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    Week of April 14, 2008

    by Chris Martenson

    Sunday, April 20, 2008, 6:50 PM


political circles, the Friday afternoon press release is the equivalent
of burying a story under the theory that something gets lost over the
weekend. Which means the weekend is my favorite time to find out what
sorts of economic items are being buried from view…

What’s this being released in the Sunday electronic edition of the WSJ? This ought to be good…

Wachovia to Get Capital Infusion: WSJ

Wachovia may get a capital infusion of roughly $6 billion to $7 billion
from outside investors, The Wall Street Journal said on Sunday.


The terms of the deal were being finalized on Sunday night, but
Wachovia could get funding from investors who would get discounted
shares in the company, the newspaper said in its electronic edition.


But the bank issued a statement that it rescheduled the release of its
first quarter earnings and would announce its results on Monday instead
of Friday.

Ouch! An earnings miss, a delay in reporting the damage, and a
Sunday night bailout. No wonder they went for late Sunday press
release. Must have been a long, tough weekend at the Wachovia executive

But it really isn’t going all that much better elsewhere…

Deutsche Bank seeking to sell $20 billion in debt

LONDON (MarketWatch) — European banks are facing another round of losses from the credit crisis, with Deutsche
Bank looking to sell as much as $20 billion of leveraged-buyout debt
and Credit Suisse expected to write down as much as $5 billion
in the first quarter, according to media reports.

U.S., Europe Warn of Further `Bad News;’ Strengthen Regulation

April 13 (Bloomberg) — Finance chiefs from the U.S. and Europe said
the eight-month credit squeeze is still festering and urged banks to
take steps to relieve it.


“The chain of bad news may not have come to an end,” Italian
Finance Minister Tommaso Padoa-Schioppa said yesterday as the
International Monetary Fund held its semi-annual meetings in

This next pair are an odd couple. First, on Saturday, we have the G-7
ministers publicly proclaiming that they want the dollar’s slide to
stop. The next article, on Sunday, has the ECB talking about inflation
concerns, which is very nearly an exactly opposite message to the G-7
statement. Why? Because any steps that the G-7 might take to support
the dollar would almost certainly be inflationary.

So which is it? Inflation or a stronger dollar? What will Europe
do? Who knows, but this sort of ‘message disparity’ tells me that their
coordination could be better and makes me wonder if fractures aren’t
developing between the political and banking interests.

G-7 Signals Concern on Dollar’s Slide

April 12 (Bloomberg) — Finance chiefs from the
Group of Seven nations signaled concern on the dollar’s slide and said
the global economic slowdown may worsen amid an "entrenched" credit


"Since our last meeting, there have been at times sharp
fluctuations in major currencies, and we are concerned about their
possible implications for economic and financial stability," the G-7’s
finance ministers and central bankers said in a statement after talks
in Washington yesterday.


"They ratcheted up the currency rhetoric a notch or so,"

said Marc Chandler, global head of currency strategy at Brown Brothers
Harriman & Co. in New York. "They’re trying to buy some time for
the dollar."


"We continue to monitor exchange markets closely, and cooperate as appropriate,"
the G-7 said.

ECB’s Quaden, Wellink Say Inflation Remains a Concern

April 13 (Bloomberg) — European Central Bank
council members Guy Quaden and Nout Wellink said inflation remains
their chief concern, suggesting they see little room to cut interest


"The current level of inflation in the euro zone is well above our
definition of price stability and the prospects for the coming months
are not really reassuring," Quaden said in an interview in Washington
yesterday. Wellink told reporters today in the U.S. capital "there’s
reason to worry about price stability" and so the ECB has a "steady
hand" policy.

And now for some energy news.

Have you been wondering how successful GWB was when he went over to
Saudi Arabia and asked for them to produce more oil to help bring
prices down? Wonder no more.

Saudi King says keeping some oil finds for future – Forbes.com

SAUDI ARABIA – RIYADH, April 13 (Reuters) – Saudi Arabia’s King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world’s top exporter for future generations, the official Saudi Press Agency (SPA) reported.


"I keep no secret from you that when there were some new finds, I
told them, ‘no, leave it in the ground, with grace from god, our
children need it’," King Abdullah said in remarks made late on
Saturday, SPA said.

