Week of June 23, 2008

Sunday, June 29, 2008, 2:58 PM


June 28

Hoping the Upswing Is Nigh (June 28 – NYT)

DON’T worry! All the bad news about the economy is
actually good news, Kiplinger’s Personal Finance says as part of a
package of articles highlighted on its cover with the headline: "Market
Update: For Stocks, the Worst Is Over."

The stock market,
"which tends to anticipate future economic activity, typically bottoms
in an atmosphere of pervasive gloom and negativity," Andrew Tanzer

Those who have lost money in the market so far this
year need to hope this optimism is justified. Elsewhere in the same
issue, James K. Glassman notes that "it’s possible that the 10-year
period ending Dec. 31 will be the first since the 1930s in which
Standard & Poor’s 500-stock index loses money."

“Hope” and
“optimism” are great things to have, but they should not form the basis
for an investment strategy. In times like these, I am constantly
scanning for signs, data, and any information that might indicate that
a change in investment strategy is warranted. Which means I find the
sorts of sentiments expressed in this article to be irksome. Where’s
reasoning? What’s the data?

us some solid information about how corporate earnings are going to
fare over the next few years. Or how we will manage to rebuild savings
while maintaining full spending. Anything. Instead we get a mélange of
sentiment readings and some hand-waving. Please don’t allow these sorts
of articles to cloud your vision. Remember, hope is not a strategy.

Now's the time to buy and hold (CHICAGO MarketWatch)

Investors may be seeing the "peak of negativity" in
the markets these days, and that's exactly why buy-and-hold types
should be on the lookout for opportunities, T. Rowe Price's chief
investment officer said on Friday.

"Sentiment is so negative
right now that you can't help but make money in some of these companies
if you take a three-year, buy-and-hold horizon," Brian Rogers told
attendees of the Morningstar Investment Conference. He expects it will
take the next couple of years for the market to recover.

in companies that have been in downturns before, that can survive
periods of stress and that are long-term survivors," he said. "You have
to look for companies where you trust management ... and where you
think they will not bet the ranch on a bad strategy."

Okay, here’s another example of
pursuing a strategy of hope, but this guy goes a bit further by stating
that “you can’t help but make money” if you plow your money into the
market right now and wait 3 years. First off, the S&P has returned
exactly zero over the last ten years, so, yes, it is possible
to not make any money with a buy-and-hold philosophy. Here’s my
investing philosophy:

I hate losing money.

Making money is harder than losing money.
What I mean is that if you lose 50% you then have to earn 100% just to
get back to even. Accordingly, I take the position that I’d much rather
avoid losses than potentially miss out on gains when the deck is
stacked against me. I know that some people in the investment community
have a serious aversion to “being out of the market,” as if this were
some sort of sin. Here’s my advice: cash is a legitimate position.

The corollary to this is that being fully
invested (i.e. long and unhedged) in the market at all times is for
suckers. There are times when it makes the most sense to sweep your
chips off the table, go get a drink, and come back a bit later when the
cards are more in your favor.

In Bear Bailout, Fed Tried to Avoid a ‘Contagion’ (June 27 – NYT)

The Federal Reserve scrambled to avert an "expected
contagion" that risked infecting the nation's financial system when it
took unprecedented actions in mid-March to provide financial backing to
a Bear Stearns rescue package and provide emergency loans to big Wall
Street firms.

The Federal Reserve released documents Friday
providing insights into its private deliberations of those
controversial decisions. The documents said that the Fed, in
discussions on March 16, believed that the takeover — and its
involvement in helping to bring it about — was "necessary to avoid
serious disruptions to financial markets."

On March 23,
2008, a few days after the Bear Stearns crisis hit, I wrote that “If
the Fed did not act to save Bear Stearns, there's a very real chance
that we'd already be living in a very different world.” These notes
from the Fed confirm that they shared this assessment. Also revealing
in these documents is that the emergency was so severe that they
couldn’t wait for all the members to arrive for the required unanimous

Because one of
the voting governors (Mishkin) was on a plane coming from Helsinki,
they dusted off an emergency provision of the Federal Reserve Act and
voted without him. It’s these sort of extremely fast-moving
developments that separate our modern financial markets from those of
times past. And this is why I will continuously counsel you to have at
least some of your money “out of the system” (in cash and gold). The
Bear Stearns collapse happened at night, on a weekend, and so rapidly
that there wasn’t even time to let a plane finish its flight before
urgent, unprecedented measures were undertaken. That’s kind of how I
see the next crisis developing, too.

CDO Defaults Reach $220 Billion on Deerfield Failure (June 27 - Bloomberg)

Deerfield Capital Management LLC and Declaration
Management & Research LLC pushed the amount of collateralized debt
obligations in default to $220 billion, according to Wachovia Corp.

Downgrades to mortgage bonds and their underlying
securities triggered so-called events of default on 200 CDOs since
October, including Rosemont, Illinois-based Deerfield's Knollwood CDO
Ltd. and Kent Funding II, managed by Declaration in McLean, Virginia,
Wachovia analysts wrote yesterday. The total compares with 191 CDOs
totaling $212 billion on May 21, according to the bank.

failures are equivalent to 36 percent of CDOs that include U.S.
asset-backed debt sold since 2003, and 19.3 percent of all CDOs,
Charlotte, North Carolina-based Wachovia said.

You can
search long and hard throughout our financial and economic history, but
you will not find such a massive default rate on what had been deemed
“highly rated” bonds as we’re seeing here.
are absolutely massive amounts of money, and, it bears noting, this is
in just one class of derivative. Who lost that $220 billion? I wish I
could say it was mainly well-heeled hedge fund speculators, but there
were all too many teacher retirement funds and municipal money market
funds in the mix.

