Saturday, June 26, 2010

June 26 2010: The Great Tropical Debt Depression

Detroit Publishing Co. Mule force 1903
"Mule teams on the levee, New Orleans, Louisiana"

Ilargi: As the first African waves, the weather disturbances which are responsible for some 60% of named storms in the Caribbean and the Gulf of Mexico, have come early this year, we can prepare ourselves for a "high season" in tropical depressions. Number one, Alex, may not yet be powerful enough to blow tarballs dozens of miles inland, nor may it go for a direct hit on the worst of the spill, but it would be reckless to presume that there will not be another storm sometime over the summer that will do exactly that. The waters of the Atlantic are warmer than they have been in the past 60 years in the end of June. Wind shear (elevated winds that cut off the tops of hurricanes, preventing them from growing larger) is at only half the level it normally is.

And that covers just one meaning if the term "depression". The other, and more obvious, one, is financial. It’s not seasonal either, and no matter who tells you what, we are in a depression, hidden from view only through seizing and spending today the future tax revenues of generations to come. And if only that a had a chance of working out for more than a few months (ok, say a year, feel better now?), it might have been worth a try. But it was always a lousy idea from the start, and one that will lead to immense human suffering. Which is something foolish spend spend ass-clowns like Paul Krugman and Tim Geithner seem completely blind and deaf to. The belief system that grasps the human brain around the notion of perpetual growth seems more damaging than advanced Alzheimer's, or Mad Cow Disease, if that’s a better metaphor..

First a few Main Stream (not to be confused with Main Street) Press articles. In the Daily Telegraph, Ambrose Evans-Pritchard sees the Fed balance sheet more than double to $5 trillion. God forbid that happens, America, for you will have to pay it all back, on top of the $10 trillion or so you’re already on the hook for. Together, that would make your immediate debt obligations larger than a whole year's GDP.
Ben Bernanke needs fresh monetary blitz as US recovery falters
The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation.

Ilargi: Eh, yes, Chris, but let's do the whole picture, shall we? Velocity of money is not the only indicator that's down. M3 money supply is tanking downward at a 7.6% annual clip over the past three months as well. With the Fed balance sheet at already unprecedented levels. Nor will doubling it halt the debt deflation. It cannot and will not be prevented. If there are still people out there talking about (hyper-)inflation, they are simply not getting it, against their own better judgment slash Alzheimer's.
New home sales crashed 33pc in May to an all-time low of 300,000 after the homebuyer tax-credit expired, confirming fears that the housing market has been propped up by subsidies. Unemployment is stuck at 9.7pc. Manufacturing capacity use is at 71.9pc. The Fed's "trimmed mean" index of core inflation is 0.6pc on a six-month basis, a record low.

Ilargi: Neil Irwin in the Washington Post has no clue which way the wind blows either:
Economic recovery threatens to run sideways
Just two months ago, a strong, self-sustaining economic expansion seemed to be taking hold,

Ilargi: People like Irwin get paid royal salaries to provide you with this sort of bullcrap. "A strong, self-sustaining economic expansion..." Yeah, right.
"We're not going to keep accelerating," said Alan Levenson, chief economist at T. Rowe Price. "It looks like we're either settling into a cruising speed for growth, or even decelerating."

Ilargi: Nonsense, quatsch, blubber. The man's a nincompoopish fool. His sort of creature makes me both mad and hugely tired. There are scores of hard-working well-meaning Americans who base their decisions on what they think is a neutral news source. What they don’t realize is that the Post, as well as most US economists, are merely part of a propaganda machine, pushing the growth religion that has put the present day high priests where they are and where they intend to stay. At the cost of their readers and clients.

We are in the early innings of a depression, guys, and we’ve never gotten out, there is zero chance of a double dip because we’re still mired neck-deep in the first dip. What we’ve done is what I’ve described before: we've taken money out of our left hand pocket and put it into out right hand one. Then we proceed to focus only on our right hand pocket and voilà: we tell ourselves we’re richer than we were before. Not only is that a stupid move, we’ve also been charged interest to move the cash from one pocket to another, and have been so happy to be rich again we didn't even notice.

That's all old news for those of you who been following The Automatic Earth through time, though you, like me, must be as amused as you are disturbed by the fact that it just keeps going on, this political spin machine that eats people alive and throws their remains off the back of the truck.

What is new is the arrival of a new stage in the debt deflation process: the moment in time when entities, be they companies or governments (let’s leave individuals out of it for now), run into trouble simply paying the interest on their debt, let alone the principal. I can’t quite prove that we have arrived there, but the little man inside says I'm dead on.

On the corporate level, Bloomberg's Tim Catts writes:
Corporate Bond Sales in U.S. Fall 19% as Recovery Shows Strain
[..] The U.S. economy is continuing its recovery even as "financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," [sic!] Fed officials wrote in a June 23 statement after two days of meetings. U.S. corporate bond sales tumbled from $140.1 billion in March, the most since January 2009, to $32.9 billion last month [..]

On the state level, Edward Robinson (great name when talking about the little man inside) has this, also for Bloomberg:
States of Crisis for 46 Governments Facing Greek-Style Deficits
Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end. Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt[..]

Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone. Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.[..]

By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged. State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009 ..[..]

"States don’t have a choice anymore," Whitman says. "These problems are going to require major surgery." Reform may get short shrift as Republicans and Democrats intensify their age-old fight over taxes and spending in this election year. On May 20, New Jersey Governor Chris Christie vetoed a Democratic bill that would have raised income taxes for residents earning at least $1 million a year to help close an $11 billion deficit. Christie, a Republican, wants to cut spending for school districts and cap property tax increases. "At some point, the people’s ability to pay runs out," Christie said in a speech in New York on May 25.

The widening deficits have led to some unorthodox moves. In California, the state grabbed $1.7 billion in redevelopment money from local governments in May. Riverside County, a Los Angeles suburb where the housing bust has left unemployment at more than 15 percent, lost $28 million that had been set aside to build fire stations, senior centers and other public works.[..]

For years now, say, since the 1970's, our economies have largely remained "viable" through credit, not through income from work. But credit involves debt, and debt has to be repaid. In what is ironic for anyone who’s not Paul Krugman, Tim Geithner or their neo-Keynesian economics ilk, debt so far has been paid off by simply issuing new debt. The Federal Reserve in the past decade has facilitated this "brilliant" move by lowering interest rates. The entire scheme, 100% of it, and this should be in-your-face obvious by now, lives or dies by economic growth. And preferably a lot of it, since there's a lot of debt to go around.

It is that part that is failing today. And the fact that it necessarily would have to has been evident to us here at TAE for a long time. It’s not complicated at all. It’s the left hand pocket vs the right hand pocket. You may shift money from one to the other, but you end up with the same amount of money. And of debt.

Just like -major- corporations (want to buy some BP debt?), governments all over the western world will increasingly rely on debt issues, on bonds. But municipal bonds have no future, since investors, and certainly the larger funds, will figure out they've become a casino all on their own. State bonds, re: California and Illinois, are rapidly going the same direction. And then the US federal government is planning to issue trillions of dollars in bonds inro that market.

Where it will first become evident that my little man inside is right once again is in debt roll-overs. We will start seeing a rapidly increasing number of "entities" who will find that rolling over debt, which used to be a non-issue [sic], will become greatly more expensive than what anyone had thought. Let alone issuing new debt. That is also where we will all find out that the Federal Reserve "setting" interest rates is but a joke. Interest rates are set by the markets, and both governments and corporations are going to find that out, if they didn’t know already. And that’s when they’ll figure that they can no longer pay the interest. That they are as helpless in the debt depression as Gulf of Mexico citizens will soon be against the force of tropical storm depressions. The analogy is more perfect than you want to know.

Ilargi: I don't know the maker of this video, CaptainSheeple, but it’s very nice. Thanks.

States of Crisis for 46 Governments Facing Greek-Style Deficits
by Edward Robinson - Bloomberg

Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end. Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.

Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone. Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

"States are going to have to cut back spending and raise taxes the same way Greece and Spain are," says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. "That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year."

Stimulus Dries Up
State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged. State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.

Lawmakers need to overhaul tax policy, underfunded public pensions and entitlement spending programs such as Medicaid if they want to establish long-term plans that will foster growth, says former New Jersey Governor Christine Todd Whitman. If they fail to act, state fiscal positions will steadily erode and hurt the U.S. economy through 2060, according to a March 2010 report prepared for Congress by the U.S. Government Accountability Office.

‘Major Surgery’
"States don’t have a choice anymore," Whitman says. "These problems are going to require major surgery." Reform may get short shrift as Republicans and Democrats intensify their age-old fight over taxes and spending in this election year. On May 20, New Jersey Governor Chris Christie vetoed a Democratic bill that would have raised income taxes for residents earning at least $1 million a year to help close an $11 billion deficit. Christie, a Republican, wants to cut spending for school districts and cap property tax increases. "At some point, the people’s ability to pay runs out," Christie said in a speech in New York on May 25.

The widening deficits have led to some unorthodox moves. In California, the state grabbed $1.7 billion in redevelopment money from local governments in May. Riverside County, a Los Angeles suburb where the housing bust has left unemployment at more than 15 percent, lost $28 million that had been set aside to build fire stations, senior centers and other public works.

The projects would have created 3,000 jobs, says Tom Freeman, spokesman for the county’s Economic Development Agency. The government needed the county cash for schools, says Aaron McLear, spokesman for Governor Arnold Schwarzenegger. The episode demonstrates how the fiscal mess pits job creation against education in a zero-sum game, says Robert Hertzberg, the Democratic speaker of the State Assembly from 2000 to 2002. California is locked in a rigid system in which legislators need a two-thirds majority to raise taxes and yet must comply with voter-approved initiatives that mandate prison construction and other spending.

There’s little chance of any sweeping changes this year ahead of a gubernatorial race between Republican Meg Whitman, former chief executive officer of EBay Inc., and Attorney General Jerry Brown, a Democrat who was governor from 1975 to 1983. The winner will have to muster the political courage to take on core constituencies, whether anti-tax conservatives who support Whitman or labor unions that back Brown, says Steve Westly, California’s Democratic treasurer from 2003 to 2007.

The risk is that California ends up like Greece, with no one trusting that it can get its financial house in order, says Westly, now a venture capitalist in Menlo Park. "It has to be a combination of cuts and revenue increases," he says. Still, California isn’t Greece. It’s home to Silicon Valley, Hollywood and a $27 billion agriculture industry. "It’s unbelievable," says Bob Nichols, CEO of Windward Capital Management Co. in Los Angeles. "How do you screw up a place with the growth capability of California? It’s so dysfunctional."

Bill to Extend Unemployment Benefits Dies
by Greg Hitt and Sara Murray - Wall Street Journal

Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago. The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

The impasse has been weeks in the making and reflects the deepening concern on Capitol Hill with the nation's fiscal situation, as well as a hardening of Republican opposition. Democrats had moved several times to pare the cost of the bill in an effort to win support from centrist Republicans and to make up defections from their own ranks. On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.

Obama administration officials have argued that cutting off government support for the economy too quickly could harm the nascent recovery, and have been pressing both Congress and their international peers to keep the cash flowing. Conservative economists, Republicans and some European leaders say deficit reduction should be a higher priority. The sudden move by Congress provides an unexpected test of that argument. Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.

Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S. There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.

In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. "If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Mr. Katz said. Other economists argue that extended benefits have played a part in keeping people out of the labor force. "There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," said Bruce Meyer, an economist and public policy professor at the University of Chicago.

James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn't ideal either. "You don't sort of pull the rug out from someone halfway through," he said. The labor market is slowly improving, which could make the transition to fewer weeks of benefits easier. "I don't think there's going to be a big disaster by letting the extended unemployment insurance expire," said Phillip Swagel, a former Bush Treasury official and a Georgetown University professor. Still, he said, "it's going to be tough for some people."

With unemployment expected to remain high for months, Democrats argued the government should not pull back. Struggling families "are counting on us to come through," Senate Finance Chairman Max Baucus (D., Mont.) said before the final vote. Democrats Thursday night weren't talking about returning to the bill any time soon, if at all. Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."

Republicans said the government can't afford further increases in the budget deficit, expected to reach $1.4 trillion this fiscal year, and said that Democrats have lost sight of the economic risks posed by the nation's rapidly mounting total debt. In the give and take, the contours of the 2010 midterm election debate have become clear. Senate Minority Leader Mitch McConnell (R., Ky. ) chided Democrats for refusing to fully pay for the legislation with offsetting savings or revenue increases. "The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said.

The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research. The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.

Deficit concerns weren't the only issue for senators. Nebraska Sen. Nelson, an opponent of the legislation, cited deficit concerns but also said that the tax on investment partnerships would discourage real-estate deals. One element that will survive in a different form: a proposal to suspend a 21% cut in Medicare payments to doctors that's set to take effect this month. That was stripped from the bill last week in a cost-cutting step and sent to the House as a stand-alone measure. The House, voting 417 to 1, approved the six-month suspension of the cuts late Thursday.

