Thursday, December 27, 2007
Just like 2003-2006 where in retrospect we can categorize the time as booming years of economic thrill/euphoria, brought about by easy money and cheap credit, I believe 2008 will eventually be regarded as the year of desperation and panic brought about by falling home values, falling stock market, falling dollar, declining state revenues/budget cuts, rising inflation, increasing unemployment and dying credit markets.
The major inflection-point leading into 2008’s “Desperation and Panic” was crossed in 2007 with the the seizure in global credit markets. As US mortgages began defaulting in large numbers, hedge funds eventually collapsed, Commercial Paper couldn’t be offloaded, banks began to distrust one another, lending standards tightened and the contagion spread to a myriad of other areas (many still unknown or unacknowledged).
Even with the anxiety/fear brought about by the 2007 global credit seizure, the masses were appeased by the constant "denial" of mainstream experts who assured everyone that all was well (the US economy is robust--never stronger); by our Federal Reserve who “had control of the situation”; and by the fact the US stock markets were “in the green” and a great bargain at these P/E ratios…
Note: I expect 2007, in hindsight, to eventually be viewed as “The year of denial”.
As the ongoing Credit Crisis intensifies into 2008, the spillover effect, when combined with the massive wave of new mortgage resets, will crush the already faltering US housing market, and one or more of the large financials (Citigroup, Goldman, Merrill, etc) will most likely have to publicly declare insolvency (which we already know they are). Their recent, yet surprising losses on toxic-waste, marked-to-model, tier-III assets will only be exacerbated by new bond insurer markdowns and eventually, with increasing defaults and rising US foreclosures in 2008, their massive losses will no longer be containable. This candid information, when released, will prove to be staggering and will finally provide the equities markets with the irrefutable justification needed for the massive haircut that will ensue shortly thereafter.
Simultaneous with the above issues and related in nature, we will also soon see unemployment numbers rise as credit continues to dry up (spilling over into commercial loans, auto/boat/motorcycle credit, credit cards, etc) and consumer spending and confidence falls—compounding the equities problems mentioned above.
Furthermore, the dollar will continue to fall as the Fed floods the banking systems with liquidity in their attempt to bail out the financial systems and reinvigorate credit markets. This devaluing of the US dollar will stoke consumer inflation and bring about increased oil prices—causing gas prices to cross the $4 gallon mark in 2008. Public outrage will ensue and politicians will be forced to action (I’m from the government and I’m here to help)—ultimately making the problems worse.
These factors mentioned above, along with many others left unmentioned, will eventually overwhelm the ability of our statistical government manipulators, and skewing economic data to appease/console the masses/markets will become next to impossible—else they risk public backlash and full acknowledgement of their manipulation. This new forthright information will provide the hard evidence for Recession and it will be officially announced in 2008. (I say “official” because we are already in a recession, but falsely reported Inflation, GDP, unemployment figures and numerous other manipulated statistics currently state otherwise--see my link on Inflation or Hyperinflation for a couple of examples).
Bottom Line: The economic euphoria of 2003-2006 is gone, 2007’s denial is nearly over and it will be replaced in 2008 with a new economic era--where desperation, panic and ultimately recession will prevail
Thursday, December 20, 2007
So I turn to the next available news channel and lo and behold they are discussing the same… Geesh, I got to turn this crap off.
On my drive home from work, I tune in to AM talk-radio hoping for some intelligent discussion. I typically listen to Savage or Beck, but it’s a bit early today, and as I’m scanning through my usual channels, guess what the topic of the day is? You got it--Spears! Holy cow--I’m really irritated now. Aren’t there any intelligent people out there? Aren’t there more important things going on in the world?
Maybe it’s not really the media’s fault, as they are only catering to the attention span of the majority--ignorant consumers who live for today and care more about Dancing with the Stars, Cribs, the latest celebrity gossip and the next football game spread than most anything else.
Possibly these folks are just trying to vicariously live through someone else’s experiences, wondering what it would be like to be rich and famous for a day. Perhaps it just that people are just too shallow and superficial to relate to the realities of the world--(oh, it’s all so confusing out there, so I’ll just stick with what I know).
Or maybe, just maybe, the media conglomerates have been successful in their efforts to dumb-down society to the point that by discounting real-world problems (and real-world solutions), the nation’s people stay ignorant/oblivious, while the monied elite influence government policy through new legislation—to their own benefit and bottom lines (example—outsourcing of jobs and the fleecing of America).
It’s all a facade:
No longer do we have a Government of the people for the people. Our leaders have been and are continuing to neglect us--to the benefit of corporate interests. Sure they make huge promises to get elected, but once in office, it’s all about the high power lobbyists and corporate bottom lines. I can’t tell you how disgusted I am with the current administration (who I helped to put in office) and the entire pack of leading presidential candidates—they are all con men/women who are going to tell you what you want to hear, get into office then turn the other cheek. Don’t believe for a minute that they care about you or your future—they are interested in themselves, their futures, their wallets and once in office they will act just like everyone else—bowing to corporate special interests.
Power and Greed are two very powerful forces:
Though I highly doubt our current and future politicians actually have a set agenda to intentionally harm our country, I do believe many of these elected leaders are just as ignorant as the masses who elected them, and once in office, the power and greed gets the best of them, and they are easily persuaded (by others who have already kowtowed to special interests) to work an agenda at the behest of corporate desires--unwittingly working to the detriment of the people and of the country…
The ironic part is: these detrimental agendas are usually sold to the public as “Good Things”… and we believe.
The sad part is: those who question the issues or who believe differently than the message our mainstream propagandists spew are labeled “Conspiracy Nuts” by the media and ignorant masses.
The media conglomerates constantly fill our brains with mush to distract us from reality, while politicians pass legislation to take away our rights, spend like drunken sailors, devalue our currency, outsource our jobs, increase our debt, take away our sovereignty (e.g. North American Union), ignore our immigration concerns, create booms, bubbles and busts, etc and the masses could care less, because American Idol is on tonight - the majority are oblivious, ignorant and happy and the powers that be like it that way…
As I stated in a previous post (3rd World America): 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.
Well, our once great nation is now collapsing before our eyes. Foreigners own HUGE PORTIONS of US Domestic Industries, Banks are insolvent (soon to fail w/banking runs), millions of families are going to lose their homes, inflation is raging, the dollar is tanking, Government spending is out of control, outsourcing continues, the North American Union plan continues while immigration issues are ignored, etc, yet we fail to open our eyes to see what is happening. It’s quite appalling that we’ve sunken this far and unless the masses pull their heads out of the sand quickly, we are doomed.
Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.
The above quotation is old, and most people have attributed it to Alexander Fraser Tytler, Lord Woodhouselee (1747-1813), a Scottish attorney and writer, although it has been attributed to several other men as well.
