Friday, March 31, 2006

GM, DELPHI and Profound Consequences

I've spoken of GM and Delphi's precarious situation on several past occasions, and how their predicaments are only the most recent indicator of broader problems in the US economy (lack of competitiveness). Well, I humbly believe the old adage "As goes GM, so goes America" is on right on the mark in this situation, and I don't think GM will get out of its pickle without filing for bankruptcy... which I believe is right around the corner.

Bottom Line: These two companies are at a serious competitive disadvantage in the world marketplace due to the high cost of union workers, soaring health care, expensive pension plans and dwindling market share.

Please allow me to provide a readers digest version of the situation, so many of my new readers understand what is going on here.

Delphi is a spin-off of the original GM and is responsible for manufacturing many of the parts GM uses to build their cars during the assembly process. These two are tied at the hip and both need each other to survive.

GM, over the last couple of years, has been losing a large portion of their auto market share, while at the same time they have been losing $ billions due to increasing health care costs, legacy pension plans, poor investments, high union wages, too many manufacturing plants, to many auto brands, and other issues... If it were not for the available liquidity in GM's bank accounts, they would have already needed to have filed for bankruptcy protection. Last year alone, GM lost $10.6 billion and the picture is not getting any prettier today.

Recently, Delphi filed for chapter-11 bankruptcy, as there was no way to stop the bleeding of red ink. Their only hope for survival is massive restructuring and across the board cost savings.

Over the past couple of weeks, Delphi and the United Auto Worker Union (UAW) have been trying to come to an agreement on wage and benefit cuts, and each side has been playing hardball. The Unions do not want to give in to the drastic cuts (drop in wages from $27hr to $16.50 hr) and Delphi cannot survive without them.

With zero luck in their recent UAW discussions, Delphi today filed a request through a Federal bankruptcy judge, asking to allow cancellation of their Union contracts.

If the Judge grants Delphi's request, the UAW has threatened an all out strike, which would shut down Delphi part production.

Without Delphi parts, GM would be unable to keep their own assembly lines moving. GM would then end up in a standstill, would lose over $1 Billion per week and would probably end up filing for bankruptcy themselves.

A GM Bankruptcy would send shockwaves through the bond market, derivatives market, stock market, etc and the ripple effects would be felt worldwide.

With that said, we'll have to wait until May 9th or 10th for the Court hearing, but keep your eyes on this issue, as it could have far reaching and very profound consequences.

Wednesday, March 29, 2006

Issues in the News

I’ve been pretty busy lately (sick kids, work, honey-do’s, etc) and haven’t had much time to Blog, but enough about my life, that’s not why you are here…

Looks like much is going on in the world this week. Please allow me to share what I feel are some of the important issues:

Fed Rates
The Helicopter man raised interest rates again, and due to inflation concerns, it looks like further increases are in the works. Personally, I think these rate hikes have more to do with US Dollar support than inflation, but it probably wouldn’t be politically correct for the Fed to state this much. Anyway, Reuters is suggesting Choppy waters loom for dollar as we begin to near the end of this Fed tightening cycle.

Trade Protectionism
As I mentioned earlier in the week, trade tensions are rising between China and the US as protectionist sentiment increases on Capitol Hill. This issue is beginning to worry currency markets. Stephen Roach (a well-known Morgan Stanley Economist) even put his 2 cents in on the problem. While speaking in China, Mr. Roach stated it would be economic suicide for the US Congress to pass a proposed bill which will impose a 27% Tariff on Chinese imports. (Note: I’d have to agree, but either way we look at the issue we’ve got a mess on our hands. We can either pay the price now through imposing tariffs, possibly leading to a currency crisis & increasing anti-US sentiment, or we can continue to bleed slowly through ever increasing trade deficits and loss of US manufacturing competitiveness).

In other areas worth mentioning, Silver broke through $11oz today (1st time in 22 years), while gold is creeping back up to a 25 year high. Call me a Goldbug if you wish, but I feel these two are nowhere close to being done.

Oil, on the other hand rose to over $66 a barrel on the world market while US Gasoline supplies tumbled. Remember last week when I warned of $3 gas this summer. Well tomorrow, six world powers sit down to discuss their next step with IRAN. If this issue spirals out of control, mere $3 gas could be a blessing.

Delphi labor union talks are not going too well. From the looks of things, Delphi will most likely file a request (on the 31st of March) asking a Bankruptcy Judge to allow them to set aside Union Labor Contracts and pay substantially reduced wages. If the Labor Union calls for a strike, GM will be at a standstill, due to a lack of parts… GM shares fell 4% on this news.

Looks like the American Dream of homeownership is starting to develop cracks around the edges… Home foreclosures in January were 45% higher than 1 year ago. Even my little bubblicious state of Nevada was mentioned: Nevada came in second with 1,795 properties going into foreclosure; one for every 483 households and 2.5 times the number reported a year before.

Yield Curve
Inverted Yield Curve—Bernanke says it’s different this time and old rules need not apply, but when the last 5 out of 6 inversions were followed by a recession, I’d say Ben is way too full of hot, politically correct air… I believe he knows a slowdown is looming and is probably just as concerned (even more so) than the “doom & gloomers.”

The final issue I’d like to bring to light is this article concerning UAE and Saudi foreign Reserves (someone emailed it to me--thanks).

UAE, Saudi considering to move reserves out of dollar

WASHINGTON — A number of Middle Eastern central banks said on Tuesday they would seek to switch reserves from the US greenback to euros.

The United Arab Emirates said it was considering moving one-tenth of its dollar reserves to the euro, while the governor of the Saudi Arabian central bank condemned the decision by the United States to force Dubai Ports World to transfer its ownership to a ‘US entity,’ the UK Independent reported.

“Is it protectionism or discrimination? Is it okay for US companies to buy everywhere but it is not okay for other companies to buy the US?” said Hamad Saud Al Sayyari, the governor of the Saudi Arabian monetary authority.

The head of the United Arab Emirates central bank, Sultan Nasser Al Suweidi, said the bank was considering converting 10 per cent of its reserves from dollars to euros.

“They are contravening their own principles,” said Al Suweidi. “Investors are going to take this into consideration (and) will look at investment opportunities through new binoculars.”

The Commercial Bank of Syria has already switched the state’s foreign currency transactions from dollars to euros, Duraid Durgham head of the state-owned bank said. The decision by the bank of Syria follows the announcement by the White House calling on all US financial institutions to end correspondent accounts with Syria due to money-laundering concerns.

Sunday, March 26, 2006

US-China trade war looms

If the latest US rhetoric (blaming China for our economic ills) turns into action (slapping Tariffs on Chinese imports), the US could end up in a dollar crisis much sooner than many think.

US-China trade war looms :

Senators' protectionist anger over $200bn trade gap puts pressure on Beijing and risks damaging future strategic relations.

American senators could vote this week to slap tariffs of 27.5 per cent on all Chinese goods, amid a rising clamour of protectionist anger on Capitol Hill.

The sponsors of the so-called Schumer-Graham Bill were in Beijing last week - Chuck Schumer's first official trip overseas in 25 years - to press home the message that China's cheap currency gives it an unfair advantage over the Americans. Schumer, a Democrat who represents New York, and his Republican co-sponsor, Lindsey Graham of South Carolina, have been promised a vote on the measure by the end of March.

Some analysts have compared the bill with the infamous 'Smoot-Hawley' tariffs of 1930, which kicked off a tit-for-tat transatlantic trade war and helped turn the stock market crash of 1929 into the Great Depression. Phillip Swagel of the American Enterprise Institute said that unless Schumer drew back from the brink this week, he could become known as the Smoot of the 21st century: 'He would go down in history as the man who crashed the US economy.' He said the anti-China senators were likely to 'declare victory', having delivered their message to the Chinese in person.

But Stephen Roach, chief economist at Morgan Stanley, who met the senators - and Beijing officials - in China last week, said the rhetoric on Capitol Hill was already damaging a fruitful trading relationship. 'China is deeply troubled over the outright hostility from an increasingly xenophobic US Congress,' he said.

He said the trade deficit was the flipside of America's insatiable demand for foreign goods and its lack of savings. The US consumes more than it earns and borrows the difference, much of it from Asian central banks, including China's.

'The danger is that the United States views China with a growing sense of distrust - poisoning the chances for strategic co-operation and squandering one of the greatest opportunities of globalisation,' Roach warned.

Chinese premier Wen Jiabao made it clear that he has no intention of acceding to US politicians' demands. 'It is unfair to make China a scapegoat for structural problems facing the US economy,' he said. China has repeatedly said that it plans to float its currency eventually, but it fears the impact of 'big bang' flotation on its fragile financial sector.

Ikenson warned that by threatening punitive sanctions, America would exhaust Beijing's goodwill, which it might need for tougher geopolitical issues in the future: 'If we continue to hound them about their currency, we're not going to have enough left to push them on issues that really matter.'

