“The green shoots have disappeared. They turned out to be a powerful bull derivative.” – Art Cashin (UBS trader on NYSE, avoiding direct reference to bullshxt)
“We gave $12-14 trillion to the big banks. Now we are giving nada to state and local government and everyone else. They have it. We don’t. They are now going to have a party. We are the food.” – Catherine Austin Fitts
◄The Crisis Coverage Report from the Hat Trick Letter in July includes many incredible events unfolding and explosive information. An important lawsuit against the World Health Org and United Nations was submitted by an Austrian reporter, over the suspected global genocide events to spread deadly swine flu designed in laboratories. Global control and reduced population are their perverse goals. The story does not show up on the mainstream media. Burgermeister outlines considerable evidence. The death of Michael Jackson has a possible motive for his murder, since his canceled London tour was to have profits devoted to worldwide exposure of the swine flu dissemination and corrupted vaccination process. Israel licks its chops over potential cyber attacks on Iran, but backfires are possible using the same incoming ray to render damage in return to the source. Precedent exists surprisingly. Gerald Celente again warns the United States is hurtling in descent into the Third World, with awful but credible depictions. Geopolitical expert and author Chalmers Johnson warns about the high costs of maintaining the USMilitary, referring to the Empire of Bases, those embassies that are abused as defended fortresses. The new planned Pakistan Embassy is yet another monstrosity. High ranking retired USMilitary General Stubblebine disputes the absurd official 911 story about the crash of a commercial aircraft at the Pentagon, with details. A quick update on the $135 billion in legitimate USTreasury bearer bonds, with a photo that backs up authenticity. The document has signatures of Greenspan and Bernanke, and official seals from the USFed itself.
High profile murders continue, as a Dutch banker from ABN Amro was killed. This follows the Austrian provincial governor murder last autumn, whose case has been investigated further and disputed. Open banker warfare continues between the USGovt and the Swiss Govt over secret accounts. This is the visible tip of the iceberg. The Global European Anticipation Bulletin analysts in Paris warn of extreme economic and financial breakdown in the United States and England before autumn 2009 (imminent). They provide details on the bank and labor fracture points, with implications on USDollar and GBPound currencies, with timetables. The jugular point of vulnerability in the US remains its banking system, whose fracture should reach a climax in the next few months. US banks continue to fail, with commercial mortgage losses a common factor, setting the stage for climax. Harry Schultz reports that the US State Dept has warned major US Embassies around the world of a planned September banking system shutdown. One can only speculate what activities (criminal, federal strongarm) behind the scenes would take place. It would surely be a perfect setting for a major USDollar devaluation and forced bank mergers with zombie major money center bankrupted firms, setting the stage later for a USTreasury default.
◄$$ See the Hat Trick Letter Special Report entitled “Attack & Bunker Defense of the USFed” for July. The challenge in the USCongress by Ron Paul continues with a well sponsored legislative bill, so far blocked by procedure. Paul is adamant to have a vote. It would force a formal independent audit of the USFed. Internal signals point to the USFed being petrified about public outcry directed at the central bank, and Congressional attention. They cite need for independence, but it is criminal executive privilege at issue. Their counter attacks continue, as members warn of potentially higher interest rates and lost ‘AAA’ debt rating. The attacks and scrutiny could be rendered moot, since the USFed is trapped and insolvent with dangerous leverage. The lead economist at the Bank For Intl Settlements in Switzerland warned of bank crisis well in advance. The views of William White were drowned out by the sirens of wealth delivered by Sir Alan Greenspan, his rival, as the banks subsequently went to ruin. Extreme criticism has come to USFed Chairman Bernanke, whose term ends in February 2010. He might be painted as the scapegoat for a recovery that fails. He was not Obama’s choice. Lawrence Summers waits in the wings, whom most entities despise.
◄$$ GOLDMAN SACHS IS RECEIVING INCREDIBLY DAMAGING PUBLICITY FROM MULTIPLE SOURCES, LAYING BLAME FOR BUBBLES & BUSTS ON THEM. A RUSSIAN GSAX EMPLOYEE HAS STOLEN PROPRIETARY SOFTWARE THAT IMPLICATES GSAX WITH THE ULTIMATE INSIDER TRADING MECHANISM, KNOWING TRADES ORDERED BUT NOT EXECUTED. THE SYNDICATE FIRM HAS MANAGED TO KEEP A LID ON THE EXPLOSIVE STORY OF THE TRADING SOFTWARE SYSTEM, THANKS TO THE F.B.I. WHICH PROTECTS THEM. $$$
The Rolling Stone had a feature article by Matt Taibbi with acute detail, making excellent arguments and solid points about how Goldman Sachs has contributed to the ruin of the US financial system. They are intertwined into our financial system with their people placed at top levels of the USGovt, many agencies, and global structures like the World Bank. They have a large role in creating all the bubbles and engineering the crashes, with exploitation in each direction. They pay out huge bonuses to their partners and employees, much like a gigantic tax on the entire nation. Never under-estimate GSax and their ability to exploit the next new trend, like Cap & Trade. Perhaps they will end up selling some federal lands and national parks, and earn huge fees, in satisfaction of debts that default with China. GSax serves as police for the entire financial system, with access to information used routinely in insider trading. They dispatch federal agencies to attack their rivals. Taibbi is a brilliant journalist who continues to uncover cockroaches with his flashlight. See the scathing Rolling Stone article (CLICK HERE) or ZeroHedge article (CLICK HERE).
Taibbi calls the Goldman Sachs machine ‘The Wall Street Bubble Mafia’ in his article, and deservedly so. He has generated controversy, with Goldman Sachs firing back that his work is ‘an hysterical compilation of conspiracy theories’ with their spokesman saying, “We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good.” Taibbi responded immediately, saying “Goldman has its alumni pushing its views from the pulpit of the USTreasury, the New York Stock Exchange, the World Bank, and numerous other important posts. It also has former players fronting major television shows. They have the ear of the president if they want it.” Taibbi should be careful when in his car on public roads.
Added strength to the terrible publicity comes from Market Oracle in London. They emphasized the work of Taibbi without some added information. See the article entitled “Goldman Sachs: The Fourth Branch of the US Government” (CLICK HERE). Graham Summers wrote, “Trying to detail exactly how integrated Goldman has become to the Federal Government would be like trying to track the peanut butter swirls in Ben and Jerry’s Chocolate Peanut Butter Swirl ice cream. Indeed, with the exception of Ben Bernanke and a few other officials, Goldman Sachs provided all the lead characters for the Tragic Comedy that is our latest Financial Crisis.” The GSax machine is pervasive, whose tentacles reach into every conceivable official financial channel and crevice, controlling the flow of money, and enforcing the laws. That access has been abused to the hilt. In my view, they serve as a financial crime syndicate point team that has co-opted many federal functions. They are a cancer.
BUT THE BIG STORY IS THE GSAX ‘ULTIMATE INSIDER TRADING’ SCHEME. Sergey Aleynikov was arrested in New Jersey for allegedly stealing a key Goldman Sach’s secret trading formula, bound in software. Phony stories in the press have resulted. GSax has put forth statements to the effect that the possibility exists for somebody who knew how to use the programs to potentially use it to manipulate the financial markets. Wow! That constitutes as admission that GSax owns market manipulation software! US Attorney Facciponti said, “The copy [of software] in Germany is still out there, and we at this time do not know who else has access to it. Once it is out there, anybody will be able to use this, and their [GSax] market share will be adversely affected. [It enables the firm to do] sophisticated, high-speed and high-volume trades on various stock and commodities markets.” The trading system generates countless million$ per year in profit. See the ZeroHedge article (CLICK HERE). USGovt authorities believe Aleynikov may have had help from two sources. The German website onto which received the stolen software was downloaded is actually registered to a person in London. This story will be as impossible to control and herding a group of cats.
The supposed theft coincides with a sudden decline in the automated program trading activities of Goldman. In recent months, program trading on the NYSE has been clearly dominated by Goldman Sachs. They are very large batches of trades of multiple stocks written by and initiated by computer programs. In mid-June, the NYSE reported that program trades Goldman made for its own account represented 60% of all program trading. They have usually been responsible for 50% to 70% of program trade volume. The following week, Goldman was not even listed among program traders. After his arrest, Aleynikov was formally charged with ‘theft of trade secrets’ by the legal authorities. Is it illegal to steal illegal trading software??? FBI agents seized the computers from his home. Aleynikov joined Goldman Sachs in May 2007 and was vice president for equity strategy. His bio says he was responsible for “development of a distributed real-time co-located high-frequency trading platform.” That seems to be their proprietary program trading options, which Aleynikov himself has described as “a very low latency (microseconds) event-driven market data processing, strateg,y and order submission engine.” See the Business Insider article (CLICK HERE).
GSax has sent forward its troops to shore up the damage. Harvey Pitt, former chairman of the Securities & Exchange Commission, calls proprietary electronic data a significant risk posed for all financial institutions. He said, “This is a wake-up call to all financial institutions to review their security systems, not just with respect to trading codes, but with respect to all proprietary information.” To be sure, illegal trading methods must be protected that fleece the entire financial system. Or is that a GSax privilege? One must wonder what the trading system is!!! Are attacks of Goldman Sachs intended to ruin them, to expose them, to unseat them, or to prosecute and imprison them. For sure, as Catherine A Fitts said, “They are being swarmed, to take away market share.”
Subscriber RobertF in Oregon asks several excellent probing questions, none of which can easily be answered, certainly not yet. A) Was the program allowed to be stolen, maybe to cover up what is coming soon? B) Was the program allowed to be stolen because it had a secret backdoor installed so that it could be monitored without being detected? C) Was the program allowed to be stolen as it was set to self-destruct the markets at a specific time? D)
Was there an article out a week ago about a USGovt report on the various positions by firms that was to be revealed, and this report was to end very shortly. Zero Hedge was on GSax’s tail using this report, maybe too close. The implication of the questions is that GSax might be cleverly deflecting blame for an upcoming market disaster, where they can blame the thieves.
Karl Denninger lays out some details to make clear the Goldman Sachs so-called advantage. In reference to the Daily Kos, he wrote, “Goldman Sachs, through access to the system as a result of their special govt perks, was/is able to read the data on trades before it is committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the world& If true, this should be highly illegal, and would, in any sane country, result in something like what happened to Arthur Andersen& God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a ‘handslap.’ Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.
