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

* Miscellaneous Morsels
* USFed Exposed, Trapped, Ruined
* Dead Ahead, More Zombie Banks
* Fannie Mae & Small Bank Tsunami
* Hidden Slide in the USEconomy
* The Informative Tax Angle
* Real Estate Stuck in the Toilet


HAT TRICK LETTER
Issue #72
Jim Willie CB, 
“the Golden Jackass”
14 March 2010

"Treasury bonds are certificates of guaranteed future confiscation." -- Franz Pick

"The Fed, in my opinion, is a price taker in the security markets. While its control over the interest rate in the inter-bank market for reserves (Federal Funds) may be very large in the short run, it cannot and does not control interest rates in other markets, such as Treasury Bills. These rates and yields are linked to world markets that are too large for the Fed to control." -- Michael S. Rozeff (Professor Emeritus, SUNY at Buffalo)

"Based on credible reports, the USTreasury over the past 30 years has printed more than US$ 29,000 billion in debt based banknotes and has given it to nations in exchange for goods. This method is the biggest theft in human history." -- Iran President Ahmadinejad

MISCELLANEOUS MORSELS

◄$$$ CITIGROUP ANNOUNCED DELAYS ON ACCOUNT WITHDRAWALS, CITING AN OBSCURE REGULATION ON THE BOOKS FOR A LONG TIME. STRESS WITHIN THE U.S. BANKING SYSTEM APPEARS TO BE ON THE RISE, SOON POTENTIALLY REACHING A CRESCENDO. THE WINDOW MIGHT BE CLOSING, THE HOURGLASS RUNNING OUT OF SAND. $$$

Invoking an old USFed regulation still on the books, Citigroup declared that withdrawals from many types of accounts must wait seven days to receive funds. Since highly liquid accounts are not required to be reinforced by reserves requirements, banks are granted a 7-day leeway in the current regulatory framework. See Regulation D of the Securities Act of 1933, which applies to all accounts classified as Negotiable Order of Withdrawal (NOW) accounts, the interest bearing checking and savings accounts held by individuals and non-profit organizations. So NOW no longer means now! They have not used the legally available rule until this moment. The notice serves as a vivid reminder of the vulnerability of the fractional reserve banking system and the shaky guarantee from the FDIC on insured deposits in the event of a bank run or sudden closures. Delayed access to savings compounds the concern that the FDIC deposit insurance is an empty promise. Seven days might be more than enough time to lock people out from taking any reaction to a global currency crisis, complete with bank runs. Recall that most giant US banks are deeply insolvent, a condition likely to worsen. They have almost zero loan loss reserves, operating on the edge, with the USFed serving as reserves account holder. Some speculate that a Bank Holiday comes, an event the big banks might exploit by refusing depositors their money. Mass bankruptcies could follow, then bank system restructuring, but with depositors left out in the cold. See the Prison Planet article (CLICK HERE).

◄$$$ THE U.S. HOUSING MARKET IS IN SHAMBLES. BUT FOR A BONAFIDE EXAMPLE OF MAJOR WRECKAGE, CHECK OUT IRELAND. THEIR HOME PRICES FELL BY HALF LAST YEAR!! THEIR ECONOMY IS A MESS. THE AUSTERITY MEASURES SWALLOWED BY EUROPEAN UNION DICTUM WAS OF THE I.M.F. POISON PILL VARIETY. THE SUN HAS SET ON IRELAND FOR AN EXTENDED PERIOD OF TIME. $$$

Ireland is the home of my mother (mee wee mither), as she grew up on a small farm east of Dublin. The emerald isle has a special place in my heart. When at Digital Equipment Corp (DEC) in the 1980 decade, the Jackass served as a quality control analyst and a market research analyst. During that time, my DEC corporation struck a wonderful symbiotic deal with the Irish Govt. The Irish would eliminate property tax for a given number of years, reduce income tax as well, while DEC would expand into two important plants in Galway and Clonmel, hiring almost exclusively Irish engineers. DEC provided up to 100 grants for engineering students. It was a successful plan, typical of the visionary leadership displayed by the Irish Govt. However, they followed the United States down the road of housing bubbles, offering cheap home loans, approving every conceivable loan application, and creating vast fiat funding machinery, only to find the road led to ruin, just like in the United States. My work calls it the Death of the AngloSphere, in which Ireland was ensnared. A friend from Vancouver wrote me a note last week. He works in commercial property development. He said, "Today, my bank teller at Toronto Dominion who is here from Ireland on a one year visa told me about the Irish boom. He said Ireland had a great 10 year run, but the government has bailed out virtually all the banks. Worse, housing prices in Ireland dropped by about 50% in 2009." That is a major ouch! Ireland had a 20 year run. It just committed to the austerity plan, a death sentence.

◄$$$ THE RUNAWAY STATE DEFICITS PRESENT AN IMMEDIATE THREAT FOR MUNI BOND BREAKDOWNS. LOSSES ARE ON THE VERGE OF A MAJOR WRECK. IT IS INEVITABLE AND UNAVOIDABLE, ESPECIALLY SINCE THE FEDERAL GOVT TREATS ONLY THE WALL STREET SYNDICATE. $$$

Defaults offer a clear signal for unprecedented municipal bond wreckage, better described as domestic junk bonds. The surge in high yields last year attracted investors, who are in line for major losses very soon. Investors poured $7.8 billion into high yield Muni Bond funds last year, lifting assets to a two year high. The total municipal bond market is valued at $2.8 trillion, of which states are responsible for about half. Last year, $409.7 billion in new muni bonds were issued. The undisputed default leader is Florida, as it alone is responsible for 122 muni bond defaults. Losses are due this year, as default risks grow. Once again, the ultra-low USTreasury yields starved investors for yield, inducing them to accept higher risk.

The source of such bonds is typically a municipality for to finance a project with a public benefit such as hospitals, nursing homes, housing developments, sports stadiums, bridges, tunnels, and roadways. US state & local government tax revenue fell 6.7% in September versus a year earlier, its fourth quarterly decline in a row, according to the Census Bureau. The basis for a massive skein of bond defaults is in clear and present danger. Moodys expects bond defaults to be pushed higher this year and next. Investors will soon be burned, just like they were in mortgage bonds that offered higher yields than the puny USTreasury yields. Risk to investors pertains both to falling value and default. If a project fails for economic reasons, the muni bond associated with it falls in value from lost revenue stream. See the Bloomberg article (CLICK HERE).

A new level of drastic fiscal actions is coming, a reflection of state woes. The people will surely respond with loud outcry, as state tax refunds are to be frozen on a widespread (not isolated) bassis. Residents eager to receive their state tax refunds might have a long wait. The recession has interrupted state cash flow and led officials in half a dozen states to consider freezing refunds, in one case for as long as five months. States from New York to Hawaii have been slammed by the economic downturn. Their response is drastic, as they promise either delayed refunds or promises to do so, due to budget shortfalls. The maneuver would be a confirming indicator of how bad current conditions are. For example, New York, under the weight of a $9 billion deficit, is toying with a $500 million delay in refunds to keep the state from running out of cash, claims Governor David Paterson. See the USA Today article (CLICK HERE).

◄$$$ FITCH AND MOODYS, THE DEBT RATING AGENCIES, ARE CHALLENGED BY A LAWSUIT FROM STATE OF CONNECTICUT. INTENTIONAL FALSIFICATION OF RISK LEVELS IS THE CHARGE. MASSIVE COLLUSION WITH WALL STREET FIRMS WAS THE NORM. $$$

The heat is turning up for the debt rating agencies. They were complicit with the Wall Street firms to rate and sell toxic bonds in previous years. The issue has nowhere been resolved, as hundreds of billion$ in mortgage bond losses were suffered. Since Wall Street controls the federal regulators, the burden falls on the states. Enter Blumenthal. The state of Connecticut has entered a lawsuit against Moodys Investors Service and Standard & Poors over ratings the agencies issued on ruined investments. Last week the ground breaking lawsuit was filed, in which Attorney General Richard Blumenthal alleged Moodys and S&P knowingly assigned false ratings to complex investments that resulted in massive investor losses, and further banking industry mortal wounds. The lawsuit is being brought under the Connecticut unfair trade practices law. They are seeking penalties and fines into the hundreds of million$. Blumenthal said, "Moodys and S&P violated public trust, resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless."

The securities involved at the center of controversy are not standard mortgage bonds, but rather complex leveraged bonds called Collateralized Debt Obligations that contain subprime mortgage elements. They were ruined after mortgage defaults skyrocketed. The Attorney General called the ratings process "deceptive and misleading" during a news conference, accusing Moodys and Standard & Poors of conflict of interest due to lucrative fees received when rating the investments. Companies that issued the investments paid the agencies for the debt rating. Many such securities were given top AAA ratings, but went worthless as their risk was suddenly exposed after loan defaults and plummeting home prices. The ratings granted did not reflect the extreme risk. They were of lower quality than junk bonds. See the Huffington Post article (CLICK HERE). After the damage, the ratings agencies have systemically cut the debt security ratings. Too little, too late, cannot hide the partnership with Wall Street fraud kings. It will be interesting to watch how the defendents bring forward information about Wall Street firm knowledge and complicity during the discovery phase. Also, watch to see if Blumenthal is delivered a similar fate as befell Elliott Spitzer.

◄$$$ THE TOYOTA CAR ACCELERATOR PROBLEMS WILL NOT SLOW DOWN. HUNDREDS OF CASES PLAGUE THE ERSTWHILE LEADER IN RELIABILITY AND QUALITY CONTROL, EVEN CONSTRUCTION EFFICIENCY. GRILL PANELS IN THE USCONGRESS ARE FOLLOWED BY CLASS ACTION LAWSUITS. $$$

As if the vehicle recalls have not been painful enough, costing in the $billions, as if the tarnish to their former sterling reputation in reliability and quality has not been painful enough, a fresh new threat comes to the Toyota HQ doorstep. In all, 89 class action lawsuits have been lodged in the last few weeks against Toyota Corp. The claim is that the blizzard of highly publicized cases of deadly accelerator problems besetting Toyota cars has ruined the brand name and car resale values. Current owners of good working Toyota cars seek $3 billion in a class action lawsuit from unrealized losses due to lower resale value of their automobiles. The nightmare is not over, as 50 fresh new cases of accelerator problems are being investigated. Toyota has dispatched its own team of engineers to examine the latest case, where a Prius hurtled through the California highways at 94 miles per hour (150 kph). It finally was brought to a stop by a police cruiser positioned in front to slow it to a halt.

◄$$$ SOCIAL SECURITY HAS TURNED INTO A LOSER'S PENSION. RETIREES IN 2007 AND AFTERWARDS WILL BE NET LOSERS, A TREND GROWING WORSE EACH YEAR. $$$

Create a model projecting an assumed salary equal to the top taxable Social Security limit for 45 working years. That salary limit was $3000 dollars in 1940 and $106,800 in 2010. Assume the maximum benefits option. Add payout benefits received over 13 years, derived from the average US life expectancy of about 78 years. Finally, calculate the difference between taxes paid over 45 years and the payouts received for 13 years. The projected retirees were net gainers from Social Security until 2007, the first losers at -$411 net. Retirees in year 2010 will be $40,403 at loss. Thanks to the Casey Research for the chart.

◄$$$ AMERICANS ARE POOR, AS EVIDENCE MOUNTS. TAKE IT AS A THIRD WORLD CONFIRMATION. THEY HAVE INADEQUATE SAVINGS TO RETIRE. LEGIONS OF AMERICANS ARE ON FOOD STAMP SUPPORT. $$$

American workers with grossly inadequate retirement savings grew for the third straight year. The percentage of workers with under $10k in savings grew to 43% in 2010, from 39% in 2009, according to the annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute. Workers who said they had less than $1000 jumped to 27%, from 20% in 2009. Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey. See the CNN Money article (CLICK HERE). If the Third World model prevails, older Americans will be forced to rely upon their children when retired, out of the work force. Such practice is standard in Costa Rica and other economically challenged nations. In a previous Hat Trick Letter report, details were provided on the 10% of Americans, over 30 million, who receive public assistance in the Food Stamps program.