Ominous Warnings and Dire Predictions of Financial Experts, Part 2

On March 4, 2006 I posted up the Ominous Warnings and Dire Predictions of World's Financial Experts part 1—an article that consolidated various economic warnings as stated by many of the worlds leading financial experts. The experts suggest that our economic future is not what it seems, and the US economy could be headed for disaster.

Later, (on March 10th) a related article was released Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure?. This article provided several expert opinions on investment options--that they feel can help folks weather the storm ahead.

Today, I found the latest release from Dudley Baker and Lorimer Wilson (the authors of the previous articles) and thought many of you would be interested in reading it: Ominous Warnings and Dire Predictions of Financial Experts, Part 2. This new article discusses US Debt, the dollar, the housing bubble, inflation, systemic banking crisis, stock market crash, depression, etc.

Widening Global Imbalances

Rodrigo de Rato, Managing Director of the International Monetary Fund at a recent speech at the University of California at Berkeley, stated that “while global current account imbalances have been widening, the fact that they have been financed easily thus far seems to be inducing a sense of complacency among policy makers. I think they should be more concerned. This is not to say that the risk of a disorderly adjustment is imminent, but the problem is growing, and if a disorderly adjustment does take place, it will be very costly and disruptive to the world economy.

“The most visible aspect of the global imbalances problem is a very large deficit in the current account of the balance of payments of the United States – amounting to about 6.25% of GDP. The main problem is that in the United States savings are too low. These global imbalances could unwind quickly, and in a very disruptive way, with either an abrupt fall in the rate of consumption growth (i.e. increased savings) in the United States which is holding up the world economy or by investors abroad becoming unwilling to hold increasing amounts of U.S. financial asset, and demand higher interest rates and a depreciation of the U.S. dollar, which in turn forces U.S. domestic demand to contract.”

Economic Pain

Timothy Adams, Undersecretary of Treasury for International Affairs, stated recently that “the world economy is dangerously imbalanced and the U.S. current account deficit is now at levels that many experts fear could trigger a run on the dollar, soaring interest rates, and global economic pain.”

Severe Consequences

Robert E. Rubin, director of Citigroup Inc. and former Secretary of the Treasury; Peter Orszag, Senior Fellow at Brookings Institution; and Allen Sinai, Chief Global Economist at Decision Economics Inc., made a presentation to a joint session of the American Economic Foundation and the North American Economics and Finance Association recently.

They stated that “the scale of the nation’s projected budgetary imbalances is now so large that the risk of severe consequences must be taken very seriously. Continued substantial deficits could cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. This, in turn, could cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt. The increase of interest rates, depreciation of the exchange rate, and the decline in confidence could reduce stock prices and household wealth, raise the cost of financing to business, and reduce private-sector domestic spending.”

Wild Ride

Paul Kasriel, Director of Economic Research at Northern Trust and co-author of the book ‘Seven Indicators That Move markets’, has stated that “If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar, which would lead to sharply higher U.S. interest rates, which would do great harm to household finances and the housing market, which would put a crimp in consumer spending, which would increase unemployment, which would result in a spike in mortgage defaults, which would likely cripple the banking system given that a record 61% of total bank credit is mortgage related, which would, in turn, render future Fed interest rate cuts -expected on or about September 20th, 2006 - less potent in reviving the economy.

“We have the most highly leveraged economy in the postwar period and the Fed is still raising rates and in the past 30 years or so, whenever the Fed has raised interest rates, we have usually had financial accidents. Our federal government is spending like a drunken sailor so my advice is to put on your safety harness as it is going to be a wild ride. My bet is that we are going to end up on the rocks.”

Category 6 Fiscal Storm

Isabel V. Sawhill, Vice President and Director and Alice M. Rivlin, Senior Fellow of Economic Studies at the Brookings Institution have said that “the federal budget deficits pose grave risks – a category 6 fiscal storm – to the U.S. economy. The current course is simply not sustainable. Promises to the elderly, especially about medical care, cannot be kept unless taxes are raised to levels that are unprecedented or other activities of the government are slashed. Postponing such action would be reckless and short-sighted.

“Massive amounts of capital have flowed in from around the world, financing much of America’s federal deficit, as well as its international (or current account) deficit. While this inflow of foreign capital has kept investment in the American economy strong it means that Americans are accumulating obligations to service these debts and repay foreigners out of their future income.

As a result, the future income available to Americans will be lower than it would have been without the government deficits. Foreign borrowing also makes the United States vulnerable to the changing whims of foreign investors. There is a risk that Asian central banks, or other large purchasers of dollar securities, will lose confidence in the ability of the United States to manage its fiscal affairs prudently and shift their purchases to euros or other currencies. Such a shift could precipitate a sharp fall in the value of the dollar, which could cause a spike in interest rates, a plunge in the stock and bond markets, and possibly a severe recession. The risk of such a meltdown is unknown, but it seems foolish to run the risk in order to perpetuate large fiscal deficits, which will ultimately reduce Americans’ standard of living.”

Drastic Fall

Sebastian Edwards, the Henry Ford ll Professor of International Business Economics at UCLA’s Anderson School of Management and a research associate of the National Bureau of Economic Research and has been a consultant to the Inter-American Development Bank, the World Bank, the OECD and a number of national and international corporations, has stated that “The future of the U.S. current account – and thus of the dollar – depend on whether foreign investors will continue to add U.S. assets to their investment dollars. Any major reduction in the USA’s ability to obtain sufficient foreign financing would cause the dollar to fall by 21% to 28% during the first three years of any adjustment period, cause a deep GDP growth reduction, and push the USA into recession.”

Substantial Macroeconomic Consequences

Ian Morris, Chief U.S. Economist at HSBC, has said that “about half the U.S. housing market may be overvalued by as much as 35-40%. When these housing bubbles begin to deflate, it is likely to have a substantial macroeconomic consequence.”

Serious Collapse

Ian Shepherdson, Chief U.S. Economist for High Frequency Economics, has warned that “house price increases are going to slow much further dragging down expectations for future price gains and therefore raising real mortgage rates. This, in turn, will be the trigger for a serious collapse in home sales. The housing market is a bubble, and it will burst.”

Economic Earthquake

Robert R. Prechter, President of Elliott Wave International and author of ‘At the Crest of the Tidal Wave’ and ‘Conquer the Crash,’ calls for “a slow motion economic earthquake that will register 11 on the financial Richter scale.

“The Great Asset Mania of recent years is in its final euphoric months and the next event will be a sharp decline of historic proportion in stock prices - the Dow should fall to below the starting point of its mania which was 777 in August 1982 and probably below 400 by no later than 2008 - resulting in a deep economic depression lasting until about 2011. If an across-the-board deflation occurs, which has a substantial probability, then real estate, commodities and all bonds issued by other than those rated AAA will fall in value as well.

“That we are in the midst, and apparently near the end, of the greatest debt build-up in world history suggests that the resulting deflation and depression will be the biggest deflation in history by a huge margin. A corollary of deflation will be a soaring value for the U.S. dollar, contrary to virtually all current expectations. Credit expansion is a major reason why stocks have kept rising and the dollar has kept falling but when the bubble begins to deflate, the investment markets will go down and the dollar will start up. The period after the market crash will be the most vulnerable in terms of the potential for hyperinflation. The ultimate result will be the destruction of any value remaining in bonds and the wipe-out of all dollar-denominated paper assets.”

Giant Speculative Bubble

Ravi Batra, Professor of Economics at Southern Methodist University, in his book ‘The Crash of the Millennium’ foresees not a deflationary depression but an inflationary one. He sees “the giant speculative bubble that we are currently in bursting, the stock market crashing and then the U.S. dollar collapsing almost immediately followed by a rise in interest rates and plunging bond prices culminating in a depression made doubly damaging by rising inflation through the early part of this decade. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the United States. In the long run, home prices will probably continue to climb but in the short run, however, they could sink and sink hard.”

Systemic Banking Crisis

Richard Duncan, a former consultant for the International Monetary Fund, current Financial Sector Specialist (Asia) at the World Bank and author of the book, ‘The Dollar Crisis’, writes that “the United States’ net indebtedness to the rest of the world, already at record highs, will continue to increase every year into the future until a sharp fall in the value of the dollar against the currencies of all its major trading partners puts an end to the gapping U.S. current account deficit or until the United States is so heavily indebted to the rest of the world that it become incapable of servicing the interest on its multi-trillion dollar debt.

“In the meantime, as long as the U.S. current account deficit continues to flood the world with U.S. dollar liquidity, new asset price bubbles are likely to inflate and implode; more systemic banking crises can be expected to occur; and intensifying deflationary pressure can be anticipated as low interest rates and easy credit result in excess industrial capacity and falling prices (i.e. deflation).”


The above comments are from some of the best minds in the business and what they have said about our current financial situation and what is in store for us in the years ahead. We advise investors to listen, to learn and to recognize the need to be strategically positioned in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.