As is typical of
Wall Street, far too many of these toxic bonds were aggressively sold
to states and individuals who had no way of knowing just how shabby the
products actually were. Let me say this one more time: Wall Street is
not your friend. Wall Street exists to take your money from you. I’m
not saying it’s wrong, but it is what they do. Where do you suppose the
$40 billion Wall Street bonuses came from last year?

Why do you
suppose that the S&P is pretty much exactly where it was 10 years
ago, sporting a zero percent gain even as inflation has marched along?
Wall Street fees are a good place to begin answering those questions.

Gold revs its engine and squeals down the track (SAN FRANCISCO MarketWatch)

The U.S. Federal Reserve gave gold the fuel it
needed to restart its engine and the precious metal has already driven
through the trading range barrier it's been stuck in for the past
month. The Fed's policy statement essentially acknowledged the "trick
box" the central bank is in -- "facing growing inflationary pressures,
but unable to raise rates while economic conditions are so weak and
with a national election so near," he said.

That combined with
growing expectations that the European central bank will begin its own
rate hikes well before the Fed can act to create a bearish environment
for the U.S. dollar which in turn, provided a very bullish outlook for
gold, he said.

"People are finally coming out of the fog and
realizing that we're in a world of hurt and people are plain scared,"
said Dale Doelling, chief market technician at Trends In Commodities.

are in the toilet, the dollar is getting hammered, oil is going through
the roof, food commodities are in the stratosphere [so] there's only
one solution," he said. "Buy gold! Buy silver! Buy them because they're
the only defense against what's happening in all the other markets."

What else
can I say? Buy gold and buy silver, because they can protect you from
both an inflationary Fed and the risk of a systemic banking crisis.


June 27

Crude taps fresh record [$143.00], set for 5% weekly gain (June 27 – MarketWatch SAN FRANCISCO)

Crude futures climbed to a fresh record of nearly
$143 a barrel in Friday afternoon on Globex, as concerns about weakness
in the U.S. dollar, global production and the economy helped set up oil
prices for a weekly gain of more than 5%.

"The commodities
rally is continuing in full effect," said Zachary Oxman, a senior
trader at Wisdom Financial. "Oil and all things commodity-related
continue to be the big trade."

Well, oil hit an
all time new record high again today. While Congress looks in all the
wrong places for somebody to blame, the major fault lies with the bad
(loose) monetary policy of the US and a worrisome decline in the output
of oil from existing fields. Oddly, in the face of startling hikes in
the price of oil, we’ve seen the US government dither and delay the
reintroduction of alternative energy tax credits (Congress) and slap a
2 year moratorium on the construction of new solar power plants (EPA).

Call me nuts,
but I kind of thought that after 50 years of paving large swaths of
land for strip-mall parking lots, we’d be pretty comfortable with the
environmental impact of covering large areas with photon absorbing
materials. But the EPA thinks apparently otherwise and suddenly wants
to study the issue.

Mexico Cantarell oil field output falls again in May (June 26 – Reuters MEXICO CITY)

Crude output from Mexico's struggling Cantarell oil
field fell in May for the eighth month in a row to 1.038 million
barrels per day, its lowest level in more than 12 years, Energy
Ministry data showed on Thursday.

The fading jewel of Mexico's
oil industry, Cantarell has declined rapidly since 2004 and is pulling
down overall oil production in the world's No. 6 oil-producing nation,
threatening Mexico's status as a top supplier to the United States.

Cantarell for years produced 60 percent of Mexico's crude oil, and production peaked at around 2 million barrels per day in 2004

This is an
amazing collapse in the world’s third most productive oil field. The
numbers work out to a stunning 25% per year rate of collapse in
production and cause me to suspect that Mexico will find itself unable
to export oil for money sometime within the next 2-3 years.

Could this be a factor in driving up the price of oil? You bet.

Is it possible that other aging oil fields are collapsing faster than previously estimated? You bet.

This year alone,
~ 4 million barrels of daily global production will disappear and need
to be replaced with new fields just to stay even. One interesting brain
exercise is to divorce yourself from thinking of how many dollars a
barrel of oil costs and simply consider how many barrels of oil are
available. After watching the Crash Course, you know why I frame it
this way; dollars that are printed in limitless quantities out of thin
air are a useless yardstick with which to assess the value of an
irreplaceable substance.
I mean, if
it ‘costs’ us the same amount of energy to print a billion dollars as
it does a million dollars, does it really matter how many dollars we
use to buy real energy?

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

Barclays Capital has advised clients to batten down
the hatches for a worldwide financial storm, warning that the US
Federal Reserve has allowed the inflation genie out of the bottle and
let its credibility fall "below zero".

"We're in a nasty
environment," said Tim Bond, the bank's chief equity strategist. "There
is an inflation shock underway. This is going to be very negative for
financial assets. We are going into tortoise mood and are retreating
into our shell. Investors will do well if they can preserve their

Mr Bond said the emerging world is now on the cusp of
a serious crisis. "Inflation is out of control in Asia. Vietnam has
already blown up. The policy response is to shoot the messenger, like
the developed central banks in the late 1960s and 1970s," he said.

will have to slam on the brakes. There is going to be a deep global
recession over the next three years as policy-makers try to get
inflation back in the box."

It is finally
coming out in the open…analysts and traders all across the globe are
starting to come to the conclusion that the Federal Reserve has made
not just one, but an entire string, of policy blunders. The failure to
raise rates on Wednesday was a clear sign to the rest of the world that
the US is going to let inflation burn, in an effort to maintain banking
solvency and economic growth.

This “preserve
banks and growth at any cost” mentality will result in tears as the Fed
will later be forced to defend a badly sinking dollar through rate
hikes. The size and the timing of these rate hikes will no longer be of
the Fed's choosing. The costs to you will be enormous, and time is
running out for you to take definitive steps to protect your wealth and
reposition yourself.

