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    Daily Digest – June 24

    by Davos

    Wednesday, June 24, 2009, 2:54 PM

  • Russia, Venezuela sign $4 bln joint bank deal
  • Alternate Elliott Wave Possibility…
  • 1931, again, what if?
  • Update on Bonds
  • California Collapsing (H/T Nate)
  • FDIC’s Bair: ‘Too Big to Fail’ must end
  • Another Hotel Defaults on Mortgage Debt
  • Local Shelters Lose Food Aid Because Of Fees
  • Hey New York – You’re Next After California
  • Downey Savings and Loan: The Anatomy of an Option ARM led California Banking Disaster. Other People’s Money Delusion
  • New California Law Will Have Impact on Small CA Websites Including LATOC Blogger (SuzieGruber)

Economy

Russia, Venezuela sign $4 bln joint bank deal

The bank will be 51-percent owned by Russia through the state-controlled lenders VTB and Gazprombank, with the rest going to various Venezuelan partners, Russian Deputy Finance Minister Dmitry Pankin told reporters.

The new bank is due to be created by the end of 2009, Pankin said.

Venezuela is a key partner for Russia in South America, where Moscow is trying to expand its reach mainly through arms and energy deals.

Moscow and Caracas signed arms deals worth 4.4 billion dollars between 2005 and 2007 and Russian energy groups are expanding activities in the country.

Alternate Elliott Wave Possibility..(Charts on page)

McHugh is labeling the rally off the 666 low as wave B up (the eye of the storm) with wave A having finished at that low in March. He believes that wave C will follow and that it will be devastating. I agree completely with that sentiment but am not certain of the count, not that it matters much in the short term, but in the longer term it will matter, so let’s take a look…

Speaking of the short term, this trumped up rally has been very difficult to count on the way up – almost unnatural, because that’s exactly what it was. But the recent decline that began on June 11th is very easy to count… you can see in the 10 minute SPX chart below that we had 5 clean waves down in a neat channel (wave 1), we broke that channel up with a smaller corrective channel (wave 2), and we have now begun wave 3:

1931, again, what if?

I am beginning to sense another paradoxical twist. What if the Fed is right and Angela Merkel, Zhou Xiaochuan, Warren Buffet and James Grant are wrong? And that contrary to their inclinations the American authorities are forced to moderate their monetary expansion in order not to undermine the confidence of the international community. Whilst at the same time the bond market pushes long rates higher.

Under such a scenario the debt reduction efforts of the private sector would usurp the government’s attempts at stimulus; the economy would falter once more. Back in 1931 the same thing happened. Bond prices dropped and yields rose to the level that had prevailed for the previous ten years; a feeble economy lapsed back into a deflationary spiral. Perhaps if this were to happen again, and we were once more confronted by a truly dire economic outcome, then it is conceivable that the authorities could gain the vital legitimacy necessary to engage in an unquestionably large monetary response which finally purges the system of deflation. That is when I would choose to let rip on buying commodities and cheap equities.

The key is the economy’s sensitivity to bond yields. Russell Napier argues that it would require ten-year yields of 6pc (vs. 4pc today) to knock the economy and stock market from their perch and reassert the deflationary trend. But he bases his assertion on observations taken since the early 1960s. My quibble is that today’s leverage is unprecedented and prices are falling. May’s American CPI is forecast to contract by 0.9pc YoY; they fell in April. We never had falling prices in the 1960s, 70s, 80s or 90s. I therefore maintain that it is feasible that some unquantifiable but certainly lower nominal rate could choke the economy.

Regardless, it is my contention

Update on Bonds (Charts on page)

Commodities are down sharply. That is not a good sign for the bulls as commodities and technology led this rally after the manipulation in the financials (who are also manipulating oil and other commodities). Without the leadership of commodities, further rally becomes way less likely. And beyond speculation, why would they continue to rally? Demand is certainly not strong, in fact it has fallen off the proverbial cliff.

This weekend we learned that the Fed is going to be a buyer at today’s bond auctions, but they don’t say how much and once again we return to the fantasy of QE (printing/buying our own debt) but now without any transparency whatsoever, not that there was ever any real transparency anyway. It is my belief that the $300 billion announced by Bernanke (and supposedly only $150 billion spent so far) is just the tip of the iceberg for the amount of QE that has happened in reality. Of course they don’t want their books to be audited by an independent agency, it likely won’t happen, and we’ve all seen the video of how effective and competent the internal auditor is (not).

So, the biggest weekly auction amount in history is scheduled for this week and that is the real news. More debt than there are buyers for and the Fed admits it must continue to buy its own debt. That is DEFAULT. When you can no longer finance your debts, you have failed – as in BANKRUPT!

And speaking of bankrupt, California is a disaster that is not waiting to happen, it is imploding NOW. Martin Weiss wrote a good article on California and I suggest everyone read it. With an economy larger than Russia or Canada, its collapse is not insignificant, quite the contrary, it will have a very profound effect indeed. Please take the time to read Weiss’s article – California Collapsing.

