MACRO ANALYSIS REPORT
ECONOMICS, CENTRAL BANK POLICY
BANKS, BONDS, GEOPOLITICS

* Miscellaneous Morsels
* Capital Controls Overture
* Goldman Sachs Corruption Accused
* Unresolved Big Bank Distress
* The Flood of USTreasury Issuance
* Credit Derivative Fires Burn
* Resumed Housing & Mortgage Slide
* The Tiny USEconomic Bounce


HAT TRICK LETTER
Issue #73
Jim Willie CB, 
“the Golden Jackass”
18 April 2010

"Most people prefer to believe their leaders are just and fair even in the face of evidence to the contrary, because most people do not want to admit they do not have the courage to do anything about it. Most propaganda is not designed to fool the critical thinker, but only to give moral cowards an excuse not to think at all" -- Michael Rivero (political writer)

"It should be no surprise that when rich men take control of the government, they pass laws that are favorable to themselves. The surprise is that those who are not rich vote for such people, even though they should know from bitter experience that the rich will continue to rip off the rest of us. Perhaps the reason is that rich men are very clever at covering up what they do." -- Andrew Greeley (2001)

"Low rates, over time, systematically contribute to the buildup of financial imbalances by leading banks and investors to search for yield. The search for yield involves investing into less liquid assets and using short-term sources of funds to invest in long-term assets, which are necessarily riskier. Together, these forces lead banks and investors to take on additional risk, increase leverage, and, in time, bring in growing imbalances, perhaps a bubble and a financial collapse." -- Thomas Hoenig (Kansas City Fed President)

MISCELLANEOUS MORSELS

◄$$$ A NEW PHENOMENON HAS HIT THE BANKING SECTOR. THE EFFECT OF COMMERCIAL MORTGAGES AND REGIONAL BANKS IS DIFFERENT WITH RESPECT TO THE F.D.I.C. INSURANCE AND ASSET TREATMENT. MORE LIQUIDATIONS OCCUR, LED BY THE F.D.I.C. IN ITS TREATMENT OF SEIZED ASSETS. THE ENTIRE REAL ESTATE MARKET IS CONSEQUENTLY VULNERABLE FROM DIVERTED ATTENTION AND LACK OF VESTED INTEREST. A PRICE SHOCK MIGHT HIT SOON. $$$

A powerful new phenomenon is at work. The description will be given in broad strokes. The commercial mortgages are defaulting, and have caused numerous regional banks to fail. As they fail, the FDIC enters, finds buyers for some assets, but liquidates portions of the assets unlike before. The liquidation is new, something not done in 2008 and early 2009. In the last few months, the FDIC has enlisted the cooperation of liquidation firms. They bid on seized FDIC assets, along with other parties. But the liquidators sell off the assets at heavy discount almost immediately, leading to the extreme anger of the other parties. Losses are in the 25% to 50% range, a reflection of reality not suffered in the residential housing market. The FDIC in doing so has discouraged primary participants in wholesale asset distributions, so the liquidators will begin to dominate. The FDIC has caused a strong downward effect on property prices within weeks, primarily with the commercial properties. The trend change is for more asset liquidations since almost no Wall Street role is involved. In the past, big swaths of mortgage assets were seized by the FDIC, but sold or given to Wall Street firms. They promptly hid the off-balance sheet. The commercial properties are different, since little or no Wall Street participation. So the FDIC, in obedience to its Wall Street masters, proceeds to liquidate, with no concealment of mortgages off-balance sheet. The commercial arena might therefore trigger an avalanche on the real estate market generally. Banks are suffering losses, whether declared or not. Property prices are being forced down, with certain effect on the asset backed securities, the mortgage bond. A shock wave might come in the next few months, with a 15% or 20% price decline, suddenly hit. The origin would be the commercials, which Wall Street has lost control of from lack of vested interest. The shock might be global.

◄$$$ THE USFED TOLERATES EFFECTIVE REGIONAL BANK PRESIDENTS WHO ACTUALLY COMPREHEND THE DEPTH OF THE NATION'S BANK PROBLEMS. HOENIG CONSISTENTLY HAS PERCEIVED THE CHALLENGES WITH GROSS IMBALANCES CAUSED BY EXTREMELY LOW BOND YIELDS IN USTREASURYS. $$$

Some call him the rogue USFed President. Thomas Hoenig is the Kansas City Fed President. He comprehends much of what is upside down, in a ruined state within the US banking system. His perspective goes counter to the prominent dominant banking themes, called these years Keynesian (when John Maynard Keynes would objectively vehemently). Propping up and mopping up the last credit cycle failure has led to massive imbalances, the opposite of what a well functioning market would do. That is, to reduce the credit rapidly, increase interest rates, liquidate bad loans, permit bank failures, reassign the healthy assets, and clear the deck for the new chapter. Instead, debts have grown in wild fashion on the USGovt side, and interest rates are back near 0%, which caused the current crisis to take root in the first place. Worse, outsized federal deficits almost guarantee the USEconomy will not and cannot recover. The nation is on a permanent speculative craze, since near 0% rates cannot be permitted to rise. That would destroy both the USGovt debt burden and wreck credit derivatives.

Hoenig is one of the few policymakers who grasp the complexity of the situation, and the new seedbed of future problems being encouraged with near 0% rates and amplified monetary growth. He said, "Low rates, over time, systematically contribute to the buildup of financial imbalances by leading banks and investors to search for yield. The search for yield involves investing into less liquid assets and using short-term sources of funds to invest in long-term assets, which are necessarily riskier. Together, these forces lead banks and investors to take on additional risk, increase leverage, and, in time, bring in growing imbalances, perhaps a bubble and a financial collapse." The inducement once again is to pursue higher bond yields that carry much more risk, like mortgages did three to five years ago. Those mortgage bonds are today's toxic bonds. Hoenig chooses not to be complicit in the ZIRP (zero interest rate policy) experiment that is guaranteed to cause tremendous problems in the near future when the speculation unwinds. Hoenig has the courage to speak up about long-term consequences. His stated viewpoint is a refreshing contrast to the short-term thinking and ignorance of the long-term consequence of ZIRP, not to mention the constant devoted banker welfare for Wall Street firms. The crowd of USFed academics point to supposed benefits of zero interest rates and deep deficit spending, while remaining either blissfully unaware of the assured destructive consequences of these policies or deeply engaged in exploiting them. More accurately, that crowd is both intellectually dishonest and corrupted by the Wall Street syndicate whose helm that are part of the obedient subservient helm.

Take for example the heretical irresponsible myopic position stated by Alan Greenspan in testimony before the USCongress last week. His appearance was intended to put his feet to the fire. His thought pattern is so corrupted that he barely noticed the heat that has burned his legacy to a crisp. Even after the 2008 crisis that extends powerfully to the present, Greenspan still refuses to acknowledge the distortions that his USFed policies inflicted on the USEconomy, resulting in the insolvency of the entire upper echelon of the US banking system. One very important contradiction, totally ignored by the mainstream financial arena is that short-term rates near 0% imply that savings are monumentally ample and available, a huge supply of credit. It is not, except for Wall Street and connected insiders. High rates correspond to limited funds for credit. The painful hardship imposed on the society as a result is the near zero return on bank CDs offered to savers, like for my father. They are induced to seek out the next reckless mortgage bond yield. Even when they find money market funds, they tend not even to return all their money back, as in redemptions below 100 par value.

◄$$$ THE IRISH BANK SYSTEM IS GROTESQUELY INSOLVENT. THE CLEANUP PROCESS IS COSTLY. MANY BELIEVE THE EVENTS ARE ONE-TIME ONLY, BUT THEY WILL BE REPEATED IN A STEADY PACE. THE IRISH ECONOMY WILL NOT REBOUND QUICKLY OR MUCH AT ALL. THE POISON I.M.F. PILL ASSURES MORE DEEP DEFICITS IN AN ASSURED DOWNWARD SPIRAL. $$$

Irish banks will require a staggering $43 billion to reinstate them after appallingly reckless lending. A mountain of new capital is needed to clean up after years of abundant yet unchecked lending decisions that left the country's financial system on the brink of collapse. It has collapsed actually, but recognition is not given. This $43 billion amount was announced by the National Asset Mgmt Agency (NAMA). The central bank set new capital buffers for Allied Irish Banks and Bank of Ireland, giving them a 30-day deadline to announce how they will raise the funds. Denial is apparent at some level, but disappointment is stark. Finance Minister Brian Lenihan said, "Our worst fears have been surpassed. Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come." Financial regulator Matthew Elderfield said, "The banks are undergoing major surgery via NAMA. They need a transfusion now to speed their recovery and that of the economy." Another common view is laced in denial, held by Ciaran O'Hagan, a fixed-income strategist at Societe Generale. She said, "The bank losses, awful as they are, represent a one-off hit. It is water under the bridge. What is of more concern for investors in government bonds is the budget deficit. Slashing the chronic over-spending and raising taxation by the Irish state is vital." The Irish Govt deficits will continue, since no solution on restructure was achieved. The Intl Monetary Fund poison pill of reduced spending, huge job cuts, higher taxes, and radical surgery will provide no remedy, as history has shown. The IMF austerity measures have not a single example of viable remedy in 30 years. Greece might be closely watching Ireland, as an example of conditions growing worse after IMF supposed aid.

The critical equity to be raised is enormous. Allied Irish needs to raise ¬7.4 billion to meet the capital targets. Bank of Ireland will need ¬2.66 billion. Anglo Irish Bank, nationalized a year ago, may need as much ¬18.3 billion. Scores of smaller banks have proportional needs. The NAMA agency is designed to function much like the Resolution Trust Corp in the United States back in 1990. The banks in Ireland must be cleansed of toxic loans after the housing market entered a powerful recession. NAMA is on track to purchase loans with a book value of ¬80 billion (=US$107B), about half the size of the entire Irish economy. That would equate to $7 trillion in the United States, as in $7000 billion. Allied Irish plans to sell its stakes in foreign banks located in the US and Poland, enough to meet a substantial part of its capital needs. It also plans a stock sale. The banks must have an 8% core Tier 1 capital ratio by the end of the year, according to the regulator. The core equity for Allied Irish stood at 5%, and Bank of Ireland at 5.3% by end 2009. Those ratios exclude a government investment of ¬3.5 billion in each bank, made at the beginning of 2009. Ireland will likely not be able to afford to direct more money into the banks. Its budget deficit widened to 11.7% of GDP last year, almost four times the European Union limit. See the Bloomberg article (CLICK HERE).

