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

* Miscellaneous Morsels
* USGovt Bond Fraud & QE2 Overview
* Mortgages in Emergency Room
* Wobbly Defunct Banking System
* Broad Property Death Spiral
* Bumbling Faltering Failing USEconomy


HAT TRICK LETTER
Issue #77
Jim Willie CB, 
“the Golden Jackass”
15 August 2010

"What is happening now to bring the timing into focus is the economy IS turning down. It is no longer the perspective that the economy is going to turn down. That, in turn, will eventually trigger all the problems with the dollar, the debt, and the deficit." ~ John Williams

"The Federal Reserve is hard pressed to explain how a quarter point rate cut would do any good." ~ Steve Liesman (CNBC Economic reporter)

"Everything the USGovt is doing is a grand experiment. Maybe what they are doing IS the problem, and a recovery might actually come if they were removed from the picture."
~ Rick Santelli (CNBC reporter)

"Bernanke took the helicopter up, and dropped off the cash. But the people and corporations picked it up and quickly stored the cash in their garages. The Fed cannot control the money velocity." ~ Art Cashin (UBS agent on the New York Stock Exchange floor)

[EDITOR NOTE: A special thanks to several friends and colleagues who share articles, analysis, opinions, and data. Some share unique information from privileged sources that is highly valued. Mention goes to DavidA, CraigM, RobK, ChrisS, BobO, UncleD, EricD, KevinF, AaronK, CathyF, EdS, ScottM, SteveK, DougB, RichardB, ScottB, JohnM, GaryS, TomU, TT, and a few others. You know who you are. We share well. Thanks should go out every single month. The Hat Trick Letter benefits greatly from the consistent sharing. The gestures and effort are greatly appreciated toward diverse research.]

MISCELLANEOUS MORSELS
◄$$$ THE ARGUMENT OF MASS CASH SITTING ON CORPORATE SIDELINES IS A DECEPTION AND HOAX, MORE PROPAGANDA. THE CASH IS ACTUALLY SUPPLIED BY DEBT AND OTHER I.O.U. FORMS LIKE CORPORATE BONDS AND USTREASURYS. OFTEN THE DEBT IS TIED TO PAST PROJECTS. $$$

John Hussman wrote, "Put simply, there is a lot of apparent cash on the sidelines because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability." This supposed mountain of corporate cash is not even retained earnings, but rather derived from new debt issuance. Brett Arends of MarketWatch wrote, "According to the Federal Reserve, non-financial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That is up by $1.1 trillion since the first quarter of 2007. It is twice the level seen in the late 1990s. Central bank and Commerce Dept data reveal that gross domestic debts of non-financial corporations now amount to 50% of GDP." See the Business Insider article (CLICK HERE).

◄$$$ DOMESTIC OUTFLOW OF STOCK EQUITY FUNDS MARKS THE 13TH STRAIGHT WEEK OF SIZEABLE EXITS. THE U.S. STOCK MARKET HAS MORPHED INTO AN INCESTUOUS PREDATORY PLAYGROUND FOR WALL STREET FIRMS, EATING EACH OTHER'S CHILDREN. THEY HAVE THEIR EXOTIC TOYS. THEY HAVE USGOVT SPONSORED RESCUES TO EXECUTE. $$$

High Frequency Trading and Plunge Protection Team rescues are all that remain on Wall Street within the hollowed out stock market arena. Retail investors abandoned the stock market many months ago. The Investment Company Institute (ICI) reports that the week ending July 28th saw a record 13th consecutive outflow from domestic mutual funds. The major index surges can be attributed to lack of competition by its control freaks. High Frequency Trading has become somewhat more refined, with easier communication with other parties in the actual unique flow patterns of cancelled stock bids, as algorithms are coordinated. The players have refined their circlejerk. Many analysts say the game is all over for retail investors. Nearly $50 billion in outflows have hit since January, with 12 straight weeks of outflows totalling $40.7 billion. Computerized front running games have obtacles removed. The arena is merely burning bridges and firemen paying tolls. According to the Financial Times, banks have begun to panic that as a result of vanishing trade volumes and missed profit targets, that large scale layoffs are imminent at the major banks. Underwriting of Initial Public Offerings for stocks is way down, as is the underwriting of corporate and municipal bonds. Even big hedge funds are reluctant to expand positions, in a state of retrenchment. July was a turning point. John Brady from MF Global summed it up, saying "A lot of the drop we have seen in trading volumes during June and July follows violent changes in markets during the preceding months." The exodus is broad within US equity mutual funds. Retail investors often lose on both ends of swings during volatility.

The exodus continued for a 14th consecutive week of equity outflows, an update. As Tyler Durden points out, another vote of no confidence in the market. Retail investors have been departing the stock market for a full quarter, non-stop. According to the same ICI data, the week ending August 4th saw an outflow of $2.788 billion. Durden wrote, "The problem is that now everyone is starting to notice the stench that the market is not supported by anything except momentum manipulation and primary dealer machinations... Retail is now fully boycotting stocks, as the no-volume surge of July was not even sufficient to bring one meager week of inflows. In fact, July saw almost $16 billion in outflows... We cannot wait to see how the market drop of this week impacts fund flows. If history is any indicator, it will not be pretty." See the Zero Hedge article (CLICK HERE).

◄$$$ FOUR GIANT STATES ARE ON THE EDGE OF BANKRUPTCY AND FAILURE. CALIFORNIA, NEW YORK, ILLINOIS, AND MICHIGAN ARE TOPPLING INTO FISCAL CHAOS. MOMENTUM IS MATCHED BY THE SPOTLIGHT OF FAILURE. $$$

Four Giant US states have been teetering in insolvency for many months, but are on the doorstep of bankruptcy motions. Together the four big states comprise over 25% of the national GDP and are home to over 25% of its population. California is the 8th largest economy in the world. Tax revenues have fallen sharply uniformly, and state programs must be cut substantially. No legal process exists for states to declare bankruptcy. They continue in an unresolvable crisis mode, all parties involved fumbling around, frozen. Neither dreaded tax hikes nor painful spending cuts are approved. Systemic failure is thus worse than a bankruptcy procedure. My position all along has been that the USGovt is beholden to Wall Street and the Pentagon, but to nothing else, definitely not the states. It holds both the people and states in utter contempt. Some states have declared secession movements, invoking the Tenth Amendment, but the USGovt resists by declaring in turn their actions an act of terrorism. Any hint that the USGovt would order a rescue at the last moment to bail out both debtor and creditor was fleeting and folly. The tide may be shifting as the federales are distancing themselves from any implicit guarantee. The National Governors Assn meeting made clear to all governors that minimal aid would be forthcoming. In 2008, the USCongress passed a bill to provide higher Medicaid payments to certain states. But the federal bill that to extend such payments through 2011 is set to die before reaching the floor of the US Senate.

California Gov Schwarzenegger declared a fiscal state of emergency to force lawmakers to pass a state budget more than one month overdue. The state faces a $19 billion deficit. They resorted to paying bills with IOU coupons last year, a bastard form of illicit legal tender (surely not currency). A few years ago the coupons were redeemable for food and utility payments. They will repeat the farce. CA State Controller John Chiang said last week that without a state budget, the government would be unable to pay its bills in late August. Big payments to schools are due at that time. Many anticipate a return of IOU issuance for limited usage. The Golden State has stopped making debt payments. Bond holders cannot conceive of default, but that is precisely what comes, whether legally permitted or not. My eye has been on the coupon issue steadily, since it constitutes printed money. Redeemability implies legal tender, which implies money. Watch to see if the money printing monopolists in the USGovt attempt to interfere with Sacramento.

Illinois is broke, a condition worsened by corruption and incompetence. The Land of Lincoln state government refused to raise taxes or to cut spending. Lack of leadership is appalling. The state halted payments for $4.7 billion in bills it owes to public schools, rehabilitation centers, child care providers, the University of Illinois, and other unsecured creditors as of July. Even $3.7 billion worth of unfunded pension payments has been ignored until after November elections. New York state did cobble a spending plan, but did not provide the funds to pay for it. Thus a $9.2 billion deficit, as it could run out of cash by September. Gov Paterson could not even muster a quorum for an emergency legislative session to examine funding provision. EJ McMahon from the Empire Center for New York State Policy said, "The state's 2010-2011 budget, like its deficit ridden predecessor, shapes up as a flimsy house of cards that could begin to collapse before the year is out." Michigan has never recovered from the lost tax revenues generated by the car makers General Motors, Ford, and Chrysler. Without a mere $560 million in federal money, Michigan faces drastic cuts to programs, such as for universities, health care, and tax revenue sharing to local governments. And if a budget is not approved by October 1st, the state faces a total shutdown of governmental operations. The 46 other states, except for two or three, will feel the similar shock, pain, and damage from the Great Recession in the coming years. See the Investigating Answers website (CLICK HERE).

◄$$$ STATE GOVERNMENT BUDGET SHORTFALLS WILL FINALLY REGISTER AN IMPACT IN THE NEXT YEAR WITH A SLEW OF JOB CUTS. A RIPE $400 BILLION BUDGET SHORTFALL IS BRINGING STATE ECONOMIES TO A HALT. THE STATES MIGHT SOON BE THE BIGGEST NATIONWIDE FACTOR FOR JOB LOSS. $$$

A study produced by National League of Cities, the US Conference of Mayors, and the National Assn of Counties concluded that local governments plan massive job cut, as many services are reduced. Local governments are planning to cut 500 thousand jobs in 2010 and 2011. The cuts would represent 8.6% of their workforces from 2009 to 2011. The job losses are expected to rise beyond such magnitude in the following months. The summary of the report is particularly grim. It stated, "Over the next two years, local tax bases will likely suffer from depressed property values, hard hit household incomes, and declining consumer spending. Further, reported state budget shortfalls for 2010 to 2012 exceeding $400 billion will pose a significant threat to funding for local government programs. In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services." State officials have held off massive job cuts under the hope of federal aid. It will not come in sufficient volume. The public is deeply disappointed with both the Presidential Admins and USCongress, as attention is almost totally devoted to bankers and warriors. See the Zero Hedge article (CLICK HERE).