On Banks & Bankers:
"Give me control of a nation's money and I care not who makes it's laws."-- Mayer Amschel Bauer Rothschild, Godfather of Central Banking
"Whoever controls the volume of money in any country is absolute master of all industry and commerce." -- James A. Garfield, President of the United States
"I have never seen more Senators express discontent with their jobs....I think the major cause is that, deep down in our hearts, we have been accomplices in doing something terrible and unforgivable to our wonderful country. Deep down in our heart, we know that we have given our children a legacy of bankruptcy. We have defrauded our country to get ourselves elected." -- John Danforth (R-Mo)
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs." -- Thomas Jefferson, U.S. President.
"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance." -- James Madison
"A great industrial nation is controlled by it's system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world-- no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men." -- President Woodrow Wilson
"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States." -- Sen. Barry Goldwater (Rep. AR)
"The financial system has been turned over to the Federal Reserve Board. That Board administers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money" -- Charles A. Lindbergh Sr.
"The Federal Reserve banks are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this nation is run by the International bankers." -- Congressman Louis T. McFadden (Rep. Pa)
"Capital must protect itself in every way...Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd." -- Taken from the Civil Servants' Year Book, "The Organizer" January 1934.
Sunday, December 16, 2007
Banks are feeling the pain and it’s only going to get worse:
Merrill Lynch downgrades banks
Bank of America, J.P. Morgan, Wachovia cut on credit, recession risks. BOSTON (MarketWatch) -- Analysts at Merrill Lynch & Co. downgraded several banking stocks Wednesday, saying rising credit risks and an economic slowdown could further pressure corporate earnings.
UBS writes down $10 bln, Singapore injects capital
ZURICH (Reuters) - Swiss bank UBS unveiled $10 billion in shock subprime writedowns on Monday and said it had obtained an emergency capital injection from the Singapore government and an unnamed Middle East investor.UBS, which has been severely battered by the U.S. subprime mortgage meltdown, issued a profit warning and cancelled plans for a cash dividend in moves that depressed the company's shares and those of its rivals.The $10 billion charge was one of the largest writedowns by any global bank since the subprime crisis broke and was the latest sign of the devastation wrought upon some of the world's largest financial institutions from the credit crisis.The announcement sent UBS's shares tumbling as investors took fright from the anticipated dilution of their share of earnings.
Bank of America Corp will liquidate a $12 billion cash fund
Dec. 10 (Bloomberg) -- Bank of America Corp. will liquidate a $12 billion cash fund for wealthy clients and institutions, the largest investment of its type to close because of losses tied to the collapse of the subprime-mortgage market.The fund, Columbia Strategic Cash Portfolio, was sold as an alternative to money-market funds, offering a higher yield by taking more risk. It was the biggest so-called enhanced cash fund, with $33 billion in assets two weeks ago before an investor pulled more than $20 billion, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence.``This could be the death of enhanced cash funds,'' Crane said. Such funds hold about $850 billion in assets.
Washington Mutual Cutting Dividend and Jobs
Washington Mutual, one of the country's largest lenders, said yesterday that it would exit the subprime lending business, cut its dividend and eliminate 3,150 jobs.The company said it was acting in the face of an "unprecedented challenge" in the mortgage and credit market, which it expected to continue through next year.The company said the mortgage market was undergoing a fundamental transformation and predicted a prolonged period of reduced lending. It said national mortgage originations would shrink by 40 percent next year, falling to $1.5 trillion, compared with $2.4 trillion this year.
MBIA Gets $1 Billion From Warburg
MBIA Gets $1 Billion From Warburg Pincus, Sees LossesMBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC. The added capital may help avoid a cut in MBIA's AAA credit rating, which is under scrutiny by Moody's Investors Service, Fitch Ratings and Standard & Poor's. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.
Desperate Central Bankers to the Rescue:
In one of the largest concerted Central Banking operations ever, five of the world’s key Central Banks joined together last week in an effort to restore confidence in the world’s financial system.
Central bank liquidity plan hatched at G20-sources
Kleinmond, South Africa, is where the world's top central bankers last month first gave shape to Thursday's unprecedented shot in the arm for money markets gripped by fear and panic ahead of the holidays. Heads of the various central banks involved -- the Fed, the ECB, the Bank of England, the Bank of Canada, and the Swiss National Bank -- were in further contact last week, the sources said. The Bank of Japan also offered its support. "It all came together last Friday," said one G7 source. With the ECB representing France, Germany and Italy, and the Bank of Japan also being involved, this was a coordinated G7 operation between the central banks as much as anything. Sentiment has been deteriorating fast in the global financial markets," the source said. "This operation is less about liquidity and more an attempt to restore confidence."
Confidence is just what the market is lacking. Trading between financial institutions has all but dried up and interbank lending rates have shot up. The fear is banks have still to announce huge losses linked to investments in dodgy U.S. mortgage debt in addition to multi-billion dollar write-offs already announced.
Central bank moves to inject more capital into banking system
WASHINGTON — In a joint move with European central banks designed to ease the grip of a dangerous credit crunch, the Federal Reserve unveiled a plan Wednesday to pump billions of dollars into tight-fisted U.S. banks so they will be more willing to lend to people, businesses and each other. Sharply criticized by Wall Street on Tuesday for a modest interest rate cut that critics labeled as too timid, the nation's central bank announced the biggest concentrated injection of funds into the economy since the Sept. 11, 2001, terrorist attacks. In doing so, it signaled its profound concern that the financial crisis could spawn a deep recession.
The Fed's novel plan for providing more funds to the economy establishes temporary "auctions" of loans to banks that will total $40 billion in December and an unspecified amount in January. Fed officials said the temporary auctions could be extended and could become a permanent monetary feature. In addition, the U.S. central bank will make $24 billion available to the European Central Bank and the Swiss National Bank in a complex swap arrangement that will increase the supply of dollars in Europe. The Bank of England increased the amount of funds it will auction in its money-market operations.
The aim of the action is to inject more liquidity, or funds available for lending, into a banking system that has been reeling from the housing-induced credit crunch. Some banks have been reluctant to make loans to each other, economists said, because interest rates have been too high. Commercial banks can now borrow directly from the Federal Reserve through its so-called discount window. The Fed has cut its discount rate several times in recent months to induce banks to use it, but it has been disappointed at the response. Many banks are reluctant to borrow from the Fed because the discount rate has long been viewed as a "penalty rate" that carries a stigma for a borrowing bank.
The new Temporary Auction Facility, as it will be called, would seek to avoid this problem. The Fed said it would keep the names of borrowers secret. "There is no reason to believe there would be a stigma associated with the use of this facility," a senior Fed official told reporters. In addition, the interest rate on these loans will be determined competitively. Under the new system, banks could put up a wide range of collateral, including subprime-mortgage-backed securities, which have been a central element in the credit problems, Fed officials said.
