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

* Gold Report Snap Previews
* Miscellaneous Morsels
* Monetization & Absent Exit Strategy
* Bank Chaos Grows
* Contradiction of Economic Propaganda
* Grand Threats of Job Loss
* Hidden Housing Foreclosure Inventory


HAT TRICK LETTER
Issue #67
Jim Willie CB, 
“the Golden Jackass”
11 October 2009

GOLD REPORT SNAP PREVIEWS

The Saudis, with Russians, Chinese, and Japanese at their sides, announced the eventual end of the Petro-Dollar. Germans were involved, but remained in the shadows of control. Sales of Persian Gulf crude oil will be consummated no longer in USDollars after a certain date. Payment for oil will be made in the IMF basket currency. The USDollar must stand on its own merit, meaning at Third World levels. Implications to the USEconomy are enormous, as the cost structure will rise markedly. Implications to the banks worldwide are enormous, as they will no longer need to hold vast sums of USTreasury Bonds. Implications geopolitically are enormous, as the United States will step back from the front of the global stage of control, respect, and prestige. Clearly the Saudis reached a military protection accord with Russia. The new global cops are soon to be the Russians and Chinese, starting with the Persian Gulf. For your review, note the following articles by Fisk, a highly respected journalist who is fluent in Arabic.

See the UK Independent article entitled "A Financial Revolution with Profound Political Implications" (CLICK HERE) by Robert Fisk, dated October 7.

See the UK Independent followup article entitled "Demise of the Dollar" (CLICK HERE) by Robert Fisk, dated October 6.

See the analytic treatment of the blockbuster topic, entitled "Death of Petro-Dollar, Told Ya So" (CLICK HERE) by the Jackass, dated October 8. Several mega-forecasts have come to pass, this the latest. The USDollar deathbed is being built, and its funeral planned. In its wake comes the Third World.

Max Keiser comments on the Fisk articles, an end to a free pass to the US to abuse its credit facility, an end to the US$ global reserve currency, and an end to US$-financed militarism. Foreign USTreasury creditors wish to pursue a different path. The IMF basket will fill the void for some time, until gold-backed currencies arrive. The timetable will be just a couple years, not 2018 as Fisk cites. See the video clip (CLICK HERE).

See the review treatment of the devastating leveraged vehicle, entitled "New Deadly Dollar Carry Trade" (CLICK HERE) by the Jackass, dated September 23. The shameful 0% interest rate is funding a carry trade to invest in non-US$ assets. Implications will be the destruction of the USDollar and the end of its global reserve currency status. This carry trade will send the gold price beyond $2000 and the silver price beyond $50.

The Jackass makes his first appearance with Max Keiser to explain the Dollar Carry Trade, the illicit nature of COMEX gold operations, the falsity of USGovt economic statistics, and the requirement of military backing for any currency. See the video clip (CLICK HERE).

A surge in the gold price cometh, perhaps imminently. In the next several weeks, the gold price might jump quickly to the $1500 level. A contact with excellent access to gold transaction information and developments has shared that the sharp price rise could come very soon "due to certain transactions that are being consummated at this very moment. Even if the Boyz try to hold own or depress the price, it will do them no good. The pressure that has been built up is uncontrollable. We shall see some big banks hit the wall very soon (weeks/months). The market will take over in very short order from here on forward." A phase has begun to remove illicit corrupt controls on the gold & silver market, from demand of physical bullion.


The same source told a story about events at the London Bullion Market Assn. That market is to London what the COMEX is to the United States, both deep in corruption and government interference, where grossly inadequate metal inventory exists to maintain their charades of markets, each dominated by paper pricing. They manage paper markets for syndicates in total illegal operations. Several large gold futures contract holders are demanding physical delivery in London.
The LBMA does not have the metal in inventory. The officials have offered the futures contract holders cash plus 25% dividend for settlement without gold delivery. The contract holders refused. They want their fuchn gold (using a French term by the source, my unique palatable spelling)!!! There was very high volume involved in the contracts. The standoff is not settled. It could go to court. The London authorities are trying desperately to keep the story from hitting the press. It helps to have the syndicate in control of the press networks. The Bank of England and one other European member central bank are working feverishly to fill the contract order, but unfortunately they are using very old gold bars that are reportedly only 90% gold. That invites a new potential challenge.

The gold market could soon explode and possibly work toward a convergent fair market. My hint is that it is Germans and Swiss with other Europeans are working diligently and pointedly to kill off the US-UK bank nazis. A LBMA and COMEX bust and default is visible on the horizon. See the Jackass article entitled "Hitman Contracts to Bust Comex" (CLICK HERE) dated in May 27. It would include big bank ruin and legal prosecution. The same source hinted that the ruin of commodity exchanges could coincide with the bust of JPMorgan. So, based upon the London incident, gold has a real price of near $1300.

◄The USDollar is dead, the G-20 Meeting concluded. The larger group of bank & finance ministers appears to have displaced the G-8 Meeting, as the US-UK domination faces a sunset. The basket of currencies used by the Intl Monetary Fund its is expected to take a central role in global transactions like for crude oil. Time will tell whether IMF bonds are floated or IMF central bank functions arise.

◄ C.I.A. documents confirm a gold price suppression strategy. This confirms the entire mission for the Gold Anti-Trust Action committee claims and reason for being. The wheels of the USDollar and USTreasury wagons are beginning to come off. If you smell a USTreasury Bond default on the horizon, then we are on the same trail.

MISCELLANEOUS MORSELS

$$$ WHAT THE HECK! TOO PRECIOUS & CUTE! A NEW ZEALAND TODDLER DANCES TO BEYONCE MUSIC $$$. Sorry, but could not resist. Cory dances to a song named "Single Ladies" and shows some style. See the MSNBC video clip (CLICK HERE).

$$$ REPO MAN VISITS AN ILLINOIS POLICE DEPT. $$$ Collapsing state and municipal revenues have led banks to repossess police cars.The situation turned so bad this month that the bank repossessed five of his seven cruisers in Cairo Illinois. Four of them sit in the bank parking lot, after clipped of their emergency lights, antennas, and seals. In addition to losing cruisers, the sheriff lost 75% of his staff, most of them deputies, to budget cuts. At its peak, the staff had 29 full and part timers. The staff is down to five. Sheriff David Barkett promised to protect the people and to continue with a struggle. See the CBS News story (CLICK HERE). The possibly universal breakdown in state and local government will contribute eventually to panic, slowly at first. As the public sees law enforcement as a victim in the funding morass, the chaos grows, riots begin, and looting goes unfettered. Conditions will call for martial law in time.

$$$ LAS VEGAS UNDERGROUND HOMELESS RESIDE IN STORM DRAINS. $$$ It better not rain! People are living in drains below Las Vegas. Beneath the glitz of the casinos, hotels, and non-stop entertainment is squalor, desperation, but innovation. One couple is are part of a secret community living in the dark and dirty underground flood tunnels below the famous strip. See the Sun article (CLICK HERE). These folks in Vegas are the lucky ones, but they must hope for no rain. Others less fortunate are the tent city residents like in Ontario California. As conditions worsen, look for tent denizens possibly to launch raids on suburban homes to steal whatever is available during the daytime hours. In time, attacks of the tent cities might come, and things will turn ugly. The FEMA Camps will enter the discussion, as an option for an emergency location to house unruly homeless.

$$$ THE UNITED STATES RELINQUISHES SOME CONTROL OF THE INTERNET. $$$ After years of complaints about American dominance of the internet and growing rumblings worldwide, the USGovt promises to relinquish some control over the way the network is run and share more of that control with foreign governments. Icann is the official body that ultimately controls the development of the internet, due to its oversight of web addresses (such as x.com, x.net, and x.org suffixes). The group announced an end to its agreement with the USGovt. Icann chief Rod Beckstrom is a former Silicon Valley entrepreneur and Washington insider who this summer took the head post at the organization. He reports legitimate concerns that some countries were developing alternative internets as a way of routing around American control. The new agreement go into effect immediately. Many rules put in place since 1998 have expired. The long term future of the internet is ensured, by way of a shift of power away from the United States. See the UK Guardian article (CLICK HERE) or the Axis of Logic article (CLICK HERE). This story highlights the slip in US control, hampering any future attempt by the USGovt to limit internet access. Bogus stories about breached systemic security are sure to come, since the internet is the primary foundation in truthful reporting, despite its share of goofy stories. The available foreign routes might grow like a handy mushroom, in response to USGovt attempts to censor.

$$$ TRUTH IS ENEMY OF THE STATE, KEPT PRISONER TO CREATE A SOCIETY OF SHEEPLES. $$$ Wall Street bond fraud, confiscation of USCongress funds, challenges ot the US Federal Reserve, and rampant dishonesty of the existing financial system inside the United States are almost never adequately covered on the managed news media networks. My personal opinion will be kept close to my vest, as part of the personal threats received. The Wall Street syndicate steals because members can. It is not reported properly because the syndicate is entrenched. See the OfTwoMinds article (CLICK HERE). If you believe that US interests controls its own media networks, you are indescribably naïve. An upheaval in the news media networks is well along, with financial solvency and cash flow the major challenges to their mainstream businesses. Internet advertisement is damaging the news networks. The public is fast losing credibility in major networks. A breakdown in control of official propaganda stories across the full spectrum is possibly in progress.

$$$ STUPIDITY OF HERD IS SHOWN AS IT FLOCKS TO MUNI BONDS. $$$ The municipal bond yields plummet to a 42-Year low as new issuance slows. But the size of such funds is growing, despite the heightened risks associated with municipal and city finances. They are crippled financially. Just like hefty mortgage bond yields attracted those clueless fund managers and individuals, now muni bonds are the lead vehicles going over the cliff. The sheeple are buying exactly what they should not be buying, having learned little. See the Bloomberg article (CLICK HERE).

$$$ HUGE DEMAND FOR SOCIAL SECURITY EARLY BENEFITS. $$$ The Social Security Admin reports that early applications have doubled because of the recession, up almost 50% from the norm this year. Analysts attribute the demand to the recession. Agency statistics show that 2.57 million people requested benefits, up from the 2.10 million applications received during the previous 12 months. The increase by 465 thousand makes for a rate 47% higher than the expected rise. This substantial increase in new Social Security applicants further exacerbates the financial problems of the USGovt. See the Bloomberg article (CLICK HERE). People have begun to grab whatever they can from a bankrupted Social Security system, while income sources have been damaged. This is clear evidence.

$$$ AN OVERSEAS COMMODITY INDEX GROUP CONSIDERS CUTTING OUT U.S. MARKETS, IN RESPONSE TO CORRUPT INFLUENCE. ISOLATION IS BEGINNING. $$$ Investors are seeking a new benchmark for commodities that excludes prices from US markets in response to a regulatory clampdown in WashingtonDC. The company behind the world's largest commodity index is working on such a benchmark, in a move that could threaten trading volumes on commodities exchanges in New York and Chicago. Way too many clear examples of heavy strong-arm influence have come from Wall Street firms with USGovt blessing, such as attacks on hedge funds and USGovt release of Strategic Oil Reserves, even USMilitary oil and diesel supply in past years. See the Financial Times article (CLICK HERE). Notice the stated excuse of regulatory clampdown but not corruption, a political sidestep. The days of dominant US-UK financial pricing systems might be coming to an end very soon. Gold will respond.

$$$ IRAN TURNS TO EUROS IN OIL PAYMENTS, JUST LIKE SADDAM DID IN IRAQ BEFORE HE WAS ATTACKED. A SIMILAR MOTIVE ARISES, IN ADDITION TO IRAN BEING A SOPHISTICATED COUNTERFEITER OF USDOLLARS AND MERCHANT OF ITS OUTPUT. $$$ Iranian President Ahmadinejad (a.k.a. Mr Dinner Jacket) has ordered the replacement of the USDollar by the Euro in all its foreign exchange accounts. The September 12th edict was issued after consultation with the trustees of their foreign reserves, according to the Mehr News Agency. Earlier, the Islamic Republic of Iran had announced that the Euro would replace the USDollar in all its national oil transactions. Iran has called on other OPEC members to abandon the sinking USDollar in favor of the more credible Euro. See the Daily Market article (CLICK HERE). One can draw a timeline from how long it took for Saddam to sell his oil in Euros before Iraq was bombed, attacked, and occupied. It was about nine months. By that measure, Iran has until April or May of 2010. Iraq was attacked in March of 2003. Count on it being sooner, but this time China and Russia are in the theater, watching, motivated, angry, and loaded.