Take one Irish bank as an example. Anglo Irish Bank has reported a record ¬12.7 billion loss. One of the largest banks is also the most ruined bank, nationalized already. It has announced the largest corporate loss in the history of the Republic of Ireland. The disclosure came one day after the Irish Govt said it would inject a further ¬8.3 billion into the bank. Anglo Irish declared its bad debt writedowns totalled ¬15.1 billion, of which ¬10.1 billion would be transferred to the state-run 'Bad Bank' known as the National Asset Management Agency. It is the official cesspool to liquidate toxic and impaired assets. Finance Minister Lenihan justified putting good money after bad into the bank in true politician form, saying "[It was] the least worst option. [The solution for Anglo Irish was] by far the biggest challenge in resolving the [Irish] banking crisis. The unavoidable reality is that the bank has incurred losses from its large scale property lending and needs substantial further capital." The European Union Commission has entered the picture, warning that the bank must draw up a new business plan and restructure profoundly, in their words. The Irish Govt disagrees with the NAMA amount of urgently needed capital. It estimates that collectively the nation's banks have a capital shortfall of up to ¬32 billion, a smaller sum. See the British Broadcast Corp article (CLICK HERE).

An email came from a contact in Europe. The message read, "Just heard from a good friend in Ireland that the austerity measures adopted by the Dublin government are causing untold hardship. He thinks there will be an uprising among the people  that could get very nasty indeed." An economic recovery is such a distant hope. The Irish cannot blame the Americans for their disastrous housing and mortgage bubbles. They had industry. They had balance. But they followed the American lead over the cliff. Way too many small Dublin houses fetched $300k in insane fashion. Banks copied the reckless American bank lending, and went over the cliff with just as much damage done, maybe more. The Americans can at least still attract foreign capital... well, maybe not anymore.


CAPITAL CONTROLS OVERTURE

◄$$$ THE ADVENT OF CAPITAL CONTROLS FOR FUNDS SHIPPED OUT OF THE UNITED STATES IS COMING. THE PLAN CALLS FOR A 30% TAX IMPOSED ON ALL FUNDS EXITING, BEGINNING IN YEAR 2013. FOREIGN FINANCIAL FIRMS ARE TO BE REQUIRED TO SERVE AS UNPAID USGOVT TAX COLLECTORS. THEIR ROLE IS FAR FROM CERTAIN, AS COOPERATION MIGHT BE LACKING DUE TO HOSTILITY FROM SUCH EDICTS. THE MOVEMENT OF MONEY OUT OF THE UNITED STATES SOON WILL CARRY A TARIFF EXIT TAX. $$$

Capital controls are scheduled to come to the United States. Implications are two-fold. First, money will be trapped within the deteriorating landscape, as hostage to support the crippled USDollar. Second, in time, my expectation is for the only legitimate accepted investments to be USTreasurys, Fannie Mae mortgage bonds, and other related heavily damaged and highly risky bond securities that support official USGovt bubbles and their trillion$ fraud structures.

Hidden within a Congressional Bill (HR 2487), complete with a gross misnomer, comes capital controls. The bill is called the Hiring Incentives to Restore Employment Act (HIRE Act), to provide $17.5 billion in employment stimulus for job creation. Really? The bill caught the attention of few legislators, too busy raising campaign funds and defending against the objection to the Health Care Bill. Check the important provisions on page 27, known as Offset Provisions in Subtitle A, the Foreign Account Tax Compliance. The Provision requires that foreign banks not only withhold 30% of all outgoing capital flows, but also disclose the full details of non-exempt financial account holders to the USGovt and the tax agents at the IRS. Furthermore, if this provision draws fire from being declared illegal by a given foreign nation's domestic laws, the foreign financial institution is obligated to close the financial account. Capital Controls are on the legal books, to be enforced in the next couple years by law. But it is not that simple. Foreign nations have their own laws, their own inspector generals. Their financial institutions do not feel compelled to hire a person as a full-time employee for the expressed purpose of following the reams of new laws passed by the broken corrupt and insolvent USGovt, whose policies and edicts resemble a Third World nation. Some nations might choose to close foreign accounts. Other might choose simply to ignore the latest dictum. Some might simply appear to comply by the new rules. Be sure that none of the mainstream US press networks covered the story, but the intrepid internet was alive with it two weeks ago. It was all abuzz.

The Internal Revenue Code is set to be amended. Items in the new Chapter 4 pertain to certain foreign accounts. Withholding tax equal to a 30% on payments to foreign financial institutions are to be made, in the case of any US account maintained by such institution, and to report on an annual basis the required information. Any account holder that refuses to comply or is located with a financial institution that do not meet the requirements is deemed recalcitrant, a loose word that means in violation or dragging the feet. Without a waiver within a certain period of time, the account must be closed. Capital flows will be overseen and controlled by the USGovt and the IRS. The foreign financial firm is to be required to provide the identity of each US account holder, the account number, the account balance, and some indications on gross receipts, gross withdrawals, and payments from the account.

Exceptions are granted if under $50 thousand is held in the foreign accounts. A broad definition is to be applied for a financial account, including depository, custodial, or equity and interest paid. Other exceptions are given for "any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion." That means any of the USGovt agency friends, colleagues, and family members. Exemptions are certain to come for an armada of Wall Street executives, key USGovt agency executives, and the narcotics syndicate accounts. Recall that almost ten Obama Cabinet ministers had income tax violations in recent years. People like these would surely be exempt. Unclear in the language of the legislation is the treatment of gold in delivery, since it is not considered money. Similarly, some doubt exists over the treatment of commodities in delivery. Preliminary legal discussions with lawyers indicates that a such deliveries might be considered as 30% taxable transaction. See the Zero Hedge for all the legal details of the HIRE Bill and its capital controls (CLICK HERE).

Thus the noose on capital mobility tightens, as very soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation. Such dictums will culminate with every single free US$ required to be reinvested into the United States, likely in the form of purchasing USTreasurys, TIPS, Fannie Mae bonds, and other worthless pieces of paper. The USGovt will attempt to abuse their tax exempt declarations and steer pension funds into the USGovt sponsored bubbles, after imprisoning funds within domestic borders. Watch for 401k and IRA rule changes. See the New York Times article (CLICK HERE).

The Hiring Incentives to Restore Employment Act contains numerous provisions that impose new taxes, penalties, and requirements regarding the reporting of foreign bank accounts. The most important issue is the imposed 30% withholding tax on most US-source income paid to foreign financial institutions which do not comply with IRS reporting requirements. One can assume that simple transfers to meet a commercial contract obligation will be either immune or waived, and after demonstrated proof, the withheld funds would be passed through to the destination in whole. Essentially, Treasury Secy Geithner expects foreign financial institutions to become unpaid tax collectors and informants and for the USGovt. The default will serve as a 30% tax for those who do not wish to comply, when those funds constitute income from US sources. The 30% withholding tax has set off alarm bells across the cyberspace. The bill aggressively expands the definition of a 'US beneficiary of a foreign trust,' extends the penalty period for erroneous reporting, and expands the offshore financial account reporting requirements. In the strictest sense, these measures are NOT capital controls, since they do not block fund transfers, nor do they make it illegal for US citizens to open a foreign bank account. To be sure, these measures are a probably prelude to tougher total capital controls. For instance, capital controls are in effect between the US and Cuba. The consequence even in this instance is to inhibit the flow of funds, and thereby tend to trap wealth within the US borders. An intriguing element to the HIRE Bill and its hidden taxation is its quiet passage into law. Check the following level headed, plain English interpretation of the bill from Mark Nestmann's website (CLICK HERE). Thanks to the Sovereign Man in Panama for contributions.

GOLDMAN SACHS CORRUPTION ACCUSED

◄$$$ GOLDMAN SACHS WAS HIT WITH A CIVIL SUIT AND FRAUD CHARGES OVER C.D.O. BOND DERIVATIVES LOADED WITH TOXIC SUBPRIME MORTGAGES. THEY ALLEGEDLY FAILED TO DISCLOSE KEY PARTS TO THE ISSUANCE. THE DIE IS CAST FINALLY. RECOGNITION IS COMING THAT GOLDMAN SACHS IS BUT A CRIME SYNDICATE HEADQUARTERS THAT ACTS LIKE A PARASITE ON THE FINANCIAL MARKETS AND THE USGOVT ITSELF. LEGAL ACTION MIGHT COME NEXT FROM GERMANY. $$$

The Securities & Exchange Commission on April 16th charged Wall Street's most gilded firm Goldman Sachs, the nexus of the Wall Street financial crime syndicate, with defrauding investors in a sale of securities tied to subprime mortgages. The SEC charged New York-based Goldman Sachs and a vice president Fabrice Tourre for their failure to disclose conflict of interest in a 2007 sale of a Collateralized Debt Obligation. It is a civil case, not a criminal case. Investors in the CDO ultimately lost $1 billion, claims the SEC. A CDO is a financial instrument backed by a pool of assets, typically home loans or mortgage bonds joined by credit derivatives, but with leverage of 5:1 or 7:1 typically. The civil fraud complaint alleges that Goldman enabled hedge fund Paulson & Co, run by John Paulson, to help select securities in the CDO issuance. Paulson made billions of dollars betting on the subprime collapse. Goldman did not inform investors that Paulson was shorting the CDO, betting on a decline in value. When the CDO plunged within months of its issuance, Paulson escaped with $1 billion in ill-gotten gains. The SEC alleged that the Paulson fund paid Goldman Sachs approximately $15 million for structuring and marketing the deal, known as Abacus 2007-AC1. That seems like bribery. Khuzami said Paulson was not charged because it had no duty to fully disclose conflicts to other investors. Goldman did have such a duty, since it sold the securities to investors. The loss to investors was extremely rapid. While many CDO deals were losers, the Abacus CDO at the center of this case blew up with a distinction on speed. Within six months of the closed deal, 83% of the residential mortgage backed securities in the portfolio had been downgraded, the SEC said. Within nine months, 99% had been downgraded. Khuzami and the SEC are pursuing the return of the fraudulent gains as well as future penalties.

Robert Khuzami is director of the Division of Enforcement for the SEC, a new squad. Khuzami said the case was the first brought by a new SEC division investigating the abuses of structured financial products such as CDOs in the credit crisis. He admitted the investigation continues but declined to comment further. Broader charges to other firms could follow. He said, "The product was new and complex but the deception and conflicts are old and simple. We continue to examine structured products that played a role in the financial crisis. We are moving across the entire spectrum of products, entities, and investors that might have been involved." Shares of Deutsche Bank (DB), another big player in the structured securities markets of the bubble era, fell 8% on the same day, perhaps in sympathy or due to suspected future similar charges. See the Fortune magazine article posted on CNN Money (CLICK HERE).

The Wall Street Journal provided a summary of the case, worthy of any intrigue filled mystery crime novel. They wrote, "The 22-page Securities & Exchange Commission complaint against Goldman Sachs provides an outline of such a narrative. It has big players: Goldman Sachs and Paulson & Co, not the former Treasury secretary, the hedge fund that famously made a winning bet on the collapse of the housing market. It has an alleged villain with a spy novel name: Fabrice Tourre, the 31-year-old vice president on Goldman's Structured Product Correlation Trading Desk who was selling a financial product called Abacus. It has victims: The hapless state owned German bank IKB, which the SEC says bought Goldman manufactured securities and lost $150 million. It has an allegedly hoodwinked middleman: ACA Management, from which the SEC says Goldman hid the truth. There is even a cameo role for American International Group. And it has motive: Paulson, the SEC alleges, essentially paid Goldman $15 million to create junk so the hedge fund would have something to bet against, and then Goldman allegedly tricked ACA to say it was not junk so Goldman could sell the stuff to unwary investors. Paulson made $1 billion, and the investors lost $1 billion. Paulson is not named as a defendant."

