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

* Miscellaneous Morsels
* Suffocation on Rotten Debt
* Entering Sovereign Debt Meltdown
* Insolvent Banking System Sinks
* Housing in Quicksand
* Another Economic Recession Looms


HAT TRICK LETTER
Issue #75
Jim Willie CB, 
“the Golden Jackass”
13 June 2010

"My best guess is we will have a continued recovery, but it won't feel terrific. The reason it won't feel terrific is because it is not going to be fast enough to put back 8 million people who lost their jobs within a few years. It is going to take a while." -- Ben Bernanke (USFed Chairman)

"[Bernanke's statement on the economic recovery] guarantees that we are going to have a double dip recession, because his track record is 100% accurate, but it is 100% accurate in the wrong direction." -- Michael Pento (Chief Economist for Delta Global Advisors)

"Many are convinced that the Fed and the Department of the Treasury will come out with a new, bigger, and better bailout, and I have no doubt that the will. I am also convinced that it will be a huge failure for the simple reason that the market will take this as a colossal admission of failure. You cannot come out with an even larger bailout after you have already patted everybody on the back and declared victory." -- Enrico Orlandini

"Fuxx my victims. I carried them for twenty years, and now I am doing 150 years. They deserved what happened to them, because they were rich and greedy." -- Bernie Madoff (from his prison cell, with no remorse, only contempt)

"It is the things you learn after you know it all that count." -- John Wooden (UCLA basketball coach who passed away last week)

MISCELLANEOUS MORSELS

◄$$$ THE STOCK MARKET IN THE UNITED STATES IS ROLLING OVER, WITHIN DEFINED BOUNDARIES OF TECHNICAL CHARTING. A RESUMED LONG-TERM DECLINE PROCESS APPEARS CLEARLY UNDERWAY. $$$

Honestly, my view of the US stock market major indexes is that they are tails on a wayward dog led by tightly controlled leashes amidst staggering insider trading and massive illegal front-running flash trading. Apart from its corrupted foundation and structure, examine the recent directions. Something big is in progress. Take the S&P500 index (symbol SPX). An important bearish crossover took place in the early months of 2009 that many blind followers believe was reversed. It is a 'Death Cross' pattern. The 100-day arithmetic moving average crossed below the 200-day MA in March 2009, then below the 300-day MA in May 2009. Alone they are dire signals, but their meaning was reinforced by the failure of the SPX to rise above either the 100dMA or the 200dMA in April 2010. The critical support of 1060-1070 is the current battleground, where the battle is fierce, pocked by recent instability marked by big intraday movement and saddled by unusually low volume. Some support has been found in the 100dMA, which did its job in February 2010, which should turn up slightly in the coming weeks. Watch the 900-950 range for extremely critical support. Some deviant mainstream analysts argue feebly and erroneously that the S&P500 has engineered a significant reversal. The chart does not bear that out. It appears more like a long-term breakdown, as any shoulder line has a strongly pronounced downward tilt with MA lines dictating the breakdown process, obstructing lifts, not aiding it.

The arguments for recovery, reversal, and revitalization are all false and phony. They say cash flow dictates higher valuation, yet only large firms have cash, and much of it is provided by direct or indirect USFed largesse and liquidity. They say earnings trends dictate higher valuation, yet that trend is downward as the financial sector has been decimated. They say money on sidelines must return to stocks, yet this line has been used for two full years, maybe smart to stay out of turbulence. They say balance sheets are repaired, yet the relaxed corrupted FASB accounting rules permit the banks to continue in insolvent broken condition. Their arguments are shallow, incorrect, and desperate. Worse, the New York Stock Exchange volume is 83% attributed to High Frequency Trading, where computers compete among Wall Street firms in a race to see which has the best insider and front running software, as they eat each other's books. The public has lost a significant amount of trust in Wall Street and the stock market, especially after the Flash Crash on May 6th that featured a 1000-point intraday swing, complete with a mass of forced sell stop trades and canceled trades. The integrity of the US stock market is ruined and in shambles. The fact remains that GOLD has been the best performing asset class for ten years running, and that fact scares the shit out of them.

The US stock market will roll over like a bear in steep declines unless and until the USGovt, the USCongress, and USFed decide to inflate across the floodgates into Main Street, to permit the expanded monetary aggregate to flow into ordinary business loan credit creation, and to risk a rise of price inflation. The greater risk is that hyper-inflation will take root, when the US leaders choose and embrace much more inflation that reaches the people. The alternatives have gone polarized, as systemic collapse on one end is opposed by price hyper-inflation on the other. Neither is favorable. My firm expectation is that the Powerz will choose inflation, like during every single past crisis event.

◄$$$ DENNIS GARTMAN IS A HACK. HIS FUND IS PATHETIC. HIS ANALYSIS IS COMPROMISED. HE IS A PAID SHILL. OFFERING NOTHING OF VALUE, MAY HIS BUSINESS PERISH. MAY HIS FOLLOWERS BE BURNED IF THEY FAIL TO AWAKEN. MAY HIS REPUTATION BE TARNISHED FOREVER. HIS FUND'S CHART TELLS THE STORY. HIS CONSISTENTLY WRONG RECORD ON GOLD CALLS HAS RENDERED HIM A COMEDY SIDESHOW. GARTMAN IS AN ENEMY OF THE GOLD STATE. $$$

◄$$$ EINHORN AT GREENLIGHT CAPITAL IS SHORTING MOODYS. THE DEBT RATING AGENCY IS ON DEATH ROW. WARREN BUFFETT WAS DRAGGED BEFORE THE USCONGRESS, SOUNDED BRITTLE AND APOLOGETIC, IF NOT RATIONALIZING. $$$

Moodys received a Wells Notice toward an SEC investigation for impropriety, collusion, and malfeasance. Buffett sold a large tranch of Moodys stock just before the unpublicized notice was given, he appeared before the USCongress, but he was not questioned about gross insider trading. That seems normal in today's financial environment in the United States. Recall Buffett purchased a Country Club membership with his investment in Goldman Sachs preferred  stock a year ago. Closer to the reality of asset devaluation is the abandonment by major fund managers of Moodys stock. Its maket capitalization has plunged from the $14 billion range in 2007 to $4.66 billion today, under the stock symbol MCO. Many believe the rejection by David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square Capital Mgmt represent the kiss of death for Moodys against a backdrop of federal regulator investigation. The public spotlight of impropriety at best and failure at worst is horrible for their image. David Einhorn announced that his fund has placed a large strategic short on Moodys, for which he has repeatedly noted his hatred. See the Zero Hedge article (CLICK HERE). The Moodys business model is riddled with conflict of interest, as are the other major debt rating agencies Standard & Poors and Fitch. Federal regulators are struggling as to how these agencies can function within any reasonable framework. One must wonder why S&P and Fitch have been spared the shame and spotlight? My conjecture is that Moodys would not conspire with corruption as much as the other two, or threatened to reveal some dirty Wall Street secrets. So Moodys will be destroyed.

◄$$$ BUFFETT WARNS OF A PENDING DISASTER IN MUNICIPAL BONDS, WHERE THE USGOVT MUST BRING AID. NO OFFICIAL ACTION HAS COME SINCE THE EARLY 2009 STIMULUS BILL, WHICH OFFERED PLUGS TO FILL STATE SHORTFALLS. STATE BUDGET GAPS CONTINUE TO GROW OUT OF CONTROL. MANY BIG DEBTS ARE ALSO COMING DUE SOON. $$$

Before a hearing of the US Financial Crisis Inquiry Commission in New York, Warren Buffett spoke freely about the massive state budget shortfalls. He said, "There will be a terrible problem, and then the question becomes: Will the federal government help? I do not know how I would rate them myself. It is a bet on how the federal government will act over time." Later, at his own Berkshire Hathaway annual meeting, he continued "It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they have gone to General Motors and other entities and saved them. I do not know how you would tell a state you are going to stiff-arm them with all the bailouts of corporations." See the Bloomberg article (CLICK HERE).

The details on the state budget disaster are mindboggling. Steep declines have hit hard in state tax receipts, the worst on record. Atop deep spending cuts over the last two years, states continue to face large budget gaps. At least 46 states face shortfalls for the upcoming fiscal year FY2011 beginning July 1st (in most states). Counting all holes at various times, 48 states have addressed or still face shortfalls in their budgets for fiscal year 2010, with a staggering total of $200 billion. Another additional $112 billion in FY2011 gaps are open issues in 46 states, in the process of being addressed. This total is likely to grow as revenues continue to deteriorate, and should exceed $180 billion. Federal assistance is on the decline. Hundreds of thousands of jobs lie in the balance, just a decision away from the axe. Roughly $40 billion remains in the fund to aid with 2011 fiscal budgets, as federal aid to states provided in the American Recovery & Reinvestment Act is now mostly gone. See the article from the Center on Budget & Policy Priorities (CLICK HERE).

Colleague GregL adds a great perspective, highly relevant, completing the picture somewhat. Debt rollover and refinance for states is a constant aggravating burden. He wrote, "The really scary part is that these state debt numbers do not include huge short-term loans due in the next few months from last year and the year before. I think Illinois has a $6 billion loan coming due next month. Of course California has some thing like $44 billion in debt. And the press fixates on an economy and debt structure smaller than California. Millions of people will lose benefits before November elections. No jobs are in sight. They have to extend past election so we do not look like Greece for the election."

◄$$$ STATE JOBLESS INSURANCE IS BEING PAID BY BORROWED FEDERAL MONEY, LED BY CALIFORNIA. EXTENDED BENEFITS BEYOND 99 WEEKS HAVE ENDED. $$$

Quietly in the background, a grand funding channel has been heavily relied upon by states to honor jobless benefits, even with recent emergency extensions. In all, 32 states have tapped federal loans in order to maintain their jobless benefits, borrowing $37.8 billion. The worst offenders are California, Michigan, and New York. The USTreasury has been conducting a shadow bailout with little fanfare or attention paid. Over 60% of Americans receiving state unemployment benefits receive them indirectly from USGovt funding. The states in most dire condition are those with different twists in the debacle. California borrowed $6.9 billion (housing bust, tech/telecom cutbacks), Michigan borrowed $3.9 billion (car industry devastation), and New York borrowed $3.2 billion (financial sector breakdown). Expect other shadow programs to emerge so as to fund states in dire straits with federal money, at the eleventh hour. The more dependent, and possibly insolvent, US states are listed in order of their federal tap to continue the jobless benefits. See the article by the Economic Policy Journal (CLICK HERE).

◄$$$ DAS POINTS OUT FUTILITY OF STIMULUS EFFORTS AND STILL MORIBUND ECONOMIES. HE REGARDS U.S. BANK EARNINGS TO BE PURE CARRY TRADE BENEFITS, WHILE CONGLOMERATES SUFFER ANEMIC EARNINGS GROWTH. $$$

Satyajit Das is a superstar independent credit analyst in Australia who frequently offers clear explanation of credit derivatives and their high risk laced nature to the banking industry. Das identifies the central problem in historicaly huge monetary actions. The governments have spent more than $1 trillion in funds from questionable sources but are not getting as much bang for their buck as expected in his words. Strip out federal spending and low interest rates, and not a whole lot of resultant activity is happening. The USGovt has tried to prime the pump, but the pump is still just dribbling. Das pointed to US bank earnings as suspect, owing to USTreasury carry trade. JPMorgan has a balance sheet of $1 trillion, and can borrow at essentially zero cost. So if they buy a mountain of 10-year USTreasurys at 3%, an easy $30 billion per year could be earned. Yet the bank announced a profit of $3.3 billion last quarter.