Denninger cites qualifications of the source of this information. He wrote, “There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos. His [Sergey’s] expertise was in fact in this general area of knowledge in the telecommunications world. This is precisely the sort of thing that a Unix machine, sitting on a network cable, where it can ‘see’ traffic potentially not intended for it, could have an interface put into what is called ‘promiscuous mode’ and SILENTLY sniff that traffic! & Folks, I have no way to know what the code in question does, but if there is anything to this, there is a major, as in biggest scam of the century (scandal here) something much, much bigger than Madoff or Stanford. What would this mean, if it was all to prove up? It would mean that Goldman was able to ‘see’ transaction order flow (bid, offer, and execute messages) before they were committed in the transaction stream. Such a SNIFF would be COMPLETELY UNDETECTABLE by the sender or recipient of the message. The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively stealing pennies from each transaction they were able to front-run.” We are talking about hundreds of millions of trades every day to steal a few pennies, totaling in the multi-million$ every year. See the Market Ticker article (CLICK HERE). Such GSax profits can pay for a really nice luxury headquarter building, seen below.
USTREASURYS & HIDDEN MONETIZATION
◄$$ CHINA HAS PROBABLY SHED MUCH OF ITS HUGE USTBOND HOLDINGS ALREADY, SPENDING THEM FOR HARD ASSETS, ALLOWING BEIJING LEADERS TO BADMOUTH THE USDOLLAR INCREASINGLY $$$. Last week, it was my pleasure to speak with a friend and colleague for an hour, Greg McCoach of Denver, the newsletter analyst writer who shared the stage at Cambridge House conferences across Canada for a few years. He said evidence is coming with huge volume. He claims the Chinese are spending their USTreasury Bonds in a huge way, a process well along, maybe close to total depletion. We hear stories of Chinese purchases of mining firms, or minority interests in the firms, or of individual projects from the firms. We hear of gigantic multi-year projects that involve huge infrastructure and community development. All over the world, company front signs have appeared with Chinese statements. One can only guess that the signs say "NOW UNDER CHINESE OWNERSHIP" or something similar. The Chinese are in an accelerated process of ridding themselves of their USTBonds, by using them as payment for large scale acquisitions. My response was “Fine, but the combined volume might not exceed even $100 billion after adding all their investments together, when they hold $768 billion in USTreasurys” in turn. He is investigating the total global volume, and will share information. Other analyst writers travel far more than McCoach, who does himself get around. The Coffin Brothers and Lawrence Raulston confirm the heavy USTBond spending by China, and the appearance of front signs dotting the globe. They travel to Asia, South America, and Africa frequently.
The Chinese officials intentionally might permit the USTreasury Bond holdings data to be incorrect in TIC Reports and elsewhere. Sort of like paper certificates of gold in the COMEX. Doing so gives them political cover. They have learned tricks by the masters of financial deception, the Americans. This is potential evidence of erosion of USDollar support. It is actually construction of sinkholes under the core US$ reserve structures.The emerging market nations will likely spend their USTBonds quickly, in a manner that again eludes detection. The USTreasurys are increasingly vulnerable.
Reports are circulating that the Chinese might not hold anywhere near as much USTBonds and USAgency Mortgage Bonds as US political and banking leaders believe. Recall that the Chinese leaders have increasingly been openly critical of the USDollar and its legitimacy, surely its integirty. They might be increasingly critical recently, only after having rid themselves of their US$-based holdings. They might have pledged an enormous amount of USTBonds to the Intl Monetary Fund in return for committed gold bullion delivery at a later date. They might have spent an enormous amount of USTBonds in their installed Yuan Swap Facilities across the world, in order to fund them. They might have placed an enormous amount of USTBonds in the ASEAN regional development fund for Southeast Asian nations. They sums all add up. The Beijing leaders might be far more innovative in removing USTreasury Bonds from their accounts in secretive clever devisive ways.
The USGovt federal deficit has topped $1 trillion for the first time in history. Including the $94.3 billion June deficit, the total reached $1.086 trillion. Monthly deficits are actually accelerating dangerously. The deficit could grow to nearly $2 trillion by this autumn. Renewed fears and concerns are certain concerning higher interest rates, the advent of price inflation, and the fate of the USDollar. President Obama and Treasury Secy Geithner state bland vacant words of a commitment to bringing down the deficits. The Obama Admin has set a goal of cutting the deficit in half by the end of his first term in office, a lunatic notion divorced from reality. The US official federal debt now stands at $11.5 trillion. Interest payments on the debt cost $452 billion last year, comprising the largest spending category after Medicare & Medicaid, Social Security, and Defense. The total federal debt is now over 80% of the annual output of the entire USEconomy, as measured by the gross domestic product. Former Wells Fargo economist, Sung Won Sohn is now economist at the Smith School of Business at California State University in the Channel Islands. He said, “These are mind-boggling numbers. Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”
◄$$ HIDDEN MONETIZATION OF USTREASURY BOND DEBT HAS IN ALL LIKELIHOOD BEGUN, SURE TO CAUSE DEEP PROBLEMS WITH FOREIGN CREDITORS EVENTUALLY $$$. What was a sequence of troublesome USTreasury Bond auctions in May and early June now becomes a tranquil series of supposedly successful auctions in late June and early July. What has changed? Simply stated, a desperate bid by foreign central banks has helped USTreasury auctions, which reeking with suspicion of foul play. First the details on the USTreasury auctions. A total of $19 billion in 10-year USTreasurys was auctioned on July 8th at 3.365% with a bid/cover ratio of 3.28, which is strong. The indirect bid was reportedly over 50% again, like the previous one. A total of $11 billion in 30-year USTreasurys was auctioned on July 9th at 4.303% with a bid/cover ratio of 2.36, which is still good. The indirect bid was reportedly over 50% again. In late June, the USFed did something very slippery. They changed the definition of indirect bid. It used to be strictly foreign central banks placing bids through hired agents. Now it includes a wider proportion of primary bond dealer bids from certain types of institutions as well. The clear motive is to cloud the measurement process, so that the much higher foreign central bank participation is obscured. Indirect bids for central bank purchase of USTBond at auctions has risen from 22-23% a year ago to 50-60% in recent weeks. Globally, the central banks wish to exit the USDollar, not to fortify it. Their public statements border on defiant, laced with accusations of US irresponsibility, failed regulations, and even pervasive fraud. We are led to believe that they are more actively supporting the US$ in auctions. My contention is that they are not using their own money.
My father did not raise a fool. Look at the many coincidental signals. If foreign entities were bidding heavily on USTBonds at auctions, and these auctions each week had volume much greater to entire monthly volume from last year, then the USDollar would clearly rise in the process. THE US$ IS NOT ON THE RISE! Basic signals are therefore evident that the USFed is enabling foreign central banks to purchase hidden monetization. My hypothesis is that the USFed is handing money in US$ denomination to foreign central banks for the specified purpose of purchasing USTreasury Bonds. The process begins and ends with USDollars, thus no currency shifts in the midst of staggering auction volume. The USFed is accumulating large accounts managed by foreign central bankers. This hidden monetization through the back door will eventually infuriate the Chinese, who have openly warned the US fraud kings running the financial sector.
◄$$ LIES ON FOREIGN USTBOND DEMAND APPEAR IN I.M.F. DATA $$$. The foreign central bank demand for USTreasurys has peculiar contradictions in the Intl Monetary Fund data. Reserve growth has slowed in the last twelve months. With admittedly somewhat incomplete IMF data, their US$-based reserves from the end of 1Q2008 to the end of 1Q2009 declined by about $130 billion. China and Saudi Arabia do not provide such data to the IMF, but in the June reports a steep decline in Chinese USTBond holdings was established, down to near 0% growth. The decline is clearly evident in the COFER data (light green triangles) in the chart. Notice the direct contradiction in the Official central bank purchases, whose records are kept by the USFed itself. A rise is shown in US-kept data (olive green squares). The graph tracks totals over the last four quarters on a rolling basis. The US data show record inflows into USTreasuries. Hmm! Most analyst estimates are consistent with the IMF COFER data. An easy conclusion is that the USFed is lying very loudly in stated official purchases, as it places its own accounts on foreign soil, calling it foreign owned, when it is indeed USFed owned. Hence, more strong evidence of hidden monetization.
Brad Setser writes his own possible explanation on the Council on Foreign Relations (the lion’s den) journal. He hypothesizes that “Central banks reserve managers pulled funds from banks, the US agencies [Fannie Mae Bonds], and private fund managers, producing an uptick in demand for Treasuries. We know that this happened inside the United States. From the end of 1Q2008 to the end of 1Q2009, central banks reduced their dollar deposits in US banks by about $200 billion, providing a lot of the funds that flowed into Treasuries. I would bet the same thing happened globally. From early 2007 to mid-2008, central bank demand, in even the revised US data, lagged my estimated of global dollar reserve growth. From mid-2008 on, central bank demand in the US data has exceeded my estimate for dollar reserve growth.” Setser seems to offer political cover for the USFed.
So Setser believes it very possible that just like inside the US, where we know that the USTreasurys hogged the bond flows at the expense of the private sector, the foreign investment action might have dominated activity also. My belief is that monetization occurred as described, in addition to some concentrated foreign monolith investment paths directed into USTreasurys. The other piece of contradiction comes from foreign inflows. The US data keepers have their hands full, as they cannot avoid the loud contradictions that unmask them as liars. Notice the outright abandonment of USAgency Mortgage Bonds (in blue) by foreign creditors. The USTreasurys are distorted by US clerks reaching across the oceans, lifting the numbers artificially (in olive green) with accounts improperly identified. The solid line is the same official central bank purchases as the previous graph. Setser does not believe foreigners shifted out of their US$ securities so rapidly. He identifies what he believes is an enormous gap between the nasty rhetoric coming from some foreign creditor nations, rhetoric that claims a loss of confidence in the long-term USTreasurys value, and their actual actions. My view is in disagreement with his view, one too mainstream and trustful of US data keepers whose lies are escalating in magnificent manner. See the CFR article (CLICK HERE).