Colorful Jim Sinclair made some juicy comments in his weblog. He wrote, "If you think that Goldman's problems are not shared by the entire derivative market, you are bonkers. If you see the Goldman situation as negative to gold, you are a total fool. If you see the Goldman situation as being bullish to the dollar, you are hopeless." Chris Whalen is a bank analyst at Institutional Risk Analytics. He said, "This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another."

Goldman Sachs is the most adept investment bank and brokerage firm at corrupt insider trading. They use information from their perch at the USDept Treasury, from management of USTreasury Bonds and the USDollar, from special funds like the GS Commodity Fund and the gold mining stock fund GDX (handy for shorting in big strokes), and even NYSE trade flow data (highly illegal). Rumors are brisk and wild that Goldman Sachs shorted their own stock and profited from the 12.8% decline in share price last Friday. Reuters reports have come that the SEC notified GSax of the charges months ago, and tipped them off in the last ten days. Tyler Durden at Zero Hedge makes a damning charge. He wrote, "Time for the SEC to take a look at what bets Goldman's prop desk, and material affiliates as well as hedge funds that are close to Goldman's flow traders, were taking on Goldman's stock over the past few days. If indeed Goldman shorted itself, bought SPY puts, bought octuple leveraged negative financial ETFs, or something else of the sort, on material non-public information, it would be time to shut the firm down." The SPY is for the S&P500 index, not a spy novel stock. See the Zero Hedge article (CLICK HERE).

Losing bond investors included German bank IKB (Deutsche Industriebank AG). It was eventually rescued by the state owned KfW development bank, along with other financial firms during the financial crisis. The Welt am Sonntag newspaper quoted Chancellor Angela Merkel's spokesman, UIrich Wilhelm, as saying that German regulator BaFin will seek additional information from the US Securities & Exchange Commission. He said, "After a careful evaluation of the documents, we will examine legal steps." An IKB representative said the bank is aware of the charges filed by the SEC, but declined to comment further. The SEC claims IKB lost almost all its $150 million investment. Since the onset of the crisis, IKB was sold in 2008 to Lone Star Funds in Texas. See the Huffington Post article (CLICK HERE).

Once this die is cast, a long list of grievances and lawsuits might come against Goldman Sachs, that also include European sovereign bonds. It is far easier to add a firm's name to a list than to be the first one. Goldman Sachs might find itself in court for the next two to three years on dozens of cases, along with other Wall Street banks. Maybe the USDept Treasury will pick up the legal expense tab. A fine point must be cited, how prosecution sheds light and forces the issue on mortgage bond fraud often cited by the Hat Trick Letter. This case is a simple premeditated misrepresentation, bribery, fraud case. Another big question in my view is the role change at the SEC itself. Long a pack of errand boys and country club buddies from Wall Street, the SEC staff might finally show some stones or be given carte blanche to prosecute from a hidden higher power. The group that Khuzami comes from is a special task force, which might expand and become a permanent fixture to the SEC itself. My suspicion is that the Obama Admin has entered a war with segments of Wall Street, or else they wish to produce a single prosecution with clean non-criminal outcome, so as to claim to the US public that legal action against Wall Street firms has finally been completed. This could be another Stress Test. Recall that Bush II Admin had a Fascist core, but the Obama Admin has a Communist core, and they clash like Hitler and Stalin did. The majority of Americans are oblivious to such dynamics and historical details. However, my guess is that they are opening yet another grand Pandora's Box, out of possible fear of US population outrage, or at least November mid-term elections. Once prosecution begins, it could turn to criminal cases, and it could invite a long list of legal complaints and lawsuits to recover lost investments, from many nations.

◄$$$ THE CORRUPTED MARKET MANIPULATION BY WALL STREET BANKS EXTENDS TO STOCK PRICE. SELF-SERVING ACTIVITY BEHIND THE CURTAINS ENRICHES THEIR EXECUTIVES ON STOCK OPTIONS. THEY STEER DOWN THE STOCK PRICE UNTIL OPTIONS ARE SET WITH STRIKE PRICES, THEN STAGE A MIRACULOUS RECOVERY. SUSPICION STATED IS NOWHERE. $$$

In lieu of cash bonuses that would anger the USCongress and US public at large, Wall Street executives accepted ample stock options back in early February. They turned them into highly profitable awards. One must suspect that the stock gain recovery benefited from the strong bidding arm of the Plunge Protection Team funds (aka Working Group for Financial Markets) at work by USGovt intervention freaks. The financial stocks were on a downward trajectory at the time of the bonus controversy, enough to enlist the hue & cry from many commentators and analysts. Their charts including GS and JPM appeared in January to be breaking down. But Richard Guthrie from the Scarborough Bullion Desk in England did not believe the breakdown, even made comments over this period to his clients that it was unlikely the bankers would award themselves bonuses in stock if concerned over a possible collapse in their share prices. The executives at Goldman Sachs and JPMorgan have indeed made an absolute killing on their stock bonuses! Not coincidentally, the price of these stocks plunged in January just prior to the issuance of directors stock, when stock options were awarded and strike prices were set, at a nice convenient discount. Below are the charts of Goldman Sachs and JPMorgan, with annotations provided by Guthrie. Judge for yourself the timing, motive, and effect.

Both GS and JPM stock share prices fell before the executive options were fixed in strike price, and rebounded afterwards. Usage of PPT funds and leverage are the likely devices to lift the stocks by 25% to 30%. Danger lies ahead, when the USDollar monetary crisis hits the doorstep with full brunt force. The Wall Street executives will have cashed out by then.

As a rejoinder, consider two stories. Early in the 1990 decade, JPMorgan entered a merger acquisition to take over Chase Manhattan Bank. It was one of a long series of takeovers, that included Chemical Bank, Manufacturers Hanover, Bank One, and others. The takeover of Chase Manhattan was unique. Of course, Chase owned a powerfully profitable consumer business. But hidden from view was its long position in the Gold market. Being the official unspoken agent for the US Federal Reserve, the giant JPMorgan found it necessary to remove Chase from its adversary gold role, so that the USFed could support the USDollar. The effect had two sides. The Chase long gold position would offset some of the JPMorgan short gold position. Also, Chase would no longer oppose JPMorgan and put itself in the path of whatever tactical maneuevers were deemed urgent in the USDollar defense and Gold suppression.

Protests on the Syracuse Univ campus in upstate New York have arisen over the selection to invite JPMorgan CEO Jamie Dimon as keynote speaker for graduation commencement exercises set for May 16th. So far protests are vocal and diverse. The students claim that Dimon is not an inspiration toward future, not an example of a respected leader or icon, and is insensitive to the difficult financial climate. He comes from a controversial arena with collective bad behavior. The group of 60 protestors carried signs reading "Power to the People" and "No Corporate Commencement" to express their discontent with the choice of commencement speaker. Syracuse student senior Ashley Owens told the Wall Street Journal that objection to Dimon runs deep for some on campus. She said, "I personally know students who have had to drop out of school because their parents have lost their jobs in the financial crisis. To have Dimon as our commencement speaker is really insensitive." Openly, discussion has been heard of silent protests planned, whereby students in the audience might turn their backs to Dimon during his speech. See the ABC News article (CLICK HERE). It is highly doubtful that Dimon will divulge details on the corruption of JPMorgan under his leadership, their role with Enron, their sale of twice as many USTreasurys as issued (read counterfeit), or the demolition of the third World Trade Center building that housed their database.

UNRESOLVED BIG BANK DISTRESS

◄$$$ MAJOR HOME EQUITY LOSSES ARE DUE FOR THE BIG BANKS. NEITHER COMMERCIAL LOAN LOSSES NOR HOME EQUITY LOSSES HAVE BEEN LOGGED. THE HOME EQUITY LOAN LOSSES ARE ASSURED WITHOUT DOUBT SINCE THEY ARE SUBORDINATE TO FAILED FIRST MORTGAGES IN DEFAULT OR FORECLOSURES ALREADY COMPLETED. THE BIG FOUR BANKS HAVE AT LEAST A $100 BILLION SHORTFALL IN THEIR SECOND LIEN LOAN LOSSES. $$$

The four biggest US banks by assets (Bank of America, JPMorgan, Citigroup, and Wells Fargo) hold $442 billion of the $1.1 trillion in second lien mortgage loans, according to Amherst Securities Group. The Big Four banks hold 42% of the entire sack of toxic paper from home equity and second mortgages. Bank analysts roughly estimate that the Big Four banks must soon set aside an additional $30 billion to cover possible losses on home equity loans, according to CreditSights. The magnitude is enormous, since it is of a size equaling analyst estimates of their profit this year. The agency stresses how such writedowns are unfinished business from the housing bubble, in their words. Baylor Lancaster is senior bank analyst at CreditSights in Miami. He said, "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity. The banks are saying that they can work through it. Our view is that it may be bigger than they are letting on." He expects the start of such writeoffs to hit in the latter months of 2010.

The House Financial Services Committee is currently struggling with the obstacles created by second lien mortgages, when reworking home loan debt in USGovt aid packages. A key point on inevitable bank loss pertains to the nature of these loans. Second lien mortgages and most home equity lines of credit rank behind first lien debt in seniority. They are wiped out in a foreclosure in almost every case. Home equity loans are open lines of credit, but still are subordinate. Here is the obstacle. In many cases, first mortgages cannot be modified or written down because lien priority dictates that junior loans be erased first. Few lenders have agreed to reduce or forgive home equity loans when modifying mortgages, even if a property is worth less than the loan balance. The majority have not written down home equity loan losses at all.

Denial of further bank loss is prevalent. Nancy Bush is an independent bank analyst at NAB Research in New Jersey. She said, "Banks have been saying we are close to the end. People have built that into their expectations. I do not think we are there yet." A blockheaded naive view came from Jason Goldberg, a Barclays Capital senior analyst in New York. He said, "The majority of banks last year saw the pace of reserve build slow. That trend continues amid signs of stabilization in delinquency trends and an improving economy." Goldberg is wrong on all his points, but efficiently stated. In this case it means the big banks, Barclays being one of them, have woefully inadequate loan loss provisions. Return to reality with Joseph Pucella, an analyst at Moodys. He expects banks to keep feeding funds into loan loss reserves at least through the end of the year, because they still face losses. Attention has turned. Second mortgage loans are poised to be a big bump in the road, said former bank examiner Paul Miller, an analyst at FBR Capital Markets. He said, "There is very little recovery for home equity loans." Focus upon second lien loans finally comes next after US banks have taken $294.6 billion in losses related to credit costs, loan writeoffs, and increased provisions, according to Bloomberg data. Investors may still lack confidence that banks have cleared out the worst of second lien loans, said Jack Ablin, chief investment officer at Harris Private Bank, who oversees $55 billion. The scope is grand. Over half of first mortgages have second lien loans behind them, admits Laurie Goodman of Amherst Securities. Those loans add more than 20% of the value of the property to the amount owed.