Das summarized. He said, "It is never incremental news. It is how old news sinks into the people with brains the size of caraway seeds who populate the financial markets. They always depend on selective information and process it in uneven ways. Even smart people tend to believe what they want to believe. They are using the idea that central banks and governments will miraculously prevail as a crutch. This is magical thinking. I have said from the beginning that governments will not have enough money to bail everyone out... What does [JPMorgan earnings] tell you? It says they are losing money on everything else [except carry trade]. Strip out the gifts, and it is big net loss." He points to industrial conglomerates like General Electric, whose revenue growth is anemic, and concludes their earnings growth is solely stemming from cost-cutting and layoffs. The tragic conclusion is that monstrous Keynesian stimulus has failed, in a manner unlike all past cycles. My contention all along has been that this is not a credit cycle, not a business cycle, but rather a systemic cycle breakdown.

◄$$$ OBAMA HAS PULLED A WEEKEND SURPRISE, REQUESTING $50 BILLION IN EMERGENCY STIMULUS AND STATE BUDGET AID. THIS IS ADMISSION OF DEFEAT ON PAST STIMULUS. DEFICITS BE DAMNED! PROPAGANDA IS STRAINED. REMEDY AND REFORM ARE NOWHERE. $$$

President Obama over this past weekend has pleaded for $50 billion in state and local aid. He urged reluctant lawmakers on Saturday to quickly approve nearly $50 billion in emergency aid. He said, "[The nation must avoid] massive layoffs of teachers, police, and firefighters. We must take these emergency measures. It is essential that we continue to explore additional measures to spur job creation and build momentum toward recovery, even as we establish a path to long-term fiscal discipline. At this critical moment, we cannot afford to slide backwards just as our recovery is taking hold." Obama made mention of supporting the fragile USEconomic recovery. What patent nonsense! Regard his action as open admission of a failed recovery, exacerbated by ruptures in state budgets. In his letter to Congressional leaders, Obama defended last year's Stimulus Plan, claiming it interrupted an economic freefall. He argued that more spending is urgent and unavoidable. Establishing discipline? Not in our lifetimes! The USCongress is openly concerned about additional expenditures to pierce the national debt ceiling. Obama urged lawmakers to be patient on the deficit, as a special commission is hard at work on comprehensive deficit reduction ideas. What incredible relief! The conventional viewpoint is that more spending could help reduce the stubbornly high unemployment. Again, the funds will be poorly spent, mere handouts and bandaids, without remedy or reform, hand to mouth like in the Third World. Republicans harp on the record deficits. Democratics harp on the need to halt stimulus, rescues, and aid. House Leader Steny Hoyer put it well, when he said "I think there is spending fatigue. It is tough in both houses to get votes." How very true! See the Washington Post article (CLICK HERE).

SUFFOCATION ON ROTTEN DEBT

◄$$$ TOTAL UNITED STATES NATIONAL DEBT TOTALS HAVE REACHED 130% OF GROSS DOMESTIC PRODUCT. THE NATION IS GRADUALLY TAKEN ON THIRD WORLD FINANCE CHARACTERISTICS WITHOUT MUCH RECOGNITION, WITH THE EXCEPTION OF BASIC COMPARISONS TO THE P.I.G.S. NATIONS. $$$

Permit Jesse of the Cafe Americain to make the point. Jesse wrote, "This includes only current debt and not future unfunded obligations. I like to call this US debt chart 'The Last Bubble' but it could equally apply to a chart showing the representation of this debt, [which is] the US Bonds, Notes, Bills, and of course Dollars, which are really nothing more than Federal Reserve Notes of zero duration in the modern fiatopia. It all adds up, eventually, and must be reconciled. It is easier to print money and accumulate debt when you own the world's reserve currency. For a while the Dollar might even flourish, despite the printing, as the international savers flee ahead of the economic hitmen, from country to country, and crisis to crisis." Jesse implies afterwards, severe reckoning comes. My view is the reckoning comes from behind the scenes, under the stage, and in war rooms loaded with global confrontations creating air pockets and broken platforms and otherwise tremendous areas of instability. The US$-based system before long will suffer its entire carpet pulled from under it in a magnificent global revolt. New currency systems are past the planning stage, and have entered the implementation stage.

◄$$$ THE USGOVT DEBT FINANCE STRUCTURE HAS A STRONG SHORT-TERM FOCUS, DUE TO MINIMIZING COST AND TUNNEL VISION MISMANAGEMENT. A HIKE OF THE FED FUNDS RATE JUST TO 1.0% WOULD BE HIGHLY DISRUPTIVE AND CAUSE A 3-FOLD RISE IN USGOVT DEBT BORROWING COSTS. ANY USFED HIKE TO 1% WOULD RESULT IN DISPROPORTIONATE DAMAGE. THE USFED CANNOT RAISE INTEREST RATES NOW, TOMORROW, OR EVER. $$$

My best description is that the USFed, through reaction to an insolvent banking system gutted by the housing bust and mortgage debacle, has painted itself into a corner. The 0% corner has no doorway, but rather contains a trap door to the Third World. The USFed cannot hike interest rates. Three huge factors prevent it. First, the USGovt borrowing costs have jumped from $460 billion in FY2006 to $700 billion in FY2009. Nearly half of the USTreasurys are financed with short-term maturity debt securities, often less than one year. The proportion of USTreasurys financed under one year is close to 60%. An official USFed rate hike to the 1.0% FedFunds level would be accompanied by a move in the 6-month USTBill from the current 0.2% yield to 1.2% or so, maybe higher. A five-fold rise for half the financed USGovt debt would bring the borrowing costs at least 2.5x higher, which equals $1750 trillion. That would be greater than the current entire USGovt deficit. The total USGovt federal deficit would balloon totally out of control. The highest competing lead ledger items are Defense and Health Human Services. The graph below deletes most of the ledger items except the largest. It is safe to say that the US Federal Reserve is cornered, and cannot hike interest rates to cause a bloodletting. No Exit Strategy exists, as Japan has shown for over a decade that the 0% trap is the final chapter in the Keynesian Handbook. Without a strong industrial base, the United States can expect a quick trip to the Third World.

As preface to the second reason, consider the comments by Hoenig, who sits as President of the Kansas City Fed. He is a loudmouthed hawk who preaches wisdom in the sense of what should be USFed policy, but ignores the reality of what the USFed can install as policy in a practical sense. Hoenig believes the USFed should raise the FedFunds rate to 1% by the end of this summer. Hoenig also believes the USFed should immediately sell its MBS mortgage bonds before the summer rate hike. He dwells in an academic ivory tower long ago abandoned and separated from the world of reality. Going further with his lunatic viewpoint, he says the USFed should promptly proceed to raise rates from 1% to 3% afterwards. Hoenig admits that the price inflation over the next year would increase as the economic recovery picks up. The USFed cannot hike interest rates, beginning with the borrowing cost reason stated previously. Second, a higher interest rate would quickly lead to a stock market decline (if not a rout), would gradually remove mortgage application attractiveness (thus pushing down housing prices further), and would generally cause an easily recognized USEconomic recession (worse than anything seen since the Civil War). The only benefit would be to savers, who today receive very little income from their deposits. The long maturity USTBonds would normally come down in yield from a grippingly powerful recession, except that foreigners would abandon the United States entirely in debt finance. USFed Chairman will most certainly permit Hoenig to speak from the minority view, and be ignored. See the Zero Hedge article (CLICK HERE).

An important but well hidden third reason must be mentioned for why the USFed will not and cannot hike interest rates. It is pre-emptive in nature. A rate hike would light a gigantic fire under the entire Interest Rate Swap tinkertoy woooden structure. Interest rates have remained far below the prevailing price inflation rate for two decades, by means of the heavy powerful leverage from Interest Rate Swaps. These contracts permit control of the long end from the short end, control of the 10-year USTreasury yield from the Fed Funds rate. This has been a very broad prevalent blind spot among analysts. Imagine the nearly infinite leverage when maintaining a short-term interest rate near zero. The leverage on the IRSwap is utterly huge, and some argue immeasurable. Furthermore, the official FedFunds rate has been near 0% for 20 months, a long time to build in the leveraged dependence. The more time in heavy leverage mode, the greater the damage when exiting it. JPMorgan is reported to be suffering massive credit derivative losses, all hidden and covered by the Printing Pre$$ handily. Any concerted move would cause a few $trillion in such losses. If they attempt a hike, they will retreat quickly from the heat of the fires.

◄$$$ HUGE APRIL AND MAY USTREASURY ISSUANCE OCCURRED. HUGE MAY BUDGET DEFICITS OCCURRED. THE SYSTEM IS BROKEN, SPEWING RED INK. $$$

On May 25th, the USGovt total debt surpassed the $13 trillion mark. A significant $397 billion in debt had been rolled in refinance in the first 20 days of May, of which $359 billion were in short-term Bills. The USTreasury has the unenviable role to auction off both new debt issuance and to roll over refinanced debt. The $14 trillion debt mark will be reached in ignominy sometime around the midterm November elections, a certain campaign football. The statutory debt limit of $14.3 trillion will probably be in need of an increase next January 2011. A new shameful milestone or watermark looms on the horizon. Within a year, the USGovt debt will accumulate to reach the 100% GDP level, a point that mars nations and relegates them to the Third World. These important points should ordinarily bring US bond vigilantes out of hibernation and push US interest rates upward, but these are times governed by credit derivatives. The monetary inflation actually keeps interest rates down, from money directed as bond purchase. The Interest Rate Swap contract managed by JPMorgan is the lever that helps to accomplish the feat.

The USGovt ran a $136 billion budget deficit in May, versus a deficit of $190 billion in May 2009. Income was $147 billion in May, $30 billion higher than receipts in May 2009. The data is skewed by more refunds than usual made in April this year. Spending was $283 billion in May, $24 billion lower than May 2009, as a large amount of payments were shifted to April. The May deficit was the 20th consecutive monthly budget shortfall. For the first eight months of the current fiscal year, the USGovt incurred a budget deficit of about $936 billion, a measly $56 billion less than the deficit recorded during the same period last year. The pace is set for at least a $1.4 trillion annual deficit, since extrapolation must factor in much worse second half finances than first half traditionally.

◄$$$ A MOUNTAIN OF COMMERCIAL PAPER IS DUE TO ROLL OVER FOR REFINANCE IN THE NEXT SIX WEEKS, TWO-THIRDS OF A $TRILLION. STRAINS TO THE CREDIT MARKET ARE EVERYWHERE. THE RETIRED USFED FACILITY MIGHT HAVE TO BE RE-INSTALLED. $$$

According to the US Federal Reserve, a whopping $673 billion in commercial paper is set to mature in the United States through July 16th, as in the six weeks from the start of June!! The loan rates on such paper are actually rising gradually across various tranches, both in the US and Europe. Without question, commercial paper has become one of the biggest components of the US shadow banking system. The Commercial Paper Funding Facility (CPFF) managed by the USFed used to be a feature on their alphabet soup offerings. The emergency facility was recently retired. Any disruption in the CP market will require yet more involvement in broad liquidity provisions by the USFed. Precedent exists for sudden re-installment of the CPFF program if urgently needed, just like the Central Bank Dollar Swap Facility. No end to the toxic bond backstop for the USFed, or for bond market strains. See the Zero Hedge article (CLICK HERE).

