Talk of Recovery Hides Collapse

The talk of recovery pervades insider thinking. The major media worldwide plays the same refrain. This is a desperate attempt to befuddle the public with misdirected propaganda to preserve confidence in a system that is in a state of collapse. As CNBC leads the charge, loss of faith in the system grows with each passing day. In spite of control of the major media by elitists, talk radio and the Internet hammers away incessantly with the truth influencing more and more 24/7 worldwide. As a result of the success of the alternative media a good many investors realize we have a systemic credit crisis that has turned into a debt crisis as well. The residential real estate collapse is still collapsing with no end in sight. That has been joined by a commercial credit crisis, which has forced banks, Wall Street and corporate America to keep two sets of books â€" Europe and England as well. We called the beginning of the top of the residential real esta te in the summer of 2005, warning our subscribers it was time to begin to move out of real estate and to personally rent. We were the first to make that call as a few others followed six months or more later. The failure of Bear Stearns was soon followed by Lehman Bros., and a crisis of confidence was underway.

The immediate move was to save the banks, Wall Street, insurance and elitist corporate America. A number of programs were initiated, some of which are still in place. During the crisis worldwide a number of people began to accumulate cash. Some cash in hand, some in money market funds and some in gold and silver related assets. During this period lenders called loans and an unprecedented de-leveraging took place that affected every investment. As a result today such cash and cash like holdings are more than 50% higher than they were five years ago. The system is under pressure, and was it not for government deficit spending of $1.6 trillion and the infusion annually of some $2 trillion by the Federal Reserve the system would have long ago collapsed into deflationary depression.

The Dow fell to 6550 in March of 2009 and then with the above spending rallied back to 11,200. During that one-year timeframe many investors left the market pouring into cash, money market funds and gold and silver related assets. There was certainly no incentive to buy bonds at zero interest rates and the market had again become too dangerous.

We are some 14 weeks away from congressional elections, which could be the most important in history. Will the electorate dump the duplicitous incumbents to try to regain control of their country and their freedom? We won’t know until we get there. If voters do not turn out these crooks we cringe to contemplate the future.

Talk today centers around a stillborn recovery that never quite held on long enough to materialize. Five quarters of 3% to 3-1/2% growth traded for $2.5 trillion. Money and credit was thrown at the system again, and again it didn’t work. Keynesianism at its finest.

The housing purchase subsidies are gone, and real estate sales and prices are again falling. Even with interest rates near 4-1/2% for a 30-year fixed rate mortgage there are few takers in the hottest sales period of the year. There are four million houses in inventory for sale or 1-1/2 years supply. That figure could be 5 to 6 million by yearend, as builders’ build 545,000 more unneeded homes. More than 25% of mortgages are in negative equity. Excess mortgage debt is $4 trillion and headed much higher. Government is so desperate that they have begun to take punitive action against those whose homes are under water, but they can still make the payments, but are bailing out. What a disincentive for anyone to buy a house. Will debtors prison be far behind?

There certainly have been strategic defaults, but not as many as government would have you believe. Twenty-five percent of all borrowers are stuck with negative equity, which we expect will worsen. That could mean a wealth loss of some $4 trillion. Obviously, homeowners are hoping for higher prices. If that does not happen you can expect more walk-away foreclosures. There are already four million homes for sale and many more could be on the way. Plus, more than 500,000 more new homes are being added to saleable inventory annually. Next year will be another bad year for builders. Some will fail and others will merge. Government is having ongoing meetings with three major builders in an effort to nationalize the industry, as they will do with banking. Government is doing the worst thing possible. It reminds us of Sovietization. The only thing government has going for it is that underwater homeowners usually do not default until they are down 62% from equity, but that could change. Interest rates at 4-5/8% for a 30-year fixed rate mortgage should keep them in their homes for now, but if interest rates rise that plus could become a negative. That leads us to believe that interest rates will stay that way for a long time. As a result the Fed must keep interest rates at zero for a long time to have millions of mortgages kept from falling into foreclosure.

At $15.3 trillion the world’s holdings of US dollar denominated assets in ten years rose from 60% of GDP to 108%. This in part has been caused by a never-ending current account deficit. This factor alone makes one wonder how the US dollar can be a strong international reserve currency.