◄$$ FOREIGNERS ARE ABANDONING G.S.E. DEBT (USAGENCY MORTGAGE BONDS), WHILE USFED PRIMARY DEALERS ARE CHOKING ON INVENTORY OF QUESTIONABLE VALUE $$$. One can safely conclude that we are seeing a complete collapse in foreign interest for USAgency Mortgage debt. Their owned portion has fallen from 50% to 20% in one year. Last month the extreme challenge to USFed primary bond dealers was described. More details have emerged. Primary dealers are holding a record $368 billion in Corporate, Agency, Mortgage Backed Securities, and USTreasury inventory. And the vast bulk of dealer holdings of agency debt has less than a 3-year maturity. They are not able to unload their inventory to pension funds, insurance portfolios, and other investment houses like hedge funds. They are due to choke on paper assets, some of which is obviously toxic. Furthermore, the USFed is feverishly attempting to support the residential property market, a certain titanic struggle. The USFed has purchased $881.0 billion in Mortgage Backed Securities. Around $475 billion comes in the variety paying out 4.5% in yield or less. The USFed is a fat hog on a bad nutrition diet, while the primary dealers are badly constipated! See the Zero Hedge article (CLICK HERE).
◄$$ CANADIAN BANKS MINDLESSLY JOIN THE USFED PRIMARY DEALER CREW $$$. The Canadian giant Toronto Dominion Bank has begun discussions with the US Federal Reserve about joining the ranks of its primary dealers. Earlier in the same week, Royal Bank of Canada agreed to join the network of banking institutions that deal directly with the USFed in moving USTreasury inventory into the market. One can only wonder why these two banks would want to step into a bad cheese factory. Maybe they are confident of a North American economic recovery. Maybe they are offered legal cover in past processing fraudulent bonds. Maybe they are promised a cut in USMilitary narcotic money laundered funds. Maybe they are permitted admission into some counterfeit operations. Maybe as a contact with Canadian bank expertise said, “They are frightfully stupid.” See the Reuters article (CLICK HERE).
DEBATE OF INFLATION VERSUS DEFLATION
◄$$ INTERESTING CRITIQUE OF THE INFLATION VS DEFLATION ARGUMENT, AS PERSPECTIVES OF GARY NORTH ARE ANALYZED VERSUS THOSE OF MIKE SHEDLOCK. $$$. An in-depth article is available on the inflation versus deflation debate with analysis of the exchange between two main philosophical opponents. Trace Mayer touches on many salient points as moderator after the fact, like money supply, backwardation of gold futures contracts, perception of gold as a commodity, and debt collapse. He points out some flaws in the Mish arguments. See the RunToGold article entitled “Inflation With Gary North or Deflation With Mish” (CLICK HERE).
In addition, check my July article entitled “Walls To Block US Deflation” (CLICK HERE). My main points are as follows. Neither inflation nor deflation will prevail since both will intensify, resulting in a storm that deliever staggering damage, perhaps enough to topple the entire financial structures. Many miss the storm itself as they argue through a microscope. The inflation programs actually destroy productive capital, resulting in shortages and economic deterioration. The crude oil price stands as a contradiction to the Deflationists, who never answer why its price rises. It is their blind spot. Commodity prices generally are rising, from a weak USDollar, even the suspicion of its mortal decline. This underpins the entire price structure inside the USEconomy. Inflationary recession or depression is the likely outcome inside the imploding United States. The gold price shows absolutely no sign of decline from deflation, whatever it is they mean by deflation. Central banks are the only buyers of USTreasurys these days, which is a golden alarm bell. Monetization is being disguised. Two important driving motivations are clear among foreign creditors. First, they are protecting their outsized core of US$-based bonds of several stripes. Second, they are diversifying away from the US$ at the margin in bold moves. The Chinese are leading this initiative with numerous important strides, and have stopped buying USTreasury Bonds, in a taper down from the October peak. The major 2009 psychological theme is to support US$ at its core, but revolt at its margin. Foreign economies have sharply reduced trade surpluses, and thus cannot support the monumentally growing USTBonds under new issuance. Deep isolation comes to the US financial system. With these changes come rising prices, not falling prices.
The Deflation Knuckleheads are wrong-footed, but the bigger knuckleheads are in charge of central banks. They block the flow of credit to the mainstream in order to achieve their perverse consolidation goals. At the same time, deep damage is being done to production supply. The central bankers are totally unaware of how their inflation programs destroy productive capacity in huge swipes. Check out decades of destroyed industry, climaxing to some extent. People should have no trust in the current money system, period! Many from the Knucklehead camp fail to comprehend what money is, and therefore lump gold in with commodities. Gold should be the best performer among all asset groups before long. The entire world is revolting against the global currency and banking system, along with the international transaction settlement system. Both are now US$-based, but a major birth process is underway to establish an alternative. Even if it is not a quick clean birth process, the damage to the US$ will be profound, which will unleash price inflation.
◄$$ THE SUPPLY ARGUMENT SUPPORTS PRICE RISES IN HARD ASSETS, AND NOT FINANCIAL PAPER, BUT BEWARE OF DEMAND $$$. The Oil Drum is an outstanding source of information. They must be tired of hearing about deflation and the bolt out of hard assets precisely when currencies and the entire global banking system is in the process of ruin. They wrote, “Finite resources are being quantified by infinite money. Today the Commodity Futures Trading Commission made some announcements regarding transparency in futures positions. Also Congressional hearings began with intent to limit futures positions sizes, especially for energy speculators. Unfortunately, this ‘speculation’ issue is one of many red herrings that ignores the widening fundamental disconnect between financial and real assets.” The battle continues with deep corruption and misdirection against the speculators and hedge funds. Position sizes will be reduced, but not for the cartel that works closely with the USGovt officialdom. Refer to gold and silver, in addition to occasional assaults on the crude oil bastion.
One should always keep in mind that price is determined by supply meeting demand. In a time when businesses are being wrecked, banks are reluctantly lending, profit margins are vanishing, people are losing their jobs, home equity is unavailable to raid for cash, and investments are in trouble, the reaction calls for demand on the uptrend for USTreasury Bonds as recession takes deep root, banks to park their reserves with the USFed for a guaranteed tiny yield but with security. Demand for consumed crude oil is falling slowly, but depletion is staggering at every major oilfied (called elephant fields). The US-based recoverable crude oil supply is falling badly. The supply of USTreasurys is reaching for the sky. The contrast is stark, the trend revealing, which should shake anyone who leans toward paper investments. Watch crude oil continue upward. See the Oil Drum article (CLICK HERE).
Numerous examples can be cited of destruction to production capacity. US-based economists prefer to spout with running mouths about demand destruction to push down commodity prices. The publicized analysis conveniently overlooks supply destruction. Any argument that treats demand without supply, or supply without demand, is faulty out of the gate. Once at a Toronto conference, Frank Veneroso made absurd indefensible arguments in 2005 that Chinese increase in industrial metal output from smelter plants would push down metals prices. He ignored growing demand. Prices continued up for another two years. He onced argued in 2002 that copper prices would fall from their high $1.50/lb level. They more than doubled in the following years. THE USECONOMY WILL CONTINUE TO SEE FLAT OR HIGHER PRICES FROM SUPPLY DESTRUCTION. Here we have US economists talking about reduced crude oil and refined gasoline demand, without mention of supply problems. One legitimate item can be cited. US domestic gasoline demand has fallen by 3% on an annual basis. Let’s take a few examples of supply destruction, admittedly incomplete. The same arguments hold for paper supplies, machine parts, car parts, lumber specialties, and more.
When producers cannot make a profit, they subsidize losses either with gains elsewhere or from formal government grants. If that is not possible, they shut down the business piece by piece. That was happening in Pennsylvania with dairy farmers earlier this spring, who were losing $50 per 100-weight (hundred pounds milk). With declining energy costs generally, they have found a reprieve. Many dairy farmers went out of business, or slaughtered their livestock, or sold out, or trimmed back. The California agricultural farmers have been in a bad bind. In order to secure bank loans, they had to formally prove access to water supplies. Many could not for many known reasons. Agricultural output has been inhibited as a result. As gasoline prices declined, so did crude oil feedstock costs. The result was gasoline refiners actually suffered a negative profit margin this spring. End product prices actually dropped more than oil input costs. At the same time, worker strikes, maintenance delays, and old creaky equipment slowed production considerably. Some gasoline refiners went out of business.
Next on the refiner nightmare is the gradual removal of the Mexican crude oil supply, as their giant Cantarell oilfied dwindles to nearly nothing. Its output has been coming down 15% to 20% annually. The entire Texas, Lousiana, and Gulf Coast array of gasoline refineries has its chief oil supply coming from Mexico, like 90% of its supply. That will gradually wind down to make for shortages. One particular US-based oil producer (missed catching the name) put out some data on drill rig counts. The data is alarming, and reinforces my point about reduced production supply. Their North American oil drill rig count has fallen by well over 50%, down 1216 rigs to only 1093 rigs in the last year. Their US rig count has fallen by over 50%, down 993 rigs to only 928 rigs in the last year. Their Gulf of Mexico rig count has fallen by one third, down 21 rigs to 42 rigs in the last year. Do not overlook a neverending story. Problems with Nigerian bandits continues, and has recently halted 250 to 280 thousand barrels per day in oil output. This is not depletion, but supply destruction, or at least interruption.
◄$$ THE CHINA CREDIT EXPLOSION CONTINUES TO HURTLE ONWARD, ASSURING EITHER AN EXTENSION OF THE COMMODITY PRICE RISE OR ADVENT OF PRICE INFLATION. HIGHER PRICES COULD BE IMPORTED FROM ASIA TO THE UNITED STATES. $$$ One must consider as preface that the Chinese are fast learners on informational deception on economic statisics, following the US lead on false data. It has some mercurial value. The Peoples Bank of China announced a bombshell. New Chinese bank lending for June was 1.53 trillion Yuan (=US$224 billion), which doubled the lending volume for May. The total already for the year is an astounding 7.4 trillion Yuan (=US$1083 billion). Their annual target was 5 trillion Yuan, equal to an astounding 25% of their 2008 GDP. The risk is clear, that lending standards have fallen, in such manner to provoke defaulted loans down the road. Also, the risk of undue hard asset speculation is strong. The USGovt is learning the hard way that fiscal stimulus, that coming from federal spending and stimulus programs, does not necessarily translate (trickle down) into economic spending, business investment, or growth of any kind. Banks must be willing intermediaries, and LEND THE MONEY. So far, big banks receiving federal funds park them in the USFed for guaranteed puny interest yields, but with safety from economic firestorms. Monetary stimulus is much more powerful than fiscal stimulus. It results in more vigorous effects since households and businesses and financial firms can immediately draw upon credit and use it the same day, as oppose to hoard it.