Hope fades for the unemployed

Ben Bernanke needs fresh monetary blitz as US recovery falters
by Ambrose Evans-Pritchard - Telegraph

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral. Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam.

The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.

The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding". Financial conditions are now "less supportive" due to Europe's debt crisis. The subtle tweaks in language have been enough to set bond markets alight. The yield on 10-year Treasuries has fallen to 3.08pc, the lowest since the gloom of April 2009. Futures contracts have ruled out tightening until well into next year.

Yet the statement may understate the level of angst at the Board. New home sales crashed 33pc in May to an all-time low of 300,000 after the homebuyer tax-credit expired, confirming fears that the housing market has been propped up by subsidies. Unemployment is stuck at 9.7pc. Manufacturing capacity use is at 71.9pc. The Fed's "trimmed mean" index of core inflation is 0.6pc on a six-month basis, a record low.

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness." Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. "This is very substantial fiscal drag. On top of this the US Treasury is talking of a 'Just War' against the banks, which will further crimp lending. It is absolutely the wrong moment to do this."

Kansas Fed chief Thomas Hoenig dissented from Fed calls for ultra-low rates to stay for an "extended period", arguing that loose money risks asset bubbles and fresh imbalances. He recently called for interest rates to be raised to 1pc by the autumn. While he has been the loudest critic, he is not alone. Philadelphia chief Charles Plosser says the Fed has blurred the lines of monetary and fiscal policy by purchasing bonds, acting as a Treasury without a legal mandate. Together with Richmond chief Jeffrey Lacker they represent a powerful block of opinion in the media and Congress.

Mr Bernanke has fought off calls from FOMC hawks for moves to drain stimulus by selling some of the Fed's $1.75 trillion of Treasuries, mortgage securities and agency bonds bought during the crisis. But there is little chance that he can secure their backing for further purchases at this point. "He just has to wait until everybody can see the economy is nearing the abyss," said one Fed watcher.

Gabriel Stein, from Lombard Street Research, said the US is still stuck in a quagmire because Mr Bernanke has mismanaged the quantitative easing policy, purchasing the bonds from banks rather than from the non-bank private sector. "This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it," he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.

Mr Bernanke focuses instead on loan growth but this has failed to gain full traction in a cultural climate of debt repayment. The Fed is pushing on the proverbial string. The jury is out on whether or not his untested doctrine of "creditism" will work. "We are now walking on deflationary quicksand," said Albert Edwards from Societe Generale.

Economic recovery threatens to run sideways
by Neil Irwin - Washington Post

Just two months ago, a strong, self-sustaining economic expansion seemed to be taking hold, with consumer spending, output of goods and services, corporate hiring and financial markets all on the rise. The latest string of economic data, however, has thrown cold water on that view. On Friday, the Commerce Department revised down its estimate of first-quarter gross domestic product growth to 2.7 percent from the estimated 3 percent.

The components of that revision were particularly worrisome -- not only was growth weaker than thought, but more of it came from businesses rebuilding inventories, which amounts to a one-time boost. Real final sales -- a measure of consumption and investment that can be sustained -- rose at only an 0.8 percent annual rate, hardly the stuff of a roaring expansion.

That followed evidence earlier in the week that home sales are falling rapidly following the end of a homebuyer tax credit. And several regional manufacturing surveys, including those from the Federal Reserve Banks in Richmond, Kansas City, Philadelphia and New York, have shown less optimism around hiring and capital spending among businesses. And the number of new weekly claims for unemployment insurance benefits has remained around January levels, rather than declining steadily as analysts had expected.

"We're not going to keep accelerating," said Alan Levenson, chief economist at T. Rowe Price. "It looks like we're either settling into a cruising speed for growth, or even decelerating." Economic recoveries rarely move in a straight line, and the recent weakness could well just be a soft patch on the road to stronger growth. Indeed, the economy appears to have continued growing in the second quarter, which ends next week, with forecasters expecting growth at a 3.5 percent annual rate. But many have downgraded their expectations for the second half of the year.

Still, with the unemployment rate at 9.7 percent and a deep recession barely in the rear-view mirror, a slowdown in the expansion -- let alone a dip back into recession -- would further delay the return of 15 million jobless Americans to work.

Because the economy is capable of expanding 2.5 to 3 percent annually in the long run because of population and productivity gains, it takes growth faster than that to meaningfully reduce unemployment. The softness in the latest economic data appears to reflect uncertainty among businesses prompted by the debt crisis in Europe, a slide in retail sales in May and the fading need to rebuild inventories.

Financial markets are both reflecting the gloomier outlook for the economy -- and feeding it. While the wild swings in the stock market during the height of the European debt crisis have ebbed, there have been steady declines in the prices of stocks and other risky assets over the past week. The Standard & Poor's 500-stock index fell 3.6 percent for the week, dropping four of five days. The index, a broad-based measure of U.S. markets, was up 0.3 percent Friday. And money has gushed into safe assets, particularly U.S. Treasury bonds, driving down long-term interest rates. The yield on ten-year Treasurys fell to a 13-month low this week, closing Friday at 3.11 percent, down from 3.22 percent a week ago.

The spate of uneven economic data complicates policymakers' decisions. The Federal Reserve this week left its interest rate target near zero and repeated its intention to leave rates very low for an "extended period," while acknowledging new risks to the economy. But Fed leaders are reluctant to pull out new, more extraordinary measures to support the economy such as buying long-term Treasury bonds. Officials at the central bank hold to their forecast that the economy will grow, if at an unexceptional pace, through the remainder of the year, and it would take a reversal of that basic forecast to consider exceptional measures.

Meanwhile, a bill to extend unemployment insurance benefits and support strapped state governments could not gain enough votes in the Senate to begin debate, bogged down by lawmakers concerned about the budget deficit. A fiscal pullback by the government creates its own risks for the economy, economists said. "My sense is the recovery will remain intact," said Mark Zandi, chief economist at Moody's "This won't be enough to push us back into recession. But the odds are uncomfortably high that I'm wrong and that the economy does back track into recession."

Hugh Hendry On George Soros, Shorting Asia and Europe's "Axis of Financial Evil"
Hugh Hendry, chief investment officer and co-founder of London-based Eclectica Asset Management, talks with Bloomberg's Erik Schatzker about investment opportunities in Asia. Hendry, speaking in London at a Bloomberg sovereign debt conference, also discusses the euro, billionaire investor George Soros ("I want to bring George down") and Europe's "axis of financial evil."

click to open in new window

Citi: Brace For An Avalanche Of Economic Downgrades
by Vincent Fernando - Business Insider

The rising expectations cycle appears to be peaking, according to Citi in a new strategy note. We're in for a double dip for growth expectations, if not a complete double dip for the economy:

Citi's Geoffrey Dennis:

Given this background, the next challenge we see for equity markets is that, as ‘double-dip’ fears have risen recently, the pattern over several months of steady upgrades to GDP forecasts around the world appears now to be ending.

The broad-based evidence of this is that our economists’ forecast for global GDP growth has leveled off at 3.8% in their latest monthly report published earlier today; further modest declines in this forecast are possible in the next few months. (What this means in effect is that, as forecasts for the Euro Area slide further – although they may simply hold for a time at current very low levels – the pressure of downgrades elsewhere causes the global growth forecast to turn down more readily.)

This downgrade process has barely started, as yet, and is unlikely to be universal in any sense of the word; however, there are some important economies, where downgrades have either occurred or seem possible in the months ahead:

The U.S., the Eurozone, Australia, Canada, China, and Asia are where Citi sees risk of economic downgrades.

It doesn't mean a complete disaster is ahead, it's just that after a period of rising expectations, we could be diving into a period where investors are forced to dial-back their bullishness.

Although the upshot is that we have recently cut our 2010 growth forecasts for the biggest economy in the world – the US – and some others, this remains far from a ‘double-dip’ scenario. Even after these downgrades, the US should remain amongst the strongest of the major industrialized economies in terms of economic growth in 2010.

The question then remains as to whether or not stocks have priced-in peak expectations, or if they are already priced to reflect a few downgrades to current economic forecasts (relative to each market/industry).


(Via Citi, Global Emerging Markets: Navigating the Downside Risk, Geoffrey Dennis, 23 June 2010)

Lennar Home Sales Down as Much as 25% in June as Tax Credit Ends
by John Gittelsohn - Bloomberg

Lennar Corp.’s home sales are down 20 percent to 25 percent this month compared with a year earlier as the expiration of a government tax credit for buyers saps demand, Chief Executive Officer Stuart Miller said. "The entire market knew there’d be a slowdown as we came off the tax credit," Miller said on a conference call with investors today. "It’s just that the reality of it doesn’t feel good."

Lennar, the third-largest U.S. homebuilder by revenue, reported its second quarterly profit in three years today as cost cuts helped offset a drop in revenue. The Miami-based company said new orders in the fiscal second quarter sank 10 percent after the tax benefit’s expiration at the end of April, causing demand to plunge in May. Sales in June have shown "modest improvement" from last month, Miller said on the call.

The end of the tax credit may hold back a recovery in the U.S. housing market, which has been hurt by weak demand and increasing foreclosures during the recession. New home sales plunged 33 percent in May from April to a record low pace, the Commerce Department reported yesterday. To qualify for the credits -- worth as much as $8,000 -- purchasers must have signed contracts by April 30 and must close the sale by June 30. Lennar shares fell 17 cents, or 1.2 percent, to $14.57 as of 4:15 p.m. in New York Stock Exchange composite trading. They have plunged 27 percent since April 30, while the Standard & Poor’s Supercomposite Homebuilding Index has lost 25 percent.

Profit Outlook
Lennar expects to remain profitable for the rest of the year by focusing on improving margins rather than increasing sales, Miller said on the call. The drop in demand after the benefit will be temporary, he said. Toll Brothers Inc., the biggest U.S. luxury-home builder, said on June 16 that orders were running about 20 percent behind year-earlier levels in the three weeks after its May 26 earnings release. "Most people are viewing the glass that is half empty right now," Toll Brothers CEO Douglas Yearley Jr. said at an investors conference sponsored by Deutsche Bank AG in Chicago today. "They are not buying."

Meritage Homes Corp. expects sales for its quarter ending June 30 to fall about 25 percent below the same period last year, when the Scottsdale, Arizona-based company closed on 890 homes, CEO Steven J. Hilton said at the conference. Lennar’s decline in volume "will make profitability challenging" in the second half of this year, Daniel Oppenheim, an analyst with Credit Suisse Group AG, wrote in a note to clients today.

Orders in Lennar’s West division, which includes California and Nevada, tumbled 33 percent, the most of any region. Orders in the Houston area fell 25 percent. "The one metric that makes us pause is the order level," Stephen East, an analyst with Ticonderoga Securities LLC in New York, said in a note to investors. East, who rates Lennar "buy," had estimated orders would rise 14 percent in the fiscal second quarter ended May 31.

Analysts Question Fannie's Threat on Mortgage Defaults
by David Streitfeld - New York Times

Fannie Mae’s decision to begin punishing people who walk away from their unpaid mortgages could prove difficult to sell to the public and might be impossible to execute, housing and lending experts said Thursday. The big mortgage financing company, which owns or guarantees millions of mortgages, announced on Wednesday that it would sue homeowners who have the capacity to pay but default anyway. It also said it would prevent these strategic defaulters from getting a new Fannie Mae-backed loan for seven years, which could potentially shut millions of buyers out of the market.

But it was unclear, the experts said, why Fannie Mae was threatening delinquent owners and what it hoped to achieve. The new direction seems to run counter to the Obama administration’s efforts to reinvigorate the housing market. And there were basic questions about how Fannie would be able to distinguish between those homeowners who defaulted intentionally and the unfortunate ones who had no choice.

"How are they going to do this, and for what result?" asked Grant Stern, president of the Morningside Mortgage Corporation on Bay Harbor Islands, Fla. "So they can find the people who have a little money left after their house crashed and take it away from them?" A Fannie Mae spokeswoman said that the goal of the new punitive policies was to force defaulting homeowners to work with their servicers to surrender their houses through either a lender-approved short sale or by formally giving up the deed. "We really want to encourage borrowers to pursue alternatives to foreclosure," said the spokeswoman, Janis Smith.

Fannie’s newly aggressive stance comes as the debate is heating up over how much, if at all, borrowers should be held liable for their foreclosures. Republicans recently added a measure to a Federal Housing Administration financing bill in the House of Representatives that would forbid strategic defaulters from getting an F.H.A.-insured loan. The California Legislature is debating a proposed law that goes in the other direction, shielding many more delinquent borrowers from debt collectors.

Fannie and its sister company, Freddie Mac, control 30 million mortgages, providing liquidity to the housing market. They have been under government conservatorship since September 2008; the ultimate cost of the rescue to taxpayers might hit $400 billion. Chris Dickerson of the Federal Housing Finance Agency, which regulates Fannie, said, "We support Fannie Mae taking a policy position that discourages borrowers who can afford to pay their mortgage from walking away."