◄$$$ USCONGRESS VOTES TO CUT FOOD STAMP BENEFITS, BUT WILL RETAIN OIL & GAS SUBSIDIES. THEY CITED THE REDUCED FOOD COSTS. ACTUALLY, POLITICAL CLOUT OF THE POOR CANNOT MATCH THE CLOUT OF THE ENERGY INDUSTRY. THE REALITY IS THAT FOOD STAMP USAGE CONTINUES TO RISE, DESPITE CLAIMS OF STABLE JOBLESS RATE. A RECORD 40.8 MILLION AMERICANS ARE ON THE PROGRAM, EQUAL TO 12.9% OF THE ENTIRE POPULATION. $$$

The US Senate voted to cut Food Stamp benefits by $6.1 billion with stated motive to support Medicaid and teacher jobs. The Senators reasoned that food costs are lower than predicted, and coupons were too generous. Last year's Recovery Act increased the food stamp value by $80 per month, known as the Supplemental Nutritional Assistance Program (SNAP). During the recession and harmful unemployment, about six million more people registered for the program in the past year alone. The federal program costs boomed from $20 billion to $65 billion in twelve months. The nation's working poor and jobless are indeed suffering. However, an economic multiplier effect is at work. Ezra Klein of the Washington Post argues with validity that food stamps serve well to ramp economic activity. He points out how $1.70 of activity comes for every $1 spent. He called into question the priorities, as the Senate voted against proposed cuts to oil & gas subsidies.

Food Stamp usage has hit 18 consecutive monthly record highs, and stands at 40.8 million Americans. Recipients of food purchase subsidies jumped 19% from a year earlier and increased 0.9% from April alone, the USDept Agriculture reported. The department projects the figure to rise to 43.3 million in 2011. Half of food stamp users are children and elderly, about one quarter working age women, and 14% working age men. The majority have jobs, but 90% fall below the poverty line. An increasing number of recipients were classified as middle class before the powerful recession. Many feel too embarrassed to sign up, due to the associated stigma. The jobless rate hovers near a 27-year high. As Tyler Durden remarked sarcastically, "But who cares? Can someone please tell these ungrateful sods their stocks are up like 70% since the Fed became the market in March 2009." See the Zero Hedge article (CLICK HERE).

The Food Stamp data reveals directly that the official USGovt jobless rate is false. People are falling off jobless insurance at record rates, to explain the mismatch. The impact of high unemployment is visible in the programs for food subsidies. While the official unemployment rate (blue region) is claimed in improvement, no evidence is seen for those requiring food stamps (red bars) in the above graph. A more accurate jobless rate series might be from the Shadow Govt Statistics. Both displayed series will likely continue to hurtle upward in the current tragedy. Thanks to Blytic for a great unique chart. The Business Insider concludes, "It could be that government statistics on food stamps are slower to adjust, but it could also be that unemployment rates are not telling the full story." See their article (CLICK HERE).

USGOVT BOND FRAUD & QE2 OVERVIEW
◄$$$ EXPLANATION OF THE $1.5 TRILLION IN EXCESSIVE USTREASURY ISSUANCE VERSUS FEDERAL DEFICITS IS SIMPLE. WALL STREET FIRMS ARE DEAD, WITH LOST BUSINESS AND VANISHED LIQUIDITY. THEY PRODUCED A LIQUIDITY STREAM BY NAKED SHORTING OF BOTH USTREASURY BONDS AND USAGENCY MORTGAGE BONDS. THE CONFIRMATION COMES FROM MORTGAGE BOND FAILURES TO DELIVER, WHICH RAN $1.34 TRILLION IN A SINGLE JULY WEEK. WALL STREET FIRMS HAVE A FRAUDULENT LIQUIDITY STREAM TO SURVIVE THAT TAKES ADVANTAGE OF THE ASSET BUBBLE IN USTREASURY BONDS THAT IS READY TO EXTEND GAINS MUCH MORE. THE BOND RALLY TO 2% SERVES AS A LOUD SIGNAL OF SYSTEMIC ECONOMIC FAILURE. $$$

Last month the huge over-issuance of USTreasury Bonds was cited. The best explanation of the additional $1.5 trillion in sold USTBonds, over and above the USGovt deficits, is that Wall Street firms are doing massive naked shorting of them. They sell what they do not own, using the big USTBond asset bubble and its heavy volume to conceal the bond fraud. The confirmation of the naked shorting angle comes from the mindboggling $1.34 trillion in Failures to Deliver USAgency Mortgage Bonds in the week of July 21st. The average of such failures on mortgage securities was $150 billion per week for two years running, a 9-fold rise!! Wall Street firms are dead, killed, ruined by the housing bust pushing their own sword from financial engineering onto their corrupted bodies. See the Jackass article in August entitled "Naked Shorts as Liquidity Machine" (CLICK HERE) for details on this magnficent story.

This is definitely NOT explained by bond maturity and rollover re-sale here, as Rob Kirby confirmed. That is clearly labeled in USTreasury auctions. He is a former bond and credit derivative trader, and expert in the field. These big banks on Wall Street are dead zombies bereft of income, reliant upon counterfeit a source of income to remain in operation. The big banks (including investment banks) have seen a huge decline in IPO stock offerings, bond issuance, and hedge fund business. Legitimate income sources, even liquidity sources, have largely vanished. They have a big source of income in the USTreasury Carry Trade, buying long, selling short, but that money has been forced by order to sit at the USFed, earning interest as Excess Reserves. Sequestered reserves actually conceal the insolvency of the USFed, a broken central bank. The naked shorting of USGovt-guaranteed bonds generally explains how Wall Street and Big US Banks keep their liquidity flowing. A failure to deliver occurs when the selling party cannot locate, cannot find a bond, or it does not exist. They are engaged in basic counterfeit, much like selling the Brooklyn Bridge. Wall Street firms are not worried about legal prosecution, since a Goldman Sachs preppy sits at every important regulatory leading post. Closer examination might expose that Goldman Sachs could be the greatest offender of them all in this grotesque naked shorting game. They were a primary player in the last bond fraud scheme, the packaging and sale of mortgage backed securities. This is a natural extension within their field of expertise, their realm of dominance. See the spikes in Failures to Deliver, called Fails in the bond market. The bold bond fraud is totally out of control.

In the aftermath of the USFed's $1.25 trillion of mortgage bond purchases (Quantitative Easing) over the last 18 months, they have exposed the market as broken. When the central bank called in mortgage bonds to buy them with newly printed USDollars, they expose the massive bond fraud as they scooped up the objects of their counterfeit. Caroline Salas and Jody Shenn started off in their Bloomberg article with a powerful salvo. They wrote, "For all the good the Federal Reserve's $1.25 trillion of mortgage bond purchases have done, they have also left part of the market broken. By acquiring about a quarter of home loan bonds with government backed guarantees to bolster housing prices and the US economy, the Fed helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades. Failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009." The last sentence should be read two or three times. It is a smoking gun of USAgency Mortgage Bond fraud, not so much of monetization. The USFed's massive mortgage buying is causing the 'tide to go out' on this market, revealing massive manipulation, gigantic fraud, and unsound synthetic derivatives trading on these major fixed income bonds.The US financial coin has monetization on its face side and bond fraud on the obverse side, the rotten output of a fiat currency system in its final phase.

Thomas Wipf chairs an industry group that is trying to address the problem, which is hardly a secret. Wipf is chairman of the Treasury Market Practices Group and the head of a bond group at Morgan Stanley. He is openly concerned about exacerbated damage caused by the collapse of a bank or fund. Translate that concern, as Wipf is worried about exposure of massive bond fraud by Wall Street and Big US Banks during a routine bank failure. Wipf said, "You are adding systemic risk into the market. Investors are taking on counter-party risk in trades they did not intend to take on." In other words, investors are being defrauded and could retaliate if powerful enough. Numerous other bank and bond analysts are hot on this story, but they refuse to state the obvious or they are not permitted to state the obvious. Even Moodys Investors Service is on the crime scene, but not likely to speak truthfully, accurately, or boldly. Senior analyst Alexander Yavorsky at Moodys is concerned about the drag on the mortgage bond business, when he should be more concerned about massive fraud within the business. Obviously, if reduced liquidity in the mortgage bond market persists and causes investors to seek other assets, the consequent effect would run counter to the USFed's goal of buoying demand for the securities. See the Bloomberg article before it is pulled by order of the USGovt (CLICK HERE). It is entitled "Fed Finding No Good Deed Goes Unpunished With Mortgage Bond Trades Failing" and is an eye-popper.

The grand bond fraud would not be possible without the effective cloud cover provided by the biggest asset bubble in existence, the USTreasurys. The extra grand dose of liquidity provided by the USFed adds significantly to the cloud cover for the massive naked shorting bond fraud. Ironically, the central bank participation adds powerful liquidity but at the same time grabs bonds from every corner and crevice, thus exposing the fraud perpetrated by Wall Street banks. The 10-year USTreasury yield has firmly gone below the 3.0% psychological level. It is heading toward the low 2% range established in the October 2008 panic. This time, panic will be joined by confirmation of USEconomic recession in unprecedented fashion. For only the first time in modern history has a recession taken hold after 18 months of near 0% official interest rates. In addition to a recession, what is being confirmed is systemic economic failure after $2 trillion was thrown at the credit crisis with no effect. The monetary stimulus does not work because the banking system is dead.

