Street haberdashery, New York City
Ilargi: There's a bad moon rising somewhere today. Not for the increasing numbers of people living in tent cities, they've been there and done it. All the happy talk passes them by. To get a home they need to find a job. But everyone agrees job losses will continue, even if the economy would really recover. If you don’t have a job, you ain't getting no home. And if you don’t have a home, you ain't getting a job. For many of the tent city dwellers, and the large numbers set to join them in the aftermath of mortgage resets, foreclosures and more job losses, that is their foreland.
There's a great piece of logic today in the Wall Street Journal that goes something like this: because so many people lost their jobs in the past 12-18 months, many more will find jobs. Or something. I kid you not. It's absolutely brilliant:
Pace of Job Losses Sets Stage for Quick Labor-Market Rebound
"But the biggest reason jobs might bounce back quicker from this downturn than the past two recessions, said Comerica Bank economist Dana Johnson, is that the economy looks likely to see a much bigger bounce as it recovers. Gross domestic product -- the value of all goods and services produced by the economy -- has fallen by 3.9% since economic output peaked last year, marking the steepest decline since the end of World War II. In contrast, the 2001 and 1990-91 recessions were among the shallowest on record.
History says that given the depth of the downturn, GDP should grow at a 6% to 8% rate over the next year..
Yes, history says so. That's one for the history books. Making up stuff like that must be highly satisfactory. It takes a lot of extra effort, of course, but you may well arrive at entirely new heights. And there'll always be people who believe you. I can't even say I'm sure I understand it. But it sure sounds pretty.
Still, I'm sticking with that bad moon. If we must have it, let's face it with honest minds. I don't take any pleasure in what's going to come under that moon, but neither do I long for any more empty promises and predictions.
Yes, stock markets have been going up. So what? That just means there's still money out there that's seeking a place to be. Or, more correctly, there was money out there when the rally started and now it's found a way to change hands. And when everybody and their pet parrot feels they need to get themselves a piece of the profits, that's when the lever for the false bottom is pulled. Tragic for many, but not exactly a unique event.
Consumers are still up to their necks in debt, the Obama administration requests permission to drag the nation deeper in, and companies across the industrial spectrum are hoarding cash as a buffer against what they fear will befall them once the bad moon starts rising. Namely, that they won't be able to pay back their debt. It's the same anguish that options trades are already acting on: a deep seated fear of September and October, a fear that is much less abstract and much more real than the childish green shoots mantra that has lifted markets in the first part of 2009.
We are at the tail end of a six month period of change we can believe in that hasn't changed much of anything, a period that will be remembered as one characterized primarily as an orgy of free money, free money for banks, for carbuyers and for homebuyers. We are soon to find out how free that money exactly has been. It may take another month, or two, it may take us into November even, if debt ceilings are raised and more stimulus plans full of free money are spread among the faithful flock.
But when the days shorten, when temperatures start dropping and that bad moon rises above a pale horizon, the time will loom for individuals, companies and governments to face their debts and make good on them. As governments from small to federal sink ever deeper into debt, while tax revenues sink into dark deep black holes, it'll be time for an increasing number among them to find themselves incapable of selling any more debt unless and until they pay off their old ones.
Which will lead to massive new job losses (Jefferson County last week laid off 2/3 of its workers), which will lead to more foreclosures, which will lead to more job losses. It will also lead to more bank failures, while the banks that are left standing will have no choice but to limit lending to a minimum, just in order to survive. Ironically, banks most often need that same lending business in order to survive. In order to make up for that lost business, many will put their money in what today seem to be solid investments, only to incur additional losses.
The appetite for risky investments that has greatly increased lately, driven largely by desperation over financial realities, will be the final straw for scores of individuals, governments and businesses. Double or nothing as the only way out will never work as a general principle. That is a reality that can only temporarily be hidden from view by what looks at first glance like free money. And then the bad moon will come to collect, and it won't appear so free anymore. Looks like we're in for nasty weather. One eye is taken for an eye.
I see the bad moon arising.
I see trouble on the way.
I see earthquakes and lightnin'.
I see bad times today.
Don't go around tonight,
Well, it's bound to take your life,
There's a bad moon on the rise.
I hear hurricanes a-blowing.
I know the end is coming soon.
I fear rivers overflowing.
I hear the voice of rage and ruin.
Hope you got your things together.
Hope you are quite prepared to die.
Looks like we're in for nasty weather.
One eye is taken for an eye.
Debt Burden to Weigh on Stocks
Economists are boosting growth forecasts. Employment numbers are improving. Manufacturing activity is bottoming. Housing demand is strengthening. Business leaders are starting to say the worst may be over.
Markets are celebrating, hoping the good news will keep on coming. But there is a smudge on the picture. A surprisingly large number of money managers and economists are warning that, despite the hopeful signs, the economy is still deep in the woods, not strong enough to support a long-running stock and bond recovery.
The Dow Jones Industrial Average now has jumped 43% from the 12-year low hit March 9. It finished Friday at 9370.07, its highest close since Nov. 4. Risky credit investments, such as junk bonds and even mortgage-backed securities, also have been recovering. "The question now is, 'Where do we go from here?' " John Osterweis, chief investment officer of Osterweis Capital Management, told clients in a recent report. "The simple answer is probably, 'Nowhere fast.' "
According to this view, the market surge of the past five months has been a celebration of the government's success in staving off financial doom. Stocks deserved to rise from panic lows. To keep rising in the future, the market needs a sign of real economic recovery, and that requires a surge in consumer spending, business investment and home buying. That is what is in doubt, and one word explains why: debt. Despite an uptick in consumer saving, debt levels have only barely begun to come down. Even after the recession ends, economists expect the gradual reduction of the nation's massive consumer debt to take years. In the meantime, they are warning that the economic-growth surge expected for the second half of this year could be followed by slower growth and a softer stock market in 2010.
A survey of six leading Wall Street stock strategists, ordinarily a bullish bunch, shows them on average forecasting the Standard & Poor's 500-stock index at about 1033 by year's end. Their forecasts range from 930 to 1100. The S&P 500 finished Friday at 1010.48, already nearly at the average forecast. On Wednesday, in the wake of encouraging manufacturing and auto-sales data, economists at Goldman Sachs Group tripled their forecast for inflation-adjusted economic growth to a 3% annual rate for the second half of this year. And after that? They see the growth rate steadily declining to 2% in the first half of 2010 and 1.5% in the second half.
The debt data are striking. According to the Federal Reserve, total household indebtedness peaked at the end of 2007 at 132% of disposable income. That was by far the highest level since at least the end of World War II, nearly quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting, the ratio had fallen to 124%, a tad lower but still miles from the level of, say, 69% in the middle of 1985.
Consumer spending today accounts for two-thirds or more of economic output. But as they boost savings and cut borrowing, consumers can't be the drivers of economic growth that they were at the end of other recent recessions.
Consumer borrowing fell in June for the fifth consecutive month. The savings rate, which had fallen below zero in 2005 as a profligate nation spent more than it earned, was back to 6.9% of disposable income in May. It pulled back to 4.6% in June, but as people struggle to repay debt, many economists expect the savings rate gradually to return to the 7% to 10% range of the post-war years.
"Consumers are under significant financial pressure," Goldman notes in its report. "The weakness in household income -- partly resulting from the sharp slowdown in hourly wage growth -- will make it harder to raise saving without significant constraints on consumption." As for home building and capital spending, two other possible growth motors, "we do not expect a 'traditional' rebound in these sectors, largely because the overhang of unused capacity in both the housing and business sectors remains enormous," Goldman said.
Morgan Stanley, Goldman's big rival, is on pretty much the same page. "We believe that the painful adjustments to household and corporate balance sheets that are likely, given the excesses of the past, are enough to make the economic recovery a slow and tenuous one over the medium term," wrote Morgan Stanley economist Manoj Pradhan in a recent analysis. Nonsense! says Michael Darda, chief economist at brokerage firm MKM Partners in Greenwich, Conn., who bullishly and accurately predicted this year's huge rally in risky assets such as stocks and junk bonds.
"We continue to believe the consensus view of only 2% real [gross domestic product] growth for 2010 is far too tepid," Mr. Darda said in a recent report. He added, in another report, "The conventional wisdom has coalesced around the idea -- which goes virtually unchallenged -- that higher average savings on the part of households will ipso facto reduce the average rate of GDP growth during the impending recovery cycle." He says the pessimists once again are ignoring clear economic and financial signals, such as the continuing recovery in the corporate-bond market, which typically precede a recovery in stocks and in the economy. He thinks doubters soon will have still more egg on their faces. And he has been right so far.
In an effort to make sense of the increasingly intense disagreement, Bridgewater Associates, an often-contrarian money-management firm that oversees about $72 billion in nearby Westport, Conn., has recently sent clients a series of reports. Although the reports are complicated and detailed, their essence can be summarized simply. The optimists see signs that the recession is ending, and they forecast the normal next step: a stronger stock market. The pessimists believe the most important development isn't the end of the recession, it is the long process of debt reduction by families and businesses. Bridgewater lines up with the pessimists. It has been trying to avoid stocks tied to the U.S. economy in favor of those linked to the emerging economies of the developing world, notably China.
The bulls believe the economic and stock-market recoveries will continue to look like a V. The pessimists fear they will be more like a W -- or even a succession of W's. "And remember that the up-leg of a V and the first up of a W look the same when you are in them," says David Kotok, president of money-management firm Cumberland Advisors in Vineland, N.J. He is betting that the stock market will keep doing well for a while, and then will suffer as the economy sputters. "The U.S. is not out of the woods by a long shot," he says.
VIX Signals S&P 500 Swoon as September Approaches
Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities. Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks, according to futures prices at the end of last week compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
VIX futures above the level of the index show investors expect fluctuations to widen and stocks to retreat. The S&P 500 has rallied 49 percent in five months, pushing valuations to the highest levels since December 2004. The S&P 500 gained 2.3 percent last week as reports showed home sales rose and the unemployment rate fell. "It’s a danger sign," said Ronald Egalka, a 36-year options trader who oversees $8 billion as chief executive officer of Rampart Investment Management in Boston. "People expect volatility to pick up in the future, and that implies that there’s going to be a downward movement in the market."
History shows that U.S. investors lose the most in September. The benchmark index for American equities fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show. The S&P 500 lost 0.3 percent to 1,007.10 at 4 p.m. in New York. Mark Mobius said global stocks will drop as much as 30 percent following their recovery from last year’s rout as companies take advantage of the rebound to sell more shares.
"When you have these rapid increases almost without correction, you will definitely have a correction," Mobius, who oversees about $25 billion as executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. "We can expect a lot of volatility." The S&P 500 plunged 9.1 percent last September after New York-based Lehman Brothers Holdings Inc. collapsed. The biggest drop occurred in September 1931 during the Great Depression, when the S&P 500 tumbled 30 percent. February is the only other month when stocks fell on average since 1928, losing 0.3 percent, Bloomberg data show.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, usually moves in the opposite direction of the S&P 500 because demand for insurance rises as stocks fall. VIX futures expiring in September were 3.29 points higher than the index on Aug. 7, and last month were as much as 5.91 points higher, a record gap for so-called second-month contracts. Last week’s spread was comparable to the one in August 2008. The VIX added 0.9 percent to 24.99 today, while the September futures contract was unchanged at 28.05.
The index has averaged 20.22 over its 19-year history and surpassed 50 for the first time in October after Lehman filed for the biggest U.S. bankruptcy. Frozen credit markets and bank losses approaching $1 trillion tied to subprime loans pushed the measure to a record 89.53 on Oct. 24. Losses at the world’s biggest financial companies now exceed $1.5 trillion, according to Bloomberg data. Last week’s reading indicated a 68 percent likelihood the S&P 500 would fluctuate as much as 7.2 percent in the next 30 days, according to data compiled by Bloomberg.
"VIX futures are telling you that investors are willing to pay a premium for protection," said David Palmer, who helps oversee $300 million as volatility portfolio manager at Hudson Bay Capital Management LLC, a New York-based hedge fund that returned 11 percent last year, according to Absolute Return magazine. "People expect some sort of a break in the market."
Hedge funds lost an average 18.3 percent in 2008, according to Chicago-based Hedge Fund Research Inc. The S&P 500 declined 38 percent, the worst performance since 1937. Options strategists saw the same upward-sloping curve last August, before the S&P 500 tumbled 9.1 percent in September and 17 percent in October. VIX futures two months from expiration were 4.11 points higher than the VIX on Aug. 22, when the index slumped to an 11-week low of 18.81.
Volatility may be increasing for reasons unrelated to stock prices, according to Macro Risk Advisors LLC, a New York-based options brokerage. Traders who sold bullish options when the rally began on expectations the gain would fizzle may be buying them back now, Dean Curnutt, the firm’s president, wrote in a note. That demand could be artificially boosting the VIX.
U.S. companies are also beating analysts’ earnings estimates at an almost record rate, making investors more bullish, according to Rob Morgan, who helps oversee $6 billion as market strategist at Clermont Wealth Strategies in Lancaster, Pennsylvania. For the second quarter, 72.2 percent of S&P 500 companies surpassed consensus estimates for profit, just below the 72.3 percent ratio five years ago that was the highest since at least 1993, data compiled by Bloomberg show.
Investors still hold more than $3.6 trillion of their assets in money-market funds, equal to about 30 percent of the total market capitalization of U.S. companies, according to data compiled by the Washington-based Investment Company Institute and Bloomberg. That’s double the percentage when the S&P 500 reached its all-time high in October 2007, the data show.
The number of contracts to buy previously owned homes in the U.S. rose 3.6 percent in June, the fifth straight monthly increase and more than economists estimated, as lower prices and mortgage rates lured buyers, the National Association of Realtors said Aug. 4. The unemployment rate fell for the first time in more than a year, dipping to 9.4 percent from a 26-year high of 9.5 percent, the Labor Department said Aug. 7.
"There’s a good underpinning to the market here, and the VIX is just one tool in the toolbox," Morgan said. "Stocks follow earnings and revisions are going up and you also have a boatload of cash still sitting on the sidelines as the economy is turning." The S&P 500 will keep rallying this year as exports to expanding Asian economies help U.S. companies boost profits, David Bianco, the chief U.S. equity strategist at Bank of America Corp., wrote in a report today. Bianco said S&P 500 companies will earn $59 a share this year, tying him with Credit Suisse Group AG’s Andrew Garthwaite for the highest estimate among 11 strategists that Bloomberg tracks who have 2009 profit projections. Bianco is based in New York, while Garthwaite is in London.
Paul Tudor Jones, the hedge fund manager whose $8.9 billion Tudor BVI fund gained 10 percent this year through July, said he expects that global stocks may "pause in September" on slower Chinese economic growth. The advance since March is a "bear- market rally," Jones wrote in a report to clients last week. "We are not inclined to aggressively chase the market here." The S&P 500 traded for 18.6 times its companies’ average earnings this year at the end of last week, the highest since December 2004, according to data compiled by Bloomberg.
The first global recession since World War II may worsen as more Americans get thrown out of work and the benefits of government spending wear off, according to Martin Feldstein of Harvard University. "There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news," Feldstein, the former head of the National Bureau of Economic Research, said on Bloomberg Television last month. "We could slide down again in the fourth quarter."
