Monday, August 23, 2010

August 23 2010: How low can we fall this fall?

Frances Benjamin Johnston Hanging 1937
"Laundry day in the Quarter, New Orleans, 1133-1135 Chartres Street"

Ilargi: Just after I wrote a few days ago on the Consumer Metrics Institute's latest batch of graphs and data, I saw that Doug Short had had the same idea, and even added a number of his own great graphs using the CMI data. I decided to do a follow-up on the topic, because this may well be the most important set of economic indicators we have available to us when it comes to what's going to happen between now and 2011, as well as beyond. (Do note, once again, that CMI bases its data exclusively on the 70% of US GDP driven by consumers.)

Allow me to start off with what Doug Short has to show and tell. That is, after this little detail, which Short has had no time to incorporate yet either: The CMI Current Growth Index Values table indicates a further deterioration in the 91-day Trailing Index from last Friday's -5.06%. Today it stands at -5.25%:

Take it away, Doug:

The charts below focus on the [Consumer Metrics Institute] 'Trailing Quarter' Growth Index, which is computed as a 91-day moving average for the year-over-year growth/contraction of the Weighted Composite Index, an index that tracks near real-time consumer behavior in a wide range of consumption categories. The Growth Index is a calculated metric that smooths the volatility and gives a better sense of expansions and contractions in consumption.

The 91-day period is useful for comparison with key quarterly metrics such as GDP. Since the consumer accounts for over two-thirds of the US economy, one would expect that a well-crafted index of consumer behavior would serve as a leading indicator. As the chart suggests, during the five-year history of the index, it has generally lived up to that expectation. Actually, the chart understates the degree to which the Growth Index leads GDP. Why? Because the advance estimates for GDP are released a month after the end of the quarter in question, so the Growth Index lead time has been substantial.

Has the Growth Index also served as a leading indicator of the stock market? The next chart is an overlay of the index and the S&P 500. The Growth Index clearly peaked before the market in 2007 and bottomed in late August of 2008, over six months before the market low in March 2009.

The most recent peak in the Growth Index was around the first of September, 2009, almost eight months before the interim high in the S&P 500 on April 23rd. Since its peak, the Growth Index has declined dramatically and is now deep into contraction territory.

It's important to remember that the Growth Index is a moving average of year-over-year expansion/contraction whereas the market is a continuous record of value. Even so, the pattern is remarkable. The question is whether the latest dip in the Growth Index is signaling a substantial market decline like in 2008-2009 or a buying opportunity like in June 2006.

The next chart is a three-way overlay — the 91-day Growth Index, GDP and the S&P 500. I've also highlighted the recession that officially began in December 2007 and unofficially ended last summer. As a leading indicator for GDP, the Growth Index also offers an early warning for possible recessions.

Preliminary Conclusion

The Consumer Metrics Institute's Growth Index hasn't been in operation very long, but thus far it has been an effective leading indicator of GDP. As such, the prospect of a double-dip recession, something that's happened only once since the Great Depression, remains a possibility.

Ilargi: It won't surprise you when I say that I think Doug Short's preliminary conclusion, that a double-dip recession "remains a possibility", is way too cautious, to say the least.

A society cannot buy its way out of a debt-driven depression by taking on more debt, or at least not when a number of vital necessities are entirely lacking. When there's no (rise in) productive capacity, or in consumer spending, and when exports can't go up substantially, in other words, when every penny written off has to be replaced by another penny borrowed just to stand still, it doesn't really matter what all sorts of statistics seem to indicate, that society is no better off for it, and can thus not be said to be out of its recession.

As for the choice of the words "remains a possibility", look, I know CMI hasn't been around for ages, and I know nobody can predict the future, and yes, maybe, there's a flaw somewhere in their model. But I also know that this model, as we can all see in the graphs, has been remarkably and consistently dead on when compared to both "official" GDP numbers and the S&P 500.

And with that in mind, what I see, especially in Doug Short’s last graph, the one where all three come together, is downright scary. Yes, since CMI doesn't incorporate government spending in its data (other than direct give-aways to consumers, presumably), there is a chance of the government injecting enough money to counter the downtrend.

Still, if you look closely, and you shift the CMI Growth Index forward by one quarter, and the S&P backward by the same amount, relative to GDP, so you get a more or less correct alignment of peaks and troughs, there can be only one conclusion: the 91-day Trailing Index, which is a leading indicator, foresees a huge drop in both GDP and the stock market in the months ahead.

How low can we fall in the fall?

David Rosenberg, citing Macroeconomic Advisers' U.S. real GDP series, says we're in for a -1.5% drop. He's supposed to be the doomer among "serious economists", yet he's still quite a ways away from the -5.25% that CMI data indicate. Not that a -1.5% plunge in US GDP wouldn't be sufficiently devastating all by itself, mind you.

A few more or less recent developments may shed some additional light on what lies ahead. David Streitfeld writes in the New York Times:
Housing Fades as a Means to Build Wealth
[..] many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good. "[..]

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year. The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values. [..]

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade. With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

Ilargi: Americans, or a large part of them, have -correctly- given up on the notion of the home as a nest egg, or even an ATM. They will increasingly be reluctant to put what's left of their wealth there. So where does their money go? Not in stocks either, say both Bernard Condon at AP :
Bond Bubble Fear Returns as Investors Flee Stocks
Bad economic news sent investors out of stocks and into U.S. Treasurys this past week, extending a rally that has defied some of Wall Street's best minds, and, some say, logic. Treasury bonds maturing in 20 years or more have returned 21 percent so far this year. By contrast, stocks in the Dow Jones industrial average have lost 2 percent. The question now: Is it too late to jump into the great government bond bonanza?

.......... and Graham Bowley at the New York Times:
In Striking Shift, Small Investors Flee Stock Market
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds. If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked. [..]

Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. "People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds," he said. "In the financial markets, there is one truism: flow follows performance."

Ilargi: In other words, as a society, Americans no longer buy homes nor stocks, or at least a whole lot less than they once did. They now think bonds are where safety lies. Which is partially true. Unfortunately, many will get into long-term bonds, which promise the highest returns. That gets them into a market place they don't know, and if they want to sell before their bonds mature, they are bound to find that other parties do know it.

Short-term Treasuries, people, are the one and only truly viable alternative to cash in your pocket. Even precious metals will prove too volatile in the next few years, though they should be fine later on. Question is: can you afford to hold on to them if the economy staggers, if you lose your home, your job, your health insurance?