Banking leaders refuse to liquidate impaired and worthless credit assets on the bank balance sheets, since doing so would kill the big banks, extinguish their power, and remove them from control of the USGovt. Prosecution for bond fraud would render them prison system inhabitants or exiles living on the run overseas, probably even hunted. Liquidation is the requisite step behind any remedy and recovery, but it is steadfastly obstructed by the Powerz. The center of much controversy is the Too Big To Fail issue. The big bank failures would remove their strangehold on the USGovt and its finance ministry, enable a recovery, but only after an economic depression. Political opposition is therefore multi-faceted. This upleg in a USTreasury Bond rally, clearly a major asset bubble, is proof positive of monetary system implosion. The entire bond fraud, bond bubble, and recession amidst 0% backdrop is the biggest story of the last three years, bigger than the Wall Street breakdown, bigger than Quantitative Easing. Fast rising deficits and bond supply have had no effect at all on pricing, proof positive that the USTreasury Bond rally is a major bubble, aided by the Printing Pre$$ with heavy monetization at every turn. Behind every major asset bubble is major league fraud.

◄$$$ THE SLIDE INTO USECONOMIC RECESSION WILL ASSURE A RESUMED QUANTITATIVE EASING (QE2). THIS TIME, IT WILL BE PERVERSE, BROAD, INNOVATIVE, DESPERATE, AND CONTROVERSIAL AS IT ALTERS THE POLITICAL SPIRIT. IT WILL CHANGE THE NATION INTO A COLLECTIVIST STATE AND INVITE HYPER-INFLATION. THE USGOVT IS SET TO TAKE CONTROL OF FAILING MORTGAGES, SECURITIZE F.D.I.C. DEAD ASSETS, AND EXPAND FANNIE MAE INTO A RENTAL HOME BUSINESS. THE VAST QE2 THREATENS TO KILL ALL REMAINING CONFIDENCE AND TRUST IN THE USGOVT AND USDOLLAR. IT COULD PUSH THE NATION INTO A THIRD WORLD STATE. $$$

Nobel Prize winning economist Joseph Stiglitz urges another USGovt stimulus program. The last one was hollow. The next one must be better designed, he claims. How many chances at a cost of $1 trillion each does an administration receive? He still focuses on aggregate demand, but with empty calls for a return on investment without the thought of a return of industry to the US shores. The return requires a reform of the corporate tax structure and an entire revamp of a stifling entangled government regulatory lattice work, even improved education toward making a competitive labor force. He does mention education as a priority.

Rasputin behind the curtains, former Clinton Treasury Secy Robert Rubin argues against a large scale Stimulus Plan, but in favor of deficit reduction. Of course, he gutted the national gold treasury, spearheaded the disastrous de-regulation chapter, presided over the Wall Street collapse, and probably wishes to centralize global power. His reward is control of policy from the rafters!! Any revival, even if very wobbly, would complicate his true plans. A constant state of sluggishness works best for Rubin, from which he and his cadre can control the monetary creation apparatus, redeem the dump sites of ruined banks assets, and skim from the table without threat of regulatory reaction. The nation is way past deficit reduction concepts, but rather collapse avoidance.

QE2 will be more cancerous than QE1, as ineffective programs will flourish. Since the official interest rate cannot be reduced, full dependence upon monetary inflation will be the weapon deployed. The FedFunds futures market properly provides a tipoff the the USFed will not hike the official interest rate until at least the Q1 of 2011. My belief is no hike for at least another 18 months, since they are stuck, and therefore asset bubbles will be encouraged, namely the USTreasurys and USAgencys. All debt is subject to coverage by new money, called monetization of debt, a scourge. Next comes hyper-inflation, as confidence in all things paper evaporates. We are on its dangerous doorstep. No debt will be spared from coverage by phony money. The floodgate is vulnerable to release from lost confidence. QE2 will produce four major effects, all ruinous:

1)      The reliance upon new money growth to monetize rapidly growing debt in the US financial system will undermine all things US$-related. The continued artificial support of the USTreasury will transfer risk to the USDollar.

2)      Whatever respect and prestige in the USFed will vanish quickly. It lies at the nexus of the failed central bank franchise system. The bravado of helicopter drops will seen hollow, amateurish, and invite mockery in the open among the respected brain trust.

3)      The smartest people in the room will begin to declare that the current global monetary system is irreparably broken, and that past and future response, even if amplified, will be doomed to fail.

4)      It will ignite the price of Gold and Silver, toward the $2000 and $50 price levels. The major currencies will be recognized as totally ruined from monetary growth gone haywire, totally out of control, made necessary by unending crisis. The sovereign debt chapter of the credit crisis served as the harbinger for the next important upleg in precious metals.

The FDIC has launched what could grow into a vast securitization initiative. It is better described as the QE2 from the rear guard, not well noticed. Since broken and busted, the FDIC has resorted to selling packaged credit assets from failed banks in order to raise cash, with more USGovt guarantees. Apparently, viable banks are harder to find for buying their healthy assets. Be sure that the Printing Pre$$ of monetization is behind the scheme, not well disguised.

James Bullard of the St Louis Fed wrote a brief white paper entitled "Seven Faces of The Peril" in which he urges the USFed to immediately restart the purchase of USTreasurys if the deflation scenario takes deeper root. The initiative is expected to expand into a newly proposed plan that would feature an instant automatic refinance program for troubled mortgage loans. It which would take millions of borrowers to current market rates overnight. The Refi Plan would stop short of reducing the loan balances of under-water mortgages, those suffering negative equity. That could easily come next. In the process, $46 billion of consumer savings per year would be created, from basic reduction of monthly payment costs. The plan was revealed by both Morgan Stanley and Merrill Lynch in their concurrent release of analyst reports. They surmise that Fannie Mae and the Federal Housing Admin might be preparing an imminent launch of a broad sweeping initiative.

Clearly the loan modification pathways will be well occupied, even expanded, maybe meaningfully. Regardless, the nation is moving gradually toward Fannie Mae Rental homes, but with certain challenges. Recall that on Christmas Eve 2009, the USDept Treasury waived a $400 billion limit on financial assistance to the failed fat duo Fannie & Freddie, pledging an unlimited credit line. Mix in the other essential ingredients, and it adds up. The GSE agencies (Fannie, Freddie, Ginnie, FHA) have in their hands a blank check from the USDept Treasury to expand loan modification. Then the same USDept Treasury can raise all its money from the USFed Printing Pre$$. We are heading toward outright bold monetary inflation of the second order in QE2.

QE2 will likely feature a monstrous Fannie Mae Rental Home business enterprise. Except a major blemish will grow further, as defiant non-payment of mortgages will flourish. Recall that $148 billion is the cost so far since its nationalization, while it owns 70% of all home mortgages. Look for Fannie Mae to gather in hundreds of thousands of broken mortgages. They will attempt to build a business subsidiary of the most queer type. An ulterior motive is to bail out big banks but not reveal doing so, and to hide their mortgage bond fraud. My forecast made in 2004 and 2005 was for the advent of a bizarre perverse Fannie Home Rental program, where people could forfeit title to their homes, lose their equity, but remain in the same home as renters making small monthly payments. A seemingly strong revenue stream is the perceived benefit. Imagine a professional who wishes to sell a Chicago home and buy a Dallas home, but is stuck unable to sell since deep in negative equity. He/she can relinquish title to Fannie Mae and simply move into a Dallas home of choice using the same sewage treatment landlord. Fannie Mae would thus be spared of legal costs, and prevented from dumping properties on an already bloated housing market.

Rumors swirl with gathering strength and persistence. The USGovt might soon take over all failing home mortgages, and have their titles signed over to Fannie Mae. The next step would be to lease the properties to the people who occupy them, according to pay scales. The USGovt would be the landlord, and Fannie Mae would be the agent in management. All the deep disadvantages of federal mismanagement would add to obscene overhead costs. The accounting would be covered up by federal accounting elves. The nation marches inexorably to collectivism, communism, and marxism under eventually military rule amidst rationing and supply shortages. The Fannie Mae subsidiary would have a seat on the Obama Politburo.

One thing to be totally certain with respect to Quantitative Easing. The QE2 ship of state will sail, with a powerful next phase of monetization for USTreasurys and USAgency Mortgage Bonds. The Powerz in charge will choose inflation over reform, restructure, and replacement of the helm. Unfortunately for the Powerz, the respect, prestige, and faith in the US Federal Reserve will fade like a sea mist after the QE launch. Its christening will be done in deep shame. Its level of respect is approaching rock bottom, the lowest in decades. Lastly, the US Inc stock value (US$) will sink like a stone relative to the Gold price. The price of Gold in USDollar terms will skyrocket, or put another way, the USDollar will sink like a stone. The US banking leaders will point to the USDollar exchange rate versus the Euro, British Pound, and Yen, in an attempt to conceal the decline and distract attention from gold.

MORTGAGES IN EMERGENCY ROOM

◄$$$ UNDERWATER MORTGAGES IN THE UNITED STATES ARE BEING ESTIMATED AND QUANTIFIED WITH MORE CLARITY. THEY FORM THE BALL & CHAIN FOR AMERICAN HOUSEHOLDS. THE BANKING INDUSTRY, AND THE USECONOMY. $$$

Gratitude is owed to Mark Zandi and Robert Shiller for their fine work on collecting housing detailed data. Neither seems to possess much forecasting skill or acumen though. Take their best contributions. They determine that 19% of US mortgage are saddled with negative equity, from 14.7 million homes. The combined deficit from the negative equity, the amount the loan balances exceed total home values, is estimated to be $771 billion, equal to 55% of the US Gross Domestic Product. The total volume of homes loans infected by negative equity is valued at $2.4 trillion. Their summary statistics:

  • 14.75 million of 77.57 million US households (19%), are in negative equity
  • 30.6% of 48.243 million homeowners with first mortgages are in negative equity
  • 21.8% of 67.58 million owner occupied single family homes have negative equity
  • 4.133 million of 14.75 million underwater homeowners are underwater by 50% or more, thus owe 50% more than their homes are worth
  • Of the 50%+ underwater category, the worst states are California (672 thousand homes), Florida (423k homes), and Texas (344k homes)
  • Total Negative Equity in the US is currently at $771.1 billion
  • California mortgages have $234 billion in negative equity, Florida mortgages $79 billion in negative equity, Texas mortgages $48 billion in negative equity
  • $2.4 trillion in total mortgage debt is impaired due to negative equity.

