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Daily Digest - Dec 19

Friday, December 19, 2008, 7:54 AM

Fiat economy,  Fed's attempts lead to refi activity mainly, a bearish interview, Bay area home prices sink, the disorderly bankruptcy option, a huge current account deficit,  personal income (chart), the 'flation battle, where your looted money went.

Economy

The US Economy has become a "Fiat Economy"

Ask yourself this question...

Why has the Federal Reserve essentially created a ‘zero interest rate policy' for the United States today by cutting the Fed Funds rate to near zero?

If your answer is ‘to create economic growth' then I must tell you that you are listening to Jim Cramer too much.

The correct answer is that the Federal Reserve is desperately trying to ‘create credit growth‘, not organic economic growth. When the United States lost its status as a manufacturing powerhouse in the 1970's and the nation became ever more dependent on a consumer driven 'services industry' the only way to show any growth was to keep the availability of money growing.

The past decade of credit growth was pushed so high that when it fell over the edge it sent the economy of the United States into a free fall. When credit is removed from the system the true health of the economy was revealed.

Credit is merely a disguise for real growth

The collapse of the credit system in this country last year has pulled the mask off the real economy. And what has been revealed is that there was nothing behind it. The only growth obtained (as reflected in the US GDP) has been a direct result of credit growth.

This chart shows the personal savings rate of Americans for the last half century. Notice that in the early 1980's the ability of people to save money began to decline. Ever since that time that ability to save has continued to dwindle up to this day.

 

Federal Reserve's Efforts to Get New Homes Selling Has Failed, Refi The Only Game In Town (Chart)

 

Bearish
Interview (7:25+/- Minute Combined Household Debt, 9:15 +/- Minute # of
Homes, NOT About Credit Crisis, All About Unwilling Borrowers) 

 

Bay Area median home price sinks to 8-year low; sales up over '07 again 

La Jolla, CA.----Bay Area home sales decelerated in November but beat the year-ago mark for the third consecutive month. The allure of discounted foreclosures continued to drive sales in affordable inland markets, which helped push the median sale price down to its lowest point since former President Bill Clinton was in the White House. 

The median price paid for all new and resale houses and condos combined in the nine-county Bay Area fell to $350,000 last month. That was down 6.7 percent from $375,000 in October and down a record 44.4 percent from $629,000 in November 2007, according to MDA DataQuick, a San Diego-based real estate information service.

The November median sale price - the point where half of the homes sold for more and half for less - stood at its lowest since it was $350,000 in September 2000. It was 47.4 percent below the peak median of $665,000 reached last year in June, July and August. 

 

"orderly" bankruptcy for automakers 

i would submit that an 'orderly' bankruptcy for the automakers is quite unlikely for so long as the credit default swap market exists in its current form. if credit events at GM and Chrysler trigger collateral calls on the multiparty CDS that underlie huge piles of synthetic CDOs, bankruptcy here could well spark another wave of the illiquidity and forced asset sales such as was seen in the aftermath of Lehman -- except this time, with trillions in synthetic CDOs on bank balance sheets being revalued from 95 cents to pennies or less, such a wave might be accompanied by massive bank nationalizations. 

 

Dr. Peter Morici: US records huge Current Account Deficit; Heightens risk of Depression 

Today, the US Commerce Department reported the third quarter current account deficit was $174.1 billion. This was caused largely by a $214.7 billion deficit on trade in goods. 

 

Change in Personal Income (Chart)

 

BATTLE OF THE FLATIONS

While the beginning of the collapse from too much credit was parallel to the previous experience of the depression, the response today is different. The size of the monetary stimulus and the risk to the dollar from foreign holders -- who can also see the implications of the out-of-control deficits -- strongly argue for a return to inflation much sooner.

How much sooner? Impossible to say, but remember: deflationary or inflationary fears are not the independent agent that will determine whether or not we will see inflation (though, in the intervening phase, they will certainly be an important economic driver). The Federal Reserve is throwing everything it can at the financial markets to fight deflation. As you can see in the chart below, the Fed has doubled the size of its balance sheet since September.

 

Where Our Looted (aka "Bailout Money") Tax Dollars Wound Up

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11 Comments

Doug's picture
Doug
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Baltic Dry Index (BDI)

I believe I've seen some mention of this index on this site before.  A friend sent me this link.  It's a pretty ugly indicator.  Comments?

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barrt
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Schiff Interview, thanks Doug

Wow strong speach from Mr Schiff, you gotta like him, spot on so far all the way through. Thanks Doug

heres a link to the dollar index http://quotes.ino.com/chart/?s=NYBOT_DX&v=d1

it may be that the dollar collapse isnt here yet (of course im not contradicting peter schiff, i know next to zip) there has been a bounce in the last few days. It seems to me like if the sccok market is going down, then the dollar goes up and visa versa, hence the recent drop in the dollar as the markets have been rallying, i think there is a strong chance that the markets are going down a lot more, if it does then the dollar will go up as everyone sells more stock.

