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

* Miscellaneous Morsels
* Bankrupt Economic Policy Continues
* Bank Battles & Ongoing Bank Failures
* The Great Home Mortgage Albatross
* The Crippled USEconomy Limps


HAT TRICK LETTER
Issue #65
Jim Willie CB, 
“the Golden Jackass”
17 August 2009

For those of you who were unable to catch a glimpse of the solar eclipse, an extremely rare earth event, here is your chance to see it on your computer. Asia and India had the best viewing opportunity, but people elsewhere are not to be left out. See the YouTube video (CLICK HERE).

"Big losers in the last recession do not become the leaders in the next recovery phase." - Anonymous from New York Stock Exchange (therefore the financial sector cannot realistically lead the stock market recovery, since it is so deeply and most recently damaged)

"Californians seem in denial but some are actually getting upset. More to come and soon I think. My business is in the Napa Valley and the wine ain't moving. The next harvest of grapes is right around the corner. Actually ads appear in the classifieds from farmers selling their grapes. Never saw that before." - EricS in California

"Those Green Shoots were either marijuana plants (and were being smoked by the media) or worse, they have been running around with cans of green spray paint, colorizing the dead brown weeds, then pointing at them and screaming Green Shoots!" - Karl Denninger

MISCELLANEOUS MORSELS

$$$ A GRANDIOSE ERRANT MYTHOLOGY CHAPTER IS BEING ATTEMPTED, WHICH IS BASELESS AND WILL NOT EVEN ACHIEVE PRELIMINARY LIFTOFF. THE MGMT OF PERSPECTIVE ECONOMICS ATTEMPTS TO REPLACE REALITY WITH PERCEPTIONS IN PURE ORWELLIAN STYLE. $$$

Wall Street and USFed Chairman Bernanke are witnessing the end of what Greenspan began, management of an economic and banking system through a prevailing consensus of opinion. They took the inflation expectations principle and built a foundation with it to control the uncontrollable. The principle is called the Management of Perspective Economics (MOPE). In my view it is the NewSpeak concept taken directly from the novel "1984" by George Orwell. The MOPE mind control program has been developed into belief of an economic recovery if the stock market rises, and end to banking distress if the LIBOR and other important bond spreads become narrow, and major banks pass a rigged Stress Test. In general the deceptions are more achievable during good times with expansion than bad times with recession, bankruptcies, bank failures, job losses, and home foreclosures. The MOPE foundation evaporates into reality under the laws of economics. Recall the entire advanced sophisticated bank linkage practices with off-loaded risk, credit derivative contracts, all blessed by Greenspan, the grandiose mumbo jumbo that preceded the greatest bank system collapse in 75 years. MOPE is pure heresy, deception, and misguided popular mythology. One could say Pandora's Box is fully open, ever since official US interest rates went to 0% and extreme monetary easing became policy. These are officially called Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) in order to make them seem sophisticated and effective. They are inflation gone amok, leading to a powerful downward spiral that seeks its practical end, a return to sound money backed by commodities like gold at its core.

$$$ EXCHANGE TRADED FUNDS CONTINUE TO DOMINATE, DESPITE ISOLATED CRITICISM, AS MARKETING THEM APPEALS TO INVESTOR LAZINESS. $$$ Control of the stock market is achieved by two major vehicles, the program trading led by Goldman Sachs and the proliferation of Exchange Traded Funds. While GSax has been exposed, they avoid prosecution for the ultimate in insider trading, front-running the entire New York Stock Exchange, and front running executed USGovt financial policy. Never confuse corruption for brilliance. The ETFunds enable the stock market control in direct manner, hardly subtle. The investment community is appealed to for the low management cost as overhead (fund load), the hands off approach for the lazy investor, and guaranteed return on investment consistent with a market or sector on the rise. However, the dark side contains the risk of diverse direct sector manipulation, as Wall Street employs program trades to target those sectors. Take for instance the GDX, an ETFund for the entire gold mining sector, managed by Goldman Sachs itself. Investors must be made aware of the ongoing vulnerability to GSax shorting the entire sector, and even using USGovt money from the Working Group for Financial Markets in the process. The GDX fund should be actively avoided. The naïve behavior of even the gold community of investors is shameful.

$$$ SPORTS PULLBACK AS AN ECONOMIC VICTIM. $$$ The women's PGA golf tour announced that it will have only 14 events next year in 2010, down from 31 this year and more than 50 two years ago, as sponsors back out. The economic fallout will soon extend to universities and colleges, not to mention towns shutting down services. See the surrounding areas of Detroit Michigan.

$$$ THE ECONOMIC PLIGHT HAS ANOTHER SORDID SIDE, UNCLAIMED DEAD AT MORGUES. THE POOR AND DISENFRANCHISED CANNOT ACHIEVE A DECENT BURIAL. $$$ The story is from Wayne Country Morgue outside Detroit Michigan. Piles of dead bodies lie unclaimed. The chief medical examiner comments on the destitution, counting the 52 unclaimed bodies stacked like cordwood, in some cases four to a shelf, always two to a gurney. Choices must be made, of putting food on the table or burying their loved ones. Some of the dead have been signed over to the county by people either unable or unwilling to pay for the burial. Challenges are faced to locate the next of kin, when indigents are involved. Dr Carl Schmidt offers a final comment laced in truth. " If you do end up here, your chances of getting out of here are greatly increased the nicer you were to people when you were alive." See the Detroit News article (CLICK HERE).

Contrast the morgue story with another story about the unfortunate. The homeless are vanishing from the WashingtonDC streets. A spokesman for the homeless raised a highly controversial and disturbing point that cannot be dismissed. He cited numerous cases of people known to live on the streets of WashingtonDC vanishing without a trace.Wayne Madsen of the Online Journal wrote, " Although the best-case scenario is that these unfortunate people have, in fact, been relocated to other areas, the spokesman ended the interview on a chilling note. He said with federal camps and a high demand for any usable body parts by the lucrative transplant industry, he feared the worst may have befallen some of DC's invisible residents." The disappearance of homeless people from the streets of WashingtonDC continues to this day, but with more frequency. It could be that secretive US security agencies are following a longstanding Chinese practice of organ harvesting. Just speculating here. See the Online Journal article (CLICK HERE).

$$$ INSIDER STOCK SALES ARE RUNNING 53:1 OVER PURCHASES. THIS STOCK RECOVERY IS A PURE SHAM, WITH EXECUTIVES FULLY AWARE. $$$ An insider stock sell-buy ratio tracked by Thomson Reuters has been hovering around extreme bearish levels not seen since November 2006. It recently registered a high at 53, which means insiders sold $53 worth of stock to hapless investors for every $1 in stock they purchased. Nothing confirms the fraud of this stock rally more than executives who do not believe it, although they might needs funds for a foreign getaway home or second boat, maybe a private jet. Executive insiders have a front-row seat the the deline in earnings at the major US corporations. See the 96% decline from the peak, complete with invisible Green Shoots. See the Money Central article (CLICK HERE).

$$$ CHINA TRADE FRICTION CONTINUES TOWARD TRADE WAR, WITH THREE CASES HITTING THE STAGE. THE RIO TINTO CASE SETS A DANGEROUS TONE, WHILE THE TIRE EXPORT CASE IS MORE OF THE TYPICAL. EXPECT THE BILATERAL CONFLICT TO CONTINUE TO WORSEN, AND EXTEND INTO CREDIT SUPPLY. GREAT COMPLEXITY COMES. TRADE BATTLES IN THE W.T.O. ARE SURE TO PROVIDE MUCH DRAMA, AS THE CHINESE GOVT HAS MANY RESTRICTIONS ON COPYRIGHT TRADE AND LITTLE LAW ENFORCEMENT AGAINST PIRACY. $$$

The Chinese legal authorities formally arrested four employees of mining giant Rio Tinto on suspicion of violating commercial secrets and bribery, the official Xinhua news agency reported. The four were detained a month ago. One Australian citizen Stern Hu and three Chinese employees of the Anglo-Australian company Rio Tinto were taken into custody by prosecutors, suspected of ‘using improper means to obtain commercial secrets about our country's steel businesses.' The statement came from prosecutors in Shanghai, quoted by Xinhua. The state prosecutors also approved their arrest on suspicion of what they call commercial bribery. Whether a trial ensues is unclear at this point. China is a major purchaser of Rio iron ore output. Rio Tinto, the world's second largest iron ore producer, and Anglo-Australian firm BHP Billiton, the third largest producer, have become embroiled in iron ore price negotiations with China. The talks have had a backdrop of arrests and other accusations. The four men might be under investigation for violating state secrets, potentially a more serious charge. The Xinhua report also cited that Chinese steel executives have also been formally arrested on suspicion of ‘providing commercial secrets' to Stern Hu. An online webpage published by a Chinese state secrets agency accused Rio of corporate espionage related to Chinese mills for six years. Here is where the battle has escalated. The same online article concluded that the Chinese mills overpaid by $102 billion for iron ore. The Australian Govt awaits word of confirmation, approved, and sanctioned by official authorities. See the Yahoo Finance article (CLICK HERE). Simon Black, the independent International Man, pitched in. He has a Chinese contact, who could not discuss the details of the Rio Tinto bribery scandal, but did indicate that it was far more about saving face and establishing position than anything else.

The second story is tame by comparison, more of the same typical conflict. China has accused the United States of protectionism in a tire import case, with a formal appeal to the USGovt not to render harm to relations. Chinese trade official warns that a US complaint about Chinese tire exports smacks of protectionism. The origin of this dispute is the US Intl Trade Commission, which ruled in June that increased imports of Chinese tires were harming American tire producers. The Chinese deputy commerce minister Fu Ziying shot back, " I believe the case is neither supported by facts, nor does it have valid legal grounds. It is against basic WTO principles and looks like trade protectionism. We hope the USGovt will refrain from taking action, for the long-term healthy and stable development of US-Chinese relations." In addition to tires, the USGovt has begun a series of investigations to examine whether Chinese exporters were dumping wooden bedroom furniture, honey, candles, gift boxes, industrial chemicals, and fresh garlic. The formal definition of ‘dumping' pertains to sale below cost. The constant chronic problem involved is that Chinese costs are so much lower, since wages are lower, taxes are lower, overhead is lower, and regulatory requirements impose less cost. The case was brought to US legal authority attention by the United Steelworkers, which claims Chinese tire exports to the United States more than tripled in the 2004-2008 period to 41 million tires a year. The union reckons their import has led to the loss of 5100 American jobs as another 3000 jobs could be shed this year. The union urges the Obama Admin to cap imports of Chinese tires at 21 million per year. See the Yahoo Finance article (CLICK HERE). My quick interpretation is that unions are gaining power with the Obama Admin, which could be the newest structural extension to the Fascist Business Model power. The trend actually indicates a move toward Communism from fascism.