Two important points must be kept in mind. China has huge savings to finance the lending. They need to be prudent to lend into productive capacity and prudent risk. A certain proportion of lending will be devoted to bad risk and silly speculation, as always in a free system. Also, China has begun to turn inward, to promote internal growth, along with the coordination of regional growth and partnerships. The Asians realize that the West, where they export finished products, has become a weak link in their economic chain. Whether China will be able to maintain firm growth, relying upon demand from its own huge population as a purchasing pool remains to be seen. They will clearly lie on economic statistics, so as to maintain a strong facade. The important risk is a powerful one that haunts fiat money locations where unbridled money creation exists. Chinese stand the risk of creating the same boom-bust cycle that has happened elsewhere. If that is the fate of China, then in a few years, the ruinous bust will be historically magnificent. The major difference for China is that they have huge savings, which means they are not building a house of cards made of thin paper. They have a much stronger house of cards with stronger cards and a firmer foundation. It is a fiat house nonetheless. The Chinese at the same time are big buyers of gold on the government side and sizeable buyers on the household side. They have hedged their bets on the viability of fiat structures, using commodity stockpiles and gold reserves.
SUDDEN DEATH OF MYTHICAL GREEN SHOOTS
◄$$ WARREN BUFFETT SETS THE TONE OF A FAILED RECOVERY AND THE BOTCHED STIMULUS PLAN. MARTIN WEISS PROVIDES DETAILS ON THE GREAT RECOVERY HOAX. RICHARD BENSON LAYS OUT THE UPCOMING DESPERATE MEASURES, WHICH INCLUDE MORE MONETIZATION AND A SEVERE USDOLLAR DEVALUATION. $$$ Buffet always offers plain statements laden with wisdom and no nonsense. He said, “We have had no bounce [in the USEconomy]. I am afraid it is true [that the economy is still in shambles.] I do not worry about deflation at all. They are doing things, but they take a while to have an effect. You cannot produce a baby in one month by getting nine women pregnant.” He discussed on CNBC during an interview that the US Gross Domestic Product fell at a 5.7% annualized rate in the first quarter. He called the USGovt efforts to stimulate business activity a work in progress. He fails to notice that stimulus is badly off target. He agreed with President Obama who said the national jobless rate will rise above 10%. We are witnessing the death of the Green Shoots myth, as reality enters the room for all to see, finally acknowledged on a public basis. It was a sham to promote a stock rally, led by dead US banks attempting to sell stock. They did so and fleeced the investment community, again.
Martin Weiss with his paid service Safe Money Report and his free Money & Markets publication focused on the “The Great Lie of 2009: Recovery Is Around The Corner” in good detail. He provided ample evidence. Unemployment is surging. US industrial production is falling at the same rate as it did during the Great Depression. Global trade is falling at twice the pace of the 1930 decade. California is collapsing, while many cities and states are slashing budgets. Huge USGovt rescue aid programs have been in place, forcing the largest federal deficits in history. USFed Chairman Bernanke wrote this chapter of mythology in mid-March by saying he detected green shoots in the USEconomy. The June Jobs Report shattered the myth, for some reason, the turning point on reality. Now that big US banks have completed $75 billion in stock sales, the Wall Street forces can permit reality to drift back in. Lower monthly job losses had fortified the myth, but repeated changes to seasonal adjustment and continued abuse of small business estimates do little to change the reality of 650 to 700 thousand lost jobs per month. Five large US banks are ridiculously exposed to credit derivatives. Weiss points out five major threats that continue to lurk. 1) The sheer size of the credit derivatives market, at $202 trillion in notional value in the US banks, and $592 trillion in banks globally. 2) The lack of transparency for credit derivatives, beyond the reach and view of regulators. 3) Too much concentration of derivatives in the hands of too few, like 97% with just five banks. 4) Shenanigans in Credit Default Swaps, with one third in the hands of hedge funds, resulting in grand counter-party risk from under-capitalized firms. 5) Outstanding derivatives dwarf the trading in the underlying securities, which results in a runup in corporate bond values when the firm dies (see Delphi, Delta Airlines, NorthWest Airlines, and Calpine). The crisis is nowhere complete. It could easily reach some points of climax this September and October.
Richard Benson is an excellent economist, despite coming from Harvard University (which we joke privately about). He cites the impoverishment of Americans here and now. He points to the unemployed who do and do not collect jobless insurance, the under-employed, the nearly 1% prison population, those subsisting on Social Security benefits and Disability benefits, the 10% of the population aided by Food Stamps, and those who have lost considerable sums from their home equity and pension funds. He blames the severity of the crisis on misalignment of heavy consumption funded by debt. He believes that if the US press networks told the truth about the current economic catastrophe, the USGovt officials would respond in panic. Benson anticipates monumental rise in the USGovt deficit, major suffering for savers, and the advent of severe price inflation. He expects three major policy initiatives by yearend 2009. Another massive Stimulus Plan with job creation focus. Another round of Quantitative Easing to fund the stimulus, which means heavy USTreasury Bond monetization to purchase debt with printing press money. A major USDollar devaluation to encourage export trade and discourage spending on imported products.
◄$$ THE USGOVT AND WALL STREET FINALLY ADMIT THE STIMULUS FAILURE $$$. Numerous factors conspired to the failure of the Stimulus Plan, many of which have been outlined in these reports. A) The bank losses mount every month and every quarter, at a pace that in my view exceeds the pace of incoming capital from sale of stock, conversion of debt, or basic federal welfare doled to bankers. The ongoing housing decline is unrelenting, which results in continuous bank losses from loan defaults. The leading types are residential mortgages, commercial mortgages, and credit card lines. B) The USFed has secretly and viciously ordered US banks not to lend money, but to keep it with the USFed itself. This amounts to compulsory support of a USTreasury Bond bubble, as part of a Bank Consolidation Plan to be revealed. Banks see neither viable business expansion opportunities nor qualified borrowers, resulting in a stalemate. C) Not much of the Stimulus Plan was actually designed as stimulus, like 10% to 13% only. Thus the Jobless Recovery principle is promoted, a sham that really means only bankers receive lasting benefits. D) The Stimulus Plan had over 70% to 80% of its features and programs designed in future years, an insane plan for an economy in current desperate straits. Much planned spending on big public works projects will not begin to be felt until 2010. So the plan had neither much actual stimulus nor timely delivery. E) The low level of aid going to states and local governments was consumed in the form of budget holes plugged. To be sure, some jobs were saved in this manner, which acts to stem direct job cuts, a positive development. But no capital formation or even household handouts were enabled. F) Most households simply pay down debt like credit card balances instead of spending the tax cut savings.
A huge error is underway. Handouts to businesses and households proves a fleeting solution without wings, when capital formation is needed instead. The economic counsel at work is ignorant of this fact, and remains transfixed on a return to a consumption based economy. The Obama Admin and USCongress are now stuck politically. They claim to have had insufficient information on the depth of the USEconomic ailments. Now they will be reluctant to put forth another Stimulus Plan. They wish to avoid the political fallout from admission of a failed first step. They are distrusted in the designs for stimulus that they put on the table. The combination of corruption and incompetence is very profound and painful. Most parties involved would be rejected as corporate summer interns or apprenticeship applicants.
◄$$ JUNE JOBS FOR SOME REASON CONVINCED THE NATION THAT THE RECOVERY HAS BEEN TOTALLY DERAILED, NOT TO HAPPEN. LEADERS IN GOVT AND INDUSTRY HAVE NOT YET HIT THE ALARM BUTTON, WHICH IS COMING SOON. $$$ The economic hacks had expected a better improvement in job losses, like only 363 thousand lost in June. Instead, US non-farm jobs fell by 467k, and the jobless rate rose to 9.5% on the doctored statistic. The Bureau of Labor Statistics (BLS) continues its heretic practice of adding jobs from seasonal adjustment, which seems to be altered every month. Its methods are hardly the fixed method required. The Birth-Death Model handily added 185k jobs from nowhere. Without the B-D Model fictitious additions, a robust 652k job losses would have occurred. Without the loony seasonal adjustment additions, estimated by Shadow Govt Statistics to be 46k jobs, the job loss would have been over 698k in June. The 700k level has been stubborn for a few months. The same SGS outfit that deals with honest statistics estimates at 20.6% the total jobless rate, a higher figure than the official U-6 consolidated 16.5% jobless rate published by the BLS. They count the people without work, who want work, and who no longer qualify for state unemployment insurance benefits. Thus, the Green Shoot theory has been busted wide open in full view. The creative B-D Model added 31k construction jobs when the sector is in retreat, added 25k business services jobs when the finance sector is in retreat, and added 87k leisure & hospitality jobs when the hotel industry is in retreat. These all come from political vapor and pure deceit.
The majority of economists predict the jobless rate will hit 10% this year, and keep rising into next year, enough to capture widespread attention. If so, expect political uproar. They stopped spouting their ignorant ‘lagging indicator’ propaganda diversionary deceptions. All told, 14.7 million people remained unemployed in June. What put an exclamation point on the bad labor report for June was the drop in both the average work week and the hourly wages. The average work week in June fell to 33.0 hours, the lowest on record since 1964 when first calculated. It is down 8% from its December peak. Average weekly earnings fell by $1.85 to $611.49 in June, the lowest level in nearly a year. Furthermore, the average duration of unemployment rose by two full weeks during June, reaching 24.5 weeks, which at almost half a year is a record high. Optimistic quotes from economists will not be provided, since too stupid to repeat, and this is not a comedy center. Labor Secretary Hilda Solis admitted the harsh news bit hard. She said, “We are in some very hard and severe economic times. The president and I are both not happy. I do think the public needs to be patient. We know they are hurting.” For political reasons, like admitting failure, a second USGovt Stimulus Plan is not being considered. The compromised corrupt fools running the USGovt will simply permit conditions to worsen, patiently, so as to save face.