The Fed Comes Out Blazing
The next Federal Reserve policy meeting isn't scheduled until the end of January, but there will be no winter break for the central bank or its chairman, Ben Bernanke. The continuing global credit crunch stemming from the tumbling U.S. housing market has pushed the Fed and other major central banks into their most activist role since the Asian currency crisis in 1997. First up are two $20 billion loan auctions this week for cash-strapped banks at rates far below what the Fed charges for loans from its "discount window." (Two more auctions will be held in January.) They are one half of a two-pronged financial rescue effort announced by the Fed and other big central banks the day after the financial markets booed a skimpy quarter-percentage-point cut in the federal funds rate. In addition, the Fed set up lines of credit with foreign central banks to allow them to pump dollars into their banking systems.
"In effect, the Fed will lend dollars to these central banks, which can then lend them to commercial banks in Europe," says Jay Bryson, global economist at Wachovia. "The actions have the potential to end the crunch that has paralyzed credit markets for the past few months.... I think the Fed is getting ahead of the curve." (My 2 cents—I don’t think so)
So Will The Central Banking Rescue Plan Work?
Central bankers fire off their last cannon
Central bankers have now fired off their last cannon, so we had all better hope it does. There hasn't been a banking crisis quite like this one in decades. The Bank of England's mistake was to think that by providing any assistance to markets at all it would be bailing out those who had been reckless in their lending and funding and would therefore create moral hazard. What has now been recognized is that the sickness has afflicted the banking system as a whole. The good are being punished alongside the bad. Without treatment, what is at present still just a banking crisis of limited impact on the real world threatens quickly to turn into an all-encompassing economic malaise. Let's hope that policymakers haven't left the medicine too late.
Money-Market Rates Fail to Respond to Bank Measures
(Bloomberg) -- The biggest concerted effort by central banks in six years to restore confidence in global money markets is showing little sign of success. The rates banks charge each other for three-month loans held at seven-year highs for a second day after policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to ease the logjam in short-term credit markets. The cost of borrowing in euros stayed at 4.95 percent, the British Bankers' Association said today, up from last month's low of 4.57 percent and 3.68 percent a year ago. ``The market clearly doesn't believe central banks can do anything about this crisis,'' said Nathalie Fillet, senior interest-rate strategist at BNP Paribas SA in London. ``This is not going to be a magical solution to the problem.'' Policy makers are reacting to more than $70 billion of losses announced by financial institutions this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralized-debt obligations and structured investment vehicles, or SIVs. Citigroup Inc. said yesterday it will take over seven investment funds and assume $58 billion of debt to avoid forced asset sales.
The surge in money-market rates since August is fueling concern that the slump in bank lending will exacerbate a slowdown in global economic growth. Goldman Sachs Group Inc. in a report last month estimated losses related to record home foreclosures may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said. In a sign of banks' increased perception that loans are becoming riskier, they are demanding 95 basis points more than the European Central Bank's key interest rate to lend three- month cash in euros, up from an average of 25 basis points in the first half of the year.
Economic cross-currents hit Wall Street
NEW YORK (AFP) — Wall Street's outlook remains cautious after a turbulent week as investors confront rising concerns about an economic downturn as well as resurgent inflation data. Even with the Federal Reserve joining forces with central banks around the world to combat a global credit squeeze, investor’s tensions are still running high. To make matters worse, data this week showed inflation gaining momentum, making it harder for central banks to cut rates and stimulate growth. Consumer prices rose at the fastest pace in more than two years last month, and wholesale prices posted the biggest gain in more three decades.
As I’ve stated numerous times in the past, the Fed is in a panic trying to battle deflation. With new concerted efforts, such as those mentioned above, they may be able to slow the hemorrhaging of our system, but they CANNOT save it—it’s far too late for that.
Looking at the graph above, I personally believe our equities markets are somewhere between “Denial and Fear”, whereas Bernanke and the Boyz are somewhere between “Desperation and Panic”. Once the markets finally wake up to reality (that the crunch is getting worse) we are probably going to see huge sell offs--to be followed by more Fed Panic, more financial intervention, etc.
Bottom Line: The Fed will continue to intervene and will stop at nothing to save our banking systems. This incessant intervention will eventually hyper-inflate our currency, but the lending crisis will still remain/get worse (credit will become unavailable). These issues will probably take several more years to play out, so I don't think we will see the ultimate bottom, and the ensuing Economic Depression/Kondratieff Winter, till 2010-12.
Sunday, December 09, 2007
Kondratiev observed certain characteristics about the growth and contraction phases of the long wave and among them, he detailed the number of years that the economy expanded and contracted during each part of the half-century long cycle.
The fifty to sixty year cycles go through four distinct phases: beneficial inflation (spring), stagflation (summer), beneficial deflation (autumn), and deflation (winter). Since, the last Kondratieff cycle ended around 1949, we have seen beneficial inflation 1949-1966, stagflation 1966-1982, beneficial deflation 1982-2000 and according to Kondratieff theory, we should now be in the (winter) deflation cycle which leads to a depression.
So what happened, why are we not there yet?
In an effort to stave off a US recession after the stock market collapse in 2000-2002 and the 9/11 terrorist attacks, Fed Chairman Alan Greenspan panicked and cut the Federal Funds Rate 13 times over a period of two years, until the rate reached its lowest point (1% in Jun 03) in over forty years. This aggressive Fed action, along with massive printing of money (increasing liquidity) and a lowered tax rate (remember the Bush income tax cuts?) stimulated the US economy and kept the recession very short. With a flood of cheap new money available, US consumers went on a spending spree, the reinflation process began and winter was delayed.
Had Greenspan not panicked and allowed market forces to work, it is more than likely Kodratiev’s theory would have proved correct already, but Alan staved off our looming Kondratieff Winter when he held interest rates at this 40-year low to inflate his next bubble--the massive US housing bubble.
It was a complete success for the Maestro and our deflationary depression was defeated… Well, at least temporarily…
Fast forward to today:
By now it certainly is no secret to anyone that the US housing bubble has burst; that credit markets are in unprecedented turmoil; or that the Fed is back to battling some of the same (albeit larger) pressures we faced earlier this decade.
Last month I wrote:
“ The problem right now is: The largest speculative bubble in our world’s history is beginning to deflate (Housing Bubble) and its reverberations are being felt across the entire globe: Hedge funds are collapsing, bank write-downs are massive, toxic waste marked-to-model Commercial Paper (CP) sitting in off-balance sheets cannot be offloaded (and will soon have to be accounted for), credit markets are drying up, and home foreclosures (the catalyst to all these problems) are just now getting started.”
