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Week of March 31, 2008

Sunday, April 6, 2008, 7:35 AM

On the brink of disaster

03/31/2008

This is a powerful article by a long-time financial commentator (Allan Sloan) who is not known for hyperbole or literary excess.

Here are a couple of snippets from the article. But, if I were you, I'd immediately click over and read the whole thing.


(Fortune Magazine) -- What in the world is going on here? Why is
Washington spending billions to bail out Wall Street titans while
leaving struggling homeowners to fend for themselves? Why are the
Federal Reserve and the Treasury acting as if they're afraid the world
may come to an end, while the stock market seems much less concerned?
And finally, what does all this mean to those of us who aren't
financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice,
and I'll tell you what's happening - and what I think is going to
happen. Although I expect these problems will resolve themselves
without a catastrophic meltdown, I'll also tell you why I'm more
nervous about the world financial system now than I've ever been in my
40 years of covering business and markets.


Below are Allan's closing remarks, which I think are excellent, as far
as they go. However, I think they do not go far enough, because they
are written as if this crisis exists all by itself, without connection
to other problems or concerns.


Sooner or later, all this money being thrown at the debt markets will stabilize things.

But the costs will be steep. Those of us who have been prudent,
lived within our means, and didn't overborrow are paying a huge price
for this. Income on our Treasury bills, money market funds, and CDs has
dropped sharply, thanks to the Fed's rate cuts, and our wealth has
eroded relative to foreign currencies and commodities.

As an indirect result of the Fed cutting short-term rates, we've
already seen a loss of faith in the dollar by our foreign creditors.
That's helped run up the price of commodities that are priced in
dollars, and may well be stirring up inflation even as the Fed lowers
retirees' incomes.

It's going to get harder and harder to finance our country's trade
and federal budget deficits, with our seemingly ever-falling dollar
carrying such low interest rates. The dollar has been the world's
preeminent reserve currency - but I think those days are drawing to a
close. Don't be surprised if in the not distant future the U.S. is
forced by its lenders to borrow in currencies other than its own. It
could get really ugly.

Our financial institutions will emerge from this episode weakened,
compared with those in the rest of the world. It's going to take years
to work out our country's excess borrowings, with lenders and borrowers
- and quite likely American taxpayers - all bearing the cost.


My concern has always been that we will be entering the "twenty-teens"
in the weakened state that Allan Sloan summarizes above, yet we'll be
needing vast funding for other purposes at precisely the same time:

  1. Massive reinvestment for an energy infrastructure that is woefully out of alignment with the reality of Peak Oil.
  2. Insolvent federal entitlement programs that would require more than $50 trillion, in cash, today, in order to be solvent.
  3. Trillions and trillons of dollars of underfunding for corporate and state pensions.
  4. Boomers funding their retiring by selling their assets (to whom, exactly?) at the same time.
  5. A national infrastructure of roads, bridges, and treatment plants that needs trillions of reinvestment, also at the same time.

How will we fund all of these very real and very significant
needs at the essentially the same moment in time? I'm not sure. But I
am sure that the current crisis is more than simply one of a few bad
debts on the books of a few big banks. That is the recognition
that we're lacking in our national discourse, although I am pleased to
finally be seeing articles in our mainstream press like the one being
discussed here.

USA 2008: The Great Depression

04/01/2008
On
the one hand, the stock market continues to climb against all
odds....on the other hand, record numbers of Americans are bankrupt, in
foreclosure, receiving food stamps, or all three.


Will we some day see soup lines forming under a "Dow 20,000" banner, as some have waggishly suggested?

That day is getting closer and closer, according to all the data I am finding.

This article, found in a UK paper of course,
reveals some grim statistics that conform better with a country already
in recession and facing high inflation than they do with a still
positively expanding GDP and low inflation.

Dismal projections by the Congressional Budget Office in Washington
suggest that in the fiscal year starting in October, 28 million people
in the US will be using government food stamps to buy essential
groceries, the highest level since the food assistance programme was
introduced in the 1960s.
[...]
Emblematic of the downturn until now has been the parades of houses
seized in foreclosure all across the country, and myriad families
separated from their homes. But now the crisis is starting to hit the
country in its gut. Getting food on the table is a challenge many
Americans are finding harder to meet. As a barometer of the country's
economic health, food stamp usage may not be perfect, but can certainly
tell a story.