Check out the Big Four banks for red ink spilling on the balance sheets. Even JPMorgan comprehends the depth of the problem. JPMorgan CEO Jamie Dimon mentioned investors in their annual report published in February that quarterly writedowns for home quity lending could reach $1.4 billion in 2010. That adds up to record writeoffs of $5.6 billion this year, 19% more than in 2009 and more than double the amount in 2008. JPMorgan has set aside $13.8 billion of loss reserves for the division holding all of its mortgages. JPMorgan holds $101 billion of home equity loans, the third largest amount of any US bank. They report 1.6% of their second lien loans are non-performing. Bank of America holds $138 billion of home equity loans. About $112 billion of them are second liens, equal to 81%. The bank doubled its allowance for loan loss reserves in 2009, up from $5.39 billion to $10.2 billion a year ago. It wrote off $7.1 billion last year, up from $3.5 billion in 2008. Wells Fargo holds about $123.8 billion of home equity loans, with about $103.7 billion in a second lien position. The lender has $5.3 billion in reserves set aside to cover the second lien mortgage loans and wrote off $4.6 billion last year. Citigroup has the smallest home equity credit portfolio of the four biggest banks with $49.4 billion, hardly a small figure. CreditSights estimates Citigroup could face home equity losses of $3.4 billion. These are loan loss reserves set aside just for second mortgages and home equity lines of credit! They go directly against earnings. These banks are all insolvent and worthless hollow shells whose only valued assets are their buildings and computer systems.

Joshua Rosner is an analyst at Graham Fisher, an independent research firm based in New York. He earned some deserved recognition in May 2007 when he issued a report that claimed ratings companies were under-estimating the risk of subprime mortgage bonds. Rosner concludes that second lien reserves set aside by the Big Four banks are $100 billion to $125 billion short of requirements in the next few years. He points out the clue for gross inadequacy to date. Rosner said, "If banks were properly accounting for their second liens, there would be no problem with them choosing to do principal writedowns. They would already be reserved for it." The Federal Deposit Insurance Corp, which oversees US commercial lenders and insures their deposits, demanded with limp wrist in August that banks consider boosting reserves for potential losses on home equity loans. The FDIC wrote, "Failing to properly consider the current effect of more senior liens on the collectability of an institution's existing junior lien loans is an inappropriate application of accounting principles" in an August 3rd letter to banks and examiners. The FDIC is a bunch of slackers who carry Wall Street baggage and open their doors. If truth be known, the USFed itself has highjacked the bank reserves, holding them to hide their own deep insolvency. See the Bloomberg article (CLICK HERE).

◄$$$ JPMORGAN GOES FACE TO FACE IN OPPOSITION OF THE OBAMA ADMIN PLAN TO FINALLY PROVIDE HOMEOWNER RELIEF ON MORTGAGES, WITH ACTUAL LOAN BALANCE REDUCTION. THE JPMORGAN HYPOCRISY IS CLEAR, AS HIS MOTIVES ARE ELITIST AND NOT GENUINE. $$$

The battle has escalated publicly between JPMorgan executives and the Obama Admin. Finally the people can see an open dispute between the fasicst element (elite privileged bankers) versus the communist element (proletariat seizure craftsmen) played out in view before the House Committee on Financial Services. The case for JPMorgan Chase is made by David Lowman, the CEO of their home lending subsidiary. He argued strongly against the plan to help homeowners facing foreclosure. He is opposed the reduction of mortgage principal. He said, "Like all loans, mortgage contracts are based on a promise to repay money borrowed. If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?" But then again, a quick check would show that commercial mortgages are being written down. JPMorgan conglomerate CEO Jamie Dimon has made it clear that principal writedown will not be considered, as he no longer fully backs President Obama. The bank has paid back fully its TARP bailout loan. JPMorgan seeks to derail financial reform, having spent $6.2 million on lobbying to try to minimize its provisions. In recent weeks, Dimon has complained about credit card reforms that will cost the bank between $500 million and $750 million in after-tax income. Dimon also works to stop the sweeping financial overhaul that could force JPMorgan and other banks to vastly reduce their balance sheet and become smaller institutions. Such is the movement against 'Too Big To Fail' banks. At issue is the $448 billion in equity lines and other junior loans held in large part by the nation's four biggest banks. Principal would be wiped out in a single justified stroke in most of the equity lines of credit, all subordinate to frontline mortgages. The Obama Admin proposal announced last week allowed only 10 to 20 cents per dollar for second lien holders. See the Housing Watch article (CLICK HERE).

At the heart of the dispute are toxic bank credit portfolio assets. These are signficant portions held on big bank balance sheets that can be best described as toxic rot decomposition, fully permitted by FASB accounting rules to be valued at par value. The insolvency of JPMorgan and other big banks might soon be unmasked. The big banks refuse vigorously to write down their losses on toxic worthless assets. They would rather let homes go to foreclosure slowly, collecting fees, swapping certain assets with the USFed, dumping other assets on Fannie Mae, and selling some to unsuspecting hedge funds. Never mind that most experts believe that principal reduction is the only solution to the foreclosure crisis. The conferences underway withing the USCongress explore how equity lines and other junior liens are thwarting the mortgage modification process. The big banks do NOT want a solution, since they do NOT want to reveal the details of their mortgage bond criminal fraud. Many home loans were sold and linked to same mortgage, making overlapping claims to the same income stream multiple times. Many mortgage bonds had sloppy, incomplete, or non-existent linkage to home loan revenue stream. Many mortgage bonds, in particular Fannie Mae bonds, are total counterfeits sold with no property title linkage, without restriction, sold fraudulently with impunity. Most Wall Street mortgage bond sales are integrally linked with corrupted databases that hold property titles, which the federal courts have declared have no legal standing. Those court decisions have opened the door for homeowners to stop loan payments and demand to see the property title. Tens of thousands of people are not submitting loan payments.

THE FLOOD OF USTREASURY ISSUANCE
◄$$$ THE U.S. BANK LOAN TOTAL JUST JUMPED $420 BILLION IN ONE WEEK. SOMETHING IS BREWING, AND SPECULATION IS RUNNING RAMPANT. LET ME JOIN THAT SPECULATION. $$$

Check out of the vertical line showing a powerful rise of $421.8 billion dollars of outstanding loans and leases to commercial banks in a single week. The main question is just exactly where did the money go, and what collateral was accepted against such a huge sum of outstanding loans. Some calmer heads suggest that the jump in loan volume was due to the FASB changes to accounting rules, that have led to securitized loans returning to the bank balance sheet. No comment or news release has come from the USFed, to explain the sudden change. One must wonder what will be the effect on bank reserve capital ratios and debt to equity ratios. Additional capital would normally be needed to support items on the balance sheet. It is very doubtful that huge volume off-balance sheet assets will be returning to US bank balance sheets. See the 321Gold article (CLICK HERE).

Karl Denninger makes some hypothesis that the entire European continent was just bailed out by the USFed. What an incredibly silly naive charge! The guy is a really smart dumbkopf. He is great at gathering information and putting it on the table. But he often makes a bonehead conclusion or dismisses corrupt realities along the way. If any huge credit lines were extended regarding the European sovereign debt crisis, it was probably the USFed aiding Wall Steet firms to short government bonds. They might have funded gargantuan shorts against Greek, Spanish, Italian Govt bonds in one svelte swoop. The USFed is all about providing giant assists to Wall Street, where its partners are located within the syndicate. The effect of rescue aid packages handed to Greece only serve to add to liquidity in bond sales, which Wall Street firms routinely and profitably short. That is precisely why the bond yields rise after the auction sales, every single time.

One very big certainty is the failure of these three Southern European nations, where debt default is assured. Perhaps Wall Street just received funding to the gills in Credit Default Swaps that will turn wildly profitable when the sovereign defaults occur. One other possibility could be the case. Perhaps the USFed just funded offsets to huge JPMorgan losses from Interest Rate Swaps gone toxic with the rising long-term rates. For that matter, maybe Fannie Mae with the IRSwap funded losses was also funded in offsets, even American Intl Group too. In my honest opinion, Denninger could discover a big leather shoe in front of the USFed and conclude it is rock solid proof that Wall Street Chief Financial Officers have taken up residence in the grand shoe. More rational observers might conclude that credit derivatives have burned through so much Wall Street capital that their officers lost their shirts, and shoes too. Denninger has a knack for producing excellent evidence in stream, but arriving at the wrong conclusions, to prove the dog can hunt but cannot intrepret events.

◄$$$ A USTREASURY AUCTION GOES BADLY AGAIN, AS DIRECT BIDS HIT A HIGH LEVEL, BUT INDIRECT BIDS HIT A HIGHER LEVEL. CONFUSION IS THE ONLY CONCLUSION. THE STATISTICAL TALLY NO LONGER CAN BE CLEARLY INTERPRETED. $$$

Ok, so a scad of USTreasury Bonds with 30-year maturity were auctioned on April 8th, paying a 4.770% final yield. The bid/cover ratio was a weak 2.73, when 2.0 would mean outright failure. Direct bidders took a massive 25.48%, more than double their 11.24% average. Indirect bidders took an even bigger 36.80%, half again higher than their 23.85% average. It used to be that direct bids came from pension houses, insurance firms, and bond funds. Not anymore, after incredible confusion has come to the USTreasury market. It is impossible anymore to interpret the bidding trends and changes. See the Direct Bid chart. Who knows what it means? Surely not the smartest guys the Jackass knows, with long years of bond experience. The story is the confusion, not the chart and ratios on display.

In the last two years, profound changes have taken place. The Caribbean Centers have morphed into crime syndicate platforms to conceal heavy outsized monetization during monthly auctions of $20 billion or $30 billion or $40 billion, or $50 billion, or more. In no way are these amounts that the credit market can handle. So the US Printing Pre$$ responds, via the hidden centers. One cannot say whether even PIMCO, the bond giant fund, or other very large bond houses, use Caribbean locations to obtain a better price with a secretive hand assisting them by the USGovt. One cannot determine whether the Caribbean agencies are loaded with offices from both the USFed and Bank of England, with false store fronts. Probably so. One cannot determine if these locations are sovereign entities like foreign central banks, pension funds plying their trade, or even US security agency narcotics funds filtering money back into the system. What is clear is that a vast shell game is at work, with grotesque obfuscation and confusion generated intentionally. The authorities in charge of USTreasury auctions are attempting to create enough confusion to hide enormous monetization of USGovt bond purchases. The data is no longer comprehensible. The irony is that the bankrupt banks in London, with nexus the Bank of England, are bailing out the USGovt. Huge increases are evident in the Treasury Investment Capital (TIC) Report, that England is buying huge amounts of USTreasurys! With what? They are in my view the nexus of the USGovt self-dealing in monetized USTreasury Bond purchases using the US$-based Printing Pre$$. London billionaires are major owners of the USFed itself. They are not hiding their tracks too well, but they have effectively created terrific confusion. Lines are blurred, and legitimate interpretation is impossible.