“ The Fed and US banking systems understand that deflation is setting in and are now operating in crisis mode... In a brazen attempt to prevent a collapse of the entire banking/financial systems (and hence the US Economy) “Helicopter” Ben Bernanke (under severe pressure from Treasury Secretary Henry Paulson and the many heads of leading financial institutions) has sacrificed the dollar in the hopes of printing/inflating our way out of this mess.”
In two of my recent posts (Inflation or Hyperinflation) and (Will Bernanke Cut on Dec 11th) I told you that Ben Bernanke and crew were trying to fight deflation with new inflation and then explained how their efforts were an attempt to bail out the banking/financial system—actions that were creating massive consumer inflation and diminishing the dollar’s purchasing power.
I feel that Ben Bernanke (using the same old bag of tricks from Alan Greenspan’s playbook) will continue to lower rates (through 08) while simultaneously increasing liquidity, but in due course (with locked up credit markets) he will be relegated to the act of pushing on a string and the markets will finally wake up--realizing the emperor has no clothes.
I previously wrote vis-à-vis our current banking/credit crisis:
“Reduced credit leads to reduced money creation, which leads to reduced spending which leads to a deflationary environment. That is where we are today… The beginning of a deflationary environment poised to implode the economy…”
Could this lead to a Kondratieff Winter?
I think so, and so do many others…
Even if, prior to this reading, you weren’t familiar with Kondratieff Cycles, I’m sure you can infer how inflation leads to spring (up-cycles) and deflation leads to winter (down cycles) and how now, with housing and credit markets cratering, deflation is setting in.
Though already familiar with the Kondratieff Cycle myself, I recently had the time to read a superb 31 page article from Ian Gordon (from over at the Long Wave Analyst) that described how many of the economic events today parallel very similar events of the 1920’s and 30’s, and how the delayed Kondratieff Winter is once again standing at our doorstep, but with much colder winds this time.
If you have the time yourself, I highly recommend you read this entire article! Again, it’s rather lengthy but well worth your time. THIS IS IT!
A few snippets below:
“This is it. The Kondratieff winter is now underway in earnest and nothing can stop it. The huge credit expansion initiated by the Maestro, the past Federal Reserve Chairman, Alan Greenspan, has now reversed. The ensuing credit contraction will be devastating. It will take down creditor and debtor alike and will result in a destructive and frightening deflationary depression.”
“This time it is different. As the 4th Kondratieff winter unfolds, most of the world is party to the debt bubble and the congruent speculative mania. The sheer size of this situation is at least 100 times greater than 1920s. Thus, the repercussions are likely to be far more punitive than during the ‘dirty 30s’.”
“Never in the history of the world has there ever been a credit bubble of the recent magnitude. All made possible by a worldwide fiat monetary system, which has been grossly mismanaged by the exorbitant use of the printing press. But nowhere more so than in the United States, which had a moral responsibility to temper her fondness for debt, because of the extraordinary privilege accorded to the dollar as the world’s reserve currency. Now the chickens are coming home to roost. The credit bubble is rapidly losing air. It can not be re-inflated, much as the Federal Reserve will try. The sheer size of the bubble and the attendant speculative excesses makes the task impossible. These speculative excesses include a derivatives market valued at approximately $525 trillion, a US stock market valued in excess of $17 trillion, a housing market currently valued at about $21 trillion, but now rapidly depleting in value, a host of packaged debt instruments with little or no value. The banking system is already beginning to show signs of strain from the initial credit problems. When credit can no longer be expanded, it contracts. Credit contraction is deflationary because the economy collapses without the continued sustenance of debt. Deflation is further exacerbated by a collapse in asset prices.”
“Regrettably, many people believe that their leaders can always positively control the future. It is a mistaken belief that always costs them dearly.”
“Following the previous Kondratieff autumn stock bull market in peak in 1929, many former heroes paid dearly for their hubris. Up to 1930, Andrew Mellon was touted as perhaps the greatest Secretary of the Treasury since Alexander Hamilton, who was appointed to that position in 1789. Thereafter, to save Mr. Mellon from possible impeachment, President Hoover appointed him as Ambassador to Great Britain in 1932.” A quick thought--will this eventually turn out to be Greenspan's Fate?
With all this said you may be wondering when I think the winter season will set in? Well, as previously stated in other posts, if we are fortunate enough to evade a complete systemic banking failure (If not--then all bets are off), I feel the powers that be will find a way for us to muddle through until ~ 2010 (hyper-inflating and killing the dollar along the way), but fortunately (or unfortunately depending on how you feel) I don't think Ben “The Helicopter-Man” Bernanke can inflate forever and Kondratieff Winter will arrive ~ 2010-2012.
Saturday, December 01, 2007
Knowing that prices were rapidly rising and with interest rates soon to rise, I started (in late 2003) seriously researching housing issues. Eventually I decided to act on my basic understanding of the problem and ultimately sold my home late in the mania phase (end of 2004--just a bit early, but no one can pick THE top), and made out quite well.
Later, though completely out of the housing ownership market and now renting, I continued on with my voracious research and gained a much better understanding of the myriad of complex economic issues that impacted this housing bubble. I eventually tried to pass my knowledge on to those around me, but to many, I was merely a gibbering lunatic who didn’t know what the heck he was talking about. In due time, I became frustrated with my unsuccessful attempts in convincing these media-hyped & fed, brainwashed individuals, so I decided to take to the web--to possibly help others who were themselves trying to understand the developing situation. Ultimately, I started this Blog back in December 2005 with my first post.
Though I didn’t specifically target Las Vegas’s housing bubble in my routine posts, I did occasionally address this booming Valley bubble market (see links below):
Las Vegas—A House of Cards Bound to fall
Las Vegas Housing Inventory Breaks 20,000 Mark
Las Vegas Housing Party is Nearly Over
Today’s post (LV housing bubble update) is based on recent developments in the market, so please allow me to share with you some new data and current media releases that (I believe anyway) irrefutably prove that my Las Vegas bubble predictions have been correct (thus far anyway—as we have much farther to deflate):
REAL ESTATE COMPANIES GOING BANKRUPT:
Prudential Americana Group Filed For Bankruptcy
Nov 28, 07: Prudential Americana Group, one of the largest residential real estate firms in the Las Vegas Valley, is filing for Chapter 11 bankruptcy so it can reorganize its debts while continuing operations.
Prudential Americana is the second big Las Vegas realty firm to seek bankruptcy protection in recent months.
Jimmy Dague, president of Vision Properties doing business as Century 21 Advantage Gold, filed for Chapter 11 bankruptcy protection in August 07.
Nevada First in Preforeclosures
Nov 27: Nevada leads the nation in the actual number of preforeclosure filings through October with 40.5 preforeclosure filings per 1,000 households.
