"I am always pleasantly surprised when I find a mainstream media article that displays a healthy dose of common sense when it comes to fiscal stimulus and debt.
Philip Coggan's special report Repent at Leisure, in The Economist manages to do just that.
Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.
The answer to all problems seemed to be more debt. Depressed? Use your credit card for a shopping spree “because you’re worth it”. Want to get rich quick? Work for a private-equity or hedge-fund firm, using borrowed money to enhance returns. Looking for faster growth for your company? Borrow money and make an acquisition."
Tuesday, June 29, 2010
CHART OF THE DAY: LOOKING VERY JAPANESE
"As deflation chatter gathers steam and worries over a double dip increase I thought it might be interesting to take a look at our “Japanese Syndrome”:
Gold Price Manipulation Prior to Options Expiration Exposed
"Gold futures expire today, June 28th. If you follow the manipulation theories, it is just prior to expiration time, either in futures or options, that paper shorts increase their net short positions in order to manipulate precious metals (and stocks) downward. This allows the manipulators to profit as the contracts they sold to unwitting investors expire worthless. The sudden drop in price also provides an opportunity for the shorts to cover their positions, profiting via paying back their creditors with lower priced gold or equities.
Investment banks and savvy traders riding their coattails have used this pattern to profit at the expense of honest traders that aren’t in the loop, as was detailed in the precious metals market by whistle-blower Andrew Maguire in March of this year. And despite the manipulation being meticulously explained to the Commodities Futures Trading Commission (CFTC) and released to the press by the Gold Anti-Trust Action Committee (GATA), nothing has been done to stop the manipulation or address the massive concentration of paper short positions by a few of the largest investment banks. But schemes of this nature tend to eventually fall apart one way or another, even if market regulators are bought off and completely lacking in the moral integrity necessary to do the right thing. Market forces have a way of re-asserting themselves, particularly when the scam is brought into the light..."
Investment banks and savvy traders riding their coattails have used this pattern to profit at the expense of honest traders that aren’t in the loop, as was detailed in the precious metals market by whistle-blower Andrew Maguire in March of this year. And despite the manipulation being meticulously explained to the Commodities Futures Trading Commission (CFTC) and released to the press by the Gold Anti-Trust Action Committee (GATA), nothing has been done to stop the manipulation or address the massive concentration of paper short positions by a few of the largest investment banks. But schemes of this nature tend to eventually fall apart one way or another, even if market regulators are bought off and completely lacking in the moral integrity necessary to do the right thing. Market forces have a way of re-asserting themselves, particularly when the scam is brought into the light..."
Did the G-8 Push Us Closer to Gold Confiscation?
"The global economic recovery is not looking good. The G-8 meeting this weekend saw divisions that could lead [as the I.M.F. put it] to losses of trillions of dollars and millions of jobs. Now it is reported that Mr. Bernanke and his close allies at the board in Washington are worried by signs that the U.S. recovery is running out of steam. The E.C.R.I. leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.
Add to this the evidence that money velocity is slowing [M3 has contracted at an annual rate of 7.6% over the last three months] and we may well face a huge bout of money printing again? If that is the case, confidence in currencies [not just the $] will lurch lower again.Mr Levine of HSBC, in a recent gold conference pointed out that some top U.S. Asset Managers were fearful of the possibility of government confiscation of gold. Has the G-8 taken steps towards the day when governments would their citizen's gold in their vaults again?
Where and why do top U.S. Asset Managers want gold for?
First, why gold, you may ask? Bottom line, Gold still represents the ultimate form of payment, it is always accepted. In a world drowning in debt, gold's debt-free nature appeals even more strongly and will particularly to governments whose currencies are failing to retain confidence.
Second, Mr. Levine explained, that on being told that the bank's U.S. vaults had sufficient space available for their gold he was informed that they did not want their gold stored in the U.S.A. but preferably in Europe because they feared that at some stage the U.S. Administration might follow the path set by Franklin D. Roosevelt in 1933 and confiscate all U.S. gold holdings as part of the country's strategy in dealing with the nation's economic problems. Are their fears well grounded?
Surely this view is a bit extreme? The job of Asset Managers is to manage asset for the greatest return and with prudence. They have to see what may lie ahead and guard against dangers that may threaten the assets under their wings.
Who are these Asset Managers?
You may feel that they may be going too far? Who are these men? For a start, they are highly qualified capable men who understand the ins and outs of investment management. They were carefully chosen for their capabilities and good investment management sense. They have built up a body of knowledge that places them on top of the investment world. Such knowledge usually encompasses monetary matters of the sort that would include gold. As such we would suggest their opinions do have value. We should treat these opinions with respect?..."
Add to this the evidence that money velocity is slowing [M3 has contracted at an annual rate of 7.6% over the last three months] and we may well face a huge bout of money printing again? If that is the case, confidence in currencies [not just the $] will lurch lower again.Mr Levine of HSBC, in a recent gold conference pointed out that some top U.S. Asset Managers were fearful of the possibility of government confiscation of gold. Has the G-8 taken steps towards the day when governments would their citizen's gold in their vaults again?
Where and why do top U.S. Asset Managers want gold for?
First, why gold, you may ask? Bottom line, Gold still represents the ultimate form of payment, it is always accepted. In a world drowning in debt, gold's debt-free nature appeals even more strongly and will particularly to governments whose currencies are failing to retain confidence.
Second, Mr. Levine explained, that on being told that the bank's U.S. vaults had sufficient space available for their gold he was informed that they did not want their gold stored in the U.S.A. but preferably in Europe because they feared that at some stage the U.S. Administration might follow the path set by Franklin D. Roosevelt in 1933 and confiscate all U.S. gold holdings as part of the country's strategy in dealing with the nation's economic problems. Are their fears well grounded?
Surely this view is a bit extreme? The job of Asset Managers is to manage asset for the greatest return and with prudence. They have to see what may lie ahead and guard against dangers that may threaten the assets under their wings.
Who are these Asset Managers?
You may feel that they may be going too far? Who are these men? For a start, they are highly qualified capable men who understand the ins and outs of investment management. They were carefully chosen for their capabilities and good investment management sense. They have built up a body of knowledge that places them on top of the investment world. Such knowledge usually encompasses monetary matters of the sort that would include gold. As such we would suggest their opinions do have value. We should treat these opinions with respect?..."
Derivative Monster Alive and Kicking Despite Financial Reforms
"Anyone who thinks the new financial reform law will save us from the next debt disaster must be dreaming. Here are the facts …
Fact #1 Derivatives at U.S. Banks to Be Shifted Like Deck Chairs on the Titanic
In its latest update, the Comptroller of the Currency (OCC) reports that the national value of derivatives held by U.S. commercial banks is $216.5 trillion, or nearly FIFTEEN times the nation’s Gross Domestic Product.
Moreover, instead of diminishing, they’re getting larger, up by $3.6 trillion — the equivalent of one full quarter of GDP — in just the most recent three-month period.
Fact #2 The Derivatives Monster Overseas Is Twice as Big. But Nothing Whatsoever Is Being Done to Tame It.
The Bank of International Settlements (BIS) reports that, at year-end 2009, the total notional amount of derivatives traded on the over-the-counter market globally was $614.7 trillion.
In addition, the total traded on organized exchanges was $21.7 trillion in futures contracts and another $51.4 trillion in options.
Grand total globally: $687.8 trillion.
Problem: At this juncture, strictly the portion held by U.S. banks (the $216.5 trillion tabulated by the OCC) has anything to do with the new legislation. The balance of $471.3 trillion — TWICE as much — remains outside the realm of any reforms.
Fact #3 Financial Reform Does Nothing to Curb The Two Biggest Risk-Mongers of All: The Treasury and the Fed
The financial reform bill grants both the U.S. Treasury Department and the Federal Reserve new powers and responsibilities to control and monitor the risk-taking of large financial institutions.
What’s ironic, however, is that these are precisely the agencies that have created — and continue to create — the greatest systemic risks of all:
The Treasury, by running the largest federal deficits of all time, exposes the U.S. bond market to the same kind of contagion risk that recently struck Greece, Spain, Portugal, and Hungary. And …
The Federal Reserve, by massively increasing the U.S. monetary base, helps create the same kind of speculative bubbles that caused the debt crisis in the first place."
Fact #1 Derivatives at U.S. Banks to Be Shifted Like Deck Chairs on the Titanic
In its latest update, the Comptroller of the Currency (OCC) reports that the national value of derivatives held by U.S. commercial banks is $216.5 trillion, or nearly FIFTEEN times the nation’s Gross Domestic Product.
Moreover, instead of diminishing, they’re getting larger, up by $3.6 trillion — the equivalent of one full quarter of GDP — in just the most recent three-month period.
Fact #2 The Derivatives Monster Overseas Is Twice as Big. But Nothing Whatsoever Is Being Done to Tame It.
The Bank of International Settlements (BIS) reports that, at year-end 2009, the total notional amount of derivatives traded on the over-the-counter market globally was $614.7 trillion.
In addition, the total traded on organized exchanges was $21.7 trillion in futures contracts and another $51.4 trillion in options.
Grand total globally: $687.8 trillion.
Problem: At this juncture, strictly the portion held by U.S. banks (the $216.5 trillion tabulated by the OCC) has anything to do with the new legislation. The balance of $471.3 trillion — TWICE as much — remains outside the realm of any reforms.
Fact #3 Financial Reform Does Nothing to Curb The Two Biggest Risk-Mongers of All: The Treasury and the Fed
The financial reform bill grants both the U.S. Treasury Department and the Federal Reserve new powers and responsibilities to control and monitor the risk-taking of large financial institutions.
What’s ironic, however, is that these are precisely the agencies that have created — and continue to create — the greatest systemic risks of all:
The Treasury, by running the largest federal deficits of all time, exposes the U.S. bond market to the same kind of contagion risk that recently struck Greece, Spain, Portugal, and Hungary. And …
The Federal Reserve, by massively increasing the U.S. monetary base, helps create the same kind of speculative bubbles that caused the debt crisis in the first place."
Monday, June 28, 2010
Second Gold Price Intervention In An Hour
"There is smoke rising from the windows of the LBMA as the 270 Park boys have rarely been so busy creating gold short contracts out of thin air and selling them to all willing manipulators. Gold now down $22 after second major leg down on no news, and in fact as ML reiterates its $1,500 PT for gold by the end of 2011."
The Third Depression
"We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."
Bank For International Settlements: Deficits Are Crippling
"The Bank for International Settlements made two observations in its 8oth Annual Report. One made sense. The basis for the second is a mystery.
Much like the declaration of the G-20 nations, the BIS believes that the preeminent threat to the global economy is deficits.
“The first and most immediate challenge is to make a convincing start on reducing budget deficits in the advanced economies. Placing public debt on a sustainable path must be accompanied by structural reforms to enhance sustainable growth.”The second imperative mentions in the BIS report was that central banks need to raise the cost of borrowing.
“The second challenge is to foster the strengthening of balance sheets and necessary behavioural changes in the financial industry. Official support was intended to facilitate orderly adjustment. But if such support is maintained for too long, it will create moral hazard, undermine private sector financial intermediation and generate new, hidden risks.”
Much like the declaration of the G-20 nations, the BIS believes that the preeminent threat to the global economy is deficits.
“The first and most immediate challenge is to make a convincing start on reducing budget deficits in the advanced economies. Placing public debt on a sustainable path must be accompanied by structural reforms to enhance sustainable growth.”The second imperative mentions in the BIS report was that central banks need to raise the cost of borrowing.
“The second challenge is to foster the strengthening of balance sheets and necessary behavioural changes in the financial industry. Official support was intended to facilitate orderly adjustment. But if such support is maintained for too long, it will create moral hazard, undermine private sector financial intermediation and generate new, hidden risks.”
Chicago Fed: Best Days Behind Us?
"The Chicago Fed’s National Activity Index – one of my favorite measures — printed this morning. The monthly number edged down slightly, and the 3-month moving average, which the folks in Chicago tell us to focus on, rose somewhat.
Here, however, is the money shot from the release (my bold):
May’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession. With regard to inflation, the CFNAI-MA3 in May indicates limited inflationary pressure from economic activity over the coming year.
So here’s the Chicago Fed letting us know that we may well have seen the best of what this “recovery” had to offer. I would note that the Personal Consumption and Housing sub-component of the index continued to be mired in negative territory, subtracting 0.42 from the overall print. Now, this is not to imply that a double dip is a foregone conclusion, though that is certainly one outcome. At the very least, it argues for a very slow growth scenario."
Here, however, is the money shot from the release (my bold):
May’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession. With regard to inflation, the CFNAI-MA3 in May indicates limited inflationary pressure from economic activity over the coming year.
So here’s the Chicago Fed letting us know that we may well have seen the best of what this “recovery” had to offer. I would note that the Personal Consumption and Housing sub-component of the index continued to be mired in negative territory, subtracting 0.42 from the overall print. Now, this is not to imply that a double dip is a foregone conclusion, though that is certainly one outcome. At the very least, it argues for a very slow growth scenario."
Hussman: A Double Dip Recession is Coming
"Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.
A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks."
A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks."
We're Nowhere Near the End of the Real Estate Houisng Bear Market
"For starters, May 2010 was the worst month for new home sales in America since records began in 1963.
Every month, the Commerce Department counts the number of new homes sold during the month. In April, for example, it counted 42,000 new single-family home sales. That's an annual rate of 504,000... and a 15% increase over March levels.
The Commerce Department reported its most recent tallies last Wednesday. In May, it counted only 25,000 new home sales around the country. In addition, the Commerce Department revised its sales numbers for April down to 37,000... and revised March's sales numbers down by 4,000 to 32,000 after people backed out of their agreements.
The Commerce Department said the average sales price for these new homes was $200,900... a new seven-year low. That's down 10% from a year ago, and 22% from the all-time high in June 2006.
These shocking declines in real estate sales show the government's tax credit artificially spiked activity in March and April. Now that the tax credit has expired, no one's buying houses. The Commerce Department also said the national inventory of new houses for sale hit a new 11-month high in May.
Meanwhile, even though mortgage rates are at 50-year lows, no one wants to borrow mortgage money anymore. Thirty-year fixed mortgage rates hit 4.69% last week, yet applications for mortgages fell in five of the last six weeks, and are now running at low levels last seen in 1997.
What should you make of May's terrible real estate data?
It's simple... real estate has moved from the guillotine stage into the sandpaper stage. The worst of the price declines are behind us, but we're still in a bear market.