And then there’s this sorta buried and VERY ominous admission about
the state of Canadian natural gas production over the next few years.
If you’ve heard (and fretted) about Peak Oil, then Peak Natural Gas
should capture an equal portion of your attention. Why? Because natural
gas plays a far larger role in electricity production than does crude
oil. More on this later…

Is LNG flame burning out?

The National Energy Board, at the same time it announced an anticipated 15 per cent decline in domestic natural gas production between 2007 and 2009,
confidently asserted last October that over the long term, "Canadians
should rest assured" that their natural gas needs will be met as
unconventional sources, including LNG, enter the market.


Or maybe not.


The LNG ship isn’t arriving on continental shores as first hoped, and
initial enthusiasm over the prospect of LNG is, in some corners,
beginning to fade. Critics say the fuel is difficult to secure,
expensive to get, and in some circumstances not much cleaner than
generating power from coal.

Crikey! 15%?(!)? In TWO years? Is that a lot?




I am a huge Paul Volcker fan. He withstood tremendous political and
social pressure (the only Federal Reserve Chairman to have been burned
in effigy on the Washington Mall, to my knowledge) as he saved the
dollar in the late 70’s and early 80’s.

This article is very important…you would do well do
seriously consider what is being said by Volcker. I’ve put a few
snippets below to pique your interest, but I really want you to go and
read the whole thing.

A blunt former Fed chairman takes on Bernanke. Take heed of what he says.

A few days ago an unusual event took place: Paul Volcker, the mythical
U.S. Federal Reserve Board chairman from the Reagan years, criticized
the policy of the current Fed chairman, Ben Bernanke, in a speech to
the Economic Club of New York.

Just so you grasp how extraordinary this was, you should first
understand that normally a past Fed chairman scrupulously avoids saying
anything at all about current Fed policy – for the simple reason that
the current Fed chairman’s words are one of his most important tools:
They can sway markets.

This ability does not fade entirely when a Fed chairman leaves.

So when a past Fed chairman speaks, his words can clash with those
of the present one and make that one’s job difficult. Out of
professional courtesy, past Fed chairmen therefore keep quiet; Mr.
Volcker especially – the man who hiked interest rates to 20 per cent to
kill inflation, at the cost of a deep recession. But last week Mr.
Volcker spoke his mind bluntly. He said, in effect, that the current
Fed is not doing its job.

This would have been unusual enough. But Mr. Volcker went further.
Not only is the Fed not doing its job, he said, but it is doing the
wrong job: It is defending the economy and the market, instead of
defending the dollar. And just to stick the knife in, Mr. Volcker added
that this bad job now will make the real job – defending the greenback
– much harder later. It’ll cause even greater economic suffering.

In plain words, Mr. Volcker implied that the current Fed is not only incompetent, but that its actions are dangerous.


Up to now Mr. Volcker kept quiet, but no more. In his speech he
just said, in effect, that the recession is not the Fed’s problem. It’s
the government’s. The Fed’s job is to defend the currency and fight
inflation – exactly the opposite of what this Fed is doing. The
solution? Raise interest rates, Mr. Volcker practically said, no matter
the consequences now, because if you don’t, you’ll have to raise them
even more later, with even more awful consequences.




There are two forms of inflation tracked by
the Labor Department; one is the Consumer Price Index (CPI), and the
second is the Producer Price Index (PPI), which
(supposedly) tracks
the prices that producers are experiencing for raw, intermediate, and
finished goods. Unsurprisingly, there are quite a few commentators
(myself included) who eye the reported PPI figures as suspiciously as
they do the CPI.

However, even with all the statistical massaging, this months reading for the PPI was quite high:

U.S. March Producer Prices Rise More Than Forecast

April 15 (Bloomberg) — Prices paid to U.S. producers rose almost twice as much as forecast in March, reflecting higher fuel and food costs that threaten a pickup in inflation.

The 1.1 percent gain followed a 0.3 percent increase in
the prior month, the Labor Department said today in Washington. So-
called core producer prices that exclude fuel and food increased 0.2
percent, as forecast.

Rising raw-material costs are hurting profits as slowing demand makes
it difficult for companies to pass increases on to consumers. The
need to avert a deeper economic slump will prompt Federal Reserve
policy makers to lower the benchmark interest rate again this month
even as inflation accelerates.