The Shrinking Influence of the US Federal Reserve

The United States Federal Reserve Bank, or Fed,
seems as much a part of America as Coca-Cola or Pizza Hut. But at least
one difference has become apparent in recent days.

While the
pizza chain and soft-drink maker are likely to expand their scope of
influence in the age of globalization, the US central bank is finding
that its power is shrinking.

Nowadays purchasing power exceeds
purchasing opportunity. Most of all, there is not enough oil, and too
few raw materials and food products. These increasingly scarce
resources are becoming the focus of disputes among many people and
billions of dollars are at stake. This is why the price of a barrel of
crude oil (159 liters) has increased from $25 (€16) in 2002 to $135
(€87) in 2008. And it is also why the price of corn has tripled in the
same time period, while that of copper has almost quintupled.

And here’s an
article from Germany also questioning the Fed’s policies and correctly
identifiying the loose money policies of the US as the prime cause of
inflation. More subtly, this article gets it right when it notes that
some inflation is due to an actual severe shortage of commodities. This
is a direct result of the fact that China and India were able to ramp
up their economies in response to easy US monetary conditions at a much
faster rate than new mines, farmland, and energy sources could be
opened up. It takes decades to significantly ramp up new commodity
production, but only years to open up new factories. A good portion of
our inflation is now structural in nature and will not go away easily.

City Pension Funds Lose Billions (June 26 – NY Sun)

In the nine months leading up to March 31, the
city's five pension funds lost a total of nearly $5 billion, or 4.4%,
according to data from the city comptroller's office. This is a far cry
from projections published as recently as last month, when budget
planners assumed the pension system would post no losses.

government will have to make up the shortfall from the poor performance
of the pension funds at a time when it is already suffering from tax
revenue losses due to a souring economy.

The miracle of
compounding becomes a nightmare when it works against you. State,
municipal, and corporate pensions are all modeled on the ‘fact’ that
assets always go up in price. If you thought that the stock market
crash of 2000-2003 would have cured the pension actuaries of this
notion, you would have been wrong (I was).

Even with the
recent hard, cold fact of pension losses from the stock market crash,
every single pension plan I’ve looked at has assumed a rate of return
of between 8% and 10%. Instead, many are now finding themselves losing
money, which will require additional taxpayer funds to shore up even as
tax revenues and social services costs are rising. In short, these
realities carry a triple whammy of bad news for state and municipal
budgets. Why this comes as a complete shock with each and every
downturn is a real mystery to me.


June 26

Existing home sales inch up 2% in May (June 26 – Detroit Free Press)

Sales of existing homes edged up slightly in May although median home prices continued to fall.

National Association of Realtors reported that sales of existing
single-family homes and condominiums rose by 2% to 4.99 million units
last month It was only the second sales increase in the past 10 months,
but it was not viewed as a sustained rebound. Many economists believe
that prices will have to decline more before the housing industry can
mount a sustained recovery.

Distressed areas that now are
seeing sales gains included Sacramento, the San Fernando Valley and
Monterey in California; Sarasota, Fla.; and Battle Creek.

I just love the
spin on this! This article is a virtual compendium of misleading
information and key omissions designed to help you misunderstand what’s
going on. The sin of omission here is failing to put into print the
fact that bank repossessions and foreclosure sales are an ever-growing
component of the reported “home sales.”

They put a clue
in that last paragraph above, where they noted, hopefully, that
distressed areas are seeing an uptick in sales, as if this were a good
thing. Instead, they should have called up the NAR and asked how many
“sales” in those areas were actually bank repos. What they’d have found
is that the “sales gains” are actually a mixed bag of organic sales and
distressed sales.

I would suggest
that the true state of the housing market could only be gauged by
separating real sales and bank repos and reporting the two numbers
side-by-side. I’m not holding my breath.

Warren Buffett Tells CNBC U.S. Inflation is "Exploding" (June 25 – CNBC)

Warren Buffett says inflation in the U.S. is
"exploding" and he urged the Federal Reserve not to signal in any way
that controlling prices takes a back seat to encouraging economic

"I think inflation is really picking up...Whether it's
steel or oil...We see it everyplace. It's exploding," Buffett told
Becky Quick in a live interview on CNBC's Power Lunch.

He spoke ahead of a charity lunch he is hosting in New York City.

I think Warren is right, and gold is in agreement as well, at least if today's $31 rise can be trusted.

S&P sees record number of potential bond-rating downgrades (June 25 – MarketWatch)

Standard & Poor's said Wednesday that it has
elevated its count for potential bond-rating downgrades this month to
an all-time high of 749 due to a material slowdown in housing and
consumer-related activity. The number is 132 more than the group
reported at the same time a year ago, and 11 more than it reported last
month. Issuers at risk of downgrade have ratings ranging from AAA to B-

defaults will be the next shoe to drop. I am privately estimating a
further $500 billion in corporate bond default losses at some point
over the next year. I have yet to estimate a municipal default figure,
but that, too, will have to be added into the mix. Once again we will
find that the rating agencies are worthless, because they consistently
rate everything too high and routinely fail to consider some pretty
common sense stuff like cross-correlations and the fact that sometimes
things go haywire. For instance, their models for subprime default risk
did not include the possibility that house prices could slip into
negative territory, even though they had done so as recently as 1991.

Analysts Backtrack on Banking Stocks After Saying Worst Is Over (June 25 - Bloomberg)

Wall Street analysts who only weeks ago were
telling investors to buy bank stocks because the worst of the credit
crisis was over are now flip-flopping.

Goldman Sachs Group
Inc. reversed a call on financial stocks, saying on June 23 that its
May 5 recommendation was "clearly wrong." Merrill Lynch & Co. on
June 17 cut its rating on Lehman Brothers Holdings Inc. to "neutral,"
just a week after telling clients to buy. Barron's, the financial
newspaper, said this week that its February advice to buy American
International Group Inc. was a "mistake.'"