Same with oil... and gold. Dollar up, price of oil and gold down (although that rule for gold is being distorted by mass interest in my view)

Elliotwave.com had been spot on through this, they are amazing if a little wierd, they call this All The Same Market, meaning that its one up, all up, all markets are going up or down together. look at the yearly charts for many different assets, markets or resourses and they all display the same graphs, wierd. Again gold is a bit different because i think of the mass interest. Of course that will all change at collapse time, there will be only one market, gold. And if things get really bad, there wont even be that. Just a bunch of cavemen with their shiny metal and guns. But thats not going to happen. Is it?

i think between Chris, Schiff and elliotwave, we know what is coming, there cant really be too much doubt can there? the dollar strength or weakness will tell us exactly when it arrives

Get out of the dollar (or pounds - im in pounds sadly) is surely sound advice, protect your claim on human labour before it evaporates for ever.

thats my 1.35 uk pence anyway

good luck

barrt

Doug's picture
Doug
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Re: Daily Digest - Dec 19

Oops, I screwed up.  I posted the wrong link.  This is the right one (I hope):

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Re: Daily Digest - Dec 19

Damnthematrix's picture
Damnthematrix
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Re: Daily Digest - Dec 19

US rescues carmakers, seeks more money for banks

http://www.abc.net.au/news/stories/2008/12/20/2451763.htm?section=justin


The long-awaited car bailout caps a week of dramatic events in the US economy.

The long-awaited car bailout caps a week of dramatic events in the US economy. (Reuters: Rebecca Cook, file photo)

The US Government has thrown a $25 billion lifeline to
Detroit carmakers crippled by the severe economic downturn, and
Treasury has called on Congress to release more money for the still
fragile banks.

The long-awaited car bailout caps a week of dramatic events in the
US economy, most notably a cut in rates to near zero. A recessionary
Japan followed up yesterday by shaving its already minimal rate to 0.1
per cent.

The rescue of American icons, General Motors and Chrysler, averts a
collapse that could send the economy into a deeper and longer
recession. GM said it was in danger of running out of cash by year-end.

"The American people want the auto companies to succeed and so do
I," President George W Bush said in announcing the rescue, sealed in
the waning days of his eight years in office.

Had the Government not intervened, Mr Bush said, a free market
allowed to take its course "would almost certainly lead to disorderly
bankruptcies."

President-elect Barack Obama agreed and said Mr Bush's decision
was a "necessary step" to avoid collapse and that the carmakers should
not squander the chance to reform management.

US stocks lost some of their initial gains on the auto news by
midday. European shares fell on the continued drop in oil stocks and a
bank rating downgrades and the dollar extended gains against the yen.

Long-term US Treasury bonds, a safe haven offering record-low yields
in recent days, fell overnight and pushed the 10-year yield up to 2.13
per cent.

"It's a lifeline, but it doesn't get them completely out of the woods," Erich Merkle, analyst at Crowe Horwath, said.

"It takes them [GM and Chrysler] forward until March. Basically the next administration has to deal with it."

Taps run dry

The bailout funds will come from the $700 billion Troubled Asset
Relief (TARP) program passed by Congress in October and originally
designed to help the banking industry.

Treasury Secretary Henry Paulson said after the car deal that the
first $US350 billion allocated to TARP was effectively exhausted and
the second tranche was needed soon.

"It is clear however that Congress will need to release the
remainder of the TARP to support financial market stability," he said
in a statement.

Banks, under pressure to use TARP funds to increase lending, had
some more bad news on their risk overnight. Standard and Poor is to
downgrade the credit ratings of 11 top global banks, including
Citigroup and JPMorgan Chase and Co.

The carmakers get just a fraction of the bank funds. GM will receive
$US13.4 billion and Chrysler $US4 billion, while Ford Motor Co said it
does not need a loan at this time, the White House said.

Loans would be called in if the automakers cannot prove they are viable by March 31.

A thankful Rick Wagoner, GM CEO, said he will now focus on "fully and rapidly" implementing the restructuring plan.

Carmakers are among the hardest hit by the global economic downturn,
with Japan's Toyota expected to report its first-ever annual loss.

The head of Japanese automaker, Honda, warned the strong yen could
cripple Japanese industry and spur massive layoffs and transfers of
production abroad.

Japan nears zero rates

The yen was trading at a 13-year high against the dollar after
Tuesday's dramatic rate cut by the US Federal Reserve to a range of
zero to 0.25 per cent.

With the US rate below Japan's, the Bank of Japan (BOJ) lowered its
key policy rate yesterday to 0.10 per cent from 0.30 per cent.

The BOJ said it would step up outright buying of Japanese government
bonds and temporarily buy commercial paper outright - further moves to
ease the credit squeeze throttling the world's second-biggest economy,
already in recession.

Calling the economic turmoil of the past few months "the most rapid
in our lifetime," BOJ governor Masaaki Shirakawa told a news conference
he could not rule out further rate cuts.

Oil, which has fallen 25 per cent in the last five trading sessions
on the bleak outlook for energy demand, was trading 3 per cent lower
yesterday despite OPEC's announcement this week of a 2.2-million-barrels-per-day supply cut, its biggest ever.