Upcoming scheduled USTreasury auctions are like a string of yard sales in a stressed out neighborhood. It is a bonanza, with a whopping $53 billion to be auctioned on April 12th, and over $150 billion within a week afterwards. In no way are maturities extended as promised. They want, nay lust, for the lower short-term yields in commitments. The month of April will see a total of over $250 billion in net issuance among USTBills, USTNotes, and USTBonds. That follows the $333 billion in March. No way can a normal market handle that volume of supply without vast monetization reliance and hidden money creation. The list of of upcoming USTBill auctions over the next week look like this:

  • April 12, $26 billion in 3-month Bills
  • April 12, $27 billion in 6-month Bills
  • April 13, $26 billion in 4-week Bills
  • April 14, $25 Billion in 56-day Cash Management Bills
  • April 22, $TBD billion, in 3-month Bills (likely $26 billion)
  • April 22, $TBD, in 6-month Bills (likely $27 billion)
  • by the way, TBD means to be determined

Furthermore, the US stock market is no clearer. A decade ago, market observers could check the New York Stock Exchange database to see a summary of computer program trade activity. The percentage peaked near 75% of all NYSE volume, until they stopped reporting it. In recent months the high frequency trades, including the illicit insider trading tools used so effectively by Goldman Sachs, have tilted the program trade percentage probably closer to 80% or 85%. But the public will not be told. My best description of the stock market is of a grand fraternity circle jerk. The parasites are feeding off other rival firms. The stock and bond markets have never been less transparent.

◄$$$ USGOVT DEBT ISSUANCE IN MARCH WAS A RECORD. IF ITS MARCH PACE IS REPEATED OVER THE COURSE OF A FULL YEAR, AROUND $4 TRILLION WOULD BE ISSUED. SOME REACTIONS ARE ASSURED, ALL BAD FOR THE USTREASURY COMPLEX AND THE USDOLLAR. AN IMPLOSION IS IN PROGRESS. $$$

The beat goes on. The destruction of currency continues. In March, the USGovt issued an incredible amount of debt totaling $332.8 billion. That is not a misprint, it reads three hundred and thirty two point eight billion dollars! That is the grandest sum ever since the record amount of $545 billion raised during the peak of the financial crisis in October 2008. The USTreasury held $12.717 trillion in debt at the end of March, compared to $12.384 trillion in the beginning of the month. The limit of $12.9 trillion fast approaches, at which time the corrupt compromised clowns in the USCongress must extend the limit on federal debt one more time, and earn a great deal more publicity. The debt transfer is going as planned, from the private Wall Street hands to the ruined public balance sheet of debt with future obligations. The ruinous parade continues. The shadow banking system turns its wheels in hidden fashion, greased by credit derivatives that sustain such flow. The evidence of fiat currency failure continues to be plastered upon public billboards and chartroom walls. The central bank franchise system has failed under our noses, a story not told. The total outstanding debt (in red line) climbs relentlessly, undeterred by any hint of recovery, as each month racks up another debt (in blue bars) seen in the following chart. See the Zero Hedge article (CLICK HERE).

◄$$$ USTREASURYS BREACH THE 4.0% MARK. IMPACT IS EXACERBATED BY INVESTMENT HOUSE HEDGES ON MORTGAGE PORTFOLIO MANAGEMENT. THEY REACT BY SELLING USTREASURYS. THE CONVEXITY WORKS NEGATIVELY IN THE OPPOSITE FASHION TO 2002 & 2003 WHEN IT WORKED POSITIVELY. THIS IS THE GREAT UNWIND. EXPECT FIERCE OPPOSITION BY JPMORGAN ACTING AS AGENT FOR THE USGOVT AND USDEPT TREASURY, USING INTEREST RATE SWAPS, USING PLUNGE PROTECTION TEAM PURCHASE OF USTREASURY BOND FUTURES, AND MORE. $$$

The 10-year USTreasury Note yield (TNX) touched 4.0% in the last two weeks. The news generated concern, noted by the Jackass also in a public article. The event also marshalled forces to oppose it. The TNX has since come down to near the 3.8% level. The relief has enabled the Dow Jones Industrial Index to push above the 11,000 mark. My view is that the major US stock indexes are a concurrent indicator of the USDollar. A weak US$ permits a higher Dow stock index. Many serious worries come with higher USTreasury yields. The threat to stock valuation is obvious from pricing models. Going hand in hand is the threat that mortgage rates will rise enough to harm home sales even worse. A strange effect is also at work. Homeowners will repay their mortgages at a slower rate, since refinanced loans will halt. Thus the investors will hold mortgage bonds for a longer period. The typical strategy employed by large investors like mortgage finance firms is to hedge the interest rate risk and the early mortgage repayment risk. The firms execute the hedges by selling USTreasurys and selling USTreasury Bond futures contracts. The effect is to push USTBond yields higher still, which could also send mortgage rates higher, undoing the efforts by the USFed to hold the mortgage rates under 5%. The unwind of hedges is called the Convexity Effect, and it is as powerful as it is perverse. BY FAR THE MOST PERVERSE CONSEQUENCE OF HIGHER USTREASURY BOND YIELDS IS THE URGE FOR THE WALL STREET MAESTROS TO SEND DOWN THE STOCK MARKET IN ORDER TO PRODUCE HIGHER DEMAND FOR USTREASURYS. They have all the tools and experience, along with the fascist partnerships (meaning merger between state & corporation). See the Wall Street Journal article (CLICK HERE).


CREDIT DERIVATIVES FIRES BURN

◄$$$ CREDIT DERIVATIVES ARE CAUSING AN ENORMOUS HIDDEN FIRE, AS LONG-TERM INTEREST RATES RISE SLOWLY. MUTUAL DAMAGE IS DONE FROM THE CREDIT DERIVATIVES WITH USTREASURYS AND MORTGAGE BONDS, THE GREAT HIDDEN BLACK HOLES. POSSIBLY TRILLION$ OF NEW MONEY FINANCES THE BLACK HOLES. DYNAMICS WITHIN CREDIT DERIVATIVES GENERALLY HAVE SUFFERED MASSIVE CHANGES, RESULTING IN CATASTROPHIC LOSSES FOR THE BIG FOUR BANKS. $$$

The monetization to put out the ongoing endless credit derivative fires is not measurable, possibly in the tens of trillion$. Proof of a killing field in our presence is difficult when it comes to credit derivatives. They do their work under the creaking and broken financial structures out of view. Wall Street firms basically created a system of contracts that exploited the demise of the financial system itself, whose destruction they were largely responsible for. My suspicion screeches loud, that the biggest banks are being crushed under the weight of Interest Rate Swaps. The evidence is indirect, seen in the form of negative swap spreads. The Interest Rate Swap credit derivative market must be suffering from powerful hot fires as long-term rates rise and spreads turn negative. As usual, the financial press ignores the negative swap spread story. They would not know how to describe it anyway. According to the BIS that publishes such data, the volume of IRSwap contracts was roughly $154 trillion in a June 30th report. The Greek bond debacle and various sovereign Credit Default Swap contract discussions could actually be lesser events by comparison. The veteran bond traders are quick to point out, how the likelihood of negative spreads having been hedged effectivly by the massively large banks is very low. Thus their unhedged bank IRSwap exposure is massive, and must be burning through capital at a rapid rate. Record losses are probably being registered. Zero Hedge reports about rampant rumors of a few of the trading desks having placed leveraged bets on spread divergence over the past months and years that are currently in critical condition. Yet nobody is discussing this for fear of another round of bank runs directed at the big banks. Complex factors are being interpreted to mean that banks satisfy all of their short-term funding needs via the ready shifting of excess reserves. Therefore, the USFed hike in the discount rate was a most irrelevant stroke. And just in case there is still confusion as to what negative swap spreads mean, here is a useful primer.

The IRSwap spread is defined as LIBOR rate minus the USTreasury Note yield, in other words the 10-year LIBOR rate minus the 10-year USTreasury Note yield. Pardon the edits, to enable clear reading. They say height of the crisis, but could mean height of the circus. Morgan Stanley Research wrote, "The big news is that 10y swap spreads have fallen below zero. This spread has always been positive, but today it is negative, implying that UST 10y yields have risen above 10y Libor rates. But the bigger questions are how do we define value in spreads and how much more inverted can 10y spreads go? At the height of the crisis in 4Q08, 30y swap spreads got to minus 41bps and have remained inverted ever since. The inversion of 30y spreads had more to do with technical, exotic, and hedge related factors. But those elements are missing from the inversion of 10y spreads. That is what makes it interesting. Today we view the inversion in 10y swap spreads as a harbinger of the massive supply of UST debt that will ultimately drive yields higher." REPEAT THAT LAST LINE. CONDITIONS HAVE BEEN CREATED FOR THE MASSIVE SUPPLY OF USTREASURY DEBT TO LIFT LONG-TERM BOND YIELDS MUCH HIGHER!! But that is only their opinion, a position held for almost a year. They might vastly under-estimate the power of JPMorgan, with unlimited money creation to support the Interest Rate Swap contracts.

The technical factors are difficult. Zero Hedge explains, "The first point argued that Libor rates should be higher than UST rates because there was a 'repo-specialness' premium between UST's and Libor. The second point refers to corporate issuance: if the curve steepens, then corporations are more likely to swap their long-term liabilities at higher rate levels into short-term liabilities at lower rate levels. The last point refers to the relative level of UST issuance. If the US economy slows and goes into a deficit, then the US will issue more Treasuries to fund itself, therefore narrowing swap spreads." The picture is one of debt security saturation, against a backdrop of phony LIBOR posted rates. If nothing else, the following two series chart confirms that no USEconomic recovery is in occurrence. The inversion might actually loudly scream that a powerful deterioration is in progress.

Much of the bond structure has changed beneath the visible platforms, with profound alterations coming from the credit derivatives relied so heavily upon. Notice the comments about speculation, not hedging, forcing important changes to the structures. My view is that speculation has rendered the IRSwap as no longer defensible, when its magnitude for defense of the USTreasurys has gone berserk to begin with. Historically, the long-term bond yield should be 2% to 4% above the prevailing price inflation rate. So long-term yields should be in the 7% to 10% range. BUT THEY HAVE NOT BEEN FOR YEARS, a testimony to the enormous magnitude of IRSwaps at work. Perhaps the extra large USFed hand has ruined the entire mortgage hedge framework. Morgan Stanley Research wrote, "Later in the 1990s and over the last decade, the swaps market took on increased importance not just as a hedging vehicle, but also as a speculative vehicle. What drove swaps over the past 10 years has been hedging the interest rate sensitivity in mortgages. But today, a case can be made that mortgages are less interest rate sensitive than in the past (i.e. less negatively convex). The reason is that households may be less able to refinance their mortgages for a given change in interest rates, because refinancing is more related to FICO scores, credit availability, loan-to-value, incomes, etc. We believe swap spreads will narrow and remain inverted as interest rates have stayed low and stable, volatility has fallen, spread products have been narrowing, and there is little hedge related need to pay fixed in swap. Add to that the old-time reasons, which are becoming more popular drivers of swap spreads today, of reduced specialness premiums, tighter REPO-LIBOR spreads, steeper yield curves and monstrous USTreasury supply. All of which become the contributors to 10y swap spreads moving negative. Oddly, the tight level of swap spreads is a look back into the future. But the inversion of spreads is the new twist."