"Analysts probably
have less credibility than they did 10 years ago," said Charles Geisst,
the author of "100 Years on Wall Street" who teaches finance at
Manhattan College in New York. "This has just eroded it a little bit

Do analysts
actually have any credibility left? Not with me, they don’t. More often
than not, I’ve seen analysts only downgrade a stock long after it’s
already lost most of its value. On the other side, I’ve seen it happen
that a downgrade precedes a significant rally in a stock, causing me to
wonder who was loading up on those shares in the brief dip that
resulted from the downgrade. At any rate, I have not been caught shor,t
as I have been consistently recommending that people get out of
financial shares for more than a year. I sincerely hope nobody actually
followed the advice of these analysts…..

Faster Inflation May Unleash `Financial Tsunami' (June 24 – Bloomberg)

Rising consumer prices will leave more U.S.
consumers unable to pay their debts and may lead to a "financial
tsunami," according to Bennet Sedacca, president of money manager
Atlantic Advisors LLC in Winter Park, Florida.

"Whether it is
anecdotal or statistical evidence, I see inflation everywhere, and this
is where the financial tsunami cometh," Sedacca wrote in a report
published yesterday. "A battered, over-indebted consumer, if forced to
retrench, could create even more problems for the banking system as
loan delinquencies would begin to rise even further. All sorts of
delinquencies are rising. This is now a systemic issue."

This is
exactly the situation that causes Ben Bernanke to sit like a deer in
the headlights. On the one hand, if he raises rates to combat
inflation, he will drive the stake a bit further into the heart of the
housing market. On the other hand, if he does not put a crimp in
inflation, people will begin to default even more vigorously on their
loans, as they funnel their earnings into paying for daily necessities
instead of their loan payments. On the one side sits the greatest
credit bubble implosion ever, and on the other, the retrenchment of a
25-year borrowing binge. Meanwhile, the clock is ticking. Every day
that inflation is allowed to rise, the harder it is to control.

Associated Press expects you to pay to license 5-word quotations (June 26 - BoingBoing)

In the name of "defin[ing] clear standards as to
how much of its articles and broadcasts bloggers and Web sites can
excerpt" the Associated Press is now selling "quotation licenses" that
allow bloggers, journallers, and people who forward quotations from
articles to co-workers to quote their articles. The licenses start at
$12.50 for quotations of 5-25 words. The licensing system exhorts you
to snitch on people who publish without paying the blood-money,
offering up to $1 million in reward money (they also think that "fair
use" -- the right to copy without permission -- means "Contact the
owner of the work to be sure you are covered under fair use.").

I won’t be
pulling any more quotes from any AP article from this point forward. No
real loss. There are plenty of other news sources out there. Besides, I
don’t pull that many, anyway, because I’ve noted that the AP has a real
propensity for ‘catapulting the propaganda.’ That is, they often
unquestioningly run government PR pieces straight from the Whitehouse
or Pentagon using "unnamed sources" and without explaining that they
are really running a PR piece. So, as I said, no great loss.

On the path to a housing rebound (June 25 – Fortune)

The news that housing starts have fallen to their
lowest level in 17 years sounds like one more reason to be depressed
about the shrinking value of your home. In fact, it's an almost certain
sign that the path to a housing recovery is finally in sight. Builders
constructed far more homes from 2002 until 2006 - the peak bubble years
- than could possibly be absorbed by the normal growth in households.

with first timers returning, sales should rise to almost 700,000 units
by the end of next year, according to Bernard Markstein, senior
economist for the National Association of Home Builders. That means
sales will soon exceed new production by as much as 250,000 units a

This is a good
article as far as it goes, and I applaud the use of data. However, they
have it slightly wrong. Where they went right was by lining up supply
with demand. They note here that household formation is roughly 500,000
per year, and, including immigration, should result in demand for ~700k
housing units every year.

Where they went
wrong was in assuming that everybody would be buying a single family
home and comparing the 700k household formation number against the
~450k single family home starts, concluding that demand will exceed
supply by 250k. If this were true, it would clearly help eat up the
magnificent oversupply and ultimately result in higher prices again.
But their analysis is startlingly wrong for a major publication. As it
happens, the relevant figure is total housing units, which includes
apartments and multifamily dwellings. According to the Census Bureau, “Privately-owned housing starts in May [2008] were at a seasonally adjusted annual rate of 975,000.”

Now, I’m pretty
comfortable concluding that the apartments and multi-family dwellings
are being built with the intention that they be sold and lived in, so
I’m pretty sure that supply is still, even in the face of the most epic
housing collapse in peacetime history, exceeding demand. So, nope, no
bottom in sight here yet. When demand does exceed supply by 250k per
year, it will still take over 4 years to work off the excess built up
from 2003 to 2007.


June 25

Fed leaves rates unchanged (June 25 – CNNMoney NEW YORK)

The Federal Reserve left its key short-term
interest rate unchanged Wednesday at 2%, marking the first time it held
rates steady in the past nine months.

In its statement, the
Fed said it still expects inflation pressures to ease later this year,
but cautioned about the upward pressure on prices caused by rising oil
and other commodity prices.

Its statement said that in light
of continued increases in those prices, "upside risks to inflation and
inflation expectations have increased."

As expected, the
Fed left interest rates stuck in deeply negative territory, even though
world inflation is clearly spiraling out of control. The Fed has peered
into the data and decided that whatever ills still lurk in the banking
system are worse than the effects of rising inflation.

I think they’re
wrong. Inflation can kill an economy faster than a few failed banks. I
think Bernanke is fighting the wrong battle for the wrong reasons. As a
serious student of the Great Depression, he is modeling his response on
what he judges to be the key central bank failures of the early 1930’s.