In some states, one in five people are
receiving food stamp assistance. Meanwhile, Wall Street is all happy
again, because the Federal Reserve has all but guaranteed every
possible future bailout, while Washington, DC, has agreed to bailout
the most heavily indebted Americans to the benefit of Wall Street and
the profligate and at the expense of everybody else.

The solution? It's important to remember that the primary 'problem'
facing us is that Wall Street cannot figure out who is going to take
the other side of the next $10 to $20 trillion of new borrowing that
will be required to keep this banking game going. Failing that, their
solution will be to assure that the inevitable losses are taken by
somebody besides themselves, and so far they are winning that game
handily.

At any rate, the only solution is to come to grips with the fact that
the party is over and the credit bubble has burst, and to let the bad
debts get wiped out so that we can get on with the rebuilding. The
sooner the better.

And yes, let the chips fall where they may. My strong preference would be for those who made the bad decisions to take their lumps. 


Pompous Prognosticators

04/02/2008

Below, I've liberally excerpted from an article I read a couple years back that always stuck with me.

Since our challenge today is to know
whom to trust and which story to believe, I thought I'd bring this one
back to the forefront, because the parallels are so striking between
the late 1920's and now.


Below is a graph of the Dow Jones during the
years of the 1920's bubble, the stock market crash of 1929, and the
onset of the Great Depression. The numbers in bubbles indicate when one
or more quotes from a famous expert were captured.

I happen to believe that we are somewhere between points #7 and
#12, and so those are the quotes I've reproduced from the article.

I get chills every time I re-read them...

Pompous Prognosticators


Link to original article at Gold-Eagle.com


Number 7:

"The decline is in paper values, not in tangible goods and
services...America is now in the eighth year of prosperity as
commercially defined. The former great periods of prosperity in America
averaged eleven years. On this basis we now have three more years to go
before the tailspin."
- Stuart Chase , NY Herald Tribune, November 1, 1929

"Hysteria has now disappeared from Wall Street."
- The Times of London, November 2, 1929

"The Wall Street crash doesn't mean that there will be any general or
serious business depression... For six years American business has been
diverting a substantial part of its attention, its energies and its
resources on the speculative game... Now that irrelevant, alien and
hazardous adventure is over. Business has come home again, back to its
job, providentially unscathed, sound in wind and limb, financially
stronger than ever before."

- Business Week, November 2, 1929

"...despite its severity, we believe that the slump in stock prices
will prove an intermediate movement and not the precursor of a business
depression such as would entail prolonged further liquidation..."

- Harvard Economic Society (HES), November 2, 1929


Number 8:

"... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."

- HES, November 10, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."

- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect."

- Paul Block (Pres. of the Block newspaper chain), editorial, November 15, 1929

"Financial storm definitely passed."

- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929


Number 9:

"I see nothing in the present situation that is either menacing or
warrants pessimism... I have every confidence that there will be a
revival of activity in the spring, and that during this coming year the
country will make steady progress."

- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

"I am convinced that through these measures we have reestablished confidence."

- Herbert Hoover, December 1929

"[1930 will be] a splendid employment year."

- U.S. Dept. of Labor, New Year's Forecast, December 1929


Number 10:

"For the immediate future, at least, the outlook (stocks) is bright."

- Irving Fisher, Ph.D. in Economics, in early 1930


Number 11:

"...there are indications that the severest phase of the recession is over..."

- Harvard Economic Society (HES) Jan 18, 1930


Number 12:

"There is nothing in the situation to be disturbed about."

- Secretary of the Treasury Andrew Mellon, Feb 1930


Recession Indicators, part II

04/04/2008

Are we in recession, heading towards one, or
not? The stock market seems unconcerned with the Dow rising 3.2%,
S&P up 4.2%, and the Nasdaq 4.9%. This collection of news items
will help you sort this out.




The central question for those holding 401k, brokerage, or other stock
bearing accounts is "should I hold, or should I sell?" Since stocks
tend to decline heavily during recessions, it is important to keep your
eye on the signs of recession. So far, stocks are indicating that there
is literally no concern about an impending recession. The data says
this is a perplexingly out-of-touch view to hold.

And for people who are wondering if perhaps they should hold off on
that next big purchase and save a few bucks for a rainy day, keeping an
eye on the recession indicators is also important.