Friday, March 24, 2006

$3 + Unleaded Fuel this summer

Hold on to your wallet folks--this could get quite ugly. I've previously discussed oil supply concerns regarding Iran, Venezuela and Nigeria, but that doesn't seem to be the worst of it.

According to the latest reports (and my empty wallet) Gas prices have risen 16 cents in the last 10 days alone and we are far from the peak driving season:

The federal Energy Information Administration said a similar jump in the nationwide average during the past week was the third-biggest increase recorded since 1990. "We're seeing large increases all across the country," said Jason Toews, co-founder of, a Web site that tracks the lowest fuel prices.

Why are prices higher? There's a new wrinkle in the mix. Environmental concerns about MTBE, a gasoline additive, and resulting state bans on it have forced refineries to begin adding ethanol to fuel instead. But Toews said ethanol is in short supply in the U.S., forcing up wholesale prices of the corn-based blend because a lot of it has to be imported.

With that info now digested, here is another chunk to swallow: Several major refineries will soon shut down for routine maintenance at the peak of driving season--more bad news for prices at the pump.

Traders also appeared to be shifting focus to expected lower refinery production in the U.S., the world‘s largest gas guzzler, due to planned maintenance and unplanned outages.

Oil prices are sensitive to any disruption to gasoline supplies from U.S. plants ahead of summer, when demand usually peaks for the motor fuel.

Exxon Mobil Corp. will close for routine work in May a gasoline-producing unit at the largest refinery in the mainland U.S, according to traders. The one-month shutdown of the unit at the 564,000-bpd refinery in Baytown, Texas, is for planned work.

On Wednesday, Exxon shut down a crude unit and a coker at its refinery in Baton Rouge, Louisiana for 32 days, the company confirmed.

Another article reports the situation a little differently:

There has been no shortage of media reports detailing surging gasoline prices in the past two years, but this time most analysts say gasoline costs are being heated up by a lack of refinery capacity, not crude-oil shortages.

U.S. refineries typically shut down for two to three weeks every spring for maintenance and to prepare to create cleaner-burning gasoline, which some states require in the summer. The market does not always react to these shutdowns, but the pipes have little excess capacity this year, according to Noel Casey, a Charleston-based consultant and former president of the National Association of Petroleum Investment Analysts.

"There is no margin for error here," Casey said. "The whole gasoline supply picture around the world is tight."

There are about 150 refineries in the United States, about half as many as there were in 1980, according to the South Carolina Petroleum Marketers Association.

Other analysts blame the higher prices on refineries switching gasoline additives, from methyl tertiary-butyl ether, also known as MTBE, to ethanol, a petrochemical derived from corn. MTBE, a carcinogen, has been found to contaminate drinking water and is the focus of several lawsuits.

One more issue I would like to point out: We're nearing Hurricane season again... If another major storm passes through the gulf and disrupts pumping or refinery operations, it could spell disaster for US oil/gas.

Bottom Line: I honestly believe gas prices will get much worse this summer.

With all this said, I'm looking for some sound advice, as I'm considering a 120-day Bull Call Spread on unleaded futures through Tiger Financial.

Has anyone here ever dealt w/ Tiger? If so, please provide your positive or negative feedback. Also, is my logic (as presented above) sound--am I on the right track?

Thanks in advance for any feedback...

New-home sales, median prices both fall in February

CBS NEWS just released a good summary of the current US housing situation:

New home sales fell by the biggest amount in almost nine years in February while home prices declined for a fourth straight month, raising concerns that the once high-flying housing market could be in for a rougher-than-expected landing.

The Commerce Department reported Friday that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes.

It was the second straight monthly decline, following a 5.3 percent fall in January, and marked the biggest one-month drop since April 1997.

The slowdown in sales further depressed home prices with the median price for new homes sold in February falling to $230,400, 1.6 percent below the January level. It marked the fourth straight month that the median, or midpoint for home prices, had fallen since hitting an all-time high of $243,900 in October.

Analysts, who had been forecasting a much more moderate drop of around 2 percent in February sales, said the big decline and downward revisions to sales activity in the previous three months could be signaling that housing will slow more this year than had been expected.

"The new home market looks like it is starting to stagger," said Joel Naroff, chief economist at Naroff Economic Advisers, a Pennsylvania forecasting firm. "Bubbles do burst, they really do."

On Wall Street, the Dow Jones industrial average rose 9.68 points on Friday to close out the week at 11,279.97.

A crash in home prices is seen as one of the biggest threats to economic growth. Some analysts are worried that five straight years of record home sales, fueled by the lowest mortgage rates in a generation, spurred a speculative fever in housing similar to the forces that created a bubble in stock prices in the late 1990s.

The bursting of the stock market bubble in early 2000 wiped out $7 trillion in paper wealth and contributed to pushing the country into a recession in 2001.

With mortgage rates being pushed higher as the Federal Reserve raises rates to fight inflation, the worry is that home sales will slow further and put more pressure on prices. In addition, homeowners who stretched to buy homes with adjustable rate mortgages could be forced into foreclosures if they cannot meet the higher monthly payments as their mortgage rates readjust.

"The housing market is fading fast and the prospect is it will weaken further as rates move higher," said Mark Zandi, chief economist at Moody's

But other analysts said they believed the February decline overstated the weakness. They noted a report on Thursday showed that sales of previously owned homes actually rose by 5.2 percent last month, although that gain came after five straight declines in existing home sales.

David Seiders, chief economist for the National Association of Home Builders, said he still believed that sales of new homes will post a moderate decline of around 8 percent this year with home price gains slowing from double-digit increases of around 12 percent to about half that level.

He said that some of the hottest sales markets in areas such as California, Nevada and Arizona could see a bigger slowdown because a larger percentage of that sales activity has been driven by investors who might start dumping houses back on the market.

"If it pans out like we think it will, we will have a moderate slowdown and not a housing collapse," Seiders said.

Sales of new homes have fallen in four of the past five months with the sales rate of 1.08 million units in February the slowest pace since May 2003.

The slowdown in sales pushed the inventory of unsold homes up to a record of 548,000 homes at the end of February. At the February sales pace, it would take 6.3 months to sell all of the homes on the market, up from 5.3 months in January.

Analysts believe that the growing backlog of unsold homes will add to downward pressure on prices in the months ahead.

By sector of the country, sales were down by the largest amount last month in the West, a drop of 29.4 percent in February. Sales fell 6.4 percent in the South but they rose 12.7 percent in the Northeast and 5.2 percent in the Midwest.

M3 Discontinuance

Yesterday the Federal Reserve stoped publishing M3 figures - the best information available on how much new currency is being created and held around the world. Witholding this information from public scrutiny will allow the Federal Reserve to turn up the printing presses to full-blast mode and pump our money supply to massive new heights (without public knowledge). These new dollars (created out of thin air) will eventually cause inflationary pressures--as more dollars enter circulation, each dollar is worth less and prices rise... I hope this makes sense to you.

Anyway, the wrote an interesting article concerning the issue: The Feds New Secret Could Mean Big trouble

The Federal Reserve Bank’s decision to discontinue publishing M3 money totals is an inflationary omen.

The money supply (M3) is such a boring topic that most people don’t bother to pay any attention to it.

In fact, outside of economists, stock and bond investors and bankers, not too many people care about how many U.S. dollars are in the world.

However, a recent decision by the U.S. Federal Reserve regarding the M3 will likely have serious ramifications that none of us will be able to ignore. Here is why.

The United States is a nation of debts and bubbles. U.S. debts, deficits and unfunded promises total in the tens of trillions—USA Today says it is close to $53 trillion for just the future benefits promised under Medicare, Social Security and government pensions. And each year the problem gets worse as the government continues to borrow money to fund current spending.

As the nation sinks further into debt, and as more of the $53 trillion in unfunded promises comes due (the first of it starting in 2008), America will rapidly find it more difficult to pay its bills.

The United States has already proven that it is unwilling to cut services or raise taxes in any meaningful way. Instead America’s leaders have chosen to continue to borrow more money to pay for the standard of services America has become used to. The last time the United States actually paid some of its national debt was in 1960, and even then it was a miniscule amount.

While the debt’s growth has shown no signs of slowing, the housing market’s growth now looks like it has. Several major metropolitan cities across the U.S. now show negative or zero price growth. But the U.S. cannot afford a slowing housing market, let alone a housing bubble bust.

“Cash-out” refinancing, provided by soaring real estate prices, has enabled much of the voracious consumer spending over the past few years. Since consumer spending now accounts for over two thirds of U.S. economic activity, if spending falters, so does the economy.

Furthermore, over the last few years, the housing boom has accounted for about 40 percent of all new American jobs created in the private sector.

So what does M3 have to do with debts and housing bubbles?

In general terms, M3 is the only number the Federal Reserve calculates that shows how many dollars are in the system. By watching this number, economists and investors can determine the growth of money in the financial system.

However, as of March 23, 2006, the Federal Reserve Bank will no longer publish M3 figures.