This is bad news for investors who own stock in homebuilders, REITs, and home improvement warehouses like Home Depot. I expect these investments will keep falling as the real estate bear market sandpapers these investors to death. Check out this chart of Home Depot. It's one of the ugliest charts on the NYSE… "
Every month, the Commerce Department counts the number of new homes sold during the month. In April, for example, it counted 42,000 new single-family home sales. That's an annual rate of 504,000... and a 15% increase over March levels.
The Commerce Department reported its most recent tallies last Wednesday. In May, it counted only 25,000 new home sales around the country. In addition, the Commerce Department revised its sales numbers for April down to 37,000... and revised March's sales numbers down by 4,000 to 32,000 after people backed out of their agreements.
The Commerce Department said the average sales price for these new homes was $200,900... a new seven-year low. That's down 10% from a year ago, and 22% from the all-time high in June 2006.
These shocking declines in real estate sales show the government's tax credit artificially spiked activity in March and April. Now that the tax credit has expired, no one's buying houses. The Commerce Department also said the national inventory of new houses for sale hit a new 11-month high in May.
Meanwhile, even though mortgage rates are at 50-year lows, no one wants to borrow mortgage money anymore. Thirty-year fixed mortgage rates hit 4.69% last week, yet applications for mortgages fell in five of the last six weeks, and are now running at low levels last seen in 1997.
What should you make of May's terrible real estate data?
It's simple... real estate has moved from the guillotine stage into the sandpaper stage. The worst of the price declines are behind us, but we're still in a bear market.
This is bad news for investors who own stock in homebuilders, REITs, and home improvement warehouses like Home Depot. I expect these investments will keep falling as the real estate bear market sandpapers these investors to death. Check out this chart of Home Depot. It's one of the ugliest charts on the NYSE… "
Sunday, June 27, 2010
Increasing Risk of Double Dip Recession as Leading Economic Indicators Start to Turn
"The Leading Indicators Are Starting to Turn
Even while I was on vacation in Italy, I had to regularly feed my addiction for economic and investment information. Over the course of a few days I ran across several studies on the Economic Cycle Research Institute's (ECRI) Index of Weekly Leading Economic Indicators. The index has turned down of late. Chad Starliper of Rather & Kittrell sent me the following charts and analysis.
"The ECRI has been getting some news of late. I did a little work on it, played with the rates of change, and found something a little ominous you might be interested in. The normal reported growth rate is an annualized rate of a smoothed WLI. However, when the 13-week annualized rate of change is used - shorter-term momentum - the decline in growth has fallen to a very weak -23.46%. The other times it has fallen this fast? All were either in recession or pointing to recession in short order (Dec. 2000)."
US Money Supply Plunges At 1930's Pace
"The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression..."
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression..."
The Big Picture Following the Worst Crisis Since the Great Depression
"...Three Stages of a Currency Crisis
Stage #1: Loss of Confidence
The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued....
Stage #2: Herding
When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology...
Stage #3: Contagion
The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses...."
Stage #1: Loss of Confidence
The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued....
Stage #2: Herding
When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology...
Stage #3: Contagion
The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses...."
Is it Time to Bet Against the U.S. Dollar?
"...From Leader to Laggard?
Given that the dollar soared 11% through the end of May , I'm sure some experts will call me crazy for going against the dollar at this point in history. But here's my thinking:
•Our $14 trillion fiscal hangover, weaker-dollar policies and increased spending will lead to additional dollar weakness in the immediate term. Longer-term, this is a foregone conclusion: The high debt load relative to U.S. gross domestic product will erode growth - studies prove this - and all the extra money that we've printed will fuel inflation, as always happens..
•Foreign central bankers - especially China - are actively diversifying away from dollar reserves and dollar-denominated securities. They can't and won't "dump" the dollar in a wholesale manner. But this shift away is nothing less than a long-term decrease in demand for the dollar - and we all know that when demand for an asset declines, so does its value.
•The Organization of the Petroleum Exporting Countries (OPEC) - and what's left of the non-OPEC nations - are still pressing for non-dollar-denominated oil deals. Expect some of those deals to take place in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon disaster, which will bring about major regulatory changes and cause onshore reserves to command a major premium. This group, incidentally, isn't to be dismissed, given that it contains such heavyweights as China, Japan, Russia, most of the Arab nations and, of course, France.
•If you look at the following chart of the U.S. dollar, you can see that appears to be forming a perfect "rising wedge," a technical formation and a bearish signal that frequently precedes rollovers. That's the opposite of a "falling wedge," a bullish signal that presages reversals to the upside."
Given that the dollar soared 11% through the end of May , I'm sure some experts will call me crazy for going against the dollar at this point in history. But here's my thinking:
•Our $14 trillion fiscal hangover, weaker-dollar policies and increased spending will lead to additional dollar weakness in the immediate term. Longer-term, this is a foregone conclusion: The high debt load relative to U.S. gross domestic product will erode growth - studies prove this - and all the extra money that we've printed will fuel inflation, as always happens..
•Foreign central bankers - especially China - are actively diversifying away from dollar reserves and dollar-denominated securities. They can't and won't "dump" the dollar in a wholesale manner. But this shift away is nothing less than a long-term decrease in demand for the dollar - and we all know that when demand for an asset declines, so does its value.
•The Organization of the Petroleum Exporting Countries (OPEC) - and what's left of the non-OPEC nations - are still pressing for non-dollar-denominated oil deals. Expect some of those deals to take place in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon disaster, which will bring about major regulatory changes and cause onshore reserves to command a major premium. This group, incidentally, isn't to be dismissed, given that it contains such heavyweights as China, Japan, Russia, most of the Arab nations and, of course, France.
•If you look at the following chart of the U.S. dollar, you can see that appears to be forming a perfect "rising wedge," a technical formation and a bearish signal that frequently precedes rollovers. That's the opposite of a "falling wedge," a bullish signal that presages reversals to the upside."
Friday, June 25, 2010
Disaster, By the Numbers
"America's debt bomb is ticking and is likely to detonate in five years or less, says Michael Pento, senior market strategist at Delta Global Advisors.
"It could be much sooner when we hit the debt wall," Pento says. "My opinion doesn't matter: Math tells me we're in a serious problem."
The math Pento refers to is the Treasury Department's recent estimate that total U.S. debt will top $13.6 trillion this year and rise to 102% of GDP by 2015. Moreover, the publicly traded debt (debt excluding intra-governmental obligations) will rise to $14 trillion by 2015, up from "just" $7.5 trillion in 2009.
At $14 trillion, the interest payments on the public debt will total about $1 trillion in 2015, he continues; even assuming solid growth and low inflation, that would equal about 30% of total government revenue. "What do you think that does to our bond market?," Pento wonders. "It leads to a dollar crisis and a bond market crisis. That's why gold refuses to go down. "
Demand for U.S. Treasuries and the dollar currently remain high, especially in the wake of the euro's slow-motion implosion. Pento admits timing this debt crisis is difficult but predicts we'll be "like Greece, but worse," in four years or less, unless we make a sudden turn toward austerity."
"It could be much sooner when we hit the debt wall," Pento says. "My opinion doesn't matter: Math tells me we're in a serious problem."
The math Pento refers to is the Treasury Department's recent estimate that total U.S. debt will top $13.6 trillion this year and rise to 102% of GDP by 2015. Moreover, the publicly traded debt (debt excluding intra-governmental obligations) will rise to $14 trillion by 2015, up from "just" $7.5 trillion in 2009.
At $14 trillion, the interest payments on the public debt will total about $1 trillion in 2015, he continues; even assuming solid growth and low inflation, that would equal about 30% of total government revenue. "What do you think that does to our bond market?," Pento wonders. "It leads to a dollar crisis and a bond market crisis. That's why gold refuses to go down. "
Demand for U.S. Treasuries and the dollar currently remain high, especially in the wake of the euro's slow-motion implosion. Pento admits timing this debt crisis is difficult but predicts we'll be "like Greece, but worse," in four years or less, unless we make a sudden turn toward austerity."
ECRI Weekly Index falls to a 56-week low of -5.8
"This comes via the ECRI website:
A measure of future U.S.economic growth rose slightly in the latest week, but its annualized growth rate continued to fall, indicating the economy is about to slow, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 122.9 in the week ended June 18, up from 122.4 the prior week, originally reported as 122.5.
The index’s annualized growth rate fell to minus 6.9 percent from a revised minus 5.8 percent, originally reported as minus 5.7 percent. That was its lowest level since May 22, 2009, when it stood at minus 8.7 percent. "After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown," said Lakshman Achuthan, managing director of ECRI.
The economy is still growing but signs of a slowdown are increasing in spite of the uptick in the number. The longer annualized growth of this index remains negative, the more worried policy makers should be."
A measure of future U.S.economic growth rose slightly in the latest week, but its annualized growth rate continued to fall, indicating the economy is about to slow, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 122.9 in the week ended June 18, up from 122.4 the prior week, originally reported as 122.5.
The index’s annualized growth rate fell to minus 6.9 percent from a revised minus 5.8 percent, originally reported as minus 5.7 percent. That was its lowest level since May 22, 2009, when it stood at minus 8.7 percent. "After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown," said Lakshman Achuthan, managing director of ECRI.
The economy is still growing but signs of a slowdown are increasing in spite of the uptick in the number. The longer annualized growth of this index remains negative, the more worried policy makers should be."
Gold’s Rise And The Dow’s Fate
"I can tell you that time has been moving, whereas price has not been moving as fast as should be expected (based on the time movement). What does this mean? If these two patterns are actually fractals, then price has to catch up with time, and that should mean strong rallies (shorter time periods) could be coming up. As I am writing this, gold is up $20 the last couple of hours. It is going to be interesting.
Is the big picture in gold, as shown above, consistent with what is going on in the world economy today and with what is expected going forward? Consider the following:
Debt levels world-wide are at historically high levels
These debts are holding back the world’s economy, and will continue to do so for a significant number of years. (see here for more on this)
These debt levels are probably going to bring down the current world monetary system.
All fiat currencies are depreciating, as measured against gold, and this will increase as more countries struggle to meet their debt obligations
Tangible assets like gold and silver are under-valued as compared to intangible assets like equities and bonds. This is illustrated by the Dow/gold ratio. (see here for more on this
When one takes into account the points above, then it is hard not to agree that the big picture in gold, illustrated above, is probably accurate.
If the world’s debt levels are at all-time high levels and are likely to hold back the world’s economy, then this should affect the economics of listed companies and the real values of companies listed on the great stock exchanges of the world.
This does not bode well for Dow and other listed stocks. They will very likely lose real value (as measured in terms of gold, silver and other commodities) over the next couple of years and beyond."
Is the big picture in gold, as shown above, consistent with what is going on in the world economy today and with what is expected going forward? Consider the following:
Debt levels world-wide are at historically high levels
These debts are holding back the world’s economy, and will continue to do so for a significant number of years. (see here for more on this)
These debt levels are probably going to bring down the current world monetary system.
All fiat currencies are depreciating, as measured against gold, and this will increase as more countries struggle to meet their debt obligations
Tangible assets like gold and silver are under-valued as compared to intangible assets like equities and bonds. This is illustrated by the Dow/gold ratio. (see here for more on this
When one takes into account the points above, then it is hard not to agree that the big picture in gold, illustrated above, is probably accurate.
If the world’s debt levels are at all-time high levels and are likely to hold back the world’s economy, then this should affect the economics of listed companies and the real values of companies listed on the great stock exchanges of the world.
This does not bode well for Dow and other listed stocks. They will very likely lose real value (as measured in terms of gold, silver and other commodities) over the next couple of years and beyond."
Lousy U.S. Economy Pulling Rug Out From Under Housing Market
"Here Comes the Housing Double-Dip
The latest housing numbers clearly show this new dynamic playing out …
Existing home sales dropped 2.2 percent in May, compared with expectations for a gain of 6 percent. The supply of homes on the market actually rose slightly from year-ago levels to 3.89 million.
New home sales collapsed a whopping 32.7 percent in May to a seasonally adjusted annual rate of 300,000. That’s the lowest level in the history of data collection, which goes back to 1963. Prices slid almost 10 percent from a year earlier.
The National Association of Home Builders’ index, which tracks how builders perceive market conditions, tanked to 17 in June from 22 in May. That was much worse than the economists were expecting, and it was the sharpest drop in any month since November 2008.
Slumping housing demand is pushing lumber inventories higher and prices lower.
The Mortgage Bankers Association’s purchase loan application index just touched 167.80. That was down from 270.70 a year earlier and the worst reading since 1997.
Oh, and one of my favorite indicators — the price of lumber? It’s taking an Acapulco cliff dive! Lumber futures prices have plunged from $327 per 1,000 board feet in late April to around $180 now. Folks, that’s a 45 percent collapse in two months!
Bottom line?
It’s once again time to ramp up the search for short sale and put option candidates in housing-related industries. That’s precisely what I’ll be doing in some of my services.
Meanwhile, if you haven’t already considered liquidating some of your stock positions and paring down your risk, don’t wait any longer. The risk of a double-dip in housing and the economy is rising fast."
The latest housing numbers clearly show this new dynamic playing out …
Existing home sales dropped 2.2 percent in May, compared with expectations for a gain of 6 percent. The supply of homes on the market actually rose slightly from year-ago levels to 3.89 million.
New home sales collapsed a whopping 32.7 percent in May to a seasonally adjusted annual rate of 300,000. That’s the lowest level in the history of data collection, which goes back to 1963. Prices slid almost 10 percent from a year earlier.
The National Association of Home Builders’ index, which tracks how builders perceive market conditions, tanked to 17 in June from 22 in May. That was much worse than the economists were expecting, and it was the sharpest drop in any month since November 2008.
Slumping housing demand is pushing lumber inventories higher and prices lower.
The Mortgage Bankers Association’s purchase loan application index just touched 167.80. That was down from 270.70 a year earlier and the worst reading since 1997.
Oh, and one of my favorite indicators — the price of lumber? It’s taking an Acapulco cliff dive! Lumber futures prices have plunged from $327 per 1,000 board feet in late April to around $180 now. Folks, that’s a 45 percent collapse in two months!
Bottom line?
It’s once again time to ramp up the search for short sale and put option candidates in housing-related industries. That’s precisely what I’ll be doing in some of my services.
Meanwhile, if you haven’t already considered liquidating some of your stock positions and paring down your risk, don’t wait any longer. The risk of a double-dip in housing and the economy is rising fast."