◄$$$ THE SOCIAL SECURITY SYSTEM IS TURNING NEGATIVE ON BALANCE IN 2010, SEVERAL YEARS AHEAD OF FORECAST. THE STRAIN ON FEDERAL BUDGET DEFICITS IS OBVIOUS. IT WILL AGGRAVATE THE DEFICIT WITH ACCELERATION. $$$

They are called the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). The former is automatic from payroll taxes, the latter is filed by those in personal businesses. The Social Security payouts have already begun to cripple the USGovt finances in the current 2010 year. Only five months have been logged, but patterns are clear and inferences can be made. The data on FICA/SECA tax receipts and benefit payments have hit a critical juncture, both going in the wrong direction. Receipts are down for almost 12 straight months while payouts keep rising in a trend for well over a decade as the population continues to age. Notice the crossover, which means net negative and Social Security a major aggravating drag on the USGovt deficit. The cash flow fell by $32 billion in the second half of 2009 alone, with further degradation set for 2010 as well. The Business Insider estimates the net cash flow drain in the second half of 2010 to be $55 billion, as the final six months tend to be much worse on a net basis. This translates to a rougly $50 billion deficit for the full year.

These lines were not expected to cross for at least another five years, as the negative condition was always deemed a distant future event. The clowns at the Congressional Budget Office actually promulgate the view that by year 2037 the system will have problems. Not so; it is here & now. Regard the payroll tax decline from FICA & SECA as further evidence of no USEconomic recovery, which is not generating new jobs. They reflect the incomes of 160 million workers, a reliable broad definition of employment. Like payroll IRS withholdings, they are equally horrendous, and hard to fudge. The annual rate of increase in benefit payout for 2008/2009 (coinciding with fiscal year) was at the 9.5% level, down to 3.9% in the 2009/2010 period. The slower rise is helped by a 0% Cost of Living Allowance increase for 2010, as USGovt officials stick with their claim on no price inflation despite numerous items rising 10% to 20%. The mainstream analysts have begun to decry the absent COLA, calling it a joke. Lastly, Social Security represents a large portion within the Intergovernmental account, making up $2.5 trillion of the total $4.5 trillion. This entire group of accounts is turning cash flow negative. The InterGovt account cost $160 billion in interest last year, a figure most assuredly to grow even though many analysts ignore it entirely. See the Business Insider article (CLICK HERE).

◄$$$ FORCED CONVERSION OF I.R.A. AND 401K PERSONAL RETIREMENT ACCOUNTS INTO USTREASURYS IS BEING CONSIDERED. THE PROGRAM IS PROMOTED BY THE USDEPT TREASURY AND USDEPT LABOR, WITH HEAVY SUPPORT BY THE ROCKEFELLER WING OF THE SYNDICATE. LEW ROCKWELL REPORTS. $$$

An important initiative is gaining ground slowly and quietly to force 401k and IRA accounts into a USGovt nationalization. In past reports, my sources indicated that bank Certificates of Deposit would be forced into USTreasurys, by means of the FDIC insurance pressure. The precursor might be the retirement accounts. The angle is similar, with favorable tax treatment. The Lew Rockwell Institute is stout and intrepid in their reporting. The USDept Treasury and USDept Labor will request for public comment on ways to promote the conversion of 401k savings and Individual Retirement Accounts into annuities or other steady payment streams. The initiative is spearheaded by Asst Labor Secretary Phyllis Borzi and Deputy Asst Treasury Secretary Mark Iwry. The goal is to induce people to invest their 401k and IRA funds into designed annuities, or else basic USTreasury Bonds. Never lose sight of the fact that USTBonds are the biggest overvalued bubble in world history, after the global housing and mortgage bubble. The USGovt must sell $2 trillion in bonds this year alone, and foreign demand has almost vanished. China does not want them. Pension funds do not either. So the American citizenry will be coerced into investing their pensions in subprime sovereign bonds, the USTreasurys.

The White House and a powerful network of Congressional activists are behind the initiative, which parallels the Japanese Govt requirement to put all their federal and postal worker pension funds into JGBonds. Also, the highly influential Ford and Rockefeller Foundations are pushing the reckless initiative that betrays the working class. They are engineering a new regulatory and tax incentive to pave the way for passage. Their goal and vile purpose is to herd and ultimately force Americans to convert their 40lk's and IRAs into government directed retirement accounts, obviously USTBonds. The de-privatization plan, also called individual retirement fund nationalization, is the brainchild of Teresa Ghilarducci from the Schwartz Center for Economic Policy Analysis (SCEPA), which is funded by the Rockefeller Foundation. Heavy handed tactics are being used that copy those used to ram nationalized health care down the country's throat, despite loud significant public objection. Business Week has noted that new federal regulations designed to promote the conversion of individual pension funds into annuities are essential to direct cash into government controlled entities such as American International Group (AIG), whose cost to date has totaled $182.3 billion. The public could not invest in a worse cause, nor sink money into a more acidic cesspool. Students of history note that such nationalization of the people's savings took place in Argentina two decades ago, once a powerful wealthy nation in the last century.

◄$$$ USFED VASTLY HAS EXPANDED ITS BALANCE SHEET, BUT WITH TOXIC ROT. ITS BALANCE SHEET IS LOADED WITH MORTGAGE BONDS, AS BUYER OF LAST RESORT. IN THE PROCESS, THE USFED IS BROKEN, INSOLVENT, AND USELESS. $$$

The US Federal Reserve is specializing in the purchase of toxic assets, painting itself in a corner, with little prospect of extricating itself from grotesque insolvency and toxic overload. It buys bonds as a buyer of last resort, but it buys incredibly impaired assets that nobody wants and nobody can sell, since the assets often have little value, and in time will have no value. They gobble toxic bonds, only to reside in an acid pit. Any prudent manager of the USFed would shut down the institution as a result of wanton recklessness and assured financial convulsions. The USFed needs a mammoth revival in the housing market and mortgage industry five years running. It aint happening!

USFed assets reached a record $2.35 trillion for the week ended May 19th on yet more mortgage purchases, assets that nobody wants in markets that have virtually shut down. Some argue the assets are worthless. Chairman Bernanke and his colleagues are debating when to sell their rotten holdings of mortgage debt as part of a credit tightening plan. They are delusional, as they ponder a plan to cut the balance sheet to less than $1 trillion, its size before the financial crisis. They are stuck in two deadly respects. First, they cannot raise from the 0% interest rate. Second, they are forced to continue gathering in more worthless toxic bonds. In their last FOMC meeting in may, the USFed officials repeated a pledge to keep the benchmark rate low for an extended period, a broken record. For over a year, the Hat Trick Letter has been describing the official policy as stuck at 0%, forever, or until a default. One sage contact mentioned in September 2008 that a USTreasury default could occur if the USFed decided to terminate its contract with the USCongress, and such a decision could come if they found themselves losing too many $trillions.

The official balance sheet reported $9.21 billion of liquidity swaps with foreign central banks (mostly European) using the Dollar Swap Facility, opened to ease funding pressures for European banks. The swaps settled, leaving the USFed with about $1.2 billion still. Purchases of mortgage bonds rose by $21.1 billion to $1.12 trillion in the last weekly report. Although the monetization program for buying mortgage backed securities and USMortgage Agency debt ended in March, settlement of $38.2 billion in net purchases of securities will complete soon. Loaded to the gills with toxic garbage, the USFed has discontinued most of the emergency liquidity programs this year. One continuing program, the Term Asset Backed Securities Loan Facility (TALF), had $44.5 billion in loans outstanding. This facility is designed to encourage consumer and business borrowing. The program will remain open through June to gobble up commercial mortgage bonds of worthless value whose market has vanished. Borrowing by banks through the USFed discount window decreased to $4.63 billion from $5.14 billion the week before, to mark the lowest draw since March 2008. The tiny Discount Rate hike by 25 basis points has had an effect. Imagine a bigger rate hike that included the Fed Funds rate. See the Business Wekk article (CLICK HERE).

◄$$$ THE USFED CANNOT RELEASE BANK RESERVES HELD. THE USFED CANNOT SHRINK ITS BALANCE SHEET. IT IS STUCK WITH NO OPTIONS. EITHER MOVE REVEALS THEIR INSOLVENCY AND BUSTED CONDITION. $$$

My view addresses the problematic condition with a more sinister suspicious eye. The USFed has become instead a hoarder of Loan Loss Reserves for the US banks. The big banks are running naked without protection from loan losses. The USFed is desperate to conceal its insolvency, and thus has offered an interest yield on these bank reserves for the first time ever, now almost a year. They cannot afford to permit the bank reserves to go back to banks for fractionalized loans, or used to offset loan losses. A torrent of loans would cause rampant price inflation, and besides, the banks no longer trust their customers to repay loans in this dreadful environment. The USFed cannot afford to shrink their balance sheet and sell off impaired mortgage bonds and related assets into the credit market. That would destroy whatever value remains in credit assets generally. They cannot risk to permit the mortgage bonds to find true value, triggering by themselves a run on the mortgage bond market. Doing so would reveal the USFed as $500 billion in the hole, or worse. This is an Intensive Care situation where the USFed might have be watching its own gurney moving inside the MORGUE.

The level of distrust by banks is incredible, both of other banks on counter-party risk (holding bad paper) and of customers (involved with failing business). They are openly worried about the sustainability of the economic recovery and the risk of renewed financial crisis. The evidence is the level of cash at the US banks. Last week the USFed reported the volume of cash and other liquid assets at non-financial companies. They retain $1.84 trillion at end March, up 26% from a year ago and the most in 58 years!! The ample USFed liquidity facilities are legendary by now, engendering a baseless confidence in the corporate bond market. Big companies have raised a record amount of money in bond offerings. However, many businesses remain extremely hesitant to spend the money on hiring and expansion. The psychology behind a recovery is non-existent.