Fannie Mae will announce the details of its new program next month, when the servicers who collect mortgage payments on Fannie’s loans will get explicit instructions on how to make recommendations for lawsuits. But for some in the mortgage business, the new direction seemed little more than a cruel joke. "Fannie wants to lock people up in a jail of negative net worth for much of the rest of their lives," said Lou Barnes, a Colorado mortgage banker. "They’re bringing back the debtor’s prison."

The plan poses some political problems as well as practical ones. Fannie Mae might be a ward of the government but its new policy is at distinct odds with the Obama administration, which has been trying to restart the fragile housing market by lowering interest rates, offering tax credits and insuring millions of new loans. A Treasury Department spokesman said Fannie Mae’s plan did not represent official Obama administration policy. A spokesman for Freddie Mac said it was closely following Fannie’s moves but had not yet adopted them.

Strategic defaults have been a rising concern for years. Lenders first noticed people purposefully ditching their houses early in the financial crisis. In late 2007, Kenneth D. Lewis, then chief executive of Bank of America, said people were remaining current on their credit cards but defaulting on their home loans, a phenomenon that he said "astonished" him. The lenders are less surprised now, but perhaps more worried. Bank of America said recently that it was putting owners in danger of foreclosure into payment plans that were supposed to be affordable — but that a third of the borrowers were failing to pay anyway. "You could say the customer is choosing not to make those payments," said Jack Schakett, credit loss mitigation executive for Bank of America Home Loans.

Borrowers who stop paying the mortgage can get a year of free rent, and sometimes two. "There is a huge incentive for customers to walk away," Mr. Schakett said in a recent media briefing. Fannie is not saying how many of its borrowers are strategically defaulting. The firm’s delinquency rate, traditionally about 0.5 percent of its portfolio, began sharply ascending in mid-2007. At the beginning of this year, it leveled off at 5.5 percent.

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go. Fannie was established as a federal agency in 1938 but was chartered by Congress as a private company in 1968. For years it prospered by virtue of its special status as a government-sponsored entity charged with increasing the nation’s homeownership rate, enriching its shareholders and executives in the process.

During the housing boom Fannie overreached and bought many loans of buyers who were ill-equipped to pay them. Its fate is uncertain; it is not even clear it will be around in seven years to enforce any edicts. Christopher F. Thornberg, a principal at Beacon Economics who correctly forecast that the housing boom would implode, said he understood what Fannie was trying to do, and even sympathized to a degree.

It is rational economics, he said, to assume that someone who walked away from an unpaid mortgage once might do so again. It also made sense, he said, for Fannie to try to limit strategic defaults from becoming an even bigger problem. And the new program also addresses the moral hazard question, Mr. Thornberg said: If borrowers are not punished for their missteps, they might not learn their lesson and might do it again. And yet, he noted, the banks were bailed out, and their executives walked away rich. "Why should I pay my dues when they did not?" he said. "There is no clean answer on this."

US banks and funds to face $19 billion levy
by Tom Braithwaite, Francesco Guerrera and Justin Baer - Financial Times

Banks and hedge funds would be hit with a $19bn fee to pay costs associated with financial reform, Barney Frank, chairman of the US House financial services committee, said late on Thursday. The proposed levy emerged as an unwelcome surprise for the industry deep into a late-evening congressional session to finalise landmark Wall Street reform legislation. Banks with more than $50bn in assets and hedge funds with more than $10bn will be required to pay into the fund as a proportion of their assets.

Earlier in the marathon conference proceedings, congressional negotiators closed in on a financial reform compromise that would ban banks from proprietary trading but allow some investment in hedge funds and private equity firms. After hours of wrangling in private, a Senate team finally published its new version of the "Volcker rule", including a strict ban on banks trading for their own account and a conflict of interest bar on sponsors of asset-backed securities designed to hit Goldman Sachs.

But there was some qualified celebration on Wall Street after language was published that would allow banks to invest up to 3 per cent of their tier one capital in hedge funds. Tim Geithner, Treasury secretary, had helped break the impasse between a faction of lawmakers pushing for punishing restrictions on banks and another urging moderation, according to people familiar with the negotiations.

Carl Levin, the Democratic senator from Michigan, argued for a pure rule with minimum exemptions, while Scott Brown, the Republican senator from Massachusetts, demanded broad exemptions. Mr Geithner and the bill’s two congressional leaders – Mr Frank and Chris Dodd, the Senate banking committee chairman – had preferred to maintain a lower limit on fund investment but reluctantly gave in as they scrambled for votes.

Votes due next week, including a tricky vote in the Senate that requires 60 senators to support it, should bring the reform effort to a close, but talks stretched into the night. Still to be decided in a session likely to extend into the early hours of Friday morning is the scope of a proposed rule to force banks to spin off their swaps desks into separately capitalised affiliates. Democratic lawmakers were haggling over the details in private meetings, with Blanche Lincoln, the senator from Arkansas who authored the rule, and her more bank-friendly colleagues yet to bridge their divide.

As they waited to hear the fate of their swaps operations, bankers said the 3 per cent investment limit was a positive sign for the industry as it would allow financial institutions to keep ownership of their internal hedge funds and private equity funds, albeit with less proprietary investment. "It is a victory for us because it gets away from this concept that we would have to spin off or sell most of these businesses," a senior Wall Street executive said.

In practice, however, the rule could force banks to reduce the amount of money they invest in their internal asset management vehicles. The new rule would allow Citigroup, for example, to invest about $3.5bn of its own capital in its hedge funds and private equity funds, compared with the $5bn or so the company has invested. The limit for JPMorgan Chase, which owns a hedge fund called Highbridge and a private equity group, would be about $2.8bn. People close to JPMorgan said the company had more than $1bn invested in Highbridge alone.

Limits for Morgan Stanley and Goldman Sachs, securities houses with smaller balance sheets, would be lower: about $900m for Morgan Stanley, which has already signalled its intention to sell its stakes in hedge funds, and about $1.78bn for Goldman, which has a large and very profitable fund business. Bankers stressed that a lot of the in-house money poured into the funds was meant to be replaced by outside investments once the funds got off the ground, leading to a natural reduction in the levels of proprietary investments.

The fee, though, was an unwelcome surprise. One of the long technical arguments during the reform debate has been over whether to impose an upfront fee on large financial institutions to cover the costs associated by the government seizing and winding down a failing firm using new powers. Lawmakers had resolved to recoup the costs after any use of the so-called "resolution" powers, but aides said that the vagaries of congressional budgeting meant there had to be an upfront fee of some sort.

Congressional aides said that the independent Congressional Budget Office – which estimates the costs and revenue associated with all legislation – had calculated that the chances of the resolution authority being used and the government not being paid back equated to a $19bn hole that had to be filled with revenue. The Federal Deposit Insurance Corporation would levy the fee over a number of years and hold the money.

Among other issues considered, lawmakers moved towards an agreement that should boost the coffers of the Securities and Exchange Commission and the Commodity Futures Trading Commission but retain some congressional oversight of their funding. "Madoff, Stanford, Bear Stearns and Lehman may make a compelling case that the SEC needs more resources, but they also ought to make the case that the SEC ought not to go unmonitored," said Richard Shelby, the senior Republican on the Senate banking committee.

Banks ‘Dodged a Bullet’ as Congress Dilutes Rules
by Christine Harper - Bloomberg

Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said. A deal reached by members of a House and Senate conference early this morning diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds. Banks "dodged a bullet," said Raj Date, executive director for Cambridge Winter Inc.’s center for financial institutions policy and a former Deutsche Bank AG executive. "This has to be a net positive." 

Hashed out almost two years after the worst financial crisis since the Great Depression, the legislation shepherded by Senate Banking Committee Chairman Christopher Dodd and House Financial Services Chairman Barney Frank places limits on potentially risky activities such as proprietary trading or over-the-counter derivatives and gives regulators new powers to seize and wind down large, complex institutions if needed. The overhaul, which still requires approval from the full Congress, won’t shrink banks deemed "too big to fail," leaving largely intact a U.S. financial industry dominated by six companies with a combined $9.4 trillion of assets. The changes also do little to solve the danger posed by leveraged companies reliant on fickle markets for funding, which can evaporate in a panic like the one that spread in late 2008.

‘Fig Leaf’
The Standard & Poor’s 500 Financials Index, whose 79 companies includeJPMorgan Chase & Co. and Goldman Sachs Group Inc., rose 2.7 percent at 4:05 p.m. in New York. The legislation is "largely a fig leaf," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "Given where we were when this got started, I’d have to imagine the Wall Street firms are pretty happy." Banks avoided drastic curbs on their highly profitable derivatives businesses.

Lenders including JPMorgan and Citigroup Inc. will be required to move less than 10 percent of the derivatives in their deposit-taking banks to a broker-dealer division during the next two years, which may require additional capital. Goldman Sachs and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in September 2008, won’t be as affected because they kept most of their derivatives in their broker-dealer units.

‘Pennies’ of Dilution
"There’s going to be some adaptation, but I don’t think there’s going to be any colossal impact," said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and holds stakes in Bank of America Corp., JPMorgan and Wells Fargo & Co. Derivatives rules mean "there’s going to be a capital raise, but the analysis we’ve seen suggests we’re talking in the pennies in terms of dilution" of earnings per share. 

Senator Blanche Lincoln, a Democrat from Arkansas, had originally advocated forbidding banks that receive federal support such as deposit insurance from trading swaps, a rule that could have required banks to spin off those businesses. The final agreement provides a number of exemptions: Banks can continue trading derivatives used to hedge their risks and can keep trading interest-rate and foreign-exchange contracts. Banks will have up to two years to move other types of derivatives, such as credit default swaps that aren’t standard enough to be cleared through a central counterparty, into a separately capitalized subsidiary.

U.S. commercial banks held derivatives with a notional value of $216.5 trillion in the first quarter, of which 92 percent were interest-rate or foreign-exchange derivatives, according to the Office of the Comptroller of the Currency. The five U.S. banks with the biggest holdings of derivatives -- JPMorgan, Goldman Sachs, Bank of America, Citigroup and Wells Fargo -- hold $209 trillion, or 97 percent of the total, the OCC said. The rules are "nowhere as bad as what the banks might have feared as recently as a week ago," Bill Winters, the London- based former co-chief executive officer of JPMorgan’s investment bank, told Bloomberg Television today.

"Banks have pretty much factored in already the idea that most derivatives will have to be cleared through a central clearing counterparty. Not a huge surprise and probably not a huge cost either." Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. They include credit-default swaps, which act like insurance for investors in case a debt issuer can’t repay. Swaps sold by American International Group Inc. that later went sour helped push the insurer to the brink of bankruptcy and triggered a $182 billion federal bailout of the New York-based company during the near collapse of the financial system in 2008. 

Another portion of the legislation that was amended in the final conference was the so-called Volcker rule, named after Paul Volcker, the former Federal Reserve chairman who championed it. Originally the rule would have prevented any systemically important bank holding company from engaging in proprietary trading, or bets with its own money, as well as investing its own capital in hedge funds or private-equity funds. Goldman Sachs executives have estimated that about 10 percent of the firm’s annual revenue comes from proprietary trading.

3% Rule
In the final version, the banks will be allowed to provide no more than 3 percent of a fund’s equity, and will be limited to investing up to 3 percent of the bank’s Tier 1 capital in hedge funds or private equity funds. That represents a ceiling of about $3.9 billion for JPMorgan, $3.6 billion for Citigroup and $2.1 billion for Goldman Sachs, according to the companies’ latest quarterly reports. "I don’t think it will have any impact at all on most banks," Winters said of the amended Volcker rule. "It’s a pragmatic solution that will result in the banks having no big issues." 

While the rule has been watered down, it still represents an important change in direction for a financial industry that had been allocating a larger and larger portion of capital over the last decade to making bets and investments with their own money, said James Ellman, president of San Francisco-based hedge fund Seacliff Capital LLC, which specializes in financial industry stocks.

‘Casino’ Must Go
"You’re going to be taking out of the banks areas of investing that every 10 years or so, at certain points in the cycle, tend to have dramatic losses," Ellman said. "Effectively you’re telling the system: We have to take the casino out of the utility." While Ellman said the legislation will help to make the financial system safer, he added that "it won’t satisfy anybody who wanted really strict additional regulation of banks." The new version of the Volcker rule also incorporates changes proposed by Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan that aim to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the investment.

In April, Levin presided over a hearing in which Goldman Sachs executives were accused of betting against some of the same collateralized debt obligations that they underwrote; the executives responded by saying they were acting as market-makers. While requirements for an increase in capital will provide banks with a bigger cushion to absorb losses, the legislation does little to reduce banks’ dependence on the markets to finance their balance sheets. It was that market-based funding that made firms like Goldman Sachs and Morgan Stanley vulnerable to the panic that spread in 2008. "Something has to be put in place to cause banks to have deposit-based liabilities and not market-based liabilities," Grimes & Co.’s Wallace said. 