However, Mark Zandi followed up his fine statistical sweep with shoddy economic analysis. He seems blind to the tremendous drag still in progress, since housing prices are heading down again. Zandi is a prominent figure with a consensus view most of the time, a regular item on the national financial networks. In a recent resesrach paper with Alan Blinder in collaboration, Zandi concluded that the recession is over, an utterly stupid conclusion that ignores the above data and other detrimental factors. Do not regard his analysis as valuable. It is beyond rationalization. He is quietly a part of the USGovt and Wall Street propaganda machinery. He must not be aware of the 50 thousand homes each month put in banker REO inventory, a monster price drag. See the chart, where left side scale is number of households (blue bar) and right side scale is their percentage among the housing base (red line).

◄$$$ THE USFED HAS PUT FORTH A PLAN FOR BANKS TO BUY BACK FAULTY MORTGAGES ACQUIRED DURING THE BEAR STEARNS AND A.I.G. BAILOUTS. BE SURE TO EXPECT THE MAJOR WALL STREET BANKS TO BE EXEMPT, AS THEY FUNNEL SUCH TOXIC PAPER TO FANNIE MAE OR THE USFED. $$$

The New York Fed acted as agent for the USGovt and US Federal Reserve in acquiring huge swaths of mortgage and credit assets during a hectic period in the autumn 2008. The time period in question is marked by the rescues of Bear Stearns and American Intl Group. The NYFed statement said, "We are involved in multiple efforts related to exercising our rights as investors in non-agency RMBS or CDO securities. [Steps include] those that require originators to repurchase ineligible loans. These efforts support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer." The New York Fed holds $69.1 billion of assets that were placed in three special financial entities established to manage the bailout of AIG and Bear Stearns in 2008. They are typically residential mortgage backed securities and collateralized debt obligations, and the reason stated was ineligibility. Whether of asset type of borrower qualification, it is unclear. Issuers of the involved mortgage securities include Countrywide Financial, Bear Stearns, Goldman Sachs, UBS, and New Century Financial.

The quality of the NYFed-held assets is deteriorating, not improving, a sign that the mortgage market has yet to recover whatsoever. One temporary special entity, Maiden Lane II, was given disclosure by the NYFed. About 78% of the assets backing Maiden Lane II, valued at $16.2 billion on the Fed balance sheet as of July 28th, were considered junk bonds at the end of 1Q2010, compared with 65% a year earlier. See the Bloomberg article (CLICK HERE). What remains to be seen is a grander upchuck vomit of toxic mortgage assets taken in and shown harbor by the USFed in its largesse. The central USFed is a private firm, not a charity. They are working to discharge some patients from Intensive Care, sick of caring for them. If truth be known, the UFed is insolvent. Without a housing revival, the USFed is dead, a victim of choking on mortgage bond debt. My forecast made in September 2008 was for an eventual USTreasury default. One route to such a default is the shutdown and end of the USFed, a decision to end their USGovt consultancy role. Any resignation by the USFed would be a global shock. If they cannot produce price inflation in the housing sector, they are dead and the USTreasurys will default. It is that simple!

◄$$$ FORECLOSURES CONTINUE TO SPIRAL UPWARD, NO END IN SIGHT. EVIDENCE IS LACKING FOR ANY SEMBLANCE OF USECONOMIC RECOVERY. DISPLACED HOMEOWNERS ARE SECOND CLASS CITIZENS WITHIN THE ECONOMY, CRIPPLED IN THE WALLET AND SPENDING POWER. $$$

Michael Shedlock does not believe the housing bubble can be revived and reblown, a point in agreement with the Jackass. He does not realize that the implication is a US Federal Reserve shutdown, and consequent USTreasury default. The $8000 buyer tax credit has ended for home purchases. Its temporary lift was felt, but as policy goes, it was a joke, a farce, a travesty. In big metropolitan areas of the United States, the foreclosure (FC) filings climbed in three quarters of US metro areas in the first half of 2010, compared to the same six months of 2009, according to RealtyTrac. Damage from the USEconomy, and damage rendered to the same economy, is enormous, a vicious cycle that has not ended. They cited 154 of 206 US metro areas with populations of more than 200 thousand as showing an increase in household foreclosure events from January through June. Such events include notices of default, auction sale, and bank seizure. Nine of the top 10 metro areas registered decreases in the total properties with FC filings, hence the damage is fanning out to smaller cities. OK for cities, next on the volume. The number of properties with an FC event more than doubled from a year earlier in Baltimore, Oklahoma City, and Albuquerque (New Mexico). FC events rose more than 50% in areas including Salt Lake City (Utah), Savannah (Georgia), and Atlantic City (New Jersey). The usual suspect states continue to lead in foreclosure activity. Cities in Nevada, Florida, California, and Arizona contain the 20 highest foreclosure rates.

Rick Sharga is senior VP at RealtyTrac. He said, "Foreclosures are spreading out from areas that had been hardest hit. We are dealing with underlying economic weakness as opposed to unsustainable home prices and bad loans." RealtyTrac CEO James Saccacio openly acknowledged how the lousy job market and the foreclosure process will pull down housing prices. Efforts to forestall foreclosures only delay the inevitable, in his words. Saccacio said, "There is a pretty direct correlation between job loss and foreclosure. Until the unemployment rates start to go down, until we actually see net job creation, and importantly until consumer confidence comes back, the housing market has really slim chances of recovery. That coupled with the huge overhang of distressed property, really suggests the housing market is not going to turn around for the next few years." No rose colored glasses with him, an accurate perspective. See the Business Insider article (CLICK HERE).

WOBBLY DEFUNCT BANKING SYSTEM

◄$$$ THE F.D.I.C. REVEALED ITS TOTAL FORECAST OF 1000 BANKS TO FAIL BEFORE THIS CYCLE ENDS. BUT AN END IS NOT ASSURED. RESERVE RATIOS HAVE GONE NEGATIVE. THE USTREASURY CREDIT LINE MUST BE TAPPED AND SOON, ADDING TO THE FEDERAL DEFICIT VISIBLY. $$$

The financial pages actually reported the Federal Deposit Insurance Corp as flashing an SOS signal of deep distress. It should have been more like a "MayDay, MayDay" call. (By the way, the origin of the Anglo distress signal is "M'aidez" which means "Help Me" in French with the english wording almost equally pronounced). The FDIC made an announcement that before the recession end, at least 1000 bank failures will occur, the process to continue in 2010. Given the tally to date, the FDIC is not too far away from tapping into the USTreasury $500 billion official credit line. The official tally is distorted. Since 2008 the number of bank failures has reached 269 only. The figure does not include consolidations done through the FDIC, where bigger banks merged assets with smaller banks before officially failure. FDIC Sheila Bair has facilitated many such raids, where the big banks raped the good assets, taking them for nearly nothing (all Wall Street firms), and stuck the badly impaired assets in the federal sewage plant at Fannie Mae, or else at the USFed. The current pace is on track for 364 bank failures per year. Bank shutdowns have consistently risen. The FDIC is in a precarious balancing act of managing the shutdowns but also managing public perceptions. The Deposit Insurance Fund (DIF) is technically busted broke empty. Been that way for months.

Using nasty extortion techniques, like 13-fold increases in bank premiums and front loading of premiums (paid in advance), the FDIC has stumbled along with the appearance of floating in a solvent state. The financial bleeding continues unabated. Many of the smaller regional banks are failing, due to heavy losses in their commercial real estate loan portfolios. The FDIC upped the account coverage, upped huge the premiums paid, and is on the verge of rupture itself anyway. They increased minimum deposits insured to $250k from $100k but the insurance fund is chronically negative. In full regalia, the USGovt fails to observe and assess the gravity. The USGovt is giving the FDIC until 2020 to to put its house in order. With the passage of the Dodd-Frank Act, the FDIC will have until the end of September 2020 to bring its reserve ratio to the statutory minimum of 1.35%, rather than 1.15% currently. They will be bleeding rivers of thick red ink by 2020. Thus they have an extension from the generous eight years provided under the current Restoration Plan. It requires the FDIC to bring its reserve ratio to 1.15% before the end of 2016. The latest projections presented at a Board meeting in June indicated agency did not expect to meet even that earlier deadline.

◄$$$ THE PROBLEM LIST CONTINUES TO GROW, IN AN UPTREND LINE. THEIR ASSETS HAVE GROWN BY 50% IN ONE YEAR. THE F.D.I.C. DISTRESS IS GROWING WORSE, IN A VERITABLE TRAIN WRECK WITHOUT END. $$$

The Deposit Insurance Fund is in a steady decline, reflecting the ruinous banking sector condition. This is the third consecutive quarter in the absolute red, a new deadly development. The banking system has begun to resemble a collapsing credit house of cards, far too dependent upon housing and commercial property, the wreck zone. Some analysts call it a Ponzi Scheme, along with US Housing and USTreasurys. No dispute here. The largest banks are under USGovt lifeline support, while smaller banks are dying on the unwatered vine. Capitalism is nowhere evident, as the strongest are not given aid to survive, while the largest and most corrupt, those large banks that are most responsible for the credit crisis, are beneficiaries of near permanent support lines. Incentive is gone, as relationship with the syndicate is over-arching. They are not operating a capitalist system but rather a corporate oligarchy based on political connections between Wall Street and WashingtonDC, in a system better described as kleptocracy laced with cronyism. Thus no solution, no remedy, no path to recovery in the property market. And given that dead banks do not lend, the path leads to systemic failure, seizures, and USTreasury default.