Many eyes will be on an upcoming World Trade Org decision this week requiring Beijing to lower import barriers that wouuld make more legal products available in China, and perhaps diminish demand for pirated goods. The matter is not simple, since Chinese incomes are much lower than in the United States, and the quality of pirated entertainment there is quite good. American companies need a favorable trade ruling by the WHO against China to lift sales of CDs & DVDs (for music & movies), books, and video games, which would result in potential reductions of the rampant piracy. Little known is that the Chinese Army is the biggest producer of pirated products. The WTO has already rejected the Beijing policy to force US media producers to route business through Chinese state-owned companies. The US might need the threat of sanctions to truly open this massive marketplace to American entertainment. Chinese Govt imposes numerous restrictions and engages in lax law enforcement routinely. Many blame the Chinese import restrictions for the reduction of legal goods available, thus an indirect aid to to pirates and their profit and proliferation. Foreign trade groups want Beijing to prosecute the sale of pirated goods and make enforcement more consistent, instead of relying on periodic crackdowns and giving hand slaps to violators the rest of the time. A piracy crackdown could open the gates for the video game industry too. Game consoles like Microsoft X-Box 360 and Nintendo Wii have not been successful in emerging markets. China effectively bans them. Online games vastly outpace the console games inside the Chinese market. Yet another impediment is Chinese Govt restrictions on movies. They permit foreign movies to run in theaters just two or three weeks, and stop showing them altogether during peak viewing periods such as school vacations to protect Chinese cinema. Also, a cap is enforced that effectively limits Chinese theaters to 20 Hollywood releases a year. The past WTO ruling did call for loosening distribution rules. See the Yahoo Finance article (CLICK HERE).

BANKRUPT ECONOMIC POLICY CONTINUES

$$$ DEFLATION TRIGGERS HYPER-INFLATION, ACCORDING TO PRECEDENT IN ARGENTINA LESS THAN 10 YEARS AGO. THE SO-CALLED DEFLATION IN ASSET PRICES AND JOB INCOME LOSS IS THE FIRST STEP, WHILE FIERY PRICE INFLATION IS THE SECOND STEP, IN FULL RESPONSE TO PUBLIC POLICY AND MONETARY POLICY. FEW SEEM TO REALIZE THAT CURRENT POLICY LEADS TO PRICE INFLATION. $$$

Very possibly a parallel sequence for the USEconomy is unfolding, with the advent of hyper-inflation. See the case study of Argentina. Shortly after a brief episode in declining prices came a feverish bout with price inflation. Bear in mind that Argentina was a closed system of smaller magnitude. The US is a much larger sysetm, with tentacles throughout the global economy. So we might see very different flow of events. That is not to say impossible for a parallel unfolding of events. Perhaps the USEconomy will see a much worse problem of price inflation, since global revolt against US policy and US leaders and USDollar and US Wall Street syndicate is in full swing. A declining USDollar would result in a sharp rise in producer prices from commodity costs stuck in US$ terms. See the OfTwoMinds article (CLICK HERE).

$$$ THE BANK POLICY IS TOTALLY STUCK, HAMSTRUNG BY NO VIABLE OPTIONS, WHILE THE FISCAL AND LEADERSHIP IS TOTALLY CRIPPLED BY LACK OF VISION, LACK OF COMPETENCE, AND VERY LIKELY LACK OF INTEGRITY. $$$ Axel Merk is a fine analyst. In a recent article, entitled " Fed a Rudderless Ship?" (CLICK HERE) he made some great points about the USFed. His hypothesis overlaps well with my main beliefs. The USFed is uncertain of itself. They realized they must stop the unbridled unprecedented torrent of money creation. They might have planned a halt of the formal monetization announced in mid-March to purchase $300 billion in USTreasury Bonds and $750 billion in USAgency Mortgage Bonds, used as a trial balloon to test the credit market. HERE IS THE TEST. They might halt the printed money purchase in order to see how much the USTBond (long-term) and USTBill (short-term) yields rise, to see how much seizure occurs within the US banking system, to see how much foreign creditors themselves stop bidding on USGovt debt securities, and to observe the structural damage.

The USFed is truly operating in uncharted waters, paddling down the Great Weimar River without a map and often in darkness, unaware of dangerous depths and enemies bearing spears on shore. They really do need to test the system but they also are painfully aware that any interruption to credit channels means the US financial machinery grinds to a halt. It is unclear to me whether the USFed believes the utter baseless rubbish and toothless mythology planks being pushed by both the USGovt finance crew and the financial press. Green Shoots, improved second derivatives on decline, and other clapptrapp are total nonsense. One thing is painfully clear regarding the bubbles. To sustain a bubble economy, the authorities must assure an accelerating supply of money just to keep stable growth. However, to avoid a total collapse after the bubble has burst, the authorities must assure an accelerating supply of money just to keep the rescues on course to avoid that same collapse. They must ensure the perception of stability. What is being described in policy terms is the StraitJacket, the one that prevents an Exit Strategy for the USFed. They can do nothing except continue to provide an endless supply of worthless USDollars to avoid collapse, even if it infuriates and alienates the creditors. Next comes their vengeance!

Merk mentions some parallel points, as he posits that a camp within the USFed might wish to end the Quantitative Ease policy. Letting a certain program come to an end might be a test. He wrote, " In our assessment, the Fed statement is a compromise of what may be an internal dispute at the FOMC. We are referring to a $300 billion program to buy Treasury Bonds, previously scheduled to run out in September. Buying Treasury Bonds is intended to lower long-term interest rates. From what we can tell, it is in the Fed's foremost interest to keep long-term rates low to keep the nascent economic recovery on track. However, massive financing requirements by the federal government, states, as well as the private sector, not to speak of international public and private issuers, may push the cost of borrowing higher this fall. Alas, the Fed wants to keep some powder dry to intervene in the market."

Worse, incompetence makes solutions never within grasp. It has been my firm belief that USGovt policy combined with USFed policy has created an environment where no solution is even remotely possible, since they cannot properly diagnose the fundamental problem. It is like having a badly trained physician attempt to assess a complicated medical problem and suggest a remedy. Debt balm and cream cannot cure a wound caused by the harmful chronic abuse of debt itself. The major problem is their medicine cabinet and dependence upon it, where the entire foundation of the building is flawed yet unrecognized. Watch as a proliferation of USGovt programs mushrooms like the stupid Clunker car program. Next is likely a Retail rescue for large chains, and then a deeper subsidy for Home purchases. The beneficiaries of these programs are the weak links. We could see a Fanny Mae house rental program before long, a forecast of mine stated in 2005. What they overlook is the extreme need of a State rescue for the 40 or so states in the union that are in desperate need.

Nassim Taleb is a superstar analyst, and author of " The Black Swan" packed with insight. His past work warned that the biggest banks took enormous risks and were susceptible to failures beyond what their inadequate models could predict. They actively avoided unusual events in their models, even though the became common. Taleb believes that incompetent policymakers are to blame for a financial crisis, a crisis that will continue until substantial changes are made. He rails in criticism against USFed Chairman Bernanke, suggesting he not be renewed for another term.

Taleb said, " It is a matter of risk and responsibility, and I think the risks that were there before. These problems are still there. We still have a very high level of debt. We still have leadership that is literally incompetent. They did not see the problem. They do not look at the core of problem. There is an elephant in the room and they did not identify it. I do not think that structural changes have been addressed. It does not look like they are fully aware of the problem, or they are overlooking it because they do not want to take hard medicine. Bernanke belongs to a school of Economics that is not in synch with the complex system. By having Bernanke there you are rewarding failure. It is not pessimism. I am warning against a lack of understanding of the disease. Now sometimes you see patients doing very well and they have cancer. Long-term, I am not comfortable treating a patient for his headaches when he has lung cancer." See the CNBC article and video clip (CLICK HERE).

$$$ JOSEPH STIGLITZ WON A NOBEL ECONOMICS PRIZE FOR WORK ON UNEVEN AVAILABILITY OF INFORMATION RENDERING FINANCIAL MARKET AS INEFFICIENT SYSTEMS. HE NOW CALLS FOR A DEBATE ON BANKS AND BERNANKE. HE POINTS OUT MAJOR PROBLEM AREAS, AND URGES A SECOND MUCH LARGER STIMULUS PLAN WITH SIGNIFICANT AID TO STATES. $$$ It is about time some legitimate experts called for meaningful debate, but none will come. Instead the Town Meetings will provide a forum for unproductive venting of anger. Stiglitz has been a stalwart critic of the bank bailouts, calling them ineffective remedies, rewards for failure, and a bad investment with tiny returns. He regards the banking system as on firmer footing, which might mean he believes much of the fraudulent accounting that rests on the big bank balance sheets. Maybe he refers to the smaller healthier spreads on corporate bonds. However, the commercial paper arena still shows signs of illness. The July drop of $27.6 billion in asset backed commercial paper knocked its aggregate volume down to $1.066 trillion, down $616 billion in this 2009 calendar year. That represents an annualized 64% decline, hardly firm footing.

Despite perhaps politically motivated comments about rescusitation, Stiglitz accuses the architects of the bailouts (USFed Chairman Bernanke, Treasury Secy Geithner, and White House Council of Economics Advisors Head Summers) as having championed the deregulatory bank policies and accommodative monetary policies that led to the historic credit crisis. He claims none of the three finance ministers seems to have learned from past mistakes. He points to a basic business benefit as severely lacking. He said, " Even if you thought their strategy was right, we got a bad deal [as taxpayers.] What is clear is we spent much more money than we needed to and got back much less in return. The recovery will be slower because what is needed is more lending at more reasonable interest rates. That increase in lending, to small and medium sized businesses, just is not there." So implicitly Stiglitz claims no economic recovery is evident from business credit activity. In a frontal assault criticism, he believes the primary outcome of the numerous bailout programs was to refill the bank coffers and reduce competition in the financial sector. As a result, that has enabled banks to both charge higher rates and reduce their lending activities. These points are consistent with my Bank Consolidation theory. Stiglitz calls for a serious national debate on the reappointment of Bernanke as USFed Chairman. How about a serious national debate on the expulsion of Geithner as Goldman Sachs plant in the Treasury Secy post? See the Yahoo Finance article and video clip (CLICK HERE).

Stiglitz continues his public sharing of analysis,with excellent commentary. He believes the United States is at serious risk of extended malaise after the bursting of the mortgage finance bubble behind the housing bubble. He believes that optimistic policymakers and economists risk confusing the technical end of recession with any new robust recovery. A recession can end with a period of powerful stagnation. He said, " It would be a mistake to say 'Because we are out of a sense of freefall and may have turned a corner, we are on the road to recovery.'" He judges a ‘very remote likelihood' for the job market to recover anytime soon. Therefore, many Americans will still feel mired in a recession. He does not outwardly dispute the GDP calculations and publications as false. Stiglitz cites several potential negative economic problem areas. They include 1) Weakness in commercial real estate, thus more bank losses, 2) Huge deficits at the state level, thus, thus reduced spending and 4) Weakness in our major trading partners and overall lack of final demand, thus stagnant export growth.