The world's biggest producers and consumers of oil called for
international cooperation to stabilise prices, which have plunged by
more than $US110 a barrel from above $US147 in July.

"Wild fluctuations in oil prices harm nations all round the world," British Prime Minister Gordon Brown said.

Saudi Arabia said the price crash was playing havoc with investment in producer nations.

- Reuters

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Peter Schiff Radio Show - parts 2-5

The above posted Peter Schiff clip is only part 1 of 5 of his radio show from last Wednesday. Here are the other parts:

2/5 -

3/5 -

4/5 -

5/5 -

 

Heidi

Damnthematrix's picture
Damnthematrix
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Re: Daily Digest - Dec 19
US bond yields halved in 2 months
That is a good link, it points out that it is capital gains the bond traders
are after.

Every halving of interest rates double the capital gain on T-bonds sold at
the previous rate. So even going from 2% to 1% yields big capital gains to
bond traders. This is how the bond market keeps going even with rates at 2%
or 1%. Interest rates have been trending down for 30 years, so as long as
the trend continues, there are risk-free capital gains (if you ignore the
$US's value)

Where do all these risk-free profits come from? Prof Fekete says that the
profits are capital transferred from productive enterprise to speculators.
Businesses borrow money at an interest rate x, and every time the interest
rate halves, the additional liquidated value (ie liability) of that debt has
doubled. Thus falling interest rates are a curse, not a blessing, and
destroy productive businesses. However this erosion of capital does not show
up on balance sheets due to it being overlooked by accounting standards:
http://professorfekete.com/articles%5CAEFCMRE.pdf

However the 30 year bull market in T-bonds is about to end with a blow-off
top. It is the last remnant of the post 1980 bull market and it is about to
collapse. Like the link says, it is another bubble, like IT stocks, houses
and oil, to suck people in and take their money.

Damnthematrix's picture
Damnthematrix
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Re: Daily Digest - Dec 19
GM Opens Eighth China Plant,
Won't Add Further Capacity Soon
By Tian Ying

Dec. 17 (Bloomberg) -- General Motors Corp.
opened its eighth vehicle plant in China and said it had no plans for
adding further capacity amid slowing demand in Asia's biggest auto
market.

This ``has been a big year in terms of expansion'' and it ``probably will keep us occupied for the foreseeable future,'' Kevin Wale,
GM China's president, said by phone today. He spoke from the
northeastern city of Shenyang after the opening of the carmaker's new
2.67 billion yuan ($390 million) plant.

GM expects to boost China sales about 9 percent next year as it adds
new models and an economic stimulus plan helps revive overall demand.
Auto sales in China have declined in three of the past four months
because of the global economic slowdown.

``That is a short-term downturn,'' Wale said. We are ``building
capacity for the long term and we are very comfortable with what we are
doing.''

GM, the biggest overseas automaker in China, is counting on emerging
markets and U.S. aid to help it survive a plunge in North American
sales. The Detroit-based automaker expects to sell as many as 1.2
million vehicles in China next year, Wale said on Dec. 5.

Shenyang Plant

The new factory in Shenyang will be able to make as many as 150,000
vehicles a year, using a two-shift system, the automaker said in an
e-mailed statement. The plant is an equal venture between GM and SAIC Motor Corp., China's biggest automaker.

GM's total capacity in China is more than 1 million vehicles a year, spokesman Henry Wong said. The carmaker opened a new plant in Qingdao, eastern China, in March with a capacity of 300,000 vehicles a year.

GM has no plans to shed workers in China, Wale said. The automaker
expects a ``single digit'' increase in industrywide sales next year,
helped by China's $584 billion economic stimulus plan.

The ``strong stimulatory action'' will ``start to kick in in the second half of next year,'' Wale said.

The new Shenyang plant will begin full production of Chevrolet Cruze
compacts in the second quarter of next year. GM plans to introduce 10
new models in China by 2011, according to Wale. The carmaker added a
new Buick Regal on Dec. 1.

GM's China-made vehicle sales rose 8.1 percent in the first 10
months to 861,458. Its U.S. sales fell 20 percent to 2.56 million.
China's industrywide auto sales jumped 11 percent to 7.83 million in
the period, compared with a 15 percent drop in the U.S.

GM and Chrysler LLC are seeking $14 billion in emergency aid from
the U.S. government to keep operating through the first quarter.
President George W. Bush may decide on the bailout as soon as today, according to a government official who spoke yesterday on condition of anonymity.

Damnthematrix's picture
Damnthematrix
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The.Techno.Luddite
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Re: Daily Digest - Dec 19

Looking at todays markets, and how their moves lined up with news announcements:  its pretty clear that the big systems are now ADD.  Not long ago, big announcements of various billions moved here or there would reap a few weeks of market upswing.  Then it was just a few days.  And now?  A big announcement seems to have bought them about 2 hours of dead cat bounce.

We live in short attention span theatre to an extreme now!

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Re: Peter Schiff Radio Show - parts 2-5

Heidi, those were good listens, thank you

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