MONETIZATION & ABSENT EXIT STRATEGY

$$$ FALLING ASSET PRICES, MAMMOTH MONEY CREATION, AND STALLED CREDIT ENGINES ALL ADD UP TO FINANCIAL SECTOR BREAKDOWN. IT IS JUST A MATTER OF TIME, AS WEIMAR CONDITIONS RESULT IN SEIZURES OF THE MACHINERY. $$$ As an astute contact said in a recent email, "It is like watching an entire train going in slow motion over the cliff." The US banking system is not functioning properly. The 0% rate means the primary business for US banks is borrowing short and investing in USTreasurys held at the USFed vaults. The USFed in turn is attempting to act as an entire banking system, while regional and midsized banks are circling the storm drain in a death spiral. The Federal Deposit Insurance Corp is drained dry, unwilling even to tap its credit line, preferring instead to drain the banks with FDIC 'taxes' now 14 times greater than two years ago. The banks are sitting on gigantic property inventory from home foreclosures. That is the domestic summary, when foreigners are shunning the USDollar generally and USTreasurys specifically. The breakdown is written in stone, with the climax event being a US bank system shutdown and USTreasury default. All in time, since the monetization press is the primary source of credit. That source historically has never lasted long, always a temporary fix.

Key changes have come in recent weeks. The bust of the American consumer, the inability of the USEconomy to create jobs, the continuation of home foreclosures, and the difficulty in obtaining credit contrast the USGovt initiatives that further bust the federal finances. The combined effect is to shatter the notion of any recovery in the United States. Another Stimulus Bill must come, and is coming, but at a cost of confidence and trust in the USDollar. This constitutes a major turning point that the US stock market has noticed, and the USTreasury Bond market has benefited from, for now. The USFed must stay on the 0% rate pathway, with great shame and ample rationalization. It is a badge of failure.

Another portion of this bizarre situation that eludes the analysts and media is that 0% rates slow the USEconomy from providing savers and retirees almost nothing for income. That is ok in the minds of Wall Street fraud kings who control the Dept Treasury though, since it gives them free money to run their carry trades and other speculation. Unfortunately for the USGovt, that carry trade that has entered the financial engineering factor floor feeds off the USDollar. It will kill the USDollar and ensure a USTreasury default. Foreigners employ a two-part strategy. 1) Protect their US$-based core reserves, but 2) abandon the US$ on new commitments such as USTreasurys. Foreigners are hyper-actively trading in their USAgency Mortgage Bonds, and with proceeds from USFed monetized purchases, in turn are buying USTreasurys at auctions. The Grand Paradigm Shift is in progress. It is in direct response to the amplified monetization process engaged by the USFed and USDept Treasury, acting in desperation. It ensures the gold price will rise, the USDollar will fall, prices within the USEconomy have a firm floor established, and asset prices remain at great risk. Shock waves come from the Paradigm Shift, reverberations of Uncle Sam falling down a staircase into te Third World. The residents inside the USDome of Perception are often blind to the shift, a financial revolution rooted in global response.

$$$ A WARNING COMES FROM JULIAN ROBERTSON ON CREDIT CUTOFF BY FOREIGN SOURCES. HE PROPERLY RECOGNIZES THE THREAT, WITHOUT MENTION OF THE DEADLY MONETIZATION CARD CURRENTLY BEING PLAYED BY THE USGOVT AND USFED. $$$

Julian Robertson is a legendary successful fund manager. He was one of the premier hedge fund managers of the 1980 and 1990 decades. He has a gigantic investment position currently in place that is designed to profit from a steepening of the USTreasury Yield Curve and rising price inflation. He said openly that the United States might face 'Armageddon' if China and Japan refuse to purchase US debt. The United States is incredibly dependent upon credit for its economic function and foreign credit in particular for credit supply. Robertson believes price inflation is a big risk if foreign countries halt the purchase of US$-denominated bonds. He does not anticipate the Chinese will stop buying US bonds altogether, but the Japanese could eventually be forced to sell some of their long-term bonds. His anticipated extreme price inflation ignores the monetization pattern (both domestically with primary bond dealers and with foreign central banks) for purchase of our own USTreasury Bonds and USAgency Mortgage Bonds. He misses how short-term debt has 0% borrowing cost but long-term debt has higher cost. The only way to avoid the problem in his view is for renewed US growth and domestic saving in his view. US leaders urge more spending while talk about the merits of saving, the opposite direction of actual solution. He harbors little optimism, since the global track record of short-term credit dependence is disastrous. Robertson said the following in an interview.

"It is almost Armageddon if the Japanese and Chinese do not buy our debt. I do not know where we could get the money. I think we have let ourselves get in a terrible situation, and I think we ought to try and get out of it. If the Chinese and Japanese stop buying our bonds, we could easily see [price inflation] go to 15 to 20 percent. It is not a question of the economy. It is a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we are totally dependent on those two countries. It is crazy. [Outright Japanese bond sales would be] much worse than not buying. The other thing is, they are buying almost exclusively short-term debt. And that is what we are offering, because we cannot sell the long-term debt. And you know, the history has been that people who borrow short term really get burned… The US has to quit spending, cut back, start saving, and scale backward. Until that happens, I do not think we are anywhere near out of the woods. We are in for some real rough sledding. I really do think the recession is at least temporarily over. But we have not addressed so many of our problems and we are borrowing so much money, that we cannot possibly pay it back, unless the Chinese and Japanese buy our bonds." See the My Mutual Fund article (CLICK HERE).

$$$ SHRINKAGE OF MONEY SUPPLY SIGNALS BIG TROUBLE AHEAD. THE DEFLATION KNUCKLEHEADS POINT TO SUCH DATA AS A SIGN THAT THE USDOLLAR WILL RISE FROM COLLAPSING CREDIT MARKETS. INSTEAD, CREDIT ENGINES WILL RAMP UP TO FURTHER WRECK THE MONETARY SYSTEM AND CURRENCIES. THE FINANCIAL SECTOR IS ENJOYING HYPER-INFLATION GRAND FLOWS, NOT COUNTED IN OFFICIAL ST LOUIS FED DATA SOURCES. $$$

A great storm is brewing, marked by reduced tangible economy flows and heightened financial sector flows (but only in speculation, not capital formation). An economic recession is assured again in both the United States and Europe. Nothing was remedied, only giant sums of money were shoved into the biggest banks, impaired bonds were moved to the USFed, bank stocks were propped with TARP fund improperly, while many crucial failed financial institutions changed into government ownership. The contraction of credit and M3 money in both the US and Europe signals serious trouble ahead. The previous clear warning came in July 2008, and current signals are doubly worse. The folks at Intl Monetary Research, Lombard Street Research, and Gluskin Sheff (new home of David Rosenberg) have pointed out ominous money supply signals. The M3 money supply has been shrinking at a 5% annual rate since June in the US. It has been slightly negative since March in the Eurozone. The USFed reports the M2 money supply contracted at a 7.3% annual rate in August, and a 3.1% rate in July. The bank system is not dispensing credit as intended. Recession is due soon again, especially since USGovt stimulus has dissipated.

USFed Chairman Bernanke prefers stupid measures in his focus to judge the smooth function of the US bank system. He embraces low TIPS bond yields, enjoys lower corporate yields spreads versus USTreasurys, and still crows mindlessly about tame inflation expectations contained supposedly in the low USTreasury Bond long-term yield. He led the abolishment of the M3 data at the USFed, although many sources like the Shadow Govt Statistics easily reconstruct it. His list of errors is long and growing. He has no reluctance to pump up the money supply, and therefore Wall Street loves him. If Bernanke had been watching M3, he would have known that the bubble was getting out of hand upside in 2005 to 2006, and conversely that the banking system was beginning to collapse in 2007, then disintegrate in 2008. Great audacity was heard from Bernanke at Jackson Hole this August that nobody could have seen the banking crisis coming, and worse, that they averted a disaster with prompt action. See the destruction in bank credit, the falloff of commercial loans, and the drop in money velocity (excluding finance sector speculation, as in Shadow Banking System). The crisis in credit is returning!

$$$ ORLANDINI OFFERS CRITICISM, WITH ACCUSATIONS OF HIDDEN MONETIZATION. HE WARNS ABOUT USTBONDS & USDOLLAR. $$$ Enrico Orlandini wrote three weeks ago, "It has been a while since I have talked about the bond market and I think things are about to heat up, so I would like to make a few comments. This week the government is auctioning off a record US $110 billion in bonds and it seems like each successive auction is 'record.' Those bonds are being purchased by someone, and many point to the fact that bonds are being absorbed as a sign that things are okay. I disagree. How they are being purchased is important, and I suspect the bonds are being purchased by the Fed with printed money. This type of monetization of debt is at best dangerous, and in the case of the US fatal. Everybody points to the fact that the dollar is overbought and foreigners will have to intervene or their currencies will become too expensive for them to export to the US." A global revolt against the USDollar is in full swing, better described as an integral part of the Paradigm Shift. The desperate actions taken by US finance minsters can result in sudden death, just like with the ill-fated Weimar Republic which Americans refuse to study or comprehend.

$$$ DOUBTS ABOUT BOND MARKET INTEGRITY PERSIST. THE CONTROL PLACED UPON IT REVEALS TOO MUCH CONSISTENCY. THE EVIDENCE IS UNIFORMITY AND SAMENESS, TOTALLY OUTSIDE THE REALM OF CHANCE POSSIBILITY. THESE ARE MANAGED MARKETS. $$$ The HSBC Bond Chief Stephen Major has major doubts on the economy. He wrote, "Even more importantly, why is the yield curve THE SAME across all government bond markets? Why is the UKGilt curve the same as the Canadian or Swedish curve, even though these countries have not indulged in QE? Why is it the same as the US yield curve, when it has a completely different QE going on?" See the Financial Times article (CLICK HERE). The answer is simple. All central banks are working desperately to manage with coordination, hoping to avoid a collapse. They are scared white in the face, as their bank systems are uniformly insolvent. With the flood of printed money, they manage their own sovereign bonds.

$$$ THE USFED MONETIZATION CONTINUES UNABATED. $$$ Foreigners might possibly bid for close to half the USTreasury new issuance, but one must work hard to separate the funds they receive from USAgency Mortgage Bond abandonment. The USFed talks about halting the Quantitative Easing (QE), aka money printing (monetization). The auction dates stream in like milk deliveries. The schedule calls for another $138 billion in Treasurys consisting of: $30 billion in 26-week Bills (October 5), $30 billion in 13-week Bills (October 5), $39 billion in 3-years Bills (October 6), $20 billion in 10-year Notes (October 7), $12 billion in 30-year Bond (October 8), and $7 billion in 30-year TIPS (October 5). Resumption of monetization is obvious, not even in debate by analysts free from compromise. Monetized TIPS purchases destroy the indication of inherent price inflation. The USFed will use every trick in their playbook to conceal the indirect nature of their self-dealing. The USFed is buying at least 50% and perhaps 75% of its own USTreasury issuance. Unless Bernanke and Treasury Secy Geithner want to risk a failed auction, a resumption of QE is highly likely. See the Zero Hedge article (CLICK HERE).

In the last week of September, the USFed tipped its hand completely. The central bank stated a hold of the key rate near 0% for an 'extended period' with embarrassment. This is an admission that the recovery is nowhere to be seen, and the Exit Strategy is all hyped talk. They actually stated that an economic recovery was under way, but signaled that it was still much too early to start raising interest rates. The benchmark overnight interest rate will remain at virtually zero until at least some time in 2010. Policy makers also announced that they would extend the USFed program to buy up almost $1.5 trillion worth of mortgage bond securities through the end of March.

$$$ NOBEL PRIZE WINNING ECONOMIST JOSEPH STIGLITZ EXPECTS NO EXIT STRATEGY TO BE TAKEN, AS THE 0% RATE WILL REMAIN. HACK ECONOMISTS REVEAL THEIR SHODDY LEVEL OF COMPETENCE, IGNORING THE PRIMARY CAUSES OF PRICE INFLATION. $$$ Stiglitz justifies continued money creation with a hard foot on the accelerator. Stiglitz said, "To the high priests of the fiat currency, deflation is like garlic to a vampire. The US faces the possibility of deflation for the first time since the Eisenhower Admin, a threat that may prompt the Fed to keep interest rates near zero through next year. Deflation is definitely a threat right now. The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while. A weak labor market in a competitive environment puts downward pressure on wages. So, the possibility of another actual decline in wages cannot be ruled out." Even this competent economist finds himself ensnared in the traps of deflation concepts. Regard Stiglitz as having good judgment with too much Toxic American Economics pumped into his psyche. His comments about deflation probably center on housing prices and bank assets.