◄$$$ GLOBAL EARTHQUAKES HAVE STRUCK IN HIGHLY UNUSUAL FASHION. SOME SCIENTISTS CLAIM SUCH A STRING OF GLOBAL SEISMIC EVENTS HAS NEVER OCCURRED BEFORE. MANY QUESTIONS ARE RAISED. $$$

Fore the period of seven days up to and including February 28th, over 258 significant earthquakes shook the world, each measuring greater magnitude than 4.5 on the Richter scale. Chile alone has already experienced 81 aftershocks at a rate of 4 per hour since the first big earthquake of 8.7 struck on February 27th. Tsunami alarms sounded across the world, not realized. In addition to the rampant seismic activity in Chile, moderate to strong earthquakes occurred in numerous other countries. The M-scale refers to the Richter power of the seismic event. Ecuador (M5.3 on Feb 28), Argentina (M6.3 on Feb 27), Afghanistan (M5.7 on Feb 27), Philippines (M5.7 on Feb 26), Japan & Ryukyu Islands (M7.0 on Feb 26), Guatemala (M5.6 on Feb 23), Haiti (M4.7 on Feb 23), Iran (M5.1 on Feb 23), Tonga (M5.7 on Feb 22), and two earthquakes in Mainland China of M5.4 and M5.0 on February 26th and 27th. The expected tsunamis of flood waters did not occur for some reason. Japan reported waves of only about 4 feet (1.3 meters) on the wide coastal areas of its Pacific side. Chile is now in a state of chaos, racked by looting of businesses and scrambles for supplies to merely survive (like water and food). Its infrastructure and thousands of buildings have been destroyed. The death toll in Chile is over 700 and sure to rise. By the way, Chile suffered the biggest earthquake ever recorded in human history in 1960, of magnitude 9.5 Richter. That terrible event caused thousands of deaths, and changed the country's terrain forever. See the Epoch Times (CLICK HERE).

A comment must be made. Simple natural forces seem not to explain the skein of earthquakes. One must go back several decades to find such a string, but much smaller. Some point to the new HAARP devices produced by the USMilitary. Google 'HAARP' to find a frightening week of reading. Tremendously powerful electro-magnetic microwaves directed at the earth's tectonic plates might have actually caused a few earthquake events. Do your own investigation, and make your own conclusions. Mine will remain private. Be sure to know the US & UK maestros are losing control of the global financial power grid.

USFED EXPOSED, TRAPPED, RUINED

◄$$$ USTREASURY AUCTIONS HAVE HIT CRITICAL ALARM LEVELS ON INDIRECT BIDS, THE LEDGER ITEM FOR FOREIGN CENTRAL BANK PURCHASES. THE 71% AVERAGE FOR INDIRECTS SINCE OCTOBER HAS BEEN EXCEEDED IN THE LAST FIVE AUCTIONS. THE RATIO HIT 100% IN LATE FEBRUARY. THIS IS CENTRAL BANK SELF-DEALING, AND A SMOKESCREEN FOR MASSIVE BOND MONETIZATION USING NEWLY PRINTED MONEY. $$$

In recent months, the USTreasury has been saddled with the responsibility of securitizing the USGovt deficits, sold at auctions. What mammoth deficits in the trillion$ they are! With Bid/Cover ratios near 2.0, some auctions were close to failures. Primary bond deals are choking on inventory, obligated to buy, often just about the only buyers. The hidden degree of official monetization is astonishing. Subtract the central bank purchases and the institutional purchases from the issuance, and basic arithmetic on a napkin arrives at roughly 50% Printing Pre$$ purchase in hidden fashion, half the bonds monetized. In late February an official auction showed 100% Indirect Bids, which means central banks took the entire heap of junk bonds sold by the USGovt at nearly 0%. Two weeks after the Indirect hit hit the record 100%, the March 9th auction showed Indirect Bids gathering $6.683 billion of the $6.744 billion offered, resulting in a 99.1% hit ratio. The bubble continues, but with much strain.

This self-dealing theme among central banks is likely to be an ongoing theme, due to the aggressive sales of USTreasury Bills by former principal investors such as China. Detailed data indicates an absence of maneuvering to facilitate the best price anymore, no price fishing as they say, no lowball bids, just pure veiled desperation bidding on all offerings. The auction fine point data confirms the Treasury Investment Capital (TIC) report a month ago, of reduced Chinese holdings. They appear content to permit the shorter term USTBills to expire without rollover. My ongoing suspicion in no way has been refuted by evidence, that hidden monetization from cooperative foreign central banks not only continues but has accelerated, using what is left of the Dollar Swap Facility. The British are the most likely accomplice culprits, due to genetic linkage, syndicate brotherhood, and a raft of Caribbean outposts (like what they used for Enron).

Enter the Supplementary Financial Program, whose balance has been increased to $200 billion. Quantitative Easing is still alive and well, courtesy of the expanded federal debt ceiling. In the current environment, where colossal USGovt debt must be funded, where mammoth mortgage debt must be funded, never believe calls to end the QE Printing Pre$$ operations. It continues to churn. It is a fixture. The SFProgram should cover eight consecutive $25 billion two-month USTBills. It will divert central bank purchases to some degree toward Primary Dealers. Still remaining is the mysterious Direct Bidder, the Household identity none other than a falsely labeled monetization official doing what the Secy Inflation orders from the USDept Treasury. See the Zero Hedge article (CLICK HERE). The Household entry in the latest grand lie, leading the public to believe that Fannie Mae or other pension funds are purchasing USTreasurys. The monetization is so obscenely large that the Powerz must create a new fictional category. It has been covered in past reports.

The USGovt deficits are soon to be fully recognized as relentless and powerful. The February budget deficit was $221 billion. Despite the apparent improvement in federal revenue, with income posting a 23% jump to $107.5 billion, the deficit is huge. Bear in mind that February is typically a low volume month on tax receipts, probably from hangovers on Christmas spending. The positive monthly comparison is the first year-over-year increase since April 2008. USGovt spending was $328 billion in February, up 17% year over year, the largest February total on record. Year to date, the deficit is $652 billion since the beginning of October (new fiscal year), according to the USTreasury. In five months, the federal deficit is on track for $1560 billion in the red. An extended jobless benefits package would worsen the deficit. The compromised morons in the USCongress actually believe the health care overhaul will reduce the deficit. See the Market Watch article (CLICK HERE). News stories like these are precisely why the internet is growing like a dynamo, and networks are dying!!!

◄$$$ MORE EXPOSURE SHOWS THE USFED IS INSOLVENT. THE ONGOING FINANCIAL WOES OF FANNIE MAE & FREDDIE MAC DEMONSTRATE THE LOWER TRUE VALUE OF THEIR MORTGAGE BONDS. THEY MAKE UP HALF OF THE USFED BALANCE SHEET. THE FANNIE MAE FINANCIAL SEWAGE HAS A DIRECT PIPELINE TO THE USFED. $$$

The continued major losses by Fannie & Freddie, their rising delinquency rates, and their hidden credit derivative losses prove that the US Federal Reserve is a dead entity. Questions arise more frequently about the insolvency of the USFed. Fannie Mae posted a 5.38% delinquency rate in December, while Freddie surpassed the 4.0% threshold in January. Both DQ rates continue to rise each month. The hidden implication is that their mortgage bonds drop in value. The USFed endlessly intervenes in the mortgage market, with the motive to keep mortgage rates artificially low. A housing blowup would send the USEconomy into the toilet permanently. They urgently work to prevent the banks from taking massive writedowns on their entire loan book. The impact of growing delinquencies is clear to probably the largest holder of mortgage backed securities, the USFed itself. Its total assets total around $2.3 trillion. Put attention on the liability side to their capital. Their equity buffer most recently was stated at $53.3 billion, which is over 40:1 leverage. A more correct calculation would find their equity to be substantially negative. If the USFed were to write down to a more realistic value its $1.027 trillion in mortgage backed securities, permitting them to settle in an equilibrium based market, the real capital balance sheet would go negative and quickly. Hence, the US Federal Reserve is actually insolvent.

Check the USFed assets broken down by categories. The chart below shows the most recently disclosed asset holdings as per the H.4.1 statement, which are not tied to true market value. They are a very slowly updated reduction of book value. Of the $2.3 trillion in assets, $1.027 trillion are MBS bonds (in red), and $167.5 billion are USAgency Mortgage Bonds (in orange). The total of $1.194 trillion is 51.9% in some form of mortgage bond. Given how they purchased $1.22 trillion in MBS, the implied 20% loss stands out already. Further cuts to value are obvious and required to match reality. They are busted but put on a good face in front of the USCongress.

The curious item is Bank Deposits, commonly called excess reserves held by banks. These reserves have risen to nearly $1.3 trillion in the last several months out from zero. Zero Hedge describes the inflation risk well. They wrote, "The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below. As long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyper-inflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets. This is also where the discussion about all the various mechanisms that the Fed has at its disposal to moderate tightening comes into play, whether it involves selling of assets, increase of the rate on reserves, or some combination in between."

The issue of solvency must address the resultant item on the balance sheet usually ignored. The USFed's equity or capital currently stated at $53.3 billion is a claim hardly credible. 'What If' games expose it as ridiculously flexible. When MBS writedowns are applied, justified by delinquencies that rub out significant portions of the income stream, the USFed capital turns negative. A 5% realized reduction on MBS mortgage bonds would result in the elimination of their capital balance, a wipeout. Applying a 10% or 15% writedown results in a capital deficiency of $50 billion and $100 billion respectively. One can be assured that the insolvency will grow as MBSecurities are settled over time. They mature with market transaction and aging per tranch. The rising delinquency rate on MBS bonds is the market dynamic to assure the reduction in MBS and the worsening insolvency. This entire subject of USFed ruin was addressed a few months ago in the Hat Trick Letter. Consider this treatment an update. The financial press does not pick it up at all!!

The USFed is mortally worried about a rise in interest rates. They talk about an Exit Strategy when they have none, backed into a corner. They will be forced to monetize even more debt, approved of course by the boss at the USDept Treasury. The inflation leakage described from the USTreasurys held as reserves becomes acute with a rise in interest rates. Talk of exit from the intractible corner actually keeps inflation expectations down, and long-term rates down, when inflation is likely to soon arrive as a torrent. Tyler Durden summarizes in excellent style. He wrote for Zero Hedge, "So here is the crux of the issue. The only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) single-handedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: 'WHAT IS THE TRUE BASIS OF YOUR CAPITAL ACCOUNT?' And when the Fed is forced to justify a valid response, is when monetizaton will begin." In my opinion, monetization will then be recognized as been happening all along, and finally seen going into overdrive. Then and only then will the USFed begin to use all inflation levers to INFLATE THE DEBT AWAY. But they will fail. They will permit and produce price inflation, put a floor on housing prices, but cause price inflation double the current low rate. The victim will be the USDollar. Signs of the USFed losing control come from the short-term USTreasury Bill yield. The 6-month USTBill yield is over 0.20% and rising fast, relatively. Both the 3-month and the 6-month USTBill yields are above their range in the last four months. It is early to claim a runaway horse.