In a data series difficult to doctor, the jobless claims had continued over 600k in each of the last few weeks, but on the week of July 4th, they fell to 565k probably due to the holiday week. The more important figure is the continuing claims, which took a decent rise last week on that holiday week, meaning minimal exits from the dole with job in hand. In the last three weeks, continuing claims have been steady at between 6.70 and 6.72 million. It is more meaningful since workers exit the claims program and enter it, but continuing benefit beneficiaries measures the net difference. So it factors in those who find jobs. Professional & business services slashed 118k jobs in June, more than double the 48k cut in May. Manufacturers cut 136k jobs, down from 156k in June, but still evidence of a vanishing industrial sector. Construction companies cut 79k jobs, up from 48k the previous month. Retailers cut 21k, up from 17.6 previously. Leisure & hospitality cut 18k jobs, eliminating the gain of the same size in May. Notice the increased job cuts precisely in the areas given lift by the absurd Birth-Death Model. They should be consistent, but are not. On the bright side, education & health services added 34k posts in June and 47k in May. A respite in the flood of job losses could come later this summer, according to economists, as plant shutdowns by General Motors and Chrysler abate. My view is for continued fallout, as the ripple effect hits the entire automobile supply chain, ancillary businesses, and related communities. See the Yahoo Finance article (CLICK HERE).
◄$$ TRADE GAP NARROWS, MORE EVIDENCE OF DEEP RECESSION. $$$. The Commerce Dept reported the us trade gap narrowed to $26 billion in May, a drop of 9.8% from April and the lowest level since November 1999. The weak USEconomy urged imports down for a 10th consecutive month. So far this year, the deficit is running at an annual pace of $350 billion, half of the $695.9 billion deficit for all of 2008. Contrary to consensus, this is a signal of extreme recession, perhaps depression, far beyond remedy by simply reducing consumption within an economy entirely dependent upon consumption. For three years, my analysis claimed the trade gap would reduce significantly only if the USEconomy was ruined by a horrible prolonged recession. Economists believe that trend will continue as weakness in the U.S. depresses demand for imported goods. The politically sensitive deficit with China rose 4.4% to $17.5 billion in May, far less than the 12.6% record pace of last year. The deficit with Canada, its largest trading partner, dropped to $628 million, the smallest monthly imbalance in 15 years. The deficit with Japan fell to $1.9 billion, the lowest deficit in more than two decades.
Exports of goods and services rose 1.6% to $123.3 billion in May, reflecting increased sales of soybeans, corn, and other farm products, along with higher exports of industrial machinery, generators, and computers. US exports remained 25% below the record high in July 2008. Imports slid down 0.6% to $123.3 billion, the 10th straight monthly decline. Imports are now 34.9% below the record high last July, falling by almost $70 billion per month. The May decline was aided by a 3.4% drop in petroleum imports to $17.4 billion. The decrease reflected much lower volumes despite a $5 rise in the average price of an imported barrel of crude oil. Imports of foreign cars and auto parts dropped $238 million in May, again a sign of recession. See the Yahoo Finance article (CLICK HERE).
Bank credit is on the sudden decline. Commercial bank lending for property and consumer loans fell by $6.2 billion in the last week of June. The previous week had fallen by a monster $37.0 billion. If one projects the bank credit decline from the last three weeks of data to an entire year, an astounding 22.3% decline is in progress, a veritable collapse. That is credit contraction on a scale to justify magnificent new monetization programs. The four-week rate of change is the second worst on record, as early 2006 was the worst. On a broader scale, total commercial bank credit is threatening to turn sour with momentum. Internal trend measures have turned down in a manner that has not been seen in decades. At $6.991 trillion in total credit on the week ending July 1st, it is below the April level, and near a challenge of a 2007 level. It is down for five consecutive weeks. A full-blown breakdown in US bank credit is now underway in a technical sense.
◄$$ RECOVERY WILL STALL SINCE INDUSTRIAL CAPACITY REMAINS VERY LOW, AND PENT-UP DEMAND IS NON-EXISTENT $$$. Puru Saxena is a fine analyst. He points out how in simple terms, an economic recovery, like any period of growth, requires demand to exceed supply in industrial capacity in an aggregate sense. That means lumping in all types of industry. He wrote, “It is worth noting that a genuine economic boom occurs when consumption or aggregate demand pushes up against existing capacity. When that happens, businesses engage in massive capital spending in order to meet demand and this phenomenon brings about economic prosperity. At present, we are dealing with a situation whereby the entire world is operating well below existing capacity. For instance, the US economy is currently operating at roughly 70% capacity [actually 68.0% in June with most recent data]. Globally, the capacity utilisation rate is only slightly better at roughly 80%, however there is still a lot of unused industrial capacity.” The usual argument of pent-up demand (like for cars, business equipment, factory machinery, even properties) to win the day and earn a strong robust recovery does not hold merit. The many 0% deals exhausted demand in recent years, for cars and houses. Lenders are less willing to lend in recent months, and industry is badly over-supplied. The trend is down hard!
Meanwhile, the Commerce Department said orders placed with US factories rose by 1.2% in May, the most in 11 months. They are playing games with this statistic, as reported in recent HTLetter reports, by revising past data, basic deception. Business inventories continue to fall, by 1.0% in May and 1.3% in April. The mainstream economists call this good news, but again they ignore lower sales that justify lower maintaining inventory levels. Construction spending was down by 0.9% in June, an important part of any economy. Industrial production was down 1.1% in May versus down 0.7% in April, still struggling. Railroad freight traffic went downhill by 19.2% through last week from a year earlier, the Assn of American Railroads reported. The index compares the number of freight carloads at the six largest US railroads this year with the same period of 2008. The decline in shipments is closely followed by Warren Buffett, more than any other index. A small light showed through the fog last week. The Empire State manufacturing index rose to near even, from minus 9.41 in June to only minus 0.55 in July, a surprise move. The soft statistics come last, since the least important. The Univ Michigan consumer sentiment went up to 70.8 in June from 68.7 in May. But it fell in July to 64.6, in near perfect step with the stock market.
SMALL BUSINESS ON DEATH ROW
◄$$ SMALL BUSINESS WRECKAGE IS STAGGERING. IT IS THE LIFEBLOOD OF AMERICAN ENTERPRISE, THE BIGGEST REASON FOR GROWTH IN MIDDLE CLASS, AND NOW A NATIONAL TRAGEDY. NEGLECT IS PART OF THE EQUATION. $$$ Small business is vital to any economic recovery, but on a growing level they are going bankrupt. Businesses are born, employees are hired, equipment is purchased, sales are generated, deliveries are made, services are rendered, and taxes are paid. Capital engines are built and hum. Small business in America is responsible for 50% of the GDP, 90% of new job creation, but has benefitted so far by half of 1% of TARP funds. Federal programs support lumbering inefficient big business bent on failure, even the corrupt Fascist Business Model. Commercial bankruptcies are surging. Fewer small businesses are forming. The first five months of 2009 have shown a 52% increase in the total number of commercial bankruptcy filings compared with the same period last year, according to the Automated Access to Court Electronic Records. That is 36,106 BK filings in 2009 versus 23,829 BKs a year ago in January through May months. A nationwide trend has been in effect since January, as 350 businesses file for bankruptcy on a daily basis, an increase of 240% from 2006. That is when the bankruptcy law was changed. This productive candle is burning on both ends in a vanishing act, with fewer startups and more bankruptcies. To claim an economic recovery is total blindness and stupidity, laced with corruption of thought.
The secret to the American success in past decades was the power of small business. This veritable backbone of the USEconomy was always the key to leading economic rebounds and recoveries. Now it is the signal of continued economic deterioration, a major point of my analysis. The Trickle Down effect now works in reverse, as it inflict pain. Businesses with under 500 employee make up half of the total USEconomic output and account for the majority of job growth. My best friend in Boston voluntarily left his big corporation job to join a small consulting firm of six people. It now employs 36 people ten years later. Consider problems fester with national sectors like the housing market, the mortgage market, the construction industry, home repair services, the insurance industry, and other financial services. When they occur at the national level, the distress and fallout funnels down to create extreme duress to small businesses, especially those that supply the troubled corporations. They cancel contracts and discharge debts owed to their suppliers. Few people realize that those small businesses are less solvent than larger corporations. In fact, the transportation industry generally has triggered the biggest wave in small business bankruptcy filings, according to Equifax. Behind transportation are the construction, manufacturing, and retail industries as the major causes. Such BK filings have risen the most in the Los Angeles and Chicago metropolitan areas, according to Equifax. Smaller areas across the country are also experiencing a big increase.
Put aside the major corporate failures, like General Motors and Wall Street firms, which dominate the news media. Todd McCracken is president of the National Small Business Assn. He said, “There is always this dynamism in the small business community. Businesses are always dying, and new businesses are always getting started. Usually more start than fail, but my sense is that now it has flip-flopped. And it is alarming.” Oftentimes, job layoff results opens the door to start a small business, to go into business for oneself. That is precisely how the Hat Trick Letter was launched, seven months after a job loss at a consulting firm. Nowadays, funding with bank loans and other challenges make it less possible.
Lack of available funds for loans has greatly aggravated the problem, the same credit crunch. A National Federation of Independent Business trend report states that in May the proportion of business owners who report that loans are more difficult to obtain rose to 16%, the highest level since the 1980-82 recession. Businesses cannot rely as before upon credit cards, as many banks retrench and cut back on lines of credit. The same changes to the bankruptcy law in 2005, designed to curtail abuse of personal bankruptcy filing, also resulted in harsher treatment for small businesses. Court discretion to grant more time to small business owners making a solid effort to reorganize and emerge are now gone. US Bankruptcy Court Judge Lewis Killian says from his bench in Tallahassee Florida, “The failure of a small business does not have to be a lifetime sentence for the owner. Bankruptcy gives them the ability to go forward, to start up again, and to be successful.” True words, but not so true in the current climate. See the USA Today article (CLICK HERE).
