foundation in which to operate. Or that it is necessary to prevent another crash. Or that regulators have superior knowledge and can be trusted to properly guide economies. But that is not the case.
The serious economic problems we have are the direct outcome of mainstream economic thought and these ideas now operate worldwide. If one studies economics in London, or Paris, or Rome, or Beijing, the lessons are very much the same. If one examines the policies of the EU and its member states or China or Japan, they are remarkably similar.
Perhaps the term the “Economics of Mass Destruction” is a bit of hyperbole, but I am giving fair warning that we Americans, the most dynamic capitalists and the primary drivers of the world economy, are heading for long-term economic decline if we continue with the same Keynesian doctrine that got us into the current historically big mess.
While it is nice to believe that emerging economies such as Brazil, Russia, India, and China will take up the slack, I am not convinced they yet have in place the cultural and financial resources that have made America the world’s leader.
Because of the globalization of these ideas, it now appears that the whole world will rise or fall on these policies.

Tomorrow, Part II of II: The fallout of the globalization of failed economic policies.

Unemployment Claims Decline, But Less Than Expected

Here is Goldman's take:
1. The biggest news in this battery of reports that the number of unemployed workers receiving extended or emergency benefits dropped a combined total of 508,000 in the week ending August 28. At this writing we have no clear explanation for this. Among the possible reasons to discount it: (a) Statistical noise; however, this drop comes two weeks after a 320,000 drop, with no significant change in the intervening week. (b) September is a strong month for hiring; payrolls tend to rise by about 500,000 between August and September before seasonal adjustment. Since the data on emergency/extended benefits are not seasonally adjusted they may simply reflect this seasonal rhythm, though we don't see anything similar in the corresponding week of 2009. (c) The declines of recent weeks are coming about two years after the labor market began to deteriorate seriously in the wake of the Lehman bankruptcy; since benefits are paid for 99 weeks, we may be seeing exhaustions of eligibility in the data.

2. Otherwise, the data on claims were mixed relative to expectations but fairly unremarkable. Initial claims fell 3,000 to 450,000, suggesting that last week's drop was not a fluke. Continuing claims fell 84,000 but from a level that was revised up sharply (up 91,000 from the level reported last week). None of the data points covered in this report applies to the survey week for the September employment report, which is being conducted this week.

3. Producer prices behaved as expected, with energy prices accounting for most of the boost in the headline. The core indexes for both finished goods and intermediate product rose only 0.1% with little in the detail on finished goods worth mentioning.

4. The current account deficit was likewise close to expectations, as the widening in the trade deficit already reported drove the increase. Balances on income and unilateral transfers improved by $1bn and $2bn, respectively.

Gold Reaches Another New All-Time Record

Another New Record Number of Foreclosures

NEW YORK (Reuters) - A record number of U.S. homeowners lost houses to their banks in August as lenders worked through the backlog of distressed mortgages, real estate data company RealtyTrac said on Thursday.
New default notices decreased at the same time, suggesting that lenders managed the flow of troubled loans and foreclosed properties hitting the market to limit price declines, the company said.
Root problems of high unemployment, wage cuts, negative home equity and restrictive lending practices persist, however, pointing to lingering housing market pain.
RealtyTrac sees a record 1.2 million repossessions this year, up from just under 1 million last year, with more than 3.2 million homes in some stage of foreclosure.
In 2005, before the housing bust, banks took over just about 100,000 houses, according to the Irvine, California-based company.
"It really does look like we're seeing a slowdown of new foreclosures being initiated as part of a means to manage inventory levels on the market," RealtyTrac senior vice president Rick Sharga said in an interview.
Banks foreclosed on 95,364 properties in August, topping the May 2010 record by 2 percent. These repossessions, or real estate owned (REO) homes, jumped 3 percent in the month and 25 percent in the year.
At the same time, a similar amount -- 96,469 homes -- got a default notice. Defaults declined 1 percent from July and 30 percent from August 2009 after peaking at 142,064 properties in April 2009.
It will take about three years to work through the stockpile of distressed housing, Sharga said, resulting in a market that moves sideways.
"I don't think it gets any better really until the end of 2013," he said.
Total foreclosure actions last month, including notice of default, scheduled auction and repossession, were made on a total of 338,836 properties in August, up 4 percent from July and down 5 percent from August 2009.
The number of homes getting at least one notice topped 300,000 for the 18th month in a row.
One in every 381 housing units got a foreclosure filing last month.
Slowing home sales, after buyer tax credits of up to $8,000 ended in April, could tilt more owners toward foreclosure.
"Fewer buyers means it's going to take longer to clear out the distressed inventory, the longer you have that inventory the more price pressure there is on the overall housing market," said Sharga. "The more price pressure, the more homes are in danger of going into foreclosure because they're going to be upside down."
Homeowners that are upside down, or have a mortgage bigger than the home's value, often cannot sell or refinance.
Foreclosure auctions were scheduled for the first time on about 147,000 properties last month, up 9 percent from July and the second highest total in records dating back to April 2005.
Nevada, Florida, Arizona and California had the highest state foreclosure rates in August, with Nevada topping the list for the 44th straight month despite a 24 percent drop in foreclosure actions from a year earlier.
Idaho, Utah, Georgia, Michigan, Illinois and Hawaii were the other states with the highest rates of foreclosure.
The 10 metro areas with the nation's highest foreclosure rates had fewer actions for a second straight month.
"Some markets may have already peaked, but even with the decreased levels of activity they're still running at multiples of national averages," Sharga said. "In some cases it really is a matter of trying to keep inventory levels from overwhelming the local markets."