Everything is different now, so his responses are inappropriate for today’s conditions.

For example, we
are a net-creditor nation today, we are energy dependent, and we have a
shadow banking system every bit as large as the banking system itself.
This new set of institutions and conditions feeds on money (liquidity)
very differently now than in the 1930’s, and we are now risking not
only uncontrollable inflation, but the very dollar itself as an
internationally accepted medium of exchange.

Why not let a few reckless banks go under, instead of risking all that?

Only Bernanke
knows, and he’s not saying. Contrast the US Fed to its brethren across
the pond and we see a major rift developing. See the next article for

Investors Call ECB's Bluff, Bet on Rate Increases (June 25 – Bloomberg)

The European Central Bank insists it has signaled
only one interest-rate increase; investors are calling its bluff.
They're betting the ECB will raise rates twice this year and most
predict a third step by March, even as policy makers admonish markets
for jumping the gun.

Central banks from India to South America
are raising borrowing costs as climbing prices replace the global
credit crunch as their biggest concern.

The ECB has
clearly signaled a rate hike at its next meeting, and now there’s a bit
of squabbling over whether it will be one, two, or more hikes in a row.
Regardless of that, this is a major split in what had been a tightly
coordinated US/ECB/Japan central banking program.

The US has
decided to preserve growth and risk inflation, while the European Union
has decided to limit inflation and risk growth. I guess we always fight
our last battles. The US had a painful bout of deflation in the 1930s,
so we’ll fight that, while Europe has most recently been ravaged by
inflation, so they’ll fight that. At any rate, if this split develops
into a full-fledged policy war, I would expect the immediate
consequence to be for the dollar to begin its next leg down in earnest.

Vietnam suspends gold imports in move to ease growing trade deficit (June 24 – FT)

Vietnam's communist authorities have temporarily
suspended all gold imports in a bid to tackle the country's spiralling
trade deficit and help support the depreciating local currency, the

With Vietnamese investors rushing into gold as a hedge
against skyrocketing inflation, Hanoi - which sets an annual quota for
gold imports - has withdrawn licences for further imports, traders said

The decision comes as record imports of gold bars
have made Vietnam the world's biggest market for gold bullion,
surpassing India and China and helping to deepen Vietnam's trade

Here’s a fine
example of government in action. The monetary policies of Vietnam,
initially geared towards producing a weak currency to boost exports,
have (inevitably) resulted in an inflationary crisis. Rather than limit
monetary growth to reduce inflation, they’ve opted to “kill the
messenger” by forbidding the import of gold.

Naturally, this
will only make people want it more, and will create a thriving black
market and higher prices for gold. The notion that inflation can be
controlled by spanking down the price of gold is silly.

this is pretty much the same policy that the US Fed has put in place. I
guess that Communist governments and western central banks are not all
that ideologically misaligned after all.

Heavy industries join stampede to raise prices (June 25 – IHT PARIS)

A new round of price increases hit the global
economy Tuesday as some of the world's largest industrial companies
moved to pass rising raw materials costs more quickly to customers. Dow
Chemical, the biggest U.S. chemical maker, said it would raise prices
by up to 25 percent in July - the largest increase in its history - as
its chief executive warned of a "relentless" rise in energy and raw
materials costs.

Global prices for steel, a basic building
commodity, also jumped after Posco of South Korea, one of the world's
largest steel producers, said Tuesday that it was raising prices by
more than 20 percent. That followed an agreement Monday between the
global miner Rio Tinto Group and the biggest steel maker in China,
Baosteel, to raise the price it pays for Australian iron ore by as much
as 97 percent.

Just look at
this. Wow. Dow has raised prices twice this month, for a collective 25%
increase. Now that’s inflation! Luckily, the US Fed has peered into the
future and decided that inflation will moderate later this year - and,
if not, the Fed stands ready to deliver some more harsh words that they
are even more serious about not liking inflation than they were in
their last harshly worded statement. When I read articles like this, I
worry that what little creditability the Fed has remaining might
evaporate like water splashed on hot slate.

The Fed is now
so far behind the inflationary spike that they will have to raise
interest rates dramatically to get it back under control, but that
won’t really be an option because, most large participants have
interpreted the last 15 rescue operations by the Fed to mean that they
can continue to double down on their risky investments. In short, by
the time the Fed has to raise rates, it will be a near certainty that
that their action will ruin the economy.

Housing crash hits baby boomers (June 25 - MarketWatch)

The collapse of the housing bubble will likely have
drastic implications on the wealth and retirement of certain baby
boomers, according to a report Tuesday by the Center for Economic and
Policy Research.

The median household headed by those between
45 and 54 in 2009 will have about 25% less wealth than the median
household of that age in 2004, according to the report. That
household's wealth will decline to $113,268 in 2009, from $150,113 in

And that's if housing prices remain at the level they were in March.

For all the
boomers who were feeling wealthy because their houses were rising in
price, the housing correction is a bad dream turned into a nightmare. A
25% reduction in ‘wealth’ in only 4 years is about as startling as it

If house prices
continue to slide further, which they will, this wealth will disappear
to an even greater extent. But it bears noting that getting wealthy by
having your house increase in price is an illusion anyway. I mean,
think about it – the only way to liberate the wealth from an asset is
to sell it. Okay, so a house is sold for more than it was purchased
for, but then where does one live? If the answer is ‘another house,’
then it’s probable that that house costs more, too. Ergo, no
gain and no wealth. It was an illusion. If, instead, the answer is “buy
a smaller house,” then this reflects a simple failure to think the
problem all the way through. After all, how can it be possible for
everyone to downsize? Who will buy the larger houses?