Contrast to a more mainstream hack economist, with a clueless perspective. Dean Maki is chief economist at Barclays Capital in New York. He believes recent reports showing weakness in manufacturing, housing, and consumer spending suggest that the danger of deflation is overblown. Maki forecasts 5% economic growth in the US for 1Q2010, which he expects would translate into higher prices. So Maki believes prices respond to economic growth, a backwards notion. Then there is Stephen Stanley, chief economist at RBS Securities. He said, "Inflation is driven more by the level of demand and pace of growth than by the size of the output gap. As the economy returns to solid growth in 2010, we are quite confident that, in sharp contrast to the consensus Fed view, core inflation will be creeping higher." So Stanley believes prices respond to economic growth also. Neither economist cites monetary expansion or USDollar risk as a relevant factor to prices, despite being the primary causes of price inflation. They hail from the Corrupt American Economics corridors, hampered by horrendous university training or full compromise from a Wall Street paycheck. See the Bloomberg article (CLICK HERE).

$$$ THE USFED MUST BEGIN TO DRAIN ITS HISTORICALLY MONSTROUS BALANCE SHEET, TO DISMANTLE ITS HUGE MONETARY EXPLOSIVE DEVICE HANGING OVER THE CREDIT MARKET. TALK COMES OF REVERSE REPOS TO FORCE THE US FINANCIAL SECTOR TO ACCEPT THE RISK ON THE USFED BALANCE SHEET. HOWEVER, THE INITIAL ACTION APPEARS TO BE IN MONEY MARKET FUNDS ARENA. THEIR DRAIN MIGHT SERVE AS AN EXPERIMENT TO TEST AN EXIT STRATEGY. THEY CHOOSE TO PUT AT RISK ON PEOPLE'S SAVINGS, AGAIN PROTECTING THE ELITE. HEAR THE ECHO BY EURO CENTRAL BANK TRICHET ON MONEY MARKETS. $$$

The USFed has begun talks with its primary bond dealers on using reverse REPOS. It must withdraw the unprecedented amount of liquidity injected into the financial system the last two years under emergency conditions. Central bank officials are making plans to use reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, according to sources in private talks. The process has the USFed selling securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system. Such a course of action is standard. The USFed must shed some of the mammoth portfolio of mortgage bonds and USTreasury Bonds acquired as it defended ruined banks during the financial crisis. The goal would be to drain liquidity from the financial system, and thus to avoid a burst of price inflation as the economy enjoyed even a temporary lift. The threat is that any drainage would cause grand credit market shock waves.

Next comes word that the US Federal Reserve is studying the concept of borrowing from money market mutual funds as part of eventual steps to withdraw stimulus, according to the Financial Times in London. Evaluation of standard mechanisms like REPOS must be quickly dismissed in ivory offices. The latest FOMC meeting concluded two weeks ago with no changes. The big new development is the trial balloon plan, whereby the central bank would raid money market funds because it does not believe the primary dealers have the balance sheet capacity to provide more than about $100 billion. Notice that London press networks provide better coverage than the American. Money market mutual funds in the United States contain about $2.5 trillion under management. Officials regard them to possibly provide between $400 billion and $500 billion in a formal raid. They reported that officials saw no urgent need to drain liquidity all the way to where it was before the crisis, because it was confident it could raise interest rates even with a much larger amount of reserves in the system than existed before the crisis. WE ARE WITNESSING A BLACK HOLE THAT COULD SOON SUCK MONEY MARKET FUNDS AND ACTUAL US SAVINGS.

Observe the USFed stuck in a policy corner with no exit, with only trap door to the Third World. Inaction leads potentially to hyper-inflation. See the Yahoo Finance article (CLICK HERE). The altered course to raid money market funds would transfer the risk to the vast army of small savers in an extension to the Black Hole. If problems arise, at least Wall Street banks would not suffer losses, whereas the people would. Their policy actions to date have been consistent in preserving wealth and power for the Elite banker community at the expense of the common people. See also a Casey File article by David Galland entitled "Is the Treasury Out to Kill Money Market Funds?" (CLICK HERE). A great question indeed.

Euro Central Bank head Trichet has threatened to withdraw support for money markets in the Eurozone. He cannot maintain support forever, stated before the European Parliament Committee on Economic & Monetary Affairs. The introduction of one-year lending to banks is one of the measures the ECB brought in during the financial crisis. The EuroCB has been pumping billions of Euros into money markets over the duration of the crisis in an attempt to restore order and to reduce the cost of borrowing for banks, firms, and consumers. This dominant source of funding for many commercial banks will soon dry up, but it was not yet time for the ECB to retract its support. Trichet said, "The strong intervention of the Eurosystem in the Euro area money market cannot be maintained forever. We have introduced exceptional measures under exceptional circumstances. We will have to phase them out once the rationale for these measures fades away and the situation normalizes. Now is not the time to exit. However, at some point in time exit strategies will have to be implemented. The ECB has an exit strategy and stands ready to put it into action when the appropriate time comes. Our exit strategy is an integral part of our overall monetary policy strategy."

$$$ KEYNESIAN COPS, FRIEDMAN'S FOLLIES, AND THE FLAWED THEORY BEHIND THE RECOVERY HAVE RENDERED GREAT SYSTEMIC HARM. DEBATE IS SORELY ABSENT, AS THE UNITED STATES BOUNCES FROM FAILED POLICY TO FAILED POLICY, WITH BOOMS & BUSTS. A DESTROYED ECONOMY AND FINANCIAL FOUNDATION IS THE RESULT. $$$

The current USFed Chairman Bernanke claims expertise concerning the Great Depression. The United States is destined to repeat a Depression chapter since Bernanke is NOT an expert on that ugly event. Global central bankers (under Bernanke leadership) are flooding the global economy with money because they buy into Milton Friedman's theory that economic contractions can be reversed by sufficient monetary expansion. No proof exists. Rather, proof does exist that a bigger crisis can be produced down the road. They miscalculate risk of intervention, superimposing policy over market capability to cleanse excess and ruin failed risk taken. The US is interrupting the cleansing process and instead supports failed risk heavily. The Freidman theory of Monetarism is another bad iteration of the Keynesian belief in the power of government intervention. Another of the absurd Friedman notions is that floating currency exchange rates would naturally over time bring global trade deficits into balance. This justified the removal of the gold standard, and has wrought global imbalances never seen in history. Price intervention achieves stability?? Only in the wayward mindset of American Economists.

As Daryll Schoon says, "When exchange rates were allowed to float in 1974 as encouraged by Friedman, who also encouraged Nixon to abandon the gold standard in 1971, the US had a positive balance of trade. Thirty five years later, the US trade deficit is well over $800 billion and is growing over $20 billion each month. Hey, Milton, how much more time will it take to balance the trade deficit? Professor Antal Fekete warned several years ago that Friedman would someday be proved wrong and that we would collectively suffer the consequences; and, that just as during the Great Depression when banks hoarded the government's cheap money instead of lending it, they would do so again when Friedman's theory of monetary expansion was tried during another contraction. Professor Fekete's warnings have now come true. Today, US bank lending growth has entered negative territory at the same time cash reserves at US banks increased by 1460%." The pillars of economic thought in the United States have failed, and nobody seems willing to state the case. The Jackass will. See the article by Daryll Schoon entitled "The Coffin Shaped Recovery" (CLICK HERE). We are observing the failure of US Economist Experiments.

Shockingly little debate has come on monetary policy and its principles. Bernanke is grossly irresponsible in his monetary policy, a student who follows Milton Friedman heretical principles, like the neutrality of money. He ignores the profound effects of induced bad investments, flows of easy money into vast pits of malinvestment that produce bubbles and wreckage. The concept of neutral money, never harmful, is lunatic. Both Bernanke and Friedman overlook the real factors of how money is invested within the United States, the giant tranches of speculation. Calling the steep rise in the USFed balance sheet and the US monetary base highly inflationary would be greatly understating the situation.

$$$ FROM THE BLACK-SCHOLES OPTION MODEL GENIUSES COME BLACK HOLES THAT SUCK ALL NATIONAL WEALTH INTO THE COSMOS. THAT BLACK HOLE IS THE USGOVT DEFICIT AND COSTS OF NATIONALIZING FAILED FINANCIAL FIRMS. COSTS ARE HIDDEN TO THE PUBLIC, SINCE SO HUGE. $$$

The USFed is highly reluctant to remove stimulus and raise rates, but for reasons not stated. A hike of 50 basis points can easily wipe out a bank. If the USFed in a full blown currency crisis were compelled to lift the Fed Funds rate by 200 basis points or more, the damage would be from the Black Hole tied to Credit Default Swap contracts, which would suck the financial life out of the remaining big banks. Since 3Q2007, credit default derivatives have generated $28 billion in losses to banks. As of 2Q2009 still some $13.44 trillion in notional exposure hangs around, equal to 95% of GDP. Banks that bet on the survival of other banks cannot be redeemed of a wide swath of banks are ruined. From Black Scholes to Black Holes indeed. See the Dharma Joint weblog (CLICK HERE).

$$$ THE I.M.F. WARNS OF EXCESS LIQUIDITY TO BE MOPPED UP, ANOTHER WAY OF WARNING THAT THE NEXT ROUND OF CRISIS COULD BE EITHER BUBBLE OUTBREAKS FROM NO ACTION OR ELSE BANK/MARKET SYSTEM BREAKDOWN FROM TOO HARSH ACTION. $$$ Extraordinary debt levels risk another crisis, the Intl Monetary Fund warns. They point out staggering high levels of government debt around the world, identifying it as the most likely trigger of the next economic downturn. The former IMF chief economist, now Harvard University economics professor, Ken Rogoff said that the high official debt levels must not go unnoticed. Rogoff openly warns that countries hobbled by significant national debts like the United States and other nations risk a potential USTreasury default sometime in the future. He cited the debts as a proportion of their total economies, a factor used in basic banking practices at the microcosm level. The most current USGovt annual deficit of $1.84 trillion represents 13% of estimated GDP, last seen at the end of World War II. Notice how the total varies, impossible to pin down. The Rogoff warning came as the G-20 leaders prepared to debate the Obama Plan to stimulate global growth and coordinate their fiscal stimulus exit strategies.

Rogoff said, "There is no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It is very likely that it will trigger the next crisis as governments have been stretched so wide. Talk about a big bubble that really affects the global economy! The huge run-up in government debt has led to patently unsustainable fiscal policies across a number of major countries. So far, the rest of the world has been willing to finance it, primarily with savings from China and elsewhere. But if investor confidence is shaken, we might see the interest rates on long-term debt rising, and rising very sharply." The only way sharply higher rates come is if JPMorgan is put out of business, the primary agent for monetizing the USTreasury debt and chief engineer in managing the Interest Rate Swap machinery. Maybe this prudent Harvard Professor is unaware of either factor. An echo came from IMF director Dominique Strauss-Kahn, who stressed the need to manage the mess of rampant liquidity (phony money flood). He said, "Once the fire is out, there is water everywhere. It has to be mopped up. In Pittsburgh, we have to say, there are still fires to be put out. We will see later how to do the mopping up." Most bank officials deal not at all with the mopup phase, a task for a later day. They create unfixable problems, and treat the crises with supposed cures that offer no exit. See the UK Telegraph article (CLICK HERE).

BANK CHAOS GROWS

$$$ A QUEER AND HIGHLY PUNITIVE BANKER WELFARE TAX HAS BEEN LEVIED BY THE F.D.I.C. AGAINST ALL SURVIVING BANKS. THE 14-FOLD BANK FEE INCREASE WILL WEAKEN THE REGIONAL AND MIDSIZED BANKS, AND READY THEM FOR ANY BIG BANK CONSOLIDATION PLAN. A SEVERE CRIMP TO BANK PROFITS IS THE END RESULT, SURE TO REDUCE THEIR WILLINGNESS AND ABILITY TO LEND. THE F.D.I.C. IS RELUCTANT TO TAP THE DEPT TREASURY LINE OF CREDIT, AND PREFERS TO WOUND MEMBER BANKS INSTEAD. $$$

The USGovt is looking to further suck vitality from healthy banks in order to lend to the Federal Deposit Insurance Corp. Despite sharp political criticism on big bank bailouts, FDIC senior regulators will demand that banks supply the FDIC bailout fund. The decision is not final, but the winds tell of a plan well along. The nation's healthy banks will supply $billions to rescue the insurance fund that protects bank depositors. The plan is more like Fascist extortion without recourse. The plan is supported by the big banks and their lobbyists, part of the syndicate core, but not the midsized banks. The FDIC is extremely reluctant to use its authority to borrow from the USDept Treasury, its recognized safety valve. Under current law, the FDIC would not need permission from the USDept Treasury to tap the existing credit line of up to $100 billion. The FDIC has a $500 billion line of credit in all. Doing so is dreaded by FDIC head Sheila Bair, whose is in constant bitter conflict with the Treasury Secy Geithner. Camden Fine is president of the Independent Community Bankers. He said, "Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help. She would do just about anything before going there." Apparently she would prefer to contribute to the crippling of the non-big banks. Bank profits will clearly be drained at a time when profitability is severely challenging.