Stiglitz anticipates a parallel path to some extent with Japan 10 to 20 years ago, marred by painful stagnation. He warns to expect weak growth and false starts on the road to recovery, not unlike Japan or the Great Depression. He openly recommends the USGovt should plan on additional stimulus packages focused on improving technology, education, and infrastructure. He points out the perspective that these investments provide a better long-term return than tax cuts or rebates. He criticized the last pathetic stimulus package as ‘too small and badly designed' last spring. Stiglitz recommends a much larger volume second stimulus that includes significant aid to states, whose shortfall amounts to $175 to $200 billion. State revenues are plummeting, with very localized enormous implications in visible fashion. The first stimulus plan filled only one third of the state hole for revenues. See the Yahoo Finance article and video clip (CLICK HERE).

◄ THE NATION IS STILL ON THE WRONG PATH. SO RECOVERY IS NOT EVEN REMOTELY LIKELY. EMPHASIS REMAINS ON SPENDING, CHEAP MONEY, AND ABUSE OF DEBT, RATHER THAN BUSINESS INVESTMENT AND LEGITIMATE INDUSTRIAL INCOME. THE RIGHT PATH IS NOT AN OPTION. $$$

My viewpoint is similar to that of Stiglitz, except for an Inflationary Recession. My take is that a recovery will not arrive at all, since no repairs have been made, no restructuring has taken place, only more of the same venemous balm has been applied to open wounds still bleeding. The banking sector has a tourniquet applied, blocking credit distribution. The lack of job creation is loud and clear evidence of a powerful lingering USEconomic recession. Job creation is not a lagging indicator, but a concurrent indicator and a decent forecast device. When the nation is dependent on handouts and credit withdrawals, instead of industrial income, the job market is key to reveal a continued disaster. Lack of aggregate demand is the ultimate problem, as consumption is weak, resulting in weak buinsess investment. No ‘Pent-up Demand' exists, since cars and houses were sold with 0% loans for a long time leading into the crisis. Exports are weak, since Europe and trade partners have problems too, much extending from import of US asset bonds of fraudulent nature. The deterioration in the USEconomy has not stopped. Watch the results of stimulus and staggering bank liquidity facilities, which do little for languishing business investment. Major problems lie on the horizon, such as commercial mortgages, prime Option ARM mortgages, end to jobless insurance for workers, and gigantic deficits for state budgets (totally ignored).

Ironically, the USCongress has no appetite for a second stimulus program, even though they crafted a first program with serious flaws. They just do not want another, maybe because they feel clueless, confused, and corrupt. The key area of flawed policy is the total lack of initiative to rebuild the US industrial sector. It was shipped to China in the last decade. Instead of initiatives to create and revitalize industry, where legitimate income can be derived, the national economic experts are stuck in the mindset of making money and credit cheap, available, and freely distributed, without focus on wages and income. They continue to focus wrongly on spending, rather than investment. This is bankrupt thinking by bankrupt counselors who run policy. No changes with this Obama Admin, just the same bankrupt policy.

$$$ KRUGMAN HAS BECOME THE BIGGEST NITWIT EVER TO RECEIVE A NOBEL ECONOMICS PRIZE. HE PRAISES THE OFFICIAL ACTIONS TO AVERT A DEPRESSION WITHOUT REALIZATION OF A DEPRESSION FIRMLY LODGED. HE NOW WARNS THAT THE RECOVERY WILL BE DISAPPOINTING. $$$

An economic conference in Malaysia featured Paul Krugman as a speaker. He claimed that aggressive stimulus spending by global governments helped avert a second Great Depression, but full economic recovery will take two years or more. His blind spots are all over the field of vision. He must have missed how almost no stimulus was contained within the USGovt Stimulus Plan. He must have missed the gargantuan big bank bond redemptions that took place. He expects the recovery to be disappointing, in his words. It is likely to be only a statistical recovery, in fact, my opinion. He expects the jobless rate to persist at high levels. He does not comment upon how the actual jobless rate is at Great Depression levels, at or above the 20% level. He cautioned not to expect a ‘Phoenix-like' recovery like what was seen after the 1997-1998 Asian financial crisis, where the economies expanded dramatically. That was led by a sharp rebound in exports. He anticipates that Asia is in line to witness a faster rebound than the United States and Europe, due to manufacturing exports.

Krugman misses totally that the USEconomy is hobbled and crippled by the lack of a critical mass in its industrial base, rendering a recovery almost impossible, since it denies the nation legitimate new income. Krugman therefore makes no call for rebuilding the US manufacturing base. Instead, he turns to the USGovt as a source, an architect of valid recovery. Krugman said there was still room for the USGovt to increase spending to boost growth, despite concerns over its swollen budget deficit. He did point out the need to enforce tighter regulations to avoid a repeat of the economic crisis, like with credit derivatives. He expressed concern that the political momentum for reforms appeared to be easing. He does not even remotely identify the global monetary foundation flaws, of money having no basis, no hard asset backing, and central bank controls toward insider gaming. Effective monitoring of a counterfeit system, in my view, accomplishes little as the cancer of a floating monetary system spreads. Its villainous inflation has destroyed the tangible economy in the United States. Global regulation is not the answer. That is just better police atop a flawed highway delivering flawed blood in circulation to flawed corporate entities. Sadly, Krugman has grown more stupid after receiving his prize. Perhaps pride has disrupted his brain function, or else the financial syndicate has enlisted his paid support. See the Yahoo Finance article (CLICK HERE).

$$$ AN INTERESTING DIATRIBE ASSAULT WAS GIVEN BY A GUEST ON JOHN MAULDIN'S MILLENNIUM WAVE COLUMN. MAULDIN REMAINS A RESPECTED ECONOMIST, ALTHOUGH HIS ‘MUDDLE THROUGH' FORECASTS AND PERCEPTIONS MISSED THE ENTIRE ECONOMIC DISASTER AND BANK CRISIS. HE IS A UNCOMMITTED DRIVER IN THE MIDDLE OF THE ROAD, WHOSE BIGGEST CONTRIBUTION IS NOT HIS ANALYSIS BUT HIS GREAT GRAPHS. ECONOMISTS IN THE UNITED STATES HAVE FAILED MISERABLY, AND EVIDENCE ABOUNDS. MAULDIN IS AN ECHO OF THEIR FAILURE. $$$

The Efficient Market Hypothesis has received much criticism, since the market has obvious flaws. The theory states that the market efficiently allocates goods by means of proper pricing, to clear supply from arriving demand. According to Robert Shiller, it stands as one of the most remarkable errors in economic thought and should be delivered to the dustbin of history. Price structures are subject to tremendous distortions, starting with the price of money itself. Mythology such as this, of a perfect system, is one reason economists are shocked when the markets deliver them a ‘Hundred-Year Flood' every four to five years. Economists almost never abandon their worthless models, since they continue to impress the unwashed masses, as they earn favor of the financial syndicate. Worse, silly models are often used to justify continued systems dominated by financial syndicates in control. They seem always to forecast moderate growth. The only economists who predicted a severe wreck incident in 2007 and 2008 were labeled as renegades, quacks, idiots, naysayers, and gold freaks. Mainstream economists almost uniformly missed the wreck, as they heaped praise and awards to each other in mutual lovefests.

Notice the dismal track record for economists in forecasting economic recessions and declines (in red). The bonafide idiots are the establishment, and here is their track record in plain view. Next is economist forecast of S&P500 firm aggregate return on investment, as in stock price appreciation. Again, a dismal outcome in the last three years, when the system collapsed and suffered a breakdown. They just did not anticipate the decline in equity prices, and offered clumsy absurd viewpoints on what went wrong. If economists and analysts were wrong going into the crisis, their opinions should be totally ignored concerning economic recovery. Actually, most should be fired!

Joseph Stiglitz won a Nobel Economics Prize for debunking the fair equilibrium of financial markets. The uneven distribution and control of information availability is his main argument against it. In fact, Mauldin has been a key proponent of Muddle Through economic perspective. In my opinion, his perspective never rejected policies, never pointed out lack of efficiencies, never discussed interventions, and always expected that the system would prevail. His perspective is but a corrollary to the Efficient Market Hypothesis that he implicitly rejects. As the system breaks down further, watch other mid-level priests like Mauldin reject their own principles held firmly for the last several years. Economists do not produce forecasts that depart from smooth sailing, and never expect major bumps. They produce political cover for policy entrenched in acceptance of unsound monetary foundation combined with inflation propagation, but laced throughout without benefit of risk recognition.

The recent risk has been of system implosion. Notice in 2007 through 2009, economists not only failed to predict the disaster, but MISS THE DISASTER EVEN AS IT HAS BEEN IN PROGRESS. Wall Street analysts are tightly connected co-conspirators, bound together in motive but only loosely associated in function. These conmen in suits somehow missed the 96% decline in S&P500 firm profits since October 2007, incredibly. The people have been sheeple, following economist demagogues for decades, worshipping them out of sheer ignorance and fascination with their erudite language. The high priests preach principles that have little bearing on reality, mere scribbles on ivory tower walls. Meet the species that began walking the earth, primarily in the United States since 1970, called the sheeple.

$$$ THE VACANT DECEPTIVE MYTHOLOGY CHAPTERS AND PLANKS LODGED WITHIN THE USECONOMY CONTINUE TO DESTROY CAPITAL AND WIPE OUT INCOME. $$$ In the first week of August, a Jackass public article was penned entitled " Lost Control & Economic Mythology" (CLICK HERE). It was an attempt to recall the myths reported in 2004, again reported in 2006, and update with the current nonsense and drivel sold to the public. Forgotten and overlooked was the current myth that passage of time will bring the USEconomy out of the recession, with the medicine in the system, as in rescues completed for the financial firms, ultra-low interest rates offered to borrowers for over a year, and stimulus delivered by the USGovt. What patent nonsense! Rescues of banks are reimbursed payouts for worthless bonds and outright bond fraud. That is fraud redemption, not business investment. Low interest rates mean nothing to insolvent households, jobless workers, and businesses in fast retreat. They need new legitimate income sources. The USGovt Stimulus contains tiny stimulus, plenty of plugged holes for state budgets, massive pork projeccts, and shallow energy programs for the future. Passage of time will enable gravity to work on structures without foundations scattered around the USEconomy, plagued by deep insolvency. Mere winds will render harm to the vacant structures.