Why would the Fed do this? The Federal Reserve Bank’s official reason is “that the costs of collecting the underlying data and publishing M3 outweigh the benefits.” However, this explanation sounds questionable because M3 is a number that many economists and financial analysts study, and is also a number that the Bank of Canada, the rest of the G7 nations and many other European countries rely heavily on. As financial analyst David Chapman of Bullion Marketing Services reports, “[O]f the Fed’s monetary numbers only M3 was of major importance …” (, Nov. 10, 2005).

There is, however, a more likely reason for M3 discontinuance: that is, dollar devaluation.

A crisis is coming. America is facing huge debts, and the economy, which has become largely reliant upon the housing bubble, looks increasingly like it is about to pop.

There is only one way the government will be able to keep up with its debt (at least in the short term)—and only one way that the government will be able to get enough money to mop up the housing bubble bust that is coming.

That way is to print the dollars that will be needed.

By no longer publishing the M3 statistics, the Fed can hide how many dollars are being created.

Of course, as more dollars are created beyond demand, they eventually become worthless. By hiding how many dollars are in circulation, it appears the Fed is trying to prolong the dollar’s value.

LEAP/E2020, a European economic think tank, says that “[f]or some months already, M3 has significantly increased (indicating that [money printing] has already speeded up in Washington) ….”

In fact, LEAP/E2020 thinks this is such a huge event that it is one of two factors (the other being the proposed Iranian oil bourse) that will have a negative impact on the U.S. dollar “comparable to the impact of the fall of the Iron Curtain in 1989 on the ‘Soviet Bloc’” (ibid.).

Considering the Federal Reserve Bank’s decision to stop publishing the M3 data, American consumers can expect to see a growing trend of dollars devaluing, savings becoming less valuable, and having to pay hyperinflationary prices for basic needs.

Tuesday, March 21, 2006

A Hellish Outlook From the Heavens

I am by no means an Astrology buff, nor do I understand enough to actually know or believe anything about it, but this article really seems to have some merit. The individual mentioned (Henry Weingarten) heads the Astrologer Fund in NY and has an 80% accurate prediction record leading back to 1966. I believe, with a record like this, his opinion is definitely worth considering.

Mr. Weingarten was even interviewed on Neil Cavuto today and discussed his latest prediction--Here is the link to Neil's site. Once the site loads, if you don't already see the video link, search for "In the Stars"

Here is a link to the Web article, but I'll provide some of the relevant snippets below.

Henry Weingarten, heads the Astrologers Fund, a 28-year-old New York-based private advisory service for professional investors that tracks planetary movements and also factors in fundamental and technical market trends.

His outlook is frightening: "Hell is just ahead!" Within the next 30 to 40 days, he says, stocks will start a significant decline that over the next 100 days will push the Dow below 10,000 (versus Friday's close of 11,279) and the Nasdaq Composite under 2,000 (versus 2,306). Overall, Mr. Weingarten sees at least a 10% skid in each of these averages.

"Astrologically, we're moving into an extremely high-risk period," he says, adding that the readings he's getting from the planets, three in particular, are quite ominous.

On March 29, he explains, there will be a total solar eclipse, which will set in motion a dramatic planetary shift. Likewise, Pluto, a power planet, is changing direction. Further, Jupiter, Saturn, and Neptune have formed a T-square, representing a major alignment that's coming at the same time as the eclipse. He also notes that the formation of Saturn opposite Neptune is reminiscent of the one that occurred during the 1989 real estate recession. Mr. Weingarten is already on record as having forecast a rash of real estate bankruptcies across the country over the next couple of years.

If you're about to write all this off as gobbledygook, thinking our astrologist ought to be carted off by the men in the white suits, stop! His record clearly merits a respectful contemplation of his views. He accurately predicted, two years in advance, the crashes that took place in the Japanese and Hong Kong markets and has made innumerable super calls on gold, which he thinks is on the way to $800 an ounce.

Likewise, on March 7 of last year, with the Dow at around 10,950, he forecast a major market decline. He was right on the mark. About six weeks later, on April 21, the Dow tested the 10,000 level. On April 21, with the Dow hovering around 10,000, he predicted a sizable May rally. Bull's-eye again. In May, the market boomed as the Dow rose about 500 points.

Aside from his astrological worries, Mr. Weingarten is concerned about the country's debt problems, which he sees worsening given the swelling, out-of-control budget deficit and the rising costs to maintain an increasingly expensive Iraq war. He also looks for a dollar crisis over the next year, abetted by a probable mid-year end to the Fed's current credit-tightening cycle and a likely upward revision of the Chinese yuan. Mr. Weingarten also points out that each of the last three Fed chairmen had to contend with a dollar crisis in the first three to six months of their terms.

His planetary readings also suggest a large likelihood of violence against American interests, either onshore or offshore, that could lead the country into an additional military conflict.
Mr. Weingarten further contends the American economy is not as strong as it's cracked up to be, and he believes the high energy costs will cut more deeply into corporate profits and add to inflationary pressures.

His advice on how to cope with the next 100 days: Own a little gold, be more conservative, have more cash and less risky Nasdaq stocks, and focus on companies with low debt and lots of cash. "If you want to waltz on the Titanic," he says, "you really have to know where the lifeboats are."

SEC approves rule changes for Silver EFT

Silver broke through a 22 year peak today as the Securities and Exchange Commission approved rule changes for a Silver EFT. Expect to see higher prices in the metal yet.

NY silver ends at 22-year high after ETF ruling

NEW YORK, March 21 (Reuters) - U.S. benchmark silver futures scaled a 22-year peak on Tuesday on brisk speculative buying after U.S. regulators supported rule changes for the first silver-linked exchange-traded security.

The Securities and Exchange Commission said it has approved rule changes that will allow the American Stock Exchange to list shares in Barclays Plc's (BARC.L: Quote, Profile, Research) iShares Silver Trust, which is designed to track the price of the metal. [nN21216480]
Before the Silver Trust shares can begin trading, however, the SEC would have to sign off on a registration statement allowing the shares to be publicly issued.

"The registration statement has not yet been declared effective," said SEC spokesman John Heine.

Silver for May delivery at the COMEX division of the New York Mercantile Exchange closed at $10.5650 per ounce, up 20.3 cents, or 2 percent, on the day. Tuesday's high of $10.58 was the priciest level for futures since October 1983.

George Gero, vice president at RBC Capital Markets Global Futures, said heavy buying in silver was sparked by trader bullishness about the Silver Trust probably receiving final U.S. regulatory approval in the near future.

"It seems like the SEC is favorable toward the Barclays silver ETF (exchange-traded fund) and they are moving ahead, and that I think was the major help to prices," he said.

The silver ETF would be backed by silver bullion held in vaults in London, with each share worth about 10 ounces of silver.

Leading ETF provider Barclays Global Investors proposed the security last year. Shares would be issued in baskets of 50,000 shares or multiples thereof and would be traded on the Amex like other securities, as is Barclays' iShares COMEX GOLD Trust.

The sponsor fee for the shares is set at 0.5 percent of the net assets of the trust, the SEC said.
John Reade, analyst with investment bank UBS, said silver prices may go higher if the ETF winds up triggering both substantial spot purchases and investor buying on fears of potentially decreasing liquidity in the global market.

"Silver has hit our one-month target of $10.50/oz but we believe that it can trade towards our three-month target of $11/oz very quickly.

Sunday, March 19, 2006

Unemployment & Inflation figures, Housing Outlook and Deep Recession

During the last week or so I archived a few articles that I thought I should share with all of you. The 1st article discusses unemployment and Inflation, the 2nd and 3rd discuss the dismal outlook for housing and the last one, by a former Chief Economist of a US-China Commission, discusses the potential for a deep recession. Hope you enjoy...

1st article: Bill Fleckenstein’s The Numbers Behind the Lies

Economist John Williams says ‘real’ unemployment and inflation numbers -- figured the old-fashioned way -- may be two or three times what the government admits. Here’s why, and what it means for Social Security.

Corporate America likes to play that game, the better to boost stock prices. Folks might be surprised to learn that "Governmental" America also plays the game in its compilation of macroeconomic data. Beneath the surface are undesirable, sobering consequences for us all.

The always-terrific Kate Welling published an interview with an economist named John Williams. This article is the first one that I have seen in which all the flaws in the government data, pertaining to the Consumer Price Index, unemployment, Gross Domestic Product, etc., are disclosed in one piece by someone who's been following the data for a long time.

I have been aware of nearly all the statistical tricks used by the government since they were implemented. Nonetheless, seeing them collectively described in one article is incredibly sobering. Having said that, there is a bit more "black helicopter" insinuation and fewer data points than I would like to see in an article such as this. However, the main points are the math that most folks need to know, but likely do not.

Once you read it, think about it and understand it, you will see why so many thoughtful people -- like Jim Grant, Warren Buffett, Marc Faber, Bill Gross, Fred Hickey and Paul Volcker -- have grave concerns about the future of the dollar (due to the macro imbalances that exist today).