In just six years from 2001 to 2006, mortgage debt grew to $14.5 trillion - a credit expansion unheard of in history. In the past almost two years government borrowings have grown 49% just slightly more than the 45% in 1934-35. The Keynesian game is the same, it is just the time frame is different.

Over a 20-year time frame total US credit rose from $13 to $52 trillion, or to 370% of GDP. A good part of these credit excesses have been exported to the rest of the world and they are increasing exponentially; almost 160% just in the last six years, or to $8.5 trillion.

The deliberate move to expose Greece’s problems, which those in government and finance had been aware of for years, backfired and exposed all the problems in Europe in the process. The impact of Greece, and the elucidation of the depth of problems in Portugal, Ireland, Italy and Spain curtailed the so-called global recovery and exposed extraordinary weakness in the euro zone throughout the EU and Eastern Europe. That in turn will ultimately cause problems for the US dollar and the pound. There is now no question that the dollar rally is over and the question is when will the dollar retest the 74 area on the USDX? The leverage in banking is still 40 times deposits and we see no way to easily reduce that. We believe dollar reflation will have to be the answer for the Fed.

The financial terrorists that inhibit our banking system and Wall Street still remain confident that inflation caused by quantitative easing won’t show up for years, if ever. What else can the Fed and ECB do except use stimulus? The sovereign debt contagion in 20 major countries and as many creditor countries, is not going to go away anytime soon. These are systemic, structural problems. We certainly do not see the likelihood of the dollar proving any safe harbor. Those who have flocked to the perceived safety of the dollar are going to be very unhappy with the results.

Many countries are enmeshed in major debt and in the case of the US the debt is colossal. It is hard for markets to appreciate this in Europe, the UK and US. The problems of the credit crisis are not over and there won’t be a recovery, unless the Fed injects $5 trillion in to the economy. That will keep the economy going sideways for two years as inflation rises. Small and medium sized business cannot get loans, so they cannot expand and hire. About 23% of large corporations may expand and hire. Offshore US corporations have far too much excess capacity already. As you all know there are many speed bumps on the road ahead. You had better be prepared for them.

Switching gears again, we find very little coverage of the problems in Eastern Europe. Hungary is a good example. Financial exposure is Austria $37 billion, Germany $32 billion, Italy $25 billion, Belgium $17.2 billion and France $11 billion. This kind of exposure to the banking systems of these countries could be very painful. It will be interesting to see if national governments, or the ECB step in as they did in Greece, and manage the problems. The world should be paying attention because there are 20 major countries in the same dilemma. The sovereign debt crisis is just getting underway as observed with foresight. There has been no containment and 56% of Hungarian real estate loans are in Swiss francs. The problem, which we have been citing for some time, could cause a domino effect across Europe and we wonder if the solvent nations and the ECB can handle the debt rescue. Our answer is no. The next shoe to drop could be in this region and surprise almost everyone.

We have to laugh at the amateurish journalists who work for government agencies. There are a number of them that pop up here and there from time to time to give you what government wants you to hear. We caught on to this in the late 1970s. We lived in a town where a certain writer supposedly lived. He had a P.O. Box there and we found out from the postmaster that his mail was picked up weekly by a spooky guy who then mailed it elsewhere. From time to time this journalist pops up, in far away places, or in a very important position, usually with a counte rpart. In this case it was with a well-known friend of many years who we know is part of British intelligence’s controlled opposition.

The latter was front and center on the coming depression, which both believe was caused by government intervention. It was, but that is only part of the story. These two journalists gave up the old paradigm of the Democrats cause depressions. The writer goes on to tell us how he is exceedingly suspicious of conspiracy theories, because one must have evidence. Writers do not have access to CIA files, Fed records or Wall Street criminal gangs, but we can sure back into situations. We know misdirection and misinformation when we see it, and that is what these journalists were up too, as well as being the purveyors of information on our current depression, which the average American and European is well aware of. Thus, the depression is not a conspiracy, it just happened, because we have no evidence that the depression was deliberately caused by the Bush administration. It, of course, was simple incompetence.

The commercial paper market rose $2.4 billion last week to $1.100 trillion. We now have another $34 billion unemployment benefit extension. Congress, in spite of coming elections, were terrorized into extension. Our representatives and senators do not care a wit about deficits nor do they have any understanding of economics, finance and the dollar. They know deflation has to be avoided at all costs. It neutralizes the financial sector and politicians. More than 50% of Americans feel we are entitled to full employment, no inflation and early retirement, as government deficits expand. Is this not the Keynesian way?