My view emphasizes the favored treatment given to the large corporations in the last two decades, more fully connected to federal power centers, often with deep corruption. Small business is not included in the Fascist Business Model loop. The grand consolidation occurs not only among banks, but also large businesses. Most big corporations contain significant financial business segments, which connect them to the centralized system, the syndicate. Small businesses are not eligible, are cut off, and are put at risk of death from systemic distress and basic neglect by national leadership. The wretched Fascist Business Model has contributed mightily to bringing down the system, as it neglects the very backbone described above, small business powerhouses. The consensus view is the exact opposite, that the bigger corporations must be saved. They kill the entire system.
◄$$ AN IMPORTANT FINANCE FIRM FOR SMALL BUSINESS IS GOING DOWN IN FLAMES, WITH LITTLE CONCERN BY THE F.D.I.C. SHOWN. THE USGOVT IS SLOWLY REVEALING THEIR AGENDA TO RESCUE ONLY WALL STREET FIRMS AND GIANT CORPORATIONS, SURELY NOT THE STATES, AND LEAST OF ALL SMALL BUSINESSES, THE TRUE ENGINE OF GROWTH. $$$
The CIT Group is a leading provider of financing to small businesses and middle market companies. CIT was the top lender to small businesses in fiscal 2008, lending $524.9 million, according to the Small Business Admin. A reversal of fortune has occurred in fiscal 2009, which ends September 30. CIT has fallen to 16th place, with loans volume a mere $65.7 million. Based in New York City, CIT has been informed that the Federal Deposit Insurance Corp will probably not guarantee its debt. The FDIC has so far denied CIT access to its Temporary Liquidity Guarantee Program (TLGP), tied to the USFed’s many liquidity programs. The FDIC has backstopped $274 billion in bond sales under the TLGP program since late November. The reason given was concern that standing behind the CIT debt would put taxpayer money at risk. And the dead broken AIG bailout does not put the USGovt at risk??? The CIT management is in talks with the FDIC about strengthening its financial position to win approval, including raising capital. Implicit in the decision is that the institution is not systemically important. CIT has credit default swap contracts that indicate a near death experience. Their CDSwap rose to 38% upfront this week, according to Phoenix Partners Group. Counting the 5% annual base fee, it would cost $3.8 million initially and $500k annually to protect $10 million of CIT debt for five years. THE REAL PROBLEM IS THAT C.I.T. SHOULD BE GIVEN MORE T.A.R.P. MONEY, BUT THAT FUND SEEMS LOCKED AND DEVOTED FOR VERY LARGE BANKS. SMALL BUSINESS HAS NO VOTE! The CIT Group has received $2.3 billion so far from TARP funds, with refusal for more.
CIT has a century of established business. It is lender to 950 thousand businesses. CIT reports it is the third largest US railway car leasing firm and the world’s third biggest aircraft financier. That seems like systemically critical in my view. It switched its structure to become a bank in December in order to qualify for a USGovt bailout. It also received $2.33 billion in funds from the USTreasury. The firm has logged over $3 billion of losses in the last two years. It must contend with $10 billion in maturing debt through 2010, while not having had any access to the corporate bond market in more than a year, according to Bloomberg. Without funds from the TLGP to lift it, CIT could default by next April, when a $2.1 billion credit line matures, according to Fitch Ratings. The ratings agency is not optimistic about that CIT’s application will be approved by the FDIC, since judged not important systemically. More like they are not connected to the financial sector crime syndicate, and have issued no toxic bonds worthy of redemption at USGovt expense. A CIT failure would be the biggest bank collapse since Washington Mutual in September 2008. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of 1Q2009. Fitch slashed CIT to bad junk at B+ last week. Moody’s cut CIT multiple levels to Ba2 in April. Standard & Poors downgraded CIT three grades to BB- in June.
Bond Isaacson is CEO of BlueTarp Financial, a CIT borrower that itself provides trade credit to building contractors. He said, “If Barack Obama is truly worried about small businesses, then you cannot turn your back on someone that finances 950,000 customers. If they go away, it will inevitably cause the failure of some of those businesses. Take it away and you are going to have a huge unemployment issue.” The TLGP program opens a channel of funding for financial institutions unable to borrow in US capital markets. Participants pay the FDIC a fee to backstop their bonds, which enables banks to sell debt securities with top credit ratings. The TLGP as a facility expires October 31st. Take note. The FDIC has given GMAC access to TLGP, a marginal competitor to CIT. So the USGovt could be selecting deaths and survivals, except that GMAC and CIT might have little or no overlap in competition. My point is that GMAC might be set up to take business lost by CIT later on. GMAC is the car and home lender that received $13.5 billion from USGovt aid. GMAC has a lousy speculative grade credit rating, and is supported by President Obama. Its largest stakeholder is the USGovt. GMAC is tied closely to continued credit supply to the crippled General Motors and Chrysler customers and dealers. My comparison of the two firms might be unfair, unsure.
An astute subscriber with strong insurance firm experience in this area shared the story. Craig McC of the San Francisco area said, “Most if not all of CIT’s client base is small & medium firms. Even in the good times they are unlikely to obtain financing from commercial banks. So, if the FDIC allows CIT to fail, most of its clients will likely fail. We are talking about job losses of at least 5 to 10 million workers, much larger and more geographically diversified than the auto companies. By any stretch CIT is a systemically important bank that FDIC should save. CIT’s problem is that it is not a Wall Street company and does not issue toxic derivatives.” See the Bloomberg article (CLICK HERE).
CIT executives and USGovt officials remained secluded in talks for aid to enable its survival. At issue is credit market availablity versus USGovt costs, when the bitter feelings over the AIG bailout remain. CIT is not deemed critical. Richard Lee is managing director of fixed income at independent broker dealer Wall Street Access. He said, “They are major players when it comes to financing. But I do not see the same type of impact if CIT goes under as when AIG was being batted around and GE Finance and some of the other stalwarts.” That is like saying five 80-foot oak trees would not do much damage, since each is smaller than a 400-foot sequoia, if each fell to the earth. The latest word is that the FDIC is unwavering in denial of CIT access to any debt guarantee program.
A Washington lobbyist for community banks applauded FDIC Chairman Sheila Bair for opposing CIT access its guarantee program. Camden Fine is president of the Independent Community Bankers of America. He wants to avert a situation where depository banks would end up paying the costs of any losses if CIT defaults, as is likely. He said, “The Treasury and Fed want the FDIC to step into the breach and rescue CIT. I would rather see the Treasury step in with TARP money than to see CIT go anywhere near the FDIC.” Fine believes plenty of other lenders could make loans to smaller companies if CIT failed. See the Yahoo Finance article (CLICK HERE).
◄$$ PERSONAL BANKRUPTCIES ARE SOARING, TO COMPLEMENT THE SMALL BUSINESS TREND $$$. Personal bankruptcy filings increased by 36.5% in first six months of 2009, versus last year. US individuals entered 675,351 bankruptcy filings in 1H2009, according to the American Bankruptcy Institute. BK filings by individuals totaled 116,365 in June, up 40.6% from the same month in 2008. Notice the sharp quarterly growth in the new era since the change in the law. The quarterly totals are close to the levels prior to when the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 took effect. We all have heard of the rush to file BK in front of the punitive harsh law. There were over two million bankruptcies filed in calendar 2005 before of the law change. The ABI predicts over 1.4 million new bankruptcies by year end, probably a conservative estimate. See the Calculated Risk article (CLICK HERE).
NEXT BANK DAMAGE FROM MORTGAGES
◄$$ MARK HANSON CONTINUES TO NAIL IT. NOW HE PROVIDES UPTODATE INFORMATION ON THE LOAN MODIFICATION FAILURE. $$$ Mark Hanson (aka Mr Mortgage, of the Field Check Group) remains a solid intrepid fearless excellent mortgage analyst. He points out that standards have indeed changed, not only for lenders but for appraisers. They have turned extremely conservative. The bank capital is now viewed as a precious vanishing commodity. Hanson commented on appraisers, when he said “During the bubble a ‘good’ appraiser was one that brought values in the highest. Now a ‘good’ appraiser is one that brings the value in the lowest. This ‘good appraiser’ spread, that few have ever considered, has never been as wider than since the Home Valuation Code of Conduct was enacted.” Hanson has gone on to comment about the loan modification charade. Borrowers are not being aided in much of any material manner. Bankers are going through desperate contortions. Instead, home loans are merely rejiggered, with new leverage applied upon the same millstone around their necks. Hanson commented on the modifications,when he said “Loan Mods are designed to keep the unpaid principal balances of the lender’s loans intact while re-levering the borrower. [Mortgage modifications] turn homeowners into underwater, over-levered renters for life, unable to sell, re-buy, refinance, shop, or save. They turn homeowners into economic zombies.” The banks so far are being protected, not the homeowners. However, the protection comes in the form of buying time, which only permits more magnificent mortgage losses, as property values hurtle lower and liquidations are forced due to lack of finance opportunity. This is a government for the banks, run by the banks, not the people.
Details on Loan Modification defaults are provided directly from Hanson. On initially current loans (meaning never in delinquency), Countrywide modified $87 million of loans but 59% had re-defaulted within 10 months, to make for the worst performance of initially current loans yet. Wells Fargo came in second, with 49% re-defaults on $334 million of modifications. On initially delinquent loans (meaning they had entered a stage of delinquency), Wells Fargo came in 11th and tied with Ameriquest, with 70% re-default on $605 million of loans. Countrywide had the shameful distinction of first place again, with 80% re-defaults, which tied it with Washington Mutual. The two thrifts modified $388 million and $566 million of loans respectively. The best record on initially current loans was a ‘mere’ 34% re-default rate after 10 months. By contrast, the best record for initially delinquent loans was 62%, held by JPMorgan Chase, the part excluding the WaMu subsidiary. See the Mortgage Lender Impode article (CLICK HERE). A sharp fellow on a message board made the appropriate comment that reworking an impaired loan without a balance reduction is nothing but a Forbearance, and surely not a Modification.