Wednesday, September 15, 2010

Home Prices on Verge of Double Dip

The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.
Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.
“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”
Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.
Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said.
Fannie Mae Forecast
Fannie Mae, the largest U.S. mortgage finance company, today lowered its forecast for home sales this year, projecting a 7 percent decline from 2009. A drop in demand after the April 30 tax credit expiration “suggests weakening home prices” in the third quarter, according to the report.
There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month’s sales pace, according to the Chicago- based Realtors group.
“The best thing that could happen is for prices to get to a level that clears the market,” said Shapiro, who predicts prices may fall another 10 percent to 15 percent. “Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines.”
About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody’s Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013.
‘Lost Decade’
After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said.
“A long if not lost decade,” Zandi said.
Prices dropped in 36 states in July from a year earlier, CoreLogic Inc., a Santa Ana, California-based real estate and financial information company, reported today. Its housing index showed the biggest declines in Idaho, Alabama and Utah. Maine, South Dakota and California had the largest gains.
Working through the surplus inventory varies by markets and depends on issues such as local employment and the amount of homeowner debt, said Sam Khater, chief economist for CoreLogic. Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York state has the lowest, according to the company.
8 Million
Douglas Duncan, chief economist for Washington-based Fannie Mae, said in a Bloomberg Radio interview last week that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley’s Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million.
Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent -- to 2002 levels -- before beginning a recovery in 2014.
“On a national level, you have never seen a decline of this sort,” Deb said in a telephone interview. “I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006.”
In addition to the as many as 8 million properties vacant or in foreclosure, owners of another 3.8 million homes -- 5 percent of U.S. households -- said they are “very likely” to put their properties on the market within six months if there is improvement, according to a survey by Seattle-based Zillow.
“This has the potential to create a sawtooth pattern along the bottom,” Stan Humphries, Zillow’s chief economist, said in a telephone interview. “Homes begin to sell and a few sidelined sellers rush into the marketplace and flood the marketplace.”
Gains Versus Inflation
If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up “on the backend,” said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.
The Obama administration’s effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department.
‘Day of Reckoning’
“The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize,” said Ritholtz, author of “Bailout Nation.” “We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom.”
Government policy contributed to a recent stabilization in prices that may have been an “illusion,” said Zach Pandl, an economist at Nomura Securities International Inc. The S&P/Case- Shiller index of home prices in 20 U.S. cities rose 4.2 percent in June from a year earlier. The measure is a three-month moving average, which means data in the month were still influenced by transactions that may have benefited from the tax incentive.
Even if modifications fail, keeping foreclosures off the market is worth the risk of a delayed recovery, Pandl said.
“It’s too painful and too damaging to let it happen all at once,” Pandl said from New York.
Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25.
Nevada, New York
In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said.
Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.
“I’m stuck,” Miner said. “I thought it was a stepping stone to a house.”
Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.
“I’m not $200,000 in the hole, thank God,” she said. “But the quarter of the country that’s underwater -- that’s me.”
Positive Equity
Detroit, Las Vegas and Fort Myers, Florida, will take until at least 2020 to return homeowners to positive equity, CoreLogic said in a March report that compared prices in 10 metro areas. Atlanta, Dallas and California’s Riverside and San Bernardino counties will need until 2016. The Washington, D.C., area will take the least amount of time, with negative equity disappearing around 2015, CoreLogic said.
The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months.
“It doesn’t take a tremendous number of people to turn the housing market, because only about 5 percent of the stock trades in a given year,” Case said in a telephone interview. “There’s still a lot of people who are employed, many of whom have been looking for the opportunity to buy.”
Cooperstown A-Frame
Case is an example of a homeowner waiting to sell because of low demand. He’s seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.
“I want to keep it if I can’t get what I want,” he said. “It’s a terrific little getaway and I’m not going to give it away.”
Some indicators show the real estate market has begun to turn a corner. Pending sales of existing houses increased 5.2 percent from June to July, the National Association of Realtors reported Sept. 2. Economists had estimated a 1 percent decline, according to the median of 37 forecasts in a Bloomberg survey.
“The market is starting to show some signs of stabilization,” Nicolas Retsinas, director emeritus of Harvard University’s Joint Center for Housing Studies, said during an Aug. 31 interview on Bloomberg Television’s “InsideTrack.” “But a robust recovery is a long time away.”
Fewer Foreclosures
The number of U.S. homes in default or foreclosure fell to 7.04 million as of July 31 from a high of 8.12 million in January, Lender Processing Services Inc., a Jacksonville, Florida-based mortgage servicing company, reported Sept. 2.
Defaulted mortgages as of July took an average 469 days to reach foreclosure, up from 319 days in January 2009. That’s an indication lenders -- with the help of the government loan modification programs -- are delaying resolutions and preventing the market from flooding with distressed properties, said Herb Blecher, senior vice president for analytics at LPS.
“The efforts to date have been worthwhile,” Blecher said in a telephone interview from Denver. “They both helped borrowers stay in their homes and kept that supply of distressed properties on the market somewhat limited.”