The effects of the legislation won’t be seen for several years as new regulations are drafted and implemented, analysts said. New international capital requirements under consideration by the Basel Committee on Banking Supervision, which could be implemented by the end of 2011, will also be important. Investors and analysts including Optique Capital Management’s William Fitzpatrick said bank stock prices have already factored in any likely reduction in revenue from the changes. 

"Profitability is indeed going to take a hit and we’re going to see more stringent capital requirements," said Fitzpatrick at Milwaukee-based Optique, which oversees about $800 million including stock in Bank of America, Goldman Sachs and JPMorgan. "The changes are most certainly necessary. They can certainly lead to a more stable and predictable earnings stream." Still, he added, "this doesn’t remove all of the elements of financial distress that could lead to some of the challenges we had in 2008."

European Yield Spreads Widen on Concern Debt Crisis Deepening
by Paul Dobson - Bloomberg

Belgian, Italian and French 10-year bonds declined, sending their yield differences with benchmark German bunds wider, on concern the region’s debt crisis is deepening as the economic recovery sputters. The bonds also fell amid speculation banks are selling some government debt they bought during the year-long emergency refinancing program from the European Central Bank, which expires on July 1. Germany’s 10-year bond yield headed for a weekly decline amid signs the global economy is slowing after data released two days ago showed growth in Europe’s services and manufacturing industries slowed in June. A report due June 29 will show confidence in the economic outlook in the 16 euro nations fell this month, according to a Bloomberg survey. 

"This is a supply shock" as banks consider dumping their holdings to repay the ECB, said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. "Banks are checking out the market. I anticipate this will intensify next week." The Belgian 10-year bond yield rose seven basis points to 3.57 percent, increasing the extra yield investors demand to hold the debt instead of bunds to 97 basis points, the most since June 8, from 90 points yesterday, based on closing prices. The 10-year bund yield was little changed at 2.61 percent as of 5:20 p.m. in London. The yield reached 2.59 percent yesterday, the lowest since June 15. The 3 percent security maturing July 2020 slipped was at 103.41. The bund yield fell 12 basis points from 2.73 percent on June 18. The yield on the equivalent-maturity Italian security gained four basis points to 4.09 percent, and French 10-year yields advanced three basis points to 3.10 percent.

Bund Returns
Bunds have returned 6.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, driven by investors seeking the safest assets as the crisis that started in Greece threatened to spread across Europe. Italian securities gained 1.1 percent, while Greek debt handed investors a 19 percent loss, the indexes showed. U.S. Treasuries gained 5 percent. The Greek 10-year bond yield was 12 basis points lower at 10.51 percent.

The close at 10.64 percent two days ago was the highest since May 7, before the European Union unveiled a 750 billion-euro rescue package and the ECB started buying government bonds. While the ECB’s first and largest long-term refinancing operation, or LTRO, will expire on July 1, the central bank has reinstated unlimited three-month lending to provide banks with access to cash. "Greek banks participated in the LTRO a year ago and what they did was largely buy Greek debt, especially in the long end," said Ioannis Sokos, an interest-rate strategist at BNP Paribas SA in London.

Greek debt will leave indexes managed by Citigroup Inc., Barclays Plc and the Markit iBoxx index at the end of June after the nation’s sovereign credit rating was downgraded to junk by Moody’s Investors Service last week. "This might be partly responsible for a sell-off in Greek debt and the credit-default swaps that we’ve seen recently," Andre de Silva, deputy head of global fixed income at the bank in London, said in a telephone interview.

"It has a profound effect because this is not just a duration adjustment, but one sovereign falling out of the basket." Markit Economics said this week its index based on a survey of euro-area purchasing managers in services and manufacturing fell to 56, from 56.4 in May. An index of executive and consumer sentiment in the 16 euro nations slipped to 98.1 this month from 98.4 in May, according to a Bloomberg survey of 15 economists before the report is published on June 29.

‘Increasing Concerns’
The difference in yield between German two-year notes and 10-year bonds narrowed to 204 basis points, the least since December, as investors added to bets interest rates will stay lower for longer. "In light of increasing concerns about the pace of economic recovery and periphery countries, bunds should defend their latest gains accordingly at the end of the week," Michael Leister, a fixed-income strategist at WestLB AG in Dusseldorf, Germany, wrote today in an investor report. Belgium will sell up to 3.7 billion euros of debt due in 2013, 2016, 2020 and 2028 on June 28, the nation’s debt agency said today. France will sell up to 7.5 billion euros of securities maturing in 2018, 2020, and 2026 the same day, Agence France Tresor said today. Italy, Slovakia, Germany and Spain are also scheduled to sell bonds next week.

Corporate Bond Sales in U.S. Fall 19% as Recovery Shows Strain
by Tim Catts - Bloomberg

Wm. Wrigley Jr. Co., the chewing-gum maker acquired by Mars Inc. in 2008, and Amsterdam-based CNH Global NV issued debt this week as sales of corporate bonds in the U.S. fell 19 percent. Wrigley issued $1.8 billion of debt in a four-part offering as it tapped the corporate bond market for the first time since its sale, according to data compiled by Bloomberg. CNH Global, maker of Case and New Holland farm equipment, issued $1.5 billion of notes in the biggest offering of high-yield, high- risk debt in two months, Bloomberg data show. Companies sold $16.5 billion of debt, compared with $20.3 billion last week, as sales of new homes fell to a record low rate and the Federal Reserve said Europe’s sovereign debt crisis is rendering U.S. financial conditions "less supportive" of an economic recovery.

Corporate bond yields fell to the lowest in a month, following Treasuries. "There’s definitely fear and paranoia," said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut. "The economy’s going to slow in the second quarter and there’s going to be a lot more talk about a double dip, there’s no question about it." The extra yield investors demand to own investment-grade corporate bonds instead of U.S. Treasuries fell 1 basis point to 207 basis points, according to the Bank of America Merrill Lynch U.S. Corporate Master Index. Average yields fell to 4.43 percent from 4.53 percent, the lowest since May 21, the index data show. A basis point is 0.01 percentage point.

High-Yield Spreads
Spreads on high-yield, high-risk debt expanded 7 basis points to 689 basis points, the widest since June 17, after touching 668 basis points on June 21, Bank of America Merrill Lynch index data show. Yields fell to 9.03 percent, the lowest since May 19, from 9.06 percent. High-yield debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. This week’s corporate bond sales compare with a 2010 average of $19.8 billion, Bloomberg data show. Issuance has surpassed that level only once in the last nine weeks. 

The yield on 10-year Treasury bonds, the market bellwether, fell to 3.12 percent on June 23, the least in 13 months, after U.S. government statistics showed home sales plunged in May and Federal Reserve policymakers renewed their pledge to keep overnight lending rates near zero for an "extended period." The 10-year yield rose to 3.14 percent yesterday. Purchases of new homes fell 33 percent last month to an annual pace of 300,000, the lowest level since at least 1963, according to Commerce Department data released June 23. Sales of previously owned homes fell 2.2 percent in May, the National Association of Realtors said a day earlier.

‘Developments Abroad’
The U.S. economy is continuing its recovery even as "financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," Fed officials wrote in a June 23 statement after two days of meetings. U.S. corporate bond sales tumbled from $140.1 billion in March, the most since January 2009, to $32.9 billion last month amid concern among investors that the sovereign debt crisis in Europe would stifle global economic growth. 

"The corporate bond market has a certain degree of economic uncertainty priced in already," said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. "It’s too early to really feel any of the effects of the European crisis directly in the U.S." CNH Global’s transaction was the largest high-yield bond sale since April 20, when CF Industries Holdings Group Inc. issued $1.6 billion of eight- and 10-year notes, Bloomberg data show. It led $2.43 billion of junk bond sales, an 87 percent increase over the previous week.

Junk Sales
Weekly sales of speculative-grade company debt averaged $4.7 billion through the week of June 18, Bloomberg data show. Capella Healthcare Inc., the Franklin, Tennessee-based operator of hospitals, sold $500 million of seven-year notes and Michael Foods Inc., the biggest North American producer of egg products, issued $430 million of debt due in 2018 in the week’s other high-yield offerings, Bloomberg data show. 

Wrigley’s offering and Royal Dutch Shell Plc’s $2.75 billion sale of notes due in 2012 and 2015 led $14.3 billion of investment-grade issuance this week, Bloomberg data show. Jefferies Group Inc., the New York-based securities firm that’s helped manage 22 high-yield bond sales for $4.76 billion, issued $400 million of notes, Bloomberg data show. "There’s still demand for high-yield securities," said Richard B. Handler, Jefferies chief executive officer, in a June 22 conference call with investors. "There’s still demand for well-structured transactions that are priced appropriately, and I think the market is relatively healthy."

China Bank Debt Repackaging, Loan Growth Raises Risk of Crisis, Fitch Says
by Katrina Nicholas - Bloomberg

China’s record loan growth and the repackaging and selling of debt by its banks has raised credit risks "considerably," and might lead to another financial crisis, Fitch Ratings Ltd. said. "Credit is disappearing from bank balance sheets, resulting in a pervasive understatement of credit growth and credit exposure," Charlene Chu, Fitch’s senior director of financial institutions for China, said at a conference in Singapore today. "But credit risk has not disappeared, merely been transferred to investors."

China’s government unleashed a record 9.59 trillion yuan ($1.4 trillion) lending boom last year to stimulate the economy amid the global credit crunch. The nation’s banking regulator has told lenders to report on their risk exposure by the end of this month to help prevent a pileup of bad loans. Growing numbers of Chinese banks are entering increasingly complex transactions designed to circumvent regulations, according to Fitch. They involve banks selling loans to a trust company, which then creates a wealth-management product around them and gives these back to the bank to distribute. Banks then sell on the product to investors and with the money, pay off the loan, the risk assessor said.

"When we talk to banks about this they say, ‘We’ve sold on the loan and we have no exposure. If the product goes bad, it’s the investors who’ll wear the loss,’" Chu said. "Our view is, it sounds a lot like Lehman minibonds." Banks in Hong Kong and Singapore sold credit products guaranteed by Lehman Brothers Holdings Inc., known as minibonds, which crashed after the U.S. firm’s bankruptcy in 2008. Thousands of individual investors lost money on the notes, leading Hong Kong to crack down on sales techniques.

Less Data Flow
Chinese banks’ unwillingness to disclose loan information means the extent of problems could be worse than thought, Chu said. "Chinese banks have realized we’re tracking this and have begun to cut back data flow," she said. "Disclosure about this issue is extremely poor and getting worse." Historically, Chinese banks have posted an average expected recovery rate of 34 percent on corporate non-performing loans, despite 72 percent of loans being supposedly backed by collateral, guarantees or pledged assets, a Fitch analysis of the 2009 financial statements of listed banks shows.

Loans are typically termed non-performing after being in default for three months, depending on contract terms. "Poor legal framework guiding such activity means unwinding these transactions in the event of a default could get very messy, particularly as the transactions become increasingly convoluted," Chu said. "Accelerating loan growth has considerably raised credit risk exposure," Chu said. "Future asset quality deterioration is a near-certainty."

Tropical depression stirs concern
by Eric Berger - Houston Chronicle

The Atlantic season's first tropical depression formed Friday in the Caribbean, putting much of the Gulf of Mexico on alert even though forecasters don't anticipate this weather system will become an intense hurricane. Forecasters are concerned for an altogether different reason. Hurricane season doesn't usually rev up until August, when areas of disturbed weather move off Africa into the Atlantic Ocean and eventually spin into tropical storms.

These disturbances, called tropical waves, usually begin coming off Africa as early as April or May. But they don't usually develop into tropical storms and hurricanes until August. The probable formation of Tropical Storm Alex in the western Caribbean Sea from such a wave has some meteorologists concerned because it's early for African waves to become so well organized. "The monster seasons of 1995 and 2005 began with Gulf storms that formed out of deep tropical waves rather than the normal systems this time of year that come down from the westerlies," said Joe Bastardi, a senior forecaster with Accuweather, a Pennsylvania-based private weather service.

"That we are seeing this kind of development threat early is just as big a deal as whether it actually develops," he said. There were 19 and 28 named storms, respectively, during the 1995 and 2005 hurricane seasons, both well above the long-term average of about 10 named storms a year in the Atlantic.

In Gulf by Sunday?
Forecasters don't expect the depression that's approaching the Yucatan Peninsula, and may reach the Gulf of Mexico by late Sunday, to become a strong hurricane. It's likely to remain a tropical storm. However, if the system's center survives its passage of the Yucatan intact, the waters of the Gulf of Mexico are warm enough to support some development. Even so, it is unclear how much the system might intensify, if at all, and it could go anywhere along the Gulf Coast.