The U.S. economy contracted at a 1 percent annual pace in the second quarter, less than economists forecast, as government spending increased the most since 2003. The outlays, part of President Barack Obama’s $787 billion stimulus package approved in February, masked a 1.2 percent drop in consumer spending, which accounts for more than two-thirds of the economy.
Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Karen Weaver and Ying Shen, New York-based analysts at Deutsche Bank AG, wrote in a report dated Aug. 5. The percentage of "underwater" loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, according to Frankfurt-based Deutsche Bank. As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties.
Profit for companies in the S&P 500 will fall 22 percent this quarter before an earnings rebound by financial institutions spurs a 61 percent increase in the last three months of the year, according to analysts’ estimates. Excluding banks, brokerages and insurance companies, profits are projected to drop 8.6 percent in the fourth quarter. U.S. stock trading has also slowed by the most in at least two decades. An average of 1.34 billion shares changed hands daily on the New York Stock Exchange between May 1 and Aug. 7, about 16 percent less than the average from Jan. 1 to April 30.
That’s the biggest drop since at least 1989, according to data compiled by Harrison, New York-based research firm Bespoke Investment Group LLC. "There’s always a real risk that a rally is going to be tested," said Stephen Wood, New York-based chief market strategist for North America at Russell Investments, which had $151.8 billion in assets under management as of June 30. "Investors are thinking that giving up some upside to hedge the downside is a very reasonable investment profile."
Treasurers’ Fear of Next Credit Freeze Shown in Cash Hoarding
Two years after credit markets seized up and caused the worst financial crisis since the Great Depression, companies are hoarding the most cash in at least a decade. "Every action we take or contemplate taking is measured by its impact on our balance sheet and liquidity," Mark Jacobs, the chief executive officer of Houston-based RRI Energy Inc., told analysts and investors on Aug. 3. The company sold its Texas retail electricity business and the Reliant brand name in May, helping triple cash and equivalents from a year earlier to 18 percent of assets, according to data compiled by Bloomberg.
Even as government reports show that the first global recession since World War II may be easing, corporate treasurers are raising cash as fast as they can, wary of losing access to capital. Corporate defaults reached 10.7 percent worldwide in July, the highest since 1991, according to Moody’s Investors Service. Credit markets that started to freeze in August 2007, have now triggered more than $1.5 trillion in writedowns and losses at the world’s biggest financial institutions. Cash and short-term investments accounted for about $1.98 trillion, or 8.2 percent, of assets at the end of the second quarter for companies in the Standard & Poor’s 500 index, up from about $1.6 trillion, or 6.4 percent, a year earlier, Bloomberg data show. Cash reached a record $2 trillion in the first quarter, 8.3 percent of assets.
"Cash is king," said Paul Kasriel, the chief economist at Northern Trust Corp. in Chicago. "Businesses are in survival mode right now." While companies sold a record $837.9 billion of bonds this year and raised $109.8 billion in stock offerings, the increase in cash shows they are following the lead of consumers, who pushed the U.S. savings rate to a 14-year high of 6.2 percent in May. "There’s going to be a generational psychology shift as to how you and I and the rest of the world think about finance," said Jonathan Fine, a managing director on the investment-grade syndicate desk at Goldman Sachs Group Inc. in New York. "People will keep cash on hand so long as what happened in the last two years remains so visible in the rearview mirror."
General Electric Co., the world’s biggest maker of power- plant turbines, increased cash and short-term investments at the fastest pace in 14 years in the second quarter, to $97.5 billion, or 12.5 percent of assets, from $64.9 billion, or 7.7 percent, a year earlier, Bloomberg data show. The Fairfield, Connecticut-based company raised about $49 billion this year with unsecured and government-guaranteed debt through its GE Capital Corp. finance arm as CEO Jeffrey Immelt began boosting cash after the collapse of Lehman Brothers Holdings Inc. in September.
"We’ve done a lot of stress testing in terms of making sure we’ve got sufficient liquidity, sufficient cash," Kathryn Cassidy, GE’s treasurer, said in an interview. That wasn’t the thinking until defaults on subprime mortgages made to consumers with poor credit began accelerating in 2007, causing losses on securities backed by the loans. Concern that the contagion would spread led investors to rein in credit. The asset-backed commercial paper market contracted about 20 percent in five weeks from its peak in August 2007. Paris- based BNP Paribas SA said it halted withdrawals from three investment funds on Aug. 9 because France’s largest bank couldn’t "fairly" value their holdings. High-yield, high-risk companies such as Plainview, New York-based Aeroflex Inc., a maker of testing gear for the aerospace and defense industries, were forced to delay or cancel bond sales.
That month, the Federal Reserve, in a surprise move, cut the interest rate it charged banks. It would ultimately lower its target rate for overnight loans between banks to between zero and 0.25 percent from 5.25 percent.
As the financial crisis spread, New York-based Lehman Brothers, which was founded in 1850, filed for the biggest bankruptcy in U.S. history. The government bailed out American International Group Inc. and Citigroup Inc., while Bear Stearns Cos. and Merrill Lynch & Co. were acquired. The government assumed control of Fannie Mae and Freddie Mac, the nation’s two biggest mortgage-finance companies.
The collapse of so many financial giants worsened the credit freeze. Rates banks charged each other for three-month loans soared about fourfold to a record 4.63 percentage points more than Treasury bills of the same maturity on Oct. 10 from 1.17 percentage point a month earlier. Speculative-grade companies, those with ratings below Baa3 by Moody’s and BBB- at S&P, got shut out of the bond market as the extra yield investors demanded to own their debt soared to more than 20 percentage points above Treasuries, according to Merrill indexes. Before the markets collapsed, the spread was less than 3 percentage points.
"It’s been a road to hell," said Pat Freeman, treasurer of Calgary-based Agrium Inc., North America’s third-largest fertilizer producer. The company saw its shares tumble to as low as $23.31 from a high of $112.45 in June 2008. They closed at $49.12 last week. "You never know when the market might shut down on you." Unprecedented steps by the U.S. government and the Federal Reserve halted the slide as they spent, lent or committed $12.8 trillion to revive the economy, Bloomberg data show. Access to credit still remains limited for companies that need it the most. Defaults may rise to 12.2 percent worldwide in the fourth quarter, according to Moody’s. Commercial and industrial loans fell to $1.48 trillion at the end of July, down 11 percent from a peak of $1.65 trillion in October, Fed data show.
Yield spreads on junk bonds ended last week at 8.57 percentage points on average, Merrill data show. For investment- grade companies, the difference is 2.54 percentage points. While down a record 6.56 percentage points in December, it’s above the average 1.42 points this decade before the credit seizure. Even with the relatively high rates, U.S. corporate bond issuance in the first half rose 11 percent from the previous record pace in 2007, as businesses repaid short-term loans, Bloomberg data show. Stock sales were about double the same period of 2007.
"The days of excessive leverage are over," said Scott Minerd, who helps supervise more than $100 billion as chief investment officer of Guggenheim Partners LLC in Santa Monica, California. "Having term financing in place and not having yourself be vulnerable to a refinancing event is an important feature in every balance sheet." Signs the recession is easing may encourage companies to spend more cash, said Howard Silverblatt, a senior index analyst at S&P in New York. "Once they believe the economy is getting better and not just less worse, they’ll start spending," Silverblatt said.
The economy is showing signals of improving. Payrolls fell by 247,000 in July, after a 443,000 loss in June, the Labor Department said Aug. 7 in Washington. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent. The recession may have ended in July, said Jeffrey Frankel, a member of the committee at the National Bureau of Economic Research that dates business cycles. The median estimate of 60 economists surveyed by Bloomberg is for growth of 2.10 percent in 2010, after a contraction of 2.50 percent this year.
"Confidence is improving but there are still a lot of people who are nervous," Ronald Millos, chief financial officer of Vancouver-based Teck Resources Ltd., Canada’s largest base- metals producer, said in an interview.
Teck eliminated its annual dividend last year, fired employees and reduced capital spending "to the bone" to bolster the confidence of lenders and investors, Millos said. The company sold $4.23 billion of notes in U.S. dollars in May at interest rates as high as 10.75 percent to retire short- term borrowing that funded last year’s purchase of Fording Canadian Coal Trust. When Teck issued $700 million of debt in 2005, it paid a coupon of 6.125 percent.
Pitney Bowes Inc., the world’s largest maker of postal meters, replaced commercial paper -- debt due in nine months or less -- with bonds after Lehman’s collapse reduced the availability of short-term financing. The company sold $300 million of 10-year, 6.25 percent bonds on March 2 at a spread of 3.38 percentage points. The average rate on 30-day commercial paper sold by non-financial companies ended last week at 0.15 percent, according to the Fed. "Our approach in general changed in the sense of giving ourselves a lot more event-risk protection," said Helen Shan, vice president and treasurer at Stamford, Connecticut-based Pitney Bowes.
RRI’s decision to sell its Texas energy provider freed up almost $3 billion of capital, Jacobs said. It also presented an opportunity for NRG Energy Inc., which snapped up the business for $288 million, said Robert Flexon, chief financial officer at the Princeton, New Jersey-based power producer. The purchase boosted NRG’s earnings by $233 million, according to a July 30 regulatory filing. "When you look back on the market over the last year, if you’re going to make a mistake, it’s to have too much liquidity," Flexon said in an interview. "In an environment like this, where liquidity is tight, the opportunities for investment are probably at their peak."
NRG had about 8.4 percent cash as a percentage of assets on its balance sheet in the second quarter, up from 4.9 percent the previous period and 4.7 percent a year earlier, Bloomberg data show. The company sold $700 million of 10-year, 8.5 percent notes on June 2 priced to yield 5.06 percentage points more than similar-maturity Treasuries. The last two years "really showed the importance of maintaining adequate cash and liquid investments so you’re not relying solely on banks," Flexon said. "We carry cash balances today of over $1 billion. We invest that primarily in U.S. government-backed overnight securities, so it’s an extremely liquid investment.
Corporate Earnings Are No Sign of Recovery
Despite grim predictions, most major U.S. companies have reported positive earnings for the second quarter of 2009. Given how wrong past predictions have been, the fact that earnings have blown away expectations shouldn’t be so surprising. Still, the numbers are genuinely impressive: More than 73% of the companies that have reported so far have beaten earnings estimates—and stocks have rightly rallied.
Yes, profits are down sharply from a year ago, but this is in the context of an overall global economy that is shrinking. If a company made $30 million on $100 million in revenue a year ago, and made "only" $20 million this quarter, it’s accurate to have a headline that says its profits fell 33%. But making $20 million, or a 20% margin, in an economy that contracted is nonetheless startling, or should be. The same Wall Street culture that failed to anticipate the tipping point in the financial system is just as prone to a herd mentality of negativity. Having overlooked the gaping fissures in the system last year, most analysts went to the other extreme in their analysis of what would happen this year. A similar process occurred in 2002 and 2003, as views whipsawed from unrealistic optimism to irrational pessimism.
This time, the slew of better earnings has also led to the conviction that the worst of the economic travails are behind us. As the stock market has soared, many have declared the recession either over or ending. These voices range from public officials at the Federal Reserve to notable pessimists such as New York University economist Nouriel Roubini. This rosy view assumes a connection between how listed companies are fairing and how the national economy will fair. That assumption is wrong.
The delinkage of the fate of corporate profits from that of the overall economy is not new. Beginning earlier in this decade, profits began to accelerate far in excess of either global or U.S. economic growth. In 2004, for instance, earnings for the S&P 500 grew 22%; in 2005 and 2006 they grew just under 20%. Those same years global growth barely exceeded 3%. As we now know, some of those elevated earnings were due to the leverage-fueled profits of the financial-service industry. And there’s little doubt that mortgage-laced derivatives artificially elevated growth. But even discounting those factors, the growth of corporate profits would have substantially exceeded the expansion of national economies.
Then, in the second half of last year and the first months of this year, profits plunged along with U.S. and global economic activity. That gave succor to the belief that companies can only grow as much as the economies in which they function grow. For years, most analysts argued that if there was too wide a variance between the two, something had to give. Either profits had to descend or national economic growth had to accelerate. As profits shrank over the past nine months, those who argued that a reversion to the mean was inevitable seemed to be vindicated. But that belief is wrong. Companies are increasingly less constrained by any national economy, and their success is no harbinger of national economic growth or sustained economic health for the United States.
First, companies have been profiting because they can cut costs aggressively. It’s not as if demand in the U.S. or Europe has picked up. Take Starbucks, which reported a surprising surge in profits. Little of that was due to American consumers suddenly becoming comfortable with $5 grande mocha lattes. Instead, it was because Starbucks—faced with weak demand and sluggish sales—closed stores and laid off workers. That has been a trend across industries.
Second, many larger companies have been profiting because they can focus on where the growth is around the globe. Companies such as Intel, Caterpillar, Microsoft and IBM now derive a majority of their revenues from outside the U.S., with the dynamic economies of the Asian rim and above all China assuming an ever-larger role. Companies are thriving in spite of economic activity in the U.S., not because of it.
That suggests the connection between corporate profits and robust economic recovery in the U.S. is tenuous at best. In fact, the financial crisis hastened the trend toward efficiencies, toward leaner inventories, and towards integrating both technology and global supply chains that has been taking place over the past decade. That has led to severe pressure on the American working class and eroding employment. As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S.
So we are facing a conundrum: Companies can grow by leaps and bounds—by double-digits—and yet unemployment can skyrocket and remain high. There is nothing on the horizon that would lead one to expect a turnaround in the employment picture. Job losses slowed slightly last month as the unemployment rate fell to 9.4% in July from 9.5% in June, but that’s a far cry from any sign of job creation. The weight of more than 20 million marginally employed or unemployed, combined with the increasing pace of economic activity outside the U.S., presents the prospect of permanent change in the American economic landscape: high unemployment, moderate to weak growth, and soaring corporate profits.
The ability of companies—large ones especially, but even more modest ventures that assemble and source globally—to become more efficient and go where the growth is has never been greater. This is undoubtedly good for stocks and positive for investors, but it is also a challenge for American society that we have not even begun to confront.
History suggests bears will hold sway after rally
In the past five months, the world’s stock markets have gained more than 50 per cent. Anyone who timed the rally right should now be feeling much happier. Others may at least have recouped a chunk of last year’s losses. The big question now is: where next? This rally is not unprecedented but history offers few comparisons. Those that exist are all imperfect and contradict each other. But rallies in the last century stand out:
1930. In the wake of the Great Crash, the S&P 500 staged a rally a lot like this one. From its low on November 12 1929, it rallied 47.2 percent in five months. This fooled many. Anyone who bought at the top of the rally, on April 10 1930, would have lost 83 percent over the next two years. If there is a rally for the bears to cite in their cause, this is it.
1932. Marking the very bottom of the 1930s’ bear market and arguably the most impressive rally in stock market history, the S&P did twice as well as in this current rally, in half the time. It rose by 111 per cent in the 10 weeks from July 8. This time, the lows were never revisited. But the outlook was not good. After that violent upswing, just before the election of Franklin D Roosevelt, the bear market dragged on for decades, with gains only for opportunists. The S&P fell 25 percent once more by the end of 1932 and it would fall below its level of September 1932 in 1934 and again in 1938. This was not a great time to buy and hold.