The FDIC will be burdened to an even greater extent, since the number of problem institutions is growing, shown in the quarterly graph. The list is not perfect, as some banks will fail upon surprise, not judged at risk. The current banking system is structured in absurd lopsided form, with the largest banks in full collusion and corruption with the USGovt, the USFed, and its regulatory bodies. The top four banks are Bank of America, JPMorgan Chase, Wells Fargo, and Citibank, which comprise 55% of all banking assets. The next tier of 100 banks comprises another 20 to 25% of assets. The remaining 7800 banks are very small, but usually are the most efficient and least corrupt. The entire banking industry made huge lending errors in lax loan approval in the recent bubble years from 2002 to 2007. The USDept Treasury has extended a lifeline of $500 billion to the FDIC in the event they need the money. They obviously do, but do not wish to make the announcement that they urgently require it.

The distressed bank data dictates the inevitable usage on the untapped credit line. It is only a matter of time. The trendline is clear. The latest unofficial Problem Bank list has increased to 811 institutions. Let's see if the trendline is maintained. The number of institutions has more than doubled since early August 2009. When a bank fails, it no longer is a problem bank, and is removed from the list. It goes to the dead list. So a favorable bias exists in the maintained troubled list. Assets associated to the Problem Bank list have risen 50% over the last year. In August 2009, Calculated Risk listed 389 institutions with $276 billion in assets. The same list now has 811 institutions and $416.5 billion in assets. The four red dots pertain to the bank tally on the official Problem Bank list as announced in the FDIC quarterly banking profiles. One should expect the FDIC to list around 840 to 870 institutions at the end of Q2, any day. See the Calculated Risk article (CLICK HERE).

◄$$$ GOLDMAN SACHS EARNS 25% TO 35% OF ITS PROFIT FROM DERIVATIVE TRADES. THEY ARE FULLY CAPABLE OF SEPARATING SUCH REVENUE FROM THE REST OF THEIR CROOKED BUSINESS, DESPITE THEIR PRONOUNCEMENTS IN DENIAL. $$$

Goldman Sachs earned between $11.3 and $15.8 billion in 2009 from trading of Credit Default Swaps and other derivative contracts. Goldman claimed it does not conduct its accounting in a way that delineates revenue from distinct asset types. Instead, the venerable syndicate firm mentioned how credit trading desks that are separated by industry group, without distinction of whether clients are sold a bond or a credit derivative. They told the Financial Crisis Inquiry Commission that separating the revenue among the various product lines is useless. The firm claimed its systems worldwide do not identify derivatives transactions. GSax possesses some of the world's most sophisticated software, including insider trading software to monitor orders before placed. When pressured by the FCIC panel, GSax estimated that 25% to 35% of its revenue comes from derivatives. See the Zero Hedge article (CLICK HERE) and the Bloomberg article (CLICK HERE).

Astute colleague CraigM rebutted, drawing upon his corporate accounting knowledge. He said, "GS must think the FCIC fell off the proverbial pumpkin truck to believe that whopper of a lie about the lack of sophistication in their accounting systems. I guess they expect everyone to believe they use Quick Book Pro and that their CFO and all of their Accounting Staff never went beyond an AA degree. Also, traders are indifferent about whether they sell a low margin bond versus a high margin derivative? Give us all a break from such nonesense. That is utterly absurd."

◄$$$ THE I.M.F. BELIEVES THE UNITED STATES BANKING SYSTEM REQUIRES $76 BILLION IN CAPITAL INFUSION. THEY ARE OFF BY A FACTOR OF 3X AT LEAST. THEIR DATA DOES NOT SUPPORT THEIR OWN ESTIMATE. THEY OVERLOOK THE FANNIE MAE CESSPOOL. $$$

The Intl Monetary Fund estimates the US financial system will required $76 billion in capital to restore its stable footing. They make the estimate upon additional economic stress, not the current situation. So under-statement is glaring. The IMF put a rubber stamp of stability on the insolvent US banking system, calling it stable but vulnerable. The IMF identified home prices, commercial real estate loans, and economic growth as having the potential to cause shocks that could result in deeper bank losses. Under a low stress scenario, small and regional banks as well as subsidiaries of foreign banks would require in IMF estimation $40.5 billion in additional capital to meet a benchmark capital ratio of 6% in Tier 1 common equity from years 2010 to 2014. Under the adverse scenario, those needs rise to $76.3 billion. The report describes the USEconomy as recovering from "one of the most devastating financial crises in a century" correctly so. The IMF actually proposed strong reform to Fannie Mae & Freddie Mac, suggesting a partial privatization strategy, in which the government would take over their public housing mission while privatizing investment operations. They refer to the toxic bonds. The aggregate estimates are absurdly low. They assume the stated Tier asset magnitudes are valid, but they are not. Vast tranches of assets are misplaced, many worth half what stated, some worthless. Recall that banks assign value to their own assets, as per the FASB accounting rule. So regard this cavalier IMF study as a very conservative low-ball estimate. My guess is $2 to $3 trillion would be needed of capital is required by the US banking system. Include Fannie Mae, and perhaps $5 trillion is needed, maybe more. But they are no longer part of the banking system, but rather the sewage system.

The IMF did not recommend the recapitalizing of banks. They at least are focused on the huge risk from the commercial arena. Christopher Towe is the IMF deputy director of monetary and capital markets. After directing the assessment, he concluded "We are particularly concerned about the situation among the small and medium sized banks, which are most heavily exposed to the commercial real estate sector. We are particularly concerned about their situation, since most heavily exposed to the commercial real estate sector." The IMF said about $1.4 trillion of commercial real estate loans will mature from 2010 to 2014, almost half of which are already labeled as seriously delinquent. Figure on a few hundred $billion in bank losses. The 90-day delinquency rate and negative equity conditions are worsening monthly. Home prices remain another urgent concern. The IMF called for a streamlining of the very large number of agencies involved in the regulatory role, which are seen as exceptionally complex. See the Bloomberg article (CLICK HERE).

BROAD PROPERTY DEATH SPIRAL

◄$$$ HOUSING PRICES ARE SET TO CONTINUE THEIR DECLINE AFTER THE LUNATIC EMPTY-HEADED BUYER CREDIT PROGRAM THAT COST $100K PER HOME. DOWNWARD MOMENTUM IS BIG AFTER THE LAPSE OF THE CREDIT. THE IMPLICATIONS OF A RESUMED DECLINE ARE ENORMOUS, POSSIBLY TO ASSURE A SYSTEMIC FAILURE IN THE UNITED STATES. $$$

Unlike paid shills and firms with marketing groups posing as economists to promote their vested interest, Yale Professor Robert Shiller has been very accurate about the housing market. Nevermind his silly stock market calls and clueless commentary on deflation scourge. Shiller in 2005 screamed from the over-priced rooftops that the US housing market was in the midst of the greatest housing bubble in history. Contrast to David Lereah, the chief economist for the National Assn of Realtors. Lereah acted as carnival barker, repeatedly calling it the best time to buy during the bubble expansion, even pronouncing a market bottom in January 2007 loudly and erroneously. His voice comes from halls of deep vested interest and extreme bias. Shiller continues to accurately perceive the housing market. He is doubtful that the recent recovery will continue. He wrote, "Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast. Momentum may be on the forecaster side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue."

The USGovt failure is so consistent and predictable. The Keynesian clowns who occupy the White House ordered the home buyer credit of $8000, promising a multiplier effect from furniture, appliance, gardening, and other related sales. What horrendous economic thought! Such are handouts in subsidy, not kickstarts. Instead, the program grew into a huge boondoggle. Economists have estimated phase two of this program will cost taxpayers $100k for each additional home sold. New home sales have fallen off the cliff. One might suspect that existing home sales might have fallen almost as badly if not for the empty-headed federal subsidy program. More astonishment should come to faces in future months as these handouts have pushed forward demand from later in the year, a typical phenomenon.

The tax credit was originally designed to expire in November 2009, but due to its grand failure (err, political pressure), it was extended to April 2010. The new and improved program extended the $8000 credit for first-time home buyers to all buyers, who received a $6500 credit for any home purchase. The Congressional Budget Office estimated the ultimate cost to the USGovt would be $8 billion, but they were wrong. The National Assn of Realtor estimated that 1.9 million first-time home buyers took advantage of the government handout, resulting in 350,000 additional sales over that time frame versus the usual trend. Chalk up the total cost of the lunatic stupidity to be $15 billion, not even socialist, just ineffective. Calculate the marginal cost per additional home sold to be $43k, an extra line item for the USGovt deficit. The above chart spans several years, and plainly shows a surge in home sales from the candy giveaways, followed by a plunge right afterwards. The downward momentum will bring quite the effect before end of year. See the Burning Platform article (CLICK HERE). The leading indicator on housing prices looks particularly dreadful and ominous. The below chart tracks the pending home sales (in blue) and a lead series for existing home sales with a shorter horizon in time. They are plummeting. Agency Trulia reported that in July, one quarter of home sellers reduced prices of homes up for sale.

◄$$$ BANK OWNED R.E.O. PROPERTY INVENTORY IS GROWING RAPIDLY. THE DRAG ON HOUSING PRICES SEEMS PERMANENT. NO RECOVERY IS POSSIBLE. $$$

A quick note on bank owned REO property inventory. In 1Q2010, banks seized 97 thousand homes in default valued at $14.5 billion. The total REO banker inventory stands around 600k homes, which includes 203k private label homes (not Fannie Mae et al). To put the volume in perspective, the average monthly sales of homes is 550k nationwide in the United States. So banks hold on their balance sheets, already crippled by credit portfolios tied to residential properties, over one month of monthly sales. They surely hold them at close to original value on the books, a deception, delusion, and accounting fraud. The banks have not written down REO homes as losses. Tremendous additional bank losses remain to come. Lastly, the May and June total of REO homes taken by banks averaged on the order of 50k homes per month. The pace is accelerating!! The downward pressure from an inventory overhang, as it is called, is powerful. Housing prices are set to fall for another two years, my forecast is another 10% at least, maybe more. Think worst case scenario.