The breakdown comes from a simple dynamic based in reality. The system cannot tolerate over a sustained period of time with very low mortgage rates, exploding delinquencies, embedded high federal deficits, and greater accumulation of MBS mortgage bonds put on the USFed balance sheet. The reality is that a breakdown comes from basic financial physics, as fundamentals work to break the structure while inflationary concerns arrive in force. The handoff impact to interest rates must be met by staggering power in JPMorgan credit derivative activity, which itself will come under strain. A fabled Minsky moment cometh. My expectation is that it does not come with a fast rise in interest rates, but rather in a fast decline in the USDollar. The Zero Hedge folks anticipate the revival and emergence of the Bond Vigilantes, who will grow bolder as they become more aware that the USFed is on course to destruction, and the structures are fracturing beneath our feet. The opportunity to profit from the other side of the USFed "ultimately will lead to a systemic catharsis of unprecedented proportions." See the Zero Hedge article (CLICK HERE). The Bong Vigilante arrival would be most welcome to gold investors, as they would pave the way for a grand migration from USTreasurys to Gold & Silver.

DEAD AHEAD, MORE ZOMBIE BANKS

◄$$$ BIG U.S. BANKS WILL CONTINUE TO DEVELOP AS ZOMBIES. THEIR COMMERCIAL LOAN BOOK WILL NOT BE MARKED TO MARKET. BERNANKE HAS BLESSED THE VALUATION BASED UPON INCOME STREAM, WHICH IGNORES THE FACT THAT BANKS WILL NOT REFINANCE SUCH LOANS. THEIR EQUITY RATIOS HAVE FALLEN TOO LOW. $$$

In April 2009, the US banking system entered Fantasy Land, as it changed the Financial Accounting Standards Board accounting rules. Dead banks, insolvent by any reasonable measure, were permitted to declare whatever value they chose on badly impaired or worthless assets. They employed proprietary models that ignored how certain niche markets had vanished, rendering totally worthless their assets held. They could ignore how leverage had rendered CDO bonds worthless, carrying them and other similar assets at original par values. A new wave cometh for the US banking industry, driven by commercial loans. The last wave of residential mortgages has not ended. USFed Chairman Bernanke has gone on record, offering his heretical blessing to yet more phony accounting. Bernanke, winner of "2009 Man of the Year" award, has publicly stated that the big banks can legally avoid marking down commercial loans on their balance sheets, even though these same loans will not be refinanced in rollovers by the same banks. That is a contradictory piece of hypocrisy. The borrowers might actually declare bankruptcy, or let certain projects be liquidated, but the underwriter banks will continue to hold the toxic loans at lofty fictitious values, at least until the loan disintegrates under the feet of bankers. The USFed Chairman, chief high priest, head inflation engineer, keeper of the fiat grail, and primary fraud architect, has declared that income stream determines value, not market prices, in a doctrinaire override of great importance. Other engrained multi-billion$ programs remain in place, which he made reference to, that prop up the financial system, at a time when the Intensive Care Bank Ward has gone to Main Street. This is FASB FantasyLand part II. US banking is a total tragedy, comedy, religious heresy, and crime drama. The pathogenesis of the big US banks follows the script of the Fascist Business Model, proceeding on a path marred by gross inefficiency, unprosecuted corruption, and serious undermine to the USEconomy.

Before the US Legislature last week, Bernanke said "Congressman, it remains probably the biggest credit issue that we still have. Yesterday, FDIC Chairman Bair talked about the increase in the number of problem banks. A great number of those banks are in trouble because of their commercial real estate positions& The Fed has done a couple of things here. We have issued guidance on commercial real estate, which gives a number of ways of helping, for example instructing banks to try to restructure troubled commercial real estate loans, and making the point that commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value. We have also had this TALF program which has been trying to restart the CMBS (commercial mortgage backed securities) market with limited success in quantities. But we have brought down the spreads, and the financing situation is a bit better. So we are seeing a few rays of light in this area, but it does remain a very difficult category of credit, particularly for the small and medium sized banks in our country." BERNANKE IS LORD OF THE FLIES.

Even some typically responsible financial analyst groups have endorsed the bank heresy. Expedience dictates public acceptance, it seems. Institutional Risk Analytics wrote, "Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet, and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again. While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money. Hopefully, the SEC, Treasury, the FDIC, Congress, and FASB were listening." See the Institutional Risk Analytics article (CLICK HERE). So proper accounting is a vampire? Quite the opposite, as vampires join zombies on Wall Street, which long ago stormed the USGovt.

The systemic layout of accounting fraud across cement foundations is extremely alarming. It represents a significant reinforcement since April 2009. It is the move from a super-highway ramp last April into an eight-lane highway where zombie vehicles can take to the road with full rights. The zombies on the financial roadways cannot carry passengers. They use gasoline fuel but go nowhere, circling the cities aimlessly. They will traverse the great urban maze until they disintegrate. The stock markets will continue to value the zombie vehicles as though worthy of great value. Financial colleague Craig McC of San Francisco commented, "By eliminating mark-to-market requirements, Bernanke and others are forcing the US banking system into Zombiedom. Most commercial real estate (CRE) loans are 'Bullet' loans (3-5 year term loans with a 25-30 year amortization). As these loans mature, no new lenders will take out and replace the existing loans since the current collateral value is below the existing loan amount. The Fed's plans for CRE loans seems to be more 'Extend & Pretend' clearly. Existing lenders will be encouraged if not forced to extend such existing loans until the property's cash flow implodes. While this solution provides temporary relief, it will turn the banks into zombies that lack the funds to make new and more productive loans."

◄$$$ U.S. BANKS ARE STILL BROKEN AND INSOLVENT, A POINT GAINING WIDER COMPREHENSION. THEY WILL REQUIRE MUCH MORE FEDERAL FUNDS, SURE TO SPARK CONSIDERABLE POLITICAL PROTEST AND CITIZEN OUTRAGE. $$$

The nation's largest banks remain broken. The fight to keep them solvent is a losing battle. That will not prevent grandiose efforts to aid them further. Any proper accounting of their asset base would expose their insolvency. Their assets would be overwhelmed by losses in fair market prices. Many such dead banks walking, actually continue to operate, but they offer little toward critical vitality in commerce. Consumers and businesses need to worry about their deposits, even though federally insured. With no bonafide remedy for the problem banks, the credit crisis will continue to drag down the USEconomy. No remedy is even attempted, since to embark on reform and solutions would kill the banks that control the USGovt and subvert its finance ministry. Eventually a bold cure must be taken, but until then more of the same patchwork persists. Delays mean higher costs later in systemic cleanup, like gangrene spreading into human limbs later to be amputated. Estimates of the required capital injection for the US banking system exceed $1 trillion.

Nouriel Roubini, from the New York University Economics Dept and Business School, has issued a new report. He estimates that total losses in credit portfolios by global financial firms will reach $3.6 trillion, up from his earlier estimate of $2 trillion. Of the total, half that risk is borne by US banks, the rest by other financial institutions in the United States and abroad. He admits, "The United States banking system is effectively insolvent." Others share the rising sense of alarm. Simon Johnson is a former chief economist at the Intl Monetary Fund and current an economist at MIT in Boston. He estimates US banks have a capital shortage of $500 billion. He said, "In a more severe recession, it will take $1 trillion or so to properly capitalize the banks." It is a difficult challenge to estimate the value of complex mortgage backed securities and their leveraged derivative securities in an uncertain economy. Adam Posen of the Peterson Institute said, "At this moment, the liabilities they have far exceed their assets. They are insolvent." See the New York Times article (CLICK HERE). The rescues will be an ongoing feature with USGovt participation. The absence of remedy means the rescues will be never ending. My forecast made in 2006 of eventual US banking system insolvency in the housing & mortgage bust has gone mainstream in recognition. A reminder that Roubini appears to have sold out to the syndicate in the past year, with watered down quality. His work has been compromised, but his new report is on the mark.

◄$$$ USFED TO BUY UP BONDS LOCKED IN MONEY MARKET FUNDS. A RUN ON BANKS FROM MONEY MARKET WITHDRAWALS IS UNLIKELY, GIVEN THE EXTREME VOLUME OF MONEY MARKET FUNDS IN THE $3.3 TRILLION RANGE. $$$

Some food for thought on the money market funds in the greater scheme of things. Money market funds total $3.3 trillion, which should be compared to the actual cash in circulation at only $900 billion total in the USEconomy. Thus money markets are evidence in a sense of fractional banking puffed fluff. Their large relative size would preclude a run on banks in effect. However, if the money markets are nested in semi-toxic asset wastelands, then the available funds to extract might me an order of magnitude less than the $3.3 trillion in the billboard figure. The last year or more has revealed how the mutual fund money markets are full of Fannie & Freddie trash, Colateralized Debt Obligation leveraged worthless paper, impaired Commercial Mortgage Bonds, and decomposing formerly AAA-rated garbage. To be sure, money markets do contain some USTreasurys, which used to be their primary investment in past safer years. Now we have recent news, that the USFed plans to purchase money market contents without clear specifics, and put the funds in USTreasurys. Conclude that more garbage will be injected in the USFed balance sheet, not less, when they talk drivel about unwinding their toxic bloated balance sheet. Also openly wonder if the USFed is aware of deeper toxicity behind the money market funds. Thanks to RogerL in Washington state for elements on this theme.


◄$$$ A REMARKABLE NEW TREND HAS BEGUN. FANNIE MAE & FREDDIE MAC ARE FORCING THE BIG FOUR BANKS THAT ORIGINATED FRAUDULENT LOANS TO EAT THEM AND SOME ASSOCIATED LOSSES. REFER TO JPMORGAN, CITIGROUP, BANK OF AMERICA, AND WELLS FARGO. FRAUD PERTAINS TO STATED INCOME, APPRAISALS, SECURITIZATION (TITLE LINKAGE), AND UNDERWRITING. A BATTLE BETWEEN THE GOOD PEOPLE MANAGING THE USGOVT BLACK HOLE AND THE EVIL WALL STREET FINANCIAL SYNDICATE MIGHT BE BREWING. $$$

From the Govt Sponsored Enterprise headquarters under the USGovt aegis, Fannie Mae & Freddie Mac have begun to apply pressure, demanding the Big Four banks to eat soured mortgages. Finally some pushback has come. Lenders at the giant syndicate outlets centered in the Big Four banks might be forced to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages. The estimate is provided by Oppenheimer analyst Chris Kotowski, who anticipates US banks could suffer losses of $7 billion this year when a stack of corrupted loans head back to their originators, only to be marked down to their true value. Mortgage repurchases should inflict deep damage to bank earnings through 2011, Kotowski claims, because the worst mortgages underwritten in 2007 are coming under the heaviest scrutiny, the peak of the bubble. Freddie Mac executives claim that 2009 mortgages are proving to be of better quality. "The worst of the stress is the 2007 vintages [loans originated in 2007], although 2006 and 2005 were not a whole lot better, and 2008 was not much better," Kotowski said. A war has been waged in the open. In the second week of March, the Mortgage Bankers Assn held a workshop in Dallas that promises to help banks "survive the buyback deluge [and] build up your repertoire of lender defenses." According to the MBA website, the workshop was sold out. Resistance to the pushback makes for a war, with plenty of dead banks to serve as casualties.

To doubters of a successful pushback initiative, consider that Fannie & Freddie in 2009 successfully stuck the four biggest US banks with losses of $5 billion on forced buybacks, triple the amount in 2008 according to agency filings on February 26th. The surge demonstrates that lenders, and just exclusively the F&F Dump Site for financial sewage, are bearing costs for lax standards three years after mortgage markets collapsed. The effort is on, as Fannie & Freddie continue to search for more faulty loans to return after suffering $202 billion of losses since 2007. Here is a curious if not paradoxical dynamic, to highlight how F&F might be more in control of some syndicate chambers. The big banks probably must comply with F&F directives, since the USGovt owned mortgage giants purchase over 70% of new mortgages. Paul Miller is an analyst at FBR Capital Markets and former examiner for the US Federal Reserve. He said, "If you want to originate mortgages and keep that pipeline running, you have to deal with the pushbacks. It does not matter how much you hate Fannie and Freddie." As of December 31st, Freddie Mac had another $4 billion in outstanding loan purchase demands not yet met by lenders. The larger Fannie Mae clearly has even more in such demands, but they did not disclose the amount. The uncontrollable F&F centrifuge has transformed into a more responsible rotary traffic cop, but it is still the central clearinghouse for trillion$ federal fraud schemes over two decades.