1975. After the savage 1973-74 bear market, stocks enjoyed a 53.8 percent rally from October 12 1974 to July 15 1975. In one five-month span, it gained 47.1 percent. In hindsight, it looks like a cousin of the 1932 rally, as the rally gave way to a bear market that ground on for the rest of the decade. Stocks were no higher three years later. Profits were only for opportunists.
1982. With Paul Volcker at the Federal Reserve still attacking inflation, and Margaret Thatcher and Ronald Reagan applying unpopular economic medicine, the 15-year bear market suddenly ended. In the five months after August 12 1982, the S&P gained 43 percent, starting a secular bull market that lasted until the tech bubble burst 18 years later. August 1982 was possibly the best time ever to buy stocks; early 1983 was still a good time. This is the rally that bulls call to their aid. Those alarmed by the potential for fresh crises in emerging markets can even point out that this rally survived the first great Mexican devaluation crisis, which hit in the early weeks of the equity rally.
What did these rallies have in common? Pessimism had grown overwhelmingly, with fear far outbalancing greed when they started. Except for 1930, they came near the end of severe recessions. They have both points in common with the current rally. But there are differences. The rallies of 1932, 1975 and 1982 came when stocks were unambiguously cheap, and were still cheap after the initial 50 percent rally. The cyclically adjusted price/earnings ratio, a multiple of average earnings over 10 years, was at extreme lows. But in 1930, stocks never dropped to long-term fair value before rallying and were blatantly expensive by the time the rally ended. This time, prices fell a bit below their long-term average for a few months but the rally has already brought them back to look expensive.
In the critical sense of valuation, then, this rally looks nothing like 1932, 1975 or 1982. It looks a little more like 1930. The environment of inflation and interest rates differed widely. In 1930, western economies were lapsing into deflation; in 1932, the world was mired in deflation; in 1975, it was stuck in inflation; and in 1982, inflation was high but coming under control. The current picture does not fit with any of these - consumer price inflation in the west has been tame for decades. Last year’s crisis created the risk of severe deflation but the prompt decision by governments to throw money at the problem is a huge point of difference from 1930. Those who believe the deflationary scenario can logically forecast a repeat of the 1930 collapse in share prices. But this is a pessimistic point of view.
Parallels with 1982 do not work any better. The 1980s’ huge gains from steadily lowering rates and innovation in the financial sector are not available this time around. The very opposite is more likely. The 1932 rally came in truly extreme conditions. But the 1975 rally may be a decent match; it came during a restocking boom after companies had slashed inventories (very much what the market is betting on now), at a point when oil prices were volatile and exerting a big influence on the economy. The world now is still different in many important respects from 1975 but this may just be the best comparison. That would suggest the most likely outcome now is a protracted dose of directionless trading. For those more optimistic or pessimistic, you have your examples to hang on to.
Deleveraging the U.S. Economy
We are in the process of deleveraging the most leveraged economy in history. Many investors look at this deleveraging as a positive for the United States. We, on the other hand, look at this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years. It is true that Japan didn't act as quickly as we did but our debt ratio presently is much worse than Japan's debt ratios throughout their deleveraging process.
Presently, the stock market is exploding to the upside, which you could say argues against the case we are attempting to make in this special report. However, if you step back and look at the larger picture, you can see that the stock market is still down over 35% from the highs reached in 2007 and also down over 33% from the highs reached in early 2000. In fact, the market now is acting in the same manner as it did in early 2000 at the peak of the dot com bubble and again in 2006 & 2007 at the combined housing and stock market bubble.
This seems to us to be a "mini bubble" of stocks reacting to an abundance of "money printing" by governments all over the world since stocks are rising worldwide. Of course, if the U.S. doesn't recover there will be no worldwide recovery since the rest of the world is still dependent upon the U.S. consumers' appetite for their goods and services (despite the so called growth of domestic consumption in China and India). We, however, don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world. This excess debt actually resulted from the same money printing and easy money that we are now using to alleviate the pain.
Most investors believe the bailouts, stimulus plans, and quantitative easing will lead to inflation. In fact, almost all of the bearish prognosticators are negative because of the fear that interest rates will rise once the inflation starts to work its way into the economy. They point to the doubling of the monetary base which they believe will soon lead to rising prices as more dollars are created chasing the same amount of goods. We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.
Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).
We wrote a special report in January of this year titled "Substituting Debt for Savings and Productive Investment" in which we explained why the U.S. economy historically prospered because of hard working Americans saving a substantial amount of their income which was used for productive investment. Unfortunately, all of this changed over the past few decades and got worse over the past decade. In fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. Over the past two decades, while most investors thought this trend could continue indefinitely, we have been warning them of the catastrophic problems associated with this ballooning debt.
The attached chart of total debt relative to GDP shows exactly how much debt grew in this country relative to GDP (it is now 375% of GDP). The total debt grew to over $52 trillion relative to our current GDP of approximately $14 trillion. This is worse than the debt to GDP relationship in the great depression (even when the GDP imploded) and greater than the debt to GDP that existed in Japan in 1989. Even if you took the debt to GDP when the U.S. entered the secular bear market in early 2000 and compared that to 1929 and Japan in late 1989, our debt to GDP still exceeded both (by a substantial margin relative to 1929). The approximate numbers at that time were about 275% in the U.S. in early 2000, 190% in 1929, and about 270% in Japan in 1989.
In fact, the similarities between Japan's deleveraging and the U.S. presently are eerie. Japan's total debt to GDP increased from 270% when their secular bear market started to just about 350% 7 years later (1998) before declining to 110% presently. The U.S. increased their total debt to GDP from 275% of GDP when our secular bear market started (in our opinion) to 375% presently (10 years later), and we suspect the total debt to decline similar to Japan's even though the Japanese govenment debt tripled during their deleveraging. The government debt relative to GDP was about 50% in both the U.S. and Japan when the secular bear market started. We also suspect that our government debt will grow substantially just like it did in Japan as the private debt collapses. Also, the Japanese stock market doubled during the three years preceding their secular bear market in 1987, 1988, and 1989 while the U.S. market also doubled during the three years preceding the beginning of our secular bear market in 1997, 1998, and 1999.
There also a few significant differences between the U.S. and Japan. The private debt in Japan was almost the reverse of the U.S. where most of our excess debt was in the household sector and most of the excess debt in Japan was in the corporate sector. The debt to GDP figures in Japan were not easy to come by from the typical sources until the mid 1990s and had to be estimated, but should be pretty close to the numbers used above. Our sources on the above Japanese debt figures came from Ned Davis Research and the Federal Reserve Bank of San Francisco. NDR's report, "Japan's Lost Decade-- Is the U.S. Next?" have great statistics and information and the Fed's report "U.S. Household Deleveraging and Future Consumption Growth" is well worth reading.
The Fed study charted the peak of the debt related bubble of the stock and real estate assets in Japan in 1991 (1989 for stocks and 1991 for real estate) and overlaid it with the peak of U.S. debt associated with the same assets in 2008. They concluded that if we are able to liquidate our debt at the same rate as Japan we would have to increase our savings rate from the present 6% (artificially high due to the recent stimulus paid to households) today to around 10% in 2018. If U.S. households were to undertake a similar deleveraging, the collective debt-to-income ratio which peaked in 2008 at 133% (H/H debt vs. Disposable Personal Income) would need to drop to around 100% by 2018, returning to the level that prevailed in 2002.
If the savings rate in the U.S. were to rise to the 10% level by 2018 (following the Japanese experience), the SF Fed economists calculate that it would subtract ¾ of 1% from annual consumption growth each year. We did a weekly comment about this very subject on June 25 of this year and came to a similar conclusion. In that same report we showed that from 1955 to 1985 that consumption accounted for around 62% of GDP. Because of the debt driven consumption over the past few years at the end of March 2009 consumption accounted for over 70% of GDP. If the percentage dropped to the normal low 60% area of GDP it would subtract about $1 trillion off of consumption (or from $10 trillion to $9 trillion). We also showed in that same report that H/H debt averaged 55% of GDP over the past 55 years and was 64% as late as 1995. It has since soared to over 100% of GDP giving a big boost to spending that will be reversed as the deleveraging takes place over the next few years.
Other problems we have in the U.S. that will exacerbate the deleveraging are excess capacity, unemployment rates skyrocketing (putting a damper on wages), credit availability contracting, and dramatic declines in net worth. The attached chart of capacity utilization is self evident that excess capacity in the U.S. has just dropped to record lows with the manufacturing capacity dropping to under 65% and total capacity utilization is just a touch better at 68%. It is very hard to imagine corporations adding fixed investment at this time. With unemployment rates close to 10% and rising, it is unlikely that wages will grow anytime soon. The charts on credit availability and net worth reductions are self explanatory and will also put a damper on consumer spending rising anytime soon.
We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.
Total Credit Market Debt as a % of GDP
H/H Debt relative to Disposable Income
Personal Consumption vs. GDP
H/H Debt vs. GDP
Cities Tolerate Homeless Camps
Last summer, police responding to complaints about campfires under a highway overpass found dozens of homeless people living on public land along the Cumberland River. Eviction notices went up -- and then were suspended by Nashville Mayor Karl Dean, a Democrat, who said housing for the homeless should be found first. A year later, little has been found -- and Nashville, with help from local nonprofits, is now servicing a tent city, arranging for portable toilets, trash pickup, a mobile medical van and visits from social workers. Volunteers bring in firewood for the camp's 60 or so dwellers.
Nashville is one of several U.S. cities that these days are accommodating the homeless and their encampments, instead of dispersing them. With local shelters at capacity, "there is no place to put them," said Clifton Harris, director of Nashville's Metropolitan Homeless Commission, says of tent-city dwellers. In Florida, Hillsborough County plans to consider a proposal Tuesday by Catholic Charities to run an emergency tent city in Tampa for more than 200 people. Dave Rogoff, the county health and services director, said he preferred to see a "hard roof over people's heads." But that takes real money, he said: "We're trying to cut $110 million out of next year's budget."
Ontario, a city of 175,000 residents about 40 miles east of Los Angeles, provides guards and basic city services for a tent city on public land. A church in Lacey, Wash., near the state capital of Olympia, recently started a homeless camp in its parking lot after the city changed local ordinances to permit it. The City Council in Ventura, Calif., last month revised its laws to permit sleeping in cars overnight in some areas. City Manager Rick Cole said most of the car campers are temporarily unemployed, "and in this economy, temporary can go on a long time."
After years of enforcing a tough anticamping law to break up homeless clusters, Sacramento recently formed a task force to look into designating homeless tracts because shelters are overflowing. One refuge in the California capital, St. John's Shelter for Women and Children, is turning away about 350 people a night, compared with 25 two years ago, said executive director Michele Steeb. Some communities may be "less inclined to crack down quite as hard on people" because of the recession, said Barry Lee, a professor of sociology and demography at Pennsylvania State University.
Municipal leniency isn't universal. New York City officials last month shut down a tent city on a vacant lot in East Harlem. It was erected partly as shelter and partly to campaign for more-affordable housing. Seattle authorities have repeatedly booted off public land a tent city that popped up last year. Anticipating Tuesday's vote on the homeless proposal in Tampa, hundreds of neighbors in a nearby 325-house subdivision have formed the "Stop Tent City" coalition. They are gathering petitions, passing out lawn signs and threatening lawsuits. Hal Hart, a paralegal and a neighbor who is part of the coalition, testified at the county meeting that a tent city would "devalue my home" and "devalue my community." He lives 300 feet from the proposed park.
Some homeless are battling mental illness or addictions, or both. Municipal officials in the U.S. acknowledge the tent cities can breed crime and unsanitary conditions, but with public shelter scarce, they say they have to weigh whether to spend police time to break up encampments that are likely to resurface elsewhere. Pastors in Champaign, Ill., last week asked the City Council to allow people to live in organized tent communities of as many as 50 people. Legalizing the camps is more compassionate and cost-effective than forcing "poor people who are camping because they have a lack of better choices to constantly have to fear being rousted and cited by police," says Joan Burke, advocacy director for Sacramento Loaves & Fishes, a homeless-assistance agency.
In Nashville, Mr. Harris, director of the city's homeless commission, said tent cities have existed for years, but he has seen the numbers surge. He now knows of 30 encampments. While some people are chronically homeless, he said, foreclosures have forced others into the streets, as has Tennessee's 10.8% unemployment rate, the highest in 25 years. Nashville estimates that on any given day, the city has 4,000 homeless people and 765 shelter beds. About 25% of the homeless have jobs, Mr. Harris said, but can't afford housing. A nonprofit coalition of 160 churches called Room in the Inn said it received 816 requests for financial assistance to ward off evictions or electricity shutoffs in July, up from 499 in July 2008.
More housing could be available soon. Tennessee will receive $53 million in federal stimulus money to help pay for the development of affordable rental housing across the state, the federal government announced last month. While no one is suggesting that the tent city that popped up on police radar last summer is a permanent solution, local churches and synagogues are trying to give residents there a sense of order. The Otter Creek Church of Christ built residents a shower, with a fiberglass stall, plywood door and garden hose, and on Friday, associate minister Doug Sanders went to the tent city in what is the start of a church project to help residents institute some type of formal rules -- for everything from cleaning the shower to determining the progress residents should have to show toward finding housing.
The city and local nonprofits have found permanent housing for about 25 people from the tent city. Many haven't been so lucky. David Olson, 47 years old, said last week he and his wife wound up under the Nashville overpass after he lost a job making cement pipes in Iowa four months ago. The couple came to Nashville for a remodeling job that turned out to be a scam. "I've got five years' experience in carpentry and 10 years' roofing and I can't find a job," he said.
Mr. Olson, his arms and shirt caked with dirt, said life is hard in the swampy woods. The couple woke up to mud after a night of rain. His wife said she is frightened by the dogs that roam around the encampment. As mosquitoes buzzed, they tried to set up camp on higher ground. They struggled to secure a tarpaulin over their tent to keep out the rain. Mr. Olson's wife, holding onto a pole to prop up the tarp, cried. "I'm not used to living like this."
Freddie Mac Says Its Loss From Taylor Bean May Be 'Significant'
Freddie Mac, the mortgage-finance company under government control being supported by taxpayers, said the collapse of lender Taylor, Bean & Whitaker Mortgage Corp. may cause it "significant" losses. Taylor Bean, the 12th-largest U.S. mortgage originator, shuttered its lending business last week after being suspended by U.S. agencies and Freddie Mac. The Federal Housing Administration cited possible financial-statement fraud.
The Ocala, Florida-based lender accounted for about 5.2 percent of Freddie Mac’s single-family mortgage purchases last year, according to a Securities and Exchange Commission filing by the McLean, Virginia-based company on Aug. 7. Freddie Mac can force lenders to repurchase defaulted loans that weren’t of the credit quality they represented, a use of its contracts already made harder by the collapses of IndyMac Bancorp., Washington Mutual Inc. and Lehman Brothers Holdings Inc., the company said.
"We are in the process of determining our total exposure to TBW in the event it cannot perform its contractual obligations to us," Freddie Mac said in the filing. "The amount of our losses in such event could be significant."
Lenders bought back $1.7 billion of home loans from Freddie Mac during the first six months of this year, up from $737 million during the same period of 2008, according to the filing. Lenders also can promise to cover Freddie Mac’s losses on bad mortgages without repurchasing the debt, the company said.
Also on Aug. 7, Freddie Mac, which has taken $50.7 billion of capital under a U.S. lifeline since being seized by regulators in September, reported its first profit in two years and said that it wouldn’t seek more U.S. Treasury aid.