There's the added concern this summer that any storm moving over the central Gulf could disrupt efforts to mitigate the BP oil blowout and push more crude toward the northern Gulf Coast. African waves are broad areas of low pressure associated with thunderstorms. When conditions — such as warm water, light wind shear and other factors - are right, these seedling thunderstorms wrap around a closed area of circulation and a tropical storm develops. About 60 percent of the named storms during a given year form from African waves. But about 85 percent of the category 3 and stronger hurricanes, the most intense and damaging ones, originate from African waves.

Active season ahead
Early development of African waves is just one reason forecasters are predicting an active hurricane season this year. "Everything that we're seeing across the tropics today appears to confirm the predictions of a very active 2010 hurricane season," said Chris Hebert, lead hurricane meteorologist with Houston-based ImpactWeather, another private forecasting firm. Before the beginning of the 2010 hurricane season, there were indications that vertical wind shear across the tropics would be abnormally low, which would allow more tropical waves to spin into named storms.

This is precisely what forecasters are seeing during the month of June, Hebert said. Wind shear this June has been about half of normal levels in the Gulf and Caribbean. "Though vertical wind shear does change from day to day and week to week, the shear is definitely lower than normal across the Atlantic Basin," he said. "What this means is that we can expect an elevated risk of development prior to the first week of August, a time which typically marks the real beginning of the hurricane season." On top of that, sea surface temperatures in the region of the tropical Atlantic, where most storms develop, are at record-high levels for the 60-year period during which reliable data has been kept.

Pandora’s Well
by Dylan Ratigan

BP Shares' Losses Top $100 Billion
by Steve Goldstein - Wall Street Journal

BP PLC shares dropped as much as 9% in London on Friday, putting the drop the oil major's market capitalization at more than $100 billion since the Gulf of Mexico oil spill began, as an analyst suggested the company needs to sell stock to assure counterparties of its financial health. As U.S.-listed BP shares dropped more than 3% in early trading, the hit to its market capitalization since April 20 grew to roughly $102 billion as the oil giant plumbed a fresh 14-year low.

Nomura analyst Alastair Syme said in a note published Friday that the company's funding could be threatened as the ill-fated Macondo well continues to leak oil. He said that the roughly $15 billion of current liquidity looks adequate to deal with committed acquisitions, spill cleanup costs and the phased funding of the $20 billion escrow account. "But a sharp rise in liabilities or alternatively a collapse in oil prices could leave the funding much tighter. Consider too that BP has an estimated $2 billion to $2.5 billion of one-year commercial paper to roll over, needed to fund day-to-day trading activities and working capital, which will likely be much harder (and more expensive) to do in this environment," Mr. Syme said.

Issuing debt is expensive, and selling off assets takes time -- so the analyst suggests the company sell roughly $10 billion of equity, backed possibly by sovereign wealth funds. Besides the stock market drop, credit-default swaps on the oil giant widened as well, reflecting bond market worries. The annual cost of insuring $10 million of BP's debt rose to $570,000, from $555,000 on Thursday, according to CMA Datavision. Bond yields for BP outstanding debt securities are up significantly. Bond yields move inversely to prices.

The company Friday said costs of cleaning up the spill had grown to $2.35 billion. Its market capitalization has dropped several times more on expectations the cost of cleaning up will grow further, on potential legal liabilities, on the Gulf of Mexico drilling moratorium and on reputation damage. Several analysts -- including Mr. Syme -- nonetheless have buy ratings on the stock, arguing the drop is too steep. Stephen Pope, chief global equity strategist at Cantor Fitzgerald, has a sell rating on BP. "BP has so many problems and the costs of the compensation fund and the environmental cleanup fund are unknown. The containment program is not going well and BP feels like an oil tanker with no rudder or captain on the bridge," he said in a note to clients.

Besides the worries about funding and cleanup costs, weather-related jitters weighed as the onset of Caribbean hurricanes and tropical storms could make it more difficult for BP to cap the spill. Peter Hitchens, oil analyst at London brokerage Panmure Gordon, said the market was worried that the onset of hurricane season in the Gulf of Mexico could create problems for BP. However, "the reaction is probably a little bit too strong," Mr. Hitchens said.

BP has blown-out well in sights, stock slid
by Tom Bergin and Ernest Scheyder - Reuters

BP Plc said the relief well to plug the oil spill in the Gulf of Mexico is on track and now has the blown-out well in its sights. Concern over its ability to pay the rapidly escalating cost of the worst spill in U.S. history continued to weigh on its shares, however, sending its London stock to a 14-year low and further hitting its credit profile. BP said in a statement on Friday the first of two relief wells had successfully detected the MC252 well and would continue to a target intercept depth of 18,000 feet, when "kill" operations would begin.

As concern grows that bad weather could hamper clean-up operations, BP said 37,000 people, 4,500 vessels and 100 aircraft were helping the response effort, and that almost 850,000 barrels of oil and "oily liquid" had been captured or burned off the sea. BP said, to date, clean-up and compensation costs for the ecological disaster, which has devastated the region, hit President Barack Obama's poll ratings and led to a contested ban on deepwater drilling, was $2.35 billion.

Concern the firm may need to raise extra cash to help fund the clean up pushed its shares to a 14-year low and pushed its credit default swaps wider. Nomura analysts, in a note, said the perception of near-term credit risk was damaging BP and that it may have to assure the market it had enough funds to cap the well. "With debt expensive and asset sales taking time, we consider that equity-linked financing -- perhaps backed by Sovereign Wealth -- could prove the attractive short-term solution," they said.

At 0947 GMT, BP shares traded in London were down 6.9 percent at 302.5 pence, after ending down 3.1 percent at $28.74 in New York, a new closing low for the year. Five-year credit default swaps, meanwhile, widened 19 basis points to 555 bps. Late Thursday, data released by the New York Stock Exchange showed the short interest in BP's New York-listed stock had risen 290 percent in the first half of June, as more people bet the stock has further to fall.

Moratorium Loss
The Obama administration was pursuing its legal options after a setback on Thursday when a judge refused to put on hold his decision lifting a ban on deepwater oil drilling imposed in response to the spill. After striking down the moratorium on Tuesday, a federal judge in New Orleans rejected a request to allow the six-month ban to stand while the government appeals his decision.

Judge Martin Feldman issued an order denying the stay. The government has appealed to the U.S. Court of Appeals for the Fifth Circuit and can ask it to stay Feldman's decision. The government imposed the moratorium after BP's well ruptured on April 20, unleashing millions of gallons of crude into the sea and killing 11 workers. More generally, investors are concerned about the ultimate costs to BP as it faces more than 200 spill-related lawsuits and has agreed under political pressure to set up a $20 billion fund to pay damages to oil spill victims. BP was forging ahead with its efforts to capture or burn off oil as it gushes from the well on the bottom of the sea.

Weather Brewing
Bad weather is also brewing in the region and could hamper the clean-up efforts. A tropical wave over the western Caribbean Sea has a high chance of developing into a tropical depression over the next couple of days, the U.S. National Hurricane Center and other weather forecasters said. Most weather models see it hitting the coast near the Texas/Mexico border in a few days but some expect the wave to turn northeast toward Florida and the eastern Gulf of Mexico near where BP's clean-up operations are in high gear.

Any slowdown in clean-up efforts would heap more pressure on President Obama, who has faced criticism and falling poll ratings because of perceptions that his handling of the crisis has been slow. "Obama better get off his ass and get something done," Billy Nungesser, president of Plaquemines Parish (county), told Reuters at a shrimp boil in Venice, a Louisiana fishing hub. "He still has a chance to save this coast and his presidency," he said.

BP share slide as oil spill bill climbs to $2.35 billion
by Julia Kollewe - Guardian

Shares in BP hit a 14-year low this morning after the oil giant revealed that its bill for containing and cleaning up the oil spill in the Gulf of Mexico – the worst in US history – had climbed to $2.35bn (£1.57bn). The shares dropped 6.8% at one stage and later traded down 6.3% at 304.5p, making BP the biggest faller on the FTSE 100.

Five-year BP credit default swaps, which insure the company against debt default, widened 19 basis points to 555 points. The latest cost estimate is up from a previous figure of $2bn. It includes $126m already paid out in claims to those affected by the disaster, mainly workers in the fishing industry. So far, nearly 74,000 claims have been filed and more than 39,000 payments have been made.

The bulk of the cost covers wages paid to 37,000 people involved in efforts to capture oil at the blown-out well in the Gulf and the clean-up operation on the shore. It has emerged that the oil company has ordered clean-up contractors to pay out wages to workers suspected of claiming for work they have not done. Rear Admiral James Watson, the federal on-scene co-ordinator for the oil spill, admitted that there had been "instances of fraud".

Under intense pressure from the White House, BP agreed to set up a $20bn independently administered fund to pay for the clean-up and meet compensation claims last week. The oil giant said this morning that work on two relief wells, designed to kill the leaking well, and measures to improve the capture of oil, were on track. A new containment system will start operating next month.

The company had to reinstall an oil-siphoning cap on the blown-out well and resumed collecting crude yesterday after an accident led to oil flowing unhindered into the ocean for 10 hours on Wednesday. So far, 364,500 barrels of oil have been recovered from the ocean.

Think the Gulf Spill Is Bad? Wait Until the Next Disaster
by Robert Kiyosaki - Yahoo

The world knows BP is a disaster, a monster of a disaster. Every time a TV news station shows oil gushing from a broken pipe -- one mile below the ocean’s surface -- the audience feels sick. Scenes of oil-soaked pelicans struggling for life angers and saddens us.  The financial losses endured by small businesses and fishermen cannot be imagined, let alone conveyed by the media interviews alone.  BP is a disaster whose scope is beyond comprehension.

I was in England this month when President Barack Obama blamed and criticized BP for this tragedy. His criticism sparked the anger of the English. Politicians wanted him to tone it down, to be more careful in his choice of words. English Prime Minister David Cameron told Obama "not to go after BP for the sake of it." Richard Branson said he was "kicking a company when it was on their knees." Their concern was not for the environment or those suffering the ravages of this disaster. Their concern was for the pensioners who are counting on BP for a secure retirement

On June 17, the UK’s Daily Mail ran a headline screaming, "Bullied Into a £13 Cave-In." Brits are angry with Obama for pressuring BP to suspend dividend payments and set aside $20 billion for the clean up. Obama’s strong-arm position has affected British pensioners, who own 40% of BP, as well as American pension funds that own 39%.  In other words, the economic damage of BP goes far beyond the Gulf. The damage is spreading to pensions, pensioners, and portfolios all around the world.

Ground Zero for the Next Disaster
While in London, I decided to go to dinner at London’s Canary Wharf, ground zero for the next BP. Only a few years ago, Canary Wharf was one of the centers of the financial universe. Condo prices were sky high, offices were packed, and high-paid bankers filled Canary Wharf with wealth and excitement. Today Canary Wharf seems to be dying. It has lost its vibrancy. Many restaurants and offices were nearly empty and there were few lights to be seen in those once high-priced condos.

Canary Wharf will be the next BP, and its BP stands for Bomb Production. Canary Wharf is much like AIG, a factory for exotic financial products known as derivatives. The problem is that most people do not know what these murky and mysterious products are -- and that includes the people who make or buy them. It’s why Warren Buffett has called derivatives "weapons of mass financial destruction." That is how powerful they are.

Back in 1966, when I was a student training to be a ship’s officer, my ship carried bombs from California to Vietnam. During World War II, a ship exploded while loading bombs at Port Chicago, California, the port where the bombs were loaded onto ships.  The explosion flattened everything for miles. It is said that the ship’s anchor, which weighed tons, was found more than 60 miles away.  Derivatives -- financial bombs -- have the same power if they accidently detonate inside a bank’s balance sheet.

Financial Bombs
The subprime disaster was a result of financial bombs -- derivatives -- exploding in financial institutions such as AIG and Lehman Brothers, as well as banks and financial institution throughout the world. After the bombs AIG manufactured exploded, AIG received $181 billion in taxpayer funding and immediately sent $11.9 billion to France’s Societe Generale, $11.8 to Deutsche Bank, and $8.5 billion to Barclays Bank of Britain.

U.S. taxpayer money was going to bail out banks around the world. During the last three months of 2008, AIG was losing more than $27 million an hour.  That is how powerful these derivatives can be.  The problem I see is this: There are many more such bombs still sitting in balance sheets all over the world.

Military bombs are classified by weight such as 500, 750, and 1,000 pounds, while financial bombs have interesting labels such as CDO (collateralized debt obligations), ABS (asset backed securities), and CDS (credit default swaps).  While they sound exotic and sophisticated, when put in everyday language, a CDO is simply debt sold as an asset. And CDS, or swaps, are simply a form of insurance.  Since the insurance industry is strictly regulated and the bomb factories producing CDS did not want to comply with insurance industry regulations, they simply called them "swaps," rather than insurance.