The New York Times wrote, "Bankers worry that a special assessment of $5 billion to $10 billion over the next six months would crimp their profits and could push a handful of banks into deeper financial trouble or even receivership. And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay." The FDIC is in a vise. Their actions align with what my analysis has called a Grand Consolidation Plan, wherein the biggest Zombie banks with USFed aid would acquire regional and midsized banks, but only after permitting them to weaken, or actually imposing fees to weaken them further. The big banks would have available a mountain of reserves stored at the USFed, whose release would enable the broad acquisition. See the New York Times article (CLICK HERE).

Two stories come from the field. Eric King of King World News (CLICK HERE) in a personal email reported that a midsized bank whose name he could not reveal offered details on the 'banker tax' levied. The FDIC fee increase at one bank was nearly 14-fold in two years, going from $600k in 2007 to $8.0 million in 2010 for that particular institution. A second story comes a personal friend down South. He knows a CEO of Meridian National bank in Mississippi with about 15 branches. He said that in the last year the FDIC had increased their mandatory Insurance contibution from $35k to $350k to now $1.35 million. The bank executive was stunned, and claimed the fee hike will hurt a lot of regional banks. Note the same ratio, a 14-fold bank fee hike in two years.

Finally, here is a wrinkle not thought of by many people, handed to me by an astute subscriber. The US Fed might in many cases indirectly be paying the FDIC bank fees. Since any prepayment of FDIC premiums is an asset on the banks balance sheets, the banks are permitted to use such assets as collateral for more loans from the USFed. So, the USFed in reality is bailing out the FDIC. One can easily argue that the USFed is attempting to play the role of the entire US banking system, next insuring itself, even holding the garbage. How out of control!

$$$ 1000 BANKS DUE TO FAIL, MANY OF THEM SMALL. ONLY THE LARGE BANKS RECEIVE FEDERAL ATTENTION, THE REST IGNORED AND LEFT TO DIE. $$$ John Kanas is the former North Fork CEO. He predicts 1000 bank failures will occur over the next two years. So far this 2009 calendar year, a total of nearly 100 have occurred. He said, "Many of these [failed] institutions nobody has ever heard of. They are smaller companies spread around the country. Some of them are private. It augurs poorly for smaller business mangers. Small banks tend to lend money to Mom & Pop operations. It exacerbates the problem for small business borrowers… Government money has propped up the very large institutions as a result of the stimulus package. There is really very little lifeline available for the small institutions that are suffering."

Kanas is one of the few from private equity firms to take control of a failed bank in an FDIC deal. He is currently Chairman & CEO of BankUnited, which he acquired in partnership with Blackstone, Carlyle, Centerbridge, and WL Ross. The failure of BankUnited cost the FDIC $4.9 billion in May. The FDIC announced new rules a month ago to encourage similar private investments in trouble banks. But the three-year, 10% capital requirement might deter investments. See the Business Insider article (CLICK HERE).

$$$ THE F.D.I.C MIGHT BE HOBBLED BY THE FEDERAL DEBT LIMIT, AS THE USCONGRESS IS RELUCTANT TO RUSH INTO INCREASING THAT LIMIT. DOING SO WOULD (WILL) UNLEASH A STORM OF PROTEST. $$$ The FDIC might be unable to tap USTreasury credit lines, since the extension would immediately send the federal debt above the legal debt ceiling limit. The FDIC is thus left to find innovative ways to replenish its nearly empty Deposit Insurance Fund. So they turn to dictated draconian terms for insurance hikes from member banks, who have no recourse. Imagine your car insurance going from $1000 per year to $14 thousand! Many drivers would sell their cars and take public transportation. Borrowing from the USGovt is out of the question, it seems. Any new borrow would bring the outstanding USGovt debt closer to the $12.1 trillion limit. Tapping the FDIC line of credit or using the Federal Financing Bank would carry implications for the debt limit, admitted the USDept Treasury spokesman Andrew Williams. See the Zero Hedge article (CLICK HERE).

Despite political limitations, the USCongress must raise the federal debt limit. Before that happens, look for threats or actual temporary shutdown of operations. The anger and resentment toward wasted funds on big banks is an unspeakably loud tumult. Hidden usage of TARP funds by Wall Street puppeteers has backfired, not for forced disclosure, but at least for halted credit extension. In time, the USCongress will raise the debt limit, but not before a firestorm, hot pitched battles, or even a war that pries open the USFed to formal audits. To be sure, a bank run not stemmed by a cash strapped FDIC would have very serious economic and political repercussions. The compromised legislative branch is well-known to kick the can down the road, as the saying goes, but this time, they are openly worried about an uprising at the Grassroots level in the US population. The USCongress will not give ground this time, not without major concessions from either Wall Street or the USFed itself. In my view, a MAJOR SHOWDOWN COMES. My bet is the debt limit showdown will be used directly to threaten a default on USTreasurys to kill the USFed, but at least to pry open it accounting. Then come personal death threats by the syndicate against Congressional members, along with amplified bribery. The battle is for control of the national governmental purse, which Wall Street stole.

$$$ THE FEDERAL HOUSING ADMIN OVERSEES A GIGANTIC CESSPOOL OF MORTGAGES. THEY ARE THE OFFICIAL NATIONAL SUBPRIME LENDER. NOTHING HAS CHANGED, EXCEPT THE LOCATION OF DEAD MORTGAGES. THE USGOVT OWNS THEM, AND MANAGES A CESSPOOL. A HUGE BAILOUT WILL BE NEEDED SOON. $$$ The FHA insures mortgages held under the USGovt porous rooftop, under which are mortgages in possession of Fannie Mae, Freddie Mac, Ginnie Mae, and various smaller agencies. The FHA shortfall is currently estimated at $54 billion, according to an independent consultant who is very familiar with its toxic sewage storage facilities. Edward Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the quasi-USGovt mortgage finance company that is now fully owned by the USGovt, lock, stock, and toxic barrel. In his estimation, the Federal Housing Admin, which insures mortgages with low down payments by FHA-approved lenders, might require a official USGovt bailout. He estimates $54 billion more in losses than the agency can withstand. He said, "It appears destined for a taxpayer bailout in the next 24 to 36 months." By the time the next crisis arrives on schedule, the amount will surely be much bigger. The volume of FHA program loans has quadrupled since 2006, since private lenders and insurers withdrew mortgage funding amidst the US housing decline. The leap has left the FHA backing risky loans and those exposed to widespread fraud in a market will likely descend further. The in-house sewage treatment executive, FHA Commissioner David Stevens claims the agency does not need aid, due in part to new guarantees made at much lower housing prices. See the Bloomberg article (CLICK HERE).

$$$ STRANGE EVENTS OCCUR WITHIN THE MIX OF BANK ASSETS HELD ON BALANCE SHEETS. THEY ARE STEERING AWAY FROM FANNIE MAE & FREDDIE MAC BONDS, AND TRYING TO REPLACE WITH GINNIE MAE BONDS. THE MAIN ISSUE IS USGOVT GUARANTEE. THE GINNIE BONDS REQUIRE NO RESERVES SET ASIDE FOR BANKS. THEY ARE HIDING THEIR INSOLVENCY. $$$

The practice of shedding Fannie Mae & Freddie Mac bonds since they are only implicitly guaranteed has resulted in bigtime games. Banks that hold these securities as assets on their balance sheets must divert funds to set aside reserves, based on a 20% risk weighting assigned to the value of those holdings. They are dumping from their assets the Govt Sponsored Enterprise bonds onto the USFed balance sheet, and replacing them with FHA-insured loans packaged into USGovt-insured securities issued by Ginnie Mae. In doing so, the big banks are not reducing their net assets. They are eagerly ridding themselves the toxic mortgage bonds for other more guaranteed mortgage bonds. The distinction is that Ginnie Mae bondss are fully backed by the USGovt, just like USTreasury Bonds. Their cousin bonds are not. Banks thereby avoid setting aside reserves. They can use the money they otherwise would have to set aside to actually add leverage their balance sheets. They can borrow short term and invest in long-term USTreasurys, the domestic banker carry trade. With leverage, they can amplify profits 20-fold at least. See the Commodity Online article (CLICK HERE). One should conclude that the big banks are placing themselves directly at risk for a second powerful credit market crunch, with more bank failures. All it needs to begin the wreckage is a spark, like a string of corporate failures or a rash of new home foreclosures or a skein of commercial loan liquidations. All three are not just possible, they are locked assured events.

$$$ BANK STRAIN GROWS WORSE, NOT BETTER, WITH NON-PERFORMING LOANS THE VISIBLE CULPRIT. BANKS WITH HIGH LEVEL OF DELINQUENT LOANS REMAIN IN THE MIX, ALONG WITH THE FORMAL 'PROBLEM LIST' BY THE F.D.I.C. THAT ONLY GROWS WORSE WITH TIME. LOAN MODIFICATIONS HAVE HAD ALMOST ZERO EFFECT. $$$

The USEconomic recovery is a fiction wrapped in nonsense founded in false hope. The number of US lending institutions s unable to collect on at least 20% of their loans has hit an 18-year high. The advent of the second round for deep bank losses is near. Such bank failures and losses could slow an economic recovery, or better stated, render the concept an utter joke replete with political motives. The FDIC had data compiled for Bloomberg News by SNL Financial, a bank research firm. Units of Frontier Financial, Towne Bancorp, and Steel Partners Holdings are among 26 firms with 90-day delinquencies above the 20% level, as of June 30th. That level of distress is almost five times the national average. Among banks on the list, three reported almost 50% of their loans as delinquent. Bert Ely is CEO at a bank consulting firm that bears his name. He said, "Their are some zombie banks out there. Neither the banking industry nor the economy benefits from keeping weak banks in business." The list of bank shutdowns is near 100 this year, rendering empty the FDIC insurance fund.

The FDIC counted 416 companies on its confidential Problem List banks at mid-year. A fine point. In the calculations by FDIC for a problem bank declaration, the scads of ineffectively restructured modified loans were excluded. Lowering the interest rate a smidgeon or tossing three months of unpaid interest into a fresh loan, without reducing the loan balance, accomplishes nothing. It merely sends the borrower with loan in hand through a revolving door of default. The modified loans continue to suffer rapid fire 40% to 60% default rates within a few months. Had such loans been included, the list produced by SNL Financial would have swelled to 49 lenders holding $48.4 billion of assets.

Non-current loans averaged 4.35% of the total loan portfolios at US banks as of June 30th. For banks with 20% of loans overdue, clearly the FDIC lacks the resources in staff and funds to deal with shutdowns. Recall the FDIC is in business to avoid shutdowns, since their fund is broke, and since they are devoted to feeding the giant New York banks with free deposit fund raids (or deeply discounted) in liquidation deals. The FDIC does some of its job with professionalism. They issued civil penalties or enforcement orders to least 17 of the 26 banks, linked to demands for improved management and more capital infusion. Funny, that should be the directed criticism with formal orders given to the FDIC itself. Failure to comply by the targeted banks can lead to seizure and shutdown. The number of distressed banks maintained by the FDIC is much larger than those suffering from acute delinquency and non-performance. See the Bloomberg article (CLICK HERE).

◄$$$ THE WELLS FARGO MORTGAGE PORTFOLIO IS A TICKING TIME BOMB. THIS IS THE COMMERCIAL MORTGAGE ARENA KILL ZONE TO MAKE HEADLINES SOON. THEIR PORTFOLIO IS LACED WITH TOXIC LEVERAGED CONTRACTS OBTAINED FROM WACHOVIA.

To say Wachovia lost control of its commercial property portfolio before its collapse is a gross understatement. They routinely underwrote ridiculously cheap Credit Default Swaps against the same securitized mortgage bonds they sold to clients. In doing so, they accepted risk beyond huge that was transferred to Wells Fargo (WF) in the acquisition buyout. Now the festering pit of CDSwaps sits in the Wells Fargo balance sheet, ready to explode. They induced the new bond investors to leverage their brains out, since the yield on the bond was roughly equal to the cost of the CDSwap. The hedging went haywire. WF still owns a large collection of the commercial loans within its acquired portfolio. Instead of selling the loans, or taking writedown losses against them, they decided to alter the interest rate on many modified loans, without loan balance reduction, and without lengthened maturity dates. The practice is widely called 'Extend & Pretend' so as to avoid stated accounting losses. The game is done with both the Wachovia and their own portfolio. They are virtually assuring substantial future losses. As the commercial mortgages begin to fail, WF will realize staggering additional losses.