The mass move into bonds leads Ambrose Evans-Pritchard to make the following somewhat ironic observation:
America no longer needs Chinese money, for now
[China] is building strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana. Where this expansion runs into political barriers, they are funding projects – such as a $10bn loan to Petrobras for the deepwater oil off Brazil. Where all else fails, they are buying equities. All of this recyles China's reserve surplus away from US debt.

So it is a good thing that US citizens have stepped into the breach, investing a record $185bn into bonds funds this year (ICI data). JP Morgan describes this as "extraordinary prejudice", evidence of irrational fear. Or perhaps JP Morgan has an extraordinary prejudice against bonds, arguably the shrewdest asset in a world where fiscal stimulus is being withdrawn before the rest of the economy has reached "escape velocity". The inventory cycle is ebbing, manufacturing has tipped over, the workforce is still shrinking, and the economy is sliding into a deflationary rut.

As Moody's said this week, the Great Recession has made sovereign debt suspect. "The burden of proof now falls on governments". Events have "fast-forwarded history", ripping away the 20-year cushion we counted on before the "adverse debt dynamics" of our aging crisis hits home.

Two epochal forces are colliding in the global bond market: core deflation is gathering force but the West is losing sovereign credibility just as fast. Arch-bear Albert Edwards at Société Générale advises clients to prepare for a violent policy swing from one extreme to the other. First we deflate into the abyss: then we inflate hard rates to get out again. At some point the "euthanasia of the rentier" will wear off. Misjudge the sequence at your peril.

Ilargi: However this may be, I urge you to take another look at the Consumer Metrics Institute data. Realize that their Growth Index is a leading indicator, and thus both the S&P 500 and the US GDP numbers, if we take the last five years as a measuring stick, will, over the next quarter, follow the Growth Index down. Way down.

As per this morning, the discrepancy between US GDP (official estimate still +2.45%) and CMI Growth Index (-5.25%) is a staggering 7.7%!. And then look at how closely the two are correlated in the graphs. They’re almost perfect twins. Until now?!

Something evidently has to give here, and it won't be the American consumer, that much we have seen, (s)he ain't giving much, if anything, of what (s)he’s got left. And both the government and the Fed, try as they might, and they certainly will try, have very limited influence on that American consumer, the protagonist in 70% of GDP, and her/his faith in the future. Once that faith begins to wane, and there can be little doubt that it is, it will start feeding on itself on the way down.

If we get anywhere near what the CMI data (seem to) foresee, we’ll have drama, tragedy, mayhem and panic all wrapped in one neat package. The US economy cannott withstand anything even near that sort of fall and pretend the world is still the same.

A few more -inevitable- broken promises and false green shoots and Americans will end up putting their money, if they have any left at all, in their mattresses, not in homes, not in stocks or bonds, not even in banks. Which in turn will cause GDP to fall further. Finish the story at home and color the pictures.

The Never Ending Recession
by The Pragmatic Capitalist

I have long believed that the rally in stocks was largely based on a mean reverting move that was based almost entirely on government intervention and stimulus (see here & here). But few people have remained more steadfast in their bearishness than David Rosenberg. And unfortunately for the market David Rosenberg has been redeemed. His macro outlook is becoming confirmed with every day – deflation, stimulus based recovery, continuing recession. If his outlook continues to be right then Mr. Rosenberg believes we could see a negative GDP print THIS quarter. And if he’s right that means analysts are far too optimistic about the upcoming quarter:
"Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the "build in" for Q3 is -1.5% at an annual rate.

Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak.

To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible. Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting."

Analysts at 2.5%-3.5% while Rosenberg is at -1.5%. Wow. If their expectations for equities this year were any indication (see here) then this it might be safe to say that Mr. Rosenberg is the ultimate contrarian Wall Street analyst – and one of the few worth listening to.

Housing Slide in U.S. Threatens to Drag Economy Into Recession
by John Gittelsohn and Bob Willis - Bloomberg

Housing led the U.S. out of seven of the last eight recessions. This time, it may kill the recovery. Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling. "If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. "The housing market and the broader economy are closely intertwined."

Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

A report tomorrow by the Chicago-based National Association of Realtors will show July sales of existing homes plummeted 12.9 percent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg. New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show on Aug. 25.

Housing in ‘Doldrums’
"Housing continues to be stuck in the doldrums," said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end, and a professor at Harvard University in Cambridge, Massachusetts. With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association.

Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company. Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.

Sidelined Buyers
Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

Those sidelined house hunters include Marion and Jim Lasswell, who said they spend most weekends looking at homes for sale near Raleigh, North Carolina. His engineering job at iRobot Corp. is secure, the couple’s credit is good and they have saved enough for a 20 percent down payment, Marion Lasswell said. The problem: they don’t think the market has hit bottom. "We’re still watching prices drop," Lasswell, 38, a registered nurse, said in a telephone interview. She said they won’t buy "until there’s an awesome deal."

GDP Weakens
Home prices tumbled 33 percent from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20-city index. They may drop another 20 percent by 2012 if the economy slips back into a recession, according to Chen, the Moody’s Analytics economist. Gross domestic product increased less than 1.5 percent in the second quarter, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey. That’s down from the 2.4 percent rate initially reported by the Commerce Department last month. Growth may ease to 1.3 percent by the first quarter of next year, according to the New York-based Conference Board.

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis. "There is an epidemic of thrift," said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. "Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire."

Federal Reserve policy makers on Aug. 10 made their first attempt to shore up the recovery by pledging to keep their holdings of securities and prevent money from draining out of the banking system. They said the economic expansion probably will be "more modest" than earlier anticipated. The Fed has held the target for its benchmark lending rate near zero since December 2008 and purchased $1.43 trillion worth of debt to keep rates low and bolster housing. "Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," the Fed said in a statement.

Buying Plans
The average U.S. rate for a 30-year fixed mortgage dropped to 4.44 percent in the second week of August, the lowest recorded by McLean, Virginia-based Freddie Mac, the second- largest mortgage buyer. A July survey by the Conference Board found 1.9 percent of the respondents planned to buy a home in the next six months, near December’s 27-year low of 1.7 percent. A sustained economic recovery depends on the job growth required to boost consumer spending, said Behravesh of IHS. The unemployment rate may average 9.6 percent this year, based on the median estimate of economists in a Bloomberg survey. That would be the highest annual rate since 1983.

Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New- home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery. That didn’t happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in 2009’s second half. Housing starts fell in two of seven months. While the Lasswells in North Carolina said they’ll keep spending their weekends looking at homes, they aren’t in a hurry to buy. "I don’t see things getting better," Marion Lasswell said. "I expect prices to be flat for a long time."

Housing Fades as a Means to Build Wealth
by David Streitfeld - New York Times

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good. "There is no iron law that real estate must appreciate," said Stan Humphries, chief economist for the real estate site Zillow. "All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up."

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment. Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up. "People shouldn’t look at a home as a way to make money because it won’t," Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year. The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill. "We’re trying not to think too far ahead," said Ms. Lyons, 35, an information technology manager. The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. "We were thinking, great!" said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords. "I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either," said Mr. Lyons, a manager at I.B.M. "At some point, you just have to say what the heck and go for it."

Other buyers have grand and even grander expectations. In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade. With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up. "People think it’s a law of nature," said Mr. Shiller, who teaches at Yale.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up. The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research. By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times. "The experience we had from the late 1970s to the late 1990s was an aberration," said Barry Ritholtz of the equity research firm Fusion IQ. "People shouldn’t be holding their breath waiting for it to happen again."

Not everyone views the notion of real appreciation in real estate as a lost cause. Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a "mind scar" just as the Great Depression did. But he argues that housing remains unique. "You have to live somewhere," he said. "In three or four years, people will resume a normal course, and home values will continue to increase."

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal. "It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame," said Mr. Humphries of Zillow. "The demand doesn’t exist." Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000. Freedom beckoned. "I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world," said Mr. Austin, 56. His home is now worth about what he paid for it. As for that cruise, "it may be a while," Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: "But I won’t rule it out forever."

Will Growing Rental Trends Undermine U.S. Home Sales?
by Keith Jurow - Real Estate Channel

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

Given this introduction, let's take an in-depth look at whether there is a movement away from the idea of homeownership as a worthwhile goal and toward the benefit of renting.

End of the Housing Bubble Led to a Surge in Houses Available to Rent

As early as the summer of 2005, the slowdown in speculative buying in the hottest metros caused a flood of investor-owned homes to hit the rental market.  In August 2005, an article in the Wall Street Journal entitled "Speculators Push Rents Down" pointed out that the supply of rental homes in the Phoenix area almost doubled from a year earlier.  Average rents for these houses dropped by nearly 10%.  Similar situations were found in markets as diverse as Fairfield County in Connecticut, Kansas City, Las Vegas, San Diego and Palm Coast, Florida.

Even more ominous was the fact that 1.34 million single-family home rentals stood vacant.  This had risen from only 900,000 in 2003 according to Harvard University's Joint Center for Housing Studies.  Many of these homes became rentals because the investor was unable to flip the property.  By the end of 2006, the number of vacant homes for sale had skyrocketed to 2.1 million according to the Census Bureau.    

As I pointed out in a previous REAL ESTATE CHANNEL article, the glut of rental homes in bubble markets such as Phoenix had caused rents to plunge to half the cost of owning that same home by the beginning of 2008.  The press began to notice that the soaring number of homes and condos for rent was providing an attractive alternative to buying. 

A June 2008 Associated Press article posted in the Los Angeles Times emphasized that these rental properties were attracting "displaced homeowners" who preferred them to an apartment.  As foreclosures soared, these displaced homeowners continued to opt for rental homes.  A January 2010 article about the Denver rental market posted by Inside Real Estate News pointed out that "if a family loses their home in a foreclosure, instead of leasing an apartment in a building they will rent another home."  What happens after a single-family foreclosure is that "the family moves into a rental house down the street."  The author noted the irony in the fact that the home they are moving into may also be a foreclosure that had been bought by an investor.

2010 - Homes for Rent Continue to Increase and Rents Continue to Weaken

With the collapse in Florida home prices over the past three years, you would think that house rents might have begun to firm.  No way.  An article published in January 2010 in the online Herald Tribune painted a dismal picture of the rental market.  One landlord who owns more than 150 single-family homes lamented that "There isn't the demand that there was a few years ago because we've lost our construction workers ... We certainly have a lot of empty units."

Another owner of ten rental homes stated that she and other landlords had had to reduce rents by "at least a third."  A house that commanded a rent of $900 a few years ago gets only $500 now.  There are simply not enough potential renters who can afford even these slashed rents.  Because many of these smaller professional landlords are also faced with rising vacancies, a growing number of them are seeing their properties fall into foreclosure.

A month later, an article appeared on which reviewed the house rental market around the country.  The picture was nearly as grim.  In Brooklyn, New York, whose market has held up better than most, rents have slipped by roughly 20% since early 2009.  A similar percentage drop was seen in the California communities of Venice and Santa Monica. 

The owner of a property management firm in St. George, Utah stated that home rental vacancies were the highest he had seen in the last thirty years.  Another property management owner in Portland, Oregon bemoaned the fact that frustrated sellers have been throwing their properties onto the rental market, adding to the glut.  The same thing was happening in the California Inland Empire city of Temecula.  One close observer of that market noted that the asking rent for single-family homes had slipped below apartment rents which was almost unthinkable only a year or two earlier.

More recently, the May 2010 Las Vegas Rental Home Market Report stated that median house rents were down nearly 10% from a year earlier even though leasing volume was up by 20%.

Those Who Can Afford to Buy Are Extremely Reluctant to Do So

While surveys and statistics can be very revealing about the housing market, you cannot really get a good sense of the changing mindset of Americans from them.  To do that, you need to spend time reading comments written on some of the housing blogs and in response to online articles.

Let's start with a blog called Metropolis which covers the Philadelphia region.  A mid-July posting by the roughly 30 year old editor discussed the question faced by her and her husband since they moved from Boston.  Clearly, they had the combined income to afford to purchase in the pricy Center City.

Yet they decided to rent even though rents were high.  As she explained the decision, "Part of the appeal of being young, urban and childless is the freedom to travel frequently, relocate on a whim, and throw all of our disposable income at shiny new consumables."  She went on to ask, "Do I want the responsibility of owning a home?  Not in the slightest."  Though she admitted that she and her husband might purchase a property, she ended the article by declaring that "Until then, I'll be proudly writing my monthly rent checks."