The Morgan Stanley conclusion is that USTreasury yields are poised to spike upwards. To be sure, their firm has been pushing for high rates and major curve steepending for a while. Recall it is their call that the 10-year USTreasury will hit 5.5% this year. They wrote, "The issuance of UST debt is dwarfing LIBOR-related issuance. For example, we expect UST net issuance to be $1.7 trillion and net issuance of MBS to be zero. Thus, the relative issuance of USTs versus LIBOR-based products mainly accounts for the inversion in swap spreads. This is a first sign of stress leading to higher UST yields and is not to be missed." One must wonder if Morgan Stanley is overlooking massive JPMorgan monetization of the USTreasurys, hedging in the process with Interest Rate Swaps, doing the USGovt bidding behind the curtains. Also one must wonder if they overlook the phony numbers in LIBOR itself, which have been accused of gross inaccuracies for two years. Zero Hedge implies their disagreement with the Morgan Stanley conclusion of much higher long-term rates coming.

A very significant loss could be imminent to some of the Big Five US banks, whose hint is the highly unexpected inversion. The total IRSwap volume of $154 trillion is not vulnerable to the inversion condition beyond the seven-year timeframe. The Office for the Comptroller to the Currency does indicate that there is $27 trillion in Interest Rate Swaps outstanding with a maturity greater than five years. While JPMorgan, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo have about $131 billion in IRSwaps of all types among them in total. Take a close look to see that JPM, Goldman, and BOA have $9 trillion, $7 trillion, and $5 trillion in IRSwaps over five-year timeframe. This is very troubling and might paint a picture of a massive nightmare or scheiss storm directly ahead. No wonder the USCongress, under the Goldman Sachs thumb held by the USDept Treasury, has written new backstop guarantees for Wall Street firms totaling $5 trillion. The amount dwarfs the TARP backstop by a factor of seven. The irony is that the huge sum might not be enough. They might have picked the number arbitrarily, like the $700 billion size of the TARP funds. Break out the magnifying glass for the table, Gertrude.

Huge questions must be posed, billboard type questions. 1) How big the exposure to negative swap spreads? and 2) what the portfolio loss impact as a result of this unprecedented spread inversion? See the spectacular Zero Hedge article (CLICK HERE).

RESUMED HOUSING & MORTGAGE SLIDE

◄$$$ MOODYS HAS BEEN BUSY. THEIR RESIDENTIAL MORTGAGE DOWNGRADES INVOLVE A STAGGERING $1.9 TRILLION IN CREDIT PORTFOLIOS. MOODYS IS DOING ITS PRINCIPLED JOB OF ASSIGNING PROPER STATUS ON TOXIC DEBT, WHILE THE BANKS DO THEIR DISHONORABLE JOB OF CONTINUING TO HOLD SUCH TOXIC DEBT AT PAR VALUE. $$$

At times, the rating agencies do their job. Moodys has just downgraded a whopping $1.826 trillion in 18 residential subprime mortgage backed securities (MBS) tranches. They were issued by BNC Mortgage Loan Trust. The property collateral backing the bonds is from residential mortgages of several types, first lien, fixed rate, and adjustable rate subprime. The agency Moodys also downgraded another $30 billion in other residential MBS tranches issued by numerous financial firms, such as First Franklin, Citigroup Mortgage Loan Trust, Park Place, First NLC, RASC, and RAMP. One might be amazed that nearly $2 trillion in subprime still floats in the credit market. The need for bank asset writeoffs is sharply reduced as a result of the FASB allowance that toxic worthless debt securities can be carried at par on the bank balance sheets, or at any value they deem, like from valuation models using income stream and ignoring market value. The credit market for almost a full year has operated on vapors, myth, deception, fraud, vast USFed facilities, money laundering, extorted federal funds, and gobs of hope. Recall the Obama campaign promise of much more transparency. Instead the nation has seen more bank welfare, continued endless war funding, health care, and possibly soon a value added tax. See the Zero Hedge article (CLICK HERE).

◄$$$ U.S. HOUSING PRICES HAVE RESUMED THE DECLINE. IMPACT ON THE USECONOMY IS AS CERTAIN TO OCCUR AS IT IS TO BE DENIED. THE GROWTH BUILT ATOP THE HOUSING BUBBLE WILL CONTINUE TO CAUSE WRECKAGE. $$$

The housing bear market continues to run downhill. US house prices declined 0.6% on a seasonally adjusted basis from December to January, according to the Federal Housing Finance Agency (FHFA) monthly house price index. They actually included in their report a warning that the Double Dip in housing prices has possibly arrived. The January decline follows a 2% decline in December. Current prices are marked to be near the October 2004 level. Recent surges in excess home supply from bank owned repossessions are pulling prices down. The graph below shows a compound growth rate of 3.5% consistently, interrupted since 2006-2007. The US housing market is in a decline, both in activity and prices, without much denial, except from USGovt agency and US banking leaders. Paul Dales is the US economist at the Toronto office of Capital Economics. He said, "A double dip in prices has already begun, and in the space of just two months, it has more than reversed the increases of the previous year. We first predicted a double dip in house prices at the start of February, but even we did not think it would come this soon. The housing market may remain a noose around the neck of the US economy for some time yet." It comes more quickly and more powerfully than the supposed experts anticipated, but right on schedule as the Jackass expected. Tax credits cannot sustain a market with such a huge overhang of unsold supply, that actually grows.

The graph starts in 1991, with one tick per year to the present. The reduced February existing home sales exhibit a reversal in previous gains artificially produced by the homebuyer tax credit. Dales pointed out few signs of a sustainable housing recovery and more signs of stress. The official home inventory rose to 8.6 months supply, but it is understated due to unaccounted actual inventory held on bank balance sheets, from foreclosures. Banks stubbornly refuse to liquidate into a weak market. The record low mortgage rates have accomplished little except to hold back the decline in prices. Dales estimates another 5 to 6 million homes will be foreclosed on during this entire cycle, which in my view has been and will continue to appear to be endless. My forecast is for prices to come down another 15% to 20% in this cycle. They will be pushed down by the commercial sector very soon. See the Housing Wire article (CLICK HERE).

◄$$$ FANNIE MAE SHOWS A SHOCKING DELINQUENCY RATE, DOUBLE THE LEVEL ONE YEAR AGO. FREDDIE MAC SHOWS A SHOCKING DELINQUENCY RATE, DOUBLE THE LEVEL ONE YEAR AGO. THE COMMERICAL MORTGAGE DELINQUENCY RATE IS AT A RECORD LEVEL, FAST APPROACHING THE ORIGINAL SUBPRIME RATE OVER TWO YEARS AGO. FLORIDA REMAINS A LEADER IN DELINQUENCY. $$$

All talk of economic recovery must begin with a sanity check of mortgage delinquency. The USEconomy growth spurt in the last decade was as phony as any bubble based episode, just as fleeting, but with an extraordinary climax bust. Fannie Mae reported its January serious delinquency rate (DQ) for single family houses. The rate hit a new record of 5.54%, a notable rise from the December 5.38% DQ rate, and double the 2.77% rate posted in January 2009. Bear in mind the USFed has claimed to be moving away from outright subsidies to the mortgage bond market in the form of official monetization programs. Many bank analysts claim the USFed has been the mortgage market in recent months!! The new mortgage bond issuance has been on the slight decline, a double edged sword to be sure. Only $43.9 billion in mortgage backed securities (MBS) were issued in February, fully 7% less than the $47.6 billion in January. The current challenge is for the USFed to find private buyers given that the USFed as USGovt proxy attempts to step aside, no more subsidies. A staggering accounting item must be mentioned. The Fannie Mae total book of business grew at a 1% annualized pace to $3.230 trillion, but the actual guaranteed MBS and mortgage loans declined at 0.9% to $2.882 trillion.

On the very next day, Freddie Mac announced its total delinquent loans hit a record high at 4.08%, an increase from the January 4.03% DQ rate, and double the 2.13% rate in February 2009. Despite trillion$ being throw at the housing market and the banking system for mortgage portfolio swaps, the delinquencies continue to head upwards. The financial markets should focus more on key indicators within the mortgage and housing market, like rising DQ rates and still falling home values. Instead they look at pending sales and housing starts, distracted by expert claims without grounds that the market has stabilized. Reduced fiscal and monetary stimulus programs do not necessarily translate into normal times. Instead, they spell heightened risk of a market crash, again.

The commercial mortgage backed securities have their own distress levels of significance. The month of March recorded the fastest rise in the CMBS delinquency rate in history. The breadth of the property market solvency is horrible. Commercial real estate is in deep trouble, a fact marred by record high downtown vacancy rates. RealPoint published its March CMBS delinquency data. The commercial DQ rate hit a record high 6% for the month. According to competitor tracking agency TREPP, the commercial DQ rate is even higher at 8%. They both cited the biggest monthly spike ever in delinquencies over 30 days. See how the breadth is uniform across commercial property types. The DQ rate has jumped roughly four-fold in each category. Lodging (hotels & motels) and retail (shopping malls) registered the biggest jump.

The Florida 90-day delinquency rate hit 19.4%, more than double the US national DQ rate of 8.78%, confirming the Sunshine State as ground zero. The housing crisis and mortgage debacle continues its wreckage, whose path includes California, Nevada, Arizona, and Georgia. Florida leads the housing bust with the highest delinquency rate of any state. The First American CoreLogic report shows the mortgage delinquencies have skyrocketed in the last year. From February 2009 to February 2010, the DQ rate shot up radically in Florida from 10.84% to 16.96% of all residential mortgages. The USGovt sponsored programs to halt the foreclosure movement, like the Making Home Affordable, have been ineffective.

The impact on the big banks is soon to be felt with greater force and magnitude. They have been carrying a raft of foreclosed homes on their balance sheets for over a year. They can play accounting games all they wish, with USGovt blessing, but the reality is a severe bloat and grotesque distress. Pressure to relieve the distress is acute, by means of basic supply versus demand and the need for the market to clear. Bank of America recently announced it will significantly increase the foreclosures in the year 2010. Enough is enough. Liquidation in full bore volume is a long way off. But the process might begin with some large banks. See the Calculated Risk article (CLICK HERE).