The pushback from Fannie & Freddie has resulted in an entire lattice work of minor structural changes in the pipeline. A Freddie Mac statement was made, "We are trying to be good stewards of taxpayer dollars and as part of that, it is important that those dollars not go to loans that should not have been sold to us in the first place." Even Fannie Mae attempts to take the high ground, with statements about "important tenets of the housing finance system." The irony is that F&F have overseen well over $2 trillion in direct theft, fraud, and counterfeit in the last 20 years within its own offices. So a battle among syndicate titans has been waged. Paul Miller from FBR Capital Markets points out the conflict. He said, "The government's efforts might be counter-productive, since the Treasury and Federal Reserve are trying to help banks heal... It is a fine line you are walking, because the government is trying to recapitalize the banks, not put them in bankruptcy, and then here comes Fannie & Freddie putting more pressure on the banks through these buybacks. If it becomes too big of an issue, the banks are going to complain to Congress, and they are going to stop it." The big banks have to buy back the loans at par (full original value) or close to it (previous transferred value), and then take an impairment loss writedown. In many cases for such broken assets, borrowers have stopped making monthly payments, and the price of the underlying home property has fallen in value. JPMorgan claimed in a recent presentation that it loses about 50 cents per dollar for every loan it must buy back from the GSE.

The counter-productive effect described by Miller is actually more like an amplification of the big bank problems. They have yet to undertake significant high volume liquidations of what they already hold on their ruined insolvent balance sheets. The F&F Sewage Squad demands they take back fraudulent and improperly underwritten loans, swallow the losses, but still a mountain of further credit assets sit like acid eating the ramparts of the Big Four bank foundations. My firm belief is that some of the Big Four toxic assets will soon be liquidated and face writedowns. The process will occur slowly at first. Later, these syndicate stronghold banks will sell stock to the hapless public to finance the liquidation writedowns in a publicly acclaimed cleanup process with USGovt blessing and formal aid. Shareholders will suffer future losses from additional obscene dilution. Never overlook how the USGovt has 100 tentacles and works at cross purposes constantly.

Review the inner workings of the Big Four. Bank of America recorded a $1.9 billion 'Warranties Expense' for past and future buybacks of loans improperly written, seven times the 2008 amount, according to a February 26th filing. Barbara Desoer is head of the Bank of America mortgage division. At a February 10th investor conference, she admitted that they added staff to handle increased claims from Fannie Mae & Freddie Mac. Her division lost $3.84 billion last year, the buyback volume openly stated as increasing. JPMorgan recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans, even $1 billion to increase reserves for future losses, according to a February 24th filing. JPMorgan gave unmistakable indication that such losses will remain a very meaningful issue for the next couple of years. So far, JPMorgan has succeeded in blocking about half its repurchase demands, having them rescinded. The largest mortgage lender in the nation, Wells Fargo bought back $1.3 billion of loans in 2009, triple the amount a year ago, according to a February 26th filing. Wells Fargo recorded $927 million of costs last year associated with repurchases and estimated future losses in loan loss reserves. Citigroup increased its repurchase reserve six-fold to $482 million, according to a February 26th filing. They admitted to increased "trends in requests by investors for loan documentation packages to be reviewed. The request for loan documentation packages is an early indicator of a potential claim." Analysts from JPMorgan Chase forecast that bank owned sales would maintain their share of total home sales, and could go even higher in the next three years, in more than half of the nation's 10 largest housing markets. Bank owned sales (REO) are a prevalent factor across the nation. They are expected to account for between 39% and 50% of home sales in Phoenix in the fourth quarter of 2012, up from 37% at the end of last year.

Banks that sell mortgages to Fannie Mae & Freddie Mac are obliged as part of the process to provide 'Representations & Warranties' assuring that the loans conform to the the standards upheld by the agencies. As an avalanche of home loans turn sour, the agencies are demanding that banks relinquish loan files, so they can scour the records for missing documentation, inaccurate data, and fraud. The information flow can assist in pushbacks for the big banks to eat losses, but the flow might also enable Fannie & Freddie to lock away evidence of massive fraud with duplicate property titles used in bond securities, and fraud in counterfeit bond sales, and fraud in systemic patterned trash property appraisals elevated for a bribe. The F&F Sewage Mgmt Engineering Staff is scrutinizing the most common type of minor frauds, like inflated appraisals or falsely stated incomes in the loan applications. They have planned drive-bys to actually look at properties insured or underwritten in loans. Such practice is unprecedented. See the Bloomberg article (CLICK HERE).

A final comment, which clarifies how certain banks are more vulnerable to the waves of impairment writedowns for mortgage loans. Their business model lacks income from other key operations. Reggie Middleton wrote, "PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses."

FANNIE MAE & SMALL BANK TSUNAMI
◄$$$ FANNIE MAE TAPPED THE USTREASURY FOR $10.5 BILLION. ITS TENTH LOSS REMINDS OF THE BLACK HOLE CONTINUING TO DRAW ON COSTS. THE HIDDEN COSTS WITH THEIR CREDIT DERIVATIVE BOOK IS KEPT SECRET. THEIR FORMAL STATED LOSSES ARE THE VISIBLE TIP OF THE ICEBERG. CONGRESSIONAL FINANCE COMMITTEE HEAD BARNEY FRANK HAS QUESTIONED THE INTEGRITY OF FANNIE MAE & FREDDIE MAC INVESTMENTS. A BIT  LATE, LOADED WITH HYPOCRISY! $$$

Fannie Mae is nowhere near finished with its Black Hole management. It plans to hit the USTreasury for $15.3 billion more to fund its 10th straight loss. Bear in mind that its losses are to be covered in the unlimited credit line previously announced, courtesy of the USDept Treasury. The current loss brings the total owed under a USGovt lifeline to $76.2 billion. The Fannie Mae colossus of fraud and sewage treatment owns or guarantees about 28% of the $11.8 trillion US home loan market. Fannie Mae & Freddie Mac own or guarantee more than $5 trillion in US residential debt. Incredibly, they are a One Man Band in 2009, responsible for as much as 75% of the new mortgages made last year. The agency has posted $120.5 billion in losses over the previous nine quarters. Imagine what would happen to mortgage finance and the housing industry without a USGovt-backed lender ready to take on further mountainous losses. The loss in 4Q2009 was driven in part by a $5 billion writedown on low income housing tax credits that the agency is barred from selling. Rival Freddie Mac took a similar $3.4 billion charge for the same reason.

The USDept Treasury and the F&F regulator, the Federal Housing Finance Agency, blocked Freddie Mac & Fannie Mae from selling their low income housing tax credits, which can only be recognized if the agencies expect to be profitable. Curiously, and an exercise in fiction, the Fannie Mae net worth (the difference between assets and liabilities) was negative $15.3 billion as of December 31st. If the true net value calculated after credit derivatives is not deeper than $2 trillion, then the Jackass will eat their CEO's dirty boxer shorts. The volume of non-performing loans that Fannie Mae guarantees for other investors rose to $174.6 billion from $163.9 billion in the third quarter. Fannie Mae also owned outright $41.9 billion in non-performing loans as of December 31st, up from $34.2 billion in the third quarter. See the Bloomberg article (CLICK HERE).

A retired aerospace engineer, turned amateur bank analyst, and trusted colleague, wrote me with the following summary that is worth quoting. BobO in Kansas said, "Ten straight quarterly losses, absolutely no foreseeable end, and guaranteed to increase. Fannie & Freddie's combined share now amounts to $5 trillion, just over 42%. Since an even higher percentage of their new loans made in 2009 are all but guaranteed to default, their losses will increase. By Treasury's own admission, in prohibiting their sale of tax credits, they have no prospect of a profit. Fannie's stated plan for repaying Treasury loans is to borrow more money from Treasury. Sort of a snap-shot of America, is it not?"

For an excellent summary of Fannie Mae's condition, with an entry on the recently announced unlimited credit line, balance sheet tables, summary of massive exposure, tally of losses to date, update on its shell game, and fine description of its pathogenesis, see the Economic Populist article entitled "Enron Fun With Fannie and Freddie" (CLICK HERE). The author stressed how the USDept Treasury credit line means Fannie Mae can move eight times as many loans from off its balance sheet onto it formally. My interpretation is different. Such slants are permitted in order to hide the several trillion$ in ongoing credit derivative losses, whereas the investment community can more easily digest losses in terms of its book of loans. The Obama Admin promised an overhaul by February 2010, as part of the Fannie Mae nationalization and lifting of bailout caps (unlimited credit line). The promise was broken. One should never forget the role Fannie Mae plays as the federal central clearinghouse for dozens of extremely large $trillion fraud schemes, counterfeit bond operations, politician slush funds, massive Wall Street scams, hidden shell accounts to balance the books, and conduits for CIA narcotics funds.

Check out the concentrated hypocrisy. After over ten years of encouraging and forcing Fannie Mae & Freddie Mac to make bad loans, and then helping conceal the problems, all the while taking illegal kickbacks, the US House Finance Committe is concerned. Its chairman Barney Frank now questions the investment safety of Fannie & Freddie. Either he has had a sudden awakening, or they stopped delivery of payoff checks under the table. See the Washington Post article (CLICK HERE).

◄$$$ RECENT F.D.I.C. AUCTIONS INDICATE BIG BANKS MUST SUFFER ASSET WRITEDOWNS. THE AUCTIONS IN 2009 FETCHED LESS THAN HALF THE BOOK VALUE OF ASSETS WHEN SOLD. ENTER THE COMMERCIAL LOAN FIASCO. THE F.D.I.C. HAS UNWISELY ENCOURAGED PENSION FUNDS TO COME INTO THEIR BLACK HOLE. $$$


The pattern is clear. When big banks accept tranches of failed bank assets, they are not written down. They are absorbed into their already ruined carried balance sheets, mired in insolvency. When small and midsized banks accept the tranches of credit portfolio assets, they are often liquidated in market sales. Banks of all sizes near the edge of ruin are vulnerable. The FDIC Loan Auctions have created a pattern that cannot be ignored. The sale of loans from failed banks in 2009 brought on average 43% of their held book value, according to the FDIC records. Non-performing loans, such as those in default or with prospect of repayment, were sold for 26% of their book value on average. The ripple effects should be felt by all but the biggest protected syndicate banks that do not play by any rules. An FDIC plan to auction more than $1 billion in assets seized from failed banks next month, including a loans to construct the W Hotel in Atlanta, will cause ripple effects from writedowns sure to weaken lenders nationwide. Almost half of the loans were originated by Silverton Bank, whose failure last May was the biggest in Georgia history. At issue is secondary sales in so-called flips, where the FDIC sells discounted loans to groups that turn around to sell them for hefty losses. Thus the ripples.