Investors Continue to Pull Out of Equity Markets

It is beyond a joke now: ICI's latest data discloses that in the week ended September 8, domestic funds saw outflows of $2.2 billion, following last week's massive $7.7 billion. And yes, ETFs experienced outflows as well. So far September has experienced nearly $10 billion in outflows, even as the market has ramped by over 6%. Who is buying this shit? Just ask The New York Fed and Citadel: they may have a few pointers (wink wink). This is the 19th sequential outflow from US stocks, and amounts to $65 billion in redemptions for the year. With the market pretty much unchanged YTD, it means that mutual funds can not resort to capital appreciation as a substitute to outflows, and most are on their last breath (Janus: blink twice if you are still alive please). The kicker: the S&P is at the level it was when the outflows began back during the flash crash. If that doesn't restore all your confidence that Uncle Sam will be so good at managing the market (just like he has done with everything else), nothing else will. Throw in a little HFT, a little subpennying, a little Flash trading, a little DMA trading, a little quote stuffing, a little hedge fund clubbing, a little specialist front running, a little daily flash crash in big caps like Nucor Steel, and you can see why next week we will most certainly have our first inflow in 20 weeks. Or not. It doesn't matter. Nobody that is made of carbon, or who doesn't already have direct access to the Fed for zero cost funding, is trading stocks anymore.
Weekly YTD outflows:

Cumulative YTD outflows:

Capacity Utilization Is a Wash

August Industrial Production came in at 0.2%, in line with expectations, while the prior print of 1.0% was revised lower to 0.6%. Capacity Utilization missed consensus sllightly, coming in at 74.7% on consensus of 75%, with the previous reading also revised lower from 74.8% to 74.6%. Overall, no pick up in the economy can be traced across these two metrics, meaning the double dip continues.

Surprise! Home Prices Resume Their Decline!

More U.S. homeowners slashed their asking prices for a third straight month in August to lure buyers into a market hindered by high unemployment, a study showed Wednesday.
Owners cut prices on 26% of homes for sale last month, up from 25% in July and the highest since a matching 26% in October 2009, real estate said.
Lingering job market weakness, a hefty supply of foreclosed homes and soft demand after the homebuyer tax credit ended in April kept buyers in the driver's seat in many markets.
"Nationwide, sellers continue to slash prices and this is a worrisome trend," said Pete Flint, Trulia's chief executive. "However, we're seeing gradual improvement in many U.S. cities-- several for consecutive months."
Homeowners in some areas still grapple with pricing realistically for a housing market that faces many hurdles and a snail's-pace recovery, according to Trulia.