In fact, reading this article, you will conclude that there's no way out, short of running the printing presses. The problem with that end game: At some point, foreigners will revolt. One can only hope that, somehow, there will be a way out. But without an understanding of the issues, folks will have no way to react as events unfold, and adjust their assets as we get more clues as to how all this will play out.

Thus, I would encourage everyone to print out the article and read it as many times as necessary, in order to gain a full understanding of the issues. Since we don't know at what rate some of these problems will start to impact the markets, all we can do is be prepared -- by having our insurance policies (in the form of the metals and foreign currencies), and then being alert to signs that the beginning of a chain reaction may be under way.

Meanwhile, to pique folks' interest in the article, I'm going to take the time to provide some "Cliffs Notes" here.

Jobs data don't count the down-and-out.
Williams starts by discussing the headline economic data: "Real unemployment right now -- figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression -- is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction." (By "real," he means calculating the data the way they used to be calculated, not as inflation-adjusted.)

He then explains how the employment data are compiled, noting that 5 million chronically unemployed people are not included in the statistics. In fact, there are seven or eight different employment statistics. One called U-3 is the official one. The broadest one, U-6, currently shows unemployment as running around 8.4%. As he explains, the one that's the most historically consistent is running around 12%.

On the Potomac: Reverence for reverse-engineering
Williams differentiates between two data-manipulation practices. One is "systemic manipulations, where methodologies are changed." That's done in order to align the government's view of the world with the world, i.e., make things look better than they are. The second practice is out-and-out fudging of the data to produce whatever result is desired. Williams describes instances where various administrations have literally reverse-engineered the data to achieve that result (though politics is not the main purpose of the article).

For those not familiar with "substitution," he explains the practice's evolution in the CPI calculations. The concept of substitution was a concoction of Alan Greenspan and Michael Boskin, who basically argued that if one item were too expensive, consumers would substitute that with a cheaper one. Williams' response: "The problem is that if you allow substitutions, you aren't measuring a constant standard of living. You're measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that's not the original concept behind the CPI."

That ticking sound? Social Security
Williams says that the government's motive in all of this, if there is a motive (of the government collectively; don't picture a group of men cooking up something in a back room), is its desire to put a favorable spin on all the data.

Another motive? Transfer payments like Social Security are indexed to the CPI, and they would be far higher if the CPI were accurate. In fact, says Williams, if the "same CPI were used today as was used when Jimmy Carter was president, Social Security checks would be 70% higher." That's seven-zero.

Though Williams doesn't get much into hedonics, he does talk about the inflation-understating impact of geometric weighting versus arithmetic weighting in the CPI statistics: "Geometric weighting ... has the 'benefit' that if something goes up in price, it automatically gets a lower weight, and if it goes down in price, it automatically gets a higher weight."

Then for the ticking time bomb: Social Security. The proceeds from withholding do not go into a lockbox or trust fund. They are spent, thereby reducing the size of the stated deficit. More importantly, he notes that the government's accounting for the deficit doesn't include any accruals for Social Security or Medicare liability.

In fact, if that were done and the government used GAAP accounting, the deficits for 2003, 2004, and 2005 would each have been around $3.5 trillion. That's a trillion, not billion. In 2004 alone, the deficit on an accrual basis would have been $11.1 trillion, due to a huge one-time spike for setting up the Medicare drug benefits. In essence, as he points out, we're piling up additional liabilities in an amount roughly equivalent to our total GDP every three years.

Lots of these imbalances have existed for some time, and they haven't mattered. Such macro problems only matter when they matter. Once that point in time is reached, events have a way of swiftly getting completely out of control -- which is why one has to understand the nuances and be alert for potential signs of chain reaction, as I mentioned earlier.

Charge that Maybach to my imputed income
Returning to the subject of GDP, Williams illuminates a wrinkle that I had not known about, called "imputations": They are "an outgrowth of the theoretical structure of the national income accounts. Any benefit a person receives has an imputed income component. If you're a homeowner, the government assumes that you pay yourself rent on your house, so that's rental income. ... Imputed interest income, for instance, accounted for 21% of all personal interest income in 2002, and was growing at an annual rate of over 8%. Meanwhile, fully 62% of total rental income that year was the imputed variety."

He goes on to point out that folks really aren't doing that well, which is why their incomes aren't growing, which is why they've borrowed money. And that's why understanding the housing ATM is so important -- because as that sputters to a halt, folks will be stuck in the same place they were before (which precipitated the borrowing, i.e., not enough income growth). Only now, they're going to be stuck with incremental debt of their own creation.

What festers underneath the data
Next, he strings together the stock-market and housing bubble, for a summation of where we are: "When that (stock) bubble burst (in 2000), without a foundation of strong income growth, or a financially sound consumer, it triggered a recession that was a lot longer and deeper than the government would have you believe.

"In fact, I contend that what we are in now is a protracted structural change that goes back to the beginning of that 2000 recession, which eventually may be recognized as a double-dip downturn. We did have some recovery in 2003, but in 2005, you started to see signs of a downturn in a variety of leading indicators that I use."

That's not so far off from what I believe. In other words, if you really looked at the data and understood them, you'd see that what appears in the headline numbers is nowhere near what the real supporting data show. Our financial condition is a ticking time bomb. What none of us knows is when it implodes.

2nd Article: John Talbott, a former Goldman Sachs investment banker and visiting scholar at UCLA's Anderson School has much to say about Housing

When John R. Talbott gazes into his crystal ball to discern the future of America's housing market, it isn't a pretty picture he sees.

"I don't want to be a Chicken Little," he says, "but it's gonna be bad for housing. It's a real threat to everything."

The gory details of that threat can be found within the pages of Talbott's latest book, "Sell Now! The End of the Housing Bubble," published in January by St. Martin's Press.

A financial consultant and former visiting scholar at UCLA's prestigious Anderson School, Talbott views the housing market as a house of cards on the verge of collapse. He predicts rising interest rates and plummeting property values, followed by widespread foreclosures that will not only affect the real estate industry, but almost every aspect of the economy.

"It's already started," says Talbott. "We've had 20 years of up, up, up with real estate. This spring will be brutal."

Talbott regards the latest data on the Bay Area housing market as mounting evidence for his prediction: rising interest rates, decreasing appreciation, 10 straight months of declining sales and, in January, the lowest number of sales in five years.

The problem, he says, is that home prices are way overvalued -- just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property's true value.

Novato's RealFacts puts the average Bay Area apartment rent in the fourth quarter at $1,324; DataQuick calculates that the typical homebuyer in December committed to a $2,867 mortgage payment.

"It paints a very scary picture," Talbott says. "Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you'll discover that, in real terms, housing prices were relatively flat until 1997 -- then (they) shot up about 70 percent."

To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.

"They have to make decisions about whether they're going to pay the mortgage or go to the movies," Talbott says.

Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant's salary to the mortgage payment. They're doing this, he said, without adjusting for inflation.

"So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they're never gonna get out from under."

To make matters worse, Talbott says, an increasing number of borrowers are taking out variable-rate and interest-only loans. According to San Francisco's, half of all Bay Area homebuyers used interest-only loans to make their purchases last year. With so much of their income already relegated to their mortgage payment, says Talbott, even a small rise in interest rates will push many to -- and beyond -- their limit. For others, a divorce or job loss will spell financial ruin.

Because of the above factors, Talbott predicts a wave of loan defaults and foreclosures. Bank presidents will be fired for making so many risky loans. The new presidents, wanting to clean up the mess, will unload the properties at a loss, perhaps for 40 to 60 cents on the dollar. This will flood the market and deflate home prices further.

And then, according to Talbott's prediction, the financial impact will, like an especially vicious virus, spread. First, the real estate industry will falter. Then, industries tied to real estate -- including banking, construction, home supply stores -- will be hurt.

"And then you've got a real recession," he says, "that will wash across the middle of the country."

People should protect themselves, Talbott says, by divesting themselves of any investments in real estate, including stock. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for a while.
"And after this mess," he says, "cash will be king."

3rd Article: Executive Intelligence Review author Richard Freeman’s View on Housing:

In response to a U.S. housing bubble report in The Nation, Lyndon LaRouche stated today, "This indicates that the Senate and House have no time to waste on adopting the measures I've proposed. There are those who propose that we wait until after the election to deal with these problems. That is irresponsible."

In an article in the March 12 issue of The Nation, entitled, "Leaking Bubble," Doug Henwood writes: "The past several years have seen the most extraordinary boom in the U.S. housing market in history, rivaling the dot-com stock market madness of the late 1990s. In the third quarter of 2005, the average new house sold in the United States cost 4.9 times the average household's yearly income, up from 3.9 times in the late 1990s.... Turnover of new and existing houses in the third quarter of last year was more than 16% of GDP, way above its long-term average of 9 to 10%, and easily beating the levels reached in the housing frenzies of the 1970s and '80s."