Nevada had 30,276 preforeclosure filings through October, an increase of 106 percent from last year. The state's per capita rate of 4.05 tops Florida (2.86), Arizona (2.05) and Colorado (2.04).
Foreclosures.com also showed Nevada was No. 1 in real estate owned filings, or properties owned by the lender, at 10,703 through October, or 1.45 per capita. Real estate owned filings climbed to 54,418 nationwide in October, up 24 percent from 43,941 in September.
The numbers are grim for hundreds of thousands of homeowners trapped by rising mortgage payments, stagnant home prices and tightened credit markets, Foreclosures.com President Alexis McGee said.
31,000+ Clark County Foreclosures
Based on Realtytrac Data, > 31,000 homes in Clark County are in some state of foreclosure
FUTURE WEAKENING EXPECTED:
Nov 28: U.S. homebuilders meeting in Las Vegas said the housing market probably will weaken in 2008 as foreclosures rise and banks tighten lending standards.
Demand has deteriorated in many markets, limiting the prospect of a rebound in new home sales, chief executive officers for D.R. Horton and Beazer Homes USA said Tuesday at a JPMorgan Chase & Co. conference at Mandalay Bay.
Next year "is going to be worse than '07 for us and for the industry in general," said Donald Tomnitz, CEO of Fort Worth, Texas-based D.R. Horton, the fourth-largest U.S. homebuilder.
The housing slump that began in 2005 has erased about $36 billion in stock market value for the largest 15 homebuilders this year through Monday. New home sales dropped 23 percent in the year through September.
California and Florida housing markets continue to weaken and the Las Vegas market is "soft," Tomnitz said. New home sales in Phoenix will likely worsen in 2008, he said.
MEDIAN PRICES FALLING; INVENTORY GROWING YoY:
Existing home sales (median prices)
Based on Housingtracker.net Data, existing home inventories have increased >25% and median prices have dropped >10% YoY
HOMEBUILDERS DESPERATE; SLASHING PRICES:
Ryland reduces prices; Deep Discounts
Every Ryland Homes community across the United States will offer special savings on quick move-in homes during the Ryland Homes Savings Spectacular Nov. 9-11, said Dana Rogers, Ryland's vice president of sales and marketing.
The builder will offer unprecedented savings at all of its communities, including those in the Las Vegas area, Rogers said.
"It takes a lot to impress today's home buyer," Rogers said. "That's why we're going big and offering savings of up to 25 percent or more off the base price of the home."
Rogers gave specific examples illustrating the extent of the discounts. At the Providence community, the price of the Pearl residence, home site No. 199 in the Auburn Collection, will be reduced from $442,990 to $316,990 -- a savings of $126,000, he said. The Angora residence, home site No 167 in the Ellingwood neighborhood at Mountain Edge, will be reduced from $541,790 to $393,790 for a savings of $148,000, he said.
Lennar Real Deal—HUGE REDUCTIONS MUST SEE (Very Small Sample Below)
Builders are sparing little expense in a bid to entice hesitant buyers into a soft housing market.
Virtually every major builder in the Las Vegas Valley has pushed big sales this fall, and the price breaks have been steep.
Pulte Homes marked down prices 15 percent on certain models, with discounts of up to $80,000 on some completed new homes during one October weekend. The builder's Del Webb subsidiary sliced $55,000 from some of its asking prices. Rhodes Homes has offered as much as $100,000 off on finished houses. Lennar Corp. has slashed prices on some models by about a third; Lennar cut the cost of a 5,000-square-foot home in its Earlstone community from $911,490 to $662,490, and a 4,498-square-foot home in its Silver Creek subdivision went from $807,290 to $612,290. Centex Homes has clipped $25,000 to $100,000 off the prices of some of its existing homes, and is ponying up as much as $21,000 in closing costs on some models. American West Homes' valleywide "liquidation sale" on Nov. 10 and Nov. 11 featured savings of up to $143,000.
After Astoria Homes dropped prices on standing inventory by as much as $200,000, or 27 percent, Oct. 12-14, traffic at least doubled across the board at Astoria communities, and even tripled in some cases, said Tom McCormick, the company's president.
Data signal slowing construction
Southern Nevada's construction industry showed more signs of slowing in the third quarter, the Las Vegas chapter of Associated General Contractors reported.
Taxable construction spending fell 14.8 percent over the past 12 months to $3.13 billion, largely a result of declining residential building permits. After three years of high-volume development, Las Vegas has experienced a 46 percent drop in single-family permits and 56 percent drop in multifamily permits.
Clark County has the nation's sixth-highest foreclosure rate and has one of the highest concentrations of subprime and adjustable-rate mortgages, the AGC market brief noted. Many housing analysts suggest the trend will worsen in the next 12 months as some 2 million mortgages nationwide reset to higher interest rates.
Construction employment fell 1.2 percent from a year ago to 108,500 in September, representing 11.6 percent of Southern Nevada's total employment base.
TAX REVENUE FALLING:
Nevada Taxable Retail sales falling
Taxable sales in Nevada faltered yet again in September, marking the sixth straight monthly slide in a key revenue generator for state government.
Thursday's report showed a statewide 1.5 percent drop compared with September 2006, tabbed to the housing slump as well as a growing reluctance overall to spend.
"People may not have as much discretionary money. That's how I read it," state economist Jim Shabi said.
Taxable sales are the state's biggest source of revenue, and the Department of Taxation report shows the general fund portion of the state budget is down $24.4 million, or 2.3 percent, from Economic Forum projections a third of the way into the 2008 fiscal year.
Collections on business tax and license fees as well as excise taxes also are lagging, the report showed.
Last month, Gov. Jim Gibbons directed state agency heads to prepare contingency plans to cut spending by 8 percent.
State Tax Revenue off the mark
CARSON CITY -- State government's financial woes worsened Thursday, when the Department of Taxation released reports showing tax revenue falling further behind projections.
Revenues from four major taxes -- sales, business payroll, insurance and real property -- were below expected levels for July through September, the department announced Thursday.
As a result, Gov. Jim Gibbons might have to cut more than the anticipated $285 million from the state's $6.8 billion, two-year budget when he hacks state spending in January. "It is certainly going to make the hole bigger," state Budget Director Andrew Clinger said. Gibbons has refused to identify where he might cut.
Clinger denied that Gibbons has asked state agency directors to request employees voluntarily take two weeks off without pay to avoid layoffs. That option, however, might be gaining favor with department directors, he said. "The departments are looking at anything they can to make the cuts," Clinger said.
SOUTHERN NEVADA ECONOMY: Indicators plummet to '07 low
The downturn in Las Vegas' real estate market, combined with a 5.4 percent decline in gaming revenue for August, dragged the Southern Nevada Index of Leading Economic Indicators to its lowest level of the year.