The 1.1% gain is for the month, not yr/yr, and were it to continue it
would result in a 14% rate for yr/yr inflation. However, this is
unlikely because the PPI is a notoriously volatile number. It is worth
noting the conclusion of the article, that the need to avert a deeper
slump will trump concerns about the accelerating rate of inflation.
This is dangerous thinking, although I do not doubt that the Fed thinks
this way. The Fed truly plays a dangerous game, with hyperinflation on one side of the tight wire, and deflation on the other.

As I wrote awhile ago, the next shoe to drop will be corporate
bankruptcies, especially for the companies that most resemble subprime
homeowners. An historically low rate of bankruptcies over the past 6
years lulled a lot of banks and investors into complacency, and most
high-risk companies had little difficulty in rolling over, or even
increasing, their borrowing.

Now that credit markets have regained some of their senses, money is
harder to come by, and we are seeing a fresh wave of defaults and
bankruptcies among the weaker corporations.

I am anticipating somewhere between $500 billion and $1 trillion in
losses to arise from this arena, to complement the $1 trillion in
losses that I see coming from the housing market.

Bankruptcies Rise in Crunch for Firms `That Should Have Failed’

April 15 (Bloomberg) — U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.

The filing by Frontier Airlines Holdings Inc. April 11 followed
those of three other airlines and companies in restaurants and
retailing this year. Increased levels of distressed corporate debt
signal that failures will accelerate, says Lynn LoPucki, a professor at
the University of California, Los Angeles law school who studies

The amount of distressed corporate bonds jumped to $206 billion
April 11 from $4.4 billion in March 2007, according to a Merrill Lynch
& Co. index of bonds yielding at least 10 percentage points more
than Treasuries. The share of leveraged loans considered distressed was
16 percent at the end of March, the highest since 1997, says Standard
& Poor’s, based on loans trading below 80 percent of their face

"Money was so easy, companies that should have failed were kept alive,"

said Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis in New
York. He said bankruptcies will include businesses "with severe
operational problems" and too much debt. "Companies may well be sicker
when they enter Chapter 11."

Oil news…

If it looks like a duck, walks like a duck, and quacks like a duck…it just might be a duck!

What I’m referring to here is the possibility that Peak Oil is here
right now, today, and not some distant prospect. Falling economies should create lower demand for oil, and therefore we should be seeing lower prices. But we are not. We’re seeing new records set each month…

Perhaps we need to listen to the market prices?

Oil Rises to Record Above $113 Amid Nigeria, Mexico Disruptions

April 15 (Bloomberg) — Crude oil rose to a record above $113 a barrel in New York on supply disruptions in Nigeria and Mexico and rising fuel demand in China.

Oil climbed to $113.66 a barrel on the New York Mercantile Exchange,
the highest since futures began trading in 1983. Mexico, the U.S.’s
third-largest crude supplier, shut its fourth export terminal
yesterday, while Eni SpA halted output in Nigeria. China said today
diesel imports surged 49 percent in March.

"The predominant market view is that the emerging economies will
overcompensate for any possible demand slump in OECD countries,"
said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt.

Not too many ways to slice that
statement…it is clearly saying that the market participants (who have
vast sums of money on the line, so I trust that they are paying pretty
close attention to the real situation) have decided that demand growth
is stronger than supply growth.

Now why could that be….?

Fears emerge over Russia’s oil output

Russian oil production has peaked and may never return to current levels
one of the country’s top energy executives has warned, fuelling
concerns that the world’s biggest oil producers cannot keep up with
rampant Asian demand.

The warning comes as crude oil prices are trading near their record high of $112 a barrel, stoking inflation in many countries.

Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s
largest independent oil company, told the Financial Times he believed
last year’s Russian oil production of about 10m barrels a day was the
highest he would see “in his lifetime”. Russia is the world’s second
biggest oil producer.

Mr Fedun compared Russia with the North Sea and Mexico, where oil
production is declining dramatically, saying that in the oil-rich
region of western Siberia, the mainstay of Russian output, “the period
of intense oil production [growth] is over”.

Russia was until recently considered as the most promising oil region
outside the Middle East. Its rapid output growth in the early 2000s
helped to meet booming Chinese demand and limited the rise in oil

The trend, however, has turned, with supply dropping below year-ago levels for the first time this decade, according to the International Energy Agency, the energy watchdog.