One of the commenters on the article advised the author that there were plenty of affordable nice rentals with great amenities outside of Center City.  Another commenter with a new baby felt the pressure from everyone to buy a property in the suburbs.  But that was not what they wanted.  As she put it: "We're moving this fall from one rental to another, and I like the feeling of having something new.  With a pool I don't pay for, a gym that's open 24 hours a day, and emergency plumbers on staff at 2 a.m., I have enough responsibility in my life that I don't need a home."  She closed by declaring that "my rent payment gets me ... the amenities I've grown accustomed to ... and the peace of mind that someone else is responsible for maintenance."

Another blog raised the question of whether it made more sense to rent or buy.  A Chicago commenter said unequivocally that "I think we might be renters forever.  My husband and I love sitting ... in the park reading the Sunday New York Times while our landlord is stuck fixing the garbage disposal.  Time is priceless.  And we are nowhere nearly as freaked out about finances as our friends are."

Another commenter explained unequivocally that "Renting is a service I gladly pay for. We spend about $40 a day for use of a nice three-bedroom townhouse on a quiet street, with a private yard, a larger park for kids in the complex ... I like having money set aside for a surprise like a weekend trip to Manhattan or a night at the Opera instead of a blown water heater or a leaky roof."

Finally, an article on the online Wall Street Journal in early August discussed the glut of homes for sale.  One commenter proudly boasted that "I sold my home four years ago in south Orange County [CA] and have been biding my time as the market props run their course."

Another commenter declared that "[I] have close to 200k household income, 100k down payment waiting in the bank, but any home I'm interested in is close to a million or more.  Sure, I could afford a condo or home in less desirable areas, but I prefer to live near my socio-economic peers.  I don't understand how families can afford to buy 700-800k homes on 70k household incomes.  Until things make sense, I'm not buying.  I'm happy to continue renting in a nice neighborhood close to work, and use the left over cash to feed my nest egg."

The Caretaker Alternative

For those of you who may be reluctant to buy but are hesitant to sign a lease of one year or longer, an alternative known as a caretaker could be worth looking into.  To deal with the growing number of vacant, habitable homes which the owner would eventually like to sell, an industry known as home tending has blossomed in the last fifteen years.

The concept is a simple one.  Vacant homes often attract vandals, thieves, drug dealers and even squatters.  Home tending companies provide clients such as individual owners, real estate agents, builders with vacant homes built on spec, remodelers fixing up a property to flip, and occasionally banks with a carefully screened live-in caretaker.

The home tender firm does not charge the client anything.  How do they make money?  Caretakers gladly pay a reasonable fee to live in a very nice home with their own furniture.  According to one home tending company owner in San Antonio, the caretaker may pay about $750 a month to occupy and care for a house worth $400,000.

The monthly payment is not rent according to a company owner in the Phoenix area.  As she explains it, the caretaker is a subcontractor of her firm who understands that there is no fixed time commitment for staying in the house.

The caretaker is responsible for keeping the house clean and maintained and the yard mowed and manicured so it can be shown to a prospective buyer at a moment's notice.  The Phoenix firm does a background check and requires caretakers to complete their training program.  The caretaker must also carry a minimum of $300,000 in liability insurance and $25,000 personal property insurance. 

When the house is sold, the caretaker is usually given 10-14 days to vacate.  One of the largest firms, located in Utah, will sometimes shift a caretaker to another property when the one they have been occupying is sold.

Who are these caretakers?  Many of them are professionals who are relocating and either need a temporary place to reside or want to learn more about an area before deciding where to live more permanently.  They also include former homeowners who have lost their property to foreclosure and need a place to live until they can get back on their feet.  Some are divorced men or women in transition and looking to start a new phase in their lives.  Others are renters trying to save enough money for a down payment on a house they hope to buy in the future.

Why Renting Will Be a Popular Alternative to Buying for Years

Some housing analysts argue that the American dream of home ownership is still alive and well and will reassert itself when the economy and housing markets recover.  This is little more than wishful thinking.

The housing bubble of 2004-2006 was the climax of a powerful belief which had formed over decades that residential property prices always go up.  The collapse in home prices around the country since late 2006 has shattered this assumption.  Zillow's latest Homeowner Confidence Survey for this year's second quarter reported that one-third of all homeowners do not believe that home prices have reached a bottom.

The change in attitude toward owning a home cited in the beginning of this article has now reached the blogosphere.  A Google search I ran on renting vs. buying found a website which posted links to 48 blogs that touted renting as the preferable option.  How many of them were there during the peak bubble years?

The attraction of renting now is boosted by the growing vacancy rate for both houses and apartments.  The following chart posted recently by the Calculated Risk blog shows the long-term upward trend. 


With nationwide vacancy rates now well over 10%, it is extremely difficult for a landlord to even consider raising rents.  Since roughly 25% of all home sales are currently going to investors paying cash, large numbers of homes will continue to be thrown onto the rental market.

The one major market where there is apparently a shortage of nice 3-4 bedroom rental homes is Phoenix according to the Cromford Report.  If this claim is accurate, it is due to thousands of former homeowners who have lost their house to either foreclosure or a short sale and are looking for an attractive home to rent.  The supply is down because, as I have reported in a previous article, banks are withholding most repossessed homes from the market.

For all the reasons discussed in this article, the attractiveness of renting will be a serious impediment to the return of potential buyers to the housing market.  The change in consumer attitude is well summed up in this March 2010 post on a Zillow advice thread:

"We cannot wait to rent and walk away from this upside down/underwater bad investment.  And while we go through the process (foreclosure) 6 to 8 months, we will be socking away the $2600+ mortgage payments preparing for our rental.  Even $1500.00 for the rental of a home as nice or even nicer is $1100.00 per month ahead. Just think, no property taxes, no HOA dues and when something goes wrong, call the landlord.  We can handle the credit hit.  Currently we have about 840 FICO.  The way things are going we will be able to save enough cash to just buy a house in a few years."

Post-Mortgage Meltdown, Where Do We Go Now?
by NPR

For more than 20 years, the mantra in Washington has been "more, not less" when it comes to Fannie Mae, Freddie Mac and the expansion of homeownership. But in light of the financial crisis and Fannie and Freddie's near-collapse, policy leaders are also rethinking the government's role — and many Americans are starting to question whether homeownership is the only path to the American Dream.

Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible. At least that how things were supposed to unfold. But the two mortgage finance giants "made astonishing mistakes," Raj Date, executive director of a financial policy think-tank called the Cambridge Winter Center, told NPR's Audie Cornish.

'It Has All Come Back To Haunt Them'
"As normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed made more aggressive loans during that period of 2005, 2006, 2007," Date said. "And it has all come back to haunt them."