Thursday, June 24, 2010
The Coming U.S. Real Estate Crash
"following are 7 reasons why the U.S. real estate market is already a total nightmare....
#1) In May, sales of new homes in the United States dropped to the lowest level ever recorded. To be more precise, new home sales dropped 32.7 percent to a seasonally adjusted annual rate of 300,000. A "normal" level is about 800,000 a month. New homes have never sold this slowly ever since the U.S. Commerce Department began tracking this data back in 1963.
#2) The median price of all new U.S. homes sold in May was $200,900, which represented a 9.6% drop from May 2009. If prices are still falling on new homes that means that the real estate nightmare is not over.
#3) New home sale figures for the previous two months were also revised down sharply by the government. Apparently their previous estimates were far too optimistic. But those were supposed to be really good months for home sales with so many Americans taking advantage of the tax credit right before the deadline. So the fact that the data for the previous two months had to be revised downward so severely is a very bad sign.
#4) Newly signed home sale contracts in the U.S. dropped more than 10% in May.
#5) According to the U.S. Commerce Department, housing starts in the U.S. fell approximately 10 percent in May, which represented the biggest decline since March 2009.
#6) Internet searches on real estate websites are down about 20 percent compared to this same time period in 2009.
#7) The "twin pillars" of the mortgage industry are a complete and total financial mess. The Congressional Budget Office is projecting that the final bill for the bailouts of Fannie Mae and Freddie Mac could be as high as $389 billion. Both Fannie Mae and Freddie Mac continue to hemorrhage cash at an alarming rate, but the truth is that without them there wouldn't be much of a mortgage industry left in the United States.
The following are 7 reasons why things are going to get even worse....
#1) The massive tax credit that the U.S. government was offering to home buyers has expired. This tax credit helped stabilize the U.S. real estate market for many months, but now that it is gone there is no more safety net for the housing industry.
#2) Foreclosures continue to set all-time records. In fact, the number of home foreclosures set a record for the second consecutive month in May. Not only that, but the number of newly initiated foreclosures rose 18.6 percent to 370,856 in the first quarter of 2010. A rising tide of foreclosures means that there is going to be a growing inventory of foreclosed homes on the market. As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, which was up 20 percent from a year ago. There is no indication that the number of foreclosed homes that need to be sold is going to decrease any time soon. This is going to have a depressing effect on U.S. home prices.
#3) Another giant wave of adjustable rate mortgages is scheduled to reset in 2011 and 2012. This "second wave" threatens to be as dramatic as the first wave that almost sunk the U.S. mortgage industry in 2007 and 2008. Unfortunately, what this is going to cause is even more foreclosures and even lower home prices.
#4) Banks and lending institutions have been significantly tightening their lending standards over the past several years. It is now much harder to get a home loan. That means that there are less potential buyers for each house that is on the market. Less competition for homes means that prices will continue to decline.
#5) Home prices are still way too high for most Americans in the current economic environment. Based on current wage levels, house prices should actually be much lower. So the market is going to continue to try to push home prices down to a point where people can actually afford to buy them. Right now Americans can't even afford the houses that they already have. The Mortgage Bankers Association recently announced that more than 10% of all U.S. homeowners with a mortgage had missed at least one mortgage payment during the January to March time period. That was a new all-time record and represented an increase from 9.1 percent a year ago.
#6) The overall U.S. economy is caught in a death spiral. Unemployment remains at frightening levels, a large percentage of Americans are up to their eyeballs in debt and more than 40 million Americans are now on food stamps. If people don't have jobs and if people don't have money then they can't buy houses.
#7) The Gulf of Mexico oil spill is the greatest environmental disaster in U.S. history, and it is threatening to become one of the greatest economic disasters in U.S. history. Already, real estate agents along the Gulf coast are reporting that the oil spill has completely killed the real estate industry in the region. As this disaster continues to grow worse by the day, homes in the southeast United States will continue to look less and less appealing. In fact, many are now projecting that the crisis in the Gulf will actually crush the housing industry from coast to coast."
#1) In May, sales of new homes in the United States dropped to the lowest level ever recorded. To be more precise, new home sales dropped 32.7 percent to a seasonally adjusted annual rate of 300,000. A "normal" level is about 800,000 a month. New homes have never sold this slowly ever since the U.S. Commerce Department began tracking this data back in 1963.
#2) The median price of all new U.S. homes sold in May was $200,900, which represented a 9.6% drop from May 2009. If prices are still falling on new homes that means that the real estate nightmare is not over.
#3) New home sale figures for the previous two months were also revised down sharply by the government. Apparently their previous estimates were far too optimistic. But those were supposed to be really good months for home sales with so many Americans taking advantage of the tax credit right before the deadline. So the fact that the data for the previous two months had to be revised downward so severely is a very bad sign.
#4) Newly signed home sale contracts in the U.S. dropped more than 10% in May.
#5) According to the U.S. Commerce Department, housing starts in the U.S. fell approximately 10 percent in May, which represented the biggest decline since March 2009.
#6) Internet searches on real estate websites are down about 20 percent compared to this same time period in 2009.
#7) The "twin pillars" of the mortgage industry are a complete and total financial mess. The Congressional Budget Office is projecting that the final bill for the bailouts of Fannie Mae and Freddie Mac could be as high as $389 billion. Both Fannie Mae and Freddie Mac continue to hemorrhage cash at an alarming rate, but the truth is that without them there wouldn't be much of a mortgage industry left in the United States.
The following are 7 reasons why things are going to get even worse....
#1) The massive tax credit that the U.S. government was offering to home buyers has expired. This tax credit helped stabilize the U.S. real estate market for many months, but now that it is gone there is no more safety net for the housing industry.
#2) Foreclosures continue to set all-time records. In fact, the number of home foreclosures set a record for the second consecutive month in May. Not only that, but the number of newly initiated foreclosures rose 18.6 percent to 370,856 in the first quarter of 2010. A rising tide of foreclosures means that there is going to be a growing inventory of foreclosed homes on the market. As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, which was up 20 percent from a year ago. There is no indication that the number of foreclosed homes that need to be sold is going to decrease any time soon. This is going to have a depressing effect on U.S. home prices.
#3) Another giant wave of adjustable rate mortgages is scheduled to reset in 2011 and 2012. This "second wave" threatens to be as dramatic as the first wave that almost sunk the U.S. mortgage industry in 2007 and 2008. Unfortunately, what this is going to cause is even more foreclosures and even lower home prices.
#4) Banks and lending institutions have been significantly tightening their lending standards over the past several years. It is now much harder to get a home loan. That means that there are less potential buyers for each house that is on the market. Less competition for homes means that prices will continue to decline.
#5) Home prices are still way too high for most Americans in the current economic environment. Based on current wage levels, house prices should actually be much lower. So the market is going to continue to try to push home prices down to a point where people can actually afford to buy them. Right now Americans can't even afford the houses that they already have. The Mortgage Bankers Association recently announced that more than 10% of all U.S. homeowners with a mortgage had missed at least one mortgage payment during the January to March time period. That was a new all-time record and represented an increase from 9.1 percent a year ago.
#6) The overall U.S. economy is caught in a death spiral. Unemployment remains at frightening levels, a large percentage of Americans are up to their eyeballs in debt and more than 40 million Americans are now on food stamps. If people don't have jobs and if people don't have money then they can't buy houses.
#7) The Gulf of Mexico oil spill is the greatest environmental disaster in U.S. history, and it is threatening to become one of the greatest economic disasters in U.S. history. Already, real estate agents along the Gulf coast are reporting that the oil spill has completely killed the real estate industry in the region. As this disaster continues to grow worse by the day, homes in the southeast United States will continue to look less and less appealing. In fact, many are now projecting that the crisis in the Gulf will actually crush the housing industry from coast to coast."
Path to Gold Backed Currency
"The world faces challenges and uncertainty these days like perhaps never before in modern history. Broken insolvent banking systems match the insolvent homeowners living in despair but with newfound hope from simply not paying home mortgages in large numbers. Henry David Thoreau could actually run for the US Senate, as his platform of civil disobedience is more widely embraced with each passing month. Over a quarter million Bank of America home mortgage holders have not made a loan payment in a year, yet still occupy rent-free dwellings. The European sovereign debt has shaken the entire government financial structures, offering a preview of what comes to the sacrosanct Untied States and Untied Kingdom. In its wake, a fire is lit under gold as a recognized safe haven asset that has no debt attachment or counter-party risk.
Government budgets read like Banana Republics throughout the Western world. The norm has become crime syndicates to control most Western Govts, matching the trend for local warlord criminal groups to control most Third World Govts. Mexico is now a failed state. Think evolution in reverse. Indeed, crisis has become the new norm. Indeed, stimulus and extreme liquidity buttresses have become the new norm. Indeed, sugar high on perceptions after stimulus has become the new norm. Indeed, war has become the new norm to define peace. Indeed, pursuit of truth has become the new norm to define terrorism. It makes sense that restructure of the global monetary system would evoke a powerful response by the Anglo bankster power merchants. Their response so far has been desperate attempts to preserve the system, combined with feeble gestures on actual innovative concepts. Take for instance, the Straw Man built of the Intl Monetary Fund and its primary vehicle, the Special Drawing Rights, the equivalent of a rusty corrosive chopshop car whose engine is still seized up, runs at extreme inefficiency like 1.5 gallons per mile, but sports a spiffy new paint job.
Against this backdrop, the global monetary system is clearly broken, and increasingly recognized as broken. Political and banking leaders have been working on solutions. In Europe they have been focusing on extreme solutions, but in the United States they have been focusingon more extreme measures to preserve the current system. The one main principle to recall about bubbles and Ponzis is that an accelerated supply of money is required to maintain even a constant size of the destructive condition. My firm point has been for two years that the first nations to abandon the USDollar as the foundation for their monetary, banking, financial, and economic systems will emerge as leaders in the next global chapter. The jump transition is extraordinarily difficult. The entire world, evidence seen in the G-20 Meetings, is actively pursing an alternative to the US$ as the global reserve currency."
Government budgets read like Banana Republics throughout the Western world. The norm has become crime syndicates to control most Western Govts, matching the trend for local warlord criminal groups to control most Third World Govts. Mexico is now a failed state. Think evolution in reverse. Indeed, crisis has become the new norm. Indeed, stimulus and extreme liquidity buttresses have become the new norm. Indeed, sugar high on perceptions after stimulus has become the new norm. Indeed, war has become the new norm to define peace. Indeed, pursuit of truth has become the new norm to define terrorism. It makes sense that restructure of the global monetary system would evoke a powerful response by the Anglo bankster power merchants. Their response so far has been desperate attempts to preserve the system, combined with feeble gestures on actual innovative concepts. Take for instance, the Straw Man built of the Intl Monetary Fund and its primary vehicle, the Special Drawing Rights, the equivalent of a rusty corrosive chopshop car whose engine is still seized up, runs at extreme inefficiency like 1.5 gallons per mile, but sports a spiffy new paint job.
Against this backdrop, the global monetary system is clearly broken, and increasingly recognized as broken. Political and banking leaders have been working on solutions. In Europe they have been focusing on extreme solutions, but in the United States they have been focusingon more extreme measures to preserve the current system. The one main principle to recall about bubbles and Ponzis is that an accelerated supply of money is required to maintain even a constant size of the destructive condition. My firm point has been for two years that the first nations to abandon the USDollar as the foundation for their monetary, banking, financial, and economic systems will emerge as leaders in the next global chapter. The jump transition is extraordinarily difficult. The entire world, evidence seen in the G-20 Meetings, is actively pursing an alternative to the US$ as the global reserve currency."
Central Banking in Crisis, Twenty Countries on the Verge of Insolvency
"Cycles were created for the accumulation of wealth. A boom occurs and you get wealthy from investments on the way up and even wealthier on the way down, because the elitists are controlling the supply of money and credit and interest rates. That is the real underlying mission of the Fed, which is owned by banking and Wall Street. All the power to control markets and create inflation and deflation lies with the Federal Reserve. Politicians do not create monetary policy, the Fed does. The politicians do as they are told. They know from time to time there will be economic pain, but the payoffs are so good they learn to live with it.
This time the damage is so bad that the Fed has been forced to monetize trillions of dollars of debt. The disease this time has spread to Europe with the ECB, using, quantitative easing by simply creating money out of thin air. That is something they said they would never do. The only real liquidity in Europe is emanating from the ECB and the Fed. We believe that eventually countries will fail, as Iceland has. You know all the possible victims. There are presently 20 of them including the US and UK . Three-card Monte games do not last forever. If liquidity is that scarce then where is the money coming from? The only place it could be coming from is the Fed. Not only is a $2 trillion bailout in process, but also as banks and thrift institutions fail stress tests some will be bailed out by being absorbed by other supposedly solvent institutions. When that option is gone then governments must bail them out. When the monetization hits the entire system collapses. After 50 or more years in this business we believe the system is definitely going to fold.
All the central banks involved are broke or virtually broke. If they are not broke why is their condition a big secret? The Bundesbank told Spain last week that we do not want stress test results made public. The reason obviously was because of the sad condition German banks are in and their penchant again to keep everything secret. These are the same people who want a one-world currency in the form of an SDR, which is worthless, because it has no backing. It is just another fiat currency. They all are in such bad shape they cannot even sterilize their interventions. The new trillions we see in the system in Europe and the US cannot be sterilized."
This time the damage is so bad that the Fed has been forced to monetize trillions of dollars of debt. The disease this time has spread to Europe with the ECB, using, quantitative easing by simply creating money out of thin air. That is something they said they would never do. The only real liquidity in Europe is emanating from the ECB and the Fed. We believe that eventually countries will fail, as Iceland has. You know all the possible victims. There are presently 20 of them including the US and UK . Three-card Monte games do not last forever. If liquidity is that scarce then where is the money coming from? The only place it could be coming from is the Fed. Not only is a $2 trillion bailout in process, but also as banks and thrift institutions fail stress tests some will be bailed out by being absorbed by other supposedly solvent institutions. When that option is gone then governments must bail them out. When the monetization hits the entire system collapses. After 50 or more years in this business we believe the system is definitely going to fold.
All the central banks involved are broke or virtually broke. If they are not broke why is their condition a big secret? The Bundesbank told Spain last week that we do not want stress test results made public. The reason obviously was because of the sad condition German banks are in and their penchant again to keep everything secret. These are the same people who want a one-world currency in the form of an SDR, which is worthless, because it has no backing. It is just another fiat currency. They all are in such bad shape they cannot even sterilize their interventions. The new trillions we see in the system in Europe and the US cannot be sterilized."