The only answer, as we pointed out before, is for the nations to have a meeting, execute global currency revaluation and devaluation and placing gold perhaps at $10,000 an ounce to back the dollar or some substitute currency. If the choice was the dollar then we’d have to have to see just how much gold the US really has. What it doesn’t have it would have to purchase. In that process the Federal Reserve should be relieved of its charter and its functions returned to the US Treasury. That would stop the unlimited issuance of money and credit.

That could be accompanied by legislation to enact tariffs on goods and services. This would stimulate the economy, create jobs, return production and services and get America going again. This would stop asset price inflation. The current free trade situation is like Smoot-Hawley in reverse a devastation of the US economy.

The massive injection of money and credit have to end and they will end. We will return to a gold standard and the way back will be painful.

Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trill ion, a government watchdog said on Wednesday.

The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and to guarantee more mortgages to the support the housing market.

The International Monetary Fund Executive Board weighed in on central banks' strategies for battling asset bubbles, saying they might want to use interest rates as a tool to prick such bubbles. The financial crisis has prompted reassessments of central banks' efforts to address bubbles. The IMF urged tougher regulation, such as stricter capital requirements, restrictions on banks' use of short-term loans and higher collateral requirements. Beyond that, interest-rate policy might have to be used, the IMF said.

A fiscally conservative Democrat who chairs the U.S. Senate's budget committee on Wednesday said he supports extending all of the tax cuts that expire this year, including for the wealthy.

"The general rule of thumb would be you'd not want to do tax changes, tax increases. until the recovery is on more solid ground," Senator Kent Conrad said in an interview with reporters outside the Senate chambers, adding he did not believe the recovery has come yet. Each day, $4 trillion dollars of currency are traded. For international businesses and travelers, trading dollars for other currencies serve a legitimate purpose. However, nearly 80 percent of these transactions are undertaken by a handful of major banks. Experts agree that most of these transactions are made for purely speculative purposes.

Wealthy traders and big financial institutions make huge bets on the fluctuations in currency value, and they can make massive profits if their bets are correct. This type of speculation helped to worsen the rec ent financial crisis and serves no purpose other than to make a few people and institutions even richer.

Today, I introduced H.R. 5783, the Investing in Our Future Act. My legislation would simply impose a small tax of 0.005 percent on these currency transactions. The money raised would be put toward investments in children, global health and climate change mitigation. Studies estimate a worldwide 0.005 percent tax on dollar transactions would raise $28 billion a year and reduce currency speculation by 14 percent.

Earlier the NAR released the existing home sales data for June; here are a couple more graphs. The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really he lps to look at the YoY change.

Inventory increased 4.7% YoY in June. This is the third consecutive month of a year-over-year increases in inventory, and this is the largest YoY increase since early 2008. This increase in inventory is especially bad news because the reported inventory is already historically very high, and the 8.9 months of supply in June is well above normal. The months-of-supply will jump in July as sales collapse probably to double digits - and a double digit months-of-supply would be a really bad sign for house prices.

Sales (NSA) in June 2010 were 8.3% higher than in June 2009, and also higher than in June 2008. With the expiration of the tax credit, I expect to see existing home sales below last year starting in July. In fact I expect sales in July to be well below last year, and probably the lowest since 1997 (or so). This was another weak report. Sales were slightly above expectations (5.37 million at a season ally adjusted annual rate vs. expectations of 5.3 million), but the YoY increase in inventory and the increase in months-of-supply are the real stories. If months-of-supply increases sharply as I expect, then there will be additional downward pressure on house prices.