ENTERING SOVEREIGN DEBT MELTDOWN

◄$$$ E.U. SOVEREIGN DEBT BAILOUT DIRECTED AT GREECE IS JUST ANOTHER BANK BAILOUT THAT PERPETUATES THE CURRENT POWER STRUCTURE. BUT IT CONTAINS A TWIST IN THAT THE FRENCH BANKS JOIN THE GERMANS FOR RESCUE. THE EURO CENTRAL BANK HAS BEEN CURRYING FAVOR WITH FRANCE, SINCE THE CENTRAL BANK HEAD TRICHET IS FRENCH. UNLIKE GERMANY, A SERIES OF DEFAULTS WOULD CRUSH FRANCE. THE MAJORITY OF GREEK GOVT DEBT IS HELD OUTSIDE GREECE. $$$

The European Central Bank has been gobbling up Greek bonds by the boatload. To be sure, Athens receives money from a rescue fund agreed upon by the European Union. The German central bankers have been raising a ruckus over a French scheme obscured within the massive program. After all, it gives French banks the perfect opportunity to rid themselves of their Greek assets. Ahead of the final creation of the 750 billion Euro rescue fund has been a grand initiative by the EuroCB to buy Greek Govt debt. It serves two purposes. The program keeps artificially high the prices of the bonds. But it also enables the French banks to sell their Greek bonds to the EuroCB, and thereby cleanse their balance sheets. French banks and insurance companies have a total of about 80 billion Euros in Greek Govt bonds on their books. The EuroCB is stabilizing the prices of Spanish, Portuguese, and Italian bonds. A few key central bankers suspect a French scheme at work, one to bail out French banks via the back door. Even experienced top German bankers are alarmed at how events are playing out. Top Bundesbank bankers see a coordinated plot underway at the EuroCB.

German banks stand on different ground, having led the political negotiation. They are not potential bond sellers, because they have made a voluntary commitment from Finance Minister Wolfgang Schäuble to hold their Greek bonds until May 2013. So the Germans eat toxic bonds while the French dump them!! Indirectly the Bundesbank, by committing 7 billion Euros to purchase the Greek securities, has already made a substantial contribution to bailing out banks in neighboring France. The ECB President Jean-Claude Trichet is a Frenchman, who has directed attention to excess toward France. He initiated the extensive EU rescue package approved on the weekend of May 8th. It was Trichet who violated the clearly stated EuroCB rule that forbids the central bank from buying its member state debt. Add another Frenchman into the mix, the IMF's Dominique Strauss-Kahn, and the power center tilts to the French.

Max Weber, as the Bundesbank president, voted against the broad ECB debt purchase program within its council, even going so far as to criticize it in an interview with the German financial newspaper Börsen-Zeitung. For a central banker, a very clear signal of dissatisfaction was given, one without much precedent. The Germans feel betrayed, while Weber faces a dilemma. He hopes to take over as ECB president when the Trichet term expires next year. But if he continues to fight against the bond purchase program, his prospects for securing the top ECB post will fade quickly. To German bankers, the purchase of government bonds is a betrayal of principles that discards the independent status of the Euro Central Bank itself. Furthermore, a growing fear has arisen the the EuroCB has jeopardized its own existence by embracing insolvency. See the Der Spiegel article (CLICK HERE) and the Business Insider article (CLICK HERE).


◄$$$ THE $2.6 TRILLION TRAIL OF EUROPEAN TOXIC DEBT HAS BEEN DELINEATED MORE CLEARLY. THE SOVEREIGN DEBT EXPOSURE FROM SPAIN, PORTUGAL, AND GREECE RESIDES MORE IN FRENCH BANKS THAN IN GERMAN BANKS. THE SPANISH GOVT DEBT STANDS OUT NEXT, WHILE EASTERN EUROPE HAS ENTERED THE UGLY CANVASS WITH SPLATTER. $$$

Many articles have made the point that the trail of toxic debt surprisingly and suddenly has been revealed. But Zero Hedge, at the forefront in reporting the entire financial crisis for a full year or more, disagrees firmly. ZH claims it has been disclosed regularly, well known that France and Germany would go bust overnight if the entire PIIGS debt were allowed to be marked even halfway to true market value. See the exposure in the graph below. The hidden surprise, if reality be shown the light, is that Austria and Italy are also badly vulnerable. Hungary is on the ropes with a possible repeat episode of Greek Govt debt default. The Hungarian Govt permitted a ray of light based in truth, when it issued loose words of caution on its default likelihood. In doing so, it has lost all credibility in a backtrack attempt to paint a revised picture. The sovereign bond crisis has spread to Eastern Europe. Hungary's Forint currency has shown great weakness even against the weak Euro. The FOREX response was nasty to comments made by deputy chairman of the ruling Fidesz party, Lajos Kosa. He said "[Hungary has a] slim chance to avoid the Greek situation" with a damning rejoinder on how the new government's primary objective is to avoid a sovereign default. See the Bloomberg article (CLICK HERE).

The IMF admitted it facilitated a bailout for all of Europe without another infusion of over $300 billion. The European Union is insolvent, the ugly truth. Remaining debate centers on the timetable for the end game and declaration of the dissolution of the European Union. What has happened in the last few months is a return to the stage of the Bond Vigilantes, but that stage is Europe. Ironically, the vigilantes include Wall Street roughriders carrying plenty of rope and fully prepared to lynch nations from century old tree limbs. In time, the Bond Vigilantes will turn their attention to the UKGilts and USTreasurys. As Tyler Durden said wi th bitterness, "The bored Bond Vigilantes will inevitably turn their eyes to the United States, as Roubini recently predicted. It is all now just a matter of time, and how fast the kleptocracy can load up their vaults in various non-extradition countries with non-dilutable assets before it is all let loose." See the Zero Hedge article (CLICK HERE).

◄$$$ DEBT PERCEPTIONS HAVE BECOME MORE COMPARTMENTALIZED, WITH NATIONS THE FOCUS, NOT SPECIFIC BANKS. A FINAL CHAPTER OF COMPETING CURRENCY WARS HAS BEEN OPENED. CREDIT DEFAULT SWAP CONTRACTS ARE RISING IN PRICE ACROSS EUROPE AMONG THE STABLE CORE NATIONS. EXPOSURE TO EASTERN EUROPE IS A MAIN FACTOR. ITALIAN GOVT DEBT IS UNDER ATTACK ALSO. SEE AUSTRIA, NOW ON THE RADAR. FITCH DOWNGRADED THE SPANISH GOVT DEBT, FOLLOWING STANDARD & POORS IN AN APRIL MOVE. $$$

The core of the European banking system is ablaze. The French Govt debt, along with Austrian and Belgium Govt debt, are the object of credit market devaluations as seen in Credit Default Swaps, the debt insurance contract. Nevermind the national debt ratings for a moment. Consider the CDSwap contract as the truer and more relevant measure dictated by a market, even if the created market is a Wall Street abomination. One might conclude that Austria and Belgium have come into view on the implosion radar covering the continent. The Austrian banks are most exposed to weakness in Central and Eastern Europe, after Switzerland, which curiously has a gigantic exposure no longer mentioned. Heavy scrutiny skipped over Austria until the last two weeks, when their CDSwap widened considerably. The North is at risk, just like the South, in a division in Europe, but the North can better recover, since its economic basis is less dire. The table below from a couple weeks ago points out nations formerly seen as safe. The Spanish bank Iberdrola and the German nation are included for comparison. The basis points are shown for contracts (1 bpt equals 0.01%), with recent short-term price movement.


The Italian Govt insurance CDSwap contract hit a new new record at 250 basis points on the first day of June. MarkIt reported the Italian CDSwap exploded by 50 bpts, from 200 on Monday to 250bps on Tuesday June 1st, a new record. The global contagion is in full swing force. Recall in summer 2007, USFed Chairman Bernanke publicly claimed the subprime mortgage crisis was contained, when instead the reality was a global mortgage bond crisis. That mortgage risk was fully adopted by governments, only to erupt into a sovereign bond crisis that threatens the global monetary system. The CMA report indicates that the biggest movement in CDSwap prices are all tied to sovereign bonds, led by Korea and other Asian names. CDSwap contracts on French sovereign debt are now priced like the same contracts on UK debt, in the same rotting corner. The benchmark CDS insures the 5-year bond. This sharp move could reflect worries over the French bank Societe Generale's potential heavy exposure to derivatives contracts. Austria looks like a serious worry as well, potentially over its links to Eastern European economies. Even Germany's CDS price is on the rise. Only a few months ago, the PIGS nations had CDSwap prices pushing past the 100 mark. See the Zero Hedge article (CLICK HERE).

Think nation, not bank! Until 2008, perceptions and evaluations of the banking sector were specific. Talk was about Santander in Spain, their big bank, and not about Spanish Govt bonds. Talk was about Societe General in France, and not about French Govt bonds. Talk was about Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not about UK Gilt bonds. Nowadays, focus is on national debt, and not of private banks. The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency and leverage of big banks has been transferred to entire nations and their government debt. This concept reflects an important final chapter in the Competing Currency Wars. After almost two years of shifting the debt risk from individual banks to the government balance sheets, complete with leverage, the impact has finally come to be felt. The sequence of formal debt downgrades reads like a parade of disasters, mostly concentrated on the distressed nations and their sovereign debt. It has become a global phenomenon, since Korean debt, Brazilian debt, Chinese debt, and other nations have joined the sovereign debt crisis.

The interwoven nature of the sovereign debt exposure is more visible, since banks across London, France, Switzerland, and Germany share the debt risk as underwriters and investors. As nations remove themselves from the charred ruins and entangled structures that make up the Euro Monetary System (with shared Euro currency usage), the tendency has been to decentralize the power, splinter into several currencies again, and to step away from central coordinated power structures. THE FINANCIAL POWER IS IN THE PROCESS OF UNDERGOING HEAVY DECENTRALIZATION, REVERSING A PATTERN. The New Northern Euro will have decentralized features, with more individual central bank authority and practical responsibility. The globalists have taken a setback, and have noticed political awakenings. The Amero currency never happened in North America. Too much, like over 60%, of the floating USDollars are outside the United States. In the current environment, the USGovt was in no position to dictate rules for currency overhaul in the midst of a broken currency. The USDollar in a sense is a two-tonne brick around the neck of the USGovt and USEconomy. The United States cannot shed the USDollar or its system, and clearly not its debt obligations. The Wall Street banksters are at great risk of going down with the ship.

◄$$$ GERMAN BANKS ALSO EMBODY EXCESSIVE LEVERAGE, WHICH RESEMBLE THE WALL STREET BANKS TWO YEARS AGO. STIMULUS AND BAILOUT RESCUES TRANSFERRED RISK TO SOVEREIGN DEBT WITHOUT RELIEVING PRIVATE BANKS OF EXTREME LEVERAGE. SIMPLY STATED, LEVERAGE MEANS VULNERABLE. $$$

Eric Sprott of Sprott Asset Mgmt makes some great points, highlighting the leverage problem of the German banks. Their largest banks approach 100:1 leverage, with Commerzbank well above that extreme level. Sprott wrote, "The German banks are not alone. Most large banks around the globe are operating with too much leverage. The governments can keep the 'Bailout and Stimulate' game going, but it will not amount to much in the long-term unless the leverage issue is wrung out of the banking system. Until that happens, bailing out the banks is akin to pouring money down a bottomless pit. The key point to remember with bailouts and stimulus is that it is ultimately your money that the government is spending, and your children's money. The numbers strongly suggest that your money is not being spent wisely. We need real jobs and real growth, not bigger, more leveraged banks. The market is not oblivious; it can see what is happening. Gold's recent strength in lieu of seemingly deflationary economic data confirms the market's doubts over government intervention in the financial system. Needless to say, we remain bearish." See the Zero Hedge article (CLICK HERE).