Families are buying homes on outrageously risky terms: In 2005, 43% of first-time home buyers "made no down payment at all." The housing bubble has metastasized into the entire U.S. economy, especially as homeowners borrow against the bubble-ized increase in the value of their homes. Henwood writes, "Americans have been using their houses as MasterCards, turning about $726 billion of their home equity into (borrowed) cash between 2001 and 2005. That's a big number, even by the standards of the U.S. economy; it's equal to almost 40% of the growth in personal spending." Moreover, he declared, "Wall Street economists estimate that 40 to 50% of the growth in GDP and employment over the last several years has been driven by the housing boom" (emphasis added).

In 2000, when the financial system was threatened with the bursting of the stock market boom, Alan Greenspan intentionally fed the housing bubble, by lowering U.S. interest rates to 1%, Henwood said. However, mortgage rates are rising; home sales are sagging: "So many households have taken on so much mortgage debt that if prices merely stop rising, they're going to find themselves under water.... The broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock."

Last Article: Thomas Palley, formerly Chief Economist of the U.S.–China Economic and Security Review Commission says we’re headed for a Deep Recession:

To quote Yogi Berra, “It’s tough to make predictions, especially about the future.” Many (including myself) expected that the bursting of the stock market and Internet bubbles in 2001 would cause a deep recession owing to large excesses of borrowing and spending by both the household and corporate sectors. Now we know that the recession of 2001 was fairly mild and of short duration, though the economic recovery has also been the weakest since World War II.

After having been wrong once, it’s either brave or foolish to make a second prediction that the next recession will be deep and difficult to escape. But the facts point to it being just that—despite the optimism of the Federal Reserve. This is because the economic factors that helped escape the last recession have been largely exhausted, and will not be available to fight the next recession.

The main reasons why the last recession was so relatively mild are the federal budget and interest rates. In fiscal year 2000 the federal government ran a budget surplus of $236 billion dollars, but within three years this had reversed to a deficit of $378 billion. The overall budgetary U-turn was therefore $614 billion dollars, equal to about six percent of economic output (gross domestic product). This turn provided an enormous injection of spending that helped prevent a deeper recession and jump start recovery.

The role of government spending in damping the recession and driving the recovery is evident in the employment statistics. From March 2001 (the beginning of the recession) to January 2006 government employment rose by 4.5 percent (one million jobs) to 21.9 million jobs. Over the same period, private-sector employment rose by just one percent. Government, which accounts for just 16 percent of total employment, created half of all new jobs in the four years after the recession ended. The private sector, which accounts for 84 percent of total employment, created the other half. Moreover, part of the increase in private-sector jobs involves government contract and defense-related work, so that the government’s overall job contribution was even larger. In effect, increased government employment has masked persistent private-sector weakness.

This fiscal stimulus was accompanied by an extraordinary extended period of monetary ease that kept interest rates at historical lows. In 2000, the year before the recession, the Federal Reserve’s target interest rate (the Federal funds rate) averaged 6.24 percent. When the recession began, the Fed cut this interest rate aggressively, lowering it to 1.67 percent in 2002 and 1.13 percent in 2003. Moreover, the Fed then held interest rates at historical lows three years after economic recovery had officially begun, so that the Federal funds rate was only 1.35 percent in 2004. Only since late 2004 has the Fed reversed itself and started systematically raising short-term interest rates.

There are three significant features about this monetary easing. First, it contributed importantly to warding off the recession and generating recovery. Second, the weakness of the private-sector recovery, despite the extraordinary scale of the fiscal and monetary stimulus, points to the underlying fragility of the private-sector economy. Third, the monetary easing has promoted massive consumer indebtedness and a housing price bubble, a combination that poses grave future threats.

The Fed’s lowering of interest rates to forty-year record lows served to spur the recovery. It inspired a mortgage re-financing boom, providing immediate relief to households who were able to spend their mortgage interest savings. Lower interest rates also made houses more affordable, triggering a house price bubble that contributed significantly to escaping the recession. Higher house prices increased homeowner equity, and many owners used this increased equity as collateral to borrow against.

Their borrowing then financed consumption, which significantly explains the consumer-spending boom. Higher house prices have also allowed some existing homeowners to cash out, and some have spent part of their windfall. Meanwhile, homebuyers have financed house purchases with loans, which has increased the money supply. Lastly, rising house home prices have also created enormous profit margins for builders, providing an incentive to build new homes and spurring a construction industry boom.

The problem now is that these special conditions are largely spent. The projected federal budget deficit for fiscal year 2006 is $423 billion, approximately 3.3 percent of national output. With the budget already in deficit, this leaves less room for the type of U-turn that occurred in the last recession.

With regard to interest rates, the federal funds rate now stands at 4.5 percent—so there is room to lower it. However, lowering it is likely to have far smaller effects than last time. Why?

Homeowners have already significantly refinanced so that the stock of high interest rate mortgages available for refinancing has been depleted. Consumers are borrowed to the hilt, leaving less access for further borrowing. House prices are already at all-time highs by every measure—so lower interest rates are unlikely to spur another price boom, with all its expansionary effects. Instead, house prices could actually start falling as new supply continues to come on to the market, and this effect could be amplified by recession-induced job losses that trigger mortgage defaults by workers losing their jobs. Taken together, these factors point to future interest rate reductions likely being akin to pushing on a string.

Adverse domestic economic conditions will also be echoed globally. The 2001 recession was business investment-led, with little consequence for China and East Asia. This is because those economies export consumer goods and the American consumer kept spending. However, a consumption spending-led recession will quickly spill over into East Asia, triggering job losses and a decline in investment spending in those economies. Consequently, a U.S. recession will quickly ricochet around the globe.

This is not about predicting when the next recession will happen, but rather about its character. The when game is impossible. As Nobel Prize-winning economist Paul Samuelson once quipped, “Economists have correctly predicted nine of the last five recessions.” However, it is possible to anticipate future difficulties and proscribe possible remedies.

First, the Federal Reserve should be very careful about over-shooting with its rate hikes, and at this time it should take an inflation chill pill. Second, the current recovery has been extraordinarily weak, which should finally discredit the notion that tax cuts for the rich drive growth and job creation. Third, the speculative financial market paradigm—which has ruled the policy roost for twenty-five years—is out of gas. It is time for a new paradigm that links growth to rising wages rather than to asset price boom-bust cycles

Dollar Gets Battered

Looks like the US Dollar got beat up pretty good this week as financial analysts lowered their expectations for future rate hikes beyond 4.75%. The Dollar closed Friday at its lowest level in almost 6 weeks.

Could this be the beginning of a new long-term structural decline? Some think it is a possibility.

I personally feel the Fed will stop at ~ 5% and then might even lower rates (within the next year) to help out the dying housing market (bubble will be leaking significant air by that time). If he does lower rates, I think we'll see a substantial decline in the Dollar.

Dollar gets battered but "Armageddon" not here yet

NEW YORK (Reuters) - The dollar has experienced bouts of selling in recent months and emerged the stronger, but a host of factors conspiring against the greenback suggest the extent of this week's sell-off may be different.

A dramatic downshift in financial markets' expectations on how high U.S. interest rates will go, some soft U.S. economic data, a break of key technical support levels and notable shifts in the options market against the dollar slammed the greenback down to six-week lows.

The big question in currency markets now is whether this signals the dollar's resumption of its structural, long-term decline.

Most market participants appear reluctant to make quite so bold a prediction. But they do recognize that the dollar selling momentum generated by the confluence of factors mentioned above is unlike anything seen for some time.

"This is most serious assault on the dollar since January," said Steven Englander, chief currency strategist for the Americas at Barclays Capital in New York. "This feels different."

Driven largely by the hefty shift lower in U.S. rate expectations, the dollar is poised to record its biggest weekly decline against the euro and a basket of currencies since the first week of January.

A week ago, interest rate futures markets were fully pricing in the Federal Reserve raising rates to 4.75 percent later this month, and a one in four chance it would raise to 5.25 percent by the middle of the year.

Now, however, markets have taken all bets of a hike beyond 5 percent off the table, and are pricing in only a three in four chance the Fed will even reach 5 percent.

This helped compress the spread between two-year U.S. and euro zone government debt to its narrowest level in favor of the dollar in 10 months.

Commerzbank currency strategists don't think that is enough to prompt a market "sea change" against the dollar, but they do think that will happen when it becomes clear that U.S. interest rates are no longer supportive for the greenback.

"We are not at that stage yet and it is unclear whether we will be," they wrote in a research note.

David Gilmore, partner at FX Analytics in Essex, Connecticut, goes further and argues that the dollar won't face its "Armageddon Day" until U.S. economic weakness forces the Fed to actually start cutting rates.

Still, "the dollar has broken significant levels and has plenty of scope to run lower in the next six weeks," he said.

To be sure, currency options markets firmly believe the dollar will lose more ground in the coming weeks, particularly against the euro.

Risk reversals on one-week euro/dollar options, which measure the options market's bias toward call or put options in a currency, spiked up this week to their highest levels in favor of euro calls since November 2004.

Then, the euro was trading around $1.3000 and on its way to a record high above $1.35 a few weeks later.