The FDIC Insurance Fund carried a deficit of $20.9 billion at the end of year 2009. In late February the FDIC announced that its deposit insurance fund suffered a huge $12.6 billion decline in the final three months of 2009 due to accelerating bank closures. The fund reserve ratio was minus 0.39% at the end of the quarter, the lowest ever seen. Welcome to the commercial loan bazaar, the next fiasco to rip. Geoffrey Miller is a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions. He said, "This whole thing is a mess waiting to happen across the country. Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks. It was common for them to make these loans and buy participations. It is a systemic problem that the FDIC has to deal with." Many regional and midsized banks are bracing themselves, as they are soon forced to take writedowns as a result of the FDIC sale of seized loans. These non-giant banks are often on the edge. The FDIC defends itself by citing the competitive bid process in pursuit of maximized recovery on receivership assets. In this upcoming auction, the FDIC might retain a 60% interest in the Silverton portfolio. If any loan is sold to a buyer who restructures it at less than book value or forecloses on the property, participating banks would have to write down their stakes, according to Russell Mallett from Price Waterhouse Coopers, a credit market analyst who specializes in bank accounting. Without a restructuring involved, banks are given the flexibility as to how they value loans. Gerard Cassidy is an analyst at RBC Capital Markets in Portland Maine. He said, "This is a situation the FDIC is going to face more, since the number of bank failures is going up. The FDIC is not in the business of managing loans, so they do have to sell them. But they also have to look at the bigger picture and take a global approach by liquidating those assets without hurting the banks that bought participations." See the Bloomberg article (CLICK HERE). If the FDIC auction process kills the participants, the FDIC will be stuck in mud, and gradually morpth into a second Fannie Mae repository.

The Federal Deposit Insurance Corp is actually attempting to encourage public retirement funds to purchase assets from failed lenders, and thus to take a more direct role in propping up the banking system. The pension funds control more than $2 trillion. One motive is to cut out private equity manager fees from their role. See the Bloomberg article (CLICK HERE). The direct investments proposed by the FDIC is a horrible idea and bad public policy. Retirees depend on pension funds to remain sound. They are already damaged by an excess of mortgage bonds, having chased higher bond yields. The entire fiasco shows just how desperate the FDIC is for new funds. They actually gut all groups that cooperate with the FDIC.

◄$$$ U.S. BANKS FACE A VERITABLE TSUNAMI OF BANK DEFAULTS, RESULTING IN AN ESTIMATED ADDITIONAL $1 TRILLION IN FURTHER LOSSES. THE NIGHTMARE OF BANK LOSSES SEEMS NEVERENDING BECAUSE IT IS NEVERENDING, MY FORECAST FROM 2007. THE RELATIONSHIP BETWEEN JOB LOSS AND BANK FAILURE IS CLEAR, AND PORTENDS MUCH WORSE BANK FAILURES AHEAD. $$$

The historical relation between bank failures and unemployment can be viewed, in order to properly gauge the full impact of bank failures to come. Take the Savings & Loan crisis of 1982 to 1989. It teaches that bank failures take years reach their peak long after the unemployment rate has peaked. The unemployment rate peaked in 1981, but not until six years later in 1989 did the wave of bank failures complete the process. Nearly 2000 banks were killed during that time, with the body count in 1989 (eight years later) accounting for nearly 534 of them, over 25% in all. The graph below demonstrates that one should prepare for a flurry of bank failures beginning in 2009 and stretching well into 2015. See the red series of jobless rate and the black bars of bank death count. Only when the jobless rate subsides can the USEconomy expect the total bank deaths to peak. The FDIC analysts recently forcasted over 600 banks to be on the road to failures. They are paid to be wrong. The death count will be well over 1000.

Only a few weeks into year 2010, the number of failures risen suddenly. Former hedge fund manager and Private Equity manager Fresbee expects over 200 failures this year conservatively. The ugly reality portends the FDIC problem to be nightmarish. Fresbee exepcts the outcome will be far more ugly than when Lehman crashed and burned. Consider an analysis of balance sheet numbers from 8400 banks with a review of their assets and liabilities. The Bankrate organization maintains a rating on each of these banks that is endorsed as extremely sound and independent. They assigned 1800 banks a rating 1 or 2 which potentially means they are in trouble and will be stressed toward failure at some point. The after-effect of the jobless condition will pressure many more banks which are still in good shape. The ultimate cost of treating the skein of future bank losses should reach a whopping $1 trillion, so forecasts Fresbee. The author analyst provides a quick estimate of all banks with rating 1 or 2 showing assets larger than $1 billion. Nearly $400 billion of losses from star rating 1 banks and $285 billion from star rating 2 banks loom on the horizon. His analysis stopped at smaller banks with assets under $1 billion. His analysis can also be called an optimistic best case scenario, since it does not assume any further deterioration of labor markets. Thus one can easily assume a figure closer to $1 trillion in the coming FDIC Bailout, as estimates total $980 billion. Once again, the USFed is asleep at the wheel, talking about optimistic scenarios, preparing for a recovery, when the worst is still dead ahead, again!!

Fresbee wrote, "The FDIC is staring into a black hole that is far worse than the Lehman crisis, since this can potentially shake not just the capital markets but the entire economy in a few hours time. Once we have 600, 700, and 800 banks going bust in an already weak economy, nothing can stop a bank run on the remaining safer institutions. People who have seen the S&L crisis of 1980s might just wonder that what is the big deal. The US Government will guarantee those deposits. Nothing to worry. Well that would have been fine if not for over $ 3 trillion of contingent liabilities that government carries in guaranteeing the GSE [Fannie Mae & Freddie Mac]. There is very little headroom in talking more bailouts. My greatest fear is that FED as usual is sleeping and completely oblivious to the massive tsunami of banking failures that are approaching. While some analysts have given credit to the FED for raising the discount rate, I think they will need to lower that again once the entire weight of FDIC failures comes upon them. The economy may be showing signs of some growth in headline numbers due to inventory stocking which is purely a china style stimulus spend rather than core economy improving. The bank health has only worsened in 2010."

The USGovt is weighed down by the Fannie & Freddie burden, and has less aid to devote to the FDIC, which it pushes to remain independent. It must operate from bank insurance fees, which have risen 13-fold. The timing of bank failures and potential bank run is difficult to predict, a thorny issue. The signs and stresses in the system are becoming painfully evident. Fresbee expects soon for a rupture in the system to occur, as some large banks with over $50 billion in assets start to feel the heat and succumb to the pressure. He concludes not only will the USFed be forced to lower the Discount Rate, but it will be pushed into desperate action. It will need to announce another bailout and another formal Quantitative Easing, called QE2. That is codeword for a massive money printing extravaganza to purchase mortgage bonds. See the Investing Contrarian by Fesbee (CLICK HERE).

◄$$$ A CONGRESSIONAL OVERSIGHT PANEL ANTICIPATES UP TO 3000 U.S. BANKS ARE AT STRONG RISK OF FAILURE. THE FULL IMPACT OF COMMERCIAL LOAN LOSSES HAS NOT REMOTELY BEEN FELT. $$$

A recent report by the Congressional Oversight Panel has been released, with a splash. Nearly 3000 community banks have a very high proportion of commercial real estate loans on their books. They are at particular risk of being overwhelmed, they conclude. That amounts to nearly 40% of all banks in the United States. They cite $1.4 trillion in commercial real estate loans due for refinancing between now and 2014. The report anticipates a continued pattern in today's market, that many loan applications will be refused and not approved by banks in the refinance rollover process. Property values in the commercial space have fallen 40% on average. Banks are unwilling to refinance, as they require a lower loan-to-value ratio. That will trigger an avalanche of business foreclosures. Banks could suffer losses of up to $200 to $300 billion, the report concludes. The future specter of empty office buildings, empty hotels, empty stripmalls, and empty stores could lead directly to profound job losses, but worse to a severe change in national psychology. Many banks could fear lending in the worsening environment. The largest commercial loan losses are projected for 2011 and beyond, ensuring a long new nightmare just like the subprime chapter. See the Epoch Times article (CLICK HERE).

◄$$$ SMALLER BANK FAILURES ARE BEING LOST IN THE SHUFFLE, AS BIG BANKS DOMINATE THE NEWS. THE BREAKDOWN HAS NOT STOPPED OR SUBDUED. $$$

The parade of US bank failures continues uninterrupted. The only change is the lack of attention given to the procession of smaller red ink. First American State Bank of Minnesota, La Jolla Bank of California, George Washington Savings Bank of Illinois, La Coste National Bank of Texas, Marco Community Bank of Florida, Carson River Community Bank of Nevada, and Ranier Pacific Bank of Washington, these banks were the failures in the month of February. See the comprehensive Wall Street Journal list of bank failures with branch counts, bank size, deposit volume, and more, going back to January 2008 (CLICK HERE).

HIDDEN SLIDE IN THE USECONOMY

◄$$$ FEBRUARY JOBS REPORT SHOWS 21.6% UNEMPLOYMENT, WHEN THE JOBLESS ARE COUNTED. WORSE, THE MONEY SUPPLY INDICATES THE RECESSION WILL INTENSIFY. THE JOBLESS ARE BECOMING A CLASS UNTO ITSELF. $$$

My practice is to add the long-term discouraged workers into the total unemployed, thus avoiding the USGovt deception on the officially declared unemployment rate. My perception is in line with the common practice used by the Shadow Govt Statistics in their estimated Alternate Unemployment Measure. The SGS superior unemployment rate rose to 21.6% in February from 21.2% in January. The SGS measure is based on the reported U.6 measure, with certain improvements. Thus it varies with the U.6 usually. Its current level is as wretched as the peak unemployment witnessed in the 1973 to 1975 recession. The Great Depression jobless rate was estimated according to a method that included farm workers, where 27% the US work force was located. Today, less that 2% work on farms. Hence, for purposes of comparison to the Great Depression, Shadow Govt Statistics considers the estimated peak non-farm unemployment rate in 1933 to be between 34% and 35%.

In recent months, a reference has been made to the declining annual change in inflation adjusted M3 money supply. Bernanke needs to take a look at this measure, and less at his stupid inflation expectations. The M3 signals an imminent economic downturn, or better described as a more intense contraction of the current recession that never stopped. The following graph displays the annual payroll income change with the SGS Ongoing M3 Estimate as of February 2010. As before, the M3 plot is shifted forward on the time scale by six months so as to show its leading effect on payrolls. The February real M3 estimate is based on 3.1% annual nominal M3 contraction and 2.2% annual CPI-U, to make a total 5.3% adjusted reduction. The credit contraction and business closures reduce personal and business consumption, a powerful force certain to result in an unexpected slow patch in the USEconomy in the next several months. Payrolls should soon turn down, perhaps down hard. Economists will be caught off guard, because they stink at their profession, having long ago been comprised by corporate directives and political motives.

◄$$$ THE U.S. LABOR FORCE SHRUNK NOTABLY IN THE LAST DECADE. JOBLESS CLAIMS SERVE AS REMINDER OF NO USECONOMIC RECOVERY IN PROGRESS. $$$

The labor force is made up of those with jobs and those without jobs. People not employed, but not searching for employment, are technically not part of the work force in a simple criterion. This includes a great many types of people. Examine the data for the current secular bear that began in 2000 and in all likelihood has not been interrupted through the February 2010 timeframe. Shockingly, an extra 13.5 million people have exited the work force. They have no jobs and are not in search of one. Compare that addition to the 10.9 million growth in the work force itself. Rarely does the official USGovt jobs reporting cite the need to grow jobs in order to keep pace with the growing population. The USEconomy must grow a million jobs per year to sustain its own population increase. See the Anonymous Monetarist article (CLICK HERE).

 

Year 2000

Year 2010

Civilian population

212.58 million

236.00 million

Civilian work force

142.58 million

153.51 million

Total employed

136.89 million

138.64 million

Total unemployed

5.692 million

14.871 million

Percent of population

4.0%

9.7%

Excluded from work force

69.994 million

83.487 million

The trend on state unemployment insurance claims, commonly called jobless claims, continues to prove nettlesome. Their steady high level prove false any assertion that the USEconomy has begun a recovery. The continuing claims hover at 4.60 million, hardly budging downward. The number of claims are consistently well over 400 thousand per week. They have been recorded as 462k on March 5th, another 468k on February 27th, another 496k on Feb 20th, and another 474k on Feb 13th. A financial press news story actually stated that "Jobless claims remain above the 425,000 level that many economists say would signal consistent job creation." Go figure. A certain high level of job loss signals job creation!!! Their minds are warped by lousy economics education and directives from on high, and their internals are altered by corporate cafeterias.