Sunday, June 20, 2010
12 American Warships, Including One Aircraft Carrier, And One Israeli Corvette, Cross Suez Canal On Way To Red Sea And Beyond
"Arabic newspaper Al-Quds al-Arabi reports that 12 American warships, among which one aircraft carrier, as well as one Israeli corvette, and possibly a submarine, have crossed the Suez Canal on their way to the Red Sea. Concurrently, thousands of Egyptian soldiers were deployed along the canal to protect the ships. The passage disrupted traffic into the manmade canal for the "longest time in years." The immediate destination of the fleet is unknown. According to Global Security, two other carriers are already deployed in the region, with the CVN-73 Washington in the western Pacific as of May 26, and the CVN-69 Eisenhower supporting operation Enduring Freedom as of May 22. It is unclear at first read what the third carrier group may be, but if this news, which was also confirmed by the Jerusalem Post and Haaretz, is correct, then the Debka report about a surge in aircraft activity in the Persian Gulf is well on its way to being confirmed. There has been no update on the three Israeli nuclear-armed subs that are believed to be operating off the coast of Iran currently. "
at http://www.zerohedge.com/article/12-american-warships-including-one-aircraft-carrier-and-one-israeli-corvette-cross-suez-cana?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
at http://www.zerohedge.com/article/12-american-warships-including-one-aircraft-carrier-and-one-israeli-corvette-cross-suez-cana?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Following the Worst Crisis Since the Great Depression
"...and Sovereign Debt Crises Tend to Play Out in Four Stages …
Stage #1: Burgeoning Deficits
In a financial crisis government spending increases dramatically in attempts to stabilize the financial system and stimulate economic activity. Tax revenues fall. Fiscal surpluses turn into deficits … and economies with existing deficits keep piling it on.
How it’s playing out …
All sixteen members of the European monetary union have violated treaty limits on allowable budget deficits — some to the tune of more than four times as much! Moreover, the leading economies of the world have all seen their deficits shoot higher, some to record levels.
In fact, the deficit spending that’s gone on in recent years can be summed up as follows: Over 40 percent of world GDP comes from countries that are running deficits in excess of 10 percent.
Stage #2: Ballooning Debt
When economies are contracting or even growing slowly, bringing these deficits back down to earth becomes an unenviable challenge. Governments have to make ends meet by turning to the markets. Then those burgeoned deficits turn into growing debt loads.
How it’s playing out …
When debt reaches 80 percent of GDP threshold, the borrowing costs for governments starts ticking higher and so does the market scrutiny. The IMF says five of the top seven developed countries in the world will have debt levels exceeding 100 percent of GDP in the next four years.
Stage #3: Downgrades
When deficits and debts rise and economic activity appears unlikely to curtail fiscal problems, the credit worthiness of the government falls under intense scrutiny. And that’s when we see downgrades.
How it’s playing out …
Greece’s sovereign debt rating has been downgraded to junk status. Spain has lost its AAA rating and the UK could lose its AAA status if its deficit isn’t addressed. Japan’s outlook has been cut to negative and rating agencies have even warned the U.S.
Stage #4: Defaults
This is the final and most deadly stage. That’s because downgrades only make the vicious cycle of weak economic activity and growing dependence on debt worse.
When investors see more risk, they require more return. Therefore, the borrowing costs for these troubled countries rise. Then it becomes harder to finance spending needs and harder to finance existing debt. And that’s when we see defaults..."
Stage #1: Burgeoning Deficits
In a financial crisis government spending increases dramatically in attempts to stabilize the financial system and stimulate economic activity. Tax revenues fall. Fiscal surpluses turn into deficits … and economies with existing deficits keep piling it on.
How it’s playing out …
All sixteen members of the European monetary union have violated treaty limits on allowable budget deficits — some to the tune of more than four times as much! Moreover, the leading economies of the world have all seen their deficits shoot higher, some to record levels.
In fact, the deficit spending that’s gone on in recent years can be summed up as follows: Over 40 percent of world GDP comes from countries that are running deficits in excess of 10 percent.
Stage #2: Ballooning Debt
When economies are contracting or even growing slowly, bringing these deficits back down to earth becomes an unenviable challenge. Governments have to make ends meet by turning to the markets. Then those burgeoned deficits turn into growing debt loads.
How it’s playing out …
When debt reaches 80 percent of GDP threshold, the borrowing costs for governments starts ticking higher and so does the market scrutiny. The IMF says five of the top seven developed countries in the world will have debt levels exceeding 100 percent of GDP in the next four years.
Stage #3: Downgrades
When deficits and debts rise and economic activity appears unlikely to curtail fiscal problems, the credit worthiness of the government falls under intense scrutiny. And that’s when we see downgrades.
How it’s playing out …
Greece’s sovereign debt rating has been downgraded to junk status. Spain has lost its AAA rating and the UK could lose its AAA status if its deficit isn’t addressed. Japan’s outlook has been cut to negative and rating agencies have even warned the U.S.
Stage #4: Defaults
This is the final and most deadly stage. That’s because downgrades only make the vicious cycle of weak economic activity and growing dependence on debt worse.
When investors see more risk, they require more return. Therefore, the borrowing costs for these troubled countries rise. Then it becomes harder to finance spending needs and harder to finance existing debt. And that’s when we see defaults..."
The Next Catastrophic Bubble to Pop Will Be Private Sector Debt
"Much is said about the propensity of USA to pile on public debt to try and right the wrongs of the moronic lenders of yester-year ….and the risks that entails, but private sector debt is a much bigger “Elephant” in the Jacuzzi than public sector debt."
Friday, June 18, 2010
Is China Secretly Stealth-Buying Gold?
"The Reformed Broker thinks China is a huge secret buyer of gold, highlighting a very interesting anecdote from CNN Money.
Reformed Broker:
'China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003.
Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys."
Reformed Broker:
'China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003.
Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys."
ECRI GROWTH CONTINUES TO DECLINE
"The negative trend in the ECRI’s weekly leading index continued this week. The annual growth rate for their leading index declined to -5.7% for the week ending June 11th. This was down from -3.7% last week. This is just the second negative reading since the ECRI began calling for an economic recovery early in 2009. Lakshman Achuthan, ECRI’s managing director is not yet concerned about the decline in the leading index:
“Despite the WLI’s rapid drop over the last six weeks, its downturn has not been sustained enough to signal an imminent recession.”
“Despite the WLI’s rapid drop over the last six weeks, its downturn has not been sustained enough to signal an imminent recession.”
Sovereign Crisis from Economic Stimulus to Debt Austerity Snowball Effect
"A blockbuster draft report from the European Commission saw the light of day recently, thanks to some reporting from Bloomberg. It highlights an incredibly dangerous Catch-22 facing many sovereign nations — the “Snowball Scenario.”
Let me give you an example how this works …
Suppose country A’s economy goes into the tank. The government responds by borrowing boatloads of money and spending like mad on stimulus packages.
The markets allow it to go on for a while. But then investors start to get antsy about all the debt being added to the government’s balance sheet. So they start dumping its bonds, driving prices lower and rates higher. That, in turn, forces the country to implement austerity measures to get its debt and deficit under control.
The problem?
Those moves send the economy BACK into the crapper! Government spending has to rise yet again to pay for things like unemployment insurance, new stimulus packages, and so on … at the same time tax revenues fall. That drives debts and deficits even higher.
The end game in this snowball scenario? A sovereign default!
And that’s not just a theory. In fact …
Snowballs Are Already Rolling Downhill in Spain, Greece, and Portugal"
Let me give you an example how this works …
Suppose country A’s economy goes into the tank. The government responds by borrowing boatloads of money and spending like mad on stimulus packages.
The markets allow it to go on for a while. But then investors start to get antsy about all the debt being added to the government’s balance sheet. So they start dumping its bonds, driving prices lower and rates higher. That, in turn, forces the country to implement austerity measures to get its debt and deficit under control.
The problem?
Those moves send the economy BACK into the crapper! Government spending has to rise yet again to pay for things like unemployment insurance, new stimulus packages, and so on … at the same time tax revenues fall. That drives debts and deficits even higher.
The end game in this snowball scenario? A sovereign default!
And that’s not just a theory. In fact …
Snowballs Are Already Rolling Downhill in Spain, Greece, and Portugal"
Thursday, June 17, 2010
Is Spain Next?
"The data illustrate quite clearly how the PIGS' problems could become a broader European (if not global) financial crisis (emphasis added):
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks' exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector. "
at http://www.econbrowser.com/archives/2010/06/is_spain_next.html
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks' exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector. "
at http://www.econbrowser.com/archives/2010/06/is_spain_next.html
Bad Economic News
"Just consider some of the most recent economic news....
*The number of U.S. home foreclosures set a record for the second consecutive month in May. How can the U.S. housing industry be recovering when the number of Americans being foreclosed on continues to set all-time records?
*As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, up 20 percent from a year ago. Instead of working their way through the huge backlog of unsold homes, U.S. banks continue to pile up a massive inventory of foreclosed homes at a staggering pace.
*According to figures from the U.S. Commerce Department, housing starts in the United States fell 10 percent in May, the biggest decline since March 2009. The data also revealed that single-family home starts suffered the biggest drop since 1991. There is already a massive glut of unsold homes on the market, so builders simply do not think it is profitable to build many new homes right now.
*Officials now tell us that the cost of "fixing" Fannie Mae and Freddie Mac, the government-backed mortgage companies that last year bought or guaranteed the vast majority of all U.S. home loans, will be at least $160 billion and could grow as high as $1 trillion. The twin pillars of the U.S. mortgage industry have become financial black holes that the U.S. government endlessly pours massive amounts of cash into. That is not a good sign.
*Fannie Mae and Freddie Mac are to be delisted from the New York Stock Exchange because their stock prices have been trading under $1 per share for more than 30 trading days. The truth is that Fannie Mae and Freddie Mac would have completely imploded by now if the U.S. government had not decided to step in and bail them out.
*The average duration of unemployment in the United States has risen to an all-time high. Not only are a ton of Americans out of work, they can't find work for a very, very long time once they are unemployed.
*For Americans younger than 25 years of age, the unemployment rate is 18.8%. But even those young Americans that can find employment often find themselves working in very low paying service jobs.
*Federal Reserve Chairman Ben Bernanke says that the U.S. unemployment rate is likely to stay "high for a while". Considering how badly Bernanke has been doing his job, it would be really nice if we could add just one more person to the unemployment rolls.
*According to one new study, approximately 21 percent of children in the United States are living below the poverty line in 2010 - the highest rate in 20 years. There are hundreds of thousands of American children on the streets each night, and yet we continue to insist that we are the greatest country in the world.
*For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011. How many tens of millions of Americans have to be on food stamps before we officially say that we are in a depression
"*According to the Wall Street Journal, the debates have begun inside the Fed about what it should do in the event of a "double dip" recession. If they are already debating what to do during the next economic downturn that means it is probably a foregone conclusion.
*If you were alive when Christ was born and spent one million dollars every single day from then until now, you still would not have spent one trillion dollars by now. But somehow the U.S. government is now over 13 trillion dollars in debt. According to a U.S. Treasury Department report to Congress, the U.S. national debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015.
*It is being projected that the U.S. national debt will grow to surpass our gross domestic product in 2012. Needless to say, that is a really, really bad sign.
*The total of all government, corporate and consumer debt in the United States is now equal to 360 percent of GDP. At no point during the Great Depression did we ever even come close to such a figure.
But things may be even worse in Europe right now. Unfortunately for the U.S., when Europe experiences an economic collapse it will devastate the American economy as well.
The economic news coming out of Europe lately has been extremely alarming....
*George Soros says that a European recession next year is "almost inevitable". Considering how much access George Soros has to inside information, the fact that he is so pessimistic about Europe is a very troubling thing indeed.
*A report by the Bank for International Settlements says that the debt crisis hitting southern Europe resembles the 2007 subprime mortgage crisis. Is history about to repeat itself?
*Moody's has downgraded Greece government bond ratings into junk territory, citing the risks inherent in the rescue package that the rest of the eurozone has put together for them. Soon Spain, Portugal, Italy, Ireland, Romania and a number of other European nations could have their debt downgraded as well.
*The U.K.'s new Office for Budget Responsibility has announced that the U.K. economy was more damaged by the recent financial crisis than previously admitted, and that it may never fully recover. But the same could be said for many other nations across the world as well.
*21.5% of all working-age people in the U.K. do not have a job. It seems like almost every country has a shortage of jobs these days.
*New U.K. Prime Minister David Cameron is warning that Britain's "whole way of life" is about to be significantly disrupted for years by the most drastic public spending cuts in a generation. In fact, severe austerity measures being implemented all across Europe could make this one of the most "interesting" European summers in ages.
*Spanish banks are borrowing record amounts of money from the European Central Bank as Spain's financial institutions are finding it increasingly difficult to acquire funds in international capital markets. But the truth is that it isn't just Spanish banks that are facing a liquidity squeeze - the entire world is heading for a massive credit crunch."
at http://theeconomiccollapseblog.com/archives/bad-economic-news
*The number of U.S. home foreclosures set a record for the second consecutive month in May. How can the U.S. housing industry be recovering when the number of Americans being foreclosed on continues to set all-time records?
*As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, up 20 percent from a year ago. Instead of working their way through the huge backlog of unsold homes, U.S. banks continue to pile up a massive inventory of foreclosed homes at a staggering pace.
*According to figures from the U.S. Commerce Department, housing starts in the United States fell 10 percent in May, the biggest decline since March 2009. The data also revealed that single-family home starts suffered the biggest drop since 1991. There is already a massive glut of unsold homes on the market, so builders simply do not think it is profitable to build many new homes right now.
*Officials now tell us that the cost of "fixing" Fannie Mae and Freddie Mac, the government-backed mortgage companies that last year bought or guaranteed the vast majority of all U.S. home loans, will be at least $160 billion and could grow as high as $1 trillion. The twin pillars of the U.S. mortgage industry have become financial black holes that the U.S. government endlessly pours massive amounts of cash into. That is not a good sign.
*Fannie Mae and Freddie Mac are to be delisted from the New York Stock Exchange because their stock prices have been trading under $1 per share for more than 30 trading days. The truth is that Fannie Mae and Freddie Mac would have completely imploded by now if the U.S. government had not decided to step in and bail them out.
*The average duration of unemployment in the United States has risen to an all-time high. Not only are a ton of Americans out of work, they can't find work for a very, very long time once they are unemployed.