To make matters worse, rating agencies such as Moody’s and S&P (and even Fed Chairman Alan Greenspan) blessed these financial bombs as safe, sound, and good for you. It was almost as good as the pope blessing these products. In 2007 the subprime boom busted, and we know what happened from there. The problem is that approximately $700 trillion of these financial time bombs are still in the system. While people watch the BP disaster in the Gulf, few people are aware of the other BP -- the financial bomb production -- that is still going on. If this derivative market begins to collapse, we will see another disaster.

Most of us know there is not enough money in the world to fully clean up the Gulf. The same is true with the $700 trillion derivatives market. If just 1% of the $700 trillion derivatives market goes bust, that is a $7 trillion disaster. The entire U.S. economy is only $14 trillion annually. A 10% failure, equating to $70 trillion, would probably bring down the world economy. As with the BP Gulf disaster, there is not enough money in the world to clean up the next disaster.

Could It Happen?
Could such a financial disaster happen? The answer is "Yes." In fact, just as President Obama pressured BP into doing the "right thing," so is he pressuring the financial markets to do the right thing. The president and our congressional leaders are pushing through financial reform legislation. My concern is that, if not handled delicately, it is this financial reform that will set off the derivative time bomb -- the next BP. 

Currently, derivatives are traded over-the-counter. This mean derivatives are uncontrolled, unregulated, and unsupervised. Proposed financial reform legislation is pushing to have derivatives traded through an exchange. This will bring in greater transparency and controls. My concern is, when this happens, the change to an exchange system will reveal fraud and failures we do not yet know about today.  It will be like turning on the light and watching the cockroaches (bankers) run for cover. While it is commendable that President Obama hold the rich and powerful accountable, I wonder what the price will be? And how many BPs can we afford?

Methane in Gulf "astonishingly high": U.S. scientist
by Julie Steenhuysen - Reuters

As much as 1 million times the normal level of methane gas has been found in some regions near the Gulf of Mexico oil spill, enough to potentially deplete oxygen and create a dead zone, U.S. scientists said on Tuesday. Texas A&M University oceanography professor John Kessler, just back from a 10-day research expedition near the BP Plc oil spill in the gulf, says methane gas levels in some areas are "astonishingly high."

Kessler's crew took measurements of both surface and deep water within a 5-mile (8 kilometer) radius of BP's broken wellhead. "There is an incredible amount of methane in there," Kessler told reporters in a telephone briefing. In some areas, the crew of 12 scientists found concentrations that were 100,000 times higher than normal. "We saw them approach a million times above background concentrations" in some areas, Kessler said.

The scientists were looking for signs that the methane gas had depleted levels of oxygen dissolved in the water needed to sustain marine life. "At some locations, we saw depletions of up to 30 percent of oxygen based on its natural concentration in the waters. At other places, we saw no depletion of oxygen in the waters. We need to determine why that is," he told the briefing.

Methane occurs naturally in sea water, but high concentrations can encourage the growth of microbes that gobble up oxygen needed by marine life. Kessler said oxygen depletions have not reached a critical level yet, but the oil is still spilling into the Gulf, now at a rate of as much as 60,000 barrels a day, according to U.S. government estimates. "What is it going to look like two months down the road, six months down the road, two years down the road?" he asked.

Methane, a natural gas, dissolves in seawater and some scientists think measuring methane could give a more accurate picture of the extent of the oil spill. Kessler said his team has taken those measurements, and is hoping to have an estimate soon. "Give us about a week and we should have some preliminary numbers on that," he said.

BP Alaska a 'ticking time bomb'
by Randi Kaye - CNN

Mark Kovac, a BP employee, says that their Prudhoe Bay operation could wind up worse than the Gulf.

Effort to kill BP's runaway well enters crucial phase
by Mark Seibel - McClatchy Newspapers

The saga of BP's runaway Deepwater Horizon well, already in its third month, has entered a crucial phase that will determine whether the Gulf of Mexico gusher ends in mid-August or persists, perhaps for months. Unlike the previous public drama, this act will unfold miles below the seabed, as drill technicians begin delicately maneuvering a relief well that they hope will pierce and cap the gushing oil well.

Today, BP announced that it has begun using sensitive electronic equipment to detect differences in the rock's electromagnetic field in an effort to pinpoint the metal pipes inside the wellbore. Based on what they find, they'll make adjustments every few hundred feet in an effort to intercept those pipes and kill the gusher by pumping it full of tons of heavy drilling mud and then concrete. The stakes riding on those adjustments are enormous, and the chance of failure, at least on the first try, is huge.

"The engineers will tell you that they have a 95 percent chance of success" in killing a runaway gusher with a relief well, said Bruce Bullock, the director of the Maguire Energy Institute at Southern Methodist University in Dallas. "But that depends on how you define success. It's quite unlikely they'll hit it on the first stab." "They're aiming at a salad plate thousands of feet down," Bullock said: a 7-inch pipe buried in concrete, 12,000 feet below the seafloor.

Every time a relief well misses, its crew must back up the drill bit and try again. Last year, a relief well aimed at capping a blowout in the Timor Sea off Australia missed its target four times before connecting. Each new effort took an average of another week of drilling, for a total delay of 27 days after the drillers began closing on their target. A similar delay at the Deepwater Horizon site would mean as much as 1.62 million barrels more crude dumped into the Gulf — more than 68 million gallons — if the latest government estimates of the flow are accurate.

Many obstacles lie in the way of the relief well, not least of which are the same vagaries of subsurface strata and gas pockets that put the Deepwater Horizon 43 days behind schedule before bad decisions and equipment failures sent it to the bottom of the Gulf. On Wednesday drillers were reminded how quickly success can give way to desperation. Only a day earlier, a jury-rigged containment system had captured more crude than ever before, 27,090 barrels. Then a robot vehicle nudged the "top hat" containment dome, closing a vent and sending what workers feared was flammable natural gas up a line to a drill ship on the surface.

Mindful that an unexpected surge of methane gas had doomed the Deepwater Horizon, they quickly yanked the containment dome away, leaving the well to gush, unimpeded, until the dome was put back in place 10 hours later. "Things have gone well, down to this stage," Kent Wells, BP's senior vice president of exploration and production, said a week ago about the relief well drilling. "Of course, that doesn't always mean things will continue to go well." His caution is echoed by Coast Guard Adm. Thad Allen, the Obama administration's point man on the Deepwater Horizon catastrophe.

"They are slightly ahead of schedule," Allen said of the relief wells during one of his daily briefings this week, "but I'm not coming off the second week in August date because we know, you know, things can happen." Uncertainty waits even once the drillers pierce the Deepwater Horizon pipe. That's when they'll try to plug the well with drilling mud and concrete. The idea is that the heavy mud will counteract the pressure that's forcing the oil up the well pipe.

However, such plans have failed before, according to studies of previous relief well attempts, either because the mud didn't weigh enough or the drillers didn't have enough of it.
Officials also acknowledge that the plan could be defeated if the well was seriously damaged by the explosion of methane gas that sank the Deepwater Horizon rig and took a mile of pipe down with it.

Congressional investigators have accused BP of causing the blowout by cutting corners on the well's design, not using enough spacers to hold the well pipe in the center of the bore in order to save money and selecting a single pipe system for the final leg of the well, instead of the usual one-pipe-inside-another approach. Those choices also could undermine efforts to kill the well, for example by allowing pathways for the drilling mud and crude oil to seep into the surrounding rock instead of filling the well pipe.

In a letter to BP on Wednesday, U.S. Rep. Edward Markey, D-Mass., the chairman of the Energy and Environment Subcommittee of the House of Representatives' Energy and Commerce Committee, voiced those worries, demanding answers to 30 questions about the relief well effort. The questions included how long it will take to circle back around if the drillers miss the well on their first try and what they'll do if the well is so damaged that adding heavy drilling mud cracks it further and sends crude into the surrounding rock.

Markey reminded BP CEO Tony Hayward in the letter that Allen has expressed similar concerns, quoting a briefing in which the admiral said: "I think that one thing that nobody knows is the condition of the wellbore from below the blowout preventer down to the actual oil field itself." "One of the reasons we did not continue with the top kill at higher pressures," Allen said in that June 17 briefing, referring to an unsuccessful effort in May to kill the well by pumping drilling mud into it through its failed blowout preventer, "was a concern that if we increased the pressure too hard it might do damage to the casing and the wellbore. What we didn't want was open communication of any oil from the reservoir . . . to the seafloor and then . . . uncontrolled discharge at that point."

Adding to the uncertainty of the relief well effort is the fact that, like so much of the Deepwater Horizon containment effort, there's no good precedent for comparison. The last great gusher in the Gulf, the Ixtoc 1 blowout off the coast of Mexico in 1979, ran wild for 10 months before relief wells found it and killed it. That, however, was before the latest electromagnetic technology was developed in the mid-1980s, when petroleum engineers realized that they could increase the accuracy of their ranging efforts by running electricity through the runaway well's metal pipe.

The blowout off Australia last August is a poor guide. The well was in 250 feet of water, not the 5,067 feet where the Deepwater Horizon was drilling, and the oil reservoir is less than half as deep as the Deepwater Horizon's Moncado field in the Gulf. Moncado is 13,670 feet below the seafloor. At those depths, adjusting the drill bit to make a second, third or fourth approach to the well is likely to take more time. "The operations at the well itself are so complicated," SMU's Bullock said. "The mechanics take a while to do."

BP's Wells said last week that the wellbore now lies tantalizingly close, just 200 feet laterally from the first relief well. That puts it within the limits of current electromagnetic ranging capabilities. In an announcement this morning, BP said that the first relief well had reached a depth of about 11,000 feet below the seafloor on Wednesday, when technicians removed the drill and undertook the first ranging "run." That's still more than 1,000 vertical feet above where BP's engineers would like to enter the Deepwater Horizon wellbore. BP said the ranging had "successfully detected the Deepwater Horizon's pipes.

While electromagnetic ranging helps, however, it can be off by as much as 10 percent, according to a study by John W. Wright, one of the world's foremost experts on relief well drilling. Wright's employer, the Houston blowout-killing company Boots & Coots, declined interview requests. So for the next several weeks, drillers will take a path down parallel to the Deepwater Horizon's wellbore while attempting to inch closer, guided by electromagnetic pulses in a process that in Wells' descriptions sounds equal parts science and trial and error.

"We'll drill a little bit, then we sort of use our tools to sort of test where we think it is," he said. "We'll pinpoint a place, then we'll drill another couple hundred feet towards it, test again and see if we've, you know, made the right progress." The drama isn't lost on the hundreds of men who are drilling the wells at the Deepwater Horizon site. "I'm glad to be part of the operation to try to stop this well," Wendell Guidry, a senior tool pusher aboard the Development Driller II, told reporters who visited the rig last weekend. The spill, he said, is "not only affecting me, but my family, my kids, later on down the line."

Toxins found in whales bode ill for human food supply
by Arthur Max - AP

Sperm whales feeding even in the most remote reaches of Earth's oceans have built up stunningly high levels of toxic and heavy metals, according to American scientists who say the findings spell danger not only for marine life but for the millions of humans who depend on seafood. A report released Thursday noted high levels of cadmium, aluminum, chromium, lead, silver, mercury and titanium in tissue samples taken by dart gun from nearly 1,000 whales over five years. From polar areas to equatorial waters, the whales ingested pollutants that may have been produced by humans thousands of miles away, the researchers said.

"These contaminants, I think, are threatening the human food supply. They certainly are threatening the whales and the other animals that live in the ocean," said biologist Roger Payne, founder and president of Ocean Alliance, the research and conservation group that produced the report. The researchers found mercury as high as 16 parts per million in the whales. Fish high in mercury such as shark and swordfish — the types health experts warn children and pregnant women to avoid — typically have levels of about 1 part per million.

The whales studied averaged 2.4 parts of mercury per million, but the report's authors said their internal organs probably had much higher levels than the skin samples contained. "The entire ocean life is just loaded with a series of contaminants, most of which have been released by human beings," Payne said in an interview on the sidelines of the International Whaling Commission's annual meeting.

Payne said sperm whales, which occupy the top of the food chain, absorb the contaminants and pass them on to the next generation when a female nurses her calf. "What she's actually doing is dumping her lifetime accumulation of that fat-soluble stuff into her baby," he said, and each generation passes on more to the next. Ultimately, he said, the contaminants could jeopardize seafood, a primary source of animal protein for 1 billion people. "You could make a fairly tight argument to say that it is the single greatest health threat that has ever faced the human species. I suspect this will shorten lives, if it turns out that this is what's going on," he said.

Payne called his group's $5 million project the most comprehensive report ever done on ocean pollutants. U.S. Whaling Commissioner Monica Medina informed the 88 member nations of the whaling commission of the report and urged the commission to conduct further research. The report "is right on target" for raising issues critical to humans as well as whales, Medina told The Associated Press. "We need to know much more about these problems."