◄$$$ A KEY BUSINESS CYCLE INDEX FOREWARNS OF A RECESSION REDUX. IT COMES FROM THE PHILLY FED AND IS BASED ON A COLLECTION OF ECONOMIC AND STOCK MARKET DATA, INCLUDING HIGH FREQUENCY ELEMENTS. $$$

Miguel Barbosa interviewed James Montier, a leading member of the premier hedge fund GMO, former co-head of Global Strategy at Societe Generale in Paris, and author of several investment books. Montier provided a valuable comment within the interview, which is presented as preface. He said, "Personally I have never really found it that tricky to know where we are in a cycle. There are a lot of indicators that gauge exactly that sort of thing from the ISM to the ECRI measures. The Philly Fed has a good (by which I mean timely) index called the ADS measure which tracks where we are in real time." He refers to the Institute of Supply Mgmt and the Economic Cycle Research Institute. The Aruoba Diebold Scotti business conditions index is designed to track real business conditions at high frequency. Its underlying economic indicators (weekly initial jobless claims, monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales, and quarterly real GDP) blend high and low frequency information with stock and flow data. See the Philly Fed source on the statistics (CLICK HERE). The ADS index has broken down in the last several weeks, signaling a Double Dip recession, or more accurately, a continuation in more clear fashion of the current USEconomic recession that never came to an end. It confirms the money supply warning discussed above.

Some salient points can be sketched from the Barbosa interview of Montier. The guest Montier is a treasure of useful perspective and focused information. He believes the investment community is trapped by irrelevant information, courtesy of the information age, laden with seductive details, but most not useful in valuing companies. Bear in mind all the sentiment indexes and other soft macro economic statistics of totally useless merit. He believes modern risk management is a travesty, a joke, a farce, part of a congame. Most models widely used failed to detect the most basic of asset bubbles like the housing and mortgage bond bubbles in recent years. The models instead helped to choose the best vehicles within the bubble. He criticizes the narrow framing of information, like with pro-forma earnings that intend to obscure the nature of a corporation's financial condition. He describes the Trinity of Risk where impairment of capital is measured (valuation risk, fundamental risk, leverage risk). He elaborate on how knowledge does not equate to behavior. He discusses his ten tenets of investment, and the style of his investment hero Ben Graham. He covers short sellers, the usual scapegoats chosen by authorities. He quotes David Einhorn, who observed, "I am not critical because I am short, rather I am short because I am critical." Such speculators are the smart guys, who will always serve as targets for the syndicate dons at the USDept Treasury.

Montier heaps praise on the short sellers, calling them the most fundamental investors one will come across. He said, "[Short sellers] understand the ins and outs of a business better than just about everyone else. They are highly skilled at figuring out poor economics when they see them. They act as police, helping to uncover fraud, something that the regulators used to do (a very long time ago)... My own work on short selling has focused on a number of areas. In general, shorts tend to come into a few categories: bad businesses (poor economics), bad accounting (obvious), bad management (the guys at the top have no clue). In addition I often look for several traits, such as expensive, unrealistic growth expectations, too much debt, and poor capital discipline (needless and tangential Mergers & Acquisitions)." See the Simoleon Sense article (CLICK HERE).

◄$$$ ECONOMIC GROWTH IN 4Q2009 WAS LARGELY INVENTORY BASED. PRODUCTION PULLBACK WILL KICK THE NATION INTO ANOTHER RECOGNIZED RECESSION. FURTHER REVISIONS WILL BE DOWNWARD. COMPARISON TO A YEAR AGO IS STILL FLAT TO DOWN. $$$

The Shadow Govt Statistics folks do superb work, led by John Williams. The SGS analysis concludes that fully 69% of the 4Q2009 supposed economic climb of 5.9% was due specifically to a surge of growth in non-farm inventories. Few people with functioning brain stems believe the current USEconomy is booming, despite the revised report of annualized growth in the Q4 GDP. Bear in mind that the reported growth by the USEconomy is one quarter of 5.9% for the Q4 period, since they annualize by multiplying by four. This presents ample opportunity to fudge, doctor, gimmick the numbers. Their favorite device is to amplify all technology advances in cockeyed clever fashion. The SGS analysis pointed out that stronger non-farm inventories is not supported by matched strong orders. Manufacturers will surely react to cut back production, and GDP will fall. A renewed quarterly contraction beginning as early as the current 1Q2010 quarter will be viewed popularly as a double-dip recession. The USEconomic downturn still has some time to run. Harken back to the brief 2000 recession, from March to November 2001, which was revised into the ether, out of existence in GDP reporting. It endured much longer and deeper than officially claimed, yet they erased it in Orwellian style. Similarly, the current downturn already is the second phase of a multi-phase depression than began in late 2000. Evidence is rather clear in industrial production and worker payrolls of a prolonged recession from late 2000 through 2004. Those same indicators showed recession activity again in early 2007. Note the hack economist proclamation of a renewed recession started in December 2007, by the subservient crew at the Natl Bureau of Economic Research.

From a formal statistical standpoint, the revised 4Q2009 GDP estimate is amateurish in its inaccurate and pathetically expansive attempt at estimation. The 95% confidence interval is actually 5.93% plus or minus 3.00%, a sure rough cut indeed. They are 95% sure the GDP growth was between 3% and 9%. The Jackass is 99% sure the GDP was negative, since tax receipts of various stripes indicate so. A more accurate perspective of the official kooky GDP numbers takes the 4Q2009 versus 4Q2008 for an annual snapshot of change. That method produces a 0.15% gain, but with charlatan methods of adjustment, which are at least similar in the paired experimental slant. The Q3 change versus 3Q2008 had an annual minus 2.64% change. So with big unwarranted inventory jumps and massive temporary USGovt programs like for car sales and home sales, be sure the recession is still on. The mere 0.15% gain will be revised down into negative territory. It should be stressed at all times that the USEconomy remains grossly dependent upon official stimulus, a series of one-time programs, nationalization loss reimbursement, bank liquidity facilities, stock market inverventions, USTreasury Bond monetizations, and other extraordinary efforts. The merger of very large businesses with the USGovt, otherwise known as the Fascist Business Model, continues in stark extreme fashion. Its 'Too Big To Fail' motto serves as the nameplate on the model. It represents corrosion at the ultimate level, ultimate in this case meaning final. Capitalism has died in the USEconomy in many respects, obviously not totally.

Furthermore, the 4Q2009 GDP conveniently omitted usage of the most recent trade gap figure. The December trade gap of $40.2 billion took most of the USGovt hacks and Wall Street fraud kings by surprise. The surprisingly higher trade gap will push down the 5.9% lofty GDP fantasy figure. The SGS folks cite the Goods component actually aided the GDP estimated calculation, since the services side of the trade data comes as a haphazard guess. Lastly, comparisons against 2009 on growth will contain significant tailwinds to help paint a positive picture. For 2009, inflation adjusted GDP fell by 2.42%, after a nearly flat 2008. The 2009 real decline remained the deepest since the production shutdown in 1946 after the conclusion of World War II. In unadjusted raw terms, the unrevised 2009 GDP decline of 1.27% was the worst since 1938, during the second dip of the Great Depression. The national leaders refuse to acknowledge that we are experiencing another depression.

◄$$$ DURABLE ORDERS SCRAPE BOTTOM, NO NOTABLE RECOVERY, BUT NOT WORSENING. THE CRYSTAL CLEAR INDICATOR OF NON-DEFENSE ORDERS OUTSIDE THE VOLATILE TRANSPORTATION SECTOR FELL DOWN HARD IN JANUARY. YET ANOTHER RECESSION SIGNAL. $$$

The jumpy New Orders for Durable Goods contine to scrape the floor, without sign of recovery. The statistic tracks items in service over three years, like refrigerators, furnaces, ovens, and industrial equipment, plus computers, networking, and communications gear. Nevermind the official USGovt topline figure promulgated by the Census Bureau. Focus instead on the CAPEX figure, the one that excludes military orders and ignores tallies outside the volatile transportation sector. The aircraft orders are enormous single items that distort the picture, and often are for foreign customers anyway. The Detroit carmaker output was also skewed by the Clunker Car program, a vintage initiative in short-sighted popular policy. The Shadow Govt Statistics folks calculate the pure business investment statistic that attracts my attention. Take the non-defense ex-transportation figure, called CAPEX, the business capital investment data point. CAPEX showed a 2.9% strong decline in January, compared to a 3.3% gain in December. This is the first blush of negative business reaction to bloated inventories. The corporate sector does not need new equipment, since the inventory level is overloaded. Notice how the New Orders data follows closely the Payroll data from a previous graphic in this section. That is not a coincidence. Conclude once again that a recovery aint visible.

◄$$$ RISK OF DOUBLE DIP RECESSION LOOMS LARGE. ACTUALLY THE USECONOMIC RECESSION NEVER ENDED. IT IS DEPENDENT FULLY UPON USGOVT PROGRAMS, STIMULUS, EASY MONEY, AND COLOSSAL BANK AID. $$$

US-based manufacturers continue to struggle with the economic slump. A substantial risk the USEconomy could face a double-dip recession, so believes a man who should know. Michael Psaros, partner of KPS Capital Partners, is a private equity investor who specializes in the revival of struggling industrial companies. Psaros is a turn-around specialist. He said, "I think there is a very real possibility of a double dip [recession] out there. Washington cannot continue to spend money like it has. When that stimulus stops, I do not think there is sufficient private market consumer demand to run with. In June 2009 we hit bottom, and since that time the industrial manufacturing economy has continued to remain at the June 2009 levels. Until this country puts 25 million Americans back to work, we are in a recession." Psaros stated that despite the financial markets performance, a 'disconnect' exists between the market and events on the ground at US manufacturers. The effects of a deep recession are still being felt after almost two years. Psaros assessed the risk of a double-dip recession at greater than 50%. His reasoning was based on the fact that many companies were only patching up their problems by extracting agreements from lenders and bondholders to cut or delay debt, without any serious restructure to their companies. In his words, Psaros expects a 'crescendo' of business failures to occur over the next few years. Lenders will eventually come to an end for such temporary patchwork of agreements. See the CNBC article (CLICK HERE).

The latest reported US trade deficit narrowed noticeably in January. However, few analysts or press pundits recognize the news as evidence that the USEconomy has gone deeper into recession. The narrowed trade gap reflects a big drop in imports of oil and foreign cars. These two items are mainstays in all commercial activity. American exports also fell, a tell-tale signal that foreign economies are also approaching recession. Lower exports dampen hopes that any domestic economic recovery will be assisted by sales abroad from US firms. The Commerce Dept announced that the trade deficit declined to $37.3 billion in January, a drop of 6.6% from a revised December deficit of $39.9 billion. US exports fell 0.3%, led by weaker sales of an array of products from civilian aircraft and machinery to agricultural products. But imports dropped by a larger 1.7% as domestic demand faltered. See the Yahoo Finance article (CLICK HERE). The structural imbalance fact of life for the United States is that any recovery would show big gains in imports, and much larger trade deficits. Recall that no structural reform has taken place.