*For Americans younger than 25 years of age, the unemployment rate is 18.8%. But even those young Americans that can find employment often find themselves working in very low paying service jobs.
*Federal Reserve Chairman Ben Bernanke says that the U.S. unemployment rate is likely to stay "high for a while". Considering how badly Bernanke has been doing his job, it would be really nice if we could add just one more person to the unemployment rolls.
*According to one new study, approximately 21 percent of children in the United States are living below the poverty line in 2010 - the highest rate in 20 years. There are hundreds of thousands of American children on the streets each night, and yet we continue to insist that we are the greatest country in the world.
*For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011. How many tens of millions of Americans have to be on food stamps before we officially say that we are in a depression
"*According to the Wall Street Journal, the debates have begun inside the Fed about what it should do in the event of a "double dip" recession. If they are already debating what to do during the next economic downturn that means it is probably a foregone conclusion.
*If you were alive when Christ was born and spent one million dollars every single day from then until now, you still would not have spent one trillion dollars by now. But somehow the U.S. government is now over 13 trillion dollars in debt. According to a U.S. Treasury Department report to Congress, the U.S. national debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015.
*It is being projected that the U.S. national debt will grow to surpass our gross domestic product in 2012. Needless to say, that is a really, really bad sign.
*The total of all government, corporate and consumer debt in the United States is now equal to 360 percent of GDP. At no point during the Great Depression did we ever even come close to such a figure.
But things may be even worse in Europe right now. Unfortunately for the U.S., when Europe experiences an economic collapse it will devastate the American economy as well.
The economic news coming out of Europe lately has been extremely alarming....
*George Soros says that a European recession next year is "almost inevitable". Considering how much access George Soros has to inside information, the fact that he is so pessimistic about Europe is a very troubling thing indeed.
*A report by the Bank for International Settlements says that the debt crisis hitting southern Europe resembles the 2007 subprime mortgage crisis. Is history about to repeat itself?
*Moody's has downgraded Greece government bond ratings into junk territory, citing the risks inherent in the rescue package that the rest of the eurozone has put together for them. Soon Spain, Portugal, Italy, Ireland, Romania and a number of other European nations could have their debt downgraded as well.
*The U.K.'s new Office for Budget Responsibility has announced that the U.K. economy was more damaged by the recent financial crisis than previously admitted, and that it may never fully recover. But the same could be said for many other nations across the world as well.
*21.5% of all working-age people in the U.K. do not have a job. It seems like almost every country has a shortage of jobs these days.
*New U.K. Prime Minister David Cameron is warning that Britain's "whole way of life" is about to be significantly disrupted for years by the most drastic public spending cuts in a generation. In fact, severe austerity measures being implemented all across Europe could make this one of the most "interesting" European summers in ages.
*Spanish banks are borrowing record amounts of money from the European Central Bank as Spain's financial institutions are finding it increasingly difficult to acquire funds in international capital markets. But the truth is that it isn't just Spanish banks that are facing a liquidity squeeze - the entire world is heading for a massive credit crunch."
at http://theeconomiccollapseblog.com/archives/bad-economic-news
Philly Fed's Weak Economic Report
"Bloomberg details:
The Federal Reserve Bank of Philadelphia’s general economic index slumped to 8 in June from 21.4 the previous month. Readings above zero signal growth.
Economists forecast the index would fall to 20, according to the median of 58 projections in a Bloomberg News survey. Estimates ranged from 10 to 24.
The figures follow a report from the Labor Department today that showed consumer prices fell in May for a second month. The Labor Department also said jobless claims rose by 12,000 to 472,000 last week.
That employment report is concerning, especially when taken in combination with the Philly Fed report's shift of employment (number of employees / average workweek) to negative territory."
at http://econompicdata.blogspot.com/2010/06/philly-feds-weak-economic-report.html
The Federal Reserve Bank of Philadelphia’s general economic index slumped to 8 in June from 21.4 the previous month. Readings above zero signal growth.
Economists forecast the index would fall to 20, according to the median of 58 projections in a Bloomberg News survey. Estimates ranged from 10 to 24.
The figures follow a report from the Labor Department today that showed consumer prices fell in May for a second month. The Labor Department also said jobless claims rose by 12,000 to 472,000 last week.
That employment report is concerning, especially when taken in combination with the Philly Fed report's shift of employment (number of employees / average workweek) to negative territory."
at http://econompicdata.blogspot.com/2010/06/philly-feds-weak-economic-report.html
Wednesday, June 16, 2010
SPAIN MAY BE THE NEXT DOMINO TO FALL
"As Spain wrestles to contain its budget deficit which in turn is leading to a drop in bond market values, local banks are having a difficult time in locating funding due to their holdings of underwater government debt.
Chairman for one of Spain’s largest banks, Francisco Gonzalez said yesterday that for many of the country’s financial institutions, the “international capital markets are closed”. In addition, Spain’s Treasury secretary, Carlos Ocana said that the current environment for banks and corporations was “definitely a problem”.
Generally, European banks rely heavily on lenders from abroad for funding and less so on traditional deposits according to The Economic Times. They turn to the international capital markets in both money market land and in longer-term debt, to finance about 40 percent of their 33 trillion euros of assets. The remaining amount comes from deposits which is about half and the balance through equity.
With the inability to attract funding as evident by the rise in the interbank short term lending rates, Spanish banks are turning to the European Central Bank as a lender of last resort.
According to a Financial Times article, Spanish banks borrowed 85.6 billion euros from the ECB last month which was twice the amount needed right before the last credit crunch which was triggered by the fall of Lehman Brothers in September 1998. Furthermore, it is the highest amount since the beginning of the Euro Zone in 1999. Comparatively, the borrowing is an increase of about 14.4 percent from April’s tally of 74.6 billion euros."
at http://pragcap.com/spain-may-be-the-next-domino-to-fall
Chairman for one of Spain’s largest banks, Francisco Gonzalez said yesterday that for many of the country’s financial institutions, the “international capital markets are closed”. In addition, Spain’s Treasury secretary, Carlos Ocana said that the current environment for banks and corporations was “definitely a problem”.
Generally, European banks rely heavily on lenders from abroad for funding and less so on traditional deposits according to The Economic Times. They turn to the international capital markets in both money market land and in longer-term debt, to finance about 40 percent of their 33 trillion euros of assets. The remaining amount comes from deposits which is about half and the balance through equity.
With the inability to attract funding as evident by the rise in the interbank short term lending rates, Spanish banks are turning to the European Central Bank as a lender of last resort.
According to a Financial Times article, Spanish banks borrowed 85.6 billion euros from the ECB last month which was twice the amount needed right before the last credit crunch which was triggered by the fall of Lehman Brothers in September 1998. Furthermore, it is the highest amount since the beginning of the Euro Zone in 1999. Comparatively, the borrowing is an increase of about 14.4 percent from April’s tally of 74.6 billion euros."
at http://pragcap.com/spain-may-be-the-next-domino-to-fall
Builder Survey Reports New Home Sales Down 27% in May
"New home sales were down 27% in May, according to a John Burns Real Estate Consulting (JBREC) survey of builders.
According to the monthly report, net sales per community were 1.35 units per community, down from last month's 1.84 units per community. Builders also reported a decline in new housing starts in eight of 10 regions, as builders felt little hurry to start more homes. This echoes the results of a government report that showed the seasonally adjusted annual rate of housing starts declined 10% in May."
at http://www.housingwire.com/2010/06/16/builder-survey-reports-new-home-sales-down-27-in-may?utm_source=rss&utm_medium=rss&utm_campaign=builder-survey-reports-new-home-sales-down-27-in-may
According to the monthly report, net sales per community were 1.35 units per community, down from last month's 1.84 units per community. Builders also reported a decline in new housing starts in eight of 10 regions, as builders felt little hurry to start more homes. This echoes the results of a government report that showed the seasonally adjusted annual rate of housing starts declined 10% in May."
at http://www.housingwire.com/2010/06/16/builder-survey-reports-new-home-sales-down-27-in-may?utm_source=rss&utm_medium=rss&utm_campaign=builder-survey-reports-new-home-sales-down-27-in-may
'Call It $130 Trillion or So'
"If you've ever had to deal with teenagers or IT workers, you know the drill: whatever they tell you something will cost usually turns out to be less -- often much less -- than you end up paying. Politicians, too, are especially good at this game, which is not surprising given that most don't expect to be around when the final bill comes in. So, in theory at least, no one should be unsettled by the fact, as the following National Review commentary, "The Other National Debt," by deputy managing editor Kevin D. Williamson, reveals, that the amount of money we (and our ancestors) are currently on the hook for is around ten times what our leaders say it is -- right?
About that $14 trillion national debt: Get ready to tack some zeroes onto it. Taken alone, the amount of debt issued by the federal government — that $14 trillion figure that shows up on the national ledger — is a terrifying, awesome, hellacious number: Fourteen trillion seconds ago, Greenland was covered by lush and verdant forests, and the Neanderthals had not yet been outwitted and driven into extinction by Homo sapiens sapiens, because we did not yet exist. Big number, 14 trillion, and yet it doesn’t even begin to cover the real indebtedness of American governments at the federal, state, and local levels, because governments don’t count up their liabilities the same way businesses do...
...The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare — in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt we’ve totaled up so far. In real terms, what that means is that we’d need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, that’s about twice the total private net worth of the United States. (A little more, in fact.)
Suffice it to say, we’re a bit short of that $106 trillion. In fact, we’re exactly $106 trillion short, since the total value of the Social Security “trust fund” is less than the value of the change you’ve got rattling around behind your couch cushions, its precise worth being: $0.00. Because the “trust fund” (which is not a trust fund) is by law “invested” (meaning, not invested) in Treasury bonds, there is no national nest egg to fund these entitlements. As Bruce Bartlett explained in Forbes, “The trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth. . . . Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government’s ability to pay benefits that have been promised.” Seeing no political incentives to reduce benefits, Bartlett calculates that an 81 percent tax increase will be necessary to pay those obligations. “Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.”
There’s more, of course. Much more. Besides those monthly pension checks, the states are on the hook for retirees’ health care and other benefits, to the tune of another $1 trillion. And, depending on how you account for it, another half a trillion or so (conservatively estimated) in liabilities related to the government’s guarantee of Fannie Mae, Freddie Mac, and securities supported under the bailouts. Now, these aren’t perfect numbers, but that’s the rough picture: Call it $130 trillion or so, or just under ten times the official national debt. Putting Nancy Pelosi in a smaller jet isn’t going to make that go away."
at http://www.financialarmageddon.com/2010/06/call-it-130-trillion-or-so.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+financialarmageddon+%28Financial+Armageddon%29
About that $14 trillion national debt: Get ready to tack some zeroes onto it. Taken alone, the amount of debt issued by the federal government — that $14 trillion figure that shows up on the national ledger — is a terrifying, awesome, hellacious number: Fourteen trillion seconds ago, Greenland was covered by lush and verdant forests, and the Neanderthals had not yet been outwitted and driven into extinction by Homo sapiens sapiens, because we did not yet exist. Big number, 14 trillion, and yet it doesn’t even begin to cover the real indebtedness of American governments at the federal, state, and local levels, because governments don’t count up their liabilities the same way businesses do...
...The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare — in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt we’ve totaled up so far. In real terms, what that means is that we’d need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, that’s about twice the total private net worth of the United States. (A little more, in fact.)
Suffice it to say, we’re a bit short of that $106 trillion. In fact, we’re exactly $106 trillion short, since the total value of the Social Security “trust fund” is less than the value of the change you’ve got rattling around behind your couch cushions, its precise worth being: $0.00. Because the “trust fund” (which is not a trust fund) is by law “invested” (meaning, not invested) in Treasury bonds, there is no national nest egg to fund these entitlements. As Bruce Bartlett explained in Forbes, “The trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth. . . . Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government’s ability to pay benefits that have been promised.” Seeing no political incentives to reduce benefits, Bartlett calculates that an 81 percent tax increase will be necessary to pay those obligations. “Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.”
There’s more, of course. Much more. Besides those monthly pension checks, the states are on the hook for retirees’ health care and other benefits, to the tune of another $1 trillion. And, depending on how you account for it, another half a trillion or so (conservatively estimated) in liabilities related to the government’s guarantee of Fannie Mae, Freddie Mac, and securities supported under the bailouts. Now, these aren’t perfect numbers, but that’s the rough picture: Call it $130 trillion or so, or just under ten times the official national debt. Putting Nancy Pelosi in a smaller jet isn’t going to make that go away."
at http://www.financialarmageddon.com/2010/06/call-it-130-trillion-or-so.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+financialarmageddon+%28Financial+Armageddon%29
Tuesday, June 15, 2010
Builder Confidence Flags, Housing Double Dip
"The double dip in housing has caught up to another important player. The National Association of Home Builders/Wells Fargo Housing Market Index dropped sharply in June.
Recently, mortgage application dropped another week-the fifth in a row. The federal tax credit for new and existing home buyers has expired and has not been extended. High unemployment continues to weigh on the buyers market. RealtyTrac says that foreclosures moved above 300,000 for the 15th month in a row.
In related news which indicates that consumers are saving and not buying a single thing, retail sales collapsed last month. People have gone to the mattresses, gone to ground.The National Association of Home Builders reported that its index for June fell to 17 in June, down an extraordinary five points in just 30 days. NAHB Chief Economist David Crowe said
“As today’s HMI data shows, builders still remain very cautious and are aware that several factors could impede the nascent housing recovery, including serious problems in obtaining financing for the production of housing, faulty appraisal practices and competition from short sales and foreclosed properties.”
at http://247wallst.com/2010/06/15/builder-confidence-flags-housing-double-dip/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRyNm+%2824%2F7+Wall+St.%29
Recently, mortgage application dropped another week-the fifth in a row. The federal tax credit for new and existing home buyers has expired and has not been extended. High unemployment continues to weigh on the buyers market. RealtyTrac says that foreclosures moved above 300,000 for the 15th month in a row.
In related news which indicates that consumers are saving and not buying a single thing, retail sales collapsed last month. People have gone to the mattresses, gone to ground.The National Association of Home Builders reported that its index for June fell to 17 in June, down an extraordinary five points in just 30 days. NAHB Chief Economist David Crowe said
“As today’s HMI data shows, builders still remain very cautious and are aware that several factors could impede the nascent housing recovery, including serious problems in obtaining financing for the production of housing, faulty appraisal practices and competition from short sales and foreclosed properties.”
at http://247wallst.com/2010/06/15/builder-confidence-flags-housing-double-dip/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRyNm+%2824%2F7+Wall+St.%29
Shadow Inventory to Take 3 Years to Clear: Standard & Poor's
"The shadow inventory of distressed properties that back residential mortgage-backed securities will take nearly three years to clear at the current sales rate, according to the credit rating agency, Standard & Poor’s (S&P).