The voice of rebuttal comes from James Lockhart of the Federal Housing Finance Agency. He refutes the claim that loan modifications contain little or no loan balance reduction. My firm belief all along has been that unless & until loan balances are substantially reduced, no mortgage remedy will come, foreclosures will continue like an endless parade, and banks will suffer a certain slow torturous death. My belief all along has also been that loan balance reduction would probably be obstructed in order to conceal the massive mortgage bond fraud and counterfeit committed by Wall Street and covered up by the USGovt (largely run by Wall Street). Nonetheless, Lockhart makes his point that in 1Q2009, a tiny 16% of loans saw a balance reduction among the Govt Sponsored Enterprises led by Fannie Mae & Freddie Mac. He reports that in 2Q2009, a hefty 83% of GSE loans saw a balance reduction. The amounts reduced are not available, surely tiny. Lastly, keep in mind an assessment made by Meredith Whitney, who forecasted the Wall Street destruction well in advance. Whitney simply stated that US banks are not ready for continued home price declines, and are not ready for rising jobless conditions. She expects a peak 13% jobless rate officially, hinting that was her conservative estimate. The banks will suffer additional losses that they are not prepared for, as job loss spurs loan default.
◄$$ THE PRIME JUMBO MORTGAGE LOANS ARE NOT ONLY DEFAULTING, BUT BEING DOWNGRADED FOR THEIR ASSOCIATED MORTGAGE BONDS, AS THE BANK LOSS HEMORRHAGE ENTERS A NEW PHASE $$$. Two important downgrades have occurred in recent weeks. Standard & Poors downgraded a scad of prime jumbo mortgage securities. S&P lowered ratings on 102 classes from 33 US-based prime jumbo residential mortgage backed securities, from vintage issuance between 1998 and 2004. Moodys downgraded an even larger swath. They downgraded 344 tranches within 61 jumbo residential mortgage backed securities, valued at $7.6 billion. They were of 2002-2004 vintage. The jumbo niche within the residential property market has a 40-month supply of homes in inventory, putting great pressure still on high-end property prices. Anyone who believes the housing crisis and mortgage debacle has ended simply fails to observe the data, or maybe refuses to look at data. See the Calculated Risk article (CLICK HERE).
Home foreclosures continue to explode, surge, skyrocket, with no end in sight. The overall percentage of foreclosures, relative to all mortgage loans, continues to set new records. The current level is twice the previous record high in 2002. Notice the relative calm in year 2006, when the foreclosure proportion was one quarter what it is now. Thanks to Weldon for the fine chart. The continued spike in the delinquency rate is growing worse for prime mortgage loans. The DQ rate has risen by an astounding 53-fold in the last three years, spiking to nearly 5.94% in May. Three years ago, it was a mere 0.11% in May 2006.
Miserable miscellaneous data to add. Home equity delinquency rates are shooting up alarmingly. The DQ rate for June was 3.52% nationally, up significantly from 3.03% the previous month. Also, the credit card DQ rate shot up nationally in a big jump to 6.60% in June, from 5.52% the previous month. In no way, does the data support any Green Shoots with the households. At two major credit card firms, the June delinquency rate fell. The Capital One DQ rate fell to 4.77% in June from 4.90% in May, while the Discover DQ rate fell to 5.25% from 5.38%. Even the giant Bank of America saw its DQ rate go down to 7.73% from 7.95%. Credit card defaults usually track unemployment closely, which continues to rise. The worst is probably yet to come though. Analysts expect credit card default rates to peak above 12% between the end of 2009 and early 2010, with cumulative losses reaching $100 billion.
◄$$ UNWILLING LANDLORD IN NATL ASSN HOMEBUILDERS $$$. Briefly, this story is too ironic to pass up, reported with tongue in cheek. The National Assn of Homebuilders is subleasing space in its national headquarters, putting added pressure on business property rents. The continued construction of new homes is only one factor in the endless housing bust and multi-year price decline. Over-supply of inventory seems not to matter to the clowns who run companies that build new homes. They are hellbent on bankrupting their firms. In 2006 and 2007, my statements were clear, that the housing bust would continue until over 80% to 90% of all homebuilders went out of business, either from forced bankruptcy or active liquidation. We are nowhere near such levels of burials for homebuilders. See the Calculated Risk article (CLICK HERE).
◄$$ HOUSING PRICE FALL IN APRIL AGAIN, BUT SEVERAL CITIES SHOW SIGNS OF STABILITY $$$. The pundits exaggerate the degree of the good news, saying a clear trend of moderation in home prices declines is evident, another sign the beleaguered housing market is stabilizing. Their statements are laced with hope and not so much reality. Home prices posted an 18.1% annual drop in April for the 20 major cities measured by the S&P/Case-Shiller index. One can legitimately claim that evidence of early stabilization is noticeable, but not across regions. Reaching at straws, some analysts point out that the April data marked the third straight time the decline did not set a monthly record. Indeed, annual price declines in 13 metros improved compared to March. Here is the true silver lining. Of the 20 metro areas, eight posted price gains from March, with the largest increase at 1.7% in Dallas Texas. Every city except Charlotte North Carolina showed a lessening in monthly price decline. My gut tells me that banks are sitting on properties in areas where prices firmed, and will send more of their home inventory to market soon. A housing recovery with firm footing is still distant on the horizon. The 20-city S&P/Case-Shiller index is down nearly 33% from its peak in 2Q2006. My forecast is that home prices will descend to 1989-1992 levels. They are near the 2003 level right now. The most brutal price destruction continues to be in Phoenix Arizona and Las Vegas Nevada, called the Sand Bubbles. Their home prices have lost more than half their value since their peaks. See the Yahoo Finance article (CLICK HERE).
◄$$ AN INTRIGUING AND HIGHLY CREDIBLE THEORY IS PUT FORTH BY GARY NORTH, WHO BELIEVES WALL STREET SYNDICATE BANKS PLAN TO SEIZE REGIONAL BANKS ACROSS THE NATION, BUT ONLY AFTER THE COMMERCIAL MORTGAGES RENDER DEEP DAMAGE IN THE NEXT PHASE $$$. The Lew Rockwell Institute is home to several fine analysts. Among them is Gary North, the irrepressible advocate of sound money and intrepid reporter to the perverted schemes by Wall Street. He has shared a very credible theory. Commercial mortgages have only medium volume as a niche within the credit market. However, they have a distinction of being heavily tilted toward regional and mid-sized banks for underwriting of loans. Lump the mid-sized banks with the regionals, for argument sake. My analysis parallels with a postulated conclusion put forth by Gary North. He wrote an intriguing article entitled “Bankers, Are You Scared?” (CLICK HERE). In it, he raises the theory that the USFed and Wall Street firms plan to permit commercial mortgages to fail, to allow the trend of mortgage ruin to continue, BUT ONLY UNTIL the regional banks scattered across the nation suffer serious damage. Up to now, the weakest and most insolvent banks within the United States have one of four traits in common. They are found in New York City. They were deeply involved in high volume of mortgage securitization (bonds), often with powerful leverage (see CDO bonds). They are extremely large banks in balance sheet makeup, the mega-banks. They participate in credit derivatives with crazy huge volume. The regional banks bear none of these four traits. North believes the commercial mortgage decline will take down the regional banks, wound them severely, and render them available for mergers & acquisitions with the Wall Street core. They will be bought up on the cheap, using funds set aside by them in the USFed itself as reserves. My belief is that a national initiative will compel weakened regional banks to join with the Wall Street syndicate, by USGovt order, perhaps occurring within the next stage of the banking crisis.
Gary North unequivocally states that the fractional reserve multiplier effect has broken down. In other words, the US banking system is not functioning, is broken, and is masquerading as a lending system, but no significant lending occurs to foster capital formation. Smaller businesses are being cut out of the lending process, since deemed higher risk. Banks see less chance of asset recovery from collateral held by this riskier group. North wrote, “The banks are carrying the existing system by lending to high interest borrowers who still use their credit cards, but only if the borrowers are making their monthly payments. But banks are no longer willing to lend most of their post-September legal reserves to the general public. They prefer to let the FED sit on the money. They are walking away from the interest they could earn on a trillion dollars of available reserves. This is unprecedented. It is happening all over the Western world. Commercial bankers are not lending the reserves that central banks have made available to them through massive purchases of debt. The banks bought the debt. The recipients, when not banks themselves (toxic asset sales), deposited this money in their banks. The banks then turned the money over to the central banks that created it. The fractional reserve multiplication effect has broken down. The money multiplier is not multiplying any longer& Commercial rents will continue to fall. There will be deals. Small local banks will continue to go belly-up. There will be deals, [but mainly] for big banks. That is the goal of the Federal Reserve System: to create deals for big banks at the expense of little banks. It always has been. The FED is not about to change at this late date. Small bank managers are scared. They should be.”
The only banks that benefit from phony accounting are the Wall Street banks and other giant banks with national exposure, which participate in the leverage games of destructive finance. These same banks are also funded to the hilt by the USFed liquidity programs, and assisted by the FDIC, which acts more like a Wall Street harlot than a USGovt bank insurer. So the Wall Street firms will then acquire the regional banks when they teeter toward failure. The USDept Treasury will broadcast exaggerated claims of regional bank insolvency, after having exaggerated Wall Street health. The only trouble is, these colossal agents of destruction plan to implode the entire US banking system in order to achieve their mission, BANK CONSOLIDATION. The biggest banks eat the medium and small banks. The big boys at the biggest banks are not sitting on all those unused bank reserves for nothing, which sit earning interest at the USFed, ready to be mobilized. They are putting funds on a Layaway plan for future usage to gobble regional banks! Again, the only trouble with Bank Consolidation is that the plan must first kill the national economy and banking system. At the same time, release of the funds stored in the USFed vaults by banks will be released only when the USEconomy falters to the edge of ruin. The big banks will thus consolidate a kingdom of charred ruins. The release could easily cause rather considerable price inflation, perhaps planned to launch only when the unemployment level hits alarm levels. That seems to be a very credible plan. If the US banks do experience a shutdown, forced mergers would fit in with this scenario.