So instead of rationally-priced credit, he said, the country wound up with a $6 or $7 trillion bubble in housing values. And all of Wall Street and most of the country's banks made the same sort of mistakes, Date said. Policy makers are at a bit of a crossroads, said Date, who was among a number of industry leaders who huddled with Treasury Secretary Timothy Geithner this week to figure out a new way forward on housing.

Fannie and Freddie have dramatically scaled back their level of aggressiveness in underwriting credit, Date said. But, he added, "the fact of the matter is that on average and over time, Fannie and Freddie represent an economic subsidy from the public at large to middle and upper middle-income homeowners." Despite talk on Capitol Hill of dismantling the two organizations, it might be tough to get rid of them. That's because Fannie and Freddie, along with the Federal Housing Administration, are responsible for some 95 percent of the mortgages in the country today, Date said.

"If you think that the fall of 2008 was calamitous, believe me, you haven't seen anything yet if you were just somehow to turn off the lights on Fannie and Freddie today," he warned. "That said, I think the policy makers are trying to be thoughtful about the right long-term answer is for housing finance more broadly, and that involves revisiting some issues that have been treated as sort of untouchable for quite some time." Ultimately, Date said it might be time to rethink homeownership as an American ideal.

The White Picket Fence Reconsidered
"The world we live in today is not quite the world that existed in 1950," he noted. "The nature of households and the rate at which they dissolve and reform, the nature of work and its transient nature across geographies are all things that suggest that maybe, just possibly, a middle-class American shouldn't stake themselves to an illiquid, very large, concentrated, leveraged asset —- that is to say, a house."

Alyssa Katz, author of Our Lot: How Real Estate Came To Own Us, also thinks America needs to reconsider the American Dream. "Homeowenership has gone from being pretty much an unmitigated good — something that would provide stability — and instead has thrown a huge cloud of doubt over the value of homeownership for a lot of people." Even so, there also are downsides to renting, she said.

"Some of the common beliefs about renting are absolutely true," Katz said. "Being a renter has very little security. They don't have any promise they'll be able to live in the apartment or home for more than a year or two. Renting is also perceived as something that really divides Americans by class. So I think for a lot of potential renters, or people who own and are thinking of making that transition to renting, they have to overcome this sense that they are giving up a sense of status."

That's a tough thing to shake for many Americans, she said. If more people rent, the benefits of homeownership will only increase for those who own homes because the pool will shrink, Katz said. "Those who have access to homeownership and the benefits that it brings, as a result of policy, will be even more privileged than they are now."

$4.4 Trillion
by WSJ Editorial

That's how much the US spending baseline has increased in 31 months.

Speaking last Wednesday in Columbus, Ohio, President Obama asked, "How do we, over the long term, get control of our deficit?" Good question. Here's the answer suggested by last Thursday's semi-annual budget summary from the Congressional Budget Office: Stop spending so much. CBO's mid-year review largely reinforces the bad news we already knew—to wit, that spending has exploded since Democrats took over Congress in 2007, first with the acquiescence of George W. Bush and then into hyperdrive after Mr. Obama entered the White House.

To appreciate the magnitude of this spending blowout, compare CBO's budget "baseline" estimate in January 2008 with the baseline it released Thursday. The baseline predicts future spending based on the law at the time. As the nearby chart shows, in a mere 31 months Congress has added more than $4.4 trillion to the 10-year spending baseline. The 2008 and 2009 numbers are actual spending, the others are estimates. As recently as 2005, total federal spending was only $2.47 trillion.

Keep that $4.4 trillion in mind the next time you hear Mr. Obama or Speaker Nancy Pelosi say they "inherited" this budget mess. Let's assume the recession that Mr. Obama inherited—Mrs. Pelosi was already in power—was responsible for causing $1 trillion or so in deficit spending. That still doesn't explain why the annual deficit of roughly $1.4 trillion will be nearly as high in fiscal 2010, after a year of economic growth, as it was in 2009. Or why CBO says the deficit will still be nearly $1.1 trillion in 2011 even if all of the Bush-era tax cuts are repealed.

The deficit is barely declining because of the lackluster economic recovery, which continues to yield too little revenue, and especially because of the record levels of spending passed by the Democratic Congress and eagerly signed by Mr. Obama. To pick one illustration: The annual average increase in domestic, nondefense discretionary spending—on the likes of education, food stamps, and things other than Medicaid, Medicare and Social Security—was 6.4% from 1999-2008. Yet in 2009, nondefense discretionary spending rose by 11.2%, and in 2010 it will grow by another 14.7%.

Much of this increase has been added directly to the CBO baseline, compounding future spending levels as far as the green-eyeshade can see. After all of this, CBO nonetheless predicts that nondefense discretionary spending will grow by only 2.3% in 2011. If you believe that, you probably believe that someone other than Mrs. Pelosi will be Speaker of the House.

Bond Bubble Fear Returns as Investors Flee Stocks
by Bernard Condon - AP

Maybe bonds aren't so dull after all. Bad economic news sent investors out of stocks and into U.S. Treasurys this past week, extending a rally that has defied some of Wall Street's best minds, and, some say, logic. Treasury bonds maturing in 20 years or more have returned 21 percent so far this year. By contrast, stocks in the Dow Jones industrial average have lost 2 percent. The question now: Is it too late to jump into the great government bond bonanza?

To bulls, the rally is still in its early stages. They say the weak economy will cause stocks to keep falling and people to seek the safety of U.S. government debt. Reports this past week of unexpectedly high unemployment claims and a manufacturing slowdown in the mid-Atlantic region helped bolster their case. But others say Treasury prices have risen too high, perhaps even to bubble proportions. The thinking goes that investors could dump Treasurys as quickly as they bought them on even a whiff of inflation. Inflation is bad for bonds because it eats into principal.

Bonds are generally regarded as safer than stocks because you get your money back when they mature. But that's only true if you pay face value. If you buy when prices are higher, say $101 for a $100 bond, you'll get $1 less than you put in. In purchasing power, you get back even less thanks to inflation. But bonds, of course, also pay interest, and this can more than make up the difference. The problem is, bond bears argue, the interest isn't compensating you much now. The yield on 10-year Treasurys, which moves opposite its price, stands at 2.61 percent, a low not seen since early 2009 during the depths of the credit crisis. At that rate, it would take you 27 years to double your money.