The shadow inventory is the amount of homes with delinquent mortgages yet to move through the foreclosure process. S&P narrows the definition down to the amount of outstanding properties 90 days or more delinquent, in foreclosure, or in REO status but not yet on the market.
S&P puts the total principal balance of the shadow inventory at $480bn or 30% of the entire non-agency market.
“Given this backlog, we believe that average home prices could fall again if demand doesn’t rise in step with the potential influx of supply,” said Diane Westerback, S&P credit analyst."
at http://www.housingwire.com/2010/06/15/shadow-inventory-to-take-3-years-to-clear-sp?utm_source=rss&utm_medium=rss&utm_campaign=shadow-inventory-to-take-3-years-to-clear-sp
The shadow inventory is the amount of homes with delinquent mortgages yet to move through the foreclosure process. S&P narrows the definition down to the amount of outstanding properties 90 days or more delinquent, in foreclosure, or in REO status but not yet on the market.
S&P puts the total principal balance of the shadow inventory at $480bn or 30% of the entire non-agency market.
“Given this backlog, we believe that average home prices could fall again if demand doesn’t rise in step with the potential influx of supply,” said Diane Westerback, S&P credit analyst."
at http://www.housingwire.com/2010/06/15/shadow-inventory-to-take-3-years-to-clear-sp?utm_source=rss&utm_medium=rss&utm_campaign=shadow-inventory-to-take-3-years-to-clear-sp
U.S. Housing Market Crash Next leg Down Signaled by Bulging Inventory
"Did the Federal Reserve collude with the big banks to hold millions of houses off the market until the Fed finished adding $1.25 trillion to the banks reserves? Did the Fed do this to make it appear that its bond purchasing plan (quantitative easing) was stabilizing prices when, in fact, it was the reduction in supply that stopped prices from plunging? It sure looks that way."
at http://www.marketoracle.co.uk/Article20310.html
at http://www.marketoracle.co.uk/Article20310.html
Gold Going to Parabolic Top of $10,000 by 2012 For Good Reasons
"No wishful thinking here! As I see it gold is going to a parabolic top of $10,000 by 2012 for very good reasons - sovereign debt defaults, bankruptcies of “too big to fail” banks and other financial entities, currency inflation and devaluations - which will all contribute to rampant price inflation..."
at http://www.marketoracle.co.uk/Article20267.html
at http://www.marketoracle.co.uk/Article20267.html
Fannie, Freddie "Mother of all Bailouts" may cost Taxpayers $1 Trillion
"The estimated taxpayer costs of the GSE bailouts grows by the day and has now hit as much as $1 trillion.
Please consider Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case.
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry."
at http://globaleconomicanalysis.blogspot.com/2010/06/fannie-freddie-mother-of-all-bailouts.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29
Please consider Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case.
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry."
at http://globaleconomicanalysis.blogspot.com/2010/06/fannie-freddie-mother-of-all-bailouts.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29
9 Reasons Why Spain Is A Dead Economy Walking
"The following are 9 reasons why Spain is a dead economy walking....
#1) Even before this most recent crisis, unemploment in Spain was approaching Great Depression levels. Spain now has the highest unemployment rate in the entire European Union. More than 20 percent of working age Spaniards were unemployed during the first quarter of 2010. If people aren't working they can't pay taxes and they can't provide for their families.
#2) In an effort to stimulate the economy, Spain's socialist government has been spending unprecedented amounts of money and that skyrocketed the government budget deficit to a stunning 11.4 percent of GDP in 2009. That is completely unsustainable by any definition.
#3) The total of all public and private debt in Spain has now reached 270 percent of GDP.
#4) The Spanish government has accumulated way more debt than it can possibly handle, and this has forced two international ratings agencies, Fitch and Standard & Poor’s, to lower Spain’s long-term sovereign credit rating. These downgrades are making it much more expensive for Spain to finance its debt at a time when they simply can't afford to pay more interest on their debt.
#5) There are 1.6 million unsold properties in Spain. That is six times the level per capita in the United States. Considering how bad the U.S. real estate market is, that statistic is incredibly alarming.
#6) The new "green economy" in Spain has been a total flop. Socialist leaders promised that implementing hardcore restrictions on carbon emissions and forcing the nation over to a "green economy" would result in a flood of "green jobs". But that simply did not happen. In fact, a leaked internal assessment produced by the government of Spain reveals that the "green economy" has been an absolute economic nightmare for that nation. Energy prices have skyrocketed in Spain and the new "green economy" in that nation has actually lost more than two jobs for every job that it has created. But Spain so far seems unwilling to undo all of the crazy regulations that they have implemented.
#7) Spain's national debt is so onerous that they are now caught in a debt spiral where anything they do will harm the economy. If they cut government expenditures in an effort to get debt under control it will devastate economic growth and crush badly needed tax revenues. But if the Spanish government keeps borrowing money their credit rating will continue to decline and they will almost certainly default. The truth is that the Spanish government is caught in a "no win" situation.
#8) But even now the IMF is projecting that the Spanish economy is going nowhere fast. The International Monetary Fund says there will be no positive GDP growth in Spain until 2011, at which point it will still be below one percent. As bleak as that forecast is, many analysts believe that it is way too optimistic considering the fact that Spain's economy declined by about 3.6 percent in 2009 and things are rapidly getting worse.
#9) The Spanish population has gotten used to socialist handouts and they are not going to accept public sector pay cuts, budget cuts to social programs and hefty tax increases easily. In fact, there is likely to be some very serious social unrest before all of this is said and done. On May 21st, thousands of public sector workers took to the streets of Spain to protest the government’s austerity plan. But that was only an appetizer. Spain's two main unions are calling for a major one day general strike to protest the government's planned reforms of the country's labor market. The truth is that financial shock therapy does not go down very well in highly socialized nations such as Greece and Spain. In fact, the austerity measures that Spain has been pressured to implement by the IMF have proven so unpopular that many are now projecting that Spain's socialist government will be forced to call early elections."
at http://theeconomiccollapseblog.com/archives/9-reasons-why-spain-is-a-dead-economy-walking
#1) Even before this most recent crisis, unemploment in Spain was approaching Great Depression levels. Spain now has the highest unemployment rate in the entire European Union. More than 20 percent of working age Spaniards were unemployed during the first quarter of 2010. If people aren't working they can't pay taxes and they can't provide for their families.
#2) In an effort to stimulate the economy, Spain's socialist government has been spending unprecedented amounts of money and that skyrocketed the government budget deficit to a stunning 11.4 percent of GDP in 2009. That is completely unsustainable by any definition.
#3) The total of all public and private debt in Spain has now reached 270 percent of GDP.
#4) The Spanish government has accumulated way more debt than it can possibly handle, and this has forced two international ratings agencies, Fitch and Standard & Poor’s, to lower Spain’s long-term sovereign credit rating. These downgrades are making it much more expensive for Spain to finance its debt at a time when they simply can't afford to pay more interest on their debt.
#5) There are 1.6 million unsold properties in Spain. That is six times the level per capita in the United States. Considering how bad the U.S. real estate market is, that statistic is incredibly alarming.
#6) The new "green economy" in Spain has been a total flop. Socialist leaders promised that implementing hardcore restrictions on carbon emissions and forcing the nation over to a "green economy" would result in a flood of "green jobs". But that simply did not happen. In fact, a leaked internal assessment produced by the government of Spain reveals that the "green economy" has been an absolute economic nightmare for that nation. Energy prices have skyrocketed in Spain and the new "green economy" in that nation has actually lost more than two jobs for every job that it has created. But Spain so far seems unwilling to undo all of the crazy regulations that they have implemented.
#7) Spain's national debt is so onerous that they are now caught in a debt spiral where anything they do will harm the economy. If they cut government expenditures in an effort to get debt under control it will devastate economic growth and crush badly needed tax revenues. But if the Spanish government keeps borrowing money their credit rating will continue to decline and they will almost certainly default. The truth is that the Spanish government is caught in a "no win" situation.
#8) But even now the IMF is projecting that the Spanish economy is going nowhere fast. The International Monetary Fund says there will be no positive GDP growth in Spain until 2011, at which point it will still be below one percent. As bleak as that forecast is, many analysts believe that it is way too optimistic considering the fact that Spain's economy declined by about 3.6 percent in 2009 and things are rapidly getting worse.
#9) The Spanish population has gotten used to socialist handouts and they are not going to accept public sector pay cuts, budget cuts to social programs and hefty tax increases easily. In fact, there is likely to be some very serious social unrest before all of this is said and done. On May 21st, thousands of public sector workers took to the streets of Spain to protest the government’s austerity plan. But that was only an appetizer. Spain's two main unions are calling for a major one day general strike to protest the government's planned reforms of the country's labor market. The truth is that financial shock therapy does not go down very well in highly socialized nations such as Greece and Spain. In fact, the austerity measures that Spain has been pressured to implement by the IMF have proven so unpopular that many are now projecting that Spain's socialist government will be forced to call early elections."
at http://theeconomiccollapseblog.com/archives/9-reasons-why-spain-is-a-dead-economy-walking
Monday, June 14, 2010
Global Financial Crisis Could Lead to World War III
"Throughout history, major wars have often been triggered by financial crises. So the question is: Will today’s great financial crisis — the worst since the 1930s Depression — lead to World War III? And if so, when?
This is a very important topic for all of us, for a variety of reasons. And naturally, there’s no way I can do it justice in a singe column. Or even in a 400-page book.
But the least I can do is share my research on the subject with you, and more importantly, give you an idea as to whether or not the current financial crisis could lead to a major war, and if so, when."
at http://www.marketoracle.co.uk/Article20287.html
This is a very important topic for all of us, for a variety of reasons. And naturally, there’s no way I can do it justice in a singe column. Or even in a 400-page book.
But the least I can do is share my research on the subject with you, and more importantly, give you an idea as to whether or not the current financial crisis could lead to a major war, and if so, when."
at http://www.marketoracle.co.uk/Article20287.html
BIS reports Bank Exposure to Euro area countries facing market pressure
"The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain:
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector."
at http://www.calculatedriskblog.com/2010/06/bis-reports-bank-exposure-to-euro-area.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector."
at http://www.calculatedriskblog.com/2010/06/bis-reports-bank-exposure-to-euro-area.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Moody's slashes Greece to 'Ba1' from 'A3'
"Moody's Investors Service on Monday downgraded Greece's government bond ratings by four notches to junk status of Ba1 from A3, reflecting its view of the country's medium-term credit fundamentals. "The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone/IMF support package."
at http://www.marketwatch.com/story/moodys-slashes-greece-to-ba1-from-a3-2010-06-14-1314390
at http://www.marketwatch.com/story/moodys-slashes-greece-to-ba1-from-a3-2010-06-14-1314390
Euro Up but Spain Under Pressure
"For the fifth day, the euro is recording higher highs and higher lows. It has advanced by roughly 3.25% since last Monday’s lows. While we recognize an improved news stream, the main circumstances of the European debt crisis have not gone away. Spain’s challenges are overshadowing Portugal and Greece.
Last week Spain offered bonds for the first time since the Fitch downgrade. The bonds were well received, but at the price of a roughly 50% increase in yields. Spain will be issuing 10- and 20-year bonds on Thursday. The timing could be problematic given two developments today. First, the chairman of BBVA said in a speech today that most Spanish companies and banks have been closed out of the international credit markets. Second, the ECB reported today that Spanish banks borrowed a record 85.6 bln euros from it in May. The second point would lend even more credence to the first point."
at http://www.creditwritedowns.com/2010/06/euro-up-but-spain-under-pressure.html#ixzz0qrCQALgn
Last week Spain offered bonds for the first time since the Fitch downgrade. The bonds were well received, but at the price of a roughly 50% increase in yields. Spain will be issuing 10- and 20-year bonds on Thursday. The timing could be problematic given two developments today. First, the chairman of BBVA said in a speech today that most Spanish companies and banks have been closed out of the international credit markets. Second, the ECB reported today that Spanish banks borrowed a record 85.6 bln euros from it in May. The second point would lend even more credence to the first point."
at http://www.creditwritedowns.com/2010/06/euro-up-but-spain-under-pressure.html#ixzz0qrCQALgn
U.S. HOUSING PRICES STILL MORE EXPENSIVE THAN ANY POINT IN LAST 120 YEARS
"Today’s chart of the day comes to us courtesy of Robert Shiller at Yale University. The following is Shiller’s famous inflation adjusted home price index. Interestingly, despite a 30%+ decline from peak to trough, housing prices are still more expensive than at any other point in the last 120 years when you exclude the recent bubble era . Some say housing prices have bottomed. Not unless it’s truly “different this time”.
at http://pragcap.com/u-s-housing-prices-still-more-expensive-than-any-point-in-last-120-years
at http://pragcap.com/u-s-housing-prices-still-more-expensive-than-any-point-in-last-120-years
Sunday, June 13, 2010
Unofficial Problem Bank List: 760 Institutions
"This is an unofficial list of Problem Banks compiled only from public sources.
Here is the unofficial problem bank list for June 11, 2010.
Changes and comments from surferdude808:
Extremely quiet week for the Unofficial Problem Bank List as the OCC did not release its actions for May. No doubt that will happen next week.
Only three changes to report. There were two removals -- the failed Washington First International Bank ($521 million) and an action termination by the OCC against Mission Oaks National Bank ($187 million Ticker: MOKB).
The other change is an updated Prompt Corrective Action against Imperial Savings and Loan Association ($9.6 million).
The Unofficial Problem Bank List stands at 760 institutions with aggregate assets of $385 billion."
at http://www.calculatedriskblog.com/2010/06/unofficial-problem-bank-list-760.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Here is the unofficial problem bank list for June 11, 2010.
Changes and comments from surferdude808:
Extremely quiet week for the Unofficial Problem Bank List as the OCC did not release its actions for May. No doubt that will happen next week.
Only three changes to report. There were two removals -- the failed Washington First International Bank ($521 million) and an action termination by the OCC against Mission Oaks National Bank ($187 million Ticker: MOKB).
The other change is an updated Prompt Corrective Action against Imperial Savings and Loan Association ($9.6 million).