◄$$$ GREAT CHALLENGES TO BRITAIN COME, AS FITCH WARNS ABOUT ITS FORMIDABLE DEFICIT. POLITICAL FORCES WITHIN THE U.S. & U.K. ARE HIGHLY LIKELY TO OFFER SPECIAL TREATMENT AND OBSTRUCT DEBT DOWNGRADES, ALTHOUGH DESERVED. AUSTERITY MEASURES ARE ON THE TABLE IN ENGLAND. THE SPECTACLE IS WORTH WATCHING BUT IT IS LOADED WITH MISERY, AS A FAILED STATE IS IN THE MAKING. $$$

Fitch Ratings agency warned last week that Great Britain faces a formidable fiscal challenge. They face the deadend decision to reduce the budget deficit faster in order to maintain its top credit rating. The newly formed coalition government is mired in a crisis at the start. In a special report, Fitch noted that the rise in UK public debt ratios since 2008 is faster than any other AAA-rated country. If truth be told, the United Kingdom is in worse condition than Greece, as bad as any PIGS nation, but is much larger in size. The British budget deficit is forecast to reach 10.4%  of gross domestic product this year. Total debt burden ratio was 62% of GDP in the 2009/2010 fiscal year. The downward momentum is illuminated by annual interest payments of 70 billion British Pounds. No escape exists. Prime Minister David Cameron has pledged drastic spending cuts, the infamous Poison Pill that actually results in even worse deficits. The new coalition government has announced quick tightening measures of 0.4% of GDP, amounting to 6 billion Pounds of spending cuts. Displaced clown Prime Minister Gordon Brown had repeatedly warned that bigger spending cuts this year could jeopardize Britain's non-existent recovery from the worst recession since World War II. Brown could not admit a failure of state, but Cameron might realize it in his quiet moments. The official Fitch Ratings statement reads like a plank straight out of the Intl Monetary Fund, where Poison Pills are dispensed worldwide with uniformly disastrous results. No solution exists in my view, as the leaders squirm without options, showing more misery each month as wealth erodes quickly. See the Globe & Mail article (CLICK HERE).

◄$$$ SPANISH DEBT IS IN FOCUS, AFTER A FITCH DOWNGRADE. ATTENTION HAS SHIFTED FROM GREECE TO THE OTHER P.I.G.S. NATIONS. THE SPANISH GOVT HAS TURNED SERIOUS IN DEALING WITH THEIR SITUATION IN A CLEANUP INITIATIVE. $$$

The Spanish Govt debt situation has provided a gloomy cloud over their entire banking system. Two weeks ago, Fitch Ratings became the second major ratings agency to downgrade Spanish Govt sovereign debt. They marked it down to AA+ from AAA. Standard & Poors had cut the same Spanish debt rating back in April, lower than AAA. In their formal announcement, Fitch cited the unemployment rate in Spain over 20%, along with the reversal of fortune tied to the construction boom, will weigh heavily on their economy struggling under extremely high debt burden levels. The Spanish Govt and their banking leaders have resisted reform, accounting, and liquidation actions, thus inviting a freefall in property values and associated bank assets. Fitch offered a really gutless statement about how the special Fund for Orderly Bank Restructuring (FROB) intended to clean up their banks should be sufficient, in a total denial of the depth of the problems and future losses. The FROB fund has a total value of 99 billion Euros and is funded with 9 billion Euros of capital and up to 90 billion Euros of new government supported debt. The fund is designed to facilitate the rescue and cleanup process, with a built-in June 30th deadline to make formal requests for the money urgently needed. Fitch did acknowledge the credit supply constraints at work from political wrangling. The FROB fund is designed to aid their Caja banks heavily exposed to the real estate and construction sectors. The Caja sector of the Spanish banks is their large group of savings banks. The Bank of Spain has stirred things up with a recent seizure of troubled Cajasur. Other merger announcements have followed. Rumors swirl that Caja Madrid has asked for 3 billion Euros in aid from the official rescue fund. The news has captured much attention since it is the second largest among the cajas.

Bank analysts are coming to the conclusion that the collective costs of the bailouts in Spain by their government will be an order of magnitude higher than what it anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That ratio must come down. My forecast is that the debt ratio will rise, not fall. The reason is simple. Just like with the United States and United Kingdom, no constructive initiatives or reform have been embraced, and the same scoundrels remain in charge at their posts. So the banks will face continued losses. So the housing market will face continued declines. So the economies will face continued recession. The next three big big shoes are about to hit the floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks will next go belly up and quickly, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in holding onto mindless unreasonable lofty property values, and their bank books have the biggest drop to realize in a return to reality. See the Zero Hedge article (CLICK HERE).

◄$$$ HUNGARY PROVIDES FRESH ACID ON THE OPEN EUROPEAN WOUNDS. THE PRIMARY NATIONS HEAVILY EXPOSED TO HUNGARY ARE AUSTRIA, GERMANY, ITALY, AND BELGIUM. HIDDEN FROM VIEW IS SWISS EXPOSURE.

Many nations have bank exposure to Hungary, hardly small at all. At this point in time, Hungary might serve as a signal that Eastern Europe is moving quickly to the chopping block. It is amazing to collate the European bank exposure to this relatively small nation. The nation of Hungary with 10 million in population and $186 billion in annual GDP is soon to capture attention, due to the $130.7 billion in Hungarian debt held by a scattering of European nations. These Eastern European nations differ from Greece in a key respect. The Polish Zloty, Czech Koruna, and Hungarian Forint have each taken huge declines in currency devaluations versus the Euro, in a manner to compound the credit losses to the foreign underwriting banks, whether for mortgages or commercial loans. Not on the list are the Swiss banks, perhaps the most extended in risk of all. Their 1.5% official interest rate was more than 2% below the prevailing Euro Central Bank rate for consecutive years, and thus provided Eastern Europe with cheap mortgage funds year after year.

Here are the bank exposures to Hungarian Govt debt, sure to receive greater focus soon. The process has just begun. The list is long: Austria $37.0 billion, Germany $31.9B, Italy $25.0B, Belgium $17.2B, France $11.1B, Netherlands $3.5B, United Kingdom $2.1B, Japan $1.7B, and Spain $1.2B. In addition, individual bank exposure comes from Societe Generale in France (60% stake in Komercni Banka), from K&H in Belgium, from CIB and Unicredit in Italy, from MKB in Germany, from Erste Bank and Raiffeisen in Austria. Clearly, on a relative size basis, Austria and Belgium are at extreme risk. See the Business Insider article (CLICK HERE).

Romania and Bulgaria are two other very weak nations in Eastern Europe. Notice that Greece owns some debt exposure to these nations to the East. Greece also has some debt exposure to Bulgaria and Romania. Debt from just Romanian and Bulgarian alone comprise more than 25% of the foreign debt on the Greek bank books, a hidden scourge. Even Italy is saddled with enormous risk, with over $45 billion of debt to Hungary, Romania, and Bulgaria. To say the all of European has tied metal piano wires around each other's necks is a gross understatement.

INSOLVENT BANKING SYSTEM SINKS

◄$$$ F.D.I.C. CLOSES A FEW MORE BANKS. THEY HAVE A MASSIVE PROBLEM AHEAD WITH SMALLER BANK FAILURES, AS A GRAND CONCENTRATION OF BROKEN BANKS EXISTS. SEE THE $10 TRILLION OF CLAIMED ASSETS HELD IN TOO BIG TO FAIL BANKS. FURTHERMORE, THE DEPOSIT INSURANCE FUND IS IN THE RED, GROWING WORSE STEADILY. $$$

The FDIC continues to shut down banks. Still on the table are banks dealing with massive amounts of impaired commercial real estate loans. For months the FDIC deposit insurance fund has been running negative. A recuperating USEconomy definitely would not suffer a steady stream of bank closures, not to mention jobless claims, home foreclosures, and bankruptcies. The Federal Deposit Insurance Corp must contend with a great concentration of troubled assets in banks too big to fail, where 105 banks hold 77% of all banking assets. Worse, the biggest banks, which are all insolvent, claim to hold $10 trillion in assets. Bear in mind that the great majority of these claimed assets benefit from the fantasy approved by the Financial Accounting Standards Board, and have actual negative value. The USFed and the USDept Treasury will do anything to keep these banks propped up since that is precisely where the power lies among the Ruling Elite, including the destruction of the USDollar. The eyesore remains. The largest banks are wards of the state even though the people clearly voted against support of them. See the MyBudget360 article (CLICK HERE).

The FDIC Deposit Insurance Fund is still as bankrupt as ever, with its ratio of insurance funds at minus 0.38% versus deposits. The FDIC quarterly profile revealed that the FDIC agency has negative $20.7 billion to meet any forthcoming bank failures and liquidations. Depositors have caught wind of their exposure, and decided to pull $29 billion in deposits in the last quarter, or else are desperately in need of their savings. Total assets of the US banking system among the 7932 FDIC insured commercial banks and savings institutions increased by $248.6 billion (=1.9%) during 1Q2010. The rise was largely due to an increase in non-deposit liabilities. Total overall bank deposits decreased by $28.6 billion. The breakdown of domestic deposits was almost flat, decreasing by $5.1 billion (=0.1%), while foreign office deposits declined by $23.5 billion (=1.5%). Federal Home Loan Bank (FHLB) loan advances as a percentage of total assets continued to decline, from 4.1% to 3.6% by end March 2010. That is the smallest percentage on record, kept since 2001. See the Zero Hedge article (CLICK HERE).

◄$$$ A MAJOR MORTGAGE INTERMEDIARY FIRM FACES DEEP INSOLVENCY, WITH IMPORTANT RAMIFICATIONS. THE FEDERAL HOME LOAN BANK SYSTEM IS IN DEEP TROUBLE, THE WHOLESALE BANKER. IT FACES SEVERAL $BILLION IN LOSSES, AND REVEALS A COMMON INSOLVENCY THREAD ACROSS THE BANKING SYSTEM. $$$

The system of Federal Home Loan Banks serves as a wholesale lending source for economic development. They provide steady low-cost funding to financial institutions across the United States for home mortgage loans, as well as small business, rural, and agricultural credit. With their members, the FHLBank System represents the largest collective source of home mortgage and community credit in the United States. The banks do not provide loans directly to individuals, but rather to other banks. So when the financial integrity of the Federal Home Loan Bank of San Francisco is called into question, much like Fannie Mae a few years ago, people should take notice. It is the largest of the 12 institutions in the system. An independent analysis of their investment portfolio is fueling doubts about the health of the bank. The bank brass claims an expected $688 million credit loss on a nearly $20 billion portfolio of mortgage backed securities. Analysts outside the bank anticipate a loss around $5 billion, a figure over 7 times larger. Such a loss would kill its retained earnings. Check out the inventive description of deceit and exaggeration by Espen Robak from Pluris Valuation Advisors. He said, "The bank here has a highly aspirational view of what these things are worth. It is obviously not what the market expects, and it is not what the ratings agencies are expecting either. There is a reason they have a lot of these things marked at CCC." Refer to debt rating CCC, worse than junk, as in rubbish.