Brad German, a Freddie Mac spokesman, declined to comment today. Brian Faith, a spokesman for Fannie Mae, Freddie Mac’s Washington-based rival, said last week his company hasn’t done business with Taylor Bean "for some time."
The Next Fannie Mae
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
Much to their dismay, Americans learned last year that they "owned" Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too. Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this "phenomenal growth." Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, "Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions" in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee. Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a "Congressional appropriation intervention to make up the shortfall."
The IG also fears that the recent "surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult." And it warned that the growth in FHA mortgage volume could make the program "vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program." The 19-page IG report includes a horror show of recent fraud cases. If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses.
Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had "misrepresented" its relationship with an auditor and had "irregular transactions that raised concerns of fraud."
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean "much greater losses by FHA" and will make fraudsters "much more attracted to the product."
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.
All of which means that the FHA and Ginnie Mae could well be the next Fannie and Freddie. While Fan and Fred carried "implicit" federal guarantees, the FHA and Ginnie carry the explicit full faith and credit of the U.S. government.
We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet. The housing lobby, which gets rich off FHA insurance, has long blocked these due-diligence reforms, saying there’s no threat to taxpayers. That’s what they also said about Fan and Fred—$400 billion ago.
Lawmakers Urged to Raise Nation's Debt Limit
U.S. lawmakers, already under pressure to move controversial health-care legislation and a revamp of the financial system, were saddled Friday with the unpopular task of quickly increasing the maximum amount of money the federal government can borrow. Treasury Secretary Timothy Geithner, in a letter to sent to top U.S. lawmakers on Friday, asked Congress to move "as soon as possible" to increase the nation's statutory debt limit. The Treasury estimates that the $12.1 trillion current limit could be reached as soon as mid-October, Mr. Geithner wrote.
"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Mr. Geithner said in the letter. A spokesman for Senate Majority Leader Harry Reid (D., Nev.) said Senate Democratic leaders would work with the Treasury Department on debt limit legislation, but that they have yet to decide on a final form for the measure.
One issue that will need to be decided is how much of an increase is needed. Mr. Geithner didn't offer a specific figure in his letter to lawmakers. A Treasury official said Monday that the debt increase is due to the deterioration in the economy and not necessarily attributable to spending on stimulus programs or the bailout of the financial system. "The president has made it clear that as soon as recovery is firmly established we will bring our fiscal deficit down to a level that is sustainable in the long term," the official said.
The request highlights the difficulty facing the Obama administration and Congress as they take on an ambitious legislative agenda while also seeking to improve the nation's fiscal position amidst a still-troubled economy. The non-partisan Congressional Budget Office said last week that the federal government's budget deficit is on track to reach a record high of $1.8 trillion for fiscal 2009, after reaching $1.3 trillion through the first ten months of the fiscal year.
If Congress agrees to the Treasury's request it would mark the second increase in the debt ceiling this year. The economic stimulus package passed by Congress earlier this year increased the debt ceiling by $789 billion to $12.1 trillion. As of Aug. 7, the federal debt outstanding totaled roughly $11.7 trillion. Congressional Republicans appear ready to use a vote on whether to raise the debt ceiling to contrast their approach on economic issues with Democrats and argue that the Obama administration's agenda on health care and climate change would further exacerbate the country's fiscal challenges.
"It's a clear that we've got a sign that we've got a federal government that is out of control from the fiscal standpoint," said Rep. Tom Price (R., Ga.), who leads the conservative Republican Study Committee in the House. "I don't see how anyone can vote in favor of an increase in the debt ceiling and say they're doing it is a responsible way." Robert Bixby, executive director of budget watchdog the Concord Coalition, said the debt ceiling has little practical application in curtailing government spending. "You can't not raise it, because if you do, the Treasury in effect would be defaulting on the debt, which would be crazy," Mr. Bixby said. "It doesn't really provide a whole lot of restraint."
Other deficit reduction advocates say that that the proposed increase in the debt ceiling provides an opportunity for Congress and the president to address the country's long-term fiscal challenges. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, in an interview said "the time is now" for lawmakers to tackle [the] issue. "If we were doing this right, it would be tied to a requirement that Congress and the president work together to put some kind of budget deal out there," Ms. MacGuineas said.
The End of the Peak Credit Era: 3 Quarters of Contracting Consumer Debt. Credit Card debt Contracts on a Year over Year Basis for First Time Ever
There is a small silver lining in the unemployment report released on Friday. The positive side was the amount of people being fired slowed down in July (if you can call an annual rate of 3 million layoffs positive). However, there is still a major reluctance for firms to hire. We still have 26,000,000 unemployed and underemployed Americans in the country. Many have been relying on the plastic support of credit cards to ease the pain of the deep recession. Yet many are finding out that they are unable to have access to the once abundant lines of credit. It may be the case that we have witnessed peak consumer debt.
Even though some 8 million credit cards were yanked earlier in the year, many consumers are simply embracing a more frugal lifestyle. The contraction is occurring from both sides in that consumers are being more watchful on what they spend while lenders are actually vetting more carefully who they give credit to. The latest consumer credit report from the Federal Reserve shows that the trend in less consumption is still going strong:
This is now the third consecutive quarter of credit contracting. Keep in mind this is debt that is already used up. These were purchases of flat screen televisions, food, vacations, and many items that have already been used up. The lines of credit are being pulled back at the same time. Credit card companies are hiking up minimum payments and charging higher rates to make up for the rising amount of defaults occurring in the country and they are also squeezing their prime credit borrowers. The last option may be counterproductive in the long-term. Now you might look at this contraction and think that it is no big deal. It is an enormous deal. This is the first time on record that consumer debt has contracted on a year over year basis:
Some 40 years of data and not once has consumer debt pulled back on an annual basis. It is a rather fascinating phenomenon when you pause to contemplate the massive unrelenting growth in debt over the past four decades. Americans are now having to deal with less access to cheap debt. And that is probably an important caveat to note. The days of 0 percent credit cards and no money down loans for homes are probably long gone. We see that Fannie Mae has posted a loss of over $10 billion for the second quarter and these are the more “safer” loans in the market. With unemployment this high, many people were using their credit card as a bridge loan to get through this tough patch of time.
Much of the drain that is occurring is also because we have never seen so many people unemployed for such a long time:
*Source: Calculated Risk
This is a troubling sign and has also increased the amount of bankruptcies that we are seeing. Peak debt was bound to happen at some point in time. The massive 30 year housing bubble was simply unsustainable. Spending more than you earn will eventually catch up with you. The U.S. Treasury and Federal Reserve are focused on saving the banks and Wall Street and the rest of Americans will need to fend for themselves. You would think with all this new found liquidity that banks would somehow pass it on to the average consumer. Unfortunately that is the line they sold to the public to get the bailouts passed. Remember all that talk about credit being the lifeblood of the economy? Apparently not since companies are chopping back credit for regular consumers. What was pushed through was essentially last minute expensive measures to ensure the banking syndicate remained in place. The bailouts were to fix their balance sheets. Now with taxpayer money in hand, they are squeezing the vice around the actual taxpayer that has saved them from failing. It is really a perverse system when you think about.
The average credit card rate has all shot up during this time when liquidity was being made abundant to 14.43 percent. With rising unemployment, this is still a major problem. You might be asking why did the unemployment rate drop to 9.4% when 247,000 people lost their job last month. Simply put, people left the labor force:
And with this combined, it shouldn’t come as a surprise that even with tougher bankruptcy regulations, more people are filing for bankruptcy:
Although it is better news that the layoff number wasn’t so grim, the fact that many left the labor force and companies are not hiring should cause you to pause as to what really constitutes a recovery. The peak credit era is over and we will need to remake our economy into a completely different machine.
Where did that bank bailout go? Watchdogs aren't sure
Although hundreds of well-trained eyes are watching over the $700 billion that Congress last year decided to spend bailing out the nation's financial sector, it's still difficult to answer some of the most basic questions about where the money went.
Despite a new oversight panel, a new special inspector general, the existing Government Accountability Office and eight other inspectors general, those charged with minding the store say they don't have all the weapons they need. Ten months into the Troubled Asset Relief Program, some members of Congress say that some oversight of bailout dollars has been so lacking that it's essentially worthless.
"TARP has become a program in which taxpayers are not being told what most of the TARP recipients are doing with their money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested," a special inspector general over the program reported last month. The "very credibility" of the program is at stake, it said.
Access and openness have improved in recent months, watchdogs say, but the program still has a way to go before it's truly transparent.
For its part, the Treasury Department said it's fully committed to transparency, and that it's taken unprecedented steps to report the status of TARP to the public. It regularly posts information on which banks have received money, as well as details about each of those transactions. Further, Treasury said, it doesn't agree with all of its watchdogs' recommendations, which it said could hamper the program's effectiveness.
TARP was passed in the midst of last fall's financial meltdown as a way to keep American banks from falling deeper into the abyss.
The program was controversial from the start. Its supporters say it's helped spark bank lending in the country, but critics say it's unfairly rewarded the big banks and Wall Street firms that pushed the economy to the brink.
The program also has undergone a major transformation. When the Bush administration first went to Congress for the money, TARP's main purpose was to buy up hundreds of billions of dollars in bad mortgages and so-called mortgage-backed securities that were bought and sold on Wall Street.
Today, TARP consists of 12 programs that sent those hundreds of billions of dollars to big banks, but it's also bailed out auto companies, auto suppliers, individuals delinquent on their mortgages, small businesses and American International Group, the big insurance company.
The watchdogs now must oversee the maze that TARP has become.
Just because a lot of people are watching, however, doesn't mean they get everything they want to see.
One of the most prominent watchdogs is Elizabeth Warren, a Harvard Law School professor who chairs a TARP oversight panel created by Congress.
Her panel has released 10 major reports that examine TARP's plans and policies, finding that much of the work by the Treasury and the Federal Reserve has been opaque, with unclear or contradictory goals.
One report took Treasury to task for vastly undervaluing more than $250 billion in transactions with the country's major banks, and another suggested several ways to revamp federal regulation over the financial sector. Other reports have criticized the Treasury for its initial defensiveness in opening its books.
Despite its mandate, however, the panel doesn't have subpoena power. That means it can ask, but can't compel, officials from Treasury, the Federal Reserve or the nation's banks to testify.
Henry Paulson, the Treasury secretary under former President George W. Bush, repeatedly stiff-armed the panel. Timothy Geithner, the current secretary, has been more open, but so far has testified just once before Warren's group. Geithner is scheduled to appear again in September, and has agreed to do so quarterly, and two other senior Treasury officials also have appeared.
The relative lack of testimony from top officials, however, is one reason why critics of Warren's panel think it hasn't delivered on its promise.
In June, in an otherwise mundane congressional hearing, Republican Rep. Kevin Brady of Texas surprised Warren with an aggressive critique of the panel, saying it's failed to help taxpayers understand what Treasury is doing with the billions at its disposal.
"There's been very little value that the panel has brought to this issue or even insight on how these bailout dollars have been used," he said. "I frankly believe at this point, given the reports that we've seen again with little value, I think the panel needs to be abolished."
Warren defended the panel's work, saying the lack of subpoena power means we "only have the capacity to invite" witnesses.
"So you asked Secretary Paulson in the first month of existence?" Brady asked.
"I believe we asked him repeatedly," Warren said. "We asked him in our first month, in our second month, in our third month."
Warren said she took the criticism seriously, dropping by Brady's congressional office as soon as the hearing adjourned. The two had never met before, she said, and "I was really surprised," by his comments.
"He said he felt frustrated," she said. "He wanted us to be even blunter" in the panel's reports.
Brady amplified his comments in an interview last month, saying that some of the panel's work seems like a "PR ploy" and that "the moment has passed" for Warren's group to play the role Congress envisioned.
His feelings have been partially echoed by two other members of the panel, Rep. Jeb Hensarling of Texas and former Sen. John E. Sununu of New Hampshire, both Republicans appointed by congressional GOP leaders (the other three members were appointed by Democrats).
Both have accused the panel of mission creep — of straying from the central goal of determining exactly how, and how well, Treasury is doing its job.
Hensarling said that "taxpayers have not received answers as to whether the TARP program works, how decisions are being made or what the banks are doing with the taxpayers' money." While he praises the "very smart people on the panel," he said too many questions have been left unexplored.
He acknowledges that the lack of subpoena power makes things tough. "But even if we had it, I'm not sure we would have used it," said Hensarling, who's pushing to abolish TARP.
The other primary watchdog is Neil Barofsky, a special inspector general named in November by Bush specifically to track TARP funds. His office does have subpoena power, and a growing staff that's expected ultimately to have 160 people pursuing audits and criminal investigations.
It's also made a series of recommendations to the Treasury, asking that it do more to reveal how TARP money is being spent. Treasury has adopted some of its recommendations, but rejected others — including one of the most important: Giving taxpayers precise details on how TARP funds have been used by banks.
The recommendation involves one of the most visible aspects of TARP: investing $218 billion in 650 banks, helping them to strengthen their balance sheets and boost lending to American businesses and homeowners.
Barofsky's office has long advocated that the Treasury require banks to detail how the TARP money they've received has been used. The department has refused, saying that once an investment is made in a big bank, it's not possible to track how it's used.
Barofsky's office rejected that assertion, and did its own survey of 360 institutions, finding that most could say how they'd used the money.
"Treasury's reasons for refusing to adopt this recommendation have been squarely refuted by" the inspector general, his office reported to Congress.
California Won't Even Accept Its Own IOUs
California governor, Arnold Schwarzenegger wants everyone to treat his state's IOU's like money – from the citizens and businesses receiving these scraps of paper in lieu of cash, to the financial institutions who are supposed to swap them for legal tender. The problem is that the state government, itself will not accept its own IOU's as payment for debts – at least not until their "maturity date" in October. In the meantime, small-business owners like Nancy Baird received a $27,000 IOU from the state government for supplying garments to a state-run youth camp, but after two banks refused to redeem her IOU, was forced to pay cash out of her own pocket for the sales tax on the transaction.
She and numerous other small-business operators have filed a class-action suit against the state alleging the state has violated both the Fifth and Fourteenth Amendments. The plaintiffs seek full payment for what they are owed by the state – with interest. Even if the state survives this challenge, the obvious question to ask is what will change for the state between now – when it claims it can't cover all its own IOU's – and October? The answer is: things will be a lot worse. Virtually every state in the U.S. is being to forced to make negative revisions to their budgets every couple of months to adjust to the most rapid plunge in state revenues in history.
Thus, by the time October rolls around, the state's financial picture will have deteriorated significantly at the same time it is supposed to produce several billion dollars to redeem all its IOU's. The only "plan" the state has is to try to borrow more money between now and then. In other words, the California government's state finances are now a Ponzi-scheme – where they have to borrow ever-larger amounts of money to pay off those at the front of the queue to collect their debts.
This is nothing new. It was the U.S. federal government which started Ponzi-scheme financing as a permanent means of financing a nation. To make its balance sheet look much, much better, the federal government does not carry its future obligations on its own books – like every business in the United States is required to do by law. Instead, the U.S. government calls these future obligations "unfunded liabilities" - and simply pretends they do not exist. Then when Americans actually make claims against these unfunded liabilities (now somewhere in excess of $70 trillion), these expenses are a "surprise" to the two-party dictatorship in power. Worse than that, the federal government has plundered trillions of dollars from its own Social Security "trust fund". Clearly, "federal government trust fund" is an oxymoron.