◄$$$ RICK ACKERMAN EXPECTS ANOTHER 35% HOUSING PRICE DECLINE OVER THE NEXT FIVE YEARS. HE CALLS THE LOAN MODIFICATIONS NOTHING BUT ATOMIC BOMBS. $$$

Rick Ackerman is a sage sharp analyst. He calls the loan modifications nothing but atomic bombs. He points to Bank of America, and makes direct inferences. The new gesture by Bank of America, for instance, reeks of desperation. If BOA is willing to take 20% in loan balance reductions, they must believe with conviction that the home prices are worth a quantum amount lower, like 30% to 35% or more. Ackerman wrote, "Although Bank of America has won praise from the news media for offering to reduce the mortgages of tens of thousands of underwater homeowners, Rick's Picks readers were less kind in their assessment of the new relief program... We ourselves had called mortgage modification the most consumer oriented idea to come out of the banking sector since the real estate crash began in 2007. We had not intended to sound so kind, since no matter what rescues are tried, we still expect real estate prices to fall by a further 35% before deflation has run its course in perhaps five to seven years." Ackerman referred to one reader who posted in the forum. The man saw the BOA plan as an act of desperation, their only hope of keeping foreclosed assets from being liquidated at street value. The true street market value must be MUCH LOWER. The bank is leveraged so highly that they have no choice but to write down 20% rather than take more significant credit losses, given that leverage. My view is that a quiet race is starting, to reduce home loan balances and halt a flood of liquidation that could grow out of control and kill a few very large banks.

Almost 500 thousand struggling loan customers have not supplied information in order to qualify for mortgage aid within the HAMP program. About 50% of them, as in 250 thousand people, have not made a payment for more than a year, or are underwater by at least 50% of the value of their homes. The guidelines for servicers participating in HAMP stipulate that the borrower must submit a Hardship Affidavit. The document serves as their sworn testimony that they have been driven into default due to some particular hardship encountered, and despite making every possible attempt, they can no longer "maintain payment on the mortgage and cover basic living expenses at the same time." This is according to the HAMP Directive. My belief is that they distrust the federal programs, comprehend that they are mere revolving doors of default, and wish not to wake the sleeping dogs. They hope to remain undetected in scoffing at home loan payments. They are living with free rent. See the Calculated Risk article (CLICK HERE).

◄$$$ THE NEW & IMPROVED USGOVT LOAN MODIFICATION PLAN IS BUT AN OPEN WINDOW FOR REDEEMING TOXIC MORTGAGE PAPER FOR BANKS, USING A TAXPAYER CHECKBOOK. NOTHING CHANGES, JUST THE HOPE & HYPE. BIG BANKS WILL HAVE AN EASIER TIME SWAPPING TOXIC PAPER FOR NEWLY DEVISED USGOVT INSURED BONDS. $$$

They call it the next USGovt mortgage modification plan, but it is just a streamlined window for converting toxic mortgage bonds to USGovt insured bonds, but with an incentive to reduce loan balances finally. The boatloads of mortgage bonds out there, not labeled subprime as such, but surely smelling like subprime rotting papyrus, can soon be convertible to AAA FHA-backed loans. The key is that banks and financial firms can swap insolvent loans for higher quality paper, if one regards USGovt backing as bearing value. The crafty players are grabbing all the garbage mortgages in circulation, preparing for a nice payday in the conversion to FHA loans. The handoff is but a new FHA window to be created, due to gain wide usage. The new program offers incentives to banks and other wealthy investors in mortgage backed securities (MBS) to cut generously the principal on underwater mortgages which keeps people from strategic default or foreclosure. In return for accepting a loss on the portfolio, a conversion takes place to an FHA-backed loan when the loan goes into the refinance stage. The haircut, an immediate loss to banks, comes with an explicit USGovt guarantee. The tradeoff is the credit loss on the face value of the mortgage bonds, the same market for MBS bonds that will enjoy a revival. Demand will grow for garbage toxic mortgage bonds, since they are soon convertible. The moribund securitizations (MBS) will enjoy some resuscitation, with some principal gains. The new Obama Admin mortgage modification program is not so much aid for homeowners as it is a different form of bailout for banks holding MBS bonds hard to move in a dead market. Time will tell if loan reductions are more than tiny irrelevant amounts gaming the system to qualify for refinance into AAA bonds. Savvy speculators are combing through their rotten portfolios looking any toxic paper they can find to dump on Uncle Sam in his Federal Housing Admin window. Over 167 thousand home loans are currently in a process of modification. See the Zero Hedge article (CLICK HERE).

THE TINY USECONOMIC BOUNCE

◄$$$ JOBLESS CLAIMS MARCH ONWARD, CLEAR TESTIMONY TO NO RECOVERY WHATSOEVER. CHRONIC UNEMPLOYMENT HAS DOUBLED FROM A YEAR AGO. PERSONAL BANKRUPTCIES WERE UP 9% FROM MARCH 2009, BUT THE PROPORTION OF CHAPTER 7 BANKRUPTCY FILINGS IS UP TO THREE QUARTERS. PEOPLE SHOW SIGNS OF GIVING UP AND LOSING THEIR HOMES. THE A.D.P. REPORTS SLIGHT MARCH JOB LOSSES IN THE PRIVATE SECTOR. THE USGOVT JOBS REPORT HAS BECOME A LAUGHING STOCK, CLAIMING A BIG RISE IN NET NON-FARM JOBS. $$$

Jobless claims are without a doubt the best indicator of economic recovery, difficult to gimmick. Over 400 thousand new people each week continue to file for unemployment insurance. The number of people applying for unemployment benefits rose to 460k in the week ended April 3rd, the USDept Labor reported. Fully 439k new people filed jobless claims in the week ended March 27th. The number was on par with the March 20th week when 445k filed claims. The data series is steady, without a hint of recovery. Big corporate monitor Challenger Gray & Christmas showed that planned job cuts accelerated substantially in March.

For the week ended March 27th, continuing claims were measured at 4.55 million. The four-week average of these ongoing claims declined 36k to 4.65 million, the lowest level since January 2009. This is a good sign, but still the chronic jobless make a large number. In the week ended March 20th, about 5.8 million jobless workers received extended federal benefits, down 223k from the prior week. Regard extensions as another excellent distress signal. Altogether, 11.1 million people collected some form of unemployment benefits in the week ended March 20th, down about 373k from the previous week. The Easter holiday does skew the data a little. See the Market Watch article (CLICK HERE). The ranks of long-term unemployed continue to hurtle upward, and even set an historical record. As of March, over 6.5 million Americans remain without a job for at least six months, an all-time high, according to the USDept Labor. The shocker is that the number without employment over six months is more than double the amount this time last year. No sign of recovery. See the Huffington Post article (CLICK HERE).

The federal personal bankruptcy law was made tougher in October 2005. More Americans filed for bankruptcy (BK) protection this March than during any month since that time of altered law. A report was just released by Automated Access to Court Electronic Records, a data collection company. Federal courts reported over 158 thousand BK filings in March, a brisk jump of 35% from February, and a jump of 19% over March 2009. The March data exceeded easily the previous record over the last five years at 133k last October. No evidence whatsoever of recovery. The nature of the BK filings has changed, a qualitative change for the worse. It indicates less hope and more cases of losing homes altogether. The Chapter 7 filings, a simple and inexpensive option, are rising faster than more complex Chapter 13 restructure filings. The messier Chapter 13 reworks the debt payment with reduced debt balances, according to income, in such a way to permit people to keep their homes. Therefore, more homeowners are simply walking away from mortgages that are underwater, whose debt exceeds home value, in despair.

Katherine Porter is a University of Iowa law professor and bankruptcy expert. She said, "Fewer people are trying to save their homes. They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable. We think that means fewer and fewer families believe they are really going to save their homes. They do not have any equity, so why try to keep up with their home payments? To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they cannot use Chapter 13 because they do not have that income to pay into the plan. People use their tax refunds to pay their attorney fees." The ratio data on BK filing type is clear in the trend. The US Trustee Program within the USDept Justice oversees bankruptcy cases. Their data shows Chapter 7 filings as a ratio of all bankruptcies have increased to about 73% in year 2009 from about 62% in year 2006. The data for March is similar, with 75% entering into Chapter 7 filings of the 158,141 total BK filings in March. Interpretation is vivid and tragic, as people have begun in droves to abandon hope on keeping their homes. March is a popular month to file since tax refund checks can be directly used to cover BK lawyer fees. See the New York Times article (CLICK HERE).

The ADP Employer Services report claimed that private sector employers shed 23 thousand jobs in March, surprising economists who expected job growth last month. Big losers in the ADP report were the construction industry, which lost 43K jobs in March, and factories with 9k jobs lost. On the plus side, the service sector added 28k workers last month. The ADP is simply stated a much more reliable report, a better gauge, than the silly discredited Bureau of Labor Statistics sham that receives so much attention. The ADP focus is on the private sector, avoiding the government sector entirely. In the skewed BLS prominent report, many temporary jobs are included, like the hiring of over 600k census workers by the USDept Commerce. See the Washington Post article (CLICK HERE).

The official March Jobs Report purported that 162 thousand net growth in jobs, amazingly. But they resorted to a mythical +81k jobs produced by their stat lab in the Birth-Death Model. It has no validity at all. They should tell the US public where those jobs are located, especially the layoff victims who file for unemployment insurance. The Shadow Govt Statistics folks estimate a 250k positive bias in each monthly payroll calculation in Jobs Reports. In fact, the annual Bureau of Labor Statistics benchmark revision, published in January 2010, featured massive revisions and an admission that their methods missed countless job losses. But the Birth-Death Model is politically useful and continues to be used. Massive revisions occur every year at the same time. Nobody cares. They figure jobs grow at small companies even after they shut down, since they do not bother to monitor the shutdowns. The official February USGovt unemployment rate was 9.7%, down from its recent high of 10.1% in October. The official U6 jobless rate that includes discouraged workers remains high at 16.9%, down a little in recent months. The more reliable Shadow Govt Statistics measure of the jobless rate is 21.7%, not much change in recent months. The labor market shows no signs of recovery.

◄$$$ THE GROSS DOMESTIC PRODUCT COLLAPSE IN THE UNITED STATES CONTINUES, BUT WITH SLOWER DECLINE. THE FEDERAL DEFICITS CONTINUE TO GROW, WHILE THE ADJUSTED ECONOMIC CHANGE CONTINUES TO DECLINE. $$$

Never use the USGovt economic growth statistics, even their statistical formulations. They take change from one quarter to the next, adjust the daylights out of it with grotesque deceptions, then multiply the result by four, to produce the worst accuracy of any economic statistic in existence except that for price inflation. The better approach is to view the annual change nominal GDP (shown in olive green), which is the given quarter in raw numbers versus the same quarter one year ago. Nominal means base numbers without any treatment. The adjusted GDP (shown in red) factors in price inflation, but must therefore do so inadequately. If the CPI is actually 6.0% and not 3%, then the adjusted GDP series will not display the decline as great as it should. The Shadow Govt Statistics folks professionally report the true Consumer Price Index to be in the 5.5% to 6.0% range these recent quarters. So the adjusted GDP displayed here is conservative, the reality worse. That red line is the real GDP in the USEconomy going back to the early 1990s, meaning inflation adjusted. The USEconomy continues to decline, the real GDP being at least 12% worse at the end of 4Q2009 than at the end of 4Q2008. It is still falling. The tragedy comes from the growing USGovt federal deficits, a matching bookend, worse by almost 12% at end 4Q2009 versus end 4Q2008. Justification for deep concern comes from the shrinkage in the money supply. The M3 continued by the Shadow Govt Statistics folks happens to be in a decline measured by the largest percentage in modern history. SGS expect the effects on the USEconomy to be increasingly obvious in the next month or so.