Other myths are at work. The greatest one, not mentioned in the public article out of pure oversight and brain cramp, is the Mgmt of Perspective Economics. It calls for perception to superimpose reality, as human sentiment and attitude overcome natural structure. Pure rubbish fantasy destined for the dustbin, discussed earlier. There is more myth in circulation. Like the claim that the wage gap from idle industrial capacity specifically, and the USEconomic recession generally, will guard against price inflation. This is another big distraction from understanding that an Inflationary Recession is not only possible but is at our doorstep. A declining USDollar will cause price inflation, sure to take economists off guard. Two decades ago, the public was subjected to the nonsense that fast economic growth caused price inflation, along with the NAIRU garbage. It stated that the Non-Accelerating Inflation Rate of Unemployment dictated how a sufficiently low jobless rate would push conditions toward price inflation. The key is to understand is that price inflation always has been and always will be a function of monetary growth and credit expansion. The engineers of monetary and credit inflation do not want comprehension of this truth, since they both control and abuse these mechanisms for Wall Street gain. Remember also that former USFed Chairman Greenspan blessed household balance sheet lifted by inflated home values as legitimate wealth, only to see it vanish. Now up to 30% of American households face negative equity and insolvency from their homes. The Knight is still worshipped and revered, when he should be burned at the stake for economic heresy, or for treason in defiance of the US Constitution for baseless US$ currency. In my view, he orchestrated a diverse plan to cripple the nation and prepare it for control by Elite Billionaires living in Old Europe.

$$$ TAX REVENUE REALITY CLEARLY PAINTS A PICTURE OF USECONOMIC RECESSION, AS USGOVT REVENUE FLOWS ARE DREADFUL AND NOT IMPROVING. THE DATA CANNOT BE FALSIFIED BY HEDONIC ADJUSTMENTS (SEE G.D.P.) OR BY SEASONAL ADJUSTMENTS AND BIRTH-DEATH MODEL LIFTS (SEE JOBS REPORT). PEOPLE OUT OF WORK AND UNDER-EMPLOYED DO NOT PAY WITHHOLDING PAYROLL TAXES. THE END RESULT IS HUGE FEDERAL DEFICITS AND GARGANTUAN USTREASURY ISSUANCE, FORCING MASSIVE MONETIZATION, WHETHER IN OPEN VIEW OR HIDDEN. STRESS TOWARD A USTREASURY DEFAULT GROWS BY THE MONTH. $$$

Plummeting tax revenues come when President Obama and USCongress are piling up major deficits, from stimulus plans, from bank rescues, and expansion of health care. The numbers are worse than fiction, vivid evidence of continued deep painful recession. Tax receipts are on pace to drop 18% this year, the biggest single-year decline since the Great Depression. So revenues are falling as expenses are rising, each rapidly. The USGovt deficits will easily surpass a record $1.8 trillion. An Associated Press analysis provides details on the recession's impact and federal insolvency. Individual income tax receipts are down 22% from a year ago. Corporate income taxes are down 57% from a year ago. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the USGovt revenues were this bleak, the year was 1932 in the midst of the Depression. Existing programs are under tremendous pressure also. Social Security is at risk of running out of money earlier than projected just a few month ago. Highway, mass transit, and airport projects are at risk due to reduced fuel and industry taxes paid. The USCongress just voted to replenish the highway fund by $7 billion, which would have been exhausted and empty by August. Congress spent $8 billion to replenish the fund last year. The national debt already exceeds $11 trillion, nearing its legal limit. Budgets are set to rise for key groups. Domestic security and other agency spending is set to rise by 11% in 2010 and USMilitary spending by 4%, both considered sacred. The sheer magnitude of the tax revenue decline indicates a deep recession that is snuffing out incomes and eroding corporate profits. Reliance upon monetization, outright usage of printing USDollars, to pay for the federal deficits, has grown to create enormous stresses. The likelihood of a USTreasury default grows with each passing month, a prospect that would essentially bring an end to the republic. Tragically, this threat is accompanied by a threat of a military coup to take control of the USGovt. See the Yahoo Finance article (CLICK HERE).

$$$ CALIFORNIA REFUSES ITS OWN COUPONS BUT DEMANDS TAXES PAID. THIS PATH HAS NOWHERE TO GO EXCEPT OVER THE CLIFF. THE GOLDEN STATE HAS BOUGHT A LITTLE TIME WITH A BRIDGE LOAN AND A PLANNED WALL STREET BOND ISSUANCE, BOTH BAND-AIDS. THEIR FISCAL CRISIS WILL RETURN WITH A VENGEANCE, AS SURELY AS THE SUN RISES. $$$

In cases finally publicized, the California state Govt is refusing to accept their own coupons as payment for debts and taxes. Small businesses that received $682 million in IOUs from the state complain that taxes are due on the worthless scraps of paper, but the state agencies will not accept its own IOU coupons to pay debts or taxes. Take Nancy Baird, who has filed a formal complaint. She fulfilled her contract with California to provide special polo shirts to a youth camp run by the National Guard, but never was paid the $27k owed. Her California IOU coupons given in payment were refused by two banks. Hers must not be the few big banks in participation. Yet she is obligated to pay California sales tax on the supposed sale. A small business class action lawsuit has resulted. The class consists predominantly of small business owners, who rely on income from government contracts to keep afloat. They feel duped. The class filing submitted, " Instead of seeking funds through proper channels, the State has created a nightmare. Many of these businesses will not survive if they are required to wait until October 2009 to have these forced IOUs redeemed by the State." It demands that California be ordered to honor its own IOUs, plus interest. See the CourtHouse News article (CLICK HERE). The chaos is mounting. Pressure is sure to build toward simple creation of state money. By the way, a European contact reports that NATO troops have been dispatched and stationed inside California. They will protect and serve, no doubt!

The latest word is that California, highly embarrassed from the publicity of its fiscal woes and legislative stumbles, intends to stop issuing IOU coupons on September 4th, and to enable redemption one month early with interest. The Golden State began paying creditors with IOUs on July 2nd instead of cash to avoid running out of money by the end of July. With obvious recent juggling, cost slashes, and simple delays on salaried worker paychecks, they shuffled funds around in comical style. An interim loan of $1.5 billion made final before August 28th enables the state to pay off the IOUs. The state has issued 327 thousand IOU coupons worth $1.95 billion. Officially called warrants, they pay a 3.75% annualized interest rate. Treasurer Bill Lockyer announced the state would borrow a total of $10.5 billion from Wall Street in the form of bonds in order to meet cash needs for the fiscal year.California is just out of ‘penalty box' for a while, as a CA contact said. See the Wall Street Journal article (CLICK HERE).

BANK BATTLES & ONGOING BANK FAILURES

$$$ GEITHNER SHOWED FRUSTRATION WHEN THE USFED WAS DENIED TOTAL POWER, AFTER THEY PRESIDED OVER FAILURE. THE BATTLES CONTINUE IN THE REGULATOR WAR. $$$ US Treasury Secy Geithner issued a stern warning peppered with expletives to US regulators. He urged an end to turf battles, and a call to arms in support for the Obama Admin's cockeyed Politburo plan to seize control of the entire US financial banking by means of a grand power grab of the regulatory system. Their qualification for total power is their past complete failure. At a tense meeting in last July, Geithner told USFed Chairman Bernanke, Securities & Exchange Commission Chairman Schapiro, and Federal Deposit Insurance Corp Chairman Bair to end recent public criticism of the stupid plan. The targets decry their loss of authority with full justification. Geithner vented frustration over the lack of progress to seize total bank authority, like an emperor denied his throne from a failed Coup d'Etat. Geithner showed disrespect for the regulators with various obscenities. Those in power call it reform, when it is THE BANK CONSOLIDATION FINALE, and a continuation of the Goldman Sachs power grab. The plan objected to would make broad financial regulatory overhaul. It would give the USFed added powers, and award the USGovt more power to kill troubled financial firms. These dressed up buffoons in power do not admit the danger of abused power, such as the legal right to kill not the weak firms but the rival firms. Many major banks and industry trade groups have also lodged strong criticism of the plan, as have other distrustful regulators. The critics actually question the wisdom of giving the USFed more power, when the central banking model has proved itself an utter failure. SEC Schapiro and DSIC Bair have argued that more authority should be shared among a council of regulators, and not concentrated further. See the Globe & Mail article (CLICK HERE).

The political drama centered upon Geithner's unprofessional display has obscured a huge unresolved issue, treatment of financial institutions that are dead but enormous. The Wall Street conmen and the USGovt hack ministers cannot manage large financial firms during a crisis or during normal times. FDIC Chairman Bair has a good grip on reality, with a finger on the pulse of the Elite Welfare system firmly entrenched. She said, " The notion of too-big-to-fail creates a vicious circle that needs to be broken. Today, shareholders and creditors of large financial firms rationally have every incentive to take excessive risk. They enjoy all the upside but their downside is capped at their investment, and with too-big-to-fail, the government even backstops that. Too-big-to-fail must end." During a separate meeting of the House Financial Services Committee in July, Bernanke estimated when queried that the number of too-big-to-fail financial institutions numbered about 25 firms. Bigger means easier for syndicate control. See the Bloomberg article (CLICK HERE).

Former New York Governor Elliot Spitzer accuses the USFed of running a Ponzi Scheme laden with insider confiscations. He believes that the USFed has blown it. Time and time again, they blew it. Bubble after bubble, they failed to understand the damage done to the USEconomy. He objects strongly to granting the USFed more power, as they demand. He said, " The most poignant example for me is the AIG bailout, where they gave tens of billions of dollars that went right through, conduit payments, to the investment banks that are now solvent. We [taxpayers] did not get stock in those banks. They did not ask what was going on. This begs and cries out for hard, tough examination. You look at the governing structure of the New York [Federal Reserve]. It was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous. It is time for Congress to say enough of this. And to give them more power now is crazy. The Fed needs to be examined carefully." See the YouTube video clip (CLICK HERE).

$$$ THE F.D.I.C. HAS CLOSED 77 DEAD BANKS THIS YEAR, WITH MANY MORE TO COME, LIKE COLONIAL LAST FRIDAY. WORD HAS LEAKED OUT THAT CHAIRMAN BAIR ANTICIPATES 500 BANKS ARE SET TO FAIL WITHOUT DRASTIC ACTION. LIQUIDATION OF TEETERING BANKS WOULD STRAIN THE F.D.I.C. FUND AND DUMP PROPERTIES ON A WRECKED MARKET. RATING FIRM VERBANIC FORECASTS POSSIBLY HALF OF US BANKS WILL BE DOWNGRADED IN 2009. $$$

US-based bank failures rose to 77 this year with the collapse of two lenders in Florida and one in Oregon. Regulators shut First State Bank and Community National Bank, both based in Sarasota Florida, and Community First Bank in Prineville Oregon. On Friday, a bloody bank day, another five fell victim, led by Colonial BancGroup of Alabama. It will be taken over by BB&T, and marks the biggest failure since Washington Mutual (WaMu). The others shuttered on Friday were Dwelling House S&L in Pittsburgh PA, Union Bank of Gilbert and Community Bank of Arizona, and Community Bank of Nevada. The latter in Nevada at an FDIC cost of $781 million is 10x larger than the previous three listed banks, but Colonial is another whopper to dent the FDIC fund by $2.8 billion. Colonial had funded the Florida expansion that stuck the lender with more than $1.7 billion in soured property loans. This according to the Federal Deposit Insurance Corp, which was named receiver. Colonial has been under a criminal investigation by the Justice Dept in connection with alleged accounting irregularities at its Florida division, and a civil probe by the SEC over their bid for federal bailout funds. See the MSN Money Central article (CLICK HERE).