◄$$$ COMMERCIAL REAL ESTATE WORSENS, A PRIME WRECK ZONE. ITS FUNDAMENTALS CONTINUE TO DETERIORATE. BANK LOSSES FROM THIS SECTOR RACK UP PAINFULLY, AS A SECOND WHAMMY. $$$

The most recent June 2010 CMBS Delinquency report by RealPoint put a shocker on the table for commercial mortgage backed securities. Wall Street promoters did not bother to read it. The total delinquent unpaid balance for CMBS bonds shot up by $3.1 billion to $60.5 billion in June, a record 7.7% of total outstanding CMBS exposure. The unpaid balance is a ripe 111% higher than the $28.6 billion from a year ago. Deterioration was seen in 30-day and 90-day delinquency rate, foreclosure filings, and bank REO inventory inputs. Worse still, total Special Servicing exposure by unpaid balance has taken another major move up to $88.6 billion, a rise of 0.7% from the previous month. Horrendous anecdotes come from some properties, with reportedly losses of the entire 100%, some even as high as 132%, presumably due to unpaid accrued interest. Those preaching a V-shaped recovery must be observing the market on another planet. The Hat Trick Letter forecasted this disaster with two years warning, along with Options ARM residential mortgages.

RealPoint revised their yearend forecast substantially lower. They wrote, "With the combined potential for large loan delinquency in the coming months and the recently experienced average growth month over month, Realpoint projects the delinquent unpaid CMBS balance to continue along its current trend and potentially grow to between $80 and $90 billion by year-end 2010. Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the yearend 2010." They forecast 40% greater delinquent CMBS volume by yearend. That is a crash!! Conclude without equivocation that CRE credit portfolios will fall much farther in value, whacking banks when they are already down and hurting. Contrast the CMBS asset value decline with the reckless baseless rise in REIT stock valuations, posting fresh all time highs.

The Special Servicing arena saw a surge in this forward looking indicator in June. RealPoint commented on the role of such servicing, a vital marginal indicator. They wrote, "Special Servicing exposure continues to rise dramatically on a monthly basis, having increased for the 26th straight month through June 2010. The unpaid balance for specially serviced CMBS under review in June 2010 increased on a net basis by $5.23 billion, up to a trailing 12-month high of $88.6 billion from $83.38 billion in May 2010 and $81.38 billion in April 2010. Special Servicers will play a key role in the level of delinquency reached in the next 12 to 24 months, as large loan modifications, lender financing (through discounted assumptions and modifications prior to foreclosure), maturity extensions, and approved forbearance have the potential to slow down or mitigate delinquency growth and delay losses." No basis for optimism seems justified in this wreck zone. Bank losses will be catastrophic, as forecasted. See the Zero Hedge article (CLICK HERE).

◄$$$ COMMERCIAL PROPERTY PRICES PLUNGED IN JUNE. THE DELINQUENCY TREND AND SPECIAL SERVICING RATES FORETOLD IT WELL. LIKE RESIDENTIAL, THE PAUSE IN SPRING WAS TEMPORARY. IN THE COMMERCIAL ARENA, NO SUBSIDIES ASSISTED TO KEEP THIS SECTOR ALOFT. $$$

A dichotomy exists in commercial property. The largest metropolitan markets had attracted significant institutional capital. Prices had risen slightly for two quarters. The broader market continued to soften. This divergence might soon change, and merge in trend. A pause has occurred within the investment or institutional grade primary markets. Over the past ten months the overall CCRSI sales volume index showed an uncertain sawtooth pattern. The July reading is likely to be down for the investment grade property markets. From May to June, the overall CCRSI was down 7.78% with investment grade property declining by 4.83%. The two niches are aligning again. Distress is also a factor in the mix of properties being traded. Since 2007, the ratio of distressed sales to overall sales has gone from around 1% to above 23% currently, indicative of a nightmare. Hospitality properties are seeing the highest ratio, with 35% of all sales under distress. Multi-family properties are seeing the next highest level of distress at 28%, followed by office properties at 21%, retail properties at 18%, and industrial properties at 17%. The graph below from CoStar shows the sales volume indexes for corporate (in yellow), investment grade (in blue), and general commercial (in red). Notice how the investment grade index had been on the rise, but turned sharply lower in June. See the Business Insider article (CLICK HERE).

BUMBLING FALTERING FAILING USECONOMY

◄$$$ THE JUNE DATA SHOWED A WORSE TRADE GAP, WITH LESS EXPORTED AND MORE IMPORTED. THE BILATERAL DEFICIT WITH CHINA SET A RECORD AT $26.1 BILLION, SURE TO STOKE THE TRADE WAR FURTHER. THE REST OF THE WORLD IS SLOWING DOWN. CHEAPER FOREIGN PRODUCTS LIFTED IMPORT DEMAND. $$$

The Bureau of Economic Analysis announced trade gap data. The June trade gap grew to $49.9 billion, up from May at $42.0 billion. The June exports were $2.0 billion less than May. The June imports were $5.9 billion more than May. In June, the goods deficit increased $7.7 billion from May to $62.0 billion, while the services surplus decreased a mere $0.2 billion to $12.1 billion. The USEconomy imported more foreign goods, thus making the difference, which adds nothing to US jobs. A remarkable data point came from the Advanced Technology Products. Back in 2004 and 2005, when the Hat Trick Letter began, the ATP deficit was small at $1 to $2 billion per month. The US is essentially losing its control of technology, while at the same time US corporations have outsourced to a greater extent. At issue is both labor costs and skilled labor. Advanced technology products (ATP) exports were $23.2 billion in June and imports were $31.6 billion, resulting in a deficit of $8.4 billion. June ATP exports grew by $1.4 billion and June ATP imports grew by $4.0 billion, compared to the previous month. A similar slide is evident in the agricultural component. The USEconomic growth, distorted and imbalanced as it was several years ago, occurred with a coincident widening of the trade gap. During the world in financial crisis and credit triage, the US statistics reflect a continuation in the grotesque imbalance. The Euro currency had declined from 135 to 120 in the course of two months, sparking their exports and US imports. Do not be fooled by the June import price index, up by 3.0%. That was largely driven by crude oil, which worked its way from $70 up to $80 per barrel. See the USGovt monthly trade gap announcement (CLICK HERE), whose URL link by the way does not change from month to month.

◄$$$  NEGATIVE PRODUCTIVITY WAS REGISTERED IN 2Q2010, THE FIRST DECLINE IN FIVE QUARTERS. CORPORATE GAINS CAN NO LONGER BE SQUEEZED OUT OF PRODUCTIVITY, CUT WORKERS, LONGER HOURS, AND OTHER MEASURES. $$$

Non-farm productivity in the USEconomy declined by 0.9% in the second quarter, according to the USDept Labor. Even unit labor costs rose by 0.2%, along with hours worked, up by a 3.6% annualized rate, the fastest since 1Q2006. Productivity, defined as real output divided by hours worked, is one of the most important of economic data points. It is also one of the most abused, distorted, and doctored, since it is highly sensitive to adjustments, corrupted influences, and fudges. The hedonics of higher value from technological improvements remains a key distortion device. They accumulate each year from continual  advances, like that nifty television monitor given a 10% lift in value since clearer or flatter. USEconomic data is the most doctored in the world. Given the squeeze to generate productivity, four years in the making, some economists argue that corporations will hire again and soon, a direct result of the negative 0.9% reading in Q2. Doubtful, as credit is tight, demand is sluggish, consumers are insolvent, government is meddlesome, and the Health Care Program has frozen many employers. See the Market Watch article (CLICK HERE). Bear in mind that due to regular distortions from ridiculous baseless favorable adjustments, in particular technology hedonics, the true productivity is in my best estimation between 2% and 3% lower than the official number. So figure the USEconomy is struggling heavily with minus 3% productivity, delivering much less output than a year ago under the same hourly effort. That would be consistent with the horrible negative incremental economic output relative to increased debt.

◄$$$ E.C.R.I. LEADING ECONOMIC INDICATORS INDEX IS FALTERING, AND NOT SHOWING ANY SEMBLANCE OF STABILITY. THE STEEP RATE OF DECLINE FORETELLS A SUDDEN SWOON IN THE USECONOMY. THE CORPS OF ECONOMISTS SEEMS TO IGNORE IT. THEY PREFER A GAGGLE OF GARBAGE SENTIMENT AND EXPECTATION MEASURES. $$$

David Rosenberg points out an historical fact. An ECRI level has been breached that has resulted in a recession every time, based on data from the past 50 or so years. The ECRI Leading Indicator has breached the critical minus 10 threshold. At minus 10.5 now, alarms have been sounded, but only audible to competent economists. That excludes 90% of the policy makers and Wall Street crew. The power center cares not at all about reliable predictive indexes with a strong track record, as they follow the ideology of their high priest at the central bank!! The ECRI index creators are in open debate with Ivy League senior professors over the adverse implications of the threshold breach. To be sure, a dramatic data point has been encountered. Expect a second half economic notable stumble. See the Zero Hedge article (CLICK HERE). Check out the Market Oracle article entitled "ECRI Paranoid About Calling a Double Dip Recession" for another examination, complete with bizarre flimsy flailings by the compliant polished ignorant economist Lakshman Achuthan (CLICK HERE).