Payne, 75, is best known for his 1968 discovery and recordings of songs by humpback whales, and for finding that some whale species can communicate with each other over thousands of miles. The 93-foot Odyssey, a sail-and-motor ketch, set out in March 2000 from San Diego to document the oceans' health, collecting pencil-eraser-sized samples using a dart gun that barely made the whales flinch.

After more than five years and 87,000 miles, samples had been taken from 955 whales. The samples were sent for analysis to marine toxicologist John Wise at the University of Southern Maine. DNA was compared to ensure the animals were not tested more than once. Payne said the original objective of the voyage was to measure chemicals known as persistent organic pollutants, and the study of metals was an afterthought. The researchers were stunned with the results. "That's where the shocking, sort of jaw-dropping concentrations exist," Payne said.

Though it was impossible to know where the whales had been, Payne said the contamination was embedded in the blubber of males formed in the frigid polar regions, indicating that the animals had ingested the metals far from where they were emitted. "When you're working with a synthetic chemical which never existed in nature before and you find it in a whale which came from the Arctic or Antarctic, it tells you that was made by people and it got into the whale," he said. How that happened is unclear, but the contaminants likely were carried by wind or ocean currents, or were eaten by the sperm whales' prey.

Sperm whales are toothed whales that eat all kinds of fish, even sharks. Dozens have been taken by whaling ships in the past decade. Most of the whales hunted by the whaling countries of Japan, Norway and Iceland are minke whales, which are baleen whales that feed largely on tiny krill. Chromium, an industrial pollutant that causes cancer in humans, was found in all but two of the 361 sperm whale samples that were tested for it. Those findings were published last year in the scientific journal Chemosphere. "The biggest surprise was chromium," Payne said. "That's an absolute shocker. Nobody was even looking for it."

The corrosion-resistant metal is used in stainless steel, paints, dyes and the tanning of leather. It can cause lung cancer in people who work in industries where it is commonly used, and was the focus of the California environmental lawsuit that gained fame in the movie "Erin Brockovich." It was impossible to say from the samples whether any of the whales suffered diseases, but Wise found that the concentration of chromium found in whales was several times higher than the level required to kill healthy cells in a Petri dish, Payne said.

He said another surprise was the high concentrations of aluminum, which is used in packaging, cooking pots and water treatment. Its effects are unknown. The consequences of the metals could be horrific for both whale and man, he said. "I don't see any future for whale species except extinction," Payne said. "This is not on anybody's radar, no government's radar anywhere, and I think it should be."


Ric said...

Hey Greenpa,
Thanks for the reference to Morris' Anosognosic’s Dilemma yesterday. His movies are wonderful--the Thin Blue Line is one of my favorites--and I read his article with pleasure.

Living with unknown unknowns has a long tradition. Where I come from it's called the "contemplative gaze." The Buddhists speak of how the human mind is a construct, samskara.

To pass our genes along, we don't need to know much. Living with unknown unknowns is a good way not to pass genes along as there appears little incentive to do so. Survival requires blindness--if we knew the real, we’d be terrified

It's odd how blithely Ramachandran says: "There is our physical reality and then there is our conception of ourselves, our conception of self — one that is as powerful as, perhaps even more powerful than, the physical reality we inhabit."

He's not demonstrating awareness of his cluelessness about what the "physical" is. If he did he probably wouldn't be able to keep his job.

In some ways it's hard to see why this seems such a discovery. As btraven says, s/he knew this at 20. It's something we either choose to see or don't.

Favorite line: Morris' definition of stupid: A stupid person is a person who treats a smart person as though he is stupid. That'll be the internet's epitaph.

Ilargi said...

Got this from one of my moderators:

Eliza's Eric Anderson (?) link got rejected by mistake. Please ask her to repost.


mikel paul said...

if the government reigns in the time bomb $700T of derivatives unregulated at all to this point, it indeed will reveal the true nature of the swindles magnitude. If they do not (odds are) it will happen anyway.
We have left to each of us personal choices to make. IMHO, that is where we are and where Ilargi and Stoneleigh have quite thankfully deposited there knowledge.
Debt. Get out of it.
Friends. invest in them.
There are no solutions.
Only alternatives.


Eliza said...

Good essay by Eric Andrews

Sleep, Dreaming, and National Suicide

susan said...

Great article by Michael Hudson:

EU Today, US Tomorrow
Europe's Fiscal Dystopia: the "New Austerity" Road

jal said...

ILARG said ...

“Just like -major- corporations (want to buy some BP debt?), governments all over the western world will increasingly rely on debt issues, on bonds. But municipal bonds have no future, since investors, and certainly the larger funds, will figure out they've become a casino all on their own. State bonds, re: California and Illinois, are rapidly going the same direction. And then the US federal government is planning to issue trillions of dollars in bonds into that market.”

Who are the buyers? Who has the savings?
Is it the same as ...
“... it’s the left hand pocket vs the right hand pocket. You may shift money from one to the other, but you end up with the same amount of money.”

Is it all an illusion?
Can money, capital, savings, be removed from the system without collapsing it?

getyourselfconnected said...

I keep thinking the same thing about debt rollover/issuance. Still even now the US borrowing rates keep falling and the "flight to quality" (I know stop laughing) crowd cannot seem to gobble up enough US debt. Its funny till you cry I guess. I think that nobody is in a position to call the US on this as the world economy is built on our buying crap. What will be the trigger?

M said...
This comment has been removed by the author.
Chaos said...

I just can't read any more about the destruction/pollution of the oceans and the species therein. It's just too painful. The NYTimes mag has a long one on the extinction of tuna. No, I'm not posting the link; I couldn't even read all of it. I don't want to hear about the Great Pacific Garbage Whirlpool either.

VK said...


What will be the trigger?

Either the USA's loss to Ghana OR a planetary, solar, lunar alignment around the end of July/ early August OR maybe when Miley Cyrus turns 18! Till then go watch maybe Toy Story 3? ;)

jal said...

Re.: social changes that were influential in the crash

How much influence did the pampered baby boomers have?

Did the pampered baby boomers passed on their belief/morals to the helicopter kids?

What influence are the helicopter kids, ( a lot of them are now grown up), having on reckless consumption and raising their kids?

How far ahead are we of the Chinese “little emperors”? (Yes, we did the same with fewer members of the extended family)

Those questions only apply to a small group of people in our society ... the pretend well-to-do-middle-class.

Linda said...

@ Susan

@ Eliza--I couldn't get yours to work.

@ All--Geithner at the G-20 saying something about how growth is all important, yada, yada, yada. He should be fired. Or shot.

What are those riots about in Canada? Only saw a little on the news.

Linda said...

@ VK--Don't underestimate Toy Story 3. There's a scene at the end where the toys are headed into a furnace. It's terrifying. They look at each other, hold hands, & prepare to go bravely. I sobbed. It reminds us of the terrible things that we must face bravely. I think it'll be a classic.

Jerry McManus said...

A cranky old economist who posts under the name "Don Sailorman" over at TOD just declared in a recent thread that the fine folks here at TAE are "flat out wrong":

Apparently a few percent growth in GDP (no matter what the cost) and a few million barrels per day of spare oil production (from somewhere yet to be determined) is all that is needed for everything to be perfectly right with the world.

What a relief! And to think I was actually starting to worry about those pesky reports of shrinking money supplies and tanking leading indicators. How silly of me.


Ahimsa said...

It's Unstoppable

Oil Well Blowout May Never End


Oil Spill Might Be Making Natural Seeps Larger

bluebird said...

Ilargi said "debt has to be repaid". How? There is no money, only more debt. Whether it be countries or its people, there is so much debt, it can't be paid off. It seems at some point, everything would stop, then start over with the debts canceled? A new currency would be setup?

Glennjeff said...

New Aussie PM wants to keep Australian population DOWN - go ranga go

Wolf at the Door said...

@ Linda

Haven't seen it myself but my son saw Toy Story 3 with his cousins last week and ever since then I have had to thoroughly check his room at night before bedtime to make sure that there is no toy monkey with cymbals lurking about. The movie definitely made an impression on him. He's terrified of that monkey...but he still loved it.

Glennjeff said...

@ VK

Was that a butterup for a football tip. Sorry, Heisenbergs Uncertainty Principle and all that, besides SPOILERS, as you young folk say;-}

Captain said...

@ Ilargi,
I'm glad you liked the video. Thank you for all you do.

Rumor said...

Captain, you've done a truly wonderful job with the video, and I think it may be a great tool to expand interest in TAE. Thank you kindly; I very much appreciate the effort you put into it.

Ilargi said...

For those of you who haven't seen it, I added a video this morning named "A Tribute to The Automatic Earth" below today's intro essay.


Tero said...
This comment has been removed by the author.
scandia said...

@Captain...and THANK-YOU for your video! Very timely what with secret laws passed to increase police powers in Toronto. Most citizens are heaving a sight of relief that they are " safe" from protesters. The issue of liberty lost is not noted much.Who cares about liberty? Seems such an old fashioned, not modern, concept.

Glennjeff said...

@ Captain,

Wow. Nice presentation. Did you do the music.

knutty knitter said...

Nice video - thanks :)

viv in nz

bluebird said...

@Captain - Thank your for the video, very nice!

Chaos said...

@ Jerry Mcmanus,

Being condemned by Don Sailorman is probably a pretty good indication that you're spot on...he's the classic example of an internet blowhard. How well I remember the days when us TODers had to endure his constant comments on his sexual prowess, and other drivel.

Ilargi said...

" Chaos said...
@ Jerry Mcmanus,

Being condemned by Don Sailorman is probably a pretty good indication that you're spot on"

If memory serves, Don Sailorman is the man who invented the wheel. Or was it gunpowder?


Captain said...

Thanks everyone for the positive feedback. I've been a reader here since late 2008, but a recent recording of one of Stoneleigh's presentations really moved me and inspired the video.

Regarding the music, I did a remix of the song Hometown Glory by Adele.

I'm going to submit the video to Mish to see if he will post it, and also to Chris Martenson's blog. I really can't afford to make a significant donation to TAE, but maybe the video can bring in some new traffic.


Ilargi said...


The video IS a significant donation.

Though we perpetually need donations to run and expand this site, they don't all need to be monetary ones.


scandia said...

@ Captain...submit the video to Max Keiser as well.

jal said...

@ Jeff

You picked out the right comments and questions from I&S messages.

Why should I try to give the message to the “little emperors”?

Are they capable of considering their future?

A triage is happening whether I like it or not.

Creating a Post-Peak Future You will Want to Live Into
Posted by Gail the Actuary

“People will react in many different ways as they consider the question of what their future will be. Some people will become resigned and despondent, others will become resolute as they concentrate on the job of making sure they and their family are sheltered and adequately fed. Still others will become happier as they leave the rat race and simplify their life. If you are considering this question, hopefully you will realize that creating the future rather than waiting for it to happen to you will give you a better result. That's what this article is about.”

M said...

Very nice tribute, but at the risk of being called a troll, mean spirited, dumbass, mercenary, bloated potato etc, why is the current economic morass always portrayed with visual evidence from the 1930’s? Ilargi does it constantly as well, with all of the posted turn of the century, GD1 images.

In attempting to delineate the lines of the 2010 economic crisis with traced contours from the 1930’s, a certain sort of mannerism imbues the presentation , with artifice standing in place of the real deal--IMO

In actuality, a visual portrayal of 2010 America would be a constant visual contradiction of the most subtle sort. At one end of the block, an outdoor festival with all manner of peoples strolling in and out of vendors booths belie the “ vastly reduced rent “ signs hanging from the building on the opposite end of the block. Bristling and teeming Saturday morning supermarkets abound with shoppers who stand in line with the realization that this weeks basket full of groceries is being paid for with the last unemployment check or in place of paying the gas, electric or mortgage bill. The camera might capture the outwardly affluent pushing their groceries up to the shiny new SUV whose finance company hasn’t received a payment in months, but the subtle stuff, well,that will take an artist. The dimple in the spirit and the furrow in the psyche is not easily revealed.

Presenting the real visual deal in America 2010 is going to take some effort beyond copying and pasting depression era images from the world wide web. It will mean getting up from the comfort of the computer chair and actually walking the streets. It will mean standing in the snow with wet feet, negotiating cruel winds and looking past the vast armies of people who still commute to work each and every morning. Only then will the photo of last years bristling grocery store reveal this years vacated commercial property.

“Nature levels all theories”, wrote Renoir. And perhaps what is why there is this current over reliance on imagery from the traumatized past. Actually walking the streets of America in 2010 might outwardly contradict “doomer’ claims; there is still quite a bit of reflected light bouncing back into the soon to be despairing shadow after all.

The MSM media ain’t really looking, but the evidence of demise is out there sure enough. Just go back to next years festival and snap a photo of the vendors who never returned for another years loss. And that is the visual challenge.

MJ said...