First, let's start with automobiles which are usually a very reliable
indicator of the direction of the economy. More auto sales? Then the
economy is going up. Fewer? Then it's going down. This news is about as
ugly as it gets.


U.S. auto sales fall in March as consumers hold back

Automakers reported double-digit U.S. sales
declines in March as demand for trucks and sport utility vehicles
plummeted and consumers held back because of concerns about gas prices,
the housing slump and tightening credit.

General Motors and Chrysler both reported a 19 percent drop in U.S. sales Tuesday. Ford's sales fell 14 percent and even industry stalwart Toyota was down 10 percent compared with last March. Nissan fell 4 percent, and Honda reported a 3 percent drop. Some automakers warned things could worsen in the near term.


Not only are fewer people buying cars, but among those who already did?
They're not making their payments on them. This next article also
reveals that we are trending into territory we have not experienced for
a very long time.


Overdue Consumer Debts Highest Since 1992, ABA Says

April 3 (Bloomberg) -- Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years during the fourth quarter, another sign the U.S. economy is slowing, according to an American Bankers Association survey.


And:



Auto sector feels pinch of credit crunch

April. 2, 2008 (MSNBC)
The number of Americans who are more than 60 days late on their car-loan payments rose to a 10-year high
in January, Fitch recently reported, attributing the rise in late
payments to “increasing pressure on the consumer” in a weakening
economy.


Below, we find that employment suffered
its worst decline in 5 years and that jobs losses have occurred for
four straight months.


U.S. payrolls contract by 80,000 in March

WASHINGTON (MarketWatch) -- In employment data that would seem worthy of the name recession, the government reported Friday the steepest monthly job losses in five years as well as a spike in the unemployment rate for March.

The report confirms widespread pessimism about the near-term economic outlook.

Nonfarm payrolls fell by an estimated 80,000 in March, the Labor
Department said. It marked the largest decline seen since March 2003,
underscoring how reluctant employers remain to committing to making new
hires.

Private-sector payrolls have now declined for four consecutive months, the data showed.


Perhaps most interestingly, the mainstream media is even beginning to
question these basic statistics, much as I have over the past 4 years.
Why do I care? Only because this indicates to me that the illusion may
finally be starting to wear off. Our economy is, literally, a Ponzi
economy, and faith in the official numbers is a prerequisite to its
continuation. So my antennae quiver anytime I see something like these
next two articles, both of which came out this week. Is the dam
beginning to break?


Jobs market worse than it seems

NEW YORK (CNNMoney.com)April 4, 2008

[T]he headline unemployment rate might not be the best way to judge how the overall labor market is doing.

That's because the unemployment rate calculates only the percentage
of workers who describe themselves as unemployed, divided by the number
of those potential workers counted in the labor force. So
under-employed people don't show up as unemployed.

Also not showing up as unemployed are those who want a job but are
no longer counted as being in the labor force for a variety of reasons.
The number of people fitting this category rose by more than a
half-million between November and February.


The great inflation cover-up

Apr. 3, 2008 (FORTUNE)
A March CNN poll indicates that 91% of the population is concerned
about inflation. I'd ask a member of the remaining 9% what they're
thinking - and what levels of relative fiscal comfort allow one not to
be concerned about inflation - but I'm entirely surrounded by
91-percenters. So how do we account for the discrepancy between the
Federal Reserve's recent assurances that inflation is under control and
the 91% of the population that's worried it isn't?

There are several possibilities: The first is that we're all paranoid.
We simply need reassurance from the authorities: Inflation rates are
fine, nothing to see here, move along quietly. The second is that the
Fed's insistence on focusing on "core" inflation - a measure that
strips energy and food from the consumer price index (CPI) because
they're theoretically subject to short-term volatility - makes
inflation seem smaller than it is, or than we feel it to be when our
gallon of milk that was 12% cheaper last year gets swiped across the
grocery store scanner, beeping ominously like a tiny alarm bell. (While
core inflation was just 2.3% in February, the CPI was 4%.) The third
and most disconcerting possibility is that the CPI systemically
understates inflation, in which case we're paying for it taxwise, and
the government is underpaying Social Security recipients. In the words
of many a UFO spotter, it isn't paranoia if they're really out to get
you.



Wow. Two articles in two mainstream press magazines openly talking
about the most obvious and glaring disconnect of our lifetime - the gap
between our daily lives and government statistics. There is something
in the air...