For the record, Russia is the #2 oil exporter
in the world, behind only Saudi Arabia…so this is big news. Really
big. Like, you should already be thinking about all the possible ways
that our lives will change once the reality of an oil supply crunch
becomes openly accepted as being self-evident.

Is the credit crisis over? Has the Fed, by
sloshing enormous amounts of money into the coffers of preferred
banking institutions, got us back on the path to endless growth?

At times like these, it’s important to keep your eye on the causes,
not the symptoms, nor even the ‘solutions.’ The cause of all this was a
housing bubble of biblical proportions. To believe that the worst is
behind us and that it’s nothing but blue skies going forward, we’ll
need to see some promising signs in the actual, real-world housing

Instead, we find this:

U.S. Foreclosures Jump 57% as Homeowners Walk Away

April 15 (Bloomberg) — U.S. foreclosure filings jumped 57 percent
and bank repossessions more than doubled in March from a year earlier
as adjustable mortgages increased and more owners gave up their homes
to lenders.

About $460 billion of adjustable-rate loans are scheduled
to reset this year, according to New York-based analysts at Citigroup
Inc. Auction notices rose 32 percent from a year ago, a sign that more
defaulting homeowners are "simply walking away and deeding their
properties back to the foreclosing lender" rather than letting the home
be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in
the statement.

"We’re not near the bottom of this at all," said Kenneth Rosen,
chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley,
California and chairman of the Fisher Center for Real Estate at the
University of California at Berkeley. "The foreclosure process will
accelerate throughout the year."

Bank seizures climbed 129 percent from a year earlier,
according to RealtyTrac, which has a database of more than 1 million
properties and monitors foreclosure filings including defaults notices,
auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.

Are we near the bottom yet? Nope, not even
close. If you haven’t read it yet, I have broken down the causes and
challenges we will face in the coming years in real estate in an
article titled "Housing – Simple As That."

again, we find what seems to be a more honest appraisal of the
potential impact of this crisis from foreign sources; this time from

Germany is in shock as subprime gets worse

17 April 2008

Germany is mired so deep in the subprime crisis that its entire
banking structure is under threat of collapse. As write downs continue
to mount and government guarantees wear thin, experts warn that losses
could soon reach €30bn (£24bn) – and possibly more.

It is the long-suffering German taxpayer who will be handed the
final bill, just at a time when German industry and employment as a
whole is on the up.

‘The subprime meltdown has caused the deepest financial crisis in
Germany in decades,’ wrote the influential news magazine Der Spiegel
this week.

To a people with memories of another crash, that of 1929, helping
to propel the Nazis to power and Germany to ruin, the spectre of a
replay of those dark times is grim indeed. Throughout the crisis, banks
and politicians have sought to downplay the scope of the losses, but
the risks continued to mount.

Meanwhile, Der Spiegel was pretty blunt in their assessment of our activities over here in the US…

The Madness of Ben Bernanke

The dollar is in a tailspin, the trade deficit is
growing and a recession is on the horizon. The American way of life is
in serious danger. But the head of the Federal Reserve keeps on pumping
easy credit into the system — a crazy policy that will worsen the

The credit-financed consumer boom of recent years is coming to a
painful end. Today’s American Way of Life has no chance of surviving
the coming years undamaged. The virus will continue to ravage its way
through the financial system.

The property crisis is likely to spread to credit card providers
soon and will then probably infect car manufacturers, furniture makers
and all the other firms that owe their sales increases to the growth in
credit finance. "The virus will keep on infecting the system," one
management board member from a large bank said, requesting anonymity in
return for the candour of his analysis. 


this article by Michael Hudson (former Wall Street economist and
current professor) makes clear, in the US more than $1 trillion in
official money has been applied to the ‘situation.’

A Trillion Dollar Rescue for Wall Street Gamblers

The bailout started on Sunday, March 16. The government and JPMorgan
Chase had reason to be embarrassed about the negotiations, for the
details trickled out on the Federal Reserve or Treasury websites and
Mr. Paulson’s speeches went far beyond just Chase and Bear Stearns. It
turned out that on the same Sunday on which he had negotiated the $30
billion Fed bailout, Mr. Paulson started a frenetic ten days
orchestrating actions by the Treasury, Federal Reserve, and other
government agencies to earmark a trillion dollars to re-inflate
financial markets for mortgage holders and their associated creditors
and speculators.