This is the commentary about the TAE video that I posted on YouTube:

This captures The Automatic Earth PERFECTLY. A Must-see video and send to everyone you know. Stoneleigh's voice (literally and figuratively) in conjunction with the haunting music and the lifeboat recommendations and the tip-of-the-hat to Ilargi through the use of vintage photos is BRILLIANT. The narrative is well defined with a distinct beginning, middle and end. I sobbed my way through it as I finally really GOT how devastating the oncoming deflation will truly be.


Ahimsa said...

@ Captain

So beautiful ... Thank you, thank you. The video captures the essence of the work of Stoneleigh and Ilargi.

Greenpa said...

Captain Sheeple- outstanding. You have a gift.

We need more of this kind of thing; there is simply no question whatsoever that art will communicate where words cannot.

If there are more video, cartoon, music, movie- etc- artists lurking here- what an opportunity for you to make a difference.

Ilargi said...

"...why is the current economic morass always portrayed with visual evidence from the 1930’s? "

Because it's the one reference that Americans have any mental association with that portrays where we are going. We could use images of life in Bangla Desh, since that would be equally to the point, but people would just shrug it off.


bluebird said...

@M - CaptainSheeple previously did a video with current images

Eyes Wide Open

Glennjeff said...

i could write n record some music backings if they were ever needed.

Chaos said...


Well, Don thinks he invented the wheel, anyway. But I think his gunpowder's all wet.

I perfectly understand why you and Stoneleigh decided on the Great Depression photos--it's THE tramautic economic event, imbedded in our collective consciousness. We ignore it at our peril (and of course, we've done that).

Awesome video! We need a part II, with more Stoneleigh...

Phil said...

Chris Martenson has posted a great critique of the G20 "leaders'" pronouncements:

Greenpa said...

M- I think your points are excellent; and you've written a very good script/scenario for another video. Any chance you can produce it?

I think the Great Depression images are entirely valid; and highly evocative. And you are correct that contemporary photos could serve brilliantly also.

There is room for a very great diversity of artistic visions here- and seriously- we need them all.

Ilargi said...

This made me laugh even more than England’s German drubbing:

Leon Panetta: There May Be Less Than 50 Al Qaeda Fighters In Afghanistan


samsara said...

@ Captain
Very well done. And it's nice to HEAR Stoneleigh. I'll make yet one more attempt to convince my significant other of the state of things with this!

@ Bluebird
You're right re Eyes Wide Open. I remember some people thought it was too fast/too chaotic to watch (it is, but I like the message nevertheless.) The photos are pretty close to what "M" is talking about.

Robert said...

M said: "Very nice tribute, but at the risk of being called a troll, mean spirited, dumbass, mercenary, bloated potato etc, why is the current economic morass always portrayed with visual evidence from the 1930’s? Ilargi does it constantly as well, with all of the posted turn of the century, GD1 images."

Well, yes, sometimes to the first 3 lines, but M has a very good point in the rest of his post.

There were a lot of great photographers such as Dorothea Lange who documented the utter despair of the First Great Depression. I remember my father telling about what he saw. Photos carry the message to the future when living memory is gone.

Why aren't people documenting the current era?

I don't live in the US (haven't for 20 yrs) so I only know what I read on Internet and letters from friends. I have friends from Fresno area telling about the tent cities in their area. There was some news coverage of them early on in this Second Great Depression but I have seen nothing for some time.

Perhaps it is taboo for the press to cover this for fear of retribution by those trying to convince the public that all is well in the US of A(but probably much worse elsewhere). There certainly was enormous pressure put on the media to produce shiny reports of the invasion of Afghanistan and Iraq. To the point that long time highly respected reporters were fired for not toeing the line.

Black and white photos (easy with digital) of Tent cities and people waiting in line to check for employment opportunities, etc are valid subjects for documentation of what is taking place NOW.

M is has good suggestions of using subjects such as real estate signs and others to paint the picture.

So, too, would be the haunting scenes of vacant or nearly vacant malls like K. Denninger talks about in his town of Happyville or Pleasantville or what ever. Also, scenes of going out of business notices.

Another subject would be the desperation of the unemployed who have to take work cleaning up the oil turds and oil covered birds from
GOM beaches just in order to keep food on their table. Probably risking their own long term health in the process. It is miserable demeaning work. The photographer in this case probably should wear personal protective gear (PPG)for this assignment. It would probably be appropriate to have a flack suit as part of the PPG. It is clear that BP and the government (is there a distinction?) do not want documentation of just how bad the situation is - including how dangerous it is for the people doing the drudge work.

There are so many things that need to be documented now. We can not go back in the past and take photos that should have been taken but weren't.

Ilargi is justified in using photos of the First Great Depression to characterize the present situation as there is probably not easily found large files of Present Day Depression photos to draw from.

I suspect that many think that videos on the subject is the modern day equivalent of the still shot. But the impact of the still shot, especially in black and white is often much greater. Some of the greatest wild life photographers use(d) black and white photography to great effect when they could have used colour. They are well aware of the increase in contrast that is achieved with black and white. Besides who wants to jump to links for videos when single stark photos convey the message.

I expect in the near future there will be plenty of opportunities to take photos with the same impact as those from the First Great Depression. It is not too late by any means.



Jerry McManus said...

Interesting topic, what will this great depression look like?

Obviously there are a great many differences between what we see in the world today and what we see in the photos from the 30's. At least as far as the wealthy industrialized countries go the big difference is the skyscrapers, freeways, sprawling suburbs, and cars. Everywhere cars.

It is that last bit that I personally think is the most significant difference. We have spent the last seventy years, and god only knows how much wealth, building out a vast infrastructure that is, for all intents and purposes, for the exclusive use of people in cars.

People will lose their jobs. People will lose their houses. People may well lose almost everything, but they absolutely will not give up their cars, at least not until the bitter end. After all, what choice do they have?

I don't believe the iconic images from this depression will be the bank failures or the tent cities. I think it will be abandoned parking lots, such as the acres of asphalt surrounding the soon to be failed shopping malls, crowded with desperate people living in their cars.

What better symbol for the dying days of the age of oil? Brother, can you spare some gas?


snuffy said...

Good info coming these days...not good news...but the kind of hard news that allows one the luxury of making hard decisions on how to proceed into the future

Nice film,Captain.Wish it would go viral

Top Hat Cat...that was a excellent read,yesterday."Lost"is a perfect metaphor for where we be as a culture now...

El G...
When you start to see thru the eyes of the the other peoples of the world,the picture that one sees of America is not a pretty one.The spooks,the covert agents,the banksters,and tourists are all the only real examples of Americans that are seen "up close and personal".The "ugly" American is the only one seen.When the only representatives one sees are such,it takes a major effort to "see true"

off to chores

bee good or
bee careful

I. M. Nobody said...

@ Jerry McManus

I concur with your vision of what iconic images will characterize the tribulations to come. I doubt, however, that it will be remembered as a Depression. That would imply a recovery to equal or better economic times.

To my mind, the rapidly accumulating pile of Insurmountable OpportunitiesTM, clearly indicates that this is just the first readily recognizable stage in the decline and fall of our civilization. And, I am inclined to agree, at least in part, with Eric Andrews thinking. Contrary to popular wisdom, I think the large part of surviving humanity will be happy to see it gone.

Humanity too readily accepted the lies and abandoned the things that made us happy, to pursue a doomed theory that MORE would make us even happier. Now there is no MORE to be had and even hanging on to what we've got will prove too much of a challenge for too many.

Ric said...

Captain Jeff,
Last semester I showed your Eyes Wide Open in all my classes and it generated a LOT of discussion. One young man sitting in the back said, "Now I see what you're saying." Another older woman said, "Now I see what it's like for my daughter."

In my day, we talked about a "generation gap." Today, we're aware the neural connections are wired very differently between the generations. Your work is a big help.

Glad to finally meet and thank you. Good work.

DJ said...

"Where do you see calamity and how do you profit from it right now?"

That question from the Hugh Hendry interview was all I needed to hear before closing the window and should be played all over the mainstream media. But it won't be.

RB said...

I’m not sure if this question has ever been brought up before, but what should be a sound strategy for someone who wants to preserve a little wealth (with the emphasis on little) and currently resides in the Eurozone. Switch to precious metals? Though they will never become worthless, it’s probably not completely safe as the speculative investors (e.g. hedgefunds et al) need to sell PM to cover their margins in the event of a sudden crash. This happened when Lehman went bust and the reoccurrence of such an event does seem to be unlikely. Another threat is of course the often mentioned ban on private gold ownership like in the US during the great depression.

Keeping money at the banks isn’t safe either, banks can fail and governments can implement all sorts of capital controls which can limit the accessibility of savings.

Another option would be to take it all out of the banks and stuff it under a mattress. But here is my biggest fear: If the Euro fails, the government will have to issue a new currency. And by then the shrewd bureaucrats will probably think of way to make the conversion painful, like limiting how much Euros can be converted to the new currency.

North-Korea did this last fall when they issued a redenominated Won

All above mentioned options (PM’s, banks and cash at home) aren’t fail-safe. Does anyone have a better idea?

Greenpa said...

RB- solar panels. My guess is they are not a lot more trouble to store (more space, less security) than metals; and will be just as negotiable, and more valuable.

Cassandra said...

Ilargi said...

This made me laugh even more than England’s German drubbing..

Ha, Drubbing [Origin:
1625–35; perh. by uncert. mediation < Ar ḍarb blow, beating] was the word I used too.

We promise not to gloat when Holland get knocked out... Have just sorted out our broadband so you and Stoneleigh will have the time and resources to move TAE forward, between matches of course.

Not sure who we can root for now that both Italy and England are out, can we go dutch by osmosis?

Look forward to meeting you both.

P+M, Italia :)

el gallinazo said...

Why pigeons make better deals than humans. This may be the key to the whole fiasco.

Segment: Pigeons make a deal.

Linda said...

@ Phil


agree--great article

M said...


Thanks for the heads up regarding the Captain’s excellent effort.

An effort, btw, that demands a formalist interpretation, or at least from where I’m sitting. Isn’t the rapidity of the presented images a formal embodiment and mirror reflection of MSM presentation ? Beyond the occasional disaster, or Tiger Woods infidelity hour, the MSM makes no compositional effort to feature the really critical issues. It’s just machine gun news which smothers the possibility of a contemplative focal point and what might be the resulting consternation in a continual barrage of “breaking news” saturation. It all leaves the more informed and aware wondering why righteous outrage and anger remains dormant and seemingly flaccid in the masses. As the saying goes, ‘when everyone is screaming no one is heard”.

Since art is in the eye of the beholder, more or less, that’s my take on “ Eyes Wide Open.” Which in my mind is why a formalist vantage point trumps other critical approaches (in this instance) such as feminist, multicultural, historical, deconstruction, Marxist, what have you. A formalist critical reading posses the potential to penetrates to the crux of composition intention. And what is more diabolical than drowning out the really important stuff in wave after wave of MSM misdirection and misrepresentation.

At any rate, great job Captain, I enjoyed watching both videos.

Ahimsa said...

Excellent article on the horrific effects of Corexit.

BP oil spill Corexit dispersants suspected in widespread crop damage

Wyote said...

EL G: Hilarious. I will never refer to Friedman, Greenspan, Paulson, Geithner, Bernanke etc. as bird-brains again. Just shows were using classical probabilities gets you. CDS, Derivatives, Ninja loans, meh! And here I was under the delusion that pigeons are aliens.

2question said...

@Captain great video!

@bluebird - I am with you. Nothing is getting repaid, ever. It's far too easy to default, fail, quit, reorganize or change. Yes, then then will try and start over or some like that.

@Captain - on a lighter note, my too very small boys have a dance party at least 1 time per day to eyes wide open. My 3 year old will replay it over and over again. Unfortunately, I don't think he's got the message!

scandia said...

Joe Bageant has another posting,
" Live From Planet Norte ".

zander said...

Thanks Scandia, I just dont know what to say about that post, I always manage to find some sort of disagreement in others opinions but I'm stuck with this one. Genius.

@ Captain. super stuff. Love the clean Tele sound on "eyes wide open" intro.


ben said...

thanks cap'n for the fan vid. great.

since we've taken to reviewing it my only quibble is with the dustbowl images. do they fit? should TAE 2, 80 years from now (not gonna happen), result in a fan video with images of deepwater horizon? i'm not so sure.


there are lots of people living in their cars, vans, and rv's in portland's central eastside industrial district. a few years ago it was slated to be the next big urban renewal project, replete with familiar, empty promises of a focus on affordable housing.

how's THAT for affordable housing?

maybe i can take a video camera down there sometime.


i enjoyed bageant's 'planet norte' very much, including the productive use of the n word, which, and this is an old complaint i'm unearthing, should be allowed around here, too.

we're all adults here.


watched a fantastic documentary on the radical lawyer bill kunstler last night on pbs. done by his two daughters.

the attica prison massacre was shocking behavior on the part of our government. they used exploding bullets on unarmed people.