ICI reports that the week ended July 14 saw another massive outflow from domestic equity mutual funds of $3.2 billion, bringing the July total to $7.3 billion, and year-to-date equity outflows to a stunning $37.5 billion. Yet neither liquidations, nor redemptions, nor mutual fund capitulation, nor lack of liquidity, nor lack of human traders, nor rumors that it is all one big scam, can tame the market's most recent bout of irrational exuberance: in a time when equity funds had to redeem over $7 billion in stocks, the stock market surged by 90 points! Just like last week, despite huge order blocks of selling pressure, the fact that volume is so light an d liquidity so tight, the market succeeds in ramping ever higher, now that the few remaining carbon-based market participants have reverse engineered the key algo "predictive" front-running mechanisms, and manage to fool them that there is bid side interest, into which all domestic equity mutual funds manage to sell en masse. Soon enough there will be little left to sell, which will, paradoxically cause a much overdue market crash. (It is a bizarro market for a reason). And even as equity mutual funds are running on fumes (explains Bill Miller's call of desperation yesterday), all the money in the world continues to rush into credit funds: the past week saw inflows into every single bond category, with a total of $5.8 billion going into all taxable bond funds. We are gratified that behind the fake equity facade of "alliswellishness", everyone is pulling their money out of stocks with an increased sense of urgency. Retail has had it with this pathetic shit show of a market: t he computer can front run each other for all anyone cares. We are fairly confident that the Obama administration will not have a soft spot in its heart to bail out the quant community... unless, of course, Rahm Emanuel discovers some way to unionize algorithms and give them voting rights.

Conceding that they can't find enough votes for the legislation, Senate Democrats on Thursday abandoned efforts to put together a comprehensive energy bill that would seek to curb greenhouse gas emissions, delivering a potentially fatal blow to a proposal the party has long touted and President Obama campaigned on.

Instead, Democrats will push for a more limited measure that would seek to increase liability costs that oil companies would pay following spills such as the one in the Gulf of Mexi co. It also would create additional incentives for the development of natural gas vehicles and would provide rebates for products that reduce home energy use. Senate Democrats said they expected to find GOP support for the bill and pass it in the next two weeks.

Democrats have not ruled out pushing for a more extensive measure when Congress returns from its August recess or in the session after the November midterm elections, although it's not clear that any of the Democrats or Republicans who now oppose a more expansive measure would change their minds. Republicans have long argued that the bill, by seeking to limit emissions, would lead to higher energy costs, a view that some conservative Democrats have also taken.

The decision to abandon the propos al was another concession to the difficult political environment that party leaders face, as many rank-and-file congressional Democrats are wary of casting any votes that could be used in Republican attacks.

The number of Massachusetts residents filing for bankruptcy soared in the first half of 2010, as the continued weak economy left thousands of homeowners unable to pay their mortgages or sell their properties.

Nearly 12,000 people filed for bankruptcy in the first six months of this year, 25 percent more than in the first half of 2009, according to data released yesterday by the Warren Group, a Boston real estate information company. That is the largest number of Bay State filings for a six-month period since Congress overhauled the nation’s bankruptcy laws in 2005.

Goldman Sachs G roup Inc. told U.S. investigators, which counterparties it used to hedge the risk that American International Group Inc. would fail, according to three people with knowledge of the matter.

The list was sought by panels reviewing the beneficiaries of New York-based AIG’s $182.3 billion government bailout, said the people, who declined to be identified because the information is private. Goldman Sachs, which received $12.9 billion after the 2008 rescue tied to contracts with the insurer, has said it didn’t need AIG to be rescued because it was hedged against the firm’s failure.

“We want to know the identity of those parties, partly just to know where American taxpayer dollars went, but partly to assess Goldman’s claim,” said Elizabeth Warren, chairman of the Congressional Oversight Panel, in a Senate hearing this week. “We cannot evaluate the credibility of their claim that they had nothing at stake one way or the other in the AIG bailout.”

The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankru pt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating." And since ratings are officially a part of a vast majority of Reg-S filed documentation, the response by issuers has been a complete standstill in new issuance, especially asset-backed underwriting and non-144A high yield issues, as the raters evaluate how to proceed. Alas, as there is no easy fix, underwriters' counsel and issuers will promptly uncover new loopholes and ways to issue bonds without the rating agencies' participation. Did Moody's and S&P just become extinct?

BP PLC, the company battling a record oil spill in the Gulf of Mexico, agreed to sell assets in North America and Egypt to Apache Corp. for $7 billion as part of its plan to raise cash to fund liabilities.

The deals with Apache include BP’s Permian Basin holdings in Texas and Southeast New Mexico as well as gas properties in Western Canada, London-based BP said yesterday. BP also agreed to sell Western Desert business concessions and an East Badr El-din exploration concession in Egypt.

The announcement comes after BP said it plans to sell some $10 billion of assets over 12 months to help pay for damages related to the Gulf of Mexico oil spill, caused by the explosion of its Macondo well on April 20. BP said it expects the deals to be closed in the third quarter.

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