The reason a total collapse has not occurred yet is that the USGovt has stepped in and spent around $3 trillion in newly minted paper money over the last two years. They have executed stimulus, rescues, bailouts, and nationalizations. In doing so, the USGovt has concealed and masked the insolvency of the entire banking system, but not assisted a significant slice of the insolvent households. The collapse has wrecked many pension funds along with annuity plans and other defined benefit plans. They also changed the rules of accounting for bank assets, a maneuver done in the open, resulting in a phony stock recovery based upon insolvency and fraud. The final fruit is bitter, a veneer of a recovery, exaggerated at every turn.

◄$$$ ECONOMIC GROWTH IN THE UNITED STATES IS A FANTASY. EVEN GOLDMAN SACHS KNOWS IT. THE NEXUS TO THE SYNDICATE LET SLIP ITS VIEW THAT MOST OF THE 4Q2009 GROWTH WAS AN ILLUSION. BY SHARING SUCH ANALYSIS, THEY ATTEMPT TO EARN PUBLIC GOODWILL. $$$

After the clouds clear, the dust settles, the lofty estimates are brought down, inventory levels are known, and actual trade gap data is known, the 4Q2009 Gross Domestic Product will be announced. To be sure, it is riddled with deceptions and inaccuracies, fully intended. Yet the revisions give a hint as to the direction of the USEconomy. Goldman Sachs expects the silly high 5.9% GDP to be revised downward in a significant way. Much optimism and cheer came when the strong growth was announced in the highly unreliable preview on GDP in January. The motive is clearly to support the stock market and deceive people on the fiction that is the USEconomic recovery. According to Goldman's Jan Hatzius, expect a sharp downward revision to as low as 2.2% growth for the Q4 GDP. Hatzius based his estimate on the income side calculation of GDP as opposed to an spending method. They are two different approaches toward the same goal. The USGovt will be hard pressed to avoid such a GDP release. David Rosenberg, one of my favorite economists, now working away from Wall Street and in Canada, demonstrated that the 3Q2009 GDP was about minus 7% after exclusion of official stimulus. Lastly, the bilateral trade gap with China has come down to $16.5 billion, the lowest level since March 2009. Either trade friction has blocked numerous big deals, like farm products, or else the USEconomy simply importing more from other parts of the world.

◄$$$ RETAIL SALES HAVE REBOUNDED, BUT THE EFFECT IS TEMPORARY. USGOVT STIMULUS AND VARIOUS PROGRAMS LIFTED RETAIL SALES. BESIDES, HIGHER SAVINGS AND LOWER CONSUMPTION IS THE FORMULA TO ANY ECONOMIC RECOVERY. $$$

Retail sales have been a bizarre, backwards, controversial sector of the USEconomy. For two decades, US citizens have been wild spenders on retail items, and told that this is a sign of strength in the nation. Such a viewpoint is opposite to reality. Investment, like in businesses or productive assets, is the sign of strength, not consumption. A company does not become strong by spending on frivilous junk, especially when made by foreign hands, and neither does an economy. In the last decade, the US consumer did not fortify the United States but rather the Chinese and Japanese economies and citizenry. The US is saddled with insolvency in banks, homes, government, and industry. China has its problems, but it also is in possession of $2.4 trillion in savings. The USEconomy will not show signs of recovery in rising retail sales or reduced trade gaps, which is the prevailing common heretical viewpoint held and promoted. In fact, the USGovt does much to discourage savings and investment. People are told to spend to make the nation strong, while corporations invest in plant & equipment in China and elsewhere. Labor is cheaper overseas, taxes are lower overseas, and government regulations are much less burdensome overseas. The reversed initiatives hit an extreme when US consumers raided rising home equity in the 2000 decade, spent on vacations, room additions, education, medical costs, boats, second homes, ordinary expenses, but then came the wave of delinquencies and foreclosures. The nation is not told of the linkage between consumption, called by some burning one's furniture, and loss of homes. The Hat Trick Letter warned of this linked relationship for six years.

Using the official USGovt price inflation statistics, the inflation adjusted monthly March retail sales rose by 1.5%. That figure is seasonally adjusted also. March real retail sales rose by 5.1% annually on an inflation adjusted basis, but rose by a 7.6% gain before inflation adjustment. Real February sales were up 2.1% annually, versus a 4.4% gain before inflation adjustment. Certain short-term factors assisted to produce a bounce in retail sales from under the $160 billion level. USGovt stimulus has worked its extremely limited magic. Look for the trend to head down in the months ahead. Also, higher gasoline prices have given the illusion of higher nominal sales, but the inflation adjustment is done in aggregate, meaning the overall doctored lower CPI is used to reduce those gasoline sales. No gasoline price index is used.

The Jackass position for a few years has been that very high trade deficits are linked to destructive consumer spending, harmful to the long-term health and prospects of the USEconomy. Low trade deficits mean a powerful economic recession, since imports are seriously reduced. Nothing has changed on this dynamic, since factories to produce consumer products have NOT returned to US shores after a tremendous abandonment of industry to China in years 2001 to 2004. Recall it was labeled a Low Cost Solution, when it was actually a prelude to economic failure in the United States. The outcome can be painfully seen. Hand in hand with the sustained level of US consumption has been rising levels of US indebtedness. Essentially, the United States exported income to China and replaced it with debt. The end result is insolvency.

Consider the trade deficit data. The Bureau of Economic Analysis and the Census Bureau reported the nominal seasonally adjusted monthly trade deficit at $39.7 billion for February, up from a revised $37.0 billion deficit in January. The February trade balance reflected both higher imports and exports, with a sharper increase in imports. Since February 2009, an 86% annual increase in oil prices has occurred. The January and February 2010 merchandise trade deficits were $40.9 and $42.5 billion respectively, which project to a whopping inflation adjusted annual deficit of $500 billion. The trade deficit appears likely to provide a strong net drag on 1Q2010 Gross Domestic Product, after lifting the GDP growth in Q3 and Q4 of 2009. It is all backwards, due to incredible imbalances structurally. It should be noted that March import prices were up by 0.7%, and March export prices were up by 0.7% also. Pressures to price inflation are coming from both the currency side externally and the cost sid internally. Both were down slightly in February.

A point simply must be made, one coming from JPMorgan analysts of all places. They actually made a press release that stated retail sales were up in healthy terms due to strategic home loan defaults and scoffing at mortgage payments. People are not paying their mortgage properly, instead using the money for regular expenses like shopping!! Bank of America alone claims they have 250 thousand such home loans that have not made monthly payments in over a year. This perverse phenomenon is broad. Imagine an economy that continues to churn, using money that is denied Wall Street banks!!

◄$$$ NEWLY CREATED DEBT IN THE U.S. FINANCIAL SYSTEM HAS A HORRIBLY UNPRODUCTIVE OUTCOME IN THE PRODUCTION OF NEW USECONOMIC ACTIVITY. NEW JOBS ARE NOT A CONCERN WHEN NEW DEBT HAS BEEN COMMITTED BY USGOVT AID, NOR HOLDING CURRENT JOB POSTS. ONE NEW USDOLLAR OF DEBT RESULTS IN MINUS 45 CENTS IN ECONOMIC ACTIVITY. THAT IS WORSE THAN INEFFICIENT. IT IS EVIDENCE OF BLACK HOLE DYNAMICS. $$$

The maestros believe that new money or new debt (hard to tell the difference) can be created, and presto change-o, the USEconomy rebounds. The new money production line is disconnected from the tangible economy. The bankers can thus can tap federal liquidity facilities and ignore their borrowing customers. The banking authorities are resisting the solution, for the clear reason that many from their sector would be destroyed and their power eradicated. Most USGovt programs have been blatant, extorted, or disguised Wall Street rescues, aid, and welfare. Conversion of toxic bonds does nothing to lift the USEconomy and produce jobs. The TARP funds proved that redemption of fraud ridden toxic bonds was the motive, along with executive bonuses.

The US Federal Reserve has overseen vast money printing for years, and a continuous climax in the past two years. A crescendo awaits. A tipping point comes, when all the USGovt deficits, all the USTreasury Bond issuance, all the US bank failures lead to a profound change in international sentiment toward the USDollar. The creditors will exit, since the US markets are not permitted to clear, to liquidate, to enjoy the fresh breeze inherent to capitalism. Financial markets throughout the entire USEconomy are essentially frozen. A huge waiting game has emerged between the expectant beneficiaries of USFed efforts to stimulate inflation and economic participants. In the process, the USEconomy deteriorates further. See the home loan modifications as an example of a waiting game. Consider the chart that takes the change in GDP and divides it by the change in Debt, a concept simple to simple for economists who prefer to adjust the data beyond recognition or value. The chart shows how much productivity is gained by infusing $1 of debt into our monetary system, a system wherein the money is but denominated debt. Back in the 1970 decade $1 of new debt added 60 to 80 cents to the national output of goods & services. As more debt entered the system, the productivity gained by new debt diminished. Eventually the debt won out, reaching a total saturation level. Call it constipation instead. The collapse has begun that has not ended. A dilemma has been created by the top down monetary structure, as the nature of the money itself in the USDollar is but a fish rotten at the head.

Consider the shocking graphic above, a highly illustrative if not shocking chart. The latest USTreasury Z1 Flow of Funds report was released in mid-March, reflecting activity through the end of 2009. It dismisses most modern economists and their heretical economic theory, since debt suffocation is the end result, not prosperity. It explains the jobless recoveries of the past and how each recent economic cycle produced higher monetary figures, yet lower employment. Debt suffocation has been in progress, now in climax. Macroeconomic debt saturation occurred, thus causing a radical dynamic alteration with the debt relationship in the USEconomy. Their quantitative theories are worthless, since the US financial system has been dead for 18 months, not to be revived. Any economic theory, formula, or relationship that does not consider the non-linear relationship between debt and its conversion to production is destined to fail. The resulting impact of a unit of new debt in the USEconomy is actually negative, one new US$ of debt produces minus 45 cents in economic activity. In fairness to the charlatans, quacks, and hack economists, productive benefit from debt is usually negative early in any recession. But this recession is a dreadful never-ending one, full of deceit.

The mere label of 'Jobless Recovery' should generate contempt, since never in history has a recovery come without new job creation. This is a continued deterioration, a masked chronic lingering powerful recession laced with deterioration. If the 0% official interest rate and the $1.5 trillion federal deficit do not convince the observer of failed policy, failed remedy, and failed structural beams within the system, then this chart should help. The engines of debt are totally broken, the saturation levels reached. Ironically and tragically, the response from American leadership will be to press the monetary pedal even harder, thus achieving even more debt, even more recession, worse results if that is conceivable. See the Economic Edge article (CLICK HERE).

Thanks to the following for charts StockCharts,  Financial Times,  UK Independent,  Wall Street Journal,  Northern Trust,  Business Week,  Merrill Lynch,  Shadow Govt Statistics.