◄$$$ BANKRUPTCIES CONTINUE TO MOUNT. THEIR PACE SLOWED LAST YEAR, BUT HAVE PICKED UP SPEED IN RECENT MONTHS. RECOVERIES DO NOT FEATURE AN INCREASE IN BANKRUPTCIES. $$$

The claimed USEconomic recovery is shatterd to the continued consumer bankruptcy filings, which surged 14% in February compared with a year earlier, according to the American Bankruptcy Institute. The 111,693 cases filed in February consist of 9% more than January. Approved Chapter 7 bankruptcy allows a court to discharge most unsecured consumer debt, including credit card bills. A more strict bankruptcy law took effect in 2005. The goal was to lead more families to rely on Chapter 13 bankruptcy, a process that requires people with regular income to restructure debts and often make significant repayment over a more relaxed schedule of time. The number of Chapter 13 filings decreased 3% last month from January. People generally file for Chapter 13 to try to save a home. Interpret the change as indicative that people surrendered the hope of saving their homes. Tighter credit has pushed households to the cliff's edge. Business bankruptcy filings are also on the rise. In February, there were 6557 business filings, compared with 6390 a year earlier, according to Automated Access to Court Electronic Records. Business bankruptcies represent fewer than 10% of total filings. Last year, there were 1.47 million bankruptcy filings in total, up 32% from 2008. Chapter 7 filings increased 41% in 2009, while Chapter 13 filings increased only 12%. The bankruptcy rate has risen each year since the law was changed in 2005. The head of the American Bankruptcy Institute points out that the nation is on a faster pace for BK filings in 2010 than a year ago. They anticipate consumer filings will exceed 1.5 million filings in 2010. See the USA Today article (CLICK HERE). These aint part of a recovery.

◄$$$ CREDIT CARD DEBT HAS FALLEN, BUT MAINLY DUE TO DUMPING BY HOUSEHOLDS. THEY ARE NOT PAYING THE REVOLVING DEBT DOWN. BANKS ARE BESET BY THE LOSSES. HOUSEHOLDS ARE WEAKER PARTICIPANTS IN THE USECONOMY. REPORTS OF STRONGER SAVINGS ARE NONSENSE. $$$

Households are dumping revolving debt in a big way, seen as steep drops on credit card balances. They are forcing financial firms to take charges off bad debt. Credit card debt has been falling for 16 straight months. Consumers are walking away from the debt, forcing credit card issuers to write off as much as 90% of that reported drop, according to a new report by CardHub.com. US banks took a record $83.3 billion in credit card losses last year. Compare to the $93.2 billion drop in outstanding credit card debt, down to $876 billion, reported by the USFed for 2009. For the first time in 30 years, the volume of card loans finished the year lower than they started. The Capital One charge-off rate in January climbed to 10.41%, above the December 10.14% level. Take a broader look. The overall credit card charge-offs measured by Moodys Credit Card Index shot up to 11.15% in January, compared with 10.32% in December. Moodys expects charge-offs to peak at close to 12% over the next several months. However, some good news comes with the slower rate of late payments, 30 days past due. The giant Bank of America reported that 7.35% of accounts were past due in January, the lowest level in a year. It should be noted that in the process, many households have been wounded, as they have become less capable economic participants. As consumers, they have less plastic power in their wallets. Instead of the sign of financial health from paying down debt, people remain strapped for cash. They have taken desperate measures. See the Market Watch article (CLICK HERE).

THE INFORMATIVE TAX ANGLE

◄$$$ USGOVT TAX REVENUES ARE STILL BADLY DEPRESSED. THE EVIDENCE OF ECONOMIC DETERIORATION CONTINUES IN LOUD STARK FASHION. PERSONAL TAX RECEIPTS HAVE FALLEN 11% SINCE THE RECESSION BEGAN. CORPORATE TAX RECEIPTS HAVE VANISHED. BORROWING COSTS CANNOT REMAIN LOW FOR MUCH LONGER. $$$

The February 2010 federal income tax withholdings have plunged to a multi-year low. The claim of an economic recovery is absurd. Tax revenues cannot be massaged. That is why they, like the sales tax revenues, are presented here as evidence of a powerful USEconomic recession still in force. The new release of the Daily Treasury Statement for the full month of February showed personal tax withholdings fell to a multi-year low of $30.7 billion. Combined, the personal and corporate totals posted a multi-year low of $34 billion, less than the previous recent low from February 2009. January 2010 is also below January 2009. December 2009 is below December 2008. Folks, that aint a recovery!

On a rolling twelve month basis, the USGovt must fill a hole of about $250 billion in annual tax withholdings that has vanished, the magnitude of the recent decline. The annual individual tax withholdings have dropped to a record low of $1.275 trillion, compared to the rolling $1.43 trillion level as of September 2008. If the USGovt cannot restart the tax stream of income to historical levels before the borrowing costs on the $7.9 tillion in marketable debt begins to climb toward $10 trillion in the next year, big problems will arise. Already, the short-term USTreasury Bill yields are rising. Most debt defaults occur from failure to fund short-term debt. See the Zero Hedge article (CLICK HERE).

◄$$$ USECONOMY STILL IN HARSH RECESSION, AS SALES TAX REVEAL THE ACTUAL CONDITIONS. WITH THIS ANGLE, DISTORTIONS ARE NOT POSSIBLE. RETAIL STORES ARE CLOSING BROADLY, WHICH LIFTS GROWTH DATA AT THE LOCAL STORE LEVEL AMONG SURVIVORS, A CONVENIENTLY CITED DISTORTION. $$$

So many easy methods exist to distort statistics. Lying is easy, but unmasking the lies is also easy, when common sense and basic arithmetic is at the ready. My role is to remove the distortions. Just as tax revenues from federal income tax withholdings best reveal both employment and income at an aggregate national level, the state sales tax receipts reveal commercial activity at the ground level in aggregate. Even a delivery of industrial equipment pays sales tax, just like a corporate purchase of computer & network equipment. Sales tax also derives from retail sales, upon which the USEconomy is still 70% dependent, a chronic structural defect. The nation continues to be gauged by a wrong measure of health, in consumption rather than investment. The way to produce jobs is to build businesses and to invest in equipment, offering workers income, not to ensure that people have sufficient phony money stuffed temporarily into their wallets by lunatic USGovt programs and policies.

A rash of store closings is broad. Consider the retail chains that shut down last year, a long list. The 31 retailers to file for bankruptcy in 2009 (with dates) up through November include Penn Traffic: Nov 18, Hackett's Department Store: Nov 10, InkStop: Oct 1, Sacino & Sons: Sept 11, Samsonite: Sept 2, Escada: Aug 13, Finlay: Aug 5, Bashas: July 12, Crabtree & Evelyn: July 1, Best & Co: June 26, Eddie Bauer: June 17, Arcandor: June 9, Oilily: May 28, Anchor Blue: May 28, Door Store: May 27, Filene's Basement: May 4, Bi-Lo: April 19, Z Gallerie: April 10, Ultra Jewelry: April 9, Big 10 Tires: April 2, Zounds Hearing Aid Centers: March 30, Al Baskin Co: March 23, Drug Fair: March 18, Strasburg-Jarvis: March 11, Joe's Sports & Outdoor Stores: March 4, Everything but Water: Feb 25, Ritz Camera: Feb 22, S&K Famous Brand: Feb 9, Fortunoff: Feb 5, Bruno's Supermarkets: Feb 5, and Gottschalks: Jan 14. Many are recognized names. See the Retail Info System news article (CLICK HERE). These aint signs of recovery.

The broad shutdowns enable a convenient distortion by gatherers of national statistics, the USGovt. In 4Q2009, a total of 8500 stores had gone bust, as retail shop vacancies reached a 17-year high. When a national retail chain shuts down failed and under-performing stores, loyal customers chasing the brand name will shift their purchases to the remaining stores in the same chain. Other factors force shutdowns, like inability to work out continuing lease conditions, challenges to secure labor, road route changes, and more. Former competitor stores become the available survivor stores to gather sales. Store closures tend to push up sales comparisons, the growth in sales from one year to the next. The statistic is called 'comps' in the trade, short for comparable sales. So sales comps are a very bad way of analyzing retail sales trends nationally, since they use distorted trends at the local level on a changed retail base. The surviving stores do well, but their performance can in no way be used to project nationally since closures must be factored in. Therefore, this report will not even bother to quote sales comps within certain national chains. Another distortion has been relied upon, that of comparing the typically amplified December holiday sales with November levels, and projecting forward. Put distortions aside. Turn instead to the clear argument in retail sales.

The last half of year 2009 still shows declines in the 10% range for sales tax for certain states, hardly the type of evidence to demonstrate any recovery whatsoever. That is the story told state by state. Four months into a new fiscal year that started in September, the state of Texas already has fallen nearly $1 billion behind its expected pace of sales tax collections. The Comptroller made empty baseless typical claims of anticipated gains in the second quarter of the year. The decline is dramatic. Sales tax receipts have decreased by 12.9% in the first four months in Texas. In other states like California, the sales tax rate was increased by 1%, thus yet another distortion on a clean type of statistic. A report on the sales tax collection for all counties in New York state in 2009 provided more evidence that the economy is struggling. The State Comptroller Thomas DiNapoli compares 2009 to 2008 collections, and found a 5.9% decrease in collections statewide. The report stated "Unlike other recent downturns, 2009 was the first time in recent history that there was actually a decline in county sales tax revenue, a sign of the severity of the recent recession. The sales tax decline in 2009 was one of the worst on record." The report did not offer much optimism, stating that tax collections are largely driven by personal income and employment. The state of Georgia is another laggard. Georgia sales tax revenue collections declined 8.7% in January versus the same month a year ago. That makes 14 straight months of declining tax revenue. Taxes collected by the state of Alabama are down hard. Their Education Trust Fund dropped 17.5% compared to January 2009, according to the state finance department. In November, not a single US State registered any growth in sales tax revenue over the year. See the continuing excellent weblog by Mike Shedlock (CLICK HERE). These declines aint part of a recovery.

State & local governments are under extreme duress. They account for 13% of gross domestic product for the United States. They have combined to eliminate a total of 192,000 jobs since August 2008. More worker cutbacks are still coming ahead, as a decline in property values erodes their tax base for revenue. All but one of fifty states are legally bound to balance their budgets. John Herrmann from State Street Global Markets forecasts that more than 750,000 state & local jobs could be cut in the next two or three years. In February alone, state & local govts reduced 25 thousand jobs, while the USGovt added 7000, according to the USDept Labor. Remove the 15 thousand temporary workers to conduct the 2010 census, and the federal net would have been negative. See the Bloomberg article (CLICK HERE). The nation's cities are under extreme financial pressures also. Countless stories can be told, but this one stands out. Kansas City Missouri plans to shut down the schools in 29 of its 61 districts before autumn in order to stave off bankruptcy. See the DeGroot Insights weblog (CLICK HERE).

REAL ESTATE STUCK IN THE TOILET

◄$$$ DELINQUENCIES FOR COMMERCIAL MORTGAGES ADVANCE RELENTLESSLY INTO RECORD TERRITORY, THE NEXT GRAND PIT FOR BIG BANKS. THIS SECTOR WILL KILL MORE BANKS. THE GROWTH OF FORECLOSURES HAS BEGUN TO SLOW, MAYBE JUST A REFLECTION OF WINTER STORMS, BUT STILL A RISE. $$$

Commercial Mortgage Bond Security (CMBS) delinquencies hit a new record high level. The Realpoint Research Monthly Delinquency Report for January cited the delinquent unpaid balance for CMBS increased by $4.3 billion to $45.94 billion in a single month. Compared to a year ago, the overall delinquent unpaid balance is up 326% when only $10.79 billion of delinquent unpaid balance was reported for January 2009. This is an astonishing growth in wrecked CMBS loans, fully 20 times the low point of $2.21 billion in March 2007. All categories saw similar upward trajectories for foreclosures, delinquencies, and bank owned properties. The Real Estate Owned (REO) grew for banks in aggregate for the 25th consecutive month, up by 28% to $7.42 billion from the previous month!! The REO category has grown by 508% to $27.95 billion in the past year, up from only $5.51 billion in January 2009. All portfolio items (loans & bonds) of at least a year since origin have a 5.82% delinquency rate, a big jump from only 3.15% six months ago.