As a result, the United States is hopelessly insolvent. Merely transferring its own obligations officially onto its books would instantly bankrupt the U.S. - as it is totally incapable of paying the interest on those obligations. The only option other than immediate default would be to instantly descend into hyperinflation, since it would be totally cut off all international credit (no one will lend to someone who can't even pay interest on its debt).
The truth, of course, is that the U.S. is already incapable of paying the interest on its humongous debts – even through borrowing. As I wrote yesterday (see "Federal Reserve SECRETLY buying Treasuries at auctions"), the U.S. government is trying to hide the fact that it is already forced to print money just to pay interest on its debts by "buying" its own Treasuries indirectly, through intermediaries. What transforms this from a "national crisis" to simply being "totally screwed" is that state and local governments saw how "well" the federal government was doing with its Ponzi-scheme accounting and decided to copy it. They too took their future obligations for pension and health care benefits off their books, et voila, all these governments were instantly much richer.
We all know what politicians do when they feel rich: they spend lots of money to buy votes. In this case, the "easiest" way for U.S. state and local governments to buy votes was to fatten up health and pension benefits for its own workers – since it didn't need to put any of those lavish promises onto its books, thanks to the magic of U.S. Ponzi-scheme accounting. Now, claims are starting to be made on those benefits at exactly the same time that every level of government in the United States is facing their worst financial crisis in history.
In another news item released a couple of days later, South Carolina's municipal leaders descended onto the state government pleading for state funds to bail them all out of their "unfunded liabilities" nightmares. They claim their plight is so desperate that they are nearly at the point of having to choose between paying police officers and firefighters to perform their duties or pay the benefits the promised to retired police and firefighters.
This brings us back to California's own fiscal meltdown. Even with issuing his bogus IOU's and borrowing every penny he could, Schwarzenegger is attempting to squeeze billions of dollars out of local governments to essentially force them to pay for his fiscal irresponsibility. Is there any reason to believe that California's local governments are at least in as desperate a crisis as South Carolina's local governments? How would those South Carolina municipal leaders react if they arrived at the state capital seeking hand-outs, and instead were told that billions would be squeezed out of their revenues to try to close the state's budget-gap?
Given the severe implosion of California's economy, it is only logical to assume their local funding crises are even worse than those in South Carolina. Thus, as we pass the mid-point of summer, and autumn approaches, we find that California has still done nothing to solve its own fiscal crisis. Instead, it has only delayed financial Armageddon for a few months, while simultaneously ensuring that most of California's local governments face financial crises at least as bad as those of the state government.
Pace of Job Losses Sets Stage for Quick Labor-Market Rebound
The rapid pace at which businesses shed jobs during the recession comes with a flip side: Workers will need to be hired back quickly as the economy improves. So deep have companies cut jobs that Friday's employment report, which showed that the U.S. economy lost a quarter-million jobs in July, was seen as a relief. Since the recession began in December 2007, U.S. payrolls have fallen by 6.7 million, according to the Labor Department. That's a 4.8% decline, a level not seen since the late 1940s.
"Firms were unusually aggressive in cutting costs and cutting employment," said James O'Sullivan, an economist with UBS. "The flip side of that remains to be seen, but it could mean that companies will be quicker to bring back people because they were more aggressive about getting rid of them." Businesses say they are running lean. Philadelphia staffing and outsourcing company CDI Corp. has seen demand for its services fall sharply in response to the recession. Its engineering services business, for example, has seen a 22% drop-off, said Chief Executive Roger Ballou. But the company has cut staff deeply enough that it doesn't have many idle hands, and Mr. Ballou said that's true at CDI's customers as well.
"I'm unaware of any firm out there today that has lots and lots of people sitting on the bench, waiting for business to come back," said Mr. Ballou. As a result, he thinks jobs will come back more quickly as the economy recovers than they did in 2001. Milwaukee-based Wisconsin Steel & Tube Corp., which sells precut steel bars and tubes to manufacturers and machine tool shops, has seen business pick up recently as customers move to replenish inventories and is moving to add workers.
"We're a lean company -- we don't have a VP of this and a VP of that," said company President Joseph Teich. "We got rid of some temporary workers and some other people, but now we do anticipate hiring people." Last month, the company brought in a salesman that a competitor had let go, and it will likely hire two shop workers this month. To be sure, even as more companies begin to hire as the economy recovers, it could take years before payrolls reach their prerecession level. With Americans spending more cautiously in response to the massive losses in wealth associated with this recession, some jobs may simply never come back.
"We are going through an important transition in the U.S. economy away from consumer discretionary and housing expenditures towards more exports and research and development," said Northern Trust economist Paul Kasriel. "It's going to take a lot of time for workers to retrain and get skills in those areas." Moreover, with manufacturers continuing to make strides at wringing more production out of fewer workers, even as demand picks up, they may be able to hold off on hiring. Manufacturers began cutting workers in 1998, long before the 2001 recession started, and they kept cutting them through the subsequent recovery and into the current downturn.
And a quick labor-market recovery would be a break from what has happened in recent downturns. After the brief 2001 recession ended, the economy continued to shed jobs for nearly two years, and after the 1990-91 recession, jobs growth sputtered. The two experiences led economists to conclude that there had been a shift in the behavior of the job market, which in the past recovered quickly after recessions. That said, one thing different about this recession -- and one more reason the job market may come back more quickly than in the downturns of 2001 and 1990-91 -- is that so many of the job losses have been at the service-related companies that have come to dominate U.S employment.
Since the recession began, 3.3 million service-sector jobs have been lost, a 2.9% decline that is the largest in data going back to 1939. In comparison, the previous two recessions each saw service-sector jobs fall by 0.5%. Many service-related firms may have a more pressing need than manufacturers to rehire workers as demand comes back.
"In our industry, staffing is driven strictly by the number of guests we have to take care of," said Peggy Mosley, owner of the Groveland Hotel in Groveland, Calif. "In the hospitality business, that's where we have to excel." With 30 employees, Ms. Mosley's hotel, near the northern entrance to Yosemite National Park, is at its highest staffing level in 19 years of business. More Americans are vacationing closer to home, she said, and because she doesn't cater to business travelers, she hasn't seen the drops in occupancy many of her counterparts across the country have seen. In July, there were 140,000 fewer hotel, motel and other accommodation workers than a year earlier.
But the biggest reason jobs might bounce back quicker from this downturn than the past two recessions, said Comerica Bank economist Dana Johnson, is that the economy looks likely to see a much bigger bounce as it recovers. Gross domestic product -- the value of all goods and services produced by the economy -- has fallen by 3.9% since economic output peaked last year, marking the steepest decline since the end of World War II. In contrast, the 2001 and 1990-91 recessions were among the shallowest on record.
History says that given the depth of the downturn, GDP should grow at a 6% to 8% rate over the next year, according to Mr. Johnson. But because of the financial stress that has come with this recession, he expects it will grow at a 4% rate. "What people forget is that a deeper recession has consequences," Mr. Johnson said. "There is a considerable relationship between the depth of recessions and subsequent recoveries."
How the White House’s Deal With Big Pharma Undermines Democracy
by Robert Reich
I’m a strong supporter of universal health insurance, and a fan of the Obama administration. But I’m appalled by the deal the White House has made with the pharmaceutical industry’s lobbying arm to buy their support. Last week, after being reported in the Los Angeles Times, the White House confirmed it has promised Big Pharma that any healthcare legislation will bar the government from using its huge purchasing power to negotiate lower drug prices. That’s basically the same deal George W. Bush struck in getting the Medicare drug benefit, and it’s proven a bonanza for the drug industry.
A continuation will be an even larger bonanza, given all the Boomers who will be enrolling in Medicare over the next decade. And it will be a gold mine if the deal extends to Medicaid, which will be expanded under most versions of the healthcare bills now emerging from Congress, and to any public option that might be included. (We don’t know how far the deal extends beyond Medicare because its details haven’t been made public.)
Let me remind you: Any bonanza for the drug industry means higher health-care costs for the rest of us, which is one reason why critics of the emerging healthcare plans, including the Congressional Budget Office, are so worried about their failure to adequately stem future healthcare costs. To be sure, as part of its deal with the White House, Big Pharma apparently has promised to cut future drug costs by $80 billion. But neither the industry nor the White House nor any congressional committee has announced exactly where the $80 billion in savings will show up nor how this portion of the deal will be enforced. In any event, you can bet that the bonanza Big Pharma will reap far exceeds $80 billion. Otherwise, why would it have agreed?
In return, Big Pharma isn’t just supporting universal health care. It’s also spending a lots of money on TV and radio advertising in support. Sunday’s New York Times reports that Big Pharma has budgeted $150 million for TV ads promoting universal health insurance, starting this August (that’s more money than John McCain spent on TV advertising in last year’s presidential campaign), after having already spent a bundle through advocacy groups like Healthy Economies Now and Families USA.
I want universal health insurance. And having had a front-row seat in 1994 when Big Pharma and the rest of the health-industry complex went to battle against it, I can tell you first hand how big and effective the onslaught can be. So I appreciate Big Pharma’s support this time around, and I like it that the industry is doing the reverse of what it did last time, and airing ads to persuade the public of the rightness of the White House’s effort.
But I also care about democracy, and the deal between Big Pharma and the White House frankly worries me. It’s bad enough when industry lobbyists extract concessions from members of Congress, which happens all the time. But when an industry gets secret concessions out of the White House in return for a promise to lend the industry’s support to a key piece of legislation, we’re in big trouble. That’s called extortion: An industry is using its capacity to threaten or prevent legislation as a means of altering that legislation for its own benefit. And it’s doing so at the highest reaches of our government, in the office of the President.
When the industry support comes with an industry-sponsored ad campaign in favor of that legislation, the threat to democracy is even greater. Citizens end up paying for advertisements designed to persuade them that the legislation is in their interest. In this case, those payments come in the form of drug prices that will be higher than otherwise, stretching years into the future. I don’t want to be puritanical about all this. Politics is a rough game in which means and ends often get mixed and melded. Perhaps the White House deal with Big Pharma is a necessary step to get anything resembling universal health insurance. But if that’s the case, our democracy is in terrible shape.
How soon until big industries and their Washington lobbyists have become so politically powerful that secret WhiteHouse-industry deals like this are prerequisites to any important legislation? When will it become standard practice that such deals come with hundreds of millions of dollars of industry-sponsored TV advertising designed to persuade the public that the legislation is in the public’s interest? (Any Democrats and progressives who might be reading this should ask themselves how they’ll feel when a Republican White House cuts such deals to advance its own legislative priorities.) We’re on a precarious road — and wherever it leads, it’s not toward democracy.
Republicans Propagating Falsehoods in Attacks on Health-Care Reform
As a columnist who regularly dishes out sharp criticism, I try not to question the motives of people with whom I don't agree. Today, I'm going to step over that line. The recent attacks by Republican leaders and their ideological fellow-travelers on the effort to reform the health-care system have been so misleading, so disingenuous, that they could only spring from a cynical effort to gain partisan political advantage. By poisoning the political well, they've given up any pretense of being the loyal opposition. They've become political terrorists, willing to say or do anything to prevent the country from reaching a consensus on one of its most serious domestic problems.
There are lots of valid criticisms that can be made against the health reform plans moving through Congress -- I've made a few myself. But there is no credible way to look at what has been proposed by the president or any congressional committee and conclude that these will result in a government takeover of the health-care system. That is a flat-out lie whose only purpose is to scare the public and stop political conversation. Under any plan likely to emerge from Congress, the vast majority of Americans who are not old or poor will continue to buy health insurance from private companies, continue to get their health care from doctors in private practice and continue to be treated at privately owned hospitals.
The centerpiece of all the plans is a new health insurance exchange set up by the government where individuals, small businesses and eventually larger businesses will be able to purchase insurance from private insurers at lower rates than are now generally available under rules that require insurers to offer coverage to anyone regardless of health condition. Low-income workers buying insurance through the exchange -- along with their employers -- would be eligible for government subsidies. While the government will take a more active role in regulating the insurance market and increase its spending for health care, that hardly amounts to the kind of government-run system that critics conjure up when they trot out that oh-so-clever line about the Department of Motor Vehicles being in charge of your colonoscopy.
There is still a vigorous debate as to whether one of the insurance options offered through those exchanges would be a government-run insurance company of some sort. There are now less-than-even odds that such a public option will survive in the Senate, while even House leaders have agreed that the public plan won't be able to piggy-back on Medicare.
So the probability that a public-run insurance plan is about to drive every private insurer out of business -- the Republican nightmare scenario -- is approximately zero. By now, you've probably also heard that health reform will cost taxpayers at least a trillion dollars. Another lie. First of all, that's not a trillion every year, as most people assume -- it's a trillion over 10 years, which is the silly way that people in Washington talk about federal budgets. On an annual basis, that translates to about $140 billion, when things are up and running.
Even that, however, grossly overstates the net cost to the government of providing universal coverage. Other parts of the reform plan would result in offsetting savings for Medicare: reductions in unnecessary subsidies to private insurers, in annual increases in payments rates for doctors and in payments to hospitals for providing free care to the uninsured. The net increase in government spending for health care would likely be about $100 billion a year, a one-time increase equal to less than 1 percent of a national income that grows at an average rate of 2.5 percent every year. The Republican lies about the economics of health reform are also heavily laced with hypocrisy.
While holding themselves out as paragons of fiscal rectitude, Republicans grandstand against just about every idea to reduce the amount of health care people consume or the prices paid to health-care providers -- the only two ways I can think of to credibly bring health spending under control. When Democrats, for example, propose to fund research to give doctors, patients and health plans better information on what works and what doesn't, Republicans sense a sinister plot to have the government decide what treatments you will get. By the same wacko-logic, a proposal that Medicare pay for counseling on end-of-life care is transformed into a secret plan for mass euthanasia of the elderly.
Government negotiation on drug prices? The end of medical innovation as we know it, according to the GOP's Dr. No. Reduce Medicare payments to overpriced specialists and inefficient hospitals? The first step on the slippery slope toward rationing. Can there be anyone more two-faced than the Republican leaders who in one breath rail against the evils of government-run health care and in another propose a government-subsidized high-risk pool for people with chronic illness, government-subsidized community health centers for the uninsured, and opening up Medicare to people at age 55?
Health reform is a test of whether this country can function once again as a civil society -- whether we can trust ourselves to embrace the big, important changes that require everyone to give up something in order to make everyone better off. Republican leaders are eager to see us fail that test. We need to show them that no matter how many lies they tell or how many scare tactics they concoct, Americans will come together and get this done. If health reform is to be anyone's Waterloo, let it be theirs.
Lawmakers Rethink Town Halls
The health-care debate was supposed to play out at rallies and inside gymnasiums when lawmakers headed home for the August recess. But after a series of contentious town-hall meetings, some Democratic lawmakers are thinking twice about holding large public gatherings. Instead, they are opting for smaller sessions, holding meetings by phone or inviting constituents for one-on-one office hours. Democrats have accused Republicans of manufacturing the opposition by organizing groups to attend the events and encouraging disruptive behavior. Republican organizers say the unrest reflects genuine anger about the proposed health-care changes.