◄$$$ GREENSPAN EXPECTS A USECONOMIC RECESSION IF HOUSING PRICES RESUME THEIR DECLINE. THEY ARE RESUMING THEIR DECLINE. THE BRAIN TRUST AINT THAT SMART. $$$

Greenspan was brilliant at sustaining a sequence of asset bubbles. That does not qualify him as a competent central banker or even as an astute economist, but rather as a good inflation financial engineer. He turned his back on all he respected concerning gold three decades ago. In August he warns that a resumption in the housing bear market would bring a return to a USEconomic recession. That is a painfully obvious statement to make, but true. What he fails to address is the current housing bear market risk resumption, with the pause in price decline directly attributed to a mindless tax credit scheme, and the powerful forces that assure a continued decline that is already in progress. What he fails to acknowledge is that no USEconomic recovery has even remotely begun, as all (can you say ALL?) growth statistics are the result of extraordinary monetary inflation and poorly conceived cobbled USGovt Stimulus programs. Therefore, he is a negligent economist today. He does not put a forecast on the housing market, but rather a HOPE. He discusses the distorted USEconomy that is a result of his long tenure, his aberrant monetary policy to encourage asset bubbles, and the spread of fiat cancer manifested in outsized growth of the financial sector. He overlooks mention of how the response to crisis has been great attention to the large banks and large businesses, a direct result of the Fascist Business Model he nurtured and defended so deeply. He relies still too much on the stock market, which he hopes will stimulate the economy. That is an asset bubble revival dream, backwards to the true solution, and strong evidence that he comprehends little of how the overgrown financial sector acts like weeds to economic growth and stability (or a cancer). What is desperately needed is an industrial revival with grassroots job creation that produces legitimate income. One must ask Greenspasm, the Mr Magoo stand-in, if stock gains can produce legitimate income to sustain the USEconomy. As an economist, he remains a spectacular disappointment, given the undue extreme reverence. His visage resembles Mr Magoo more with each passing year. The conviction tied to competence is no longer detectable. My Jackass disrespectful name of Greenspasm derives from the lethal spasms that have dragged down the United States since the middle of his tenure at the USFed, where he encouraged, defended, and praised financial engineering and leveraged risk, where he encouraged the construction of a series of asset bubbles, all of which busted. His precious financial engineering killed the nation, along with profound bond fraud. He presided over disasters laden with deep spasms. His inflation destroyed capital and lef the nation one of the worst examples of applied capitalism in modern history.

Alan Greenspasm is the falsely revered central banker who presided over the ruin of the USEconomy, only to depart precisely when the bust was assured, leaving Bernanke to serve as bagholder and chief fireman (think liquidity) and foreman cleaner. Greenspasm said, "We are in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession. [A Double Dip recession] is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year. If home prices stay stable, then I think we will skirt the worst of the housing problem. But right under this current price level, mainly 5%, 7% or 8% below, is a very large block of mortgages, which are under-water, so to speak, or could be under-water. And that would induce a major increase in foreclosures. Foreclosures would feed on the weakness in prices, and it would create a problem. Our problem basically is that we have a very distorted economy. [Benefits have gone to] high income individuals who have just had $800 billion added to their 401k's, who are spending it and are carrying what consumption there is. The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long term unemployment, that is pulling the economy apart. I am very much in favor of tax cuts. But not with borrowed money." The final statement by Greenspasm below was very telling and somewhat a shock. He repeated his warning that fiscal deficits could cause long-term interest rates to rise and threaten the recovery. Actually such a rise would cause a series of financial nuclear explosions in the credit derivative space, resulting in economic darkness. He concluded, "At the moment, there is no sign of that, basically because the financial system is broke, and you cannot have inflation if the financial system is not working." So Greenspam is admitting that the banking system is insolvent and in ruins!! That is the truth. See the Bloomberg article (CLICK HERE).

◄$$$ THE GOLDMAN SACHS ANALYST INDEX INDICATES A BIG SLUMP AHEAD. THE INDEX IS DRIVEN BY THE ORDER FLOW, AND MATCHES THE E.C.R.I. INDEX IN A DIRE PREVIEW. $$$

A respected Goldman Sachs Leading Indicator has plummeted with a sudden drop, and sits at a seven month low. The firm has excellent analysts. My complaint is that they use the analysis to cheat the market and take opposition against their own clients. The Goldman Sachs Analyst Index (GSAI) is composed of similar elements and data that go into the ISM index. A good early warning is given therefore, since the GSAI index for July fell to 55.4 form 61.5 to mark the bigger drop in years.

Goldman's Jan Hatzius is a fine economist. When he is not spouting the party line about Second Half recoveries and Green Shoots nonsense jibberjabber, he does great work. He wrote, "The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in June. This decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009... Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively. The new orders index is now at its lowest level since July of last year. In this context, July's slight increase in the inventories index may not be a good sign, as it suggests production may have moved ahead of demand at a time when orders may be flagging. The gap between the new orders and inventories indices, which provides a rough leading guide to future strength in industrial output in ISM-style surveys, is the narrowest it has been since May of 2009." See the Business Insider article (CLICK HERE). Look for the ISM Manufacturing index to slide further.

The ISM Mfg Index came in at 55.5 in July, a little below the June 56.2 reading, and the lowest since December 2009. The usual drivel about expectations flowed from the ivory tower PhD residents who know nothing about business or little about economics. Among the various indices, New Orders came in at 53.5 versus 58.5, the lowest since June 2009. Also, both Employment and Prices Paid came in better than before at 58.6 and 57.5 respectively. Deterioration was also spotted in Production, Backlog of Orders, and Imports. See the Zero Hedge article (CLICK HERE).

Do not believe the ISM figure over 50 and the expansion implication therein, laden with distortions. It contradicts everything evident to the trained eye. The manufacturing sector is NOT expanding. Last year a great deception in retail sales data was revealed. Suppose a retail chain has 100 stores and closes 7 in the course of the last year. Loyal customers might pursue the remaining 93 stores with a little more vigor. The comparable sales data then is artificially lifted for the survivor stores. The chain posts positive growth from comparable sales (comps). Such practice is not a deception if the chain reduces from 100 to 99 stores on a net basis, but only after adding 2 stores. Staples grew steadily but trimmed the chain by closing stores all the time during the Jackass years on staff. My guess is the ISM mfg index might use the same deception. One plant closes, so they drop it from the calculation. The remaining plants pick up a little slack, and thus show growth. The end result is an ISM mfg index over 50 and expansion is the claim, which the Jackass don't buy for a minute.

◄$$$ ROSENBERG DESCRIBES RECESSION ELEMENTS IN CONVINCING STYLE. THE GENIUS ROSENBERG HAS WARNED FOR THREE FULL YEARS OF FAILED COMPONENTS THROUGHOUT THE USECONOMY. HE SEES THEM STILL, WITH TROUBLE IN CHINA. HE OPENLY USES THE WORD DEPRESSION TO DESCRIBE THE AMERICAN LANDSCAPE, AND PROVIDES A LIST OF GENUINE REASONS WHY. $$$

David Rosenberg is an excellent economist. He departed Merrill Lynch on the Wall Street syndicate probably as a result of disgust for bond fraud and marketing groups usurping economic forecast functions. Rosenberg explains basic facts that fly in the face of mainstream conventional news, and in doing so, provides facts consistent to my analysis. He points to the 5-year USTBill yield at 1.8% as evidence that the private credit market is basically defunct. At least $1.4 trillion of securitized credit has vanished since the credit crisis began two years ago, thus 40% of this market gone. In its place is rampant USGovt intervention into the USEconomy to stave off collapse. The props, supports, and interventions have become an unmovable part of the landscape, whose removal will prompt panic, followed by their quick return installation. The following are from Rosenberg, presented in his style

YOU KNOW YOU ARE IN A DEPRESSION WHEN ...

  • Congress extends jobless benefits seven times in the past two years.
  • The unemployment rate for adult males (25-54 years) hit a post-WWII high near 25%.
  • The White House raised its projected deficit for 2011 to $1.4 trillion from $1.27 trillion.
  • The FDIC seized and shut down a total of 103 banks for the year.
  • The surviving banks have cut their Loan Loss Reserves for bad debts when the household debt/income ratio is near record highs of 120%.
  • The USFed is still openly contemplating ways to stimulate growth after 18 months of 0% as official rate. Contrast to public statements (none of which the Jackass believed) about plans by the USFed to begin an Exit Strategy with higher interest rates and a shrinking of its pregnant balance sheet.
  • Bank credit continues to contract, where in one recent week alone, bank wide consumer credit outstanding dropped $2.2 billion, real estate lending dropped $9.2 billion, and commercial & industrial loans dropped $5.1 billion.

Rosenberg provides a lucid understandable summary. He wrote, "Program trading, algorithms, momentum trading, technicals all are at play. Meanwhile, the Treasury market has steadfastly refused to budge from a Double Dip [recession] view, with real rates still under downward pressure... It is amazing that Mr Market has been able to look through some of the blemishes of the Q2 earnings season, the recent spike in jobless claims, the latest hotspot for sovereign default risk (Hungary), and the ECRI [leading economic indicator] hitting a level that is more negative now than in the worst point of the 1990-91 recession. Even with the recent recoveries, the downdraft in most industrial metal prices since mid-April has been breathtaking, down 18% for aluminum, down 13% for copper, down 27% for nickel, and down 15% for steel. Since China has accounted for 40% of global consumption of base metals over the past year, these price moves would seem to suggest that the economic landing there might be less soft and harder than is generally perceived." See the Zero Hedge article (CLICK HERE).

◄$$$ THE JOBLESS CLAIM REFLECTS A HORRIBLE SITUATION NOT IMPROVING. SOME DECEPTION HAS COME ON BETTER WEEKLY CLAIMS DATA, BUT ONLY BECAUSE MANY ARE DROPPING OUT OF THE 99 WEEKS OF BENEFITS. THE USCENSUS EFFECT HAS LEFT THE TABLE. THE JOBLESS CLAIMS DATA HAS MADE LIARS OUT OF ALL OPTIMISTIC ECONOMISTS, DONE IN PLAIN VIEW. $$$

The jobless claims are moving in the wrong direction, making liars of the marketing agents for both the USGovt and Wall Street. In the week ending July 31st, the initial claims numbered 479,000, an increase from the previous week's revised 460,000 claims. Over 400k, and especially over 450k, means a horrible labor market and a USEconomy stuck in recession. The cold facts tell a story of the unemployment situation dragging endlessly, and countless people falling out of the system. Those workers who have exhausted the 99 weeks of benefits no longer appear on the EUC 2008 line item any more. Deceivers using statistics can be exposed by honest analysts using statistics. Marketing agents point to a reduction in the unemployed among insured, when an increase was seen in the number of people under extended benefits. The data shows the unemployed among insured workers at 4.848 million (July 10) and 4.571 million (July 17) versus 6.193 million one year ago. The rise is painful for persons under extended benefit (EUC) with 3.254 million (July 10) and 3.315 million (July 17) versus 2.831 million one year ago. For those who notice the EUC rolls have not grown much versus the total insured workers, bear in mind that people fall off the EUC rolls after 99 weeks. See the Market Ticker article (CLICK HERE).