Realpoint Research forecasts delinquencies will hit 8.6% by June 2010 for the commercial space. They conclude, saying "Balloon default risk is growing rapidly from highly seasoned CMBS transactions as loans are unable to payoff as scheduled." A balloon loan is a loan that matures in a short period of time, like 3 to 5 years, with a refinance of the loan required at that time, along with any delayed principal repayment and interest. Seasoned means old in time since origin. More details are provided in their report. Check the Global Economic Trend Analysis article (CLICK HERE). It includes finer detail on individual states.

February foreclosure filings in the US rose 6% from a year ago but fell 2% from January 2010, RealtyTrac reported. The total, default notices, scheduled auctions, and bank repossessions, touched more than 308,500 properties in February. The ratio stands at 1 in 418 US homes. The rise from February 2009 was the smallest annual increase since January 2006, but it still marked the 50th consecutive month in foreclosure activity versus the previous year. Optimism might be misplaced, since strong winter storm activity interfered with the process. See the Market Watch article (CLICK HERE).

◄$$$ THE EXISTING HOUSE SALES DECLINE HAS RESUMED. STIMULUS IS LOSING ITS ZING, SOON TO END. THE HOUSING MARKET WILL REFLECT THE LACK OF OFFICIAL PROPS. THE MEDIA CALLED IT UNEXPECTED, ALONG WITH ALL THE OTHER VERY PREDICTABLE BAD ECONOMIC NEWS, SINCE THEY BELIEVE THE HYPE, OR ARE HIRED TO PROMOTE THE HYPE. $$$

Sales of existing US homes dropped 7.2% in January, to the lowest level in seven months, according to the National Assn of Realtors. The USEconomy is not responding to the banker welfare, cockeyed programs, and continued negligence, mixed with bad economic planning processes. Nowhere has the corps of economic analysts and counselors pushed for economic development, business investment, return of industry to American shores, tax incentives, hiring incentives, and more. Remedy consists largely of handouts and subsidies. The January decline in existing home sales to an annual pace of 5.05 million was the second largest on record after the 16.2% plunge in December. Note the contradiction in the official data, and the omission. The number of unsold existing homes on the market decreased 0.5% to 3.27 million. Sales fell, but inventory fell also! That only happens when homes are taken off the market, from discouraged sellers like people and bankers. This dual occurrence has been common in recent months. The banks are hoarding huge inventories, and choking on them. New home sales, which compete with discounted foreclosure deals, declined in tandem during January to the lowest level on record. New home sales account for less than 6% of the market. A federal tax credit for home buyers is losing its zing, its steam, its impact, as it comes to its closing stages. The suckers have come and have apparently been exhausted. They will regret their purchases in the next year. The tax credit incentive led to a phony surge in November to the highest level since 2007.

The financial community drinks too much laced Kool-Aid. They show surprise at the weak economic data. Not here, since the Jackass does not buy into propaganda, preferring to rely upon solid analysis. The hack compromised economists will deny the Double Dip recession until it is obvious. Former Fed Governor Frederic Mishkin is typical of the nonsense spin. Now an Economics professor at Columbia University, he serves as teacher of standard fractional bank theory and fiat currency management amidst various heresy. Mishkin believes the enormous slack of unused capacity will prompt the USFed to keep interest rates low for an extended period. These are words of weakness in economic counselor spirit, if not failure. He said, "They are pointing toward a slow expansion. We are not going to get through that slack in the near term. Monetary policy needs to be accommodative." The end of the USFed program to purchase $1.25 trillion in mortgage backed securities will create a fierce headwind of resistance. It is scheduled to expire at the end of March. A story is being told based in fantasy, that when mortgage bonds are no longer purchased in official programs, a lot of liquidity that has been put in place will sustain the mortgage finance industry from sheer momentum. This is expected to support lower mortgage rates. Such forecasts are lunatic and not based in reality, wishful thinking gone amok, and talking a desperate book. See the Bloomberg article (CLICK HERE).

Clearly the tax credit has pulled forward a signicant amount of home sales. It has exhausted its effect. Furthermore, the FDIC is experimenting with a new scheme. They are forcing lower loan balances, the so-called CramDown, but only for qualifying borrowers from certain banks, on loans that are seriously underwater but current on their payments. The experimental program is to affect less than 1% of underwater home loans. Warren Buffett anticipates the housing slump will end by 2011. A reasonable thinking man might conclude that when low prices, low interest rates, and a tax credit cannot stimulate housing sales, only further declines in home sales and home prices can result when any or all such factors are removed. This is NOT complicated.

◄$$$ U.S. HOUSING MARKET RESUMES ITS PRICE DECLINE, AFTER THE PROP SUPPORTS SLOWLY MOVE AWAY. A BIG TEST COMES WHEN MONETARY AID TO THE HOUSING MARKET STOPS. $$$

Reggie Middleton is a fine detailed analyst, covering a multitude of financial markets. He provides another comprehensive analysis of the residential property market. Middleton has concluded that with the official USGovt purchase programs coming to a conclusion, such as with tax credits, the housing market price decline is back on track on the downslope. Quantitative Easing (QE), the rampant printing of money to cover debt, is also planned to come to an end. The props are being lifted, and the leaders are likely to become frightened quickly by the resumed trend. He expects significant sudden fresh damage to the USEconomy. Middleton wrote, "It is official. The US housing downturn has resumed in earnest. The year 2009 was the year of reflation theories and bubble blowing. Theses of Green Shoots, catching the bottom, and QE reigning supreme were the order of the day. Sure enough, asset prices (nearly all of them) went one direction, straight up. We all saw it coming, but guys like me who actually count the money and rely on the fundamentals did not believe it was a sustainable gain. It was not a bull market, but a bear market rally. After nearly one year, the reflationists have had their hay day, or have they? One thing that I have been proven correct on thus far is the housing market. Despite what was probably at least a trillion dollars of effort directed at suspending real estate and real estate related assets, prices are resuming their downward slide after falling 28% nationwide, peak to trough, and over 50% in some areas. It was the sharp downturn in housing prices that started the entire domino effect. Much of this country's financial infrastructure is still heavily levered into residential (and to a lesser extent, commercial) real estate. Any further downturn will, without a doubt, wreak additional havoc on the economy."

◄$$$ ONE QUARTER OF ALL U.S. HOME MORTGAGES ARE UNDERWATER, INSOLVENT, AS OF THE END OF CALENDAR YEAR 2009. PLENTY MORE FORECLOSURES TO COME, NO END IN SIGHT. THE UNSOLD OVERHANG OF HOMES HELD BY BANKS ASSURES TWO YEARS MORE OF PRICE DECLINES, AND CONTINUED HOUSEHOLD INSOLVENCY. BRITISH CITIZENS ARE IN A SIMILAR HOUSEHOLD STRAITJACKET, WITH HUGE RISK OF FORECLOSURES CONTINUING IN A POWERFUL MANNER. $$$

The story is never ending, a nightmare, one where analysts can repeatedly use the same headlines in their coverage. Almost 25% of all mortgage borrowers were underwater, meaning the loans exceed the value of their homes. First American reported that 11.3 million homeowners were underwater as of the end of 2009, an amount equal to 24% of all homes with mortgages. The figure they cited at the end of September was 23%, from 10.7 million borrowers. The reporting of this insolvent home statistic is not reliable, since a 21.4% figure was offered just a month ago. Nevada was the state with the worst insolvent rate at 70% of all mortgaged properties, a distinction they steadily maintain. They are followed by Arizona (51%), Florida (48%), Michigan (39%), and California (35%). Chief economist Mark Fleming at First American CoreLogic said, "Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners." Better described, it creates Zombies.

American homeowners are stuck in the same quagmire as the big banks, with debts greater than assets, unable to participate in the economy. Households cannot spend and invest properly, and neither can big banks lend and invest properly. The condition of being underwater has been one of two contributing factors toward foreclosure, the other being lost income from unemployment. An increasingly important exception, the strategic default, has been cited in these reports before. As equity goes deeper negative, some homeowners decide to quit paying and hand the home keys to the bank. The tide of home foreclosures will continue to plague many real estate markets around the nation, forced and voluntary. See the CNN Money article (CLICK HERE). One must keep an eye on the Cram-Down potential on home loans. So far, banks have resisted to lower home loan balances to any substantive degree. They must protect the mortgage bonds that reek of the stench of fraud, duplicate titles, missing titles, and outright bond counterfeit. The courts so far have been obedient to the Wall Street masters, refusing to force by court order loan balance reductions. The law cannot dictate a bank to reduce a loan. Yet the law is not prosecuting the bond fraud in the hundreds of billion$ either. The mortgage finance and housing markets are frozen solid, while the big banks choke on an enormous supply of unsold homes held on bank balance sheets.

Millions of British families are also at grave risk from sudden interest rate rises or falls in property prices, so warns Britain's financial regulator. The scenario plays out if the economic current UK Economic recession intensifies. First in line for foreclosure risk are revolving credit abusers and heavy borrowers who climbed onto the property ladder, a reflection of high debt levels. The Financial Services Authority through its chairman Lord Adair Turner admitted, "This recession is really quite different than the early 1990s" when he offered a bleak analysis. Over one million desperate borrowers have applied for credit cards with interest rates as high as 60%, a sign of a tidal change. Also, housing prices have resumed their decline, just like in the United States. Halifax and Nationwide both reported a decline in home prices for the first time in more than a year. The ultra-low base interest rate set by the Bank of England has resulted in £20 billion savings on home mortgage repayments, nothing but loaves of bread tossed to the lifeboats. The Council of Mortgage Lenders show the number of repossessions soared to a 14-year high in 2009. Over 46,000 people lost their homes throughout the year, an increase on 15% from a year ago. Bank repossessions are expected to last for several years. See the UK Daily Mail article (CLICK HERE).

◄$$$ REAL ESTATE CONSTRUCTION & DEVELOPERS MIGHT BE DRAGGED DOWN BY UNCONVENTIONAL CREDIT. A NOTABLE BUILDER HAS GONE BANKRUPT, WITH AN OVERSIZED AMOUNT OF C.D.O. STRUCTURED DEBT. $$$

This case is worth noting, as to whether is is typical or uncommon. In focus is Orleans Builders, based in Eastern Pennsylvania. The home builder, with operations in eight states in mid-level homes, filed for Chapter 11 bankruptcy protection. In 2006, Orleans was ranked #42 by Builder magazine, with just over 2000 closed sales. They list $440 million in assets against liabilities of $498.8 million. The intrigue centers upon the $93 million owed to Collateralized Debt Obligations (CDOs). They are leveraged mortgage bonds, an acidic Wall Street concoction that resulted in rapid evaporation of valued assets. Orleans plans to continue operations when in bankruptcy, but must find a buyer. Some analysts wonder if banks have exhausted their patience in extending credit to builders, and force them into bankruptcy. Denial might have yielded to acceptance in a group mental process. Reality could be striking. If so, prepare for more implosions in the near future like a wave of failures of the financial bankruptcy type, where operations could continue. The CDO angle is worth further investigation, since low quality builder debt might be scattered throughout the opaque CDOs. They usually are not cited on the balance sheet, and tend to be totally worthless asssets. If Orleans Builders had 20% of all debt tied up in the acidic CDO bonds, many other builders in the property industry might have put in place pipelines leading to acid pits. See the Home Builder Implode article (CLICK HERE).

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