The Unofficial Problem Bank List stands at 760 institutions with aggregate assets of $385 billion."
at http://www.calculatedriskblog.com/2010/06/unofficial-problem-bank-list-760.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Saudi Arabia gives Israel clear skies to attack Iranian nuclear sites
"Saudi Arabia has conducted tests to stand down its air defences to enable Israeli jets to make a bombing raid on Iran’s nuclear facilities, The Times can reveal.
In the week that the UN Security Council imposed a new round of sanctions on Tehran, defence sources in the Gulf say that Riyadh has agreed to allow Israel to use a narrow corridor of its airspace in the north of the country to shorten the distance for a bombing run on Iran.
To ensure the Israeli bombers pass unmolested, Riyadh has carried out tests to make certain its own jets are not scrambled and missile defence systems not activated. Once the Israelis are through, the kingdom’s air defences will return to full alert.
“The Saudis have given their permission for the Israelis to pass over and they will look the other way,” said a US defence source in the area. “They have already done tests to make sure their own jets aren’t scrambled and no one gets shot down. This has all been done with the agreement of the [US] State Department.”
Sources in Saudi Arabia say it is common knowledge within defence circles in the kingdom that an arrangement is in place if Israel decides to launch the raid. Despite the tension between the two governments, they share a mutual loathing of the regime in Tehran and a common fear of Iran’s nuclear ambitions. “We all know this. We will let them [the Israelis] through and see nothing,” said one. "
at http://www.timesonline.co.uk/tol/news/world/middle_east/article7148555.ece
In the week that the UN Security Council imposed a new round of sanctions on Tehran, defence sources in the Gulf say that Riyadh has agreed to allow Israel to use a narrow corridor of its airspace in the north of the country to shorten the distance for a bombing run on Iran.
To ensure the Israeli bombers pass unmolested, Riyadh has carried out tests to make certain its own jets are not scrambled and missile defence systems not activated. Once the Israelis are through, the kingdom’s air defences will return to full alert.
“The Saudis have given their permission for the Israelis to pass over and they will look the other way,” said a US defence source in the area. “They have already done tests to make sure their own jets aren’t scrambled and no one gets shot down. This has all been done with the agreement of the [US] State Department.”
Sources in Saudi Arabia say it is common knowledge within defence circles in the kingdom that an arrangement is in place if Israel decides to launch the raid. Despite the tension between the two governments, they share a mutual loathing of the regime in Tehran and a common fear of Iran’s nuclear ambitions. “We all know this. We will let them [the Israelis] through and see nothing,” said one. "
at http://www.timesonline.co.uk/tol/news/world/middle_east/article7148555.ece
Double dip’ decline seen for housing
"In the short to near term, I expect a double dip. This is the logical aftermath of the sugar shot from the Federal first time buyer tax credit. It borrowed buyers from the future, and we are now going into that future. Also we are not too far from the end of the traditional SoCal buying season. I have already seen asking prices reduced 5% or so in May from April."
at http://lansner.freedomblogging.com/2010/06/12/double-dip-decline-seen-for-housing/68513/
at http://lansner.freedomblogging.com/2010/06/12/double-dip-decline-seen-for-housing/68513/
Manipulating the yuan debate dangerous game
"Some members of the U.S. congress are playing a dangerous game by manipulating the Chinese yuan debate for domestic political gains.
These congressmen, prompted by a need to appease American workers frustrated by the loss of millions of jobs in the global financial crisis, and to woo constituencies in elections to be held later this year, are resorting to their old trick of blaming everything on China.
They claim China's foreign exchange policy is costing America jobs and threaten to impose tough trade sanctions against Chinese imports.
But they choose to ignore the fact that an appreciating yuan cannot rebalance Sino-U.S. trade or help create jobs for American workers. Both trade imbalance and high unemployment are deep-rooted economic problems that can only be addressed when the United States implements some painful yet necessary structural reforms.
These congressmen claim they are the white knights defending the interest of the American people, but in fact, they are nothing more than a bunch of baby-kissing politicians trying to swing voters by manipulating the yuan debate.
They only served to divert the public attention from the much more serious domestic economic problems, which are caused in part by their incompetence.
It is really dangerous that these irresponsible remarks, played up by some sensational U.S. media outlets, will inevitably mislead the American public, and poison the atmosphere of Sino-U.S. economic cooperation.
The fact is that China now serves as the third-largest export market for American goods and it will probably become the biggest one sooner than expected. A growing Chinese economy has brought substantial benefits to American workers.
When they are manipulating the yuan debate,these American politicians may make some short-term political gains, but they put the long-term Sino-U.S. bilateral relations in jeopardy."
at http://news.xinhuanet.com/english2010/indepth/2010-06/13/c_13348628.htm
These congressmen, prompted by a need to appease American workers frustrated by the loss of millions of jobs in the global financial crisis, and to woo constituencies in elections to be held later this year, are resorting to their old trick of blaming everything on China.
They claim China's foreign exchange policy is costing America jobs and threaten to impose tough trade sanctions against Chinese imports.
But they choose to ignore the fact that an appreciating yuan cannot rebalance Sino-U.S. trade or help create jobs for American workers. Both trade imbalance and high unemployment are deep-rooted economic problems that can only be addressed when the United States implements some painful yet necessary structural reforms.
These congressmen claim they are the white knights defending the interest of the American people, but in fact, they are nothing more than a bunch of baby-kissing politicians trying to swing voters by manipulating the yuan debate.
They only served to divert the public attention from the much more serious domestic economic problems, which are caused in part by their incompetence.
It is really dangerous that these irresponsible remarks, played up by some sensational U.S. media outlets, will inevitably mislead the American public, and poison the atmosphere of Sino-U.S. economic cooperation.
The fact is that China now serves as the third-largest export market for American goods and it will probably become the biggest one sooner than expected. A growing Chinese economy has brought substantial benefits to American workers.
When they are manipulating the yuan debate,these American politicians may make some short-term political gains, but they put the long-term Sino-U.S. bilateral relations in jeopardy."
at http://news.xinhuanet.com/english2010/indepth/2010-06/13/c_13348628.htm
Banks With State Debt Ignore Not-If-But-When Default
"European banking shares indicate a Greek debt default may be just a matter of time.
Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.”
Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
‘Prisoner’s Dilemma’
Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests.
“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
at http://www.bloomberg.com/apps/news?pid=20601010&sid=aVTX9yKZzdJ4
Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.”
Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
‘Prisoner’s Dilemma’
Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests.
“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
at http://www.bloomberg.com/apps/news?pid=20601010&sid=aVTX9yKZzdJ4
Investors Face Long-term Structural Changes of Lower Growth, Higher Volatility and Unemployment
"...What do we get when we put the three structural breaks together? Higher volatility and lower trend growth produce more frequent recessions. More frequent recessions and stubbornly high unemployment rates mean that recoveries will not be long-lasting enough to put everyone back to work who would like to work. This in large part explains why high unemployment is currently so problematic.
What are the investment implications for the Muddle Through Economy? Investors will have to adjust to this new reality. Reducing leverage is one way. Another is to reduce the average holding period of investments. Investors will have to become more nimble. This in itself may add to market volatility.
For longer-term investors, this change of paradigm will mean achieving consistent returns is even more difficult. However, investors with a shorter-term, more tactical outlook may find these new, more volatile conditions a source of great opportunities.
The End Game
John Mauldin and I are writing a book called The End Game, about how government policies around the world will likely play out.
The End Game will be about the structural changes affecting the US and many other developed economies and how this impacts you, the reader. Currently the world is caught in a tug of war between deflation and inflation. The global economy faces powerful deflationary forces, which have induced equally powerful responses from governments around the world. Governments have ratcheted up the creation of monetary reserves and increased public spending across the board. Much of the spending is unsustainable, and the monetary reserves may eventually become a problem, resulting in inflation. The outcomes are binary, and they are not good.
Policymakers have not even begun to deal with the problems. As Chairman Bernanke has pointed out, "A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy, show a structural budget gap that is both large relative to the size of the economy and increasing over time." He stated that "the federal budget appears to be on an unsustainable path." Those are strong words for a Fed chairman. I hope Congress is listening.
In the current economic environment, there are bad choices and worse ones. We hope governments around the world will know how to choose wisely..."
at http://www.marketoracle.co.uk/Article20249.html
What are the investment implications for the Muddle Through Economy? Investors will have to adjust to this new reality. Reducing leverage is one way. Another is to reduce the average holding period of investments. Investors will have to become more nimble. This in itself may add to market volatility.
For longer-term investors, this change of paradigm will mean achieving consistent returns is even more difficult. However, investors with a shorter-term, more tactical outlook may find these new, more volatile conditions a source of great opportunities.
The End Game
John Mauldin and I are writing a book called The End Game, about how government policies around the world will likely play out.
The End Game will be about the structural changes affecting the US and many other developed economies and how this impacts you, the reader. Currently the world is caught in a tug of war between deflation and inflation. The global economy faces powerful deflationary forces, which have induced equally powerful responses from governments around the world. Governments have ratcheted up the creation of monetary reserves and increased public spending across the board. Much of the spending is unsustainable, and the monetary reserves may eventually become a problem, resulting in inflation. The outcomes are binary, and they are not good.
Policymakers have not even begun to deal with the problems. As Chairman Bernanke has pointed out, "A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy, show a structural budget gap that is both large relative to the size of the economy and increasing over time." He stated that "the federal budget appears to be on an unsustainable path." Those are strong words for a Fed chairman. I hope Congress is listening.
In the current economic environment, there are bad choices and worse ones. We hope governments around the world will know how to choose wisely..."
at http://www.marketoracle.co.uk/Article20249.html
Saturday, June 12, 2010
'We Need to Recognize Reality'
"In a CNBC interview, David Walker, president and CEO of the Peter G. Peterson Foundation, doesn't pull any punches when he discusses our nation's precarious financial condition:
If we do not put our federal financial house in order, if we do not deal with the structural deficits, then our best years are behind us. This is about the future of the Republic; this is about the future of our country; this is about the future of our families. If you are not economically strong, you will not be strong with regard to international influence, with regard to national security, and ultimately our domestic tranquility will suffer. We have to learn from history and we have to not repeat the mistakes that others have made.
The former Comptroller General of the United States also takes issue with the notion that the recent strength in our currency and government bond markets is a sign that America is on the right course:
In the short term, we are a flight to safety, but we should not misunderstand the situation....People are all concerned about Greece -- Greece used to be the cradle of democracy; it was the greatest civilization on earth; it controlled most of the known world. And now, because of their financial situation, it's had a ripple effect -- not just in Europe, but it's affecting us. And guess what? When you look at debt held by the public -- federal, state, local -- we're already worse in the United States than Spain, we're worse than Ireland, we're two years away from being Portugal, and we're 10 years away from being Greece. We need to recognize reality.
Compelling -- and frightening -- as always."
at http://www.economicroadmap.com/
If we do not put our federal financial house in order, if we do not deal with the structural deficits, then our best years are behind us. This is about the future of the Republic; this is about the future of our country; this is about the future of our families. If you are not economically strong, you will not be strong with regard to international influence, with regard to national security, and ultimately our domestic tranquility will suffer. We have to learn from history and we have to not repeat the mistakes that others have made.
The former Comptroller General of the United States also takes issue with the notion that the recent strength in our currency and government bond markets is a sign that America is on the right course:
In the short term, we are a flight to safety, but we should not misunderstand the situation....People are all concerned about Greece -- Greece used to be the cradle of democracy; it was the greatest civilization on earth; it controlled most of the known world. And now, because of their financial situation, it's had a ripple effect -- not just in Europe, but it's affecting us. And guess what? When you look at debt held by the public -- federal, state, local -- we're already worse in the United States than Spain, we're worse than Ireland, we're two years away from being Portugal, and we're 10 years away from being Greece. We need to recognize reality.
Compelling -- and frightening -- as always."
at http://www.economicroadmap.com/
Greece Collapsing Into Recession
"Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone while further appearing to be clearly quickly collapsing into recession.
Industrial production has fallen off a cliff, consumer confidence has plunged to historic lows, business confidence has made a sudden reversal and the leading index is turning down fast.
Worse yet, Greece may be just the leading edge with Ireland, the U.K., Italy, Spain and Portugal show some initial signs of weakening leading trends.
Is the double-dip here? For Greece the answer appears certain but we will have to wait to see whether elsewhere in Europe and the U.S. eroded similarly.
The pattern is clear though. For those who argued (and still argue) that solving the ills of an epic debt bubble with more debt was sheer folly may soon see their outlook born out."
at http://paper-money.blogspot.com/
Industrial production has fallen off a cliff, consumer confidence has plunged to historic lows, business confidence has made a sudden reversal and the leading index is turning down fast.
Worse yet, Greece may be just the leading edge with Ireland, the U.K., Italy, Spain and Portugal show some initial signs of weakening leading trends.
Is the double-dip here? For Greece the answer appears certain but we will have to wait to see whether elsewhere in Europe and the U.S. eroded similarly.
The pattern is clear though. For those who argued (and still argue) that solving the ills of an epic debt bubble with more debt was sheer folly may soon see their outlook born out."
at http://paper-money.blogspot.com/
Rating Agencies See CMBS Delinquencies Rise in May
"In two reports on the state of the commercial mortgage backed securitization markets (CMBS), two rating agencies monitoring bond performance say the market is showing weakness — a trend that will likely continue for the rest of the year.
Fitch Ratings saw office defaults push the overall CMBS delinquency rate to 7.97% in May, as Moody's Investors Service saw a 48-bps hike in CMBS delinquency to 7.5% in May:
"As expected, office loan delinquencies have begun to increase and will continue to rise well into next year," said Fitch managing director Mary MacNeill. "Landlords are facing tenant downsizing and in many cases must offer significant concessions and reduced rent to maintain their existing tenant bases."
Moody's now says it expects the delinquency rate to end 2010 in the 9%-11% range, an increase from the previous expectation of 8%-9%.
Indications of the fragile nature of the recovery in the US, with stubbornly high unemployment, along with ongoing difficult conditions for some CMBS sectors and the possibility of negative effects on the US economy from the sovereign debt problems in Europe, have led to Moody's slightly more negative view..."
at http://www.housingwire.com/2010/06/11/rating-agencies-see-cmbs-delinquencies-rise-in-may?utm_source=rss&utm_medium=rss&utm_campaign=rating-agencies-see-cmbs-delinquencies-rise-in-may
Fitch Ratings saw office defaults push the overall CMBS delinquency rate to 7.97% in May, as Moody's Investors Service saw a 48-bps hike in CMBS delinquency to 7.5% in May:
"As expected, office loan delinquencies have begun to increase and will continue to rise well into next year," said Fitch managing director Mary MacNeill. "Landlords are facing tenant downsizing and in many cases must offer significant concessions and reduced rent to maintain their existing tenant bases."