The bank stubbornly stands by its credit loss estimates, complete with zipwords, in total denial of reality. If the Pluris estimates are correct, the bank's $1.3 billion of retained earnings would effectively bring ruin to the member stock, fixed at $100 par value. The impact would hit the entire FHLBank System, not just the San Francisco office. Only one precedent event has come in 77 years for the stock to go below that fixed price. The dividend would end. It would stop the return of $4.9 billion in capital stock due to be withdrawn by FHLB members over the next few years. The Home Loan banks are putting pressure on the USCongress to exempt them from certain risk markers. The US housing finance system is under debate, led by Fannie Mae & Freddie Mac, the sewage treatment plants that serve as foundation. Financial firms across the United States are in a similar bind, inside and outside of the Home Loan Bank System. Unrealized losses from their credit portfolios, centered in residential MBS mortgage exposure, are downplayed, minimized, and managed recklessly.

The FHLB auditor, Price Waterhouse Coopers, also works for companies ranging from Bank of America to Freddie Mac. The common thread of insolvency cuts across the nation. Overly rosy assessments of residential mortgage backed securities (RMBS) exposures are being given. Here is where more contradictions and inconsistencies lie. The Home Loan Banks manages more than $44 billion in cumulative mortgage backed securities. Last March, the San Francisco Home Loan Bank filed a lawsuit seeking to force Wall Street dealers to repurchase nearly $20 billion worth of mortgage backed securities sold. The bank claimed their sale involved misrepresentation by Wall Street firms. They cited numerous "materially untrue or misleading statements" and the bank had "suffered a loss on each." However, the San Francisco bank office listed the same data more generously in their official first quarter earnings filed. The bank forecasted total credit losses on its entire portfolio of private label MBS bonds of only $688 million, a mere 5 cents per dollar. A grand contradiction exists. Watch the Wall Street lawsuit, as part of the growing parade.

An independent review by Pluris Valuation Advisors makes much more sense, consistent with market writedowns and reduced collateral valuations. Another key point. The collateral underlying the securities tends to be later vintage loans underwritten by fractured firms such as Countrywide Alternative Loan Trust and Bear Stearns Alt-A Trust. At the request of American Banker, Pluris reviewed the portfolio in an effort to gauge the FHLB's likely losses. After looking at the underlying collateral of the bonds and the initial offering prices of similar or identical securities, Pluris concluded that losses would likely fall between 15% and 45%, with a 30% shortfall the most likely, which would result in $5 billion losses. Other impairment charges have slammed the Home Loan Banks for the past two years. Intrepid housing & mortgage analyst Mark Hanson pitched in. He said, "Highly aspirational view? Is that a fancy way of saying they are lying? Of course the claim that they are going to take only a $688 million loss would not square with their lawsuit against the banks they accuse of rooking them." See the National Mortgage News article (CLICK HERE). This case is important because it reveals the condition of several hundred banks with similar lowball loss estimates in their credit portfolios.

◄$$$ THE BIGGEST BANKS APPEAR TO HAVE MADE ALL THE PROFIT WITHIN THE ENTIRE U.S. BANKING SECTOR. GREAT DECEPTIONS ARE AT WORK, SINCE THE SIX BIG BANKS ARE INSOLVENT. THEY HAVE A PRIVILEGE OF SHOVING THEIR TOXIC ASSETS TO THE USFED, AND TO HIDE OTHER IMPAIRED ASSETS IN OFF BALANCE SHEET DUNGEONS IN CARIBBEAN BEACH LOCATIONS. THEY PROFIT FROM THE USTREASURY CARRY TRADE OF BORROWING AT NEAR 0% AND INVESTING IN USTBONDS HELD IN THE SAFE HANDS AT THE USFED. THE PRIMARY DEALERS RECEIVE INSIDE TRADING TIPS CONSTANTLY, CONFIRMED BY THE DATA. $$$

The news story goes to say that six giant US banks earned $51 billion in 2009, while the other 980 banks collectively lost money. To be sure, the oligopoly of Goldman Sachs, Bank of America, JPMorgan, Morgan Stanley, Citigroup, and Wells Fargo is flourishing. Or are they? See the Forbes article (CLICK HERE). They appear to be flourishing, according to SEC filed reports on their financial statements. These stories are highly deceptive. The six big banks are permitted to shove their losses onto the USFed for outright redemption, and bury other assets off-balance sheet where they turn invisible but remain toxic acidic. The big banks are busted, insolvent, and broken badly. They merely have presented propaganda data and deceptive statements to the effect that they appear to have lifted their profitability last year. They have received low cost loans, even zero cost loans. They have invested in long-term USTreasurys in a grand USFed giveaway, but on condition that the assets remain on the USFed balance sheet in order to obscure their perilous insolvency. Check the big banks for their absent Loan Loss Reserves to see that they are flying naked without protection. The next storm will sever their family jewels and private nether parts.

Goldman Sachs Group, JPMorgan Chase, and the rest of the 18 primary dealers of USGovt securities that trade with the US Federal Reserve make a dramatic shift. One can be certain they were tipped off of the Dollar Swap Facility and the extreme beneficial effect to the USTreasury complex. They shifted from a $23.2 billion position against USTreasurys to an opposite position of $37.1 billion invested directly in USTreasurys, according to the USFed central bank data as of May 26th. To finance the shift, these primary dealers, the insiders, ordered the reduction by 17% in their non-USTreasury holdings of fixed income assets to $211 billion. They cut holdings of higher risk securities such as corporate bonds. See the Bloomberg article (CLICK HERE).


◄$$$ JPMORGAN WAS FINED FOR COMMINGLING CLIENT ACCOUNT FUNDS. BUT IT WAS A TRIFLING LOW FINE, A MINOR BUSINESS EXPENSE IN THE SCHEME OF THINGS. THE EXTENSION IS ONLY NATURAL FOR METAL LEASING OR DIRECTLY USING THE GOLD & SILVER IN UNALLOCATED ACCOUNTS. THEY HAVE ISSUES PSYCHOLOGICALLY ABOUT BOUNDARIES, AS A SHRINK WOULD CONCLUDE. $$$

The news headline sounds dire and damaging. JPMorgan has been found guilty of commingling clients funds, essentially using client funds in their corporate trading accounts. The JPMorgan criminal enterprise must pay a $49 million fine, a pittance. Think of it as a credit card with no charges for usage of funds. The JPMorgan London branch is the target of investigations. Margaret Cole is the FSA director of enforcement and financial crime. The Financial Services Authority serves as an independent body to regulate financial services in the United Kingdom. In a public statement, she said "JPMorgan Securities committed a serious breach of our client rules by failing to segregate billions of dollars of its client money for nearly seven years. The penalty reflects the amount of client money involved in this breach." The watchdog claimed that JPMorgan failed to separate client funds worth between $1.9 billion and $23 billion from 2002 to 2009. The regulator actually stated the fine is meant to "send out a strong message to firms of all sizes that they must ensure client money is segregated." They failed badly, since the fine is a ridiculously small percentage of the amount in violation. The $49 million fine is a mere 2.6% fine against $1.9 billion, and a trifling 0.21% fine against $23 billion. That is pocket change expense to a financial crime syndicate, a small line item probably an order of magnitude smaller than executive meal allowances. In closing, the FSA warned of several more cases in the pipeline. See the New York Times article (CLICK HERE). The cases should cause no worry at all.

So JPMorgan commingled client cash funds but does not co-mingle client gold? That is highly doubtful. The impact and risk comes from an insolvency condition. If an event occurs like bankruptcy, or shutdown of a subsidiary, then client assets would be jeopardized in total loss. The fractional bullion depository system at the big bullion banks can be considered a similar scheme. Investor gold can be given to another person upon demand for redemption, in a leveraged co-mingling arrangement. With unstated undisclosed fractional systems, less gold bullion would exist than claims against it. Then, the issue of allocated versus unallocated accounts arise. An allocated account is one that designates certain gold bullion as belonging directly to the client, marked and identified by serial numbers on the gold metal bars. An unallocated account is one that permits access of the metal to the gold pool, but without specific attachment claims. In the fractional application, if the banker exhausts the unallocated gold, the banker is likely to grab the allocated gold improperly, stealing from investors (replacing with a paper certificate). The legal enforcement against syndicate corporations is not there, period! In the GLD prospectus for the Gold Exchange Traded Fund managed by Street Tracks, where HSBC is the gold custodian, the risks to the shareholders are specifically stated. If HSBC suffers insolvency, or bankruptcy, then the allocated (client) account is at risk for being treated as a general unsecured creditor to HSBC when both allocated and unallocated bullion become commingled. It is improper but practical, as in criminal but easy to do. It is unprosecuted embezzlement. The creditors would tend to challenge custody if bullion that should be sitting in an allocated client bin but actually resides in the unallocated acessible bin. The prospectus specifically warns of this risk.

By the way, JPMorgan is the official custodian for the SLV, the Silver Exchange Traded Fund managed by Barclays. Conflict of interest is huge for JPMorgan. The potential for embedded fraud is huge in both ETFunds for gold & silver investors. Analysts and investors should view JPM with extreme prejudice for their custodial role, when they possess such a gigantic short position in gold & silver on the COMEX. After the imposed fine, even though small, one should cast a suspicious eye on commingling of precious metal bullion accounts. The Golden Truth journal states, "JPM was nailed for a record fine in the UK for commingling cash accounts. Anyone who thinks it does not happen in bullion accounts at these big banks is either naive, an idiot, or both. You better think again if you think your investment in GLD, SLV, IAU, or any of these bullion investment products sold by the likes of Kitco, Monex et al is really an investment in bonafide physically allocated bullion." See the Truth in Gold article (CLICK HERE).

HOUSING IN QUICKSAND

◄$$$ A ROCKING DECLINE IN MORTGAGE APPLICATIONS HAS COME FROM THE LAST FOUR WEEKS. THE FEDERAL PROGRAM PROPS AND THEIR INCENTIVES HAVE ENDED. VICTORY HAS BEEN DECLARED. THE POWERFUL HOUSING DECLINE HAS RESUMED UNDER THE WATCHFUL EYE OF HISTORICALLY UNEQUALED MISMANAGEMENT. $$$

The Mortgage Bankers Assn has reported an enormous decline. The number of mortgage purchase applications declined by 35% over the last four weeks. The latest survey should instill open fear among banking leaders, but they continue to trumpet success from past policy and even deceive themselves into noting a nascent economic recovery. Both are deeply rooted in fiction. The MBA report acknowledged the expiration of the homebuyer tax credit at the end of April. The bankers seem confused that demand has not picked up from sheer power of low interest rates, at historical lows. People struggle to qualify for loans, as income is uncertain, and banks are reluctant to make loans, as property values continue to slide down. This has been precisely the Hat Trick Letter forecast for over two years. Each year, my forecast is revised to herald two more years of housing declines in a vicious bear market, the equivalent of a perpetual decline forecast.

The MBA report admits the despair, as VP Michael Fratantoni wrote, "Although rates remained essentially flat, refinance applications dropped this past week for the first time in a month. Despite the historically low rates, many homeowners have already refinanced recently, remain underwater on their mortgages, have uncertain job situations, or have damaged credit following this downturn, and therefore may not qualify to refinance." The average contract interest rate stands at 4.82% for 30-year fixed rate mortgages. The variable rate stands at 3.23% for one-year adjusted rate mortgages. The upper end rate stands at 5.57% for jumbo mortgages, ineligible for Freddie Mac at certain heights. The prevailing points to pay (including the origination fee) are in the 1.00% to 1.05% range. The graph shows the MBA Purchase Index and four week moving average over 20 years. The purchase index was on a firm decline since its 2005 peak. It has begun yet another strong downward move following the expiration of the federal tax credit, under the weight of bank owned properties. The current reading is the lowest level for the index since February 1997. See the Calculated Risk article (CLICK HERE).