CALIFORNIA & NATIONAL FAILURE FUSE
◄$$ THE CALIFORNIA I.O.U. COULD BE PRELUDE TO A NEW STATEWIDE CURRENCY OR OUTRIGHT DEFAULT. THE IOU COUPON PROGRAM HAS MUSHROOMED FOR BANKERS, VENDORS, TAX COLLECTORS, AND INNOVATIVE MARKETEERS, AN UNWANTED EVOLUTION. THE USGOVT WATCHES, SITTING ON ITS DIRTY HANDS. $$$ Reviving what was used in 2005, the California state government created I.O.U. coupons to pay certain state workers. Formally the IOUs are registered warrants, totaling about $3.4 billion in current issuance. The IOUs were accepted at Wells Fargo, Bank of America, Chase Manhattan, and Union Bank but only until July 10th, which was last Friday. Redemptions at banks have a limited timespan. Other banks are more vague and non-committal about refusal, especially credit unions. The California Credit Union League will accept the IOUs without setting a time limit. The state officials set a redemption date of October 2nd for the IOUs, unless redeemed before then. Perhaps some arbitrage will occur, where some financial firms will offer to gobble them up at discount, hoping for full redemption later, like with a USGovt federal aid package. The big banks stated a tougher stance with short window mainly because they wish to force the state legislature into action. The participating banks will earn an annualized 3.75% tax-free rate of interest on the IOUs until redeemed. See the LATimes article (CLICK HERE). One should wonder if state taxes can be used by individuals to pay with their handy IOU coupons.
Lying on the horizon is a potential Constitutional challenge. States cannot print money. They are having great difficulty selling state bonds. Temporary issuance of IOU coupons could easily precede a temporary currency, if the duration were longer and assured, and if the acceptance across the state was mandatory as legal tender. Without federal aid and broader usage of such coupons as legal tender (aka money), California will default and cause gigantic ripple effects, both economically and politically. My belief is clear, that the USDept Treasury and USCongress are technically tools of Wall Street, serve only Wall Street, fund only Wall Street, and listen only to Wall Street, as a Coup d’Etat has occurred that few seem willing to recognize. The defiant unresponsive posture toward the states by the USGovt to date clearly exhibits the loyalty of federal government to the Financial Elite, and disdain for States and the people. We are witnessing a breakdown in the federal role to serve the states, since it serves itself and the financial crime syndicate.
Here is the latest word from Craig McC from the SanFrancisco metro area, in response to my query on the IOU coupon situation, in his words with minimal edits. The major banks stopped cashing California registered warrants (IOUs) last Saturday. However, these banks were essentially treating them as no interest loans dependent upon State redemption by October 2nd. In all, 60+ credit unions are still cashing these IOUs. No news updates on discussions to resolve budget crisis in the legislature for the past two days. The major tax collection agency for the State, the Franchise Tax Board, will accept these IOUs as payment for any income tax and related purposes. Meanwhile much anecdotal evidence that tax receipts are plunging big time. However, the Employment Development Dept, which is responsible for unemployment and disability payments, will not accept the IOUs as payment from employers. The IOU coupons were being traded on eBay until the SEC announced late last week that they were securities and should be treated as such. The State Controller strongly disagrees with SEC position. The IOUs are still actively being traded on Craigslist. Late last week the General Services Admin faxed out a request to its vendors asking them to reduce their contract costs 15%. Some are agreeing to do so, but some are asking their suppliers to reduce their costs so they can accommodate the State. Some are telling the State that a contract is a contract. Depending on the diversification of the business, those heavily dependent on the State will soon run out of cash while others say they can go on serving the State. Currently no prospect of any bailout or debt guarantee has been heard from the USGovt.
◄$$ THE USGOVT PROGRAMS HAVE BEEN WOEFULLY INADEQUATE, AND HAVE ACTUALLY FROZEN MANY BANKS. THEY ANTICIPATED WRONGLY THE ARRIVAL OF MORE GENEROUS FEDERAL AID. $$$. The Obama Admin has in place the Home Affordable Modification Program, designed to prevent as many as 4 million people from losing their houses over the next 3-1/2 years. To date, over 240 thousand distressed borrowers have been approved on a trial basis under the plan. Treasury guidelines are intended to encourage banks to allow more borrowers to sell their properties in a short sale (negative home equity), where the lender averts a foreclosure by accepting less than the full mortgage balance of the mortgage. Without formal assistance from the USGovt, many lenders will simply foreclose. The main problem is that many extremely large lending insitutions (banks and mortgage firms) have incorrectly anticipated that the USGovt would provide a broad home loan program with substantial subsidies. No such national mortgage program has arrived, for a number of important reasons having to do with mortgage bond fraud and counterfeit, in addition to an estimated multi-trillion$ cost. The new nightmare is prime mortgages in default. Newly initiated foreclosures of prime mortgage loans suffered a significant increase in 1Q2009, catapulting up by 21.5% from the previous quarter.
The national housing problem is acute. Mark Zandi of Moody’s Economy.com estimates that 15.4 million homeowners owe more on their homes than they are worth on first mortgages, stacking up to 20% in negative equity, or under-water, or upside-down (take your pick in the parlance). The upward trend in job cuts and unemployment renders the homeowner increasingly unable to fulfill mortgage contract obligations, at a time when refinance of adjustable mortgages is often an impossibility. Lenders will not finance a home in negative equity, period! Surprisingly, JPMorgan Chase is a leader in volume of modified home loans, having altered 138 thousand of them, but still they turn away even more. Bank of America is the nation’s biggest servicer of home mortgages. The bank extended offers to modify more than 45 thousand home loans under the Obama plan, but they do not release precise data on foreclosures.
◄$$ LOS ANGELES IS AN EPICENTER FOR HOME FORECLOSURES, THE MORATORIUM NOW ENDED. STATE MORATORIUMS ON MORTGAGES HAVE ENDED, PERHAPS MOTIVATED BY EXPECTATION OF FEDERAL AID. $$$ Lending institutions will move quickly to clear up grand backlogs as state mandated moratoriums on foreclosures expire. Not only have states slowed the foreclosure process, but the USGovt’s flimsy programs of mortgage relief enticed many banks into holding back Real Estate Owned (REO) properties in inventory. Banks might assist homeowners and make easier monthly payment plans, but the flood of fresh new mortgage defaults has led many banks to simply unload their inventory and force REO sales at heavy discount. The banks have a mountain of REO properties stuck on their books. California is an epicenter for the bank-owned properties hitting the market. That is why California has suffered in the neighborhood of 40% home price declines. What rose most is falling most, and causing the most wreckage. The state is collapsing.
The pipeline for foreclosures is clearly filling quickly. In the first quarter, some 1.8 million homeowners nationwide fell behind on their loans by 60 to 90 days, a 15% increase from the prior quarter. Zandi’s firm cites that loan defaults rose sharply as well, to 844 thousand in the first three months of this year. California accounts for a disproportionate share of mortgage loan defaults. A stunning 135,431 homeowners in the Golden State were hit with notices of default in 1Q2009, an increase of 11% from the earlier peak in 2Q2008, according to MDA DataQuick. This is not improvement. Foreclosure sales in the state have slowed after averaging a high of 26,500 per month last summer. Stockton home prices plunged 60% in the last two years, coinciding with a long parade of expected foreclosures. Banks continue to sit on REO properties, afraid of forcing more calamitous price declines. Sales of foreclosed homes has been unusually quiet, perhaps mainly due to legal moratoriums. Jerry Abbott is a broker and co-owner of Grupe Real Estate in Stockton. He reports a surge of requests for broker price opinions, or appraisals that lenders often ask brokers to provide just before they put a foreclosed property on the market. He said, “I think it is going to be a very big wave, just like what we saw through 2008.” Demand to grab deals is more common now, so further price declines might be moderate but not severe. See the LATimes article (CLICK HERE).
A new phenomenon has entered the purchase & sale process for homes. Most attention on this new wrinkle has come from California. The appraisal process has changed, whereby they have taken a very cautious route. Recall the Hanson comment about conservative appraisals. In the absence of many comparable relevant sales in the type and neighborhoods, essential for actual value appraisals, the appraisers are relying increasingly upon bids in the falling market! When low-ball bids enter the picture, they do damage. The national media has not even begun to focus on this factor, although CNBC did reveal the story. Low-ball bids are killing 20% to 25% of pending sales during the appraisal phase. The professional appraisers wish to enjoy continued bank business, and to avoid legal problems at a later date. Many have endured significant legal scrutiny, if not lawsuits and fraud charges.
◄$$ CALIF IMMIGRANTS HAVE BEGUN TO DRAIN THE STATE OF FUNDS, AS THE TREND HAS REVERSED FOR BOTH WORKER FLOW AND REMITTED MONEY TRANSFERS. SOME EVEN ASK FOR MONEY FROM HOME SENT TO CALIFORNIA. $$$ Migrant workers now shun California. Conditions have changed, due to expensive housing, high taxes, onerous regulations, and perceived hostility to business. Net domestic migration has been negative for ten of the last fifteen years. Cross border migration to California remains positive though, as other economies are weaker and existing ethnic networks still have an attraction. The slowdown in the aerospace and defense sectors in the last decade was followed by the bust of the housing bubble and the vanishing act by technology venture capitalists. All talk and little action failed to improve the state’s competitive position. The housing boom from 2002 to 2007 obscured the high tax rates, the cascade of harmful regulations, and deteriorating infrastructure. The general migration turned negative by 2005. Now the migrant worker migration is negative. Other migrant destinations like Oregon, Washington, Nevada, and Arizona have become less competitive as well. See the New Geography article (CLICK HERE).
With the USEconomy a mudpatch for migrant workers, money transfer agencies have been in decline from their wages sent to home countries. Shockingly, some immigrants have reversed the process, asking relatives to wire them money back. Marlen Miranda is manager of Peerless Travel in Fairview California, a money transfer service. She said, “We have never seen this before. I mean, one or two people might receive money for a special reason, but not this quantity of people. They cannot send them much, because the economy in their countries is so bad. Sometimes people only receive $20 from home.” Miranda said she has seen her regular customer base dwindle from 200 people to 75 each month. Of those 75, Miranda said, about 20 enter the offices to receive money instead of sending it home. Records and data from Western Union and foreign sources is spotty on ‘reverse remittances’ wired back to the United States. Immigrants working in the US sent home more than $50 billion to their native countries in 2008, according to the World Bank. The Mexican central bank said remittances sent to that country are down more than 18% in the past twelve months, the biggest decline on record registered in April. See the Yahoo Finance article (CLICK HERE).
Thanks to the following for charts StockCharts, Financial Times, Wall Street Journal, Northern Trust, Business Week, CIBC Bank, Merrill Lynch, Shadow Govt Statistics.