The FDIC now offers to share losses with potential buyers, reviving a practice used during the US Saving & Loan crisis in the late 1980s. The FDIC insures deposits at more than 8200 institutions with $13.5 trillion in assets, and reimburses customers for deposits of up to $250k when a bank fails. The year-to-date cost to its insurance fund from bank failures has mounted over $15 billion. The FDIC deposit insurance fund stood at $13 billion at the end of 1Q2009. In a private meeting, FDIC Chairman Bair revealed their agency's estimate that up to 500 US banks could fail. Jim Bunning from the Senate Banking Committee allowed word to leak out. Bunning said, " She told us that unless something dramatic happens, we could lose up to 500 more banks. That means that people who make mortgages in local places, people that could really help in a foreclosure, will not be there." See the Nasdaq article (CLICK HERE). A climax is approaching for USGovt finances, emphasized further by an upcoming FDIC funding request. The climax coincides with recognition of a broken US banking system. These events lead to a USTreasury default.

Many large and medium sized banks might be doomed to fail. Banks are losing the ability to earn their way through the cycle, out of the mess. Two dozen banks with at least $5 billion in assets get the lowest one-star rating on the Safety & Soundness Test adminstered by Bankrate.com. They assessed the bank regulatory filings for the quarter ended March. Three of the listed banks, in command of $45 billion in assets, have made public statements indicating they could soon collapse. Many banks have had their capital vanish by losses, while their balance sheets remain clogged by billion$ in depreciating real estate investments and construction loans. Banks have been setting aside more money for future losses, but often the increases in loan loss reserves are outpaced by the surge in non-performing assets. This point on eclipsed loan loss reserves is now being made by the independent bank analysts, like Bauer based in Florida, a point made in the Hat Trick Letter for over a year. Banks stubbornly refuse to liquidate deeply impaired assets. They can operate as banks by avoiding the process sure to to result in their shutdown. They shun low prices being offered by investors for their worthless assets. Over the past year, many weak institutions have agreed with regulators to improve their banking practices. Many other banks have undertaken plans to strengthen their capital bases. Some banks have been ordered to obtain more capital, but have failed to do so.

Take Corus for example, a major lender to 15 Florida condo projects each worth at least $100 million. The bank has has $7 billion in assets and has been ordered in urgent terms to raise new funds. Corus suffers from more than two-thirds of its loans non-performing, the highest rate among publicly traded banks. They announced recently, " It is highly unlikely that it will be able to obtain additional outside capital that does not include the provision of substantial assistance by the FDIC or other Federal governmental authorities." So Corus receives official assistance or dies. Their failure means great strain to the FDIC fund, and a major dump of supply on an already ruined Florida market.

The Federal Deposit Insurance Corp has already imposed a one-time fee on member banks to shore up its deposit insurance fund. That was a bank tax. It indicated a possible second fee imposed later this year. At the end of 1Q2009, the FDIC problem bank list had 305 firms on it, whose assets are cited at $220 billion. The agency has set aside an additional $25 billion for bank failures, agency spokesman David Barr claims. A new Congressional provision enacted this spring gave the FDIC access to up to $500 billion in credit though year 2010. Even so, the scale of the banking problem will surely test the agency's mettle. This spring bank rating agency Veribanc issued rating downgrades that were accompanied by a forecast that 97 bank failures would occur this year. They gave a shocker of a formal statement. " If the past quarter's trend continues, more than half of all banks could be downgraded during the remainder of 2009," Verbanic said. See the Fortune magazine article on MoneyCNN (CLICK HERE).

◄$$$ THE F.D.I.C. INSURANCE FUND IS BUSTED, NOW IN THE RED, ALTHOUGH SOME DISPUTE STIRS OVER SUCH A CLAIM. MANY REGARD THEIR CREDIT LINE AS PART OF THEIR AGGREGATE INSURANCE FUND. $$$

Some controvery, disagreement, and dispute exists over the size of the FDIC fund to aid failed banks. Confusion might arise over inclusion of credit lines, as opposed to an actual fund. At the end of April, Chairman Bair said they would need no additional funding from the USTreasury for the immediate future. Before bloody Friday, the FDIC Deposit Insurance Fund (DIF) had a total remaining balance of $648.1 million. Community Bank of Nevada wiped out the DIFund, and Colonial put it deep in the red. PLAINLY STATED, THE F.D.I.C. IS BUSTED BROKE!! Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. The situation is worse than the pircture shows. This graph is based on the old insurance limit with a maximum coverage of $100k per account. This limit has been raised to cover $250k per account until January 2014. Analysts estimate this change increases the deposits coverage by FDIC insurance to approximately $6 trillion in total. Mike Shedlock argues that the FDIC model is asinine, stupid. He said, " There were no bank failures for a very long time during the credit boom. Thus, FDIC insurance seemed to work very well for a while. The reality is such schemes always produce fat tails. Instead of spreading a small number of small bank failures out over a large number of years, a large number of big failures are all clustered together. If this is not an asinine model, what is? Note this is a failure caused by regulation. There should not be an FDIC in the first place. Shelia brags ‘In fact, losses from today's failures are lower than had been projected.' She needs a math lesson. The cost of FDIC is staggering, and the benefits are negative." See the Saxo Bank analysis (CLICK HERE).

$$$ SOME OF THE DETAILED DATA FOR US BANKS IS SHOCKING. THEIR NON-PERFORMING LOAN RATES ARE RISING DANGEROUSLY. $$$ Over 150 publicly traded US financial firms own non-performing loans that exceed 5% of their holdings, enough to wipe out a bank's equity and kill it. The number of banks exceeding the 5% threshold more than doubled in the year through June, according to Bloomberg. Non-performing is a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full. Ratios above 5% can avoid bank failures if they keep capital cushions and set aside reserves to absorb bad loans. Excluding the list of banks that did not subject themselves to the farce of a Stress Test, banks with non-performers above 5% had combined deposits of $193 billion, according to Bloomberg data. That amounts to 15 times the size of the FDIC rescue fund at the end of 1Q2009. Approximatly 2.6% of the $7.74 trillion in bank loans, according to the FDIC. For historical perspective, non-accrual loans peaked at 3.27% in the 2Q1991, during the Savings & Loan crisis. Its average level has been 1.54% over the past 25 years.

While 5% can signal a fatal condition for residential lenders, commercial property lenders may be able to withstand higher rates. William Black is former lawyer at the Federal Home Loan Bank of San Francisco and the Office of Thrift Supervision, currently professor of Economics and Law at the University of Missouri. He points out that commercial loans carry higher interest rates because they contain more risk. He said, " At the 5% range, you are probably hurting. Once it gets around 10%, you are likely toast." See the Bloomberg article (CLICK HERE).

$$$ WELLS FARGO IS BANKRUPT AND INSOLVENT. IT HOLDS BILLIONS IN LOSSES FROM PRIME OPTION ARM MORTGAGES, FROM SECOND MORTGAGES, AND FROM HOME EQUITY LOANS. ACCOUNTING RULES ENABLE IT TO MASK ITS DEAD ROTTING MATTER IN THE FORM OF TOXIC ASSETS WITH USGOVT APPROVAL. $$

Toxic assets still sit on the balance sheets of big US banks. The work of Reggie Middleton tells the story in very thorough forensic style. He provides several graphs that display a sharp divergence from reality, such as the Eyles Test and Texas Ratio (tangible equity). Wells Fargo faces massive upcoming losses without benefit of loan loss reserves to handle them. See the Middleton analysis and graphs (CLICK HERE).

Middleton wrote, " The total losses are expected to jump to US$187.4 billion in the adverse case in the coming two years. Wells Fargo's current Tangible Common Equity (TCE) stands at 3.28%, which is significantly lower than the prescribed limit of 4%. According to our estimate, the bank's TCE would fall to 1.56% at the end of 2010 after adjusting for accounting and economic losses. Considering the massive anticipated losses in the next two years, Wells Fargo's capital would fall short by US$34.3 billion and not US$13.7 billion as shown by the SCAP result (see America, You have been outright lied to! Bamboozled! … Welcome to the Real Stress Test Results) to maintain a TCE ratio of 4% in the pessimistic case. As Wells Fargo has raised US$8.6 billion capital, it would still be required to raise an additional US$25.65 billion as a safeguard against a deeper economic downturn or a recovery marred by another negative dip, OR a recovery hampered by lingering unemployment OR a recovery contrained by floundering property sector OR a recovery pulled down by mediocre growth… Wells share price is up nearly 400% since March while nearly every compreshensive credit metric (if calculated using real, unbiased data in a real, unbiased fashion) forecasts a very, very different outcome."

$$$ AIG IS A BROKEN FIRM, TOTALLY BANKRUPT, A BLACK HOLE LOSING MONEY RAPIDLY, WHOSE COLLAPSE WILL BE REPLAYED OVER AND OVER, LIKE AN ENDLESS NIGHTMARE. THEIR CURRENT SHELL GAME KEEPS THEM ALIVE AND NOT EXPOSED. WHEN REALITY STRIKES, GREAT CONTROVERSY WILL COME, AS THE USGOVT WASTES ALL AID. $$$

As preface, let it be known that the USGovt is spending trillion$ secretly in monetized fire fights to settle credit derivatives that constitute a veritable Black Hole. The AIG losses are hidden from view, covered by the printing pre$$. Despite $182 billion in USGovt aid and rescue, the American Intl Group (AIG) is again on the verge of collapse, an event avoided by an obvious shell game that has been exposed. In exchange for massive aid to avert a meltdown, the USGovt garnered a 78% stake in a gigantic Black Hole last autumn. The maneuver only makes the meltdown more gradual. To be sure, let us not forget the $165 million toward executive bonuses within its Financial Products Group, which sold the credit default contracts that killed the conglomerate firm. The New York Times reports that the deep damage and decay at AIG is not limited to this single trading group. The reality is that AIG has been running a massive shell game to appear to be alive. The shell game shifts assets among its 71 different North American insurance companies. In all, 19 state insurance regulators never conduct examinations at the same time, enabling AIG to fool state regulators. If one of its companies did not have enough money set aside as reserves against future claims, AIG routinely orders the movement of assets to that company deficient of reserves right before the state insurance examiner entered the room. Once that examiner completed the audit tasks, AIG was then in a position to shift assets and cash to the next subsidiary deficient of reserves. Regulators are clueless, and easily duped in a vast shell game. The core AIG insurance companies operate like a perpetual shell game. Cash and assets were shifted to the next subsidiary under audit. The practice might be common at all big US insurance companies. People do the same thing with credit cards.