"Democrats may think that attacking or ignoring this growing chorus of Americans is a smart strategy, but they are obviously forgetting that these concerned citizens are voters as well," said Paul Lindsay, a spokesman for the National Republican Congressional Committee, the House GOP's campaign arm.
Rick Scott, who leads Conservatives for Patients' Rights, a group that has helped publicize the local meetings, said: "The polls reveal the real picture of what is happening across the country -- people are genuinely concerned, some are genuinely angry, and they are expressing themselves." The Senate on Friday headed home for a monthlong break after progress stalled on passing sweeping health-care legislation. House members, whose break started a week ago, have been hit with a flood of inquiries about the legislation since they arrived home. Rep. Ann Kirkpatrick (D., Ariz.) on Thursday canceled her public schedule for the day after a "Chat with Ann" session at a Safeway grocery store in Holbrook, Ariz., turned rowdy.
A video of the meeting showed a woman shouting, "You don't appreciate our frustration!" Ms. Kirkpatrick cut the session short after 15 minutes and headed to her car, trailed by a jeer of "What a nitwit!" Rep. Tim Bishop (D., N.Y.) stopped holding town-hall meetings after a June event. Footage of the meeting showed participants screaming questions at Mr. Bishop, then repeatedly shouting him down when he tried to respond. At times, Mr. Bishop would begin to respond to a question and a participant would yell, "Answer the question!" At one point Mr. Bishop yelled back, "I'm trying to!"
Police were summoned as several dozen protesters followed Mr. Bishop to his car. Now Mr. Bishop, who has held 100 town-hall meetings during his tenure, has just one scheduled for the August recess, and his office is wrestling with how to ensure it will be civil and orderly. "I'm seeing the same clips everyone else is of these meetings that are turning into near-riots," said Jon Schneider, Mr. Bishop's district director. "Obviously we don't want that to happen." He added that the congressman is talking to voters in other ways.
Rep. Brian Baird (D., Wash.) also said the raucous nature of recent meetings about health care caused him to steer away from the events, if only because they aren't productive when so many people are shouting. "I'm not a coward, but neither am I a fool," said Mr. Baird. "There is a real concern right now about this nationwide campaign of intimidation and disruption that I think is troubling," he said. "It's getting dangerous." Several lawmakers said they aren't canceling large, public events that have already been planned.
Some Democrats who have seen the sharpest attacks say that has made them more determined not to back away from public meetings. Rep. Lloyd Doggett (D., Texas), who was recently heckled over health care at a supermarket, said he would attend a veterans-center opening, a community-health event and a meeting with Austin public school teachers in coming days. "The apparent focus was to kind of create this impression that you could run me [and] supporters of this out of Dodge," he said. "That's not what is going to happen."
Health care's big money wasters
Down the drain: $1.2 trillion.That's half of the $2.2 trillion the United States spends on health care each year, according to the most recent data from accounting firm PricewaterhouseCoopers' Health Research Institute. What counts as waste? The report identified 16 different areas in which health care dollars are squandered. But in talking to doctors, nurses, hospital groups and patient advocacy groups, six areas totaling nearly $500 billion stood out as issues to be dealt with in the health care reform debate.
Too many tests
Doctors ordering tests or procedures not based on need but concern over liability or increasing their income is the biggest waste of health care dollars, costing the system at least $210 billion a year, according to the report. The problem is called "defensive medicine." "Sometimes the motivation is to avoid malpractice suits, or to make more money because they are compensated more for doing more," said Dr. Arthur Garson, provost of the University of Virginia and former dean of its medical school. "Many are also convinced that doing more tests is the right thing to do."
"But any money that is spent on a patient that doesn't improve the outcome is a waste," said Garson. Some conservatives have suggested that capping malpractice awards would help solve the problem. President Obama doesn't agree; instead, his reform proposal encourages doctors to practice "evidence-based" guidelines as a way to scale back on unnecessary tests.
Those annoying claim forms
Inefficient claims processing is the second-biggest area of wasteful expenditure, costing as much as $210 billion annually, the PricewaterhouseCoopers report said. "We spend a lot of time and money trying to get paid by insurers," said Dr. Terry McGenney, a Kansas City, Mo.-based family physician. "Every insurance company has its own forms," McGenney said. "Some practices spend 40% of their revenue filling out paperwork that has nothing to do with patient care. So much of this could be automated."
Dr. Jason Dees, a family doctor in a private practice based in New Albany, Miss., said his office often resubmits claims that have been "magically denied." "That adds to our administrative fees, extends the payment cycle and hurts our cash flow," he said. Dees also spends a lot of time getting "pre-certification" from insurers to approve higher-priced procedures such as MRIs. "We're already operating on paper-thin margins and this takes times away from our patients," he said.
Susan Pisano, spokeswoman for America's Health Insurance Plans, said "hundreds of billions" of dollars can be saved by standardizing procedures and using technology -- something the White House has mentioned as a key to health care reform. "For that to happen, we need the technology," she said. "Doctors and hospitals must adopt the technology, and we have to develop rules for exchanging of information between doctors, hospitals and health plans." Pisano said the industry is launching a pilot program later this year that will allow physicians to communicate with all health plans using a standardized process.
Using the ER as a clinic
More insured and uninsured consumers are getting their primary care in emergency rooms, wasting $14 billion every year in health care spending. "This is an inappropriate use of the ER," said Dee Swanson, president of the American Academy of Nurse Practitioners. "You don't go to the ER for strep throat." Since emergency rooms are legally obligated to treat all patients, Swanson said providers ultimately find ways to pass on the cost for treating the uninsured to other patients, such as to those who pay out-of-pocket for their medical care.
Dees also took issue with consumers who don't get primary care for their diabetes or blood pressure on a timely basis, hence finding themselves in the ER. "Going to the doctor for strep throat would cost $65-$70. In the ER, it's $600 to $800," he said. The $787 billion stimulus bill signed passed by President Obama earlier this year allocates $1 billion for a wellness and prevention fund, including $300 million for immunizations and $650 million for prevention programs to combat the rapid growth in chronic diseases such as obesity and diabetes.
Medical errors are costing the industry $17 billion a year in wasted expenses, something that makes patient advocacy groups irate. "Do we have a good health IT system in place to prevent this?" asked Kim Bailey, senior health policy analyst with consumer advocacy group Families USA. Bailey suggested that processes such as computerized order entry for drugs and use of electronic health records (EHR) could help ensure that patients get the correct dosage of medications in hospitals.
The stimulus bill calls for the government to take a leading role in developing standards by 2010 to facilitate the adoption of health information exchanges across the system, including patient electronic health records by 2014. Obama has repeatedly said that the use of technology in the health sector will help boost savings, enhance the coordination of care and reduce medical errors and unnecessary procedures.
Going back to the hospital
Bailey suggested that processes such as computerized order entry for drugs and use of electronic health records (EHR) could help ensure that patients get the correct dosage of medications in hospitals. Discharging patients too soon is a "huge waste of money," said Swanson. "This happens a lot with elderly patients who are discharged prematurely because of insurance, bed unavailability or ageism," she said.
Many times, patients also don't follow instructions for care after discharge. "So complications arise and they are readmitted in a week," Swanson said. PricewaterhouseCoopers estimates the cost of preventable hospital readmissions at $25 billion annually. Among the reform plans, one proposal being considered is for Medicare to potentially penalize hospitals who readmit patients within 30 days of discharge.
You forgot to wash your hands!
Those ubiquitous dispensers of hand sanitizer are in hospitals for a reason: PricewaterhouseCoopers estimates that about $3 billion is wasted every year as a result of infections acquired during hospital stays. "The general belief is that hospitals are getting much better in managing this than they have in the past," said Richard Clarke, CEO of Healthcare Financial Management Association, whose members include hospitals and managed care organizations. Something as simple as hand-washing often can reduce the problem.
"Sometimes doctors are the most difficult people to convince to do this," said Clarke. "The challenge here is that patients sometimes come in with infections which then spread in the hospital." The stimulus bill signed by Obama earlier this year includes $50 million for reducing health care-associated infections. Other areas of waste identified in the PricewaterhouseCoopers report included up to $493 billion related to risky behavior such as smoking, obesity and alcohol abuse, $21 billion in staffing turnover, $4 billion in prescriptions written on paper, and $1 billion in the over-prescribing of antibiotics.
Crisis and climate force supply shift
Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts. Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously. "A future where energy is more expensive and less plentifully available will lead to more regional supply chains," Gerard Kleisterlee, chief executive of Philips, one of Europe's biggest companies, told the Financial Times.
Supply-chain experts agreed, with Ernst & Young underlining how as much as 70 per cent of a manufacturing company's carbon footprint can come from transport and other costs in its supply chain. Dan O'Regan, the accounting firm's head of supply chains, said: "It is not just the prospect of regulatory changes but also the downturn that is forcing many organisations to consider restructuring their supply chains in their entirety. I think you will find smaller, more regional supply chains."
Mr Kleisterlee said businesses needed to find ways to build an economy on a sustainable basis ahead of the Copenhagen summit on climate change later this year, with "a review of global logistics and transport" one of the important steps. He said that until now cheap transport costs had meant "Mexico wasn't competitive with China for supplying the US". But he now forecasts that companies such as Philips will use countries such as Ukraine for supplying Europe rather than Asia.
David Bartlett, an economic adviser to accounting group RSM International, pointed to industries such as steel, carmaking, aerospace and furniture where "there is a sense that distance to market really does matter". One example he cited was the use by Boeing of Mexican aerospace suppliers. He added: "We really are seeing a shift from a global supply chain to a regional one." In Europe, there have been many examples of companies bringing manufacturing back home or closer to the domestic market, from Samas, a Dutch furniture maker, to Zumtobel, an Austrian lighting group.
Mr O'Regan said several forces were causing companies to regionalise supply chains from rationalisation of production networks and regulatory change to pressure on the speed of delivery and the erosion of many of the cost or labour advantages some countries had enjoyed. Mr Kleisterlee said: "An economic crisis is a period when you should step back and think: is this a moment to make some fundamental changes?"
Canada's life insurance industry pushes pension fix
Canada's life insurers are proposing sweeping changes they say would allow the industry to help fix troubles in the pension system, lobbying against a push by some provinces for a new national plan. The industry's drive comes amid a raging debate over the problems, exacerbated by the recession and tumultuous stock markets, with how Canadians save for retirement. Aging baby boomers and the slow extinction of defined benefit plans are among the factors that have left many without sufficient financial protection for their retirement.
Alberta and British Columbia have been pushing a proposal to create a new national system for Canadians without a workplace plan. This voluntary plan would be in addition to the Canada Pension Plan and would be in the form of defined contribution, meaning the participants would receive payments that depend on the plan's investment income. Provincial premiers met in Regina last week and called on Ottawa for a national summit on retirement income, directing their finance ministers to report this year on ways that both private and public sector plans can be improved.
The life insurance industry, which is responsible for about two-thirds of defined contribution plans in Canada, has also been talking to provincial and federal governments about "private sector solutions that we think will be as effective as any government-sponsored ones," said Frank Swedlove, president of the Canadian Life and Health Insurance Association. "Some of the proposals that have been made raise some concerns for us," Mr. Swedlove said. "Some of these proposals relate to a government-sponsored defined contribution plan, and we don't think that that's the best way to go. "We think there are opportunities to increase pension activity for Canadians by changing some of the pension rules that exist in the country."
Donald Stewart, chief executive officer of Sun Life Financial, the biggest industry player in the game, agreed the private sector can service the country's retirement needs, and said it is calling on government to update pension laws to spur further involvement. The industry wants the government to alter the Income Tax Act so that a pension plan sponsor need not have a specific relation with, or be an employer of, a participant in a defined contribution plan. That would mean life insurers and others could sponsor an umbrella plan that could take in a number of companies and, the industry argues, make it easier for many small and mid-sized businesses to offer pensions to their employees.
It could also mean more self-employed people are able to access pensions. The industry also wants changes to employment standards laws that would allow for the indexing of pension contributions so that contribution rates could be automatically indexed based on age and other factors. That could help new employees who aren't yet prepared to contribute as much. More broadly, life insurers want a major overhaul of federal and provincial pension laws in general. The laws were written in an era of defined benefit plans, and have not been properly updated following the dramatic shift toward defined contribution plans, they argue. The laws also fall into a patchwork system of federal and provincial rules that the insurers believe must be harmonized.
"If you have consistent plans, individuals can be mobile across the country," said Sue Reibel, senior vice-president of Manulife Financial's Canadian Group savings and retirement solutions. She has spoken to the Alberta and Ontario finance ministers, and travelled to Ottawa on the issue. "One of the things that we all agreed on is that we need to do more," she said. "We agree that we need to enhance Canadian savings." She would like to see changes to the savings legislation that would give Canadians a lifetime RRSP contribution limit, rather than an annual one, similar to what Britain now has. That would give people the flexibility to contribute more when they can, and also account for the natural tendency to save more with age.
With such changes, government can spur retirement savings without intervening in the system further, the industry argues. "As a taxpayer, if I divorce myself from my company, I would step back and say that we've got a private sector that built everything," Ms. Reibel said. "They've been building the business for the last 10 years, which is when the defined contribution business really started to grow. Why would you build a new one to do exactly what's there, unless to point to it and say it's broken? And I don't think anyone's pointed to it and said we're not doing a good job."
Germany's gold is in U.S. custody, Bundesbank confirms
International journalist Max Keiser has just posted a nine-minute documentary he has done about the British government's gold sales that were begun in 1999 and now are disparaged as "Brown's Bottom," after then-Chancellor, now-Prime Minister Gordon Brown, who decided upon the sales and remains unashamed that they marked the bottom of the gold market. Keiser's documentary is based largely on an interview with Conservative Party opposition Member of Parliament Phillip Hammond, who is shadow chief secretary of the treasury and who remarks that the British gold sales seem to have been structured precisely to knock the price of gold down rather than to maximize the return to the British government. Hammond also wonders aloud whether "something other than achieving the best price" might have been the objective of the gold sales scheme.
But Keiser's documentary may be sensational for getting an acknowledgement from the German central bank, the Bundesbank, that Germany's gold reserves are actually in the custody of the United States. This is a detail the Bundesbank long has denied to others who have inquired and is potentially a matter of great controversy in Germany. It raises the question of whether the German gold reserves are actually intact at all or whether they have been used by the U.S. government as part of its long-time gold price suppression scheme or have been comingled and diminished with the gold reserves of other countries held in the United States.
While Keiser's documentary does not identify the Bundesbank spokesman who confirmed the transfer of the German gold reserves to New York, it does provide the date and location of the confirmation: March 17, 2008, at Bundesbank headquarters in Frankfurt. The documentary shows that Keiser was there and got the interview.
After his interview at the Bundesbank, Keiser remarks: "The most fascinating thing I've heard is that all the gold in Germany is in New York." Indeed. Keiser's documentary is titled "Brown's Bottom" and you can watch it at YouTube here:
Food crisis could force wartime rations and vegetarian diet on Britons
The British people face wartime rations and a vegetarian diet in the event of a world food shortage, a new official assessment on the UK’s food security suggests today. Even though the nation is 73 per cent self-sufficient in food production, higher than during the 1950s, the food chain is at risk from global influences such as a worldwide increase in population, climate change bringing extreme weather patterns, higher oil prices and more crops being grown for bio-fuel instead of food.