Empire State Index Sends Out Bad Omen

But stock futures are rising!

WASHINGTON (MarketWatch) -- Conditions for manufacturing in the New York region softened a bit in September from August and remained well below levels of earlier in the summer, the New York Federal Reserve Bank said Wednesday. The bank's Empire State Manufacturing index fell to 4.1 in September from 7.1 in August. This is the lowest level since July 2009. Economists had forecast a small gain to 7.5. While positive, the index is well below the high of 31.9 in April and 19.6 in June and suggests growth at a tepid pace. The details of the report were stronger than the headline. After falling below zero last month, the new orders index turned positive. The employment index improved slightly.

BOJ Intervenes to Weaken Yen

Japan returns to "beggar thy neighbor" ways! Yesterday, the Japanese Prime Minister was able to consolidate and perpetuate his power. As a radical left-winger, should we be surprised? This could initiate a trade war.

from Fox Business:

Estimates vary on how much Japan has spent so far in its first intervention in the foreign exchange market since spending 35 trillion yen in 2003-2004. Dealers talk about300-500 billion yen ($3.61-6.02 billion) though some reports put it closer to 100 billion yen.
The U.S. dollar extended its gains against the yen after an official at Japan's Ministry of Finance said intervention was not finished, climbing more than 2% on the day above 85yen and nearly two yen above a 15-year low.
Wednesday's action pleased its target audience: major Japanese exporters.

Tuesday, September 14, 2010

Gallup Polls Indicate Consumer Confidence Plunge

"Despite the recent upturn in the nation's equity markets, Gallup's Economic Confidence Index, at -34 during the week ending Sept. 12, confirms a downward trend in consumer confidence that started in mid-August."


More from Gallup:
Although economic confidence in the U.S. appeared to be improving at this time last year, just the opposite is the case in 2010. Consumer perceptions of the U.S. economy are now substantially below the depressed levels of a year ago.
More Rate the U.S. Economy "Poor" This September Than Last
During each of the first two weeks of this month, 47% of Americans rated current economic conditions as "poor." While in September of last year, fewer Americans were giving the economy "poor" ratings than was true earlier in the year, that is not the case in 2010. In fact, consumer ratings of current economic conditions are worse now than they were a year ago.
Economic Conditions, Weekly Averages, Weeks Ending July 11-Sept. 12, 2010, and July 12-Sept. 13, 2009
More Say the Economy Is "Getting Worse" Than Did So a Year Ago
In recent weeks, 63% of consumers have said economic conditions are "getting worse." These future expectations for the economy are among the worst of 2010 and have deterioriated substantially from the improving trend that held sway at this point in 2009.
Economic Expectations, Weekly Averages, Weeks Ending July 11-Sept. 12, 2010, and July 12-Sept. 13, 2009
Economic Confidence Is Not Heading in the Right Direction
Despite increased optimism on Wall Street that the U.S. economy will avoid a double-dip recession, Gallup's economic confidence data suggest consumer perceptions of the future course of the economy remain near their lows of the year. Neither the Labor Day holiday nor the upturn on Wall Street has been enough to shake consumers out of their doldrums.
The continued weakness in Gallup's Economic Confidence Index during the first two weeks of September suggests that consumer confidence is slightly worse now than it was in August. In turn, this implies that Friday's Reuters/University of Michigan Consumer Sentiment preliminary estimate is also likely to show a decline from August.
While economists may argue about the relationship between consumer confidence and the economy, there is no doubt that declining consumer sentiment is not good for incumbent politicians as they approach the midterm elections. Worse yet, the current trend in economic confidence continues to deteriorate and now trails that of a year ago -- making it harder to argue that the economy is now heading in a better direction than it was at this point in 2009.

Who Says There's No Inflation?

Just look at these charts and tell me there's no inflation! These are all daily charts, so these prices have been rising for quite awhile! All have set new record highs today! And all of these commodity prices look even more startling on the weekly charts.