Take an example their AIG affiliate National Union (NU). It indicated to Pennsylvania state insurance investigators that it had $33.7 billion in assets at the end of 2008, sufficient to offset against $21.9 billion in liabilities. Those regulators failed to detect that $10.9 billion worth of NU assets were actually investments in other AIG affiliates. Reduce the shifted assets and only $22.8 billion exist in assets. What's more, NU had $42 billion more in liabilities that the PA regulators missed. Consider their obligations to pay claims of other AIG insurance affiliates, including $23.1 billion owed to AIG affiliate American Home. NU owed another $19 billion to several other AIG affiliates, and thus was deeply insolvent. Meanwhile, subsidiary American Home (AH) had penetrating obligations too. New York state regulators accounted for $26.3 billion in assets against a mere $19.9 billion in liabilities. A little deeper below the surface, AH was bound for an additional $120.7 billion in guarantees to 16 other AIG affiliates. Thus the AH liabilities really exceeded its assets by $114 billion. The shell game is permitted by the USGovt bank regulators. They permitted AIG to become a bumbling bankrupt colossus. The regulators now permit AIG to to a Black Hole playing a shell game. See the Daily Finance article (CLICK HERE). Maybe bank analysts will soon be declared enemies of the state.

$$$ BAILED OUT BANKS ARE ACTIVELY BUYING USTBONDS, NOT LENDING, AS THEY PLAY THE USTREASURY YIELD CURVE CARRY TRADE GAME. $$$ US financial firms bailed out by the USGovt are playing a cozy game laden with incest and betrayal. They have sharply increased the purchase of USTreasurys. Bank holdings of USGovt securities are up 15.6% from a year ago, almost double the average annual growth rate of about 8%. The securities refer to USTreasurys and USAgency Mortgage Bonds. Data actually indicates that bank purchases of corporate bonds and mortgage bonds will be less than deposits after loans, whose net has been growing at a rate of $29 billion per month. The USGovt desperately needs the cooperation of the big banks, when it sells a record $2.1 trillion in securities this year. See the Bloomberg article (CLICK HERE).

$$$ BANK VAULT CASH IS PROBABLY DOUBLE-COUNTED, MORE FRAUD. $$$ Eric deCarbonnel makes a conclusion regarding the funding of ATM machines, those handy devices at street corners that dispense ready cash. The bank accounting appears to count vault cash and ATM cash, with possible overlap. He said, " Vault cash is supposed to be 100% safe (i.e. cash in a banks vault). What banks are doing with ATM Funding is fraud." To be very clear on such a charge, one would need to carefully examine internal records and balance sheet for details. See the Market Skeptics article (CLICK HERE).

THE GREAT HOME MORTGAGE ALBATROSS

$$$ OPTION ARM MORTGAGES ARE A DISASTER IN PROGRESS, FULLY WARNED IN PREVIOUS REPORTS. THEY ARE UNDERWATER AT AN ALARMING RATE, EVEN WORSE THAN SUBPRIME LOANS. BANK LOSSES WILL PILE UP IN HORRIFIC STYLE AS DELINQUENCIES AND DEFAULTS OCCUR NEXT. $$$

Deutsche Bank has released a study with tragic overtones for people and banks. Wells Fargo has faked their health for some time, but Option Adjustable Rate Mortgages (ARM) will delivery gigantic losses. As a preface, DBank anticipates continued declines in home values will increase the number of US mortgagors with negative equity from 14 million in 1Q2009 to 25 million in 1Q2011, a 78% rise in two years!!! That would constitute a projected 48% of all US mortgages, almost half. The report concluded that a rising proportion of prime Conforming and prime Jumbo home loan losses will aggravate bank losses to the extreme. Subprime and Option ARMortgage loans are the biggest source of underwater borrowers in the current market. A home loan is considered underwater (upside down, negative equity) if its loan balance exceeds the home's market value. DBank estimates 41% of Conforming loans and 47% of Jumbo loans will be underwater by the end of 2010, up from current levels of 16% and 29%, respectively. A loan is called conforming if it qualifies for Fannie Mae purchase recycle. A loan is called Jumbo if its balance is $417k or more. This spells further wreckage and disaster for Fannie Mae (conforming pit) & Freddie Mac (jumbo pit). This rapid collapse of underwater borrowers will have a significant impact on rising default rates. The process goes from delinquency to default to foreclosure and dumped sale. Entering a negative equity position for homeowners leaves them vulnerable to default if life circumstances dictate, or if they choose voluntarily to default. Falling home prices in most regions forces more homes into underwater status. Banks are in no position to claim the worst is over. This point has been hammered by the Hat Trick Letter for two years. A constant storm of mortgage portfolio and bond losses will continue like a nightmare, killing hundreds more banks in the United States. Big headline news will come when a big bank that passed the lunatic Stress Tests fails.

The three types of disastrous mortgage types are Option ARM, Subprime, and Alt-A. Note that Option ARMs have overtaken the Subprimes as being in the worst financial position, yet they receive almost no attention in the press & media. That is because the networks are too busy trumpeting nonsense about a bank recovery. The Option ARMortgage loan permitted homeowners to pay less than the required interest, to let the loan balance rise, even when the property was losing value. These three lousy types will only grow worse. By 2011, Deutsche predicts 89% of Option ARM loans will be underwater, up from 77% in 2009. The Option ARM does not sit around insolvent, since triggers are built-in to double and triple the monthly payment. So defaults will mushroom in the face of the phony bank recovery. The rate of underwater Subprime loans will increase from 50% to 69%, and underwater Alt-A loans will increase from 49% to 66%. Given the deterioration in the USEconomy, and the psychological prison imposed by the underwater status, expect a high conversion to home loan default. Then comes the bank losses. The big banks are lined up for a kill. See the Housing Wire article (CLICK HERE).

◄$$$ COMMERCIAL MORTGAGES WILL JOIN THE RESIDENTIAL DISASTER IN THE NEXT FEW WEEKS, NOT MONTHS. FALLING PROPERTY VALUES AND IMPOSSIBLE REFINANCE CONDITIONS RENDER THE COMMERCIAL SPACE A KILL ZONE, DESPITE REASONABLY DECENT LOAN PERFORMANCE RECORDS. $$$

The $3.5 trillion commercial real estate (CRE) market is fast in deterioration. The default rate has doubled on loans for apartment buildings, office buildings, housing complexes, strip malls, hotels, and hospitals in the last year. A colossal amount of commercial loans must be rolled over this year into refinancing. Most will not qualify, and will go belly-up. Some already have. Banks will not lend to refinance loans when property values have dropped so precipitously, since loan-to-value ratios are terrible. Prices in commercial real estate have fallen almost 40% from the peak in 2007, according to the MIT Center for Real Estate. They continue to plunge. Data from Moodys Investors Service confirms the decline rates. Analysts expect that commercial mortgage backed securities (CMBS) and their associated derivatives (leveraged bonds, Collateralized Debt Obligations) will explode in the next several months, the initial impact felt within weeks. The forecast is for an additional $1.5 trillion ($1500 billion) in losses on Wall Street. Bank analysts selling bank stocks conveniently overlook these forecasted losses.

Beginning June 1st, these CMBS bonds qualified as eligible collateral for five-year loans under the TALF, another of the myriad USFed liquidity programs. The FDIC plans to leverage qualified funds up to seven times so as to purchase bank holdings, in structured USGovt finance deals. Debt is to treat excessive debt gone bad. Leverage is to treat excessive leverage gone bad. No competent analyst can claim that a solution pathway is being undertaken. This is the American Way!!! Barry Rithotz of Big Picture Typepad concluded, saying " The United States is apparently going to use more leverage to work its way out of a situation created by using too much leverage. That seems a bit like trying to drink yourself sober." See the FoxBusiness article (CLICK HERE).

$$$ FORECLOSURES CONTINUE TO RISE, ADDING STRAIN ON BANKS AND THE HOUSING MARKET. HIDDEN HOME INVENTORY ASSURES CONTINUED DECLINES IN HOUSING PRICES. RESISTANCE CONTINUES FOR MEANINGFUL LOAN BALANCE REDUCTIONS. $$$ Lending instutions, banks, and mortgage agencies refuse to modify loans in any meaningful and high volume manner. The result is that July home foreclosures rose by 7% over June. USGovt efforts to limit the damage and slow the tide are just plain too small, lacking teeth. They do not address the primary need to reduce the loan balances on loans, a point made for over a year by the Hat Trick Letter. The mortgage industry has been slow to adapt to the surge in foreclosures. Reasons are many, related to requisite altered value to mortgage bonds, and revelation of massive trillion$ mortgage bond fraud, even bond counterfeit by Wall Street firms. Lenders also await a much more grandiose USGovt program to guarantee hefty huge loan balance reductions, which might not come at all before USTreasury default or US banking system shutdown. The emphasis to date has been on reducing monthly costs rather than the loan balance. Thus a revolving door has been created for future foreclosures. Actual July foreclosure filings rose by 32% from the same month last year, reaching 1.5 million households, according to RealtyTrac. Over 360 thousand households, or one in every 355 homes, received a type of foreclosure notice, such as a notice of default or trustee sale. Banks repossessed more than 87k homes in July, up from about 79k homes a month earlier. That is not evidence of a housing sector recovery!