Bank of America's Countrywide Tab Signed by Taxpayers (June 25 – Bloomberg)

Bank of America Corp.'s $3 billion takeover of
Countrywide Financial Corp. will be financed by 138 million tax-paying

Bank of America, led by Chief Executive Officer
Kenneth Lewis, can use tax write-offs to pay for Countrywide, the
country's biggest mortgage lender, said Robert Willens, a former
managing director at Lehman Brothers Holdings Inc. who now runs his own
accounting firm. Taxpayers may pick up about $5 billion of
Countrywide's losses over 20 years, he said. Countrywide shareholders
vote on the sale today.

"Ken Lewis got a break," Willens said.
"What these losses do is reduce the effective cost of the deal so the
headline price isn't really what they're paying. It's entirely possible
that the entire equity purchase price could be financed by tax savings."

An alert reader
(thanks Francoise!) sent in an article that proposed this BAC/CFC
“taxpayers will fund this!” angle a while back. Looks like BAC is
buying CFC because (a) they can get a ridiculous amount of tax benefits
since CFC has lost so much money, and (b) they’ve gotten their favorite
Senators and Congressfolks to pass an Act that will transfer most of
the remaining mortgage losses and risks to the US taxpayers.

Funny, during
all those boom years when BAC was raking in record profits, I don’t
recall them beating down the legislative doors to figure out a way to
funnel that money to the US taxpayers. But now that things have gone
slightly sour, their very first response is to figure out how to saddle
future generations with the bill. Privatized profits and socialized
costs. Anybody who claims we have a “free market” and practice
“capitalism” has not really been paying attention.

Israel Prodding U.S. To Attack Iran (June 24 – CBS)

Joint Chiefs Chairman Admiral Mike Mullen leaves
Tuesday night on an overseas trip that will take him to Israel, reports
CBS News national security correspondent David Martin. The trip has
been scheduled for some time but U.S. officials say it comes just as
the Israelis are mounting a full court press to get the Bush
administration to strike Iran's nuclear complex.

CBS consultant Michael Oren says Israel doesn't want to wait for a new administration.

Israelis have been assured by the Bush administration that the Bush
administration will not allow Iran to nuclearize," Oren said. "Israelis
are uncertain about what would be the policies of the next
administration vis-à-vis Iran."

Israel's message is simple: If
you don't, we will. Israel held a dress rehearsal for a strike earlier
this month, but military analysts say Israel cannot do it alone.

Shouldn’t it be
illegal for a country that receives US foreign aid to then turn around
and use that money to lobby the US to fight its wars? I can guarantee
you, without any doubt, that attacking Iran in not in the US’s best
interests. Not to gas prices, not to our soldiers within range of
Iranian rockets in Iraq, and not to our other Arab relationships, to
say nothing of an additional hit to our image abroad.

I am seriously
baffled here, because I’ve not yet read a single bit of compelling
logic, let alone evidence, in support of an attack on Iran. Worse, I
suspect it would be illegal under most treaties and international
rules. While the US can, and often does, ignore those rules and
treaties when the mood strikes, I contrast that behavior with the
Chinese, who are trotting about the globe with an open checkbook wooing
countries to get what they want. Of the two strategies, the military
route has bankrupted many a fine empire, while diplomacy has not.

Tuesday Spacer

June 24

Four years of home gains have been wiped out (June 24 – MarketWatch WASHINGTON)

Home prices in 20 major U.S. cities have dropped a
record 15.3% in the past year and are now back to where they were in
2004, according to the Case-Shiller home price index released Tuesday
by Standard & Poor's.

Prices in the 20 cities are now down
17.8% from the peak two years ago. The biggest declines were seen in
Las Vegas, Miami and Phoenix, with prices falling by 25% or more in the
past year. Prices in 10 cities have fallen by more than 10%.

were lower in April than they were a year earlier in all 20 cities
tracked by the Case-Shiller index. Home prices in Charlotte, N.C., have
slipped 0.1% in the past year.

While the US government via the OFHEO office just announced that US home prices slipped 4.6% over the past year, the much more believable Case-Shiller index reveals a much more dramatic decline in excess of 15%.

This is a
national number meaning that some communities are struggling with 30%+
declines while other may still be relatively flat.

What’s important
here is the knowledge that prices are now back where they were in 2004,
meaning that all 22 million homes sold over the 2004 to 2007 timeframe
are now worth less than what they were purchased for.

Overall, this
means that $3.3 trillion in home value has evaporated over the past
year and $3.9 trillion over the past two years, and it tells us that
the losses are still accelerating to the downside.

If you have been
wondering why the Fed and the Treasury have been pouring hundreds of
billions into the banks and mortgage markets, look no further than the
data in this article.

All the talk
about “providing stimulus to the economy” and the “importance of
preserving homeownership” is thin cover for the real focus, preserving
the banking system.

GMAC's $60 Billion Deal Loses Confidence as Mortgages Burn Cash (June 24 – Bloomberg)

The 300 bankers gathered at New York's
Waldorf-Astoria Hotel last month faced a stark choice: Accept Sam
Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk
pushing the lending arm of General Motors Corp., the largest U.S.
automaker, to the brink of insolvency.

"There was not room for
slippage," said Ramsey, 49, a former Bank of America Corp. executive
who joined Detroit-based GMAC in September and became chief risk
officer two months later. He pulled it off as banks led by New
York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC
and its Residential Capital LLC mortgage unit with the biggest
restructuring package since the credit-market rout began a year ago.
Whether that's enough to ride out the worst housing slump since the
Great Depression remains in doubt. Moody's Investors Service cut GMAC's
credit rating one level to six rankings below investment-grade last
week as ResCap burns through cash after losing $5.3 billion in the past
six quarters.