The American public may justifiably be puzzled by how the government
can seem to come up trillions of dollars for foreign wars and banker
bailouts, but so little for them. The United States is spending an
estimated $3 trillion for an illegal war that has made us less safe,
and $1 trillion so far to rescue bankers in a way that is destabilizing
the economy.

And the European Union has been no slouch as
they have applied roughly the same amount. It is true that these
efforts have been made in the form of loans and cheaper credit, but it
is still a very large amount of liquidity and overt stimulus.

And on both sides of the pond, the central banks are exchanging good money for highly questionable (read: unmarketable) debts:

Big questions on collateral for Fed loans

The Federal Reserve has the "lend freely" thing
down pat. As for the rate on the loan and the quality of the
collateral, that’s a different matter.

Last week we learned that banks were taking advantage of the Fed’s
largesse—extending credit to non-banks via its Primary Dealer Credit
Facility, or discount window by any other name—by bundling high-yield
corporate loans into securities that would qualify as collateral at the

The Fed isn’t alone in broadening the range of collateral it is
willing to accept in response to the credit crisis. In December the
Bank of England added asset-backed securities to its eligibility list.
The European Central Bank, which has extended the term of its loans in
recent months, has always accepted a range of marketable and
non-marketable assets as collateral.

The European press is abuzz with stories about Spanish banks
tendering boatloads of asset-backed securities as collateral for ECB

As property bubbles implode in some of the smaller Eurozone
countries, credit availability has dried up, sending commercial banks
to the ECB even though "there is no formal lender of last resort in the
European Monetary Union," said Bernard Connolly, chief strategist at
Banque AIG in London. "The need to rescue banks in particular countries
would create political problems for EMU: Which country’s taxpayers are
going to bail out another country’s lenders?"

So the Fed is in good company in the race to the bottom on collateral quality.

What happens when you apply that much money? Why, inflation and falling currencies, of course.

So what, then, is the official response of the bankers to the predictable, but alarming, consequences of their actions?

Why, that would be a simple matter of browbeating an uncooperative market, rather than admitting their policies are at fault.

Authorities lose patience with collapsing dollar

Jean-Claude Juncker, the EU’s ‘Mr Euro’, has given
the clearest warning to date that the world authorities may take action
to halt the collapse of the dollar and undercut commodity speculation
by hedge funds.

Momentum traders have blithely ignored last week’s accord by the G7
powers, which described "sharp fluctuations in major currencies" as a
threat to economic and financial stability. The euro has surged to
fresh records this week, touching $1.5982 against the dollar and
£0.8098 against sterling yesterday.

"I don’t have the impression that financial markets and other
actors have correctly and entirely understood the message of the G7
meeting," he said.

And there are some out there, notably bankers
who got us into this mess and never saw it coming, who are saying that
all is well and that the worst is behind us.

Whew! That was easy!

Bank Chiefs See End for Woes Investors Can’t Forget

April 16 (Bloomberg) — Jamie Dimon, Richard Fuld,
Lloyd Blankfein, and John Mack say that the credit-market contraction
is winding down. Investors whose bank stocks plummeted aren’t

Dimon, chief executive officer of JPMorgan Chase & Co., said
today that the credit crisis is "maybe 75 percent to 80 percent"
over. Fuld, CEO of Lehman Brothers Holdings Inc., told shareholders
yesterday that the "the worst is behind us."

Their comments followed similar remarks last week by Goldman Sachs
Group Inc.’s CEO Blankfein who told investors "we’re closer to the end
than the beginning," and Mack, Morgan Stanley’s chief, who said the
crisis will probably last `" couple of quarters" longer.


A collection of article links.

As Australia dries, a global shortage of rice (IHT – 4/17/08)

Global Food Crisis – The Fury of the Poor
(Speigel – 4/14/08)

Biggest grain exporters halt foreign sales
(Financial Times – 4/15/08)

Schools Get A Lesson in Lunch Line Economics
(WaPo – 4/14/08)

Workers Get Fewer Hours, Deepening the Downturn
(NYT – 4/18/08)

Greenspan’s Follies
(Steven Roach in Foreign Press, April 2008)

Volcker Stands Tall, Greenspan Keeps Shrinking
(Bloomberg – 4/9/08)

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