The October index, based on August data, dropped to 132.67, with six of the 10 series contributing negatively. Its down from 133.46 in September, but remains slightly higher than a year ago. The index has relinquished its gain from the beginning of the year, when it stood at 132.98.
"The Las Vegas economy in August performed at less than a stellar rate," economist Keith Schwer of the Center for Business and Economic Research said.
Residential building permits continue to plummet by more than half and commercial permits are off nearly 20 percent. Taxable sales fell 5.2 percent in August. Housing has "taken a bite out of the robust expansion" of the past few years, he said.
Based on the data above, I hope that you are now inclined to believe that my Las Vegas Housing market forecasts have, thus far, been correct. With that, I would now like to state for the record that I believe Commercial Real Estate is the next bubble to pop.
Commercial Real Estate Bubble Economicrot
Back in early 2006, my Blog was mentioned in a BusinessWeek article discussing the fact that there were many folks ranting about the housing market bubble, but few thought that there was a Commercial Real Estate bubble. I quickly fired back that we would, in due time, see this one pop too. Though, at the time, I did feel we would be in a recession by now and that Commercial Property would have already followed suit, I do believe the first signs have finally appeared and the Commercial Property Bubble is ready to let out some major pressure.
Commercial Real Estate next: WSJ & Calculated Risk
The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report set to be released today by Moody's Investors Service.
The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.
The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate.
Historically the Commercial real estate market trails the residential real estate market by about a year and half. So it appears the CRE slump is right on schedule
Commercial Real Estate next
Nov. 28 (Bloomberg) -- In the bond market, commercial property investors are about as creditworthy as U.S. homeowners with subprime mortgages.
``Commercial real estate is a full-blown bubble that feels very much at a bursting point,'' said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm. ``There's a fairly toxic mix of factors at work.''
The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.
The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent, according to Moody's Investors Service. Banks worldwide are holding $54 billion of unsold commercial mortgages, according to data compiled by New York-based Citigroup Inc. that includes fixed and floating-rate debt.
Growth in LV has been absolutely phenomenal over the last decade--a decade of prosperity driven by cheap credit (both business and personal) and rising asset values, creating a consumer wealth effect and influencing a carefree lifestyle. People (both local and tourist) had lots of cheap, easy money and access to huge credit lines if they needed more to spend in the City of Sin (all in the name of having a good time and living for the here and now). That is however coming to an end! Credit has started to dry up, (right now it is mainly influencing mortgage credit--months from now it will impact a myriad of other areas—Commercial credit, Car loans, Credit Cards, etc) and the huge party bills are coming due.
As stated in previous posts, Las Vegas’s economy has been completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc) and the city lacks any real or substantial diversification. When tourism & discretionary spending finally start to decline (due to National negative savings rates, rising inflation and falling home values), gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.
Those locals who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer!
Currently, with housing values falling, the wealth effect is under strain and many people are having difficulty understanding what has happened to the housing market, while most are still holding on to the false hope it will recover somewhat quickly. In the meantime, these folks have a mortgage that must get paid, all while coping with higher gas, food prices, tuition, insurance, energy bills, etc. Many are already strained to the max and the black hole of upcoming teaser rate mortgage resets will finally set them over the edge. (Note: refinancing will not be an option for those who have purchased within the last 3 years because they are already underwater; additionally many who have owned for decades used the cheap rates and housing boom to extract available equity--to live beyond their means; so they too cannot refinance). This same problem is beginning to impact millions from across the nation!!!
Additionally, the home ATM machine that people used to draw money out of regularly has finally dried up, so they have ended up resorting back to the credit cards (the same ones they paid off with that home equity line of credit last year) just to make daily ends meet. This is going to end horribly!!!
BOTTOM LINE: When tourism starts to wane, due to people running out of discretionary cash, gaming/hotel industry layoffs will follow, cascading the impacts of the already doomed Valley housing market, as more locals will be unable to meet their monthly mortgage obligations. Reduced spending levels, increasing layoffs, magnified home foreclosures and tightening credit conditions will cause a doubly painful domino effect on the Commercial real estate market and in due time, the impacts will be extremely painful to the entire economy. State Tax revenues will tank, crys for budget cuts will prevail and the government layoffs to follow will only exacerbate/compound the situation.
I think one of my readers summarized the situation best: “ Las Vegas lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction.”
Guess only the future will tell...
Tuesday, November 27, 2007
- Do you want to know why we have a completely ineffective border policy?
- Do you want to know why the Dollar has been sacrificed?
- Do you want to know why we've outsourced our manufacturing base?
Well, many of these answers lie below--It's all about big business, corporate profits and unfulfilled family promises.
This first video is one of our elected representatives Rep. Marcy Kaptur (D. Ohio) discussing NAFTA and Globalists on CSPAN -- Finally, a non-insider representative, looking out for our (the people's) best interests. Why don't we see this type of discussion from our Presidential front runners? hmmm...
Wake up people! Before it's too late!
The rest of these videos speak for themselves. Therefore I will comment no more.
**CAUTION: Foul Language in this video**
Saturday, November 24, 2007
If Federal Open Market Committee (FOMC) members were to center their December 07 rate decision around the basis of Treasury Secretary Paulson’s continually spouted “Strong Dollar Policy” there is absolutely no way they could make a rate cut, as the dollar is falling off a cliff and its rate of decent is increasing.
Bloomberg 24 Nov: The U.S. Dollar Index touched 74.484 yesterday, the lowest since the gauge started trading in 1973. The index tracks the value of the dollar against six major currencies, including euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
So what is happening in the financial realm and why is the dollar falling so fast? Well, a big part of the answer to this question relates directly to debt and the creation of money.
For those of you who don’t know, every dollar in circulation today was actually borrowed into existence and was created from nothing. For many years this creation of new money through debt was not a problem. As long as the debt could be adequately serviced and various conduits (banks) were open to/available to take on new debt, the system worked just fine.
Recently however, it has become abundently clear to our Federal Reserve Policy makers that massive US debt loads are proving very difficult to service, while at the same time our banking systems are having problems allowing for the creation of new debt (hence new money). This is all VERY BAD news that could cause a systemic implosion if not dealt with swiftly. Therefore, the Fed is monitoring this crisis closely and is lowering short term borrowing rates while injecting massive amounts of new money (through new bank debt) into the banking systems. This combination of excessive liquidity (monetary injections) and lower rates is causing the value of the dollar to plummet. See video below for a better understanding of this whole debt-to-money process (money as debt)
MONEY AS DEBT (~11 seconds to load)
Money As Debt Part 2
Video Summary: money is created through debt and in order to keep an economy expanding, debt loads must continually expand (increasing money supply) or else a deflationary environment sets in.