◄$$$ PERSONAL BANKRUPTCIES ARE UP 9% IN JULY SEQUENTIALLY. NO LETUP FOR THE CONSUMER FAILURES AND ITS HUMAN MISERY FOUND IN DOWNTRODDEN HOUSEHOLDS. THE FALLOUT IS SOON TO ECLIPSE THE PRE-2005 LEVEL. $$$

Personal bankruptcy (BK) filings rose 9% in July from June. No recovery there. A return is seen to the steady level before the major revamp of the BK laws in 2005. Momentum is huge and unstoppable. The number of personal BKs in the United States in July was 137,698 for a 9% increase nationwide. Compare to the 126,434 filings recorded in July 2009, according to the American Bankruptcy Institute, which relied upon data from the National Bankruptcy Research Center. Chapter 13 filings, known as debt restructure, constituted 28% of all consumer cases in July, a slight increase from June. ABI Executive Director Samuel Gerdano estimated the pace of consumer filings this year will top 1.6 million filings. The record year 2003 saw 1.62 million personal bankruptcies, a record to be easily eclipsed this year or next year. Notice the 2005 level soon to be breached. The infamous Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 was enacted, a certain misnomer, which offered instead extremely sturdy protection to lenders and bankers. See the Calculated Risk article (CLICK HERE).


◄$$$ SMALL BUSINESS SENTIMENT HAS FALLEN TO ITS WORSE LEVELS IN SEVERAL YEARS. THE RECENT MEASURE SHOWS A PLUNGE IN BOTH GENERAL OPTIMISM AND CAPITAL SPENDING PLANS. $$$

The latest Wells Fargo & Gallup small business survey is out. It is best described as UGLY. Small business optimism is on a heavy downslide. A growing number of companies plan for lower capital spending, which means no job growth and possibly job loss. Sentiment is worse than during the heart of the credit crisis two years ago. That is a sentiment indicator that established nitwit economists overlook. Small firms expect lower spending, lower cash flows, and lower headcount in the future. Their capital expenditure is sliding to dangerously low levels indicative of retrenchment, retraction, and recession. Capex leads all else. See the Business Insider article (CLICK HERE), which includes more graphs.

◄$$$ THE SUTTON ARTICLE DEBUNKS CLAIMS OF ANY MANUFACTURING FORKLIFT. THE USECONOMY URGENTLY REQUIRES A RETURN AND REVIVAL OF ITS INDUSTRIAL BASE. UNLESS & UNTIL THAT OCCURS, THE NATION WILL BE LEASING ITS SOVEREIGNTY. MEANWHILE, THE JUST-IN-TIME INVENTORY METHODS EXPOSE THE DEEP ABSENCE OF FINAL DEMAND. $$$

The field of economics is very hard to properly explain. My preference is to avoid complications, and almost never mention the soft crapp like inflation expectations and sentiment indexes. Basic indicators work best like Leading Economic Indicators, money supply data, jobless data, housing prices, bank owned home inventory, and mortgage delinquency rates. They are more reliable in forecasting, and less subject to deceptive fudges. One of the easiest forecasts in my brief economist career was that when industry was dispatched to China, and legitimate income was replaced by debt drawn from asset bubbles, that in several years the US banking system would be in ruins and the USEconomy would be stuck in a permanent decline. It happened, a remarkably easy call. Andy Sutton is a sharp knive in the economist drawer. He understands the vital role of the industrial sector. Without legitimate income sources, all spending is debt financed. When bubbles serve as collateral, the bust invites systemic failure. He adds clarity to the USEconomic picture, with its heavy service emphasis that cannot improve the trade gap. He argues that Just-In-Time inventory management strips economists of their heavy emphasis on inventory buildup as an indicator of anything. Besides, foreign factories make most of what Americans purchase off the retail shelves. Andy Sutton summarizes many ills in his article entitled "The Manufacturing Myth: My Two Cents." See the Gold-Eagle article (CLICK HERE). By the way, CRM is customer relationship mgmt, and ERP is enterprise resource planning, each major tools of business.

"For years now we have heard stories about the de-industrialization of America and have seen countless pictures of decaying factories and manufacturing infrastructure. Yet at the same time the economic masterminds of this nation are telling us that manufacturing is going to pull us out of this horrible recession, and in fact, prevent any and all future recessions. If ever there was a dichotomy in perception, it is now. It would appear as if suddenly everyone is realizing that we must produce in order to consume. While this is a notable departure from conventional Keynesian theory, are we seeing a true sea change or just lipservice to the common sense of the matter?... Manufacturing currently accounts for about 28% of GDP at just a tad over $400 billion annually (based on final value of shipments) at our current clip, but total goods producing employment accounts for just 13 million jobs, less than 14% of total US non-farm employment. By contrast, service sector jobs account for a whopping 85.5% of US non-farm employment and provisioning of services accounts for over 70% of GDP...

The biggest difference between the recession of the early 1990's (see chart above) and the last two recessions is the wide acceptance of JIT (just-in-time) inventory management, CRM, ERP, and similar systems, as firms broke away from accepting carrying costs as a cost of doing business and made an attempt to streamline operations to compete globally. The net result of these fundamental changes in the way business is conducted is that inventories are now run down much faster than previously, and the rebuilding phase begins earlier, often while the recession is still in progress. If we had a true manufacturing economy, all else being equal, we might have a reasonable chance of being rescued to some extent by inventory building. However, ultimately, in the absence of an increase in aggregate demand, manufacturing will begin to stagnate again once the rebuild is complete... Even though the ISM index made a slightly better showing than what was expected, this was clearly another case of 'less bad' being good... Overall, the composite manufacturing index put in its lowest reading of the year at 55.5. Anything over 50 signals growth with values less than 50 signaling contraction. Even the mainstream media is now admitting that manufacturing's role in the continuing recovery is becoming suspect. Small wonder...

The bottom line is that services alone will not be able to remove us from our economic and fiscal duress mainly because so many cannot be exported and therefore are of little help to the current account. A strong manufacturing presence would do wonders. However, it is very difficult to ask a struggling consumestocracy to purchase domestic goods at a steep premium to their foreign counterparts. National pride will certainly help some make the leap, but in many cases, the price gaps are just too large. Tariffs could be used to close the gap, but widespread use could very well put an end to the Chinese (and others) vendor financing of the American economy. The same can be said for import quotas. For all the talk of energy independence, that would only be a microscopic piece of recapturing true national sovereignty. And yes, we have lost a good deal of that by virtue of being dependent on other nations to fill our shelves with everything from soap dispensers to many food items."

◄$$$ TRUCK TONNAGE SLIPPED IN JUNE. ITS RECOVERY FROM A YEAR AGO SEEMS TO BE HEADING DOWNHILL, ALONG WITH MANY OTHER INDEXES. THE NEXT DECLINE MIGHT NOT HAVE A GOOD BRAKE SYSTEM. $$$

My favorite unsexy economic concurrent indicators are federal income tax withholdings, state sales taxes, electricity usage, gasoline usage, and truck miles logged. Food stamp usage is an odorous indicator. The truck tonnage index has declined in June, after a steady rise since a year ago in April 2009. The American Trucking Assn Truck Tonnage Index fell 1.4% in June. The months of May and June registered the first back-to-back truck volume contractions since March and April last year. The latest reduction lowered the index from 110.1 in May to 108.5 in June. The last year saw a rise of 7.6% from the June 2009 level. ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is in decline.


◄$$$ FLORIDA COMMUNITIES ARE RAISING PROPERTY TAX RATES IN ORDER TO MAINTAIN A STABLE TAX REVENUE FROM THE BASE. THEY DO SO IN THE MIDDLE OF A POWERFUL RECESSION. GOVERNMENT STUPIDITY IS RAMPANT. THEY ARE SHOOTING THEMSELVES IN THE FACE, NOT THE FOOT. $$$

Florida cities continue to raise property taxes during a powerful recognized statewide depression. One can reliably expect government policy to harm the economy is every respect conceivable. Take Sarasota, a tony gorgeous town on the Gulf coast. City officials in Sarasota plan to institute a 5% property tax increase, but perpetuate subsidies for artworks generally. See the eyesores and Warhol-like momentos in parks, and a proposed $150k subsidy for an auditorium that hosts performances. Homes are entering foreclosure like a virus. Office space has gone wanting in record volume. Priorities seem absurd, if not destructive.

The John Galt web journal is loaded with sassy articles and a keen edge. Editorial commentary was on the mark. They wrote, "Raising property taxes to make it more expensive to live in a community does nothing to enhance the viability of the area, enhance or attract business creation, nor help to sell or lease the thousands of empty homes and business locations throughout the area. Cutting spending, starting with a 20% across the board cut for all government employees, except for those involved in public safety, is the start, along with ending these wasteful subsidies for the arts, beautification, tourism promotion, and so on. The city and the county need to focus first and foremost on filling the potholes and providing public safety. If they want tourism promotions, let the business community create an instrument for this purpose and deduct those expenses from their property taxes, as the city has no clue about the proper way to manage a business or its affairs. For evidence of that, all one has to do in Sarasota is drive up and down US301 and US41 (Tamiami Trail) and see the numerous For Sale and For Lease signs dotting our community." See the John Galt article (CLICK HERE) and appreciate the beauty of this backwards pistol that signifies politicians that shoot themselves in the face. At least they do not need to reload.

Thanks to the following for charts StockCharts,  Financial Times,  UK Independent,  Wall Street Journal,  Zero Hedge,  Business Insider,  Calculated Risk,  Shadow Govt Statistics,  Market Watch.