The majority of large banks are engaged in the same practice of holding reams of CDSwaps off their balance sheets, of extending loans destined to default in the near future. The Wells Fargo example is perhaps the most visible, which can safely be extrapolated to the entire banking industry. The commercial shoe has yet to fall and cause extreme widespread damage. IT WILL IN TIME. Wells Fargo has buried the Wachovia toxic waste, but it is seeping to the surface. Here is another glimpse, offered anonymously. One senior member of the WF commercial loan business segment must deal directly with the dilemma. He spoke on details, and said "One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I have just hired five more guys and we cannot keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots." The macrocosm of FDIC handling of dead insolvent banks is identical to the microcosm like with WF in handling dead delinquent loans. Not enough staff, not enough money, and denial of the reality that losses must be taken. One can be assured that a delayed day of reckoning comes, cited numerous times over the past several months in the Hat Trick Letter. See the Naked Capitalism article (CLICK HERE).

$$$ DERIVATIVES TRADING PROFITS ARE DOWN FOR BIG COMMERCIAL BANKS, AS RISK LEVELS ARE DEEMED MORE RELAXED. HIDDEN MONSTERS LURK THOUGH, AS DERIVATIVES ONLY WRECK HAVOC WHEN LOANS DEFAULT AND COMPANIES FAIL. THEY WILL DO EXACTLY THAT IN COMING MONTHS, SINCE THE CREDIT CRISIS IS ENTERING A SECOND ROUND. $$$

US commercial banks earned $5.2 billion trading derivatives in 2Q2009, as the level of risk eased in the global market for the complex financial instruments, according to a report by the Office of the Comptroller of the Currency, a Treasury Dept agency. Its report found that the total value of derivatives held at US commercial banks rose to $203.5 trillion, up by $1.5 trillion, a rise 1% percent from the first quarter. The unregulated $600 trillion derivative market was at the core of the banking system meltdown a year ago. Derivatives trading is dominated by about 20 big banks worldwide, most are which are dead but permitted to continue operations. JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo account for 97% of the total derivatives among US commercial banks. A total of 1110 US commercial banks reported trading or holding derivatives at the end of 2Q2009, up slightly from the first quarter.

The $5.2 billion in their trading revenues in 2Q2009 was down from a record $9.8 billion in 1Q2009. At the same time, the primary measure of credit risk in derivatives trading, called net current credit exposure, fell $140 billion, or 20% in Q2 to $555 billion. The risk measure has decreased significantly over the first half of this year, although the exposure remain very high. Credit default swaps, an insurance contract against loan defaults, account for an estimated $60 trillion of the over-the-counter derivatives market. The industry continues to work toward establishment of a national clearinghouse to handle the massive unregulated pyramid of derivative contracts, the first step toward creating a regulatory body to oversee their activity. Last year as the credit crisis raged, US banks recorded their first recorded loss on derivatives trading. The $836 million loss compared with trading revenue of $5.49 billion in 2007. See the Yahoo Finance article (CLICK HERE).

$$$ BASEL RULES MARCH ON, LARGELY IGNORED BY ROGUE US BANKS. THE US BANKS RISK GLOBAL ISOLATION AT A TIME OF DEPENDENCE UPON MONETIZATION (A.K.A. PRINTING PRESS) FOR CREDIT SUPPLY. $$$

A final comment about Basel 2 and Basel 3 Rules, issued by the Bank For Intl Settlements (BIS). Admittedly this is not an area of great knowledge. My understanding is that Basel Rules are to global banking, what Financial Accounting Standards Board rules are to the United States banks. Basel 2 Rules required that banks bring impaired assets to the balance sheet, record their value, declare their losses, and move forward. The US banks thumbed their nose at such rules, in order to raise stock valuation and invite investors to secondary stock issuance. The US stock rally is founded on absurd corrupted FASB Rules that permit the US banks to state their own asset values, utterly ridiculous. Basel 2 is not enforced at all inside the United States. The US banks in the process earned the anger of the BIS. The Basel 3 Rules go further, in an attempt to isolate banks that refuse compliance. On October 1st all banks doing business outside of their country must meet Basel 2 and Basel 3 certification and compliance. The big banks on Wall Street do not meet Basel 3 Rules due to their Wild West derivatives, which not only have been responsible for keeping the US banks afloat for a full decade, but remain a chief arena for deep corruption. These banks can not do business with other Basel 2&3 compliant banks in their own country. Watch the US continue their defiance and become isolated further.

Time will tell if the rogue Wall Street banks and other big US banks are indeed isolated in global banking processes. The USDept Treasury and USFed are saying 'FU' to the entire world, in particular to the Top Bank Cop with grotesque monetization of USTreasurys, and with non-compliance with banking accounting rules. The world will soon start pulling the cords, yanking the levers, disrupting the US bank gears, and if that fails, order some kills in a literal sense. A murder spree has begun. The BIS is likely not involved in violence, since their ranks are made up of choir boys. Most big billionaire bankers attend church.

$$$ CITIGROUP CEO PANDIT OF COULD RESIGN NEXT, FOLLOWING KEN LEWIS OF BANK OF AMERICA. $$$ The Freedom of Information Act produced some FDIC documents recently. Careful review reveals that Citigroup CEO Pandit was absent in any individual meetings with FDIC head Sheila Bair. That means that his future could promptly converge with BOA's Ken Lewis. Bair met with with executives from other big banks that have received assistance from the USGovt. Records show that on June 30th, she met with Wells Fargo CEO John Stumpf and CFO Howard Atkins. And on August 11th, she met with the new chief risk officer at Bank of America, Gregory Curl. Lewis has departed his CEO post at BOA, although filing of charges against him by the SEC and various Attorneys General is forthcoming. The fate of Pandit could be rolled out next, especially since Citigroup is dead insolvent, and because it ceded control of his company to the taxpayers. He could very likely lose his throne. See the Zero Hedge article (CLICK HERE).

$$$ SINGAPORE CUTS CITIGROUP OWNERSHIP. $$$ The Singapore Govt pared its stake in Citigroup to under 5%. They realized a $1.6 billion profit as their investment, part of a bigger initiative to reduce holdings in European and US banks. The Govt Investment Corp (GIC) of Singapore sold the stock after converting preferred shares in Citigroup into a more than 9% common equity stake. The Singaporean manager of more than $100 billion of foreign reserves also has a $1.6 billion paper profit on its remaining holding unsold. The GIC fund exploited the deeply discounted Citigroup shares that rose four-fold since March. The other smaller Singaporean fund Temasek Holdings recently sold its stakes in Bank of America and Barclays at a loss. The Asians are wise as they shed their stakes in US banks and reduce their USDollar risk. See the Bloomberg article (CLICK HERE).

CONTRADICTION OF ECONOMIC PROPAGANDA

$$$ DURABLE GOODS ORDERS INDICATE NO ECONOMIC RECOVERY IS YET ON THE HORIZON IN THE UNITED STATES. THIS STATISTIC IS ONE OF MY FAVORITES, PERHAPS THE BEST FORWARD INDICATOR IN EXISTENCE, IGNORED BY ECONOMISTS. IN PARTICULAR THE CAPEX STATISTIC SHOWS NO GROWTH AT ALL. IF BUSINESSES DO NOT REVAMP, THEY DO NOT EXPAND AND DO NOT HIRE WORKERS. $$$

New orders for durable US manufactured goods fell in August, raising fears that recovery from recession would be anemic, or actually non-existent. A durable goods item is defined as one to remain in service for at least three years, like a refrigerator, a computer, a business air conditioning unit, factory equipment, or a truck. Durable goods orders tumbled 2.4% in August, the largest percentage decline since January, after rising 4.8% in July, according to the the Commerce Dept. Again, hack economists had forecasted a 0.5% durables rise. The July rise was probably closely tied to the goony Clunker Car Program. The broad concern of a waning effect from the absurd ineffective Stimulus Plan could be at work, as in the end of an ineffective stimulus. USFed Chairman Bernanke responded to the news by pointing out that consumer and small business loans remained in great need of US central bank support even as usage of official liquidity backstop programs tapered off. Almost all leading indicators of economic performance are lousy. Finally, recall that big banks are ordered not to lend to Main Street, while most banks generally see huge risk in lending at all, even as collateral slowly continues to erode. See the sharp decline in Durables Manufacturing.

More details and dissection reveal the weak core. New durable goods orders excluding transportation were flat in August, as in 0% growth, after rising for three straight months. The CAPEX figure, non-defense capital goods orders excluding aircraft, is a closely watched proxy for business spending, the capital expenditure investment. It is perhaps the most critical economic indicator in existence. CAPEX fell 0.4% in August, thereby confounding once more the hack economists, after falling by 1.3% in July. This all-important CAPEX figure has yet to achieve positive ground, thus no sign of economic recovery on the horizon, let alone next month. Consumer sentiment and other fuzzy measures are preferred by hack economists, who are either badly educated or compromised by their employer paycheck. The Conference Board released its consumer confidence index for September at 53.1 versus 54.5 in August. The Univ Michigan consumer sentiment index for September shot up to 73.5 versus 65.7 in August. It stands at the highest level since January 2008, and means nothing. They are both tied closely to stock market indexes. The consumers have bought into the false hope and propaganda. See the Yahoo Finance article (CLICK HERE).

◄$$$ OTHER LEADING ECONOMIC INDICATORS HAVE BEEN SUPPRESSED. BERNANKE CLOSES DOORS ON DATA WHEN CLAIMING GREATER TRANSPARENCY. $$$

ISI Carrie Butler comments, "The Fed is no longer publishing MEW (Mortgage Equity Withdrawal). This was one of the engines of the financial crisis. So much for an early warning on the next housing crisis. ISI will estimate the three main components of the Fed's report and like our estimate for some, the old 'M' statistics [on money supply], it will be there down the road when needed again."

Tyler Durden of Zero Hedge adds, "While the traditional reference to this data set has usually come from the Greenspan and Kennedy paper 'Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences' the MEW, in the housing bubble peak times, was simply the indicator of the home equity ATM, and how much money was being was coming out of [so-called] excess housing value. We are not so sure if this was actually tracked previously and will follow up on this. However, the Fed is going counter to demands for increased transparency and in fact is removing usable information would not surprise us."

Here is a strange leading indicator, at a personal level. Savings Bonds are being cashed in. A note from PaulH in Maryland, where he said "My mother works for a small bank in my hometown just south of Baltimore. In the past week she has seen almost half a million dollars of savings bonds being cashed in by customers. This trend is not new and has been increasing each week since October. I thought I would throw that out there." Either the public is strapped for cash or suspects UAGovt default in the future, probably both.

$$$ OTHER CONCURRENT U.S. KEY INDICATORS OF ACTIVITY ARE SLOWING SLIGHTLY. THE ECONOMY IS CRAWLING ALONG. $$$ The Institute for Supply Mgmt factory gauge slowed to 52.6 in September from 52.9 in August. The stimulus is expiring while unemployment keeps climbing. Manufacturing accounts for about 12% of the USEconomy. The ISM services gauge rose to 50.9 in September, the highest since May 2008, a notable lift from 48.4 last month. For both measures, the 50 level divides between expansion and contraction. This rise marks growth in the non-manufacturing sector after 11 consecutive months of contraction. The New Orders Index increased 4.3% to 54.2 which goes counter to the durable orders and CAPEX trend. Perhaps the Clunker Car Program is at work here too. See the Bloomberg article for the ISM Mfg (CLICK HERE). See the Calculated Risk article for the ISM Services (CLICK HERE).

$$$ PERSONAL BANKRUPTCIES SOAR, AGAIN DEFYING ANY CLAIM OF ECONOMIC RECOVERY. $$$ Consumer bankruptcies soared 41% in September from a year ago in the United States, as high unemployment and the housing market crash took their toll, according to the American Bankruptcy Institute. September filings totaled 124,790, the fourth highest month since the bankruptcy law changed in 2005, as filings rose 4% from August. The September filings pushed the total 2009 consumer bankruptcies to about 1.05 million, the highest for the first nine months of a year since 1.35 million in 2005. The Institute expects consumer bankruptcies to climb to more than 1.4 million this year. See the MSNBC article (CLICK HERE).

$$$ USTREASURY YIELDS FALL AS ECONOMIC RECOVERY FIZZLES. THE CREDIT MARKET CONTRADICTS CLOWNISH CLAIMS OF RECOVERY. $$$ USTreasury yields declined to the lowest levels since May. Reports on unemployment, manufacturing, and housing amplified doubts that the recovery from the worst financial crisis in seven decades was real. So far in year 2009, the US sold $1.517 trillion of USTreasury Notes & Bonds, compared with $585 billion at the same point last year. That is triple the volume. Primary dealer Barclays forecasts total 2009 issuance at $2.1 trillion, with $2.5 trillion projected for 2010. The falling 10-year USTNote yield, down to a level between 3.1% and 3.3%, sends a strong message. Demand for credit to fuel an expansion is not visible. That demand goes to USTreasurys instead, idle money. The USEconomic recovery is a mirage. See the Bloomberg article (CLICK HERE).