As previously stated: today, after many years of cheap/easy credit (much of it subsidized by foreigners--we used to suck up 80% of the world’s surplus savings) US debt loads are now at an all time high and adequately servicing this debt has become a huge problem.
A perfect example of this problem is the US housing market. Back in the heyday of our irrationally exuberant housing market, nearly anyone could qualify for a mortgage. We had >100% financing, super low teaser rate mortgages and even NINJA Loans (No Income, No Job, No Assets). All this easy money led to no-risk investment speculation and caused a huge new wave of home buyers (many who couldn't previously qualify). This led to supply/demand imbalances, which drove home prices up dramatically.
Today however, things are a bit different. As these initial teaser rates on millions of mortgages began to reset, servicing this additional debt became unbearable for many and defaulting was the only option. These defaults (in the $ tens of billions per month) eventually led to the collapse of several hedge funds, a significant tightening of lending standards and ultimately to a complete immobilization in the Securitized Mortgage Backed Commercial Paper market—where recent financial losses & bank write downs have been massive (yet merely the tip of the iceberg to date).
But, these write downs are only making matters worse, as each dollar of the losses eats into available bank capital, creating an additional burden to future lending, which tightens lending standards further, prevents the creation of new debt, and causes further downward price pressures on all those homes that sit unsold.
Additionally, part of the domino effect caused by reduced home sales (due to less available credit) is lowered sales volume at home improvement, furnishing and a myriad of other stores--cutting into business profits, leading to less work hours, increased layoffs, et cetera.
Ultimately, reduced credit leads to reduced money creation, which leads to reduced spending which leads to a deflationary environment.
That is where we are today… The beginning of a deflationary environment poised to implode the economy…
Well have no fear Ben Bernanke and the boyz are here!
In a 2002 speech before the National Economists Club in Washington, D.C., Ben Bernanke made it clear the Fed should do everything in its powers to prevent deflation: Deflation: Making Sure "It" Doesn't Happen Here
So, what are the tools Ben feels the Fed should use to prevent deflation?
Well, based on his comments, the Fed could cut rates to ZERO, while simultaneously they could print/inject massive amounts of fiat money into the system. See excerpts of the link below (Note: Emphasis is mine)
“ But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way”.
Could this comment be a sign of things to come—Zero percent?
“ Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
There you go, he said it--print more money to reduce its value and to generate more spending (sounds like a call for Hyperinflation)
“ Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
I believe what he’s saying is: the Fed will reduce rates simultaneously while increasing liquidity, but the fireworks (printing/monetary injections) will really have to pick up steam once we’re at zero because the Fed’s ammunition canister will then be empty.
“ The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.”
Huge discount window operations have become a regular thing of late, while the rules were recently changed to allow banks to pledge a broader range of commercial paper as collateral. Are we currently experiencing an extreme threat to our financial stability? Nah, can’t be--the media keeps telling me everything is fine.
“ Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15”
Minus the zero interest, I think we’re already there.
Back in 2002, Ben Bernanke highlighted what he would like to do if faced with the problem of deflation. Well, his test has just begun and deflation is now standing at our doorstep. Thus far, with consumer price inflation raging and the dollar tanking around the globe, Ben and the Boyz have been working overtime in an attempt to bail out our banking/financial sectors. They see the approaching financial train wreck, barreling downhill at ever increasing speed, and although they would really like to back Treasury Secretary Paulson’s Smoke and Mirrors “Strong Dollar Policy”, it is far too late for that. They are now stuck between a rock and a hard place (Deflation/financial collapse is the rock; Hyperinflation is the hard place) and they have chosen the hard place--Hyperinflation
With bank losses mounting, Ben and the Boyz know that they are waay behind the power curve in their rescue attempts and that deflation is setting in. Therefore, I feel pretty confident in predicting that come December 11th, rates WILL once again be cut.
As an aside, If we are fortunate enough to evade a complete systemic banking failure, I think the tools used (printing presses and helicopters) will force us into a Hyperstagflationary environment (Hyperinflationary consumer price inflation combined with slow-to-no output growth, rising unemployment, and recession) This should allow us to muddle through until ~ 2010, but unfortuantely I don't think the "Big D" can be avoided forever. My bet is: 2011/2012.
Monday, November 12, 2007
Don’t be alarmed though. This sell off, engineered by Central Banks to strengthen the dollar vs. nearly every currency except the Yen, is temporary in nature, and was done to (1) take some trade pressure off countries with strengthening currencies (2) restore some confidence back into the dollar, (3) reduce the nearly vertical ascent in gold/oil prices and (4) bring some green signals back into the ailing US equities market... They absolutely had to do this, because FASB 157 is to take effect on Thursday, Nov. 15. These new FASB provisions will make it much harder for banks to avoid “mark-to-market” pricing on their level-3 (off balance) securities, triggering much larger financial write-offs and potentially exploding into a new financial panic…
From Barrons: “ RBC Capital Markets interest-rate strategist T.J. Marta says that additional write-downs are coming and adds the U.S. banking sector is "embarking on its third major crisis since the 1920s." He adds: "Not only have the 'go-go' days of structured products come to an inglorious end -- at least temporarily -- but vast swaths of the financial system lie in ruins,"
The Financial Wizards understand that this is coming and they absolutely have to try to shore up investor confidence in the U.S. system beforehand… Today was a compelling, yet futile attempt at their manipulative ways.
So how did they engineer this?
As you all know by now, the Dollar has been bleeding badly and has been setting new record lows against almost every currency daily—except for the Yen. The Japanese for years have been trying to keep their currency artificially low to (1) enhance trade and (2) supply the global system with an endless spigot of cheap money. The Yen Carry Trade has evolved (Yen borrowed at .5% and leveraged at high multiples to invest in other areas) and has provided nearly free money for all who wish to blow big beautiful bubbles.
As previously stated, the Yen was practically the only currency NOT strengthening in direct relationship to the falling dollar. Therefore, in order to strengthen the dollar against the currencies it was falling against, make the Yen stronger… Voila! The dollar strengthens… Additionally, this Yen-Dollar manipulation was being rigged while concurrently having OPEC work to bring down Oil Prices.
With regard to the Dollar, just look at what Central Banks are up against (Bloomberg snippets below)
Nov. 12 (Bloomberg) – “Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.”
``Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work,'' said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are ``truly bizarre,'' he wrote in a report.”
`More Violent Correction'” An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.””
Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar's slide threatens to turn into a ``more violent correction'' that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.”`
`The weaker dollar causes central banks to look at foreign inflows differently,'' Robert Fullem, vice president of U.S. corporate-currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The market is pushing the central banks into corners. I don't have faith in them. They may have to push the envelope further.''
So, where do we go from here?