Fed Zero Interest Rate Policy Destroying Pensions

from Zero Hedge:
US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are in big trouble. According to actuarial and consulting firm Miliman, in August 2010, the funded status of the 100 largest defined benefit pension plans sponsored by U.S. companies dropped by $108 billion to a 10-year low of 70.1%. Yes, that's a $100 billion + deterioration in one month! The culprit - Ben Bernanke - financial market performance was poor in August, but the main reason for the decline in funded status was a large decrease in corporate bond interest rates. Who would have thought that pushing all markets so far from equilibrium could possibly have an adverse side effect. Soon, once pension funds like the Illinois TRS and others fold, and tens of millions of people who have diligently saved all their lives only to wake up one day and find they have no money left at all, their anger may finally rise and be rightfully directed at its just source: the corrupt slaveocratic inhabitants of the Marriner Eccles building. Expect to hear much, much more about this worst side effect of the Fed's flawed Keynesian solution to all of life's problems.
The assets of corporate pensions relative to their deficits, known as the funded ratio, fell to 70.1 percent in August, also the lowest in at least 10  years, from 75.6 percent the month before, according to the Milliman. Pension plan assets declined $17 billion last month to $1.076 trillion, a loss of 1.12 percent. The median expected monthly return for plans in the index is 0.65 percent for 2010, a yearly return of 8.1 percent.

It gets worse. As Bloomberg reports, "the shortfall is “like a silent heart attack,” said Kenneth Hackel, president of research and consulting firm CT Capital LLC and the former chief of fixed-income strategy at RBS Securities Inc. “People aren’t recognizing the symptoms until the patient falls on the ground.”

Corporate pension plans are a casualty of Federal Reserve efforts to keep interest rates low to prevent the economy from slipping back into recession.

As AA rated company bond yields, a benchmark in determining future liabilities, last month reached the lowest ever, obligations increased $91 billion to $1.54 trillion, Seattle-based Milliman said, without disclosing company names.

Contributions to the 100 biggest corporate pension plans increased to $54.5 billion in 2009 from $29.5 billion the previous year and compares with an average of $38.7 billion for the prior five years, Milliman said in an April report.

Companies may have to spend even more cash to fund their pensions, Hackel said.

“It’s a major, major hit for companies to take,” said Hackel of Alpine, New Jersey-based CT Capital. “Sponsors are going to need to step up their contributions massively.”

Corporate pension plans have deteriorated since the fall of 2008 as the worst financial crisis since the Great Depression caused investments to plunge, eroding the value of pension assets. The Standard & Poor’s 500 Index lost 37 percent that year, while U.S. corporate bonds lost 10.9 percent.

“Liability losses could dwarf even good investment gains,” said John Ehrhardt, a principal and consulting actuary in New York with Milliman. “It’s a cash flow issue, it’s a drag on earnings when you look at the accounting numbers, and it’s a hit to your balance sheet, which can cause all kinds of problems about loan covenants and everything else.”
And here is the data from the horse's mouth:
The funded status of the 100 largest corporate defined benefit pension plans dropped by $108 billion during August 2010 as measured by the Milliman 100 Pension Funding Index (PFI). The funded status decrease was primarily due to a significant decrease in corporate bond interest rates that are the benchmarks used to value pension liabilities. Though not as significant, the financial markets performed poorly in August 2010 as well. As of August 31, 2010, the funded ratio plummeted to 70.1%, down from 75.6% at the end of July 2010. This marks the lowest funded ratio recorded within the last 10 years for the Milliman 100 PFI. The last time the funded ratio was nearly this low was on May 31, 2003, when it was 70.5%.

August's $17 billion decrease in market value brings the Milliman 100 PFI asset value to $1.076 trillion, down from $1.093 trillion at the end of July 2010. The monthly asset performance was a loss of 1.12%. By comparison, the Milliman 2010 Pension Funding Study published in April 2010 reported that the median expected monthly investment return during 2010 on pension assets for the Milliman 100 PFI companies would be 0.65% (8.10% annualized).

The projected benefit obligation (PBO), or pension liabilities, increased by $91 billion during August, moving the Milliman 100 PFI value to $1.536 trillion from $1.445 trillion at the end of July 2010. The change was the result of a 45-basis-point decrease in the monthly discount rate to 4.78% for August (from 5.23% for July).

Over the last 12 months (September 2009-August 2010), the cumulative asset return has been 6.99% and the Milliman 100 PFI funded status has decreased by $162 billion, due primarily to lower trending discount rates. For these 12 months, the funded ratio of the Milliman 100 companies decreased to 70.1% from 77.8%.

What to expect for the rest of 2010

If, for the remainder of 2010, the Milliman PFI 100 companies were to achieve the expected 8.1% median asset return and if the current discount rate of 4.78% were maintained for the duration of the year, we forecast the funded status of the surveyed plans would increase, with a projected pension deficit of $457 billion and a funded ratio of 70.3%.