"ResCap presents a very significant risk," said
Mark Wasden, the lead GMAC analyst at Moody's. "There is no easy exit
from their difficulties right now. We think the company will yet again
find itself in need of additional cash."

GM is (was?) a finance company that also happens to make cars.

main ship has lost a wing and is spiraling towards the ground at a
furious pace. Who wants to mount a rescue here? Nobody, it turns out.
In my view, it could well be GM that takes down the financial system.

order to understand why, you need to know that a Credit-Default Swap
(CDS) is a form of insurance against the possibility of a default on
some form of a debt, usually a corporate or municipal bond.

precisely, a CDS is credit derivative where Party A pays Party B to
insure against a default by Party C. Sound complicated? It’s not,
really; just think of it as fire insurance on a house.

(Party A) pay your insurance company (Party B) in case a fire happens
(er, uh, your house ‘defaults’ on you? Okay, I may be stretching this
analogy a bit too far, but you get the idea). As long as the house
doesn’t burn down, your insurance company just rakes in the money and
has a good time. But if a fire sweeps up the canyon and takes out your
house and 40 others, and your insurance company goes bankrupt, then you
receive nothing.

many Credit-Default Swaps are perched atop GM's $300b in debt? I don't
know for sure, but I've heard rumors that it is ~$3 trillion or so...
If that's ballpark-correct, there is no possible way for that market to
clear in the event of a default.

Somebody will have to blow the whistle and declare those contracts unenforceable. This will serve to freeze all the other CDS markets. Game over. No more trading. Nobody knows who owes what to whom, who wins, or who loses.

How big is the total CDS market? Right now it stands at over $45 trillion. With a “t”.
There’s a fire in the canyon, and nobody, and I mean nobody, has any
idea what the actual financial reserves are of the thousands of
‘insurance companies’ (i.e. hedge funds, banks, brokers, etc) who are
on the hook in the event of a generalized failure. How desperate is it?

One quick glance at GM’s stock price should tell the tale:


That is one ugly chart. GM’s stock price is now at a 25 year low (Quick Wall Street Reminder: Stocks are the best long-term investment!)
and I am extremely uncomfortable with the idea that the safety of
possibly tens of trillions of dollars of derivatives rests on the
long-term health of this company.

Utilities cut off more customers who are behind on their bills (June 24 – USA Today)

As skyrocketing food and gasoline prices strain
budgets, utilities are disconnecting many more customers who fall
behind on their bills, and even moderate-income households are getting

Electricity and natural gas shutoffs are up at least
15% in several states compared with last year. Totals for some
utilities have more than doubled.

"We're seeing a record
number of shutoffs," says Mark Wolfe, head of the National Energy
Assistance Directors' Association, which represents programs that
subsidize energy bills.

Winter is going to be extremely challenging in America.

End of the Open Road (June 23 – Bill McKibben in the WaPo)

In July 1893, 115 years ago, the historian
Frederick Jackson Turner told an academic symposium that the American
frontier was closed -- a shocking notion for a people who'd defined
themselves by their steady expansion across the continent.

spring, something just as profound and defining has happened: Pulled
back by the inescapable gravity of higher prices and the growing
scarcity of fossil fuels, we're starting a slow recoil into more dense
and compact regions and localities. The frontier of endless mobility
that we've known our entire lives is closing.

Bill McKibben is
a great thinker and writer, and he’s always worth reading. Here, he’s
captured the notion that we may well be experiencing the early stages
of a shrinking world. As in, we’re all going to have to get used to
living closer to where we work and play. Not that there’s anything
wrong with that.

Floods wipe out US crops (June 22 – The Independent UK)

The river overcame more than two dozen levees last
week, submerging small towns and vast stretches of prime farmland as
the nation's most vital waterway absorbed the run-off of torrential
rains that put many Iowa towns under water.

The Midwest
flooding and storms are expected to push US and world food prices
higher. Up to five million acres of newly planted crops have been lost
at the heart of the world's top grain and food exporter. Prices for
corn, cattle and pigs all set records this week owing to the floods, as
a world economy already hit by inflation from rising energy prices
absorbed the blow.

5 million acres is a lot, but it’s only a few percent of the total US cropland.

those few percent are looming large in the current inflationary
environment, which is being propelled by massive monetary stimulus AND
record low worldwide grain stockpiles brought on by demand exceeding
harvests for 5 out of the last 6 years. Looks like this year will make
it 6 out of 7.

The first thing
you need to prepare for, which is about as certain a thing as one can
imagine, is that food prices are going to rise. While this will have an
impact on your personal food budget, I invite you to consider giving a
bit more to your local food bank, which will probably experience record
demand in the coming months.

The second thing
I want you to consider it the possibility that an actual food shortage
could develop. Both of these possibilities make a strong case for
becoming more food self-sufficient.

U.S. consumer confidence plunges again (June 24 – MarketWatch WASHINGTON)

U.S. consumer confidence plunged in June to reach
its fifth lowest reading ever, the Conference Board reported Tuesday,
as expectations reached a record low. The June consumer confidence
index fell to 50.4 from a May reading that was revised to 58.1 from a
prior estimate of 57.2. Economists surveyed by MarketWatch had expected
a June reading of 56.0. The percentage of consumers saying jobs are
"hard to get" rose to 30.5% in June from 28.3% in May.

In a confidence-based economy like ours, consumer confidence is extremely important.

I’ve been
following this measure for years and I’ve never seen a string of
“misses” by economists like we’ve seen in the past few releases. Here
we see that the expectation was for a reading of 56.0, but the actual
reading was 50.4, yielding a miss of 5.6(!!). Normally, the economists
don’t miss by more than a couple of tenths or so. Here they missed by
5.6 or 56 tenths.

This goes to
show that when the trend rapidly shifts away from “normal,” economists
are not your best source of leading information.
The incentives of their profession are biased towards conservative, middle-of-the-pack projections.