Nevada had the highest national foreclosure rate, a notorious distinction held for 31 straight months, followed by California, Arizona, Florida, and Utah. Filling out the top 10 were Idaho, Georgia, Illinois, Colorado, and Oregon. Housing prices might be leveling off in certain regions, but foreclosures continue unabated. Withheld home inventory could account for any price stability, which should be temporary. Foreclosured homes are sold at a deep discount, hurting market valuations in the neighborhood and generally. They reduce comparable property value calculations during the bank appraisal process, which lately has become a conservative exercise. See the Yahoo Finance article (CLICK HERE).

$$$ HOME LOAN REMODIFICATION PROGRAMS ARE ONLY TOUCHING THE SURFACE, AS UNDER 10% OF TROUBLED HOME LOANS ARE ASSISTED. CONFUSION CONTINUES, WHILE NON-BINDING USGOVT GUIDELINES ARE OFTEN VIOLATED. LOAN BALANCE REDUCTIONS ARE NOT PART OF ANY SIGNIFICANT PROGRAMS. $$$

Official mortgage aid program are helping only a fraction of homeowners on their loans. A mere 9% of homeowners receive assistance from mortgage programs. Some lenders have helped none. The $50 billion USGovt program has reached surprising few households. The target effect continues to be mortgage payment reductions with modified loans, and not loan balances. The irony is ugly. Banks such Bank of America and Wells Fargo have lagged far behind others despite receiving billion$ in federal bailout money. BOA modified just 4% of eligible loans, and Wells Fargo 6% only. Wachovia Corp., under Wells Fargo since December, modified 2% pathetically. In fairness, USGovt sponsored modifications are only part of the story, because the numbers do not reflect an additional 220 thousand loans modified by Wells Fargo outside the Obama plan this year. Furthermore, a reported 50% of households simply do not respond to bank inquiry toward assistance. The level of distrust or disgust is high. So far, banks have extended only 400 thousand offers among 2.7 million eligible borrowers who are more than two months delinquent on their payments. More than 235 thousand of those borrowers have enrolled in three-month trials.

The best results among the large loan services came from Saxon Mortgage Servicers. They have corralled 25% of their eligible borrowers in loan modification programs. Aurora Loan Services, GMAC Mortgage, and JPMorgan Chase all had 20% of their qualified borrowers in a trial loan. Again, worth stressed repetition, none of these major initiatives involve loan balance reductions, the primary pre-requisite in my estimation, for a significant reform and remedy of the home mortgage crisis. For each homeowner who makes regular payments for three months, the loan servicer collects $1000 from the USGovt. The company is paid several thousand$ more if the borrower stays current for three years. Numerous lenders have not followed the official program rules, adding to confusion. Freddie Mac will conduct random audits to see if borrowers are being improperly rejected. The only loan balance reductions in magnitude are done by Fannie & Freddie and other Federal Housing Admin programs. See the Yahoo Finance article (CLICK HERE).

$$$ THE USGOVT IS NOW THE SUBRPIME LENDER IN EVERY SENSE. THEIR CHARACTERISTICS RESEMBLE THE OLD WRECKED SUBPRIMES. NOTHING HAS CHANGED, EXCEPT THE LENDER OF LAST RESORT BEING THE USGOVT. $$$ The Federal Housing Admin (FHA) has standards that are notoriously lax. It continues to permit low down payments on loans, continues to approve borrowers who have below average or poor credit ratings, and perpetuates conditions with almost no protection against fraud. Those traits were the banners behind SUBPRIME LENDING, which broke Fannie Mae, Freddie Mac, Lehman Brothers, and Countrywide Financial. Reckless and lax lending on home loans continue to this day, but by the USGovt Mortgage Lenders Inc. The Housing & Urban Devemt Inspector General issued a scathing report in mid-June concerning the FHA and its lax insurance practices. It found that the FHA loan default rate has shot up to 7%, double the level considered safe and sound for lenders. The report also cited 13% of FHA loans are delinquent by more than 30 days. Worse, the FHA reserve fund has been cut in half, to 3% from 6.4% in 2007. This fund thus operates with a 33 to 1 leverage ratio, which is akin to Bear Stearns in its final days. The HUD Inspector General recommends that FHA receive a Congressional appropriation intervention to make up the shortfall. See the Wall Street Journal article (CLICK HERE). The sources of new $Billion demands on USGovt debt are as numerous as angry foreign creditors. Watch for events leading to a USTreasury default.

$$$ FANNIE MAE WANTS $10.7 BILLION MORE IN OPERATING FUNDS. THE SUBPRIME BOTTOMLESS PIT LIES ON USGOVT SOIL. $$$ Another quarter has finished and Fannie Mae has racked up more mammoth losses, to be covered by the USGovt since its nationalization. They not only cover the losses, but place cement over the fraud. Notice no news on Fannie & Freddie fraud, often conducted by Wall Street and ex-presidents. Fannie Mae plans to tap $10.7 billion in new government aid after posting another massive quarterly loss, as the revolving federal bill from the housing market bust continues. Insurer American International Group has received $182.5 billion in financial support from the USGovt to date. The new Fannie Mae request will bring the total for Fannie & Freddie to $96 billion, half as much. The generous USGovt has pledged up to $400 billion in aid for the two companies, which play a vital role in the mortgage repurchase and securitization market (package of home loans into traded bonds). The Freddie Mac Chief Financial Officer was suicided last spring in order to keep the fraud under the roof, and not enter the public spotlight. Those who believe the official suicide story are bright-eyed trusting morons who probably still believe in the honesty and integrity of Wall Street and the US Federal Reserve. He was probably given a choice to commit suicide or have his entire family murdered. A safe call is that over 80% of official financial stories are false in key ways.

Together, Fannie Mae (based in WashingtonDC) and Freddie Mac (based in McLean Virginia) own or guarantee almost 31 million home loans worth about $5.4 trillion. That comprises nearly half of all US home mortgages. Fannie Mae posted a 2Q2009 loss of $15.2 billion, compared to a loss of $2.6 billion in the same period a year ago. That does not sound like a housing & mortgage recovery! They claim results were driven by $18.8 billion in credit losses due to declining housing market conditions, made worse by rising unemployment. Nearly 4% of the loans Fannie Mae owns or guarantees were delinquent as of June 30th, up from 1.4% a year earlier. Clearly, conditions are growing worse, recently driven by economic conditions rather than mortgage features. The Obama Admin is expected to unveil its plans for Fannie & Freddie early next year in 2010. Options being considered include keeping them private, winding down their operations, merging them into a federal agency, or separating out their bad mortgage assets into a new company (a Bad Bank with acidic swill backed by the USGovt). See the Yahoo Finance article (CLICK HERE).

$$$ MONETIZATION OF $1.25 TRILLION IN USAGENCY MORTGAGE BONDS CONTINUES, WHICH KEEPS A LID ON MORTGAGE LOAN RATES BUT PERPETUATES RECKLESS MONETARY INFLATION. SOME UNINTENDED CONSEQUENCES COME FROM EXCESSIVE MORTGAGE BOND PURCHASES, AS THE BALANCE BETWEEN THEM AND USTREASURYS COULD PRODUCE CREDIT MARKET SHOCKS. $$$

The Obama Admin announced in early July a loosening of rules for Fannie Mae & Freddie Mac operations on loan approval. They actually intend to encourage more refinancing for borrowers with little or no home equity by approving refinance loans to borrowers owing 125% of their home values. That increases the threshold from the 105% limit announced in mid-February. Yes, those are subprime guidelines! The program is called ‘Home Affordable' and earns Fannie & Freddie upfront fees of as much as 2% of loan balances when borrowers have lower credit scores or home equity. To keep home financing costs low for refinancers and home buyers, the US Federal Reserve remains on course to purchase up to $1.25 trillion of mortgage bonds guaranteed by the Govt Sponsored Enterprises (Fannie Mae & Freddie Mac & Ginnie Mae). Net purchases total $721 billion, the central bank said in a recent statement. The average rate on a typical 30-year fixed rate mortgage fell to 5.22% in the week ended August 5th, according to Freddie Mac. The rate reached a low of 4.78% in April, before climbing to 5.59% in June. More aggressive USFed monetization purchase actions remedied the situation, but this is reckless inflation for the greater good, with consequences. See the Bloomberg article (CLICK HERE).

An unusual and hidden risk lies in the mortgage bond market from heavy monetization efforts. One should bear in mind that $750 billion in USAgency Mortgage Bond purchase by the USFed was announced in mid-March, but only $300 billion in USTreasury Bond purchase was part of the same plan. The USAgency purchases have been ramped up, in the planned initiatives. The risk is for disruption to the balance between USAgencys and USTreasurys, whose differentials are important to maintain. The mortgage bond yield needs to remain above the USGovt bond by a slight amount to keep stability in the arbitrage market, the spread trading market, and more. The mortgage bond market cannot appear stronger than the USTreasurys when home prices are declining and mortgage defaults are rising, plainly put. The USGovt's initiative to push home loan rates down should not ignore USTreasury yields. Even if 4% mortgage rates are the result, the $5 trillion market for USAgency Mortgage Bonds, the traded name for Fannie Mae & Freddie Mac asset backed mortgage security (MBS), could easily be irreparably disrupted, according to Credit Suisse Group. Credit Suisse analyst Mahesh Swaminathan summarized the risk, when he said " It is an idea that sounds very good on paper, but it has the potential to create a very terrible reality. It has the potential to break the one market that is working very well, agency MBS, for benefits that would be very minimal. I do not think it is being formally considered by anybody. It has taken 25 years to get where we are [in mortgage bonds]. It has been a very liquid market, even in the most trying times. That liquidity comes from you knowing what you are dealing with. If you take that away, it is very hard to get it back." Watch the credit derivatives for mortgage bonds, the REMIC contracts. They are Real Estate Mortgage Investment Conduits. Things are breaking all over. Watch for USTreasury default, and USAgency Mortgage default, simultaneously.

The risk is three-fold. First, heavy mortgage bond purchase by the USFed could result in ownership of $2 trillion to $3 trillion of bonded debt guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae investors. That is a whopping silo of mortgage bonds, at risk as the USEconomy continues to deteriorate and the banking system continues its USFed dependence. Second, the USFed could consequently push mortgage rates down too low, to a level even lower than USTreasury yields of comparable maturities. The volume of USAgency Mortgage Bond securities rivals the $6.6 trillion market for USTreasuries. Swaminathan estimates a possible backfire if that occurs would be a nearly permanent loss of liquidity in the mortgage bond market in the future, with a sharp rise in home loan rates at times as much as 1 percentage point to 1.5 percentage points higher than they would be otherwise due to that lost liquidity. Third, mortgage servicers would face greater difficulty in hedging against changes to the lending environment. They must hedge against the risk for the value of their loan contracts with mortgage bonds. They must also hedge against rising interest rates. The usage of Interest Rate Swaps is important. See the Bloomberg article (CLICK HERE).