If asset returns were to increase/decrease by 200 basis points for the remainder of the year compared with the median asset return expectation of 8.1%, the projected year-end funded status would increase/decrease by approximately $7 billion.

If discount rates were to increase/decrease by 25 basis points by the end of the year relative to the current discount rate of 4.78%, the projected year-end funded status would decrease/increase by approximately $52 billion.

Fed Tap Dancing on a Hyperinflation Mine Field

from Shadowstats:
Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable.  Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years.  Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability.  Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt.  When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow.  The Hyperinflation Special Report is referenced for broad background.  The general outlook is not changed...

In these circumstances, the financial markets likely will be highly unstable and volatile.  Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense.  For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc.  Holding assets outside the U.S. also may have some benefits.

Retail Sales: Ho Hum! (Yawn)

from Zero Hedge:

US Retail Sales came essentially in line with consensus at 0.4% versus expectations of 0.3%. As usual, the downward prior revision game continues, as the previous number was revised from 0.4% to 0.3%. And once the latest number is revised lower again next month the impact on the market will be actually positive as the next month once again come better then "prior." Retails sales came in at 0.6% on expectations of 0.3%, with the previous also getting revised lower to 0.1% from 0.2%. And auto sales dropped both M/M and Y/Y.

Gold Reaches New All-Time Record High

Stunning Drop to German ZEW -- From +14 to -4.3 in One Month!

ZEW is one of the most-watched, most prominent European indicators. This has creamed the Euro in the past couple of hours. It hit stock futures for awhile too, but American hubris is unmatched for ignoring bad news.

LONDON (MarketWatch) -- Worries about slowing U.S. growth and unresolved problems in the euro zone contributed to a sharper-than-expected drop in Germany's closely-watched ZEW economic-sentiment indicator.
The Mannheim-based Center for European Economic Research, or ZEW, said the indicator fell to -4.3 in September from 14.0 in August. Economists had forecast a more modest decline to 9.0.
"In their expectations, financial experts put more weight on risks than they did before," said ZEW President Wolfgang Franz.
Franz said the survey found rising worries about the sustainability of the U.S. recovery as well as ongoing worries about sovereign-debt problems in the euro zone, as reflected by large yield spreads for Greek government debt over German bonds.
Analysts, however, still see a low risk of a double dip in Germany, he said.
The euro (U.S.:EURUSD) came under pressure in the wake of the data and changed hands at $1.2848 in recent action, down 0.1% from Monday.
European stocks saw added pressure following the release. Read Europe Markets.
Separately, the European Union statistics agency Eurostat said industrial production across the 16-nation euro zone was flat in July. Compared to the same month last year, production rose 7.1%. Economists had forecast a 0.2% monthly rise and an 8% annual increase.
The September ZEW indicator was based on a survey of 277 German financial-market professionals, who were asked about medium-term prospects for the economy and capital markets.
Germany, Europe's largest economy, saw second-quarter gross domestic product expand by 2.2%, the strongest quarterly rise in 20 years. The ZEW said stagnating industrial production in July and a decline in incoming orders "may not only indicate a temporary slowdown but could well be the first sign of a flattening of economic activity."
The think tank said survey participants don't expect German capacity utilization to see further improvement in the second half of the year, due partly to the expiration of economic stimulus measures in several countries and the lack of a recovery from the financial crisis in many industrialized countries. That would put pressure on export-oriented sectors.
The survey's current-conditions gauge, meanwhile, continued to improve, rising to 59.9 from 44.3 in August.
Economists note that there isn't a strong correlation between the ZEW gauge and economic output, although the indicator is often viewed as a signal to turning points in the growth picture.
Carsten Brzeski, economist at ING Bank in Brussels, said the combination of a fall in the sentiment gauge and a rise in the current-conditions index doesn't always signal an imminent slowdown in growth. A similar divergence in the summer of 2006 was followed by solid growth until the start of the financial crisis, he said.
"After an exceptional performance in [the second quarter], several indicators are heralding the inevitable growth slowdown of the German economy in the second half of the year," Brzeski said, in a note to clients.
"However, with increasing backlogs, strong business confidence, improving investment plans from businesses and the strengthening of the labor market, 'slowdown' is actually not the best description. The German economy is only easing back the throttle," Brzeski said.