Moody's now says it expects the delinquency rate to end 2010 in the 9%-11% range, an increase from the previous expectation of 8%-9%.
Indications of the fragile nature of the recovery in the US, with stubbornly high unemployment, along with ongoing difficult conditions for some CMBS sectors and the possibility of negative effects on the US economy from the sovereign debt problems in Europe, have led to Moody's slightly more negative view..."
at http://www.housingwire.com/2010/06/11/rating-agencies-see-cmbs-delinquencies-rise-in-may?utm_source=rss&utm_medium=rss&utm_campaign=rating-agencies-see-cmbs-delinquencies-rise-in-may
After Government Economic Stimulus
"There is perhaps no better example of the destructive nature of government intervention than the current housing and retail goods markets. For the past three years a spend-happy Congress lavished these areas with stimulus spending, tax credits, and other palliatives all aimed at papering over the structural defects in these markets. In the case of housing, the problem was years of easy money, sky-high prices, and zero-standards lending.
In the case of retail goods, it was years of abuse of various types of credit to expand a spending bubble and increased reliance on foreign products. However, Congress has now buttoned up – in fear for their political existence in many cases. The public is aware and fearful of debt for the first time in recent memory. Living in a post-stimulus world; even if it is only until the next Congress is seated will be interesting to say the least.
The Housing Market’s Freefall
While the actual damage to the housing market in the near term cannot be totally assessed until later this month, there are some hints in the rate at which purchase applications for mortgages have plunged.
During the past 4 weeks, purchase applications are down a whopping 35%. It is easy to see the spike at the end of April as the end of the tax credit lured May’s (and perhaps June’s too) sales back a month. The downward trend of new purchase applications has continued into June despite very low relative interest rates for home loans. These low rates boosted the Refinance portion of the index during May and remain low, the national average currently at 4.88% according to bankrate.com.
With an upcoming election, we will now likely get the first glimpse at the true state of the housing market. Granted there are still many programs in place at the Fannie/Freddie/FHA level that are encouraging purchases to varying degrees, but it is not likely that direct stimulus through tax credits will be used for at least the next few months. What is very disconcerting is that more than half of the purchasing blitz during March and April was done on the back of government mortgages. Much in the way the government nationalized the student loan business it is now similarly giving the heave ho to private lenders in the mortgage market. These actions virtually guarantee the perpetuation of the distortions currently seen in this critical area.
I had commented, perhaps cynically, to some friends back in 2005 that the housing bubble seemed to be little more than a giant property grab. With government now owning or guaranteeing the majority of mortgages (69 percent), it seems that very well could be the case. Unemployment is still high, decent paying jobs are difficult to come by, and people are still being laid off. Consumer debt burdens are causing the financial hardships endured by many to continue. Repossessions of houses just hit another all-time record high last month. When the government owns the mortgage and someone defaults, who gets the house? Some food for thought on a Friday afternoon."
at http://www.marketoracle.co.uk/Article20229.html
In the case of retail goods, it was years of abuse of various types of credit to expand a spending bubble and increased reliance on foreign products. However, Congress has now buttoned up – in fear for their political existence in many cases. The public is aware and fearful of debt for the first time in recent memory. Living in a post-stimulus world; even if it is only until the next Congress is seated will be interesting to say the least.
The Housing Market’s Freefall
While the actual damage to the housing market in the near term cannot be totally assessed until later this month, there are some hints in the rate at which purchase applications for mortgages have plunged.
During the past 4 weeks, purchase applications are down a whopping 35%. It is easy to see the spike at the end of April as the end of the tax credit lured May’s (and perhaps June’s too) sales back a month. The downward trend of new purchase applications has continued into June despite very low relative interest rates for home loans. These low rates boosted the Refinance portion of the index during May and remain low, the national average currently at 4.88% according to bankrate.com.
With an upcoming election, we will now likely get the first glimpse at the true state of the housing market. Granted there are still many programs in place at the Fannie/Freddie/FHA level that are encouraging purchases to varying degrees, but it is not likely that direct stimulus through tax credits will be used for at least the next few months. What is very disconcerting is that more than half of the purchasing blitz during March and April was done on the back of government mortgages. Much in the way the government nationalized the student loan business it is now similarly giving the heave ho to private lenders in the mortgage market. These actions virtually guarantee the perpetuation of the distortions currently seen in this critical area.
I had commented, perhaps cynically, to some friends back in 2005 that the housing bubble seemed to be little more than a giant property grab. With government now owning or guaranteeing the majority of mortgages (69 percent), it seems that very well could be the case. Unemployment is still high, decent paying jobs are difficult to come by, and people are still being laid off. Consumer debt burdens are causing the financial hardships endured by many to continue. Repossessions of houses just hit another all-time record high last month. When the government owns the mortgage and someone defaults, who gets the house? Some food for thought on a Friday afternoon."
at http://www.marketoracle.co.uk/Article20229.html
What Makes Deflation Likely Today?
"Bob Prechter, Deflation Survival Guide, free Club EWI eBook
Following the Great Depression, the Fed and the U.S. government embarked on a program...both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the ’Teens and 1920s, which ended in bust, and the far larger expansionary trend that began in 1932 and which has accelerated over the past half-century. Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe.
Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit. Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy. A devastated economy, moreover, encourages radical politics, which is even worse.
The value of credit that has been extended worldwide is unprecedented. Worse, most of this debt is the non-self-liquidating type. Much of it comprises loans to governments, investment loans for buying stock and real estate, and loans for everyday consumer items and services, none of which has any production tied to it. Even a lot of corporate debt is non-self-liquidating, since so much of corporate activity these days is related to finance rather than production.
...it has been the biggest credit expansion in history by a huge margin. Coextensively, not only is there a threat of deflation, but there is also the threat of the biggest deflation in history by a huge margin. ..."
at http://www.marketoracle.co.uk/Article20231.html
Following the Great Depression, the Fed and the U.S. government embarked on a program...both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the ’Teens and 1920s, which ended in bust, and the far larger expansionary trend that began in 1932 and which has accelerated over the past half-century. Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe.
Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit. Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy. A devastated economy, moreover, encourages radical politics, which is even worse.
The value of credit that has been extended worldwide is unprecedented. Worse, most of this debt is the non-self-liquidating type. Much of it comprises loans to governments, investment loans for buying stock and real estate, and loans for everyday consumer items and services, none of which has any production tied to it. Even a lot of corporate debt is non-self-liquidating, since so much of corporate activity these days is related to finance rather than production.
Figure 11-5 is a stunning picture of the credit expansion of wave V of the 1920s (beginning the year that Congress authorized the Fed), which ended in a bust, and of wave V in the 1980s-1990s, which is even bigger.
at http://www.marketoracle.co.uk/Article20231.html
Friday, June 11, 2010
THE DIRE OUTLOOK FOR HOUSING
"While the market has been focused on the Euro, China and the BP oil spill, the impending second wave of decline in the housing market has largely gone unnoticed. Recent housing numbers have mostly been bolstered by the home buyers’ tax credit that expired on April 30th, the date when contracts had to be signed to qualify. Sales, however, are not recorded until closing, which has to take place by June 30th. Sales of new and existing houses may therefore show some further strength until then, but fade after that time. (Sen. Reid has proposed extending the completion date to Sept. 30th, but only for those who qualified by April 30th.)
The point we’re getting to is that sales already appear to have declined significantly after the tax credit expiration. We quote the following in a story from the weekend Wall Street Journal that did not seem to attract wide attention.
“.Ivy Zelman, chief executive of Zelman Associates, a research firm, estimates that sales of new homes nationwide in May were down 25% to 30% from April. She warns that the weak May performance increases the chances of renewed price cuts by builders caught with too much inventory.
“Lawrence Yun, chief economist for the National association of realtors estimated that contracts signed for home resales in May were down 20% to 30% from a year earlier. He expects June and July to remain fairly weak.”
“Now that the real estate market is not benefiting from tax-credit ’steroids, we’re probably going to see a sluggish second half,’ said Ron Peltier, chief executive officer of real-estate broker Home Services of America Inc. Joblessness, or the fear of losing a job, continues to deter many potential buyers. Mr. Peltier said, and the large number of homes in foreclosure or heading that way is still putting pressure on prices in many areas. Home Services.saw its home-purchase contracts signed in May fall by nearly 20% from a year earlier, or about twice the decline it was expecting.
“A national survey of real-estate agents by Credit Suisse, released Friday, shows that traffic at homes for sale was down in May to its lowest level since the financial crisis of late 2008.”
The overwhelming anecdotal evidence is supported by the Mortgage Bankers Association (MBA) purchase application index, probably the best leading indicator of future home sales. Last week’s index was down 42% since the April 30th tax credit expiration, and at a level not seen since 1996.
All of the evidence we see indicates that the tax credit merely pushed home sales ahead, and that without it, sales and prices will resume their decline. In addition to the lack of tax credits, adjustable rate mortgage resets will soar from about now until November and then reach an even higher peak in 2011. This will put more and more mortgage holders into a position where they can longer meet their monthly payments, leading to another round of defaults and foreclosures.
Furthermore, delinquencies were climbing even before the rise in resets. According to the MBA, 1st quarter delinquencies surged to a record in every single category—fixed prime, adjustable prime, fixed subprime and adjustable subprime. At the end of the quarter fully 10% of all prime and 27% of all subprime mortgages were in delinquency.
Another big problem for the industry is the so-called “shadow” inventory, consisting of homes that banks are holding, but haven’t foreclosed; homes that have been foreclosed, but not put on the market; and delinquent homeowners who have not yet foreclosed. We should also mention that 14.9 million homeowners owe more on their homes than the homes are worth, fully one-third of all U.S. mortgage holders. Of these, 9% are more than 20% underwater. Many of these homeowners may walk away from their homes even if they are capable of making their payments, and many already have done so. Some reputable studies have estimated that one-quarter of all defaults is caused solely by negative equity.
The prospect of declining home sales and prices has dire consequences for the economy. The further drop in prices will put even more mortgage holders underwater and exacerbate the number of subsequent defaults and foreclosures. The resulting decline in consumer net worth feeds back into lower consumer spending and sets up a negative feedback loop that works its way through the economy. Furthermore the drop in home values sharply reduces the value of the mortgages held by the banking system. Although the suspension of mark-to-market regulations means that banks won’t be forced to write down the loans, bank managements will certainly be fully aware of the potential threat to their capital, and be even more reluctant to make loans than they are today.
All in all we believe that the stock market has not discounted the potentially deteriorating housing picture that will probably hit the headlines within the next few months. In our view, therefore, the recent 1040 bottom in the S&P 500 will eventually give way and decline to significantly lower lows."
at http://pragcap.com/the-dire-outlook-for-housing
The point we’re getting to is that sales already appear to have declined significantly after the tax credit expiration. We quote the following in a story from the weekend Wall Street Journal that did not seem to attract wide attention.
“.Ivy Zelman, chief executive of Zelman Associates, a research firm, estimates that sales of new homes nationwide in May were down 25% to 30% from April. She warns that the weak May performance increases the chances of renewed price cuts by builders caught with too much inventory.
“Lawrence Yun, chief economist for the National association of realtors estimated that contracts signed for home resales in May were down 20% to 30% from a year earlier. He expects June and July to remain fairly weak.”
“Now that the real estate market is not benefiting from tax-credit ’steroids, we’re probably going to see a sluggish second half,’ said Ron Peltier, chief executive officer of real-estate broker Home Services of America Inc. Joblessness, or the fear of losing a job, continues to deter many potential buyers. Mr. Peltier said, and the large number of homes in foreclosure or heading that way is still putting pressure on prices in many areas. Home Services.saw its home-purchase contracts signed in May fall by nearly 20% from a year earlier, or about twice the decline it was expecting.
“A national survey of real-estate agents by Credit Suisse, released Friday, shows that traffic at homes for sale was down in May to its lowest level since the financial crisis of late 2008.”
The overwhelming anecdotal evidence is supported by the Mortgage Bankers Association (MBA) purchase application index, probably the best leading indicator of future home sales. Last week’s index was down 42% since the April 30th tax credit expiration, and at a level not seen since 1996.
All of the evidence we see indicates that the tax credit merely pushed home sales ahead, and that without it, sales and prices will resume their decline. In addition to the lack of tax credits, adjustable rate mortgage resets will soar from about now until November and then reach an even higher peak in 2011. This will put more and more mortgage holders into a position where they can longer meet their monthly payments, leading to another round of defaults and foreclosures.
Furthermore, delinquencies were climbing even before the rise in resets. According to the MBA, 1st quarter delinquencies surged to a record in every single category—fixed prime, adjustable prime, fixed subprime and adjustable subprime. At the end of the quarter fully 10% of all prime and 27% of all subprime mortgages were in delinquency.
Another big problem for the industry is the so-called “shadow” inventory, consisting of homes that banks are holding, but haven’t foreclosed; homes that have been foreclosed, but not put on the market; and delinquent homeowners who have not yet foreclosed. We should also mention that 14.9 million homeowners owe more on their homes than the homes are worth, fully one-third of all U.S. mortgage holders. Of these, 9% are more than 20% underwater. Many of these homeowners may walk away from their homes even if they are capable of making their payments, and many already have done so. Some reputable studies have estimated that one-quarter of all defaults is caused solely by negative equity.
The prospect of declining home sales and prices has dire consequences for the economy. The further drop in prices will put even more mortgage holders underwater and exacerbate the number of subsequent defaults and foreclosures. The resulting decline in consumer net worth feeds back into lower consumer spending and sets up a negative feedback loop that works its way through the economy. Furthermore the drop in home values sharply reduces the value of the mortgages held by the banking system. Although the suspension of mark-to-market regulations means that banks won’t be forced to write down the loans, bank managements will certainly be fully aware of the potential threat to their capital, and be even more reluctant to make loans than they are today.
All in all we believe that the stock market has not discounted the potentially deteriorating housing picture that will probably hit the headlines within the next few months. In our view, therefore, the recent 1040 bottom in the S&P 500 will eventually give way and decline to significantly lower lows."
at http://pragcap.com/the-dire-outlook-for-housing
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