THE CRIPPLED USECONOMY LIMPS

$$$ THE TRADE GAP FOR JUNE GIVES A CONFUSING MESSAGE. THE SLIGHTLY BIGGER TRADE GAP ACCOMPANIES A RACE TO SEE WHICH IS A LESSER LOSER, IMPORTS OR EXPORTS. THE DEEP USECONOMIC RECESSION ENABLES IMPORTS TO FALL FASTER. THE TRADE GAP IS LESS THAN HALF ITS PEAK, AN INDICATION OF ITS SEVERITY. THE US TRADE GAP WILL BE ELIMINATED ONLY WHEN THE USECONOMY COLLAPSES. $$$

The June trade gap rose by 4% over the May month to reach $27.0 billion. The politically sensitive bilateral trade gap with China widened to $18.43 billion, repeatedly the biggest nation in the listed gaps. If not for restrictions on sale of US computers and telecom equipment, and theft of copyrighted items by China, the US exports to the Middle Kingdom would total much more than the meager $5.55 billion. The sharp fall in exports and imports of manufactured goods within the USEconomy has begun to stabilize. A rising crude oil price was offset by stronger foreign demand for US goods and services. The average price for imported oil rose for the fourth straight month to $59.17 per barrel, lifting the trade gap with OPEC to the highest since October 2008. Stability is evident in US manufactured goods exports (consistent since February at $67 billion) and with manufactured goods imports (consistent since February at $93 billion). The trade gap for the first six months of 2009 has fallen by 50% to nearly $173 billion, compared to the same period last year. Year-to-date exports were down 19.3% from 2008, while imports were off 28.8% from 2008, in these six months. The higher June trade gap was not a sign of emerging from a recession, as economists proclaim. What is seen instead is stability of the patient (Uncle Sam) in the Intensive Care Ward. If the USEconomy truly rebounds with vitality, even with credit abuse like yesteryear, the trade gap will soar. See the Yahoo Finance article (CLICK HERE).

The US Gross Domestic Product (GDP) measures the aggregate USEconomic output of goods & service, net of inventory and external trade. The advanced estimate of GDP was minus 1.0% for 2Q2009 from USGovt statistical charlatans, shamans, and monkeys. The key item was the reduction by $142 billion in business inventory. Many economists believe such inventory depletion will spur new production and hiring. We will see, since sales levels are dropping. Businesses are permitting lower inventory levels due to either lower sales or planned closures, including bankruptcies. Economists ignore this factor. The minus 1.0% GDP is much smaller decline than the 6.4% contraction reported in USGovt methods. The important Employment Cost Index rose by 0.4% in Q2, indicating a business squeeze on profit margins even while they liquidate broadly. The USGovt Bureau of Economic Analysis prefers to use methods that enable easy distortion, as in measuring the quarter to quarter difference, loading in hedonic fictional output, heaping on constantly changing seasonal adjustments, and multiplying the result by four to annualize it. The sharp reduction from 6.4% to 1.0% is hailed by Wall Street and the USGovt ministries as the end of the recession. The official Stimulus Plan valued at $787 billion has had remarkably little input infusion into the USEconomy. State aid to plug Medicaid cost holes, tiny increases to state jobless insurance, and tax relief measures began to kick in this past second quarter. Grand criticism has come for the lagged timing in stimulus delivery as well as its promised effect. Such is the nature of mis-diagnosis, mis-management, favored treatment to the bank sector, and corruption. See the CNN Money article (CLICK HERE).

Not so fast! The Shadow Govt Statistics folks prefer to measure and report annual GDP declines, which for Q1 and Q2 were 3.3% and 3.9% respectively. The recession is still on course, of course. The SGS compares a single quarter to the same quarter last year. Notice that the GDP for Q2 in 2009 versus Q2 in 2008 fell more than it did in Q1 this year versus Q1 the previous year. So conditions are not improving, despite some minor stability in the picture. Some confirmation among consumers came with the surprising drop in the Univ Michigan consumer sentiment reading. It fell from 66.0 in July to 63.2 in August, without any stock market swoon. Also, Heartland Payment Systems reports that credit card usage is down noticeably in two respects, the volume of transactions and the size of the average transaction.

$$$ HOUSING PRICES CONTINUE DOWN, BUT WITH SOME RELIEF IN JUST A HANDFUL OF AREAS. IT REMAINS TO BE SEEN IF HIDDEN BANK OWNED PROPERTIES HAVE BEEN WITHHELD IN CERTAIN ZONES. MY VIEW CONSISTENLY HAS BEEN THAT DECLINING HOME PRICES GUARANTEE A CONTINUED BANK CRISIS, MORTGAGE DEBACLE, AND ECONOMIC DETERIORATION. SOME EARLY MINOR POSITIVE SIGNS FINALLY ARE IN EVIDENCE. $$$

Home price data through June 2008 indicate continued broad based declines in the prices of existing single family homes across much of the United States, a trend that has endured since 2007. The S&P/Case-Shiller National Home Price Index recorded a record 15.4% decline in the 2Q2008 versus the second quarter of 2007. The 10-City and 20-City indexes also set new records, with annual declines of 17.0% and 15.9% respectively. The declines are indeed moderating. No longer does one see a decline in every metropolitan area. For the month of June, the 10-City index was down only 0.6% and the 20-City index was down 0.5% only, relative to May. In June, nine of the 20 cities were higher in sequential index figures compared with seven in May. Nevertheless, not a single metro areas is showing a positive return over the past 12 months, while seven metro areas report declines in excess of 20%. At the national level, the housing market peaked in June-July period of 2006. Las Vegas remains the weakest market, followed by Miami and Phoenix. On the positive ledger, Denver and Boston were the best performing markets for the month, rising by only 1.5% and 1.2% respectively. Both these markets have registered three consecutive months of positive gains. They are outdone by Charlotte and Dallas, with four consecutive monthly gains. No national recovery is visible, although some very early signs are within view. The graph must have a decent bounce. Simply stated, as California and Florida go, so goes the nation. See the Standard & Poor report (CLICK HERE).

◄$$$ THE NATIONAL SERVICE SECTOR OF THE USECONOMY REMAINS IN TROUBLE. THE I.S.M. SERVICES INDEX FELL FOR THE FIRST TIME SINCE MARCH. STILL, ECONOMISTS HOLD FIRM TO A FABLED SECOND HALF RECOVERY, BECAUSE IT IS THEIR JOB TO DO SO. $$$

A surprise contraction occurred in service sector for July, snuffing out the notion of rapid recovery. That crucial Green Shoot is putrid brown. The service sector comprised almost 90% of the USEconomy, contradicting the growing consensus of a fabled ‘Second Half Recovery' plastered on mythological billboard format. The Institute for Supply Management (ISM) reported last week that its non-manufacturing index declined to 46.4 last month from 47 in June. It was the first decrease since March. Readings below 50 indicate contraction, while readings above 50 represent expansion. The report gave details on how business activity, employment, order backlogs, and new orders, including those linked to export trade. They all declined in July more than the previous month. Brian Bethune is chief financial economist for IHS Global Insight. He described the services pullback as " somewhat disturbing. It should quell any incipient notions of a rapid break-out in economic activity in the second half of 2009." Heck! They can just say 2010 recovery, since meaningless prattle!

Earlier in the same week, the ISM reported that its manufacturing index jumped 4.1 points to 48.9, with subindexes for new orders and production reflecting growth. This means a lesser decline. Also on the manufacturing front, the Commerce Dept reported last week that factory orders increased again in June by 0.4% after a rise of 1.1% in May, indicating a potential final chapter to its deepest downturn since the Great Depression. The best indicator in this arena is clearly the durable goods orders, excluding transportation and military, which thus qualifies as a business investment gauge (capital expenditure = capex). In June, the capex order index rose by 1.4%, a positive sign. Even economists are ignorant about which indexes are most meaningful and relevant. The topline durable good data was skewed badly by a 37% June drop in civilian aircraft orders, which is edited out of the straight capex. The July industrial production rose by 0.5% after a 0.4% decline in June. A meaningful statistic is the mfg capacity utilization (usage of industrial plant), which is scraping the bottom aat 68.5%, a multi-year low. It rose only by 0.2% in July, excluding the volatile and govt-influenced car industry. Tim Quinlan is an economic analyst at Wells Fargo. He said, " Momentum seems to have turned as orders have now increased four of the last five months. While the increase in orders is encouraging, we do not expect production to come roaring back. The pipeline of unfilled orders is still getting smaller, which casts doubt on continued gains." See the Washington Times article (CLICK HERE).

$$$ THE OFFICIAL JULY JOBS REPORT CONTAINED WHAT APPEARS TO BE GOOD NEWS. HOWEVER, AGAIN THE FIGURES ARE HEAVILY BIASED WITH TILTED METHODS THAT IGNORE THE JOBLESS. THE MORE RELIABLE STORY IS TOLD FROM CONTINUING CLAIMS, WHICH TOTALLY CONTRADICTS THE B.L.S. REPORT. $$$

The Bureau of Labor Statistics reported a notable decline in the non-farm job losses for July. But then again, so many deep distortions and intentional biases pervade this report every single month. The least accurate lines are the headlines. Supposedly, US companies shed 371 thousand jobs in July, compared with a revised 463 thousand decline in June. The jobless rate fell from 9.5% to 9.4%, and hours worked rose a smidgeon from 33.0 hours to 33.1 hours. The goofy indefensible fictitious Birth-Death Model only added a mythical 32k jobs in July, pressed into action less than in June, when it produced a mythical 185k jobs. The U-6 broad unemployment rate (counts those without jobs, stuck in part-time jobs, and given up) was measured at 16.3%, down a tad from 16.5% in June. The more reliable Shadow Govt Statistics Alternate Unemployment Measure held firm at 20.6%, a tragedy. That is where the national pain is felt, in reliable actual jobless. The SGS jobless rate is more than double the politically influenced BLS jobless rate.

The fastest and most direct rebuttal to the legitimacy of the July Jobs Report came from MarketWatch. They point out that over 450k people dropped off because they had given up searching after losing state insurance benefits. The propaganda ministry interprets people falling out of the system as an improving unemployment picture, and considers them as employed on a statistical basis. The USGovt and its minion ministries, along with the financial media networks, are more laughably diverging from reality every day. See the MarketWatch article (CLICK HERE).

Seasonality factors again distorted the July Jobs data. Despite the permanent carmaker plant shutdowns, the BLS decided to seasonally adjust as though typical seasonal shutdowns occurred, with re-opening after the normal re-tooling was completed. The BLS incorporated seasonal lifts for the entire car industry supply chain. Laughably, the car sector has a ledger item of 28k job gains in July, when maybe 100k or more jobs were axed. Their farcical methods become more comical and criticized every month.

The weekly jobless claims tell a different story of continued labor market distress. On the week ending July 25th, another 584k fresh new initial claims were made. The continuing claim total was 6.197 million. On the week ending August 1st, another 550k initial claims were made, not much change. On the week ending August 8th, another 558k initial claims were made, not much change. The continuing claims remained very steady at 6.202 million in those passing two weeks. This continuing nightmare for individual workers has not registered any such improvement. The games played at the top at the BLS with their hokey statistics attempt to hide the ongoing tragedy that has befallen the United States and its people.

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