Supplies in future may also be disrupted by animal disease outbreaks, disruption of power supplies, trade disputes and interruptions for shipping and at ports. The UK however has one of the highest cereal production capabilities in the world with seven tonnes grown per hectare, compared a world average of 3.3 tonnes per hectare. In the event of an extreme event, cereal crops would be used to feed the nation and ensure that each person received sufficient daily calories.
But people would have to consume less — the average number of calories eaten per day in the early 1960s was about 2,100, whereas the most recent figure compiled by the United Nations Food and Agriculture Organisation is 2,800. Even during the Second World War Britain did not have to rely wholly on domestic food production, but Hilary Benn, the Cabinet Minister with overall responsibility for food policy, has ordered officials to prepare for a scenario where the country could feed itself.
In the event of an extreme emergency the most dramatic consequence would be every person eating a predominantly vegetarian diet — more cereals, fruit and vegetables and less meat and poultry. Cereals used to feed farm animals would be shifted into human food production. A paper setting out the food security assessment states that the food on offer would be "a highly restricted, if sufficiently nutritious diet". One of the biggest threats to the supply chain would be restrictions in trade of meat and poultry from Argentina and Brazil or of GM soya, the main commodity used to feed livestock in Britain.
The threat of climate change however will also require new growing techniques such as reduced water usage in agriculture. In times of normal trading, however, the Government also wishes to ensure that the nation eats a healthier diet and is particularly concerned that low-income households are able to afford fresh fruit and vegetables. Ministers are also anxious that consumers have confidence in the safety of food and further work is to be undertaken to help reduce the incidence of food poisoning caused by common bugs such as salmonellas, listeria, E.coli and campylobacter. Hygiene inspections at food outlets by local authority enforcement officers is likely to be stepped up.
Mr Benn today called for a radical rethink on the way the UK produces food. He also insisted that GM crops in future could help boost food production especially if some varieties were drought-resistant or required less water, fertilisers and pesticides. He backed the need for GM crop trials to find out the facts about the new technology and to use the science to boost production. "We need a radical rethink in how we produce and consume food. Globally we need to cut emissions and adapt to the changing climate that will alter what we can grow and where we can grow it. We must maintain the natural resources — soils, water and biodiversity — on which food production depends."
"And because we live in an interconnected world — where the price of soya in Brazil affects the price of steak at the local supermarket — we need to look at global issues that affect food security here. That’s why we need to consider what food systems should look like in 20 years and what must happen to get there." He is anxious to engage the wider public in debate about the future of the country’s food security as well as how best to help people eat healthier diets and to ensure that new production techniques do not damage the UK’s natural resources. A new UK food strategy is to be published before the end of the year.
Amsterdam Trading House Van der Moolen Seeks Payments Suspension, Posts Loss
Van der Moolen Holding NV, the 117- year-old Dutch stockbroker, obtained a suspension of payments requested from an Amsterdam court because of a "very weak liquidity position," and said it may sell parts of the company. "Current management concluded Van der Moolen would soon be unable to satisfy its obligations," the Amsterdam-based firm said in a statement distributed by Hugin today. No suspension of payments was sought for any of Van der Moolen’s subsidiaries, the company said. The company said the court appointed two administrators.
Van der Moolen took the step because of slumping revenue, costs related to moving offices, and 30 million euros ($42.6 million) of treasury share purchases in 2008 that had a "too severe" impact on its reserves. The company reported today a first-half loss of 8.7 million euros and a 73 percent plunge in sales from a year earlier. "It’s clearly mismanagement," said Nico van Geest, an Amsterdam-based analyst at Keijser Capital NV. "I think a few units will survive and Van der Moolen will be delisted," said Van Geest, who rates the company "sell."
Van der Moolen said "serious consideration" is being given to selling parts of the company. The firm has been operating without a chief executive officer or management board since Richard den Drijver, 48, stepped down on July 16, leaving the supervisory board temporarily in charge. Van der Moolen was suspended in Amsterdam trading today on instructions from Dutch securities regulator AFM. The shares have dropped 76 percent in the past 12 months, giving Van der Moolen a market value of 52 million euros.
The company was founded on July 1, 1892, by F.J. van der Moolen as a stockbroker, according to the Amsterdam Stock Exchange. It became the No. 4 market maker on the New York Stock Exchange in 2001 after buying specialists including Cohen, Duffy, McGowan & Co. and Scavone, McKenna, Cloud & Co. Van der Moolen transferred its unprofitable NYSE specialist unit to Lehman Brothers Holdings Inc. in December 2007, quitting floor trading in New York after more than a decade, as the bourse’s switch to electronic dealing eroded the traditional floor-trading business. Van der Moolen has posted three consecutive annual losses. The company canceled the 43.3 million-euro acquisition of stakes in GSFS Asset Management BV and Global Securities Arbitrage BV in March, saying the moves "will not lead to the intended positive impact on the shareholders value of Van der Moolen." The firm said today it will no longer carry out dividend arbitrage with GSFS.
Van der Moolen also agreed to sell its 50 percent stake in Gekko Global Markets Ltd. to joint-venture partner Sycap, "with the condition that permission would be granted by the administrator to be named under the surseance."
The recent departure of 10 traders in the U.K. and the announced departure of 11 traders in the Netherlands will have an adverse effect on Van der Moolen’s operations and results, the company said. The financial information released today doesn’t include asset impairments, "because it can not be determined which, if any, assets should be impaired and what the extent of any such impairment may be," the firm said. "Management emphasizes that it is seriously considering significant asset impairments." The company called an extraordinary shareholders meeting to take place in the second half of September.
Latvia’s Economy Contracted Record 19.6% Last Quarter
Latvia’s economy shrank an annual 19.6 percent last quarter, the European Union’s second-steepest output slump after neighboring Lithuania, as manufacturing and retail sales plunged. The contraction, the worst since quarterly records began in the Baltic nation in 1995, gathered pace after gross domestic product shrank 18 percent in the first quarter, the central statistics office in Riga said today, citing preliminary figures. The median estimate in a Bloomberg survey of eight economists was for a 22 percent decline. The final report will be released on Sept. 8.
"The steepest decline is behind us," said Andris Vilks at SEB AB’s Latvian unit, who had estimated an 18 percent contraction for the second quarter. "The third and fourth quarters may see a decline of about 12 percent to 15 percent." Latvia’s economy, the fastest growing in the EU in 2006, is now suffering as the Baltic region, which includes Lithuania and Estonia, sinks into the severest recession in the 27-nation bloc. Latvia was forced to turn to a group led by the European Commission and the International Monetary Fund for a 7.5 billion-euro ($10.8 billion) loan after its second-biggest bank needed a state rescue and a property bubble burst.
Latvia’s inflation rate fell to 2.5 percent in July, the lowest in more than six years, the statistics office reported today. The country’s trade deficit narrowed to 67 million lati ($136 million) in June, the smallest shortfall since February 2002, as imports fell twice as much as exports in the year. "On a seasonally, quarterly adjusted basis, the figure looks roughly flat," Oliver Weeks, a London-based economist at Morgan Stanley, said by telephone. "It’s quite a positive surprise, particularly given the sharp second-quarter downturn in Lithuania. We won’t see a contraction again like we did in the first quarter" on a quarterly basis.
Households and businesses are struggling to get back on their feet after the government agreed to reductions in state pay and pensions in an effort to rein in the budget and comply with the terms of the bailout. The IMF and the commission both withheld disbursements earlier this year until lawmakers committed to budget cuts. "In the next quarters the situation will become more positive, though a number of serious economic problems will remain," said Prime Minister Valdis Dombrovskis in an e-mailed statement after the figures were released. "Latvia has already overcome the statistically deepest downturn."
Austerity measures have left households struggling to make ends meet, with spending in shops plummeting, while the slump in demand has left businesses floundering. Retail sales fell 28.5 percent in the second quarter and industrial production dropped 18.7 percent. Latvia’s spending and wage cuts threaten to exacerbate its recession this year. Parliament passed spending cuts worth about 500 million lati ($1 billion) on June 16 to ensure the continued inflow of bailout payments. The government has committed to cutting spending or raising revenue by 500 million lati a year until 2012 to enable euro adoption. Latvia pegs its lats to the euro as part of the exchange rate mechanism. Lithuania’s GDP contracted a preliminary 22.4 percent in the second quarter.
S&P Downgrades Latvia, Estonia Amid Economic Woes
Standard & Poor's Ratings Services on Monday downgraded the Baltic nations of Estonia and Latvia, citing challenges from a steep recession after years of growth from foreign investments. Estonia has amassed a big current account deficit after lapping up cheap credit during the lending boom spurred on by Nordic banks earlier this decade. Already a member of the European Union, Estonia's plans to adopt the euro were undertaken, in part, to avoid facing the same devaluation danger as neighbor Latvia. S&P warned current economic challenges could delay its efforts to adopt the currency.
In 2009, fixed investment in Estonia is set to contract 25% to 30%, as foreign capital is exiting sectors such as construction and retail. The worsening credit conditions are contributing to the country's economic pressures and compounding difficulties the government faces as it seeks to maintain revenue while the tax base is decreasing. But unlike many of its peers, Estonia entered the recession with larger fiscal reserves, and the public sector's reliance on external financing is low. For those reasons, S&P said Estonia is unlikely to need to borrow in international markets over the next few years.
As a result of those concerns, S&P lowered its long-term sovereign rating on Estonia by one notch to A-. The ratings outlook is negative, reflecting the likelihood of another downgrade if current economic adjustment fails to improve competitiveness. For its part, Latvia - which has an economy of less than $25 billion - took an outsized role in the global economic crisis. The International Monetary Fund expects Latvia's economy to contract 18% this year and 4% in 2010. S&P noted Latvia faces political and economic challenges due to pressures on public finances and its lending program with the European Union and the IMF. Those groups stepped in to ensure Latvia doesn't default on loans with Swedish banks, which could further damage the European banking system.
S&P lowered its long-term sovereign credit rating on Latvia by one notch to BB, putting the rating two steps into junk. The outlook is negative. Later Monday, S&P placed its rating on the third Baltic nation, Lithuania, on watch for downgrade. After several rounds of budgetary cuts, this year's fiscal deficit is still expected to exceed 8% of gross domestic product. Meanwhile, external demand is hurt by Lithuania's large trade exposure to the other two Baltic states. "We expect consumption to contract 18% year-over-year in real terms during 2009 and to remain anemic during 2010," said S&P credit analyst Frank Gill. He added Lithuania's prospects for entry into the euro currency zone were subsiding. Lithuania's sovereign credit rating, which was downgraded by S&P in March, is BBB. That is two steps above junk.
Entering the Greatest Depression in History
by Andrew Gavin Marshall
While there is much talk of a recovery on the horizon, commentators are forgetting some crucial aspects of the financial crisis. The crisis is not simply composed of one bubble, the housing real estate bubble, which has already burst. The crisis has many bubbles, all of which dwarf the housing bubble burst of 2008. Indicators show that the next possible burst is the commercial real estate bubble. However, the main event on the horizon is the bailout bubble and the general world debt bubble, which will plunge the world into a Great Depression the likes of which have never before been seen.
Housing Crash Still Not Over
The housing real estate market, despite numbers indicating an upward trend, is still in trouble, as, Houses are taking months to sell. Many buyers are having trouble getting financing as lenders and appraisers struggle to figure out what houses are really worth in the wake of the collapse. Further, the overall market remains very soft [...] aside from speculators and first-time buyers. Dean Baker, co-director of the Center for Economic and Policy Research in Washington said, It would be wrong to imagine that we have hit a turning point in the market, as There is still an enormous oversupply of housing, which means that the direction of house prices will almost certainly continue to be downward. Foreclosures are still rising in many states such as Nevada, Georgia and Utah, and economists say rising unemployment may push foreclosures higher into next year. Clearly, the housing crisis is still not at an end.
The Commercial Real Estate Bubble
In May, Bloomberg quoted Deutsche Bank CEO Josef Ackermann as saying, It's either the beginning of the end or the end of the beginning. Bloomberg further pointed out that, A piece of the puzzle that must be calculated into any determination of the depth of our economic doldrums is the condition of commercial real estate the shopping malls, hotels, and office buildings that tend to go along with real-estate expansions. Residential investment went down 28.9 % from 2006 to 2007, and at the same time, nonresidential investment grew 24.9%, thus, commercial real estate was serving as a buffer against the declining housing market.
Commercial real estate lags behind housing trends, and so too, will the crisis, as commercial construction projects are losing their appeal. Further, there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency's Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing. In May it was reported that, Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans, and that, we may face double-bubble trouble for real estate and the economy.
In late July of 2009, it was reported that, Commercial real estates decline is a significant issue facing the economy because it may result in more losses for the financial industry than residential real estate. This category includes apartment buildings, hotels, office towers, and shopping malls. Worth noting is that, As the economy has struggled, developers and landlords have had to rely on a helping hand from the US Federal Reserve in order to try to get credit flowing so that they can refinance existing buildings or even to complete partially constructed projects. So again, the Fed is delaying the inevitable by providing more liquidity to an already inflated bubble. As the Financial Post pointed out, From Vancouver to Manhattan, we are seeing rising office vacancies and declines in office rents.
In April of 2009, it was reported that, Office vacancies in U.S. downtowns increased to 12.5 percent in the first quarter, the highest in three years, as companies cut jobs and new buildings came onto the market, and, Downtown office vacancies nationwide could come close to 15 percent by the end of this year, approaching the 10-year high of 15.5 percent in 2003.
In the same month it was reported that, Strip malls, neighborhood centers and regional malls are losing stores at the fastest pace in at least a decade, as a spending slump forces retailers to trim down to stay afloat. In the first quarter of 2009, retail tenants have vacated 8.7 million square feet of commercial space, which exceeds the 8.6 million square feet of retail space that was vacated in all of 2008. Further, as CNN reported, vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008. Of significance for those that think and claim the crisis will be over by 2010, mall vacancies [are expected] to exceed historical levels through 2011, as for retailers, it's only going to get worse. Two days after the previous report, General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on [April 16] in the biggest real estate failure in U.S. history.
In April, the Financial Times reported that, Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the countrys economic downturn faces further challenges despite recent positive data. This is of enormous significance, as The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade. Further, an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand. A researcher at a leading Chinese government think tank reported that, he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.
In April, it was reported that, The Federal Reserve is considering offering longer loans to investors in commercial mortgage-backed securities as part of a plan to help jump-start the market for commercial real estate debt. Since February the Fed has been analyzing appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and other mortgage assets as collateral for its Term Asset-Backed Securities Lending Facility (TALF).
In late July, the Financial Times reported that, Two of Americas biggest banks, Morgan Stanley and Wells Fargo ... threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loan, as The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market. The commercial property market, worth $6.7 trillion, which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.
The Bailout Bubble
While the bailout, or the stimulus package as it is often referred to, is getting good coverage in terms of being portrayed as having revived the economy and is leading the way to the light at the end of the tunnel, key factors are again misrepresented in this situation.
At the end of March of 2009, Bloomberg reported that, The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year. This amount works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nations gross domestic product was $14.2 trillion in 2008.
Gerald Celente, the head of the Trends Research Institute, the major trend-forecasting agency in the world, wrote in May of 2009 of the bailout bubble. Celentes forecasts are not to be taken lightly, as he accurately predicted the 1987 stock market crash, the fall of the Soviet Union, the 1998 Russian economic collapse, the 1997 East Asian economic crisis, the 2000 Dot-Com bubble burst, the 2001 recession, the start of a recession in 2007 and the housing market collapse of 2008, among other things.