"In the long run we don't think you'll make a good return" in government bonds, says Mark Phelps, CEO of money manager W.P. Stewart & Co., citing the low yields. Phelps suggests that investors worried about a stalled recovery should stick to stocks of big, conservative companies with little debt and fat dividends. Though you can still get hurt if their stocks fall, at least the dividends will help compensate. An added appeal: The dividends offered by such blue chips are higher than current 10-year Treasury yields.

PepsiCo Inc., for instance, will pay you $3 annually now for every $100 you invest: nearly 50 cents more than Washington pays for holding your money for 10 years. What's more, the stock is trading at 14.5 times estimated annual earnings. The median, or midpoint, over the past 20 years is 23 times estimated earnings, meaning the stock is cheap, at least by this one measure. Phelps also likes Procter & Gamble Co. stock. It pays you even more than Pepsi: $3.20 a year for every $100 invested. The maker of Pampers diapers and Pringles chips trades at 14.8 times estimated earnings, a discount to its 19 median. "To put all in Treasurys, looks like a mistake to us," says Phelps, whose firm manages $1.5 billion. But he adds, "I would have said that at the beginning of the year, and I would have been wrong."

He's got good company. For years, famed investors and economists have been warning that the price of Treasurys had risen too high. Bill Gross of giant bond firm Pimco said that Treasurys had some "bubble characteristics" in December 2008 when 10-year yields neared 2 percent. Nouriel Roubini, who gained near celebrity status after calling the crash, warned of a bubble about the same time. In a letter to his Berkshire Hathaway shareholders last year, Warren Buffett compared the "U.S. Treasury bond bubble of late 2008" to the Internet and housing bubbles.

However, as fears of an economic collapse receded last year, investors rushed into stocks and out of Treasurys, sending prices down and yields up. Now, as yields slip closer to their late 2008 lows, bubble talk has returned. On Wednesday The Wall Street Journal published a letter from Wharton professor Jeremy Siegel and Jeremy Schwartz, director of research at Wisdom Tree Investments Inc., that likened Treasurys to dot-com stocks of the late '90s before they crashed. The headline: "The Great American Bond Bubble." They noted that yields on some bonds are the lowest in 55 years. Their advice to investors will sound familiar: Buy blue chips with fat dividends.

Avi Tiomkin, chief investment officer of Tigris Financial Group and a Treasury bull for years, disagrees. "Dividends are great as long as a company can make money," he says. "But if the economy sinks, they'll stop paying." Tiomkin says he's sticking with Washington IOUs. A year ago he correctly predicted the 10-year yield would fall from 3.75 percent to around 2.50 percent by mid-2010. Now he foresees deflation, or a consistent and widespread fall in prices for goods and services similar to what afflicted Japan during the '90s. And that will drive more people into Treasurys, lifting prices and pushing 10-year yields to below 2 percent, possibly all the way to 1 percent, within a year.

Van Hoisington, president of an eponymous investment firm in Austin, Texas, who also foresaw the Treasury rally, is not buying all the bubble talk either. In his latest newsletter, he writes that "The risk, if not the probability, is that deflation lies ahead." He recommends buying Treasury bonds, as he has done for years now. He has returned 11 percent over three years. Jack Ablin, chief investment officer at Harris Private Bank, prefers stocks. But even he's worried.

Ablin notes that Federal Reserve interest rate cuts intended to spur borrowing and spending don't have much of an impact if people are swimming in debt and can't or won't borrow. If prices of consumer goods fall, he says, that will make matters worse as people defer purchases in hopes they can buy cheaper later. "There is little (the Fed) can do but stand on sidelines with pom poms and cheer people on," he says.

In Striking Shift, Small Investors Flee Stock Market
by Graham Bowley - New York Times

Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market. Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds. If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are "losing their appetite for risk," a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday. One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments. "At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds" rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, "This is very unusual." The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.

It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades. For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession. "For a lot of ordinary people, the economic recovery does not feel real," said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. "People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery."

One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced. He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago. "Like everyone, I lost" during the recent market declines, he said. "I needed to have a more conservative allocation." To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.

Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.

Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working. And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.

On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses. According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.

For a few months at the start of this year, things were looking up for stock market investing. Optimistic about growth, investors were again putting their money into stocks. In March and April, when the stock market rose 8 percent, $8.1 billion flowed into domestic stock mutual funds. But then came a grim reassessment of America’s economic prospects as unemployment remained stubbornly high and private sector job growth refused to take off.

Investors’ nerves were also frayed by the "flash crash" on May 6, when the Dow Jones industrial index fell 600 points in a matter of minutes. The authorities still do not know why. Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008. Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.

The stock market rose 7 percent last month as corporate profits began rebounding, but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals. A big beneficiary has been bond funds, which offer regular fixed interest payments. As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009.

Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. "People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds," he said. "In the financial markets, there is one truism: flow follows performance."

Ross Williams, 59, a community consultant from Grand Rapids, Minn., began to take profits from his stock funds when the market started to recover last year and invested the money in short-term bonds, afraid that stocks would again drop. "We have a very volatile market, so we should be in bonds in case it goes down again," he said. "If the market is moving up, I realized we should be taking this money and putting it into something more safe rather than leaving it at risk."

America no longer needs Chinese money, for now
by Ambrose Evans-Pritchard - Telegraph

As the Sino-American showdown in the South China and Yellow Seas escalates into the gravest superpower clash since the Cold War, the United States cannot wisely rely on China to help fund its budget deficit for any longer.

The cacophony of voices in Beijing questioning or mocking the credit-worthiness of the US is now deafening, from premier Wen Jiabao on down. The results are in any case manifest: US Treasury data show that China has cut its holdings of Treasury debt by roughly $100bn (£65bn) over the past year to $844bn. ZeroHedge reports that net purchases by the big three of China, Japan, and the UK (Mid-East petro-dollars) have been sliding for two years. In August they bought the least amount of US debt this year.
China is finding other ways to recycle its trade surplus and hold down its currency, buying record amounts of Japanese, Korean, Thai, and no doubt Latin American bonds. "Diversification should be the basic principle," said Yu Yongding, an ex-adviser to the Chinese central bank. Beijing is buying gold on the dips, or doing so quietly through purchases of scrap ores, or by deals with miners such as Coeur d'Alene in Alaska.

It is building strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana. Where this expansion runs into political barriers, they are funding projects – such as a $10bn loan to Petrobras for the deepwater oil off Brazil. Where all else fails, they are buying equities. All of this recyles China's reserve surplus away from US debt.