◄$$$ HOME MORTGAGE DELINQUENCIES AND FORECLOSURES CONTINUE IN AN UPWARD PATH, WITH NO APPARENT IMPROVEMENT. DETAILS ARE SIMILAR TO SEVERAL PREVIOUS REPORTS. THE PICTURE TELLS THE STORY OF THE DISASTER AND HUMAN MISERY. $$$

The monitor RealtyTrac reports foreclosure activity over 300,000 for the 15th straight month. Real Estate Owned (REO) properties set a new monthly record. Despite a small 3% drop in May for overall foreclosure filings to 322,920 which is 1% above May 2009, the bank owned property tally is skyrocketing. The REO hit a record for May and April, with 93,777 more properties repossessed by bank and mortgage firm lenders, an increase of 44% from May 2009. All 50 states posted annual increases in REO activity. It appears banks are finally starting to pick up backlogged housing currently in foreclosure. And as the REO inventory goes back on the market, after stubborn banker resistance, the bloated inventory supply of unsold homes will force down housing prices even more. The REO bulge is the #1 current factor that eliminates any chance of a price recovery. The statement by RealtyTrac CEO James Saccacio made this point crystal clear. He wrote, "The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months. Defaults and scheduled auctions combined increased by 28% from 2007 to 2008 and another 32% from 2008 to 2009, creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed." Housing is on the verge, if not already, of making an important turn lower. See the Zero Hedge article (CLICK HERE).

◄$$$ THE FORECLOSURE PROCESS IS SO LONG AND DELAYED THAT HOMEOWNERS ARE USING IT AS A PERSONAL RESTRUCTURE OF PERSONAL FINANCES. $$$

Take Alex Pemberton and Susan Reboyras, for instance. Foreclosure is becoming a way of life to them. They admit to being in no hurry to exit the foreclosure process, which has permitted them to stabilize the family business, even to enjoy some little pleasures and recreation. Alex actually said, "Instead of the house dragging us down, it has become a life raft. It has really been a blessing." Maybe that is because the couple stopped paying their home mortgage last summer. They have fashioned a home-spun loan modification with their banker out of ultimatim methods, daring the bank to force them out if they can. They do not beg for permission, but instead dictate terms. Unknown is whether the bank can locate their property title, admist the mess and corrupt mortgage bond blizzard. Shame of foreclosure is a thing of the past. Moral qualms are overshadowed by full faith that the banks created the crisis by deceiving homeowners with loans in the Ownership Society programs. The key feature that enables a home finance restructure, individual style, is the long delay within foreclosure procedures. See the lengthening limbo that shows a typical 251-day process in January 2008, now a 438-day process in April 2010. Some regional differences exist. Legal tussles extend the timetables. See the New York Times article (CLICK HERE).

◄$$$ COMMERCIAL PROPERTY PRICES IN THE LAST YEAR HAVE WIPED OUT THE ENTIRE DECADE RALLY. THE BUBBLE HAD NO SUBSTANCE AND EVAPORATED IN A COLOSSAL WRECK THAT WILL PROVIDE PHASE TWO IN THE BANKING SECTOR DEGRADATION AND RUIN. COMMERCIAL DELINQUENCIES AND DEFAULTS ARE ADVANCING RAPIDLY, WITH BIG DETERIORATION IN THE PAST 12 MONTHS. $$$

The boasted property boom was actually a grand bubble, for both residential and commercial sectors. The 91% gain in commercial property prices has been wiped out since 2008 with a 42% price decline. The seven year rally has evaporated in two years time, in rapid descent. The news headlines have barely been written, although the story has been previewed for two years in the Hat Trick Letter. Watch for bank losses for the next couple years. In fact, commercial loan losses make up a signficant portion of portfolio losses for banks seized in the last few months by the FDIC.

Structured Credit Investor reports the commercial loan delinquency rate rose 48 basis points to 7.5% in May, according to Moodys Delinquency Tracker. Officially Moodys has increased its 2010 yearend forecast to the 9-11% range, up from the 8-9% range for commercial delinquencies. They track all conduit loans and fusion deals issued since 1998. Their worse revision is due to persistent unemployment, the spread of foreign sovereign debt distress, and ongoing commercial mortgage refinance problems. Office and retail properties are the most troublesome sectors. May showed 349 more commercial loans going delinquent, which brought the current DQ total to almost 4000. Their loan balance is $48.8 billion. Compare to one year ago, when 1800 DQ loans had a $15.5 billion balance and the DQ rate stood at 2.27% only. So in one year the commercial space has turned into a wreck zone, with the number of failing loans up 122%, the failing loan volume up 215%, and the delinquency rate more than tripled. To be sure, commercial property and its mortgage market are in the midst of implosion, precisely as forecasted here in the Hat Trick Letter for the past two years.

ANOTHER ECONOMIC RECESSION LOOMS

◄$$$ THE CHICAGO PURCHASE MANAGER INDEX DROPPED ALMOST UNIFORMLY IN MAY ACROSS ITS MANY COMPONENTS, EXCEPT FOR JUNK FOOD, A STAPLE OF AMERICAN SOCIETY. INVENTORY REBUILD WAS THE ONLY AREA OF PROMISE, BUT PROBABLY A SHORTLIVED FACTOR. $$$

Several individual components of the Chicago Purchase Mgmt Institute fell in the May reading. The Prices Paid, Order Backlogs, and Employment all show sluggishness, coming in at 2010 lows. The official Chicago PMI declined by the biggest amount so far in 2010. It is principally a concurrent indicator, but with some leading items related to orders. At the 59.7 level, it saw its largest decline at 6.4% in the first five months of this year. The only item with a positive light within the PMI was the ongoing surge in inventories. Aside from the inventory junk food restocking, all other PMI components tumbled. The fiscal stimulus benefits have virtually come to an end, precisely when USGovt officials claim the recovery is taking root. Final demand is falling, the opposite. Once the inventory inversion begins, look for the Business Barometer to make a sharp downward turn. See the Zero Hedge article (CLICK HERE).


◄$$$ THE JUNE JOBS REPORT WAS FLAT AFTER USGOVT CENSUS WORKERS WERE REMOVED. THE BIRTH-DEATH MODEL ADDITIONS AGAIN DISTORTED THE OFFICIAL REPORT, BUT GARNERED BAD ATTENTION. YET SOME JOB OPENING TRENDS ARE FAVORABLE. THE REALITY OF JOB LOSS COMES FROM THE JOBLESS CLAIMS RECORDED BY STATES, WHICH NO AMOUNT OF DOCTORED NON-FARM JOBS CAN OVERCOME. OVER 1.2 MILLION JOBS ARE LOST EACH QUARTER YEAR, WITH NO JOB GAINS IN OFFSET. $$$

The jobless rate in May supposedly was 9.7% versus 9.9% in April. The true actual jobless rate is over 21% in the real world of the barren USEconomy. Jobless claims continue like a tragic parade, in total dispute the USGovt statistics. Jobless claims remain over 450k per week in consistent fashion, evidence of two million jobs per month killed. In fact, nearly half of the unemployed at 45.9% have been out of work longer than six months, more than at any time since the USDept Labor began keeping track in 1948. Unemployed workers departing from positions in management, business, and financial operations have been out of work an average of 32.3 weeks.

My belligerent attitude toward the official Non-Farm Payroll report will be manifested in a very brief summary of its distortion and pathetic underlying story. This report gathers the attention, while the jobless claims are glossed over. The data from the Bureau of Labor Statistics show +431 thousand jobs in May, with no April revision at +290k jobs. The census worker temporary contribution of +411k was huge. In fact it was the entire monthly gain. Break the May job gain down as +41k in the private sector versus +390k in the govt sector. Except for the census activity, no sector showed much of any growth whatsoever. The financial community recognized the pathetic streak in the story. Also, more attention was again given to the lunatic political device known as the Birth-Death Model, which added 218k jobs from the deep fiction of the statlab ether. The spin doctors add mythical jobs each month from this Birth-Death Model that makes sense sometimes in expansion times, but none whatsoever in troubled times. Then the same spin doctors quietly remove their statistical crime in the dead of winter, like last March when they revised with a lumpectomy of 1.3 million non-existent jobs. The story hardly receives a peep of coverage, except by those intrepid analysts who pound the table.

One shred of positive light comes at the margin, where job postings are made. For the first time in ages, the list by sector is favorable. Compared to last year, the gains in posted openings is all green, all up. Several years are needed to find such an event, like in the housing bubble boom years from 2003 to 2006. This marginal uptrend bears watching.

◄$$$ MONEY SUPPLY CONTINUES TO CAREEN DOWNHILL FAST. THE MONEY SUPPLY GROWTH HAS PLUNGED TO A 1930 PACE. THE BROAD MONEY SUPPLY REMAINS TREMENDOUSLY ELEVATED, AS THE USFED STILL HOLDS HUGE BANK RESERVES. DESPITE MAMMOTH MONETARY INFLATION AND OUTSIZED BANKER WELFARE PROGRAMS,. THE FISCAL EXPERIMENT IS FAILING BEFORE OUR EYES. REPEATED QUANTITATIVE EASING INITIATIVES FAIL TO TURN THE TIDE. $$$

The M3 Money Supply measures money in circulation with the widest definition. The $871 billion decline in the estimated seasonally adjusted M3 from May 2010 has been attributed to a $642 billion drop in institutional money funds and $126 billion drop in large time deposits in commercial banks, both verified by USFed data. The balance on large time deposits, Repos, and Eurodollars are estimated to be contracting also. The contractions in M3 are occurring even though the broad monetary base is both high and still growing, a seeming paradox. The Adjusted Monetary Base rose from $880 billion in summer 2008 to a peak $2200 billion at the end of 2009, to a little over $2000 billion through June 2nd, according to the St Louis Fed. Banks are not lending the increased money sitting in bank balance sheets, certainly not with 10-fold amplication from standard fractional bank methods. The big banks continue to leave them on deposit with the USFed, instead of lending their massive excess reserve into the regular flow of commerce.

The Shadow Govt Statistics folks do a tremendous job, especially with the M3 statistic that the USGovt discontinued in 2006. The SGS folks also track the more true economic statistics like GDP, jobless rate, and price inflation indexes with a greater touch of reality. They wrote, "Where the Fed has become something like a commercial lender, in terms of fostering purported stability in the mortgage and commercial paper markets, any funds that have gotten into the system are reflected in the usual money supply components... In terms of year-to-year change, consumer credit (April) is down by 3.2%, commercial and industrial loans (May) are down by 17.6%, and commercial paper outstanding (May) is down by 17.0%." Notice the M3 in the chart (in thick blue), an index in a plummet. Despite huge reserves, banks are on order NOT to lend. The USEconomy is at risk of further deterioration, a deeper recession, and possible depression. The financial sector elite syndicate on Wall Street is the only priority of monetary policy makers. The USFed is the main destination to park funds. The economic fallout is not a concern, except to promote additional rescue packages, again for banker benefit. Main Street is being strangled. Thanks to John Williams at SGS for the graph.