$$$ RETAIL TROUBLE GLOWS AND PROPAGANDA FLOWS. $$$ Howard Davidowitz is the dean of retail analysts, a no nonsense fellow. He said you have to be retarded to believe the August retail data published by the USGovt. He said, "USGovt numbers are only what an imbecile would believe. The consumer has lost a $trillion of credit." Davidowitz, who has a home in Tokyo, reminds Americans that the Japanese forced through seven different stimulus plans, because they did not work. See the Chris Grande article (CLICK HERE). My view is that the US is much weaker than Japan in a number of respects.

$$$ CREDIT CARD DEFAULTS WORSEN, WITH CITIGROUP & BANK OF AMERICA AT RISK. $$$ The US credit card charge-off rate rose to a record high in August, according to Moodys Investors Services. Americans continue to lose their jobs, and consumers remain under stress. The talk of recovery is a distraction and insult. The Moodys credit card charge-off index rose to 11.49% in August from 10.52% in July. Vanquished are hopes of stabilization in the industry after record high credit losses. Both Citigroup & Bank of America hold the highest exposure to riskier credit card borrowers. They are already both dead, but walk from USGovt permission and infusions of federal money into their rotting corpses. See the Reuters article (CLICK HERE).

$$$ AN UNUSUAL LIST WAS CREATED OF LARGE FIRMS ON THE VERGE OF FAILURE. A BANKRUPT COMPANY LIST WAS COMPILED. $$$ The independent research firm Audit Integrity has released its list of the top 20 publicly traded companies with over $1 billion market capitalization having the highest probability of filing for bankruptcy. The list cuts across the full spectrum, outside the financial sector. It includes: Advanced Micro Devices (computer chips), Amkor Technology, AMR Corporation (aka American Airlines), Apartment Investment & Mgmt, CBS Corporation (television network), Continental Airlines, Federal Mogul, Hertz Global Holdings (rental car), Interpublic Group of Companies, Las Vegas Sands (gambling house), Liberty Media Corporation (Capital group), Macys (department store), Mylan (pharma), Oshkosh (clothing), Redwood Trust, Rite Aid (drug stores), Sirius XM Radio (digital satellite radio), Sprint Nextel (cellular phone), Textron, Goodyear Tire & Rubber. If even one third on the list went belly up, it would be a national disaster with powerful sewer drain momentum on banks, households, and psychology. See the Reuters article (CLICK HERE).

$$$ CAR SALES RESUME NORMAL LOW LEVELS. $$$ The tracking firm Edmunds predicts September car sales of only 8.8 million units. That is a 28-year low and a 38% plunge from the 14.1 million blowout in August induced by the official CARS program. The 'Cash for Clunkers' Program did not prime the pump. Demand has dropped off significantly since the program ended. USGovt stimulus like that is typical.

$$$ ANECDOTE FROM THE GROUND IN ATLANTA GEORGIA IS UNIFORMLY MISERABLE. DESCRIPTIONS OF STOREFRONT AND RESTAURANT VACANCIES, HALTED URBAN CONSTRUCTION, NEUTRON BOMBS WITHOUT REGENERATION. $$$ This story came from a friend named AaronK without solicitation. He wrote, "Atlanta: No Recovery On The Ground. I did a little bit of driving around Atlanta today. I was startled by what I saw. The storefront vacancies are scary high. Even in mainstay 'trendy' areas like Virginia Highlands, every other storefront seems to be closed. Recently opened restaurants and retail in gentrifying areas are closed. New residences (all condos, of course) are unsold. It is all at obvious depression levels. More marginal retail has been leveled or closed, but nothing has come in in its place. The rental apartment market was dismal for landlords everywhere, but even Midtown Atlanta was in exceeding bad shape. All the new developments from the last few years in this area are targetted towards the upscale luxury market, ALL of them. The completed ones have been are sitting with very high vacancies. Many of those who did buy are already trying to sell, or rent at depressed values. In the next year most of the luxury units will get recycled into mid-tier apartments, possibly by subdividing some of the units. Some luxury lots are simply fenced off without completed construction, and the sales office long ago shuttered. Halted construction is sprinkled all over the city as well. Altogether, it is a disaster. An economic neutron bomb has gone off and nothing is regenerating. It is painfully obvious there is no recovery."

GRAND THREATS OF JOB LOSS

$$$ MASS LAYOFF EVENTS CONTINUE TO HIT, A VISIBLE SIDE TO JOB CUTS. THEY ARE RELENTLESS. $$$ US-based mass layoffs rose in August, as manufacturing was worst hit. The number of mass layoff events, defined as job cuts involving at least 50 people from a single employer, rose to 2690 last month. The events included 279 mass layoff events in the manufacturing sector. They affected 259,307 workers, bringing mass layoff total so far this year to 21,184. The trend is upward, no sign of USEconomic recovery. The number of mass layoff events rose by 533 in August from July, a worsening trend. All such data is released by the USDept Labor data, which apparently never reads their data, only the political charged positive nonsensical bylines directed by their Wall Street masters. In the 21 months since the official start of the recession, the total number of mass layoff events was 44,669, accounting for over 4.56 million job losses. See the Reuters article (CLICK HERE). See the CIT story a few pages ahead for the ominous development among small and medium businesses. The nation is facing a full court press on the labor front.

$$$ UNEMPLOYMENT BENEFITS NOW LAST LESS TIME THAN THE AVERAGE NUMBER OF MONTHS TO FIND A NEW JOB. $$$ For the first time since records have been kept by the USDept Labor, the average amount of time it takes departed employees to secure a new job exceeds the length of their standard state unemployment benefits. The average duration of unemployment is currently 26.2 weeks, longer than the 26 weeks of standard state benefits normally provided. It is the first time for such an eclipse since 1948, when stuch statistics began. The USCongress has extended benefits twice, first in July 2008 and again within the Stimulus Bill in February 2009. Jobless benefits extend to the eligible for a total of 46 weeks, but only for those workers in states where the official unemployment rate exceeds 6% they extend for 59 weeks. A staggering 5.4 million people have now been out of work for at least 27 weeks, representing 35.6% of the total number of unemployed, the most on record. The audacity of leaders is acute to call this a Jobless Recovery. The jobless are racking up big numbers, but the recovery is nowhere to be seen. Stock market recovery and lifts in big bank stock valuations is not a useful criterion. See the Bloomberg article (CLICK HERE).

$$$ THE SEPTEMBER JOBS REPORT WAS NOT PARTICULARLY BAD, NOR DID IT CITE A FLOOD OF JOB LOSSES. HOWEVER, THE CONTINUED JOB LOSS PATTERN HAS BEEN REGARDED AS EVIDENCE THAT THE USECONOMY IS MIRED IN A GRADUAL DOWNWARD SPIRAL, WITH THE LAST USGOVT STIMULUS PLAN NOW DEEMED A FAILURE. IMPACT POLITICALLY IS DEEP, WHILE IMPACT WITH THE FINANCIAL MARKETS SEEMS TO MARK A TURNING POINT. $$$

The September Non-Farm Payroll report was much worse than expected, measuring 263 thousand job losses. The nonsensical propaganda and Wall Street hype of a nascent USEconomic recovery has led to rather surprising disappointment. False hope will do that! The jobless rate rose to 9.8% from 9.7% the month before, highest since 1983. A hidden factor to push down job loss with statistical chicanery has faded away. The Birth-Death Model added a mere 34k for September, after only 150k in July and August combined. Fear is legitimate that without job growth, a weak labor market could undermine economic recovery. The Labor Dept said the payrolls had now dropped for 21 consecutive months. Normally, forecasted job loss is not important, but this time it was, since so much stock market rebound was based on shallow beliefs widely held that economic prospects were improving. A recovery in financial markets built upon a grand adoption of falsifed bank accounting is not a solid foundation. Analysts polled by Reuters had expected non-farm payrolls to drop 180k in September. The official report revised job losses for July and August to show 13k more jobs lost than previously reported. Stubbornly high unemployment is viewed by the consensus collection of hapless economists as the missing link in the national recovery from its worst recession in 70 years. In reality, this chronic job loss is more shattering proof of no recovery at all, and contradiction of their propaganda and deception. One minor statistic within the Jobs Report is revealing, and patterned. The September average hourly work week fell to 33.0 hours from 33.1 hours in the previous month. In a recovery, it rises. Some things are too utterly basis to be noticed by highly paid economists.

Since the recognized start of the recession in December 2007, the number of unemployed people has risen by 7.6 million to 15.1 million. Manufacturing employment fell by 51k in September, while construction industries payrolls dropped by 64k. The service sector cut 147k workers, while goods producing industries shed 116k positions. Education & health services added a mere 3000 jobs, while government employment fell 53k. The pattern of worker discouragement resurfaced, when the USDept Labor reported that nearly 600 thousand people stopped looking for jobs last month. This is part of their recovery observations, one must assume. See the Yahoo Finance article (CLICK HERE).

The USFed actually put forth a lunatic notion, this time by Richmond Federal Reserve Bank President Jeffrey Lacker, who attended a conference in Jerusalem. The USFed wishes to inform the USEconomy victimized by the USFed failure, that it might actually hike interest rates before the unemployment rate falls. He places more weight on the outlook for economic growth, and in particular, consumer spending. He gives himself and his colleagues far more credit for insight than they deserve or demonstrate. Recall that this august cold corrupt USFed institution has not correctly foreseen anything on the economic horizon, not the mortgage bust, not the recession, not the steep housing decline, not the bank system insolvency, and certainly not the magnitude of bank losses. They will next be wrong on the economic recovery and price inflation, with rising risk of torpedoing even a period of stabilization. Some other USFed officials, including Governor Kevin Warsh, have argued that once it decides to tighten monetary policy, the pace of interest rate hikes could also be rapid. It could reverse the size of its ballooned bloated boatload of assets on its balance sheet merely by ending big bank interest payouts on reserves held at the USFed. These clowns still regard inflation expectations as well-anchored, without benefit of monetary inflation comprehension or USDollar risk to price structures. As a group, the USFed governors consider the risk of double-dip recession, in which the USEconomy would relapse into recession after a brief recovery, has 'diminished quite substantially' in Lacker's words. What a relief! See the Yahoo Finance article (CLICK HERE). Fire the entire bunch and eliminate the US Federal Reserve!

$$$ THE JOBLESS RATE RISES ACROSS THE U.S. LANDSCAPE. $$$ The USDept Labor completed a research study to gauge year-over-year changes in the labor market. The jobless rates rose in all cities across the US in August from a year earlier. In all, 16 cities recorded jobless rates of 15% or higher. For the eighth consecutive month, all 372 cities that within the scope of the survey suffered annual increases. The largest rise was in Detroit, which has the highest unemployment rate in the country at 17%. Its jobless rate increased by 7.9% horribly. But Los Angeles lost the most jobs in August from a year ago, followed by Chicago and Detroit. See the Reuters article (CLICK HERE). Also, the jobless rate for teens nationwide has reached an alarming 52% level. Younger adults tend to react by entering the world of theft and drugs. A crime wave has come, and grows worse.

$$$ MEGATRENDS CAN BE IDENTIFIED FOR DEMOGRAPHICS, ECONOMIC EXPERIMENT, AND INDUSTRIALIZATION. ALL UNFORTUNATELY POINT TO DIFFICULT TIMES FOR THE LABOR FORCE. THE MASS JOBLESSNESS CONFRONTS THE POLITICAL LEADERS, HEADING OFF EMPTY RHETORIC. $$$

Charles Hugh Smith of OfTwoMinds always offers astute editorial commentary. He describes The Gathering Storm. As preface, the United States contains a total of 26.3 million people unemployed or under-employed. The USEconomy has entered a prolonged period of structural unemployment in which an inadequate number of jobs for tens of millions of citizens. The key factors pertain to demographics, economic experiment, and industrialization (combined with the globalization trend). Smith estimates that the United States might enable only about 100 million jobs in a few years, leaving on the order of 35 to 40 million people without formal fulltime work. He identifies three long-term structural trends to be firmly in place. 1) The end of the 60-year long 'Build and Outfit Suburbia' economy that adorns the outskirts of cities. 2) The end of the 80-year long Keynesian experiment in stimulating growth and employment but at the heavy cost of ever-higher deficits and exponential expansion of debt. 3) The continuing trend to replace high cost human labor with automation, software, and fundamental inventory efficiencies, in concert with global arbitrage of wages (moving production to nations with lower wages). See the OfTwoMinds article (CLICK HERE).