On May 13, 2009, Celente released a Trend Alert, reporting that, The biggest financial bubble in history is being inflated in plain sight, and that, This is the Mother of All Bubbles, and when it explodes [...] it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world. Further, This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the 'Bailout Bubble' explodes, the system goes with it.
Celente further explained that, Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the Bailout Bubble. Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the "Bailout Bubble" pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another. Celente elaborated, Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war, and that, While we cannot pinpoint precisely when the 'Bailout Bubble' will burst, we are certain it will. When it does, it should be understood that a major war could follow. However, this bailout bubble that Celente was referring to at the time was the $12.8 trillion reported by Bloomberg. As of July, estimates put this bubble at nearly double the previous estimate.
As the Financial Times reported in late July of 2009, while the Fed and Treasury hail the efforts and impact of the bailouts, Neil Barofsky, special inspector-general for the troubled asset relief programme, [TARP] said that the various US schemes to shore up banks and restart lending exposed federal agencies to a risk of $23,700bn [$23.7 trillion] a vast estimate that was immediately dismissed by the Treasury. The inspector-general of the TARP program stated that there were fundamental vulnerabilities . . . relating to conflicts of interest and collusion, transparency, performance measures, and anti-money laundering.
Barofsky also reports on the considerable stress in commercial real estate, as The Fed has begun to open up Talf to commercial mortgage-backed securities to try to influence credit conditions in the commercial real estate market. The report draws attention to a new potential credit crunch when $500bn worth of real estate mortgages need to be refinanced by the end of the year. Ben Bernanke, the Chairman of the Fed, and Timothy Geithner, the Treasury Secretary and former President of the New York Fed, are seriously discussing extending TALF (Term Asset-Backed Securities Lending Facility) into CMBS [Commercial Mortgage-Backed Securities] and other assets such as small business loans and whether to increase the size of the programme. It is the expansion of the various programmes into new and riskier asset classes is one of the main bones of contention between the Treasury and Mr Barofsky.
Testifying before Congress, Barofsky said, From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase 'toxic' assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity. He explained that, The total potential federal government support could reach up to 23.7 trillion dollars.
Is a Future Bailout Possible?
In early July of 2009, billionaire investor Warren Buffet said that, unemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession, and he further stated that, we're not in a recovery. Also in early July, an economic adviser to President Obama stated that, The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy.
In August of 2009, it was reported that, THE Obama administration will consider dishing out more money to rein in unemployment despite signs the recession is ending, and that, Treasury secretary Tim Geithner also conceded tax hikes could be on the agenda as the government worked to bring its huge recovery-related deficits under control. Geithner said, we will do what it takes, and that, more federal cash could be tipped into the recovery as unemployment benefits amid projections the benefits extended to 1.5 million jobless Americans will expire without Congress' intervention. However, any future injection of money could be viewed as a second stimulus package.
The Washington Post reported in early July of a Treasury Department initiative known as Plan C. The Plan C team was assembled to examine what could yet bring [the economy] down and has identified several trouble spots that could threaten the still-fragile lending industry, and the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks.
Further, The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources. The article elaborated in saying that, The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises. In particular, the near-term challenge they are facing is commercial real estate lending, as Banks and other firms that provided such loans in the past have sharply curtailed lending, leaving many developers and construction companies out in the cold. Within the next couple years, these groups face a tidal wave of commercial real estate debtsome estimates peg the total at more than $3 trillionthat they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.
However, as a result of the credit crisis, few developers can find anyone to refinance their debt, endangering healthy and distressed properties. Kim Diamond, a managing director at Standard & Poor's, stated that, It's not a degree to which people are willing to lend, but rather, The question is whether a loan can be made at all. Important to note is that, Financial analysts said losses on commercial real estate loans are now the single largest cause of bank failures, and that none of the bailout efforts enacted is big enough to address the size of the problem.
So the question must be asked: what is Plan C contemplating in terms of a possible government solution? Another bailout? The effect that this would have would be to further inflate the already monumental bailout bubble.
The Great European Bubble
In October of 2008, Germany and France led a European Union bailout of 1 trillion Euros, and World markets initially soared as European governments pumped billions into crippled banks. Central banks in Europe also mounted a new offensive to restart lending by supplying unlimited amounts of dollars to commercial banks in a joint operation.
The American bailouts even went to European banks, as it was reported in March of 2009 that, European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG, as Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG. Among the European banks, French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank. Other banks that got money from the US bailout include HSBC, Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland. Because AIG was essentially insolvent, the bailout enabled AIG to pay its counterparty banks for extra collateral, with Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December.
In April of 2009, it was reported that, EU governments have committed 3 trillion Euros [or $4 trillion dollars] to bail out banks with guarantees or cash injections in the wake of the global financial crisis, the European Commission.
In early February of 2009, the Telegraph published a story with a startling headline, European banks may need 16.3 trillion pound bail-out, EC document warns. Type this headline into google, and the link to the Telegraph appears. However, click on the link, and the title has changed to European bank bail-out could push EU into crisis. Further, they removed any mention of the amount of money that may be required for a bank bailout. The amount in dollars, however, nears $25 trillion. The amount is the cumulative total of the troubled assets on bank balance sheets, a staggering number derived from the derivatives trade.
The Telegraph reported that, National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors particularly those who lend money to European governments have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
When Eastern European countries were in desperate need of financial aid, and discussion was heated on the possibility of an EU bailout of Eastern Europe, the EU, at the behest of Angela Merkel of Germany, denied the East European bailout. However, this was more a public relations stunt than an actual policy position.
While the EU refused money to Eastern Europe in the form of a bailout, in late March European leaders doubled the emergency funding for the fragile economies of central and eastern Europe and pledged to deliver another doubling of International Monetary Fund lending facilities by putting up 75bn Euros (70bn pounds). EU leaders agreed to increase funding for balance of payments support available for mainly eastern European member states from 25bn Euros to 50bn Euros.
As explained in a Times article in June of 2009, Germany has been deceitful in its public stance versus its actual policy decisions. The article, worth quoting in large part, first explained that:Europe is now in the middle of a perfect storm a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.
Taking the case of Latvia, the author asks, If the crisis expands, other EU governments and especially Germany's will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks? While addressing that, Publicly, German politicians have insisted that any bailouts or guarantees are out of the question, however, the pass has been quietly sold in Brussels, while politicians loudly protested their unshakeable commitment to defend it.
The author addressed how in October of 2008:[...] a previously unused regulation was discovered, allowing the creation of a 25 billion Euros balance of payments facility and authorising the EU to borrow substantial sums under its own legal personality for the first time. This facility was doubled again to 50 billion Euros in March. If Latvia's financial problems turn into a full-scale crisis, these guarantees and cross-subsidies between EU governments will increase to hundreds of billions in the months ahead and will certainly mutate into large-scale centralised EU borrowing, jointly guaranteed by all the taxpayers of the EU. [...] The new EU borrowing, for example, is legally an off-budget and back-to-back arrangement, which allows Germany to maintain the legal fiction that it is not guaranteeing the debts of Latvia et al. The EU's bond prospectus to investors, however, makes quite clear where the financial burden truly lies: From an investor's point of view the bond is fully guaranteed by the EU budget and, ultimately, by the EU Member States.
So Eastern Europe is getting, or presumably will get bailed out. Whether this is in the form of EU federalism, providing loans of its own accord, paid for by European taxpayers, or through the IMF, which will attach any loans with its stringent Structural Adjustment Program (SAP) conditionalities, or both. It turned out that the joint partnership of the IMF and EU is what provided the loans and continues to provide such loans.
As the Financial Times pointed out in August of 2009, Bank failures or plunging currencies in the three Baltic nations Latvia, Lithuania and Estonia could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the worlds most sensitive political fault-lines. They are the European Unions frontier states, bordering Russia. In July, Latvia agreed its second loan in eight months from the IMF and the EU, following the first one in December. Lithuania is reported to be following suit. However, as the Financial Times noted, the loans came with the IMF conditionalities: The injection of cash is the good news. The bad news is that, in return for shoring up state finances, the new IMF deal will require the Latvian government to impose yet more pain on its suffering population. Public-sector wages have already been cut by about a third this year. Pensions have been sliced. Now the IMF requires Latvia to cut another 10 per cent from the state budget this autumn.
If we are to believe the brief Telegraph report pertaining to nearly $25 trillion in bad bank assets, which was removed from the original article for undisclosed reasons, not citing a factual retraction, the question is, does this potential bailout still stand? These banks havent been rescued financially from the EU, so, presumably, these bad assets are still sitting on the bank balance sheets. This bubble has yet to blow. Combine this with the $23.7 trillion US bailout bubble, and there is nearly $50 trillion between the EU and the US waiting to burst.
An Oil Bubble
In early July of 2009, the New York Times reported that, The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy. Instability in the oil and gas prices has led many to fear it could jeopardize a global recovery. Further, It is also hobbling businesses and consumers, as A wild run on the oil markets has occurred in the last 12 months. Oil prices reached a record high last summer at $145/barrel, and with the economic crisis they fell to $33/barrel in December. However, since the start of 2009, oil has risen 55% to $70/barrel.
As the Times article points out, the recent rise in oil prices is reprising the debate from last year over the role of investors or speculators in the commodity markets. Energy officials from the EU and OPEC met in June and concluded that, the speculation issue had not been resolved yet and that the 2008 bubble could be repeated.
In June of 2009, Hedge Fund manager Michael Masters told the US Senate that, Congress has not done enough to curb excessive speculation in the oil markets, leaving the country vulnerable to another price run-up in 2009. He explained that, oil prices are largely not determined by supply and demand but the trading desks of large Wall Street firms. Because Nothing was actually done by Congress to put an end to the problem of excessive speculation in 2008, Masters explained, there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.
In May of 2008, Goldman Sachs warned that oil could reach as much as $200/barrel within the next 12-24 months [up to May 2010]. Interestingly, Goldman Sachs is one of the largest Wall Street investment banks trading oil and it could profit from an increase in prices. However, this is missing the key point. Not only would Goldman Sachs profit, but Goldman Sachs plays a major role in sending oil prices up in the first place.
As Ed Wallace pointed out in an article in Business Week in May of 2008, Goldman Sachs report placed the blame for such price hikes on soaring demand from China and the Middle East, combined with the contention that the Middle East has or would soon peak in its oil reserves. Wallace pointed out that:Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; it was named both in the Senate's Permanent Subcommittee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy & Commerce's hearing last December. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices' climb to stratospheric heights has been driven by the billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE which is not regulated by the Commodities Futures Trading Commission.
Essentially, Goldman Sachs is one of the key speculators in the oil market, and thus, plays a major role in driving oil prices up on speculation. This must be reconsidered in light of the resurgent rise in oil prices in 2009. In July of 2009, Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds. Could one be related to the other?
Bailouts Used in Speculation
In November of 2008, the Chinese government injected an $849 billion stimulus package aimed at keeping the emerging economic superpower growing. China then recorded a rebound in the growth rate of the economy, and underwent a stock market boom. However, as the Wall Street Journal pointed out in July of 2009, Its growth is now fuelled by cheap debt rather than corporate profits and retained earnings, and this shift in the medium term threatens to undermine Chinas economic decoupling from the global slump. Further, overseas money has been piling into China, inflating foreign exchange reserves and domestic liquidity. So perhaps it is not surprising that outstanding bank loans have doubled in the last few years, or that there is much talk of a shadow banking system. Then there is Chinas reputation for building overcapacity in its industrial sector, a notoriety it won even before the crash in global demand. This showed a disregard for returns that is always a tell-tale sign of cheap money.
Chinas economy primarily relies upon the United States as a consumption market for its cheap products. However, The slowdown in U.S. consumption amid a credit crunch has exposed the weaknesses in this export-led financing model. So now China is turning instead to cheap debt for funding, a shift suggested by this years 35% or so rise in bank loans.
In August of 2009, it was reported that China is experiencing a stimulus-fueled stock market boom. However, this has caused many leaders to worry that too much of the $1-trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.
The same reasoning needs to be applied to the US stock market surge. Something is inherently and structurally wrong with a financial system in which nothing is being produced, 600,000 jobs are lost monthly, and yet, the stock market goes up. Why is the stock market going up?
The Troubled Asset Relief Program (TARP), which provided $700 billion in bank bailouts, started under Bush and expanded under Obama, entails that the US Treasury purchases $700 billion worth of troubled assets from banks, and in turn, that banks cannot be asked to account for their use of taxpayer money.
So if banks dont have to account for where the money goes, where did it go? They claim it went back into lending. However, bank lending continues to go down. Stock market speculation is the likely answer. Why else would stocks go up, lending continue downwards, and the bailout money be unaccounted for?
What Does the Bank for International Settlements (BIS) Have to Say?
In late June, the Bank for International Settlements (BIS), the central bank of the worlds central banks, the most prestigious and powerful financial organization in the world, delivered an important warning. It stated that, fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.
The BIS, The only international body to correctly predict the financial crisis ... has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates, as the annual report of the BIS has for the past three years been warning of the dangers of a repeat of the depression. Further, Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise. The BIS warned that, a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.
Of immense import is the BIS warning that, At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses, and explaining how fiscal packages posed significant risks, it said that, There is a danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system, and that, There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations. Inflation would intensify as the downturn abated, and the BIS expressed doubt about the bank rescue package adopted in the US.
The BIS further warned of inflation, saying that, The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates, the BIS said. That will lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.
Major investors have also been warning about the dangers of inflation. Legendary investor Jim Rogers has warned of a massive inflation holocaust. Investor Marc Faber has warned that, The U.S. economy will enter hyperinflation approaching the levels in Zimbabwe, and he stated that he is 100 percent sure that the U.S. will go into hyperinflation. Further, The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.
Are We Entering A New Great Depression?
In 2007, it was reported that, The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. Further:The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.
[...] In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.
In 2008, the BIS again warned of the potential of another Great Depression, as complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.
In 2008, the BIS also said that, The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point, and that all central banks have done has been to put off the day of reckoning.
In late June of 2009, the BIS reported that as a result of stimulus packages, it has only seen limited progress and that, the prospects for growth are at risk, and further stimulus measures won't be able to gain traction, and may only lead to a temporary pickup in growth. Ultimately, A fleeting recovery could well make matters worse.
The BIS has said, in softened language, that the stimulus packages are ultimately going to cause more damage than they prevented, simply delaying the inevitable and making the inevitable that much worse. Given the previous BIS warnings of a Great Depression, the stimulus packages around the world have simply delayed the coming depression, and by adding significant numbers to the massive debt bubbles of the worlds nations, will ultimately make the depression worse than had governments not injected massive amounts of money into the economy.
After the last Great Depression, Keynesian economists emerged victorious in proposing that a nation must spend its way out of crisis. This time around, they will be proven wrong. The world is a very different place now. Loose credit, easy spending and massive debt is what has led the world to the current economic crisis, spending is not the way out. The world has been functioning on a debt based global economy. This debt based monetary system, controlled and operated by the global central banking system, of which the apex is the Bank for International Settlements, is unsustainable. This is the real bubble, the debt bubble. When it bursts, and it will burst, the world will enter into the Greatest Depression in world history.