I wouldn’t put much faith in the Financial Wizards, as they are putting a band-aid on a gaping wound where a tourniquet is required. Sure, they can help to slow the bleeding, but with over 400 billion in toxic waste to be written down soon, bleeding to death will be the final outcome.
Bottom line: don’t worry about the noise generated by our Financial Wizards today. Over the mid-long term, this will be regarded as merely a blip... The dollar, financials and many equities are going much, much lower while real assets (Gold, Silver, Oil, etc) are going much, much higher.
For all our soldiers who are still in harm’s way today, let us give thanks and say a prayer for their safe return.
Best regards and Happy Veteran’s Day to all!
Sunday, November 11, 2007
Anyway, though my article below is not specifically related to the economy (it’s more philosophical in nature), I think it captures how we as a people have taken the wrong path and are now throwing away what our forefathers have built for us. Ultimately, if we stay on this path, our wake-up-call could be quite severe.
I hope you enjoy the read…
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.
Friday, November 09, 2007
Anyway, one of the many folks who I regularly follow is Charles Hugh Smith-—a superb writer with a knack for simplifying various complex economic issues... Well, today I ran across one of his articles that I absolutely had to share, as it simplified the very complex financial instruments called derivatives (identified by Warren Buffet as financial weapons of mass destruction).
Problem is: we’re now starting to find out... As the housing bubble bursts, the financial world is swiftly realizing that their insurance bets on losses (derivatives) were also used by everyone else and the losses are so staggering, there is absolutely no way anyone can get paid.
Aah… I’m starting to get emotional and I’m pounding on the keyboard so I’ll just let you read the article for yourself... Enjoy!
Empire of Debt I: The Great Unraveling Begins
Some readers have been concerned that my recent posts have been overly bleak or strident. Perhaps; but I sense the Great Unraveling of the Empire of Debt is finally upon us, and breathtaking losses could be revealed any day now.
You cannot properly anticipate the coming wealth destruction unless you understand that the entire model rests on financial instruments (derivatives) which mask and distort risk. Thanks to readers Cheryl A. and U. Doran, I read the best description of how derivatives are written and sold--and how they blow up: Fiasco: The Inside Story of a Wall Street Trader .
Here is an analogy. Let's say you are offered a chance to play roulette, a very risky game of chance, but with an option for insurance which guarantees you will suffer no more than a tiny loss.
Let's say you place a $10 bet, in the hopes of winning $100. Your "insurance"--what we call a hedge, as in "hedging your bets"--costs only $1. Thus you can gamble $10, with a chance of winning as much as $100, and your loss is limited to a mere $1--the cost of your hedge. If you lose the $10, the other side of the hedge trade--whoever took your $1--will give you $10. Life is good, n'est pas?
Note what this hedge does: it makes you believe a high-risk game can be played at almost no risk. But alas, the game is inherently risky, and the reduction of risk is ultimately illusory: you can't change roulette into a low-risk gamble.
Since this is such a low-risk bet, you are soon gambling, say $100 billion. And why not? The hedges are so cheap! Abd everything goes swimmingly until the day you lose the $100 billion. Ah, bad luck, Mate; but no worries, you turn to the other side of your hedge and politely request your $100 billion.
Oops--that guy just lost his bets, too, and can't pay you. Now the risk of the underlying game is fully revealed; the entire hedge which made it all so "safe" is revealed as a house of cards which depends on all the other players being able to pay off their bets. Once they can't, well, as the saying goes, all bets are off.
To hide your immense losses, you continue to claim your bet is still worth $100 billion. Since you aren't required to "mark to market," i.e. reveal the market value of your bet, you stash the $100 billion loss in "Level 3" of your assets--a dark place where you can temporarily hide your worthless bets.
In other words, you bought an insurance policy to protect your risky bet on mortgage-backed securities and derivatives and now you find the insurer is belly-up and can't pay you.
If their bad bets were marked to market, Citicorp and Merrill Lynch would be declared insolvent. Why? Because they are insolvent--right now. The meaning of insolvency is straightforward: their losses exceed their capital. Recall that these firms list assets of $100 billion (or whatever) but their actual net capital is on the order of 2.5% - 5% --a mere sliver of their stated assets. In other words: a 5% loss of their stated assets wipes them out.
And once those leviathans fall, what other dominoes will they strike down?
The financial catastrophe which will unfold within the next few weeks is fundamentally a gross mispricing of risk. Inherently risky bets were encouraged because they were "hedged." That's what Hedge funds do: place bets on both sides so they collect gains whether the markets go up or down. But the risks of the gamble didn't really change; the introduction of low risk to a high-risk bet was an illusion.
The whole risk-management model depends on somebody being able to pay off the hedge. If they can't-- the game is over. the game is now over, and the players shuffling losses can only last a few more days or weeks.
The game is over for other fundamental reasons, too. The U.S. "prosperity" of the past five years has depended on one thing and one thing alone: cheap, easy borrowing, by consumers, home buyers, businesses, gamblers/bankers and government--cheap easy credit for everyone.
This was funded by capital inflows of billions each and every day. Foreigners poured trillions into U.S. markets, buying up risky mortgage-backed securities, supposedly "safe" U.S. Treasuries, and U.S. stocks, bonds and derivatives.
Now as the Fed and the Treasury destroy the dollar's value, foreign owners of dollar-denominated assets are seeing their wealth decimated. That "safe" Treasury you bought in 2002? It's down 30% as the dollar has been depreciated. You're underwater so deep you'll never make that money back.
And how about all those Yankee CDOs, MBS, interest-swaps and other exotic derivatives which Yankee ingenuity invented and sold to you as low-risk, high yield investments? They're mostly worthless now. You lost most of your money in a "safe investment." How anxious are you now to buy more Yankee "investments" denominated in the sinking dollar?
There goes the capital inflows which have funded our profligacy. They're gone, and not coming back. Mr. Bernanke and Mr. Paulson are busy destroying the dollar with interest-rate cuts, fueling runaway inflation as they flail mightily to save their banking buddies--but they can't succeed. Making more debt available to bankrupt entities, be they investment bankers or homeowners, solves nothing. It's called "putting good money after bad," and it simply guarantees ever-larger losses.
Allow me to sum it up: the money's lost, folks. You can't borrow more and pretend you made the money back. All those trillions in bad debt and derivatives are already lost. The Ministry of Propaganda is in a tizzy, trying to mask the meltdown and offer up a facade of normalcy. But the money's already lost.
Will it be contained to the U.S.? Why should it? The bad debt is everywhere. And the spending spree all that borrowing unleashed washed over the entire globe. Now that Americans can't borrow any more, the spending dries up--and so does the global "prosperity" built on an Empire of Debt.
Please link to original site for the rest of his article: Empire of Debt I: The Great Unraveling Begins