The nation's Orwellian economists have changed the definition of full employment. It had been equivalent to about a 5% unemployment rate since the mid-1990 decade. They take into account the time required to switch jobs, and the chronically less capable. Nobel Prize winner Edmund Phelps and PIMCO CEO Mohamed El-Erian argue the fallout from the deepest recession in more than five decades has pushed the so-called natural unemployment rate higher to 7% approximately. They expect at least two years before unemployment will fall back to the 7% range, which will render the federal budget deficit near a record $1.6 trillion into next year. Elevated unemployment will tend to dampen consumption and economic growth, El-Erian expects. On the other hand, Bruce Kasman, chief economist at JPMorgan Chase, does not anticipate the US Federal Reserve to raise interest rates in 2010. He links a rise in the full employment rate to the permanent destruction of hundreds of thousands of jobs in industries from housing to finance. These were the primary boasted job sectors during the poorly architected and ill-fated housing boom and mortgage finance wave. Give some credit to Greenspan, who was that wrecked trend's principal cheerleader, earning him icon status. President Barack Obama has stressed job creation as the ultimate measure of the economy's health, indicating his own failing grade. His Stimulus Bill was an utter joke, a travesty and betrayal to the working class, both white collar and blue collar. The Bill followed the unfettered generosity and carte blanche issued to the Elite bankers. See the Bloomberg article (CLICK HERE).

$$$ THE SMALL BUSINESS LENDER & INSURER C.I.T. FAILS AGAIN AFTER RUNNING THROUGH A 3-MONTH REVOLVING DOOR. LIKE ALL ELSE, NO FIXES, ONLY BAND-AIDS APPLIED. REALITY IS OF SYSTEMIC FAILURE, WITH THIS ONE MORE EXMAPLE. EVENTUALLY THEY FACE LIQUIDATION AND EXIT FROM THEIR SMALL BUSINESS ROLE ENTIRELY. THE USGOVT DEEMS THEM NON-ESSENTIAL. $$$

CIT has declared bankruptcy again, as a Version2.0 in sequence. This is a serial nightmare story, whose wounds might actually receive more bandages and patches for a few more months before total liquidation. The bond holders are alone struggling. In June they cobbled a half-baked plan for a big bridge loan, financed by the bond holders themselves, but with a time limit. That limit has expired. Since shutdown and liquidation is so onerous an option, with outsized implications on small businesses, the system will strive to push CIT in & out of a revolving restructure door until it collapses on its own weight. The Wall Street Journal last week wrote, "The fate of CIT Group Inc was hanging in the balance Tuesday, as the large commercial lender readied a plan that would likely hand control of the company to its bondholders. CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in outstanding debt, said a person familiar with the matter. Even in case the company manages to finalize its exchange out of court, the resulting company will be much, much smaller. The resulting impact on the millions of small business operators will be dramatic, as during its death throes CIT was still servicing existing contracts. In bankruptcy those will be the first to go." See the Zero Hedge article (CLICK HERE).

Word has it that CIT junior bond holders are not so eager to enter into writedowns as part of the restructure plan, while senior bond holders are more willing. Let it be known that their haste to cut a restructure deal again, motivated publicly to preserve value, will result in another episode down the road with the Grim Reaper. Fast deals are ineffective solutions typically. CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy. Stock holders are lowest on the totem pole, first to be wiped out. No viable large firm exists to replace the important role played by CIT in the small and midsized business arena. The demise of CIT will be the next shoe to drop for further job losses and business shutdowns. The impact on many small and medium sized businesses will be enormous, not easily gauged at this time. It will become a news item at a later date. The commercial banks will obviously do what they have done to date, sit on the sidelines and permit small businesses to die like flies trapped in windows during wicked summer heat. Watch in parallel the macrocosm story in this same arena. Later the giant conglomerate AIG will enter seizure, an event on the horizon too. Their shell game cannot last much longer. They move assets from one subsidiary to another before state audits, with gargantuan debts still accumulating and insolvency rampant within their entire structure. One might imagine AIG insures 100 times more firms than CIT, and much larger firms.

The impact of a CIT failure and liquidation would be great, much worse than hack economists and corrupted USGovt finance officials estimate. If the struggling commercial lender CIT Group were to collapse, it would be a 'drastic mistake' as the small businesses that rely on it would have few alternate sources of funding, according to turnaround experts at the Reuters Restructuring Summit last week. Lynn Tilton is CEO of distressed investment firm Patriarch Partners. She believed any collapse would result in millions of job losses at smaller US companies. Tilton said "I have a great fear of the collapse of CIT and that people do not understand the ramifications of what that can be. I think it would be a very, very drastic mistake in this country to allow CIT to go under. Over 80% of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies. Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure." See the Yahoo Finance article (CLICK HERE). An argument can be made that Big Business wants to orchestrate an economic collapse and a banking collapse, wishes to attempt to control it, and urges the Grand Bank Consolitation Plan in the process.

A debated CIT debt swap could cost the USGovt more than $1.8 billion. If the CIT Group exchanges its debt under an offer aimed at averting a bankruptcy filing, the USGovt stands to lose nearly 80% of its $2.33 billion investment in the teetering commercial lender & insurer. It bought CIT preferred shares in December 2008. The hefty quick loss would be another shameless chapter for the official TARProgram. The TARP is loaded with losses, but political leaders summarize its success by only pointing out the gains. Under the exchange offer in the CIT debt negotiation, the USGovt would end up with 2.4% of CIT equity, equal to 386.4 million shares. At current prices, its value would be $490 million, or about $1.84 billion less than its initial purchase cost. Other official investments are set to generate losses also, in the judgment of Neil Barofsky, special inspector general of the TARP program. See the Reuters article (CLICK HERE).

$$$ AMERICAN POOR HAVE RECORD NUMBERS RECEIVING FOOD STAMPS. $$$ In the US population, a shocking 35 million Americans are on the Food Stamps Program. That is 12% of the entire US population on food assistance, the highest since records began in 1969. The top five states are Texas (3.068 million), California (2.99M), New York (2.57M), Florida (1.77M), and Illinois (1.71M). See the Feed Burner article (CLICK HERE).

HIDDEN HOUSING FORECLOSURE INVENTORY

$$$ HOUSING PRICES IN THE U.S. WILL CONTINUE TO LANGUISH. PROSPECTS FOR A RECOVERY ARE WORST IN REGIONS THAT ABUSED THE MORTGAGE PROCESS THE MOST, AND WHERE THE ECONOMIC FALLOUT IS GREATEST. $$$

Home prices will not regain the peak this decade, according to Moodys. Optimistic projections of a V-shaped recovery in the battered US housing market are without basis. The debt ratings agency Moodys predicted at least 10 years would be required to reach previous peak prices. My forecast is for never, unless a hyper-inflation episode strikes. They expect the rebound to be be disproportionately small compared to the decline. The housing market is in the third year of the current decline, the worst correction in modern US history, a result of economic recession, the backfire of mortgage industry laxity and fraud, and direct interference in remedy by Wall Street dirty hands.

Moodys wrote, "The scars that this downturn will leave on the economy and the housing market will be long lasting and persist in nearly all facets of the housing industry, including the demand for homes, ownership patterns, homebuilding, and house price appreciation. It will take more than a decade for many measures of housing activity to regain ground that has been lost as a result of the correction. The intense downturn will over-correct for the excesses in the housing market generated by the boom years. [The home building industry will rebound,] but a lingering overhang of inventories, combined with consolidation in the industry, and caution on the part of both home builders and lenders to builders, will keep the pace of construction from reaching the peak it achieved at the end of 2006."

According to the S&P/Case-Shiller home price indexes, the prices of single family homes in 20 major cities rose in June for the second month in a row, but minimally so. Without withheld housing inventory from bank balance sheets, the prices would have continued down. This is a false stability seen. On a regional basis, Moodys expects the hardest hit states such as Florida and California will be among the last to recover, well beyond the rest of the nation. Celia Chen is senior director of housing economics at Economy.com, a subsidiary of Moodys. She said, "In general, the length of the downturn and the length of recovery in a region will depend on the degree of aggressive lending or over-investment in housing that occurred during the boom. On the recovery side, states with weaker job growth will also take longer to return to peak." See the MarketWatch article (CLICK HERE).

$$$ HOME FORECLOSURES TO RESUME AS USFED PLANS TO CUT MORTGAGE BOND PURCHASES. THE HIDDEN INVENTORY HAS A PIPELINE READY TO INCREASE ITS VOLUME OF UNSOLD HOMES. AS THE USGOVT ATTEMPTS TO AVOID A PERMANENT PROP OF THE MORTGAGE MARKET, THEY WILL SOON REALIZE THEY CANNOT. THEY ARE PLAYING A DANGEROUS GAME, WITH POLITICAL MOTIVE AND DECEPTION ON A RECOVERY. USGOVT INITIATIVES TO HALT FORECLOSURES ARE WINDING DOWN. $$$

A US housing market crash should soon resume, as at least seven million homes await eventual sale from bank ownership, according to Amherst Securities Group. Widely called the 'Shadow Inventory' by analysts, it reflects mortgages already being foreclosed upon or now delinquent, in addition to already foreclosed properties that banks refuse to sell into the current dreadful market. The current total foreclosures and delinquencies of 7.0 million compares with 1.27 million in 2005. This makes up 1.35 years of supply, based on the current pace of existing home sales, they said. After the favorable summer season comes to an end, the reality of this tremendous housing overhang will set in. The Amherst analysis did not regard the home loan modification initiatives to make much of any difference, in confirmation by my analysis. They dispute the optimistic assumptions leading to a one million reduction in inventory hidden overhang. They pointed to the negative equity position, and expect later defaults. That is the revolving door from benign neglect and active protection of bank bond fraud. See the Bloomberg article (CLICK HERE).

The Federal Reserve intends to reduce the pace of its purchases of USAgency Mortgage Bonds. While they state a desire to avoid disrupting the housing market as an economic recovery takes hold, they actually are testing their ability to withdraw support. They are delusional. "The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets, and anticipates that they will be executed by the end of the first quarter of 2010," the Federal Open Market Committee said in a late September statement. Their $1.45 trillion program to monetize mortgage debt was scheduled to terminate by the end of 2009. It cannot stop. USFed Chairman Bernanke and his policy makers display delusion, as they indicated for the first time since August 2008 that the USEconomy is growing again. They will nevertheless remain committed to keep their benchmark interest rate near 0% for an extended period. Doing so is a direct contradiction of any recovery forecast or actuality. In past cycles, the USFed would begin to raise interest rates in anticipation. Their policy actions mean that they have such anticipation. The USFed must not read the home foreclosure data, and instead stick with the Wall Street instruction manual. See the Bloomberg article (CLICK HERE).

Further waves of foreclosures are on the pathway to ruin. Political pressures, well meaning programs, and banker reactions are temporarily and artificially slowing the flow of properties headed toward foreclosure sales. Legal snarls, bureaucracy, and active banker decisions are preventing foreclosure sales. The constant in the equation is a broad slice of society in deep distress, from inability to make payments as well as sporting negative equity in home loans. The shadow inventory of pent-up supply will eventually hit the market. The Bank of America issued a formal statement, saying "We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running [for a loan modification or other alternatives.]" Official USGovt efforts to stem foreclosures had stalled the foreclosure process nationwide. Foreclosures will continue to spike in Q4 as the year comes to an end. See the Calculated Risk article (CLICK HERE).

$$$ A SHADOW HOUSING INVENTORY IS HUGE AND GROWING, MAINTAINED BY BANKERS RELUCTANT TO DUMP AN AVALANCHE ON A WEAK HOUSING MARKET. THE R.E.O. PROPERTY LISTS ARE ROTATED ITEMS ON BANK BALANCE SHEETS, HIDING INEFFECTIVELY THE MASSIVE GLUT. THE EFFECT IS A CONSTANT SURPLUS OF SUPPLY WEIGHING DOWN THE MARKET, MAKING HOME PRICE RISES IMPOSSIBLE FOR STILL MORE YEARS. THIS HIDDEN INVENTORY GLUT IS A HUGE EXTREMELY IMPORTANT FACTOR, A HEEL ON THE NECK OF ANY U.S. RECOVERY. $$$

It is called 'The Shadow Foreclosure Inventory' maintained by banks, mainly the biggest banks, the same banks that abused badly the mortgage bonds and leveraged derivative contracts. They find themselves stuck with a mountain of foreclosed homes. Some come to market for sale, others withdrawn when prices offered are pathetic, still others never leave the list behind closed bank doors. These banks masquerade as improving their condition, a lie. They are dying a horrible death quietly, drowning in a sea of massive home loan losses, as they put off the day of reckoning on a monthly basis. Losses per foreclosed home are between $70k and $80k, but more for the larger jumbo properties. The landscapes in the sand bubble states (California, Arizona, Nevada, Florida) are changing toward eyesores rapidly, as unsold vacant and dilapidated properties crop up like weeds in cities. Actually they contain plenty of weeds and uncut overgrown grass and trash. They hang signs 'For Sale' and 'For Rent' and sometimes both.