Monday Spacer

June 23

Gas could fall to $2 if Congress acts, analysts say (June 23 – MarketWatch WASHINGTON)

The price of retail gasoline could fall by half, to
around $2 a gallon, within 30 days of passage of a law to limit
speculation in energy-futures markets, four energy analysts told
Congress on Monday.

Testifying to the House Energy and
Commerce Committee, Michael Masters of Masters Capital Management said
that the price of oil would quickly drop closer to its marginal cost of
around $65 to $75 a barrel, about half the current $135.

Okay, this
is so far off the mark it is funny. There are four things we need to
consider and weigh as influences on the price of oil:

(1) supply vs. demand

(2) too much cheap money floating around

(3) speculators

(4) a risk premium for possible war and other geopolitical tensions in oil producing regions

The “analyst”
who was located to deliver the desired message that all our troubles
with prices at the pump are due to speculators conveniently managed to
forget about three of these four.

This ranks as
either a feat of magnificent stupidity, or, more likely, a carefully
tailored message designed for a particular political environment.

For recent articles about the other three causes of high oil prices, keep reading.

Blame central banks, not speculators for oil price (June 23 – The Australian)

The speculator is the age-old scapegoat in economic
uncertainty. Investment in commodity indexes, as an asset class, have
certainly taken off, rising from $US13 billion to $US260 billion ($273
billion) over the past five years. Energy prices make up about 70 per
cent of their value.

However, if investors in these indexes
were forcing prices higher by generating demand for oil in excess of
that from refiners, the result would be an accumulation of oil
inventory and this has not been the case.

An honest assessment
would look to the culpability of the world's central banks in running
loose monetary policy over the past decade. The slashing of US rates
over the past six months in response to recession fears raises the
prospect of one last inflationary wave of excess liquidity washing into
world markets.

Here is an
explanation for reason #2: loose monetary policy and a nice
denunciation of reason #3 (speculators), as this author rightly divines
that the only way for speculators to sustain high prices is to remove
product from the market.

Have we seen rising oil inventories? No, just the opposite.

EU Widens Iran Sanctions, Shuts Bank Melli's European Offices (June 23 - Bloomberg)

The European Union stiffened its sanctions against
Iran's nuclear program, shutting down the EU offices of Bank Melli Iran
and denying travel visas to more Iranian officials.

European actions came after President George W. Bush pressed for
further steps to isolate Iran, which western governments suspect of
harboring a covert nuclear weapons program.

Iran insists its
uranium enrichment work is peaceful and legal under the nuclear
Non-Proliferation Treaty, with the goal of creating a commercial
nuclear power industry.

And, of course, tensions with Iran are keeping a “risk premium” on the price of oil.

On this particular matter, Iran has a point.

They are a
signatory to the Nuclear Non-Proliferation Treaty (NPT) and their claim
is that the treaty gives them the express right to develop nuclear
technology for civilian uses.

That is, in
fact, true. One might suppose that the west, at this particular
juncture, would want to have hard evidence that Iran is violating this
treaty by directing nuclear fuel for military purposes, but, as the
article makes clear, only ‘suspicions’ have been offered, no hard data.

How is it that the west is falling for the same trick again?

Nigeria Oil Output At Lowest In 25 Yrs – Official (June 22 – Dow Jones JEDDAH, Saudi Arabia)

Nigeria is pumping oil at its lowest level in 25
years, following militant rebel attacks on facilities in recent days
operated by Royal Dutch Shell PLC (RDSB) and Chevron Corp. (CVX), a
senior Nigerian oil official said Sunday.

"Things are very bad now in Nigeria," he said on the sidelines of a major oil summit here between producers and consumers.

Here is another geopolitical risk factor weighing in on the price of oil.

To summarize, we
have excessively loose monetary policy combining with geopolitical
tensions all mixed together with legitimate supply disruptions. And
somehow Congress manages to trot out an analyst who says it’s all due
to speculators and that oil would fall by 50% if only we could reign
them in.

Shortages, Prices Hit California Food Banks as Schools Recess (June 23 – Bloomberg)

Turning dozens of hungry children away from a free meals program wasn't how Vince Harper wanted to start the summer.

oversees a program in Santa Rosa, California, that provides food to
kids during schools' summer recess. More than 90 lined up at a
community center on June 9, the first day of the service. Only 50 meals
were available.

"It's a terrible feeling," said Harper, 41,
director of youth and neighborhood services for the Community Action
Partnership of Sonoma County. "You have to tell them to come back
tomorrow, and hopefully they will."

As California schools let
out this month, food banks in the state face record demand for free
meals from families pressed by food price inflation and economic

Even as the
banks are busy slipping relief into congressional bills that run into
the hundreds of billions of dollars, more and more people are slipping
into genuine hunger.

Isn’t it about
time to admit that people sleeping in cars and going to bed hungry
means there’s something a bit more out of place here than a few
distressed bank portfolios?

State, city layoffs: 45,000 and counting (June 23 – CNNMoney NEW YORK)

The latest hit to the economy could come from state
houses and city halls across the nation, which are in their worst
budget crisis in years.

With falling revenue from sales and
income taxes, and property-tax declines looming, states, cities and
towns have already laid off tens of thousands of government employees.
Many expect more job cuts ahead as public officials struggle to balance
their budgets.

The American Federation of State, County and
Municipal Employees, a public employees union, says about 45,000
government layoffs have been announced this year.

The silly
part about all this is going to be the claim made later this month by
the BLS that government jobs at the state level have advanced by
45,000, or whatever number they come up with.
The reality that I
am reading about on a daily basis, or experiencing, is so far away from
the official statistics that it seems justified to ask if these
measures provide any utility at all, or if they are so wrong that they
are actually harmful.

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