Monday, September 13, 2010

The Causes Of Economic Crisis Are Now Going to Get Us Out?

from Caroline Baum at Bloomberg:
Even the most casual observer of the events of the last five years -- the housing bubble, the bust and the digging-out process -- would be struck by the similarities between the policies that got us into this mess and the prescriptions for getting us out.
Whether it’s ultra-low interest rates, borrowing and spending (too much then, too little now), or artificially inflated home prices, the cure bears an uncanny resemblance to the cause.
I’ve identified five areas where policy makers need to reexamine their recommendations or do a better job of explaining why yesterday’s mistakes will be tomorrow’s remedies.
1. Easy Come, Easy Go
The Federal Reserve kept short-term interest rates too low for too long in 2003-2005. No one at the Fed has acknowledged the role the 1 percent funds rate played in ballooning the volume and variety of adjustable-rate mortgages and inflating the housing bubble. For some reason, policy makers would rather be seen as regulators asleep at the wheel than forecasters groping in the dark.
The bubble burst, the residential real estate market tanked, and the funds rate settled at 0 percent to 0.25 percent. With the economy’s recent turn for the worse, the Fed is considering additional quantitative easing.
Both zero percent interest rates and a bloated balance sheet may be necessary for the moment, but they aren’t without costs.
2. Lend ‘n Spend
President Barack Obama’s economic team has diagnosed the U.S. economy as suffering from a lack of aggregate demand. Businesses and consumers aren’t spending enough. Banks aren’t lending to make more spending possible.
Our casual observer might wonder how it is that more borrowing and spending can fix a case of excess leverage and overspending.
Banks made loans to anyone who could sign on the dotted line. People bought homes they couldn’t afford with no money down. Household debt as a share of disposable personal income rose to a record of 130 percent in the third quarter of 2007. It fell to 119 percent by the second quarter of 2010.
Periods of loose credit beget periods of tight credit. Regulators aren’t happy with either.
In his opening remarks at the Kansas City Fed’s annual Jackson Hole symposium on Aug. 27, Fed chief Ben Bernanke said bank regulators were “working to help banks strike a good balance between appropriate prudence and reasonable willingness to make loans to creditworthy borrowers.”
It sure sounds as if regulators want banks to take a second look at that loan they nixed. Maybe it will look better with a little regulatory coaxing.
3. A House Without a Home
For decades, house prices rose in line with the rate of inflation. That changed in 1997, when the rise in home prices galloped ahead of the consumer price index.
Nationwide, home prices fell 31 percent from their peak in the first quarter of 2006 to the trough (to date) in the first quarter of 2009, according to the S&P/Case-Shiller Home Price Index. Although it’s a great time to be a renter, record low mortgage rates have done little to spur housing demand.
Consumers did perk up when the government introduced a homebuyer’s tax credit of up to $8,000 last year, but new and existing home sales are lower now than before.
What’s the solution? Prices need to fall now as they did four years ago, just not as much.
The Obama administration’s various mortgage modification programs all have underperformed expectations. The latest is a “short refinance” program. The Federal Housing Administration will offer underwater homeowners current on their mortgage payments new FHA-insured low-interest loans if the lender writes down at least 10 percent of the unpaid mortgage balance.
The FHA insures the mortgage. The taxpayer assumes the risk.
The U.S. economy was brought to its knees by dodgy loans on the books of banks deemed too big to fail. Never again would depository institutions be allowed to get so large that their failure would imperil the nation, regulators said.
Fast forward from the second quarter of 2008 to the second quarter of 2010, and the four biggest banks are even larger as a result of government-orchestrated mergers. Wells Fargo & Co. with assets of $1.23 trillion, is more than two times larger.
New financial regulations aim to address the issue of TBTF by giving regulators new resolution authority for failing banks. That presumes regulators will identify the problem and elect to pull the plug. Good luck.
5. Extend and Pretend
After the housing bubble burst, regulators were shocked to learn there was gambling, and gaming, going on at the banks. New accounting rules forced financial institutions to bring shaky assets back onto their balance sheets and take losses.
While the government is using monetary incentives to encourage lenders to modify home mortgages, banks are taking the initiative on their own when it comes to commercial real estate loans. Such forbearance may be in the lender’s self-interest, but critics refer to it as “extend and pretend.” Extend the life of the loan and pretend that the borrower will pay it back in full.
The phrase has broader implications. Extend past policies that created the bubble and pretend it won’t happen again.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)