A call option gives an investor the option to buy an asset at a certain price at a predetermined time -- effectively a bet the currency will rise in value over a given time-frame -- while a put option is a bet it will depreciate.

Similarly, the dollar's technical picture deteriorated markedly this week. The dollar broke significantly below its 200-day moving average against a basket of major currencies <.DXY> and the euro broke above its 200-day moving average against the dollar.

However, the dollar would have to slide even further to break out of broad ranges and convince some analysts its technical outlook is bleak enough to warrant calling it the start of a long-term downtrend.

Matthew Kassel, currency strategist at IDEAGlobal in New York, reckons the euro would have to break above $1.2285 -- it's currently around $1.2200-- to attract longer-term institutional and fund buyers, while others point to the 2006 high around $1.2330 struck in January as the key target.

Yet there are signs that longer-term hedge funds and "real money" investors this week have already emerged to place their bets against the dollar.

"It certainly looks like it (the euro's rise) can last a little longer, and I think there will be genuine interest to join the move or add to positions on pullbacks," said Scott Ainsbury, portfolio manager at FX Concepts, a hedge fund in New York.

GM Bankruptcy?

Last Friday, GM announced the company had understated 2005 losses by $2 Billion and they would delay filing a 2005 annual report to sort through the accounting mess--company stock tumbled nearly 5% on the news. These accounting errors come to light 5 months after the SEC launched a formal probe into GM, and the news has severely hurt the company’s credibility. In an effort to find a way out of the mess, Rick Wagoner (the Company CEO) cut short a trip to Asia to hold an emergency meeting with company directors. In addition, looks like GM has been burning the midnight oil this weekend to negotiate a buyout package for Delphi UAW workers.

Delphi, Dana and GM are all tied at the hip, each is bleeding badly and the news seems to get worse each day. Will they ever find a way out of this mess? Could we actually see GM file for Bankruptcy in the future—If so, what are the potential ramifications?

This recent Bloomberg article discusses some consequences for just the derivatives market alone… Bottom line: A GM bankruptcy could have far reaching implications.

GM Bankruptcy Risk Exposes Imbalance in Booming Default Swaps

March 14 (Bloomberg) -- Time is running out for the $12.4 trillion credit derivatives market to clean up its act as the potential for history's biggest corporate debt default looms.

The possible bankruptcy of General Motors Corp. has exposed flaws in trading of so-called credit default swaps because the number of contracts has outstripped the bonds they insure. The market's trade association, meeting this week in Singapore, is working to prevent disruptions by computerizing record keeping and permitting contracts to be settled with cash instead of bonds.

The Federal Reserve Bank of New York last year warned deficiencies in credit-derivatives trading could threaten the stability of financial markets in the event of a major default. The 10 biggest U.S. banks, including Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase Inc., have about $600 billion of credit derivatives, according to the Fed.

``If there was a major credit event, or a series of credit events, it could really cost them,'' says Tanya Azarchs, managing director of financial institution ratings at New York-based Standard & Poor's. ``It's considered dubious risk management to build a market without setting up an infrastructure to cope with the volumes traded.''

As many as 150 bankers and investors have been meeting since December to develop new rules for credit derivatives, the fastest growing part of $270 trillion derivatives market. The New York- based International Swaps and Derivatives Association plans to have a cash settlement system in place by June 20.

Credit-default swaps were designed to protect creditors against non-payment of debts, and some investors now use them to bet on a company's credit quality. Contract buyers pay an annual fee and receive the full amount insured if a borrower defaults. Under the current system, buyers are obliged to deliver the defaulted loans or bonds to the insurer.

`Lack of Transparency'

The credit-derivatives market, dominated by credit-default swaps, is unregulated, with contracts traded over-the-counter and no requirement for investors to disclose their holdings.
With more credit derivatives being traded than bonds available, a default by GM could spark panic buying of the company's bonds, driving up prices. The contracts would be worthless if prices rose to 100 cents on the dollar because investors would have to pay the same amount for the bonds as they received in payouts.

``The current method has the potential to significantly distort the economics of the trade,'' says James Batterman, an analyst at Fitch Ratings in New York. ``There are no limits on the amount of derivatives exposure vis-a-vis deliverables, and a lack of transparency as to how many contracts there are in existence.''

GM Ratings Cut

S&P on May 5 cut the credit ratings of Detroit-based GM to junk-bond status because of its failure to address ``competitive disadvantages,'' such as its reliance on sport-utility vehicles. It is the biggest company to have had its ratings cut to high-risk, high-yield status.

Investors are demanding upfront payments, in addition to annual premiums, for derivative contracts that protect holders of GM's debt. Buyers of such contracts now pay $1.85 million in advance, plus $500,000 a year, to insure $10 million of GM bonds. Advance payments reached a high of $2.4 million in December.

Credit default swaps were created by banks in the 1990s to transfer credit risk off their books and boost return on the capital. The market for credit derivatives has expanded fivefold in the past two years as investors used the market as a cheaper way to bet on credit quality than buying bonds, which are relatively illiquid.

JPMorgan and Goldman Sachs are among the biggest buyers and sellers of credit derivatives. Traders of the contracts now include investors ranging from Newport Beach, California-based Pacific Investment Management Co., the world biggest bond fund manager, to Blue Mountain Capital, a New York hedge fund.

Out of the Shadows

``Derivatives took credit markets from being in the shadows of the financial markets to center stage; credit markets are now visible and liquid,'' says Tim Frost, a pioneer of credit derivatives at JPMorgan who now helps run Cairn Capital Ltd., a London hedge fund that specializes in debt. ``Credit derivatives raised returns on capital and gave the credit market the opportunity to develop beyond the buy and hold culture.''

The speed with which demand for credit derivatives is growing is creating headaches for the banks, which can't process the deals fast enough.

The New York Federal Reserve in September told the 14 biggest buyers and sellers of credit derivatives to take steps to eliminate a backlog of unsigned order confirmations.

`One Step Forward'

New York Fed President Timothy Geithner last month said the 10 largest bank holding companies in the U.S. had about $600 billion of potential credit risk from their holdings of derivatives. That represents about 175 percent of so-called tier-one capital, the funds banks must hold to satisfy legal requirements for safety and soundness. Tier-one capital is composed of common stock and retained earnings.

Since September, the banks have reduced by 30 percent the number of credit-derivatives contracts that remain unsigned for 30 days or longer. They have now committed to cut the number of unsigned trades by 70 percent before July, Geithner said yesterday in a statement on the Fed's Web site.

``A principle challenge is that this market is growing so fast that banks take one step forward and then realize they still have many more steps to go,'' says Gay Huey Evans, a former regulator with the U.K.'s Financial Services Authority who is now European chief executive at Tribeca Global Management LLC. ``The market now understands operational risk can be just as severe in stressful markets as the actual market risk they are taking.''

`I Continue to Worry'

Incomplete recordkeeping lies at the heart of the fragility of the credit-derivatives market, and cash settlement won't solve the problem.

``Cash settlement will help get around the bond scarcity problem, but if you don't know the who, what and how much, it will be futile,'' says Mike Greenberger, a law professor at the University of Maryland and a former director of trading and markets at the Commodity Futures Trading Commission, the U.S. futures market regulator. ``I continue to worry about this market.''

As part of the cleanup, the Fed asked all regular users of credit derivatives to confirm transactions through the Depository Trust & Clearing Corp., a non-profit organization that processes most of the bond and equity transactions in the U.S. The goal is to convert the system from paper records to electronic ones. The largest U.S. banks have said they won't trade derivatives with investors that fail to comply with the Fed's request.

DTCC last month said it would create a centralized database to track all credit derivative transactions and process payments between the parties. The system would be able to quantify the value of contracts outstanding for the first time. DTCC, which initially planned to begin offering the service by June, now targets the fourth quarter, says Stuart Goldstein, a spokesman for the organization.

`Taking the Right Steps'

Some market participants are reassured by the industry's attempts to police itself and have taken advantage of market movements created by the mismatch of derivatives and bonds.

``The market is taking the right steps,'' says Tim Warrick, who helps manage $94 billion of bonds at Principal Global Investors in Des Moines, Iowa. ``There will be disruptions along the way, but they're not likely to dislocate the market, because the market understands those risks now.'' Warrick says he isn't concerned about a potential default by GM.

``With any company where there is substantial risk, we actively manage it,'' he says. ``In those cases we look to manage down that risk, or eliminate it totally.''

Toledo, Ohio-based axle maker Dana Corp. last week became the latest company in the auto parts industry to seek bankruptcy protection. The company defaulted on $2.5 billion of bonds and loans this month, resulting in a rise in its bonds as investors sought them to settle credit-derivatives contracts.

Dana Default

Dana's 5.85 percent 2015 bonds have risen 10 cents to 74 cents on the dollar since the company filed for bankruptcy protection. They traded for about 60 cents on the dollar Feb. 24, when the Wall Street Journal reported Dana had hired Miler Buckfire & Co., which advises companies in financial distress.