It is my belief that the rotating Shadow Inventory will remain a phenomenon for at least two years. The properties will NOT suddenly hit the market in a flood, but rather smother the market in a constant overhang of supply that never goes away. The Shadow Inventory of foreclosures is real, and its severity will grow. It poses a danger to the real estate market recovery without a doubt. The fact that a debilitating effect is being debated is proof of its growing debilitating effect.

The Wall Street Journal had an article about this shadow inventory two weeks ago. It explains the consequences of the bust of the housing bubble, now two to three years along. Recall the USFed and USGovt officials thought it would be over in a year, when my forecast was an endless string of decline two years more, followed by two years more. The WSJ wrote, "Legal snarls, bureaucracy, and well-meaning efforts to keep families in their homes are slowing the flow of properties headed toward foreclosure sales, even when borrowers are in deep distress. While that buys time for families to work out their problems, some analysts believe the delays are prolonging the mortgage crisis and creating a growing 'shadow' inventory of pent-up supply that will eventually hit the market."

The homeowners are not working out their problems, are not receiving meaningful home loan modification, cannot avoid the revolving door of serial defaults. The reason has to do with the unspeakable degree of mortgage bond fraud that prevents the system from reducing loan balances. To modify with lowered loan balances would reveal the bond fraud, reveal how the majority of home loans were written into multiple mortgage bonds, like between 3 and 10 times according to the forensic analysts. Until the real estate market recognizes all its losses, including full accounting for all the foreclosures, it will not be able to regain true stability. Of course, that has implications for the broader economy as well. Enormous impacts to both banks and households will result in a much deeper recession. The micro dynamics dictate to the macro dynamics. This housing factor will ensure the USEconomic recession will be drawn out and lingering for at least two years more.

The Wall Street Journal quoted John Burns, a real-estate consultant based in Irvine California. He said, "There is going to be a flood [of bank-owned homes] listed for sale at some point." When that happens, Burns believes home prices will fall further. Overall, he forecasts home prices will decline 6% in year 2010. Then the WSJ quoted Ivy Zelman, chief executive of Zelman & Assoc, a research firm based in Cleveland Ohio. They wrote, "[Ivy] believes three million to four million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble 'a fire hose or a garden hose or a drip' she says." Vote for the drip, an endless drip, a mindnumbing drip, a major torture of a drip. Expect no home price recovery.

$$$ THE SHADOW HOUSING INVENTORY CONTAINS COUNTLESS HOMES STUCK IN PROCESS, OVER A YEAR DELINQUENT. THE OVERHANG IS ACTUALLY BACKED UP. $$$ Some data on this Shadow Inventory of foreclosures is provided. Given the nature of the problem, these foreclosures have not yet been completed, stuck in a process. The WSJ shed some light as they wrote, "As of July, mortgage companies had not begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender had not yet acquired the property. The figures do not include home equity loans and other second mortgages. Moreover, there were 217,000 loans in July where the borrower had not made a payment in at least a year but the lender had not begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue are not in foreclosure, up from 8% a year earlier." These are shocking numbers, testifying to banker reluctance to foreclose even home loans a year in delinquency. No more is the limit for bank action 90 days. See the reference to 2.7 million foreclosures that have yet to hit the market. A few such loans might be modified, but the vast majority probably will not, and half of modified loans end up defaulting anyway in future months. Note the trend of the problem is growing much worse. The portion of homes not in foreclosure despite its borrowers not making a payment in a year has more than doubled compared to last year.

The WSJ points out three possible causes for this shadow inventory. They all make sense. 1) Much time is spent to determine which borrowers qualify for the Obama Admin mortgage modification program. It takes much time to process the deluge of applications. Many do not qualify and will ultimately face the foreclosure process. Banks are stuck in the middle. 2) Banks have burdensome logistical issues to process all the properties in a timely manner. A pile of paperwork and red tape is involved within foreclosures. Banks are not equipped to handle this flood. 3) Banks clearly choose not to foreclose on all of the defaulted homes immediately. The WSJ article referred to a source who described the huge inventory, and the buyer's market, where the prices of many homes can easily be driven down. Bankers plan to spread out the foreclosures over a longer amount of time, allowing potential new buyers to enter the market over that lengthened period. This Florida person knows the real estate market there, and claims that banks are purposely holding back foreclosures for exactly this reason. Think drip, not flood! See the Atlantic Business article (CLICK HERE).

$$$ HOUSING TRIPLE WHAMMY DEAD AHEAD, DUE TO INFLICT FURTHER EXTENSIVE DAMAGE TO THE HOUSING MARKET. RECOVERY TALK IS ABSURD, WHEN THE REALITY IS LIKE THREE POWERFUL VILLAINS APPROACHING A DARK ALLEY. COMMUNISM CREEP IS OCCURRING IN THE UNITED STATES, AS STATE CONTROL WIDENS AND PRIVATE OWNERSHIP DWINDLES. THE SUBPRIME PROBLEM HAS RETURNED UNDER F.H.A. STEWARDSHIP AND MISMANAGEMENT. $$$

The Obama Admin is considering to permit the lapse of the first-time home buyer tax credit due to expire at its scheduled end on December 1st. The USFed has talked repeatedly the winddown of purchased mortgage bond securities. Ending such efforts might not simply stifle the housing rebound by depressing sales of homes. Curtailed policy support might expose the only pillar of support in USGovt initiatives. Without them, the housing market would collapse in my view. Bond monetization props keep down the mortgage bond yields and keep down interest rates on home loans. A much weaker housing market would crush the USEconomic stability that appears through the mirage mist. It would lead to resumed powerful recession. Thomas Lawler is an independent consultant who spent 22 years at Fannie Mae. He said, "Things could get ugly. We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program, and rising foreclosures." Late update. The USGovt is tinkering with the idea of increasing the first-time credit of $8000 to $15k, but extending it to all buyers. The provision would be contained in the Second Stimulus Bill, not so-named since that would be an admission of failure for the first bill. Again, props must be permanent, and likely will grow.

My view is that removed USGovt giant props of support is not possible, and a state controlled national system is firmly rooted, leading toward a combination of fascism and communism. The fascist element is seen with large corporations running the USGovt, and large scale criminal activity unprosecuted. The communism element is the pack of czars assembled in the new Politburo in conjuction with lost property. When a significant portion of people lose their homes and many lose significant portions of life savings, when the USGovt nationalizes enormous financial firms and Fannie Mae collects foreclosed properties, the end result is a very pernicious form of concealed communism. The collectivism initiatives continue. Watch for Fannie Mae home rentals soon, a disguised form of government ownership of property. It will pay big dividends, while credit derivative losses will continue to be hidden. See the Bloomberg article (CLICK HERE).

Here is more evidence. The USFed purchase of USAgency Mortgage Bonds so far this year have dwarfed net bond issuance by Fannie Mae, Freddie Mac, and Ginnie Mae. The total GSE issuance has totaled $440 billion through the end of August, according to Walt Schmidt, a mortgage bond strategist at FTN Financial. Worse, Fannie Mae & Freddie Mac are virtual wards of the state. The USFed is the ONLY buyer for their debt paper. One can conclude that the USGovt IS the mortgage market. A thorough check shows the USFed IS the banking industry. The USGovt is basically replicating the high risk and unstable subprime mortgage market, but under the government roof located at the Federal Housing Admin. The lending lax standards are back. The defaults are back. The foreclosures will be back. The bailout costs will be assuredly back. The underwriter just changed, as unsound officially sponsored loans take over along with a skein of homebuyer bribes in the form of tax credits. See the Dr Housing Bubble article (CLICK HERE).

$$$ ANOTHER EXPLOSION OF MORTGAGE LOSSES IS SOON TO ARRIVE, IF NOT ALREADY. IOWA FROM THE HEARTLAND AND ARIZONA FROM THE SAND BUBBLES REPORT IMMINENT BREAKDOWNS. $$$

The USGovt and many states are girding themselves for the next foreclosure crisis in the housing downturn. This threat has been mentioned for a full year in several Hat Trick Letter reports. The absurdly flexible Option Adjustable Rate Mortgages (Option ARM) have begun to reset, often with at least double or triple in monthly payments, sometimes more. The gimmick of paying less than the interest and permitting the loan balance to rise was stupid from the start. Since home prices fell when loan balances rose, the homeowners were quickly cast into an insolvent state where they hold negative home equity. Triggers were built into contracts if the loan balance grew too high. The triggers essentially began a foreclosure since default became the norm. Refinance of the loan is impossible in almost all cases. Underwater homes drive default and foreclosure. They were a major part of the 'Ownership Society' sham trumpeted by President Bush Jr in order to cover the deep Wall Street bond fraud, still not prosecuted. Iowa Attorney General Thomas Miller met last month with members of the Obama Sdmin to discuss ways to halt the widespread mortgage scams. He said, "Payment Option ARMs are about to explode. That is the next round of potential foreclosures in our country."

The Option ARM threat is here and now in Arizona. The state's Attorney General Terry Goddard said, "It is the other shoe. I cannot say it is waiting to drop. It is dropping now. [They] threaten a much greater hit to the consumer than the subprimes." The Go-Go sand bubble state of Arizona has 128 thousand Option ARMortgages that will reset over the next year. Many have started to adjust in September, and delinquencies are fast on the rise. In fact, these Prime Option ARMs are performing much worse than the conventional mortgages to prime borrowers, indicating a deep flaw in the loan contracts themselves. These mortgages tend to be Jumbos, with significantly loan balances and home values. The high end of the housing market has suffered disproportionately high valuation declines, high percentage loss, more ruin. The delinquency rate is on par with Subprime loans!!! The majority of such borrowers are unable to sidestep foreclosure. See the Reuters article (CLICK HERE).

$$$ THE SUNBELT STATES WILL CONTINUE TO BE WRECKED BY MORTGAGE WOES. THE PRIME OPTION ARMS WILL DEAL BLOW AFTER BLOW, WHEN THE STATE FINANCES ARE ALREADY REELING. GOOD WEATHER AND RUIN GO HAND IN HAND WHEN HOUSING BUBBLES BUST. MEASURE FALLOUT IN YEARS. $$$

The latest Office of the Comptroller of the Currency Option reported in August that 900 thousand Option ARMs are active in the United States. Many of these distressed loans are located in the states of California and Florida, each with severe record breaking budget problems. These loans will again destabilize the housing markets in these regions, and cuase more job loss, thereby damaging the local economies. Fully 25% of the Option ARMs are either in foreclosure or in serious delinquency. The great majority of such loans will not hit recast dates until 2010, yet the performance of these loans is already a disaster. See the MyBudget360 article (CLICK HERE).

$$$ LIKE MATCHING BOOKENDS, THE COMMERCIAL MORTGAGE MARKET CONTINUES ITS COLLAPSE, WITH EXTREME BANK LOSSES SOON TO HIT. PRICES ARE WAY DOWN, AND SALES VOLUME IS WAY DOWN. THE LOSSES ARE INEVITABLE SINCE LOAN REFINANCE IS IMPOSSIBLE. TOO MUCH VALUE HAS BEEN LOST. REBOUND TO EQUITY IS NOT OCCURRING. $$$

Commercial property prices in the United States resumed a steep decline in July after showing signs of leveling off in June, according to Moodys Investors Service. Tighter credit standards curtail lending and have pushed landlords toward default. The Moodys/REAL Commercial Property Price Index fell by a hefty 5.1% in July from the previous month. The decline in June was a mere 1%. The index has declined around 40% from its October 2007 peak. Actual sales of commercial property this year are on track to fall to an 18-year low. See the sharp dropoff in commercial real estate (CRE) sales this year.

Neal Elkin is president of Real Estate Analytics in New York, which partners with Moodys to produce the report. He said, "We are still vulnerable to moves on the downside. As time passes, the distress and the stress among those who need to sell is growing." Elkin cited data for sales classified as 'Troubled' (close to default) as having doubled to 23% in July from March, never witnessed before. Commercial sales in year 2009 through July are running at one third the pace of the same period last year. Office sale prices fell 23% from a year ago in New York, 27% in San Francisco, and 22% in WashingtonDC. Prices of apartment buildings in the South have seen record setting steepest value declines. They have dropped 44% in the 12 months through June, almost twice the nationwide decline of 24%. See the Bloomberg article (CLICK HERE).

Thanks to the following for charts StockCharts, Financial Times, Wall Street Journal, Contrary Investors, Business Week, Merrill Lynch, Shadow Govt Statistics.