Credit crunch triggers $2 trln drop in debt underwriting

04/06/2008

Our
money system requires that ever larger amounts of new credit be issued
or else the banking system becomes really unhappy. Consumers with
credit cards is one form of credit, mortgages another, but the a
really, really huge piece of the credit pie is the corporate debt
markets. This article points out that a massive shortfall in this arena
has happened.

Credit crunch triggers $2 trln drop in debt underwriting

BOSTON (MarketWatch)- April 3, 2008 - The credit crisis that began in
July has been responsible for global debt underwriting volumes falling
by more than $2 trillion and by $1.3 trillion in the U.S., on a
period-over-period basis, analysts at Oppenheimer & Co. said in a
research note. "As more than 80% of corporate funding came from the
capital markets during 2007, we can't help but believe that such a
massive extraction of liquidity from the market will have a profound
impact on the U.S. economy," they wrote. "As bank balance sheets show
similar strain to brokers' own balance sheets, there is little room in
the system to 'pick up the slack' vis a vis corporate lending."

The story here is that several very
significant areas of borrowing are being curtailed raising the obvious
question. "where will the new borrowing come from?"

We are now seeing declines in:

  • Home mortgages
  • Auto loans
  • Corporate borrowing


I would expect it's only a matter of time
before we see actual declines in commercial and industrial loan
amounts, and even credit card debt, as well. This credit bubble is well
and truly bursting, and I am not at all comforted by the unprecedented
and possibly illegal maneuvers by the Fed these past couple of weeks.
Rather, they seem to speak of an even larger problem that we've not yet
been told about.


Okay, so the forecast of a fall in commercial loans is not all that astute. I mean, check out the recent data:


Vacant Shopping Centers

Vacancies at community and neighborhood shopping centers in the United
States rose in the first quarter to the highest level in more than a
decade, and rent growth was the lowest since the last recession, the
research firm Reis reported on Friday. The average vacancy rate rose to
7.7 percent from 7.1 percent a year earlier. It was the highest since
1996, the real-estate researcher said. Demand for retail space is being
hurt by a drop in home prices and sales, rising food and gasoline
costs, and job cuts, Reis said.

It's not much of an analytical stretch to go
from decade highs in retail vacancy to predicting a fall-off in
construction loans. So we can pretty much put that one in the bag.


Basic groceries up 8%, farm report says

04/06/2008
The
US government says that food inflation is up 4% over the past year. The
Farm Bureau, which simply measures prices and does not statistically
manipulate prices via substitution or hedonic adjustments, measured an
8% gain in just the last three months.


As you know, I am a huge critic of the US government's use of
statistical tricks to paint a much rosier picture of inflation than
actually exists. So one of the things I like to do is to track the
output of certain organizations that simply measure prices from one
period to the next.

This is a shocking report, though, even to me.


Retail food prices at the supermarket increased 8 percent in the first quarter of 2008
, according to a survey by the American Farm Bureau Federation

The informal report shows the total cost of 16 basic grocery items in
the first quarter of 2008 was $45.03, up about 8 percent or $3.42 from
the fourth quarter of 2007. Of the 16 items surveyed, 11 increased,
four decreased and one stayed the same in average price compared to the
previous quarter.


Compared to one year ago, the overall cost of the items jumped 9 percent.

A federation economist blamed rising commodity costs for the increases,
especially items made with corn or vegetable oil and wheat and cheese.
The survey is not off mark from government data, which tracks consumer
prices nationally and regionally.

Check out this list of items that they
tracked...looks like a nice, ordinary, basic list to me. This tracks my
reality more closely than anything I've heard from my own government in
a while.

  • A 5-pound bag of flour showed the largest retail price increase, up 69 cents to $2.39
  • cheddar cheese, up 61 cents to $4.71 per pound
  • corn oil, up 58 cents to $3.01 per 32-oz. bottle
  • a dozen large eggs, up 55 cents to $2.16
  • vegetable oil, up 38 cents to $2.63 per 32-oz. bottle
  • mayonnaise, up 22 cents to $3.14 for a 32-ounce jar
  • Russet potatoes, up 18 cents to $2.47 for a 5-pound bag
  • a 20-oz. loaf of white bread, up 16 cents to $1.78
  • apples, up 13 cents to $1.40 per pound
  • whole fryer chickens, up 9 cents to $1.37 per pound
  • ground chuck, up 4 cents to $2.73 per pound
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