So it is a good thing that US citizens have stepped into the breach, investing a record $185bn into bonds funds this year (ICI data). JP Morgan describes this as "extraordinary prejudice", evidence of irrational fear. Or perhaps JP Morgan has an extraordinary prejudice against bonds, arguably the shrewdest asset in a world where fiscal stimulus is being withdrawn before the rest of the economy has reached "escape velocity". The inventory cycle is ebbing, manufacturing has tipped over, the workforce is still shrinking, and the economy is sliding into a deflationary rut.

Above all, bond appetite reflects what David Rosenberg at Gluskin Sheff calls the new frugality. Americans are saving again. Surplus nations are in for a nasty shock if they hope to feed off US demand as if nothing had changed. Yet bond yields have fallen to nose-bleed levels. Ten-year rates are at an all-time low of 2.27 in Germany, and back to 0.92pc in Japan's deflation laboratory. They have slid to 2.6pc in the US.

When yields plumbed these depths over the winter of 2008-2009, latecomers burned their fingers badly. 10-year Treasury yields doubled in five months as the effects of zero Fed rates, quantitative easing, and $2 trillion of fiscal stimulus worldwide halted the downward spiral. This time yields may stay low for longer. Fiscal and interest rate ammo has been exhausted, though not QE. I have little doubt that central banks can lift the West out of debt-deflation if needed with genuine QE – not Ben Bernanke's Black Box "creditism", or Japan's fringe dabbling. Whether they have the nerve or the ideological willingness to do so is another matter.

Does that mean bond yields must keep falling to unimaginable lows, as they have in Japan for twenty years? Perhaps, but Japan is sui generis (captive bond market, vast foreign assets, demographic atrophy), and the world has moved on. As Moody's said this week, the Great Recession has made sovereign debt suspect. "The burden of proof now falls on governments". Events have "fast-forwarded history", ripping away the 20-year cushion we counted on before the "adverse debt dynamics" of our aging crisis hits home.

Two epochal forces are colliding in the global bond market: core deflation is gathering force but the West is losing sovereign credibility just as fast. Arch-bear Albert Edwards at Société Générale advises clients to prepare for a violent policy swing from one extreme to the other. First we deflate into the abyss: then we inflate hard rates to get out again. At some point the "euthanasia of the rentier" will wear off. Misjudge the sequence at your peril.

Facing Budget Gaps, Cities Sell Parking, Airports, Zoo
by Ianthe Jeanne Dugan - Wall Street Journal

Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run. California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs.

About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland's RBS Global Banking & Markets. Those assets have a market value of about $45 billion—more than ten times the $4 billion or so two years ago, estimates Dana Levenson, head of infrastructure banking at RBS. Hundreds more deals are being considered, analysts say.

The deals illustrate the increasingly tight financial squeeze gripping communities. Many are using asset sales to balance budgets ravaged by declines in tax revenues and unfunded pensions. In recent congressional testimony, billionaire investor Warren Buffett said he worried about how municipalities will pay for public workers' retirement and health benefits and suggested that the federal government may ultimately be compelled to bail out states.

"Privatization"—selling government-owned property to private corporations and other entities—has been popular for years in Europe, Canada and Australia, where government once owned big chunks of the economy. In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations. On a toll road, for example, a private operator may have more money to pump into repairs and would bear the brunt of losses if drivers used the road less.

While asset sales can create efficiencies, critics say the way these current sales are being handled could hurt communities over the long run. Some properties are being sold at fire-sale prices into a weak market. The deals mean cities are giving up long-term, recurring income streams in exchange for lump-sum payments to plug one-time budget gaps. The deals are threatening credit ratings in some cases and affecting the quality and cost of basic utilities such as electricity and water. Critics say many of the moves are akin to individuals using their retirement plans to pay for immediate needs, instead of planning for the future.

"The deals are part of a broader restructuring of our economy that carries big risks because of revenue losses over time," says Michael Likosky, a professor at New York University who specializes in public finance law. Municipalities argue that the money they raise could help build more long-term assets, boost efficiency and avoid raising taxes. "The City of Los Angeles shouldn't be in the parking business," says Mike Mullen, senior adviser to L.A.'s mayor. Mr. Mullen was hired from Bank of Montreal to study selling some of the city's assets, including parking spaces, which bring in about $20 million annually.

In the U.S., selling public buildings and leasing them back got some attention in the 1980s, but those deals were largely done for tax benefits and the asset generally stayed in public hands. The current deals are fundamentally different because control of the asset transfers to private hands. In such deals, "the private investor takes on operating risk," Mr. Likosky says. In New York's Nassau County, officials last week began seeking buyers for the rights to rent on a former military base called Mitchel Field. The county would still own the 200-acre site, but would get an upfront payment from an investor who would collect the rent payments for up to 30 years—estimated at about $113 million. The county hopes to raise about $20 million to help fill a budget gap.

The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.

After the deal, some drivers complained about price increases as well as meter malfunctions caused by the overwhelming number of quarters that suddenly were required. Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion. "The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.

Thomas Lanctot, head of public finance at William Blair & Co., which advised the city on the leasing, says Chicago got a good price. The deal protects the city from economic risks, he said, such as drivers moving to mass transit. "This is not the crown jewels," he says. "This is asphalt." The city said it is investing $100 million of the $1.16 billion in human infrastructure programs like a low-income housing trust fund, ex-offender and other job and social programs. About $1 billion has already been spent on operational expenses such as salaries and sanitation—a fact that came into the equation when Fitch Ratings in early August downgraded Chicago's bond rating to "AA" from "AA-plus."

The downgrade, which could raise borrowing costs, was due partly to Chicago's "accelerated use of reserves to balance operations," Fitch said. Around the country, at least a dozen public parking systems are up for bid, including in San Francisco and Las Vegas. Proponents say private businesses are better at balancing parkers with spaces, advertising and matching prices with demand. Critics claim the sales are garnering too little money, are driving up parking rates and removing a valuable revenue stream. Besides, if a city wants to use a parking lot property for something else years down the road, it can't—the city is typically locked into parking for the lease's life unless it compensates the new operator for the long term revenue loss.