Delphi Corp., Collins & Aikman Corp. and Tower Automotive Inc. had previously defaulted after automakers such as GM and Ford Motor Co. cut back production and put pressure on suppliers to lower prices, says Chris Benko, managing director of PricewaterhouseCoopers' Automotive Institute in Detroit.

The demise of parts suppliers has eliminated a safety valve for GM and Ford, making it more difficult for them to survive, Benko says.

``In the old days, when conditions were tough they could always put pressure on the auto parts makers,'' he says. ``Now that's not possible.''

`Nothing But Questions'

GM, Delphi's former parent, is working with the company and its labor unions to avoid a strike that Morgan Stanley analyst Jonathan Steinmetz said could bankrupt the world's biggest carmaker. As part of Delphi's 1999 spinoff, GM agreed to cover the costs of certain Delphi retirees in the event Delphi couldn't make the payments.

Marilyn Cohen, the president of Envision Capital Management in Los Angeles, says she is concerned the flood of credit derivatives may skew prices in the bond market, hurting retail investors like her clients.

``God forbid if GM files for bankruptcy,'' says Cohen, who oversees $225 million of bonds, including those of GM's finance unit. ``What will it do to the market? We have nothing but questions, and no answers.''

Thursday, March 16, 2006

3rd World America

As a USAF veteran, I’ve been fortunate enough to have had the opportunity to travel the world, experience numerous cultures, and see some of the best this small planet of ours has to offer. I’ve ridden a camel through the Sahara Desert, visited several of the Egyptian Pyramids, swam in the Red Sea, drank beer in Germany, sunbathed in Spain, toured a bit of Italy, shopped for gold in Qatar’s bazaars, visited WWII sites in the Philippines, pulled some R&R in Kenya, climbed Mt Sinai at 3am to watch the sun rise, touched remnants of the burning bush @ St Catherine’s Monastery, etc. Those were some great times…

With that said, I’ve also seen some of the worst this world has to offer. In many of the places I’ve visited over the years, although exciting to experience, I witnessed far too much human suffering. Poverty is rampant and almost the “norm” around the 3rd world. In some of the extreme cases, I’ve seen homeless beggar children (and adults) roaming city streets pleading for handouts; in-your-face prostitution as impoverished girls try to earn money any way they can to better their lives; entire communities living in slums/shanty towns--some living next to or in garbage dumps—existing off the refuse of others; the disfigured & crippled cast aside by society, and with no social programs available, left on the street to fend for themselves… I guess the absolute worst that I’ve seen over the years was the massive numbers of starving, skeletal shells of human beings trying to survive any way they could in war-torn Somalia--the smell of death hanging in the stale air as thousands of bodies slowly decayed beneath shallow improvised graves baking in the desert sun… It was an absolute nightmare and words cannot describe the complete despair and atrocious living condition of those people.

Anyway, each of these unique travels was a new learning experience for me, yet my heart always ached for the thousands upon thousands of unfortunate people I encountered. But aside from empathy, I knew there was little I could do for these folks.

Ultimately however, these travels & human experiences did open my eyes to the many blessings that I had previously taken for granted, and it also provided me with a much better appreciation for the countless advantages that we, as American citizens, have. Lastly, these experiences provided me with a new awareness for the fragility of life in general.

I only wish more Americans could visit 3rd world countries to see how the majority of the world lives. I honestly believe that most Americans have no concept of what life is like outside of our borders, and aside from what little they see on TV (when not watching Survivor or Idol) they are completely oblivious of the hardships people endure just to survive.

So, why am I bringing up this issue? Answer: We are a great nation of wealth built through the hard work and sacrifice of our forefathers, yet I believe our greatness is slowly slipping away--from both an economic and a cultural standpoint. In our get rich quick, baggy pants wearing, MTV lovin, fast-food eating, living for today, throw-away cultural mind-set, I think we’ve lost sight of what is or should be important, we don’t respect one another, we don’t appreciate what we have and are far too preoccupied with our own self interests. We have turned into an “all about me” society where everyone wants something for nothing and if we can’t get it now, we whine until someone listens.

American society has made it an accepted norm to be caught up in trivial things (fashion, keeping up with the Jones', reality TV, the latest unsolved murder mystery, sports, shopping, Hollywood, petty lawsuits, material things, etc), and the truly important things in life (family, values, education, hard work, social courtesies, respect, religion, caring for others, etc) have fallen by the wayside. Each and every day our brains are filled with mush and we become far too ignorant to realize that the things that once made us a great nation are slipping away.

I love this country, but feel that if things don’t change soon, we’ll eventually follow the path of the Romans and ultimately will see to our own demise... A 3rd world America.

Monday, March 13, 2006

Speaking truth or crying 'wolf'?

I thought I was finished posting up today, until I came across this excellent Marketwatch article written by by Paul Farrel. Hope it provides you with some useful food for thought.

LOS ANGELES (CBS.MW) -- Back during the '70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I've worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.

But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm.

But when it gets up close and personal -- like my family's home -- well, suddenly I'm shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us -- from San Francisco to San Diego -- is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs investment banker John Talbott in his new book, "Sell Now! The End of the Housing Bubble."

Next time you're in a bookstore check out his top 130 metro areas. The chapter's titled, "Are You in Trouble?"

Warning: Chances are you're in big trouble, or in denial.

And folks, this is not just an isolated West Coast phenomenon. Talbott points out that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer: "Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

Yes, the irrational exuberance of our failed stock market simply shifted over into a new irrational exuberance in housing. In five short years an estimated $30 trillion was added to housing prices worldwide, an unsustainable 75% increase to $70 trillion, largely due to then Fed chairman Alan Greenspan's cheap money policies.

Greenspan dismissed the global bubble, telling Congress it was just a little "regional froth." Happy-talk, while our housing and mortgage industry has been taking advantage of naïve home buyers and sellers with loose underwriting practices: Low-interest home equity loans, and interest-only, low-equity loans feeding housing price inflation.

Curse of Cassandra

My files are full of warnings from America's top economists predicting a housing market collapse and a widespread global disaster: Gary Shilling, Bill Gross, Jeremy Grantham, Robert Shiller, Robert Rubin and others take exception to the deceptive happy-talk of self-serving spinmeisters in Washington, Wall Street, realty brokers and homebuilders.

Lately, powerful voices are challenging the happy-talk. In his latest "Investment Outlook: The Gang That Couldn't Shoot Straight" Pimco's Bill Gross takes direct aim at President Bush's Economic Report prepared by ex-CEA boss and now Fed Chairman Ben Bernanke. He bluntly accuses them of outright lying: "It's not so much that the report was a compilation of untruths or even half-truths. It's just that it failed to tell the truth," hiding the fact that we have "borrowed from the future to pay for today's party."

The party's about over. Economist Gary Shilling recently wrote in Forbes: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... China will suffer a hard landing ... and weakness in the U.S. and China will spread worldwide."

Unfortunately, bubble warnings are routinely dismissed. Our brains can't handle all the bad news. Besides we've been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls.

Still, experts like Gross, Shilling, Talbott and others are dismissed as "crying wolf" one too many times. The housing bubble hasn't popped, warnings accumulate, we're overwhelmed, confused, numb, feel helpless, so we fade into denial. And our leaders are even more oblivious, hardened and ineffectual.

But ... am I going follow Talbott's advice and "sell now?"

No. We love our home and our town. Besides, even if prices do fall 55.8%, we're still ahead of the game, out of harm's way. But maybe you should sell now. A lot of people are going to get badly hurt in the real estate crash, far worst than in the 2000-2002 recession when we lost $8 trillion in market cap.

If your stock portfolio were out of whack there's a possible solution: Dump equities now, go all-cash or to the "nuclear bond option:" Put one quarter in each of four sectors: Short-Term Corporate Bond Index (VFSTX ) ; Intermediate-Term Bond Fund (VFITX ) ; Inflation-Protected Securities Fund (VIPSX) ; and Money Markets or U. S. Savings I-Bonds. Shilling favors bonds in a deflationary recession. They paid roughly 10% in 2000-2002 bear. Alternatively, if you have a well-diversified portfolio, sit tight; back in the 2000-2002 they beat the S&P 500 by an average of 15% annually.

Sadly, unlike the stock market there's little you can do once the illiquid housing market collapses. If you can't sell now, you'll have no choice but bite the bullet.

For example, assume you live in one of America's top 40 metro areas. You bought last year for $500,000 with $450,000 in mortgages. If the market drops just 10%, your equity's gone.

And if it drops the predicted 47.2%, your home's worth $250,000, you really are in trouble. If you lose a job, or suddenly get hit with extraordinary expenses, or just can't make tax and mortgage payments, or otherwise forced to sell, you could be wiped out under the tough new bankruptcy laws.

So please read Talbott's book closely: Is your home is at risk? Then quickly decide whether you can hang on in a housing collapse, a stock market bear and another long recession. And if not, consider taking his advice to sell now.