The broad measure in the M3 money supply is contracting at an accelerating rate within the USEconomy. Its pace matches the average decline seen from 1929 to 1933, despite near 0% interest rates and the biggest monetary profligacy and fiscal extravaganza in modern history. The aggregate stock of money declined from $14.2 trillion to $13.9 trillion in the three months ending April, making an annual 9.6% rate of contraction. The assets of insitutional money market funds fell at a 37%, the sharpest drop ever recorded. Tim Congdon from International Monetary Research said, "It is frightening. The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly. Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by Quantititave Easing. If the Fed does not act, a Double Dip recession is a virtual certainty. My contention is that the US financial structure began a death process beginning in the September and October 2008 timeframe. This has been a steadfast Hat Trick Letter premise. The data bears it out vividly.

◄$$$ PRICE INFLATION IS AKIN TO GETTING FEET WET FROM PISS IN A LIVING ROOM. THE USFED ROLE IS TO CONTAIN THE PISS. THEIR CUP SOON RUNNETH OVER. $$$

To date, the USFed has trapped the monetary inflation, either permitting it to go into Black Holes like Fannie Mae or AIG or Wall Street preferred stocks. Try to imagine a certain framework closer to home. If piss flows constantly in your living room, do the feet of your guests get wet?? That is the essential question. If your family pisses on the couch, tables, and floors, acting like a fountain, then YES, their feet get wet. If you piss in a gaping hole in the corner of the living room floor, then NO, their feet do not get wet. If one banker guest installs a urn that retains a pool of piss on a convenient receptacle, then NO, again their feet do not get wet. If bankers renew lending money to businesses in broad programs, with newfound confidence of a USEconomic recovery, then the shower of piss disseminates all through the room from multiple sources. Then all feet get wet. If a lending explosion occurs, then urns filled with piss will be poured out willy nilly. Then all will get soaking wet. This perspective is queer but reasonably accurate. Pardon the vulgar example, but the Jackass was raised in the lower middle class and only rarely displays a gentlemanly manner.

◄$$$ THE LEADING ECONOMIC INDEX CONTINUES TO DIVE. IT CONFIRMS THE MONEY SUPPLY DOWNWARD SIGNAL. THE SUGAR HIGH FROM USGOVT STIMULUS AND BANKER WELFARE HAS HIT AN END. THE USGOVT WILLINGNESS TO PERPETUATE GARGANTUAN STIMULUS IS TEMPORARILY HALTED. IT WILL RETURN WHEN THEY ARE SCARED WITLESS. $$

The gauge known as the Weekly Leading Index, put out by the Economic Research Cycle Insitute, has been one of the most reliable indexes in existence over the last five decades. Most forecast indexes  heavily relied upon by the popular economists are pure rubbish and laden with sentiment puke. USFed Chairman Bernanke is wedded to inflation expectation nonsense. The Weekly Leading Indicator (WLI), despite having a stock index component, has earned a solid reputation for accurately calling recessions and recoveries with advanced notice. It was effective in foretelling the 2008 economic pullback, and foretelling the 2009 'Sugar High' boomlet derived from USGovt programs and USFed facilities. In the final months of 2009 and first couple months of 2010, this index turned down hard, giving strong hint of an important economic pullback once again. This time however, expect something much worse since the USGovt has obtained religion in a halt to further high flying expenditures, and the USFed is eager to end its easy money in accommodation. The next two or three months will tell whether the WLI index will reach negative ground. My forecast is yes, hell yes!! Thanks to ClusterStock for the fine chart.

Michael Pento is chief economist at Delta Global Advisors. He is not known for his timid viewpoints or bashful style. He relies upon market and economic signals, which are heavily negative. He points out the following ugly measures. Crude oil has come down from $85 to $72 per barrell in several weeks. The 10-year USTreasury yield has come down from 4.0% to 3.2% in several weeks, the price of money. The price of copper, reputed to possess a PhD in Economics as the credence goes, has come down from $3.50 to $2.77 per pound. He presents the picture as a choice of reality versus USFed and USGovt propaganda. He sides with reality. He said in a financial network interview, "[Bernanke's statement on the economic recovery] guarantees that we are going to have a double dip recession, because his track record is 100% accurate, but it is 100% accurate in the wrong direction... We need to sell assets, and we need to allow the deleveraging process to consummate. We are going in a wrong direction and the double dip recession is virtually assured... The year 2008 taught us very clearly that decoupling is a dodo bird's philosophy. The US is headed down. You will see home starts, permits, and sales plummet in the next few months. That is going to add more supply to the housing market, that is going to put bank assets under duress, that is going to put their capital under duress, and that is going to help bring us into a double dip recession." His focus is very directed at the housing & mortgage sector, which makes sense, since they formed the shifting sands that provided the foundation for the USEconomic expansion from 2002 to 2006. The best advice offered by the irrepressible Pento is to increase cash levels, to hide in the short-end of the Treasury curve, and to own gold, precious metals and high-paying dividend commodity stocks. See the Zero Hedge article (CLICK HERE). My focus extends to the active aggravated neglect paid to Main Street while $trillion banker welfare is given to Wall Street, and the resulting catastrophe from credit suffocation and absent capital formation.

◄$$$ RETAIL EXPERT DAVIDOWITZ WARNS OF A PERMANENTLY DAMAGED USECONOMIC LANDSCAPE, AND A HIGH RISK OF A DEPRESSION EPISODE. HE HAS MADE THE SAME CALL BEFORE MANY TIMES, IN CONSISTENT TERMS. $$$

Howard Davidowitz is a retail expert, which provides an excellent perspective on the USEconomy. In no-nonsense style, he said "America will never be the same. There is a 50% chance that we are going into a full scale depression. Living standards will never be the same. Nothing makes sense, and the consumer knows it!" He has openly declared that the consumer is dead, and only 10% of high-end consumers will survive. He regularly appears on most national media networks and is quoted on many national journals, blasting away with his unerring message. See the Businessian article (CLICK HERE).

Yet another minor shock came, as retail sales declined for the first time in eight months in May, falling a surprising 1.2% in conflict with consensus forecasts. Economists surveyed by MarketWatch expected a 0.2% gain in sales. They known nothing typically. Sales were mixed across sectors, dominated by large declines at hardware stores, auto dealers, gas stations, department stores, and clothing stores. Building & gardening sales fell by 9.3% from April. Modest gains were found in most other types of stores. The decline in retail sales was the first since September 2009, after seven straight months of gains. The true data tied to the USEconomy is slowing emerging over the mainstream spin.

◄$$$ ELECTRICITY USAGE NATIONWIDE IS DOWN FOR THE FIRST TIME IN 50 YEARS, SUPPOSEDLY DURING AN ECONOMIC RECOVERY. THE RECESSION IS NOT DISPUTABLE BY THINKING PEOPLE. $$$

Like with federal payroll tax revenue, sales tax revenue, and trucking miles logged, the electricity usage statistic is impossible to doctor and falsify. American Electric Power (AEP) is one of the largest power generators in the United States. The company reports that 10 of its smaller coal fired generating units will remain offline for much of the year due to lower electricity demand. Its cost cutting program will place the units in extended startup status during off-peak months. Opportunities to sell excess power into wholesale markets have been nil in recent years. The recession has reduced demand for electricity, especially from industrial customers. Electricity demand for AEP fell for the past two years, the first time that has happened since 1949. The offline units are located in Ohio, Virginia, Indiana, and West Virginia. The units are older as well, with one dating to 1944. Based in Columbus Ohio, AEP has about 5.2 million customers in 11 states. See the Yahoo Finance article (CLICK HERE).

Friend Aaron Krowne of the Mortgage Lender website frequently corresponds. He wrote, "So my power bill for the last month through June 3rd came to $195. This is for a mere 1000 sqft apartment featuring one bedroom in Atlanta Georgia. This is not an expensive city by any means." Electricity demand might be down, but the cost to households is not low. Oil fired electric generating plants continue to dot the US landscape. When crude oil prices rose well above $100 per barrel, the electric bills rose too. Even after crude oil prices came down, electric bills did not.


◄$$$ THE COUNT FOR AMERICANS RECEIVING FOOD STAMPS CONTINUES TO RISE. THE AMERICAN TRAGEDY OF LOST HOMES IS ECHOED BY THE POVERTY AND NEED FOR FOOD SUBSIDIES. $$$

The USDept Agriculture reported that recipients of Supplemental Nutrition Assistance Program subsidies for food purchases totaled 40.2 million. Food stamp recipients are up 21% from a year earlier and 1.2% more even since February. The count has set records for 16 straight months. See the Boston News article (CLICK HERE).

◄$$$ HIGHWAY ROBBERY NEXT COMES IN THE FORM OF TRAFFIC TICKETS. POLICE ACTIONS MIGHT BE BETTER DESCRIBED AS ARBITRARY EXTORTION BY MEN IN UNIFORM CARRYING A BADGE & GUN. PENALTIES SOMETIMES ARE ATTACHED FOR UNSUCESSFUL COURT CHALLENGES, A HIDDEN DETERRENT FOR ANY DEFENSE. STATES AND CITIES ARE DESPERATE FOR FUNDS. $$$

Call it Highway Robbery or just a Motorist Tax, extortion by any other name. Either way, states and cities are desperate to bridge the gaps in their budgets, and have resorted to arbitrary extortion complete with deterrents to court challenges. They are using methods to ratchet up its revenues by unorthodox means sometimes described as fascist. An article by Radley Balko in Reason magazine entitled "The Motorist Tax" provides eye-opening detail. He wrote, "California has added a $26 Penalty Assessment for every $10 of some traffic fines. The assessment can turn an already steep $70 fine for not wearing a seat belt into a nearly $200 citation. A red light infraction can run as high as $500... In Virginia in March, state police carried out Operation Air Land & Speed, a mass ticket writing campaign explicitly aimed at bridging the state's $2.2 billion budget shortfall as well as helping the state apply for federal highway safety grants. The campaign issued nearly 7000 tickets in three days... In the Old Dominion [Virginia], going as little as 10 mph over the speed limit can trigger a Reckless Driving charge and a $2500 fine... Indianapolis, meanwhile, is trying to protect revenue from traffic fines by discouraging motorists from fighting unfair tickets. The city has taken to slapping administrative penalties of $500 to $2500 on motorists who unsuccessfully challenge traffic citations in court." What is next? Applications broadly of RICO laws to seize homes of those committing minor felonies and misdemeanors?

A friend told me of a personal experience in his hometown in Arizona. He said in the 1960 decade, he recalls a contest among police officers to write up tickets. The city had to bridge a budget gap in less than one month. They corralled the traffic cops in a conference room, explained the need, and offered a Hawaiian trip as prize to the #1 extortionist. The ploy worked very well. He said in smaller towns in Texas, a common practice is to create speed traps designed by sudden reductions in posted speed limits, and a cop waiting on the other end with a radar gun. (donut and coffee too). Texas is legendary for such revenue enhancement devices.

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