California Collapsing (H/T Nate)

California is home to the largest manufacturing belt in the United States and to Silicon Valley, the nation’s largest high-tech center.

California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India.

And it’s collapsing.

Major California counties are ground zero in the continuing mortgage meltdown:

Los Angeles County with 5.32 percent of mortgages 90 days past due … Monterrey County, 8.02 percent … Imperial, 8.13 … San Bernadino, 8.66 … Madeira, 9.21 … San Joaquin, 9.53 … Riverside, 10.2 … Merced, 10.57 … and more!

California’s inventory of foreclosed homes is skyrocketing. Home prices are plunging. And the impact of surging unemployment is just beginning to show up in the data …

(More)

FDIC’s Bair: ‘Too Big to Fail’ must end

“[Obama’s regulation is] a good opening to the process,” said Bair. “I commend the President for getting personally involved in this and taking leadership and putting his own considerable influence behind the efforts…We’re still analyzing the whitepaper and want to work with the administration and Congress constructively on this.”

“[The FDIC] is guaranteeing over $6 trillion right now,” she said. “The FDIC has tremendous exposure to the system so we would like a real say on systemic risk issues. [Reform overhaul] is an institutional issue, not a turf issue or a personality issue.”

"Still analyzing the whitepaper"? [emphasis mine]

Another Hotel Defaults on Mortgage Debt

From the WSJ: Red Roof Inn Defaults on Mortgage Debt (hat tips to all in the comments!)

Red Roof Inn Inc. … defaulted on $332 million of mortgage debt … Red Roof confirmed the defaults Tuesday.

All told, Red Roof’s properties carry at least $1 billion in debt, including mortgages, mezzanine loans and other notes.

"As a result of the extraordinary stress in the hospitality industry and the economy overall, we have entered into some restructuring discussions with our lenders," said Andrew Alexander, an executive vice president of Red Roof.

Occupancy at Red Roof’s properties, which averaged 62% when the mortgages were originated in 2007, sank to 50.7% in the first four months of this year.
The drop in occupancy rates are similar to the overall industry decline. And not only are occupancy rates off sharply, but so are room rates. Smith Travel Research reported last week that revenue per available room (RevPAR) was off 18.6 percent for the comparable week last year. I think this is just the beginning for the hotel related defaults.

Local Shelters Lose Food Aid Because Of Fees

SOUTH BEND – Three local shelters have lost the ability to acquire food from the Food Bank of Northern Indiana because they charge fees to certain residents or accept their food stamps.

It could create a financial pinch for the shelters: the Center for the Homeless, the YWCA of St. Joseph County and the Salvation Army’s Adult Rehabilitation Center.
Food Bank CEO Lisa Jaworski says she regrets that those ties had to be severed, but she says her “hands are tied” by the strict federal and nonprofit rules for the two kinds of food that were provided.

Hey New York your next after California

For now, folks living in New York can watch the soap opera playing out in California from a comfortable, continent-sized distance.

But after that drama plays out, New York is next.

Smart Money: Right now, at least 47 states are facing significant shortfalls in their 2009 and/or 2010 budgets, according to the Center on Budget and Policy Priorities, a think tank in Washington, D.C. And many of those states are looking to tax hikes to help fill the gaps.

“Pretty much everyone is doing poorly,” says Kim Rueben, senior research associate at the Tax Policy Center. “It’s just a question of who’s hurting more than others.”

Downey Savings and Loan: The Anatomy of an Option ARM led California Banking Disaster. Other People’s Money Delusion.

The fact that the report tells us that Downey was unresponsive is a joke. This is like a person speeding down the highway going 100 miles per hour not “responding” to a cop and his siren. Do you think the cop would just let him go and say, “oh well, I’m sure he’ll slow down later.” It is this kind of nonsense that has made the banking industry the ultimate oligarchy in our country since they are not only guiding policy, but writing it. The case of Downey Savings and Loan gives us clear policy implications yet we are not following what is in front of us. If we keep letting the banks loot this country with the aid from the U.S. Treasury and Federal Reserve, there will be a repeat of this kind of bubble in a few years in some other industry.

New California Law Will Have Impact on Small CA Websites Including LATOC Blogger (SuzieGruber)

I just learned that California legislators in efforts to close the budget shortfall have included a provision in the latest budget that will likely result in internet affiliates pulling advertising from small business’ websites. Amazon has already sent a letter to the CA state government saying they will do so if the bill passes. You can read about the details of the proposal here"

Why do i care? Because one of the websites affected is Matt Savinar’s site, lifeaftertheoilcrash.net. Matt has tirelessly educated many, many people about the realities of peak oil. While his style is very direct and overwhelming for some people, I believe he is providing much needed information especially through his Breaking News page. His site caused me to wake up to the realities of Peak Oil.

What can we do? If any of you out there have been thinking about crash prep supplies or anything from Amazon, if you buy them through Matt’s site, it will help the site stay afloat. www.lifeaftertheoilcrash.net.

Thanks,

Suzie 

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