In Pittsburgh, the mayor is proposing to lease out the parking system for an upfront sum of about $300 million over 50 years and funnel the money into the pension system. Bill Peduto, a city councilman, is fighting the plan. The spaces generate $35 million annually, and considering that the concessionaires are proposing doubling rates, he says, the city will ultimately lose $3.5 billion over the life of the lease. "Even with the money from a sale, we'll have to put another $17 million annually into the pension fund—and we don't have that," Mr. Peduto says. He prefers raising parking rates slightly and floating a bond to stabilize the pension fund.

The privatization trend is being spurred by a cottage industry of consultants, lawyers and bankers. Allen & Overy, a New York law firm, dubs it "rescue investing" and recently provided investors a booklet on "jurisdictions of opportunity"—municipalities whose laws, budget woes and credit ratings make them most likely to make deals. "More public-private partnerships for public infrastructure in the U.S. have reached commercial and financial close than during any comparable period in U.S. history," the booklet says.

Many municipalities have long done a poor job of running their roads, parking spaces and bridges, contends David Horner, a lawyer at Allen & Overy. Maintenance contracts, for example, are highly political and with revenues shrinking, infrastructure is increasingly deteriorating. Critics say buyers are taking advantage of municipalities at a vulnerable time and lack the incentive that governments have to maintain quality. Among assets on the block all over the country are state and city office buildings. Arizona received national attention in late 2009—including a skit on the "Daily Show"—when it announced plans to raise more than $1 billion turning over control of public buildings and leasing them back. Much of the money is being used to plug the state's budget hole.

Such "one-time budget maneuvers" were cited in a Moody's Investor Services report recently to downgrade Arizona a notch. "We view these asset sales as 1-shots…that create structural budget imbalances in future years, but that may be necessary actions to bridge the time gap until revenue stabilization or growth returns," says Robert Kurtter, a managing director at Moody's. The California legislature recently released a report by its analyst's office entitled "Should the State Sell its Office Buildings?" California originally bought office buildings to save money, the report says. The cost of leasing them back "would exceed sales revenue," it said, making the sales "poor fiscal policy." But "in the current budget environment," it added, such deals are necessary to balance the budget.

Water supply also is being sold to private interests. In Milwaukee, a consumer advocate called a plan to sell the water system "mortgaging Milwaukee's future." The report, by Washington-based Food and Water Watch, says private water service in general costs 59% more as new owners seek to recoup their investment. It adds: "Water users cannot vote private managers or state-appointed regulators out of office." City Comptroller W. Martin Morics argues that the plan, which is on the back burner, could bring in more than $500 million through a lease over 75 to 99 years.

Airports also are being privatized under a limited federal program. Deals under consideration for lease include airports in New Orleans and Puerto Rico. In Lawrenceville, Ga., residents last month protested against the privatization of Gwinnett County, Ga., airport. Their main concerns were noise and pollution, as a private owner aims to expand it into a commercial airport. The county and a private operator have said that the plan would free up revenues, now reserved for airport use only, for other purposes and create jobs.

Dallas is selling prized outdoor spaces. After turning over operation of the zoo to a private firm, the city is now hawking the Farmers' Market and Fair Park. "It would be part of budget solutions and streamlining operations," says city spokesman Frank Librio, who notes that the city is doing what it can to close a budget gap and replenish reserves.

How States Hide Their Budget Deficits
by Steve Malanga - Wall Street Journal

In April, the New York State Comptroller, Thomas DiNapoli, issued a damning report on the Empire State's financial practices. Albany's budgets, he observed, increasingly employ "fiscal manipulations" to present a "distorted view of the State's finances." Money shuffled among accounts to hide deficits, loans made by the state to itself, and other maneuvers Mr. DiNapoli called a "fiscal shell game" are meant to "mask the true magnitude of the State's structural budget deficit."

The comptroller's report produced yawns. Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice.

The Citizens Budget Commission of New York recently measured states' obligations against their economic resources. New Jersey was rated in the worst fiscal shape, but it judged other states that employ questionable budget practices, including New York, California, Illinois and Rhode Island, to be only marginally better. Closer SEC scrutiny of these states' muni offerings should be welcomed by investors, and also by taxpayers from whom legislators often try to hide the true depth of fiscal problems until they grow unmanageable.

New Jersey is an object case in how such manipulations eventually backfire. The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues. To make the gambit seem reasonable, Trenton projected unrealistic annual investment returns—between 8% and 12% per year—on the borrowed money. The maneuver temporarily made the funds seem well-off.

In 2001, when legislators wanted to further enhance rich pension benefits, they valued the state's plan at its richest point: 1999, when the system was flush with borrowing and the tech bubble hadn't yet burst. The scheme proved disastrous, of course, because the stock market has since gone sideways, and New Jersey has achieved nowhere near the returns it needed on that borrowed money.

Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn't want to "disrupt" government operations.) Over time, New Jersey's combination of overspending in its budget and underfunding of its pensions resulted in a tidal wave of tax increases and spending cuts.

Now, even if Gov. Chris Christie can solve the state's long-term, structural budget problems, New Jersey will have to find some $3 billion a year in new revenues to begin contributing again to its pensions. Municipal bondholders seem complacent in the face of such problems. They like to assert that they have first dibs on any tax revenues. But New Jersey has written so many "guarantees" into its constitution—whether regarding pensions or citizens' right to a "quality" education—that sorting out the competing interests in a fiscal crisis could keep the courts busy for years.

As alarming is how Jersey-style fiscal practices have proliferated in other states. The manipulations date back to the late 1970s, when taxpayer revolts produced spending caps and constitutional limits on tax increases in states. Rather than hew to these restrictions, politicians found increasingly inventive ways around them. State officials have acknowledged such practices are growing common. During the 2002 recession, a report by the National Association of State Budget Officers admitted that states were employing "creative, innovative . . . adjustments" to budgets. They include financing current operations with debt, moving money from trust funds dedicated to specific tasks (like highway maintenance) into general funds, and pushing payments to vendors into future fiscal years.

"The long-running use of gimmicks is part of the reason most state budgets are in crisis today," noted Eileen Norcross of the Mercatus Center at George Mason University in a recent study. The federal government has served as enabler. Although the special tax-free status it bestows on municipal bonds amounts to a subsidy, Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana.

California granted its workers big pension and benefit enhancements in 1999. As in New Jersey, those benefits were based on unrealistic projections of stock-market returns over the long term. Now the costs of those pension enhancements—which have added some $4 billion annually to the state budget and hundreds of millions more to municipal costs—have deepened Sacramento's fiscal woes, which it is solving with more ploys, like pushing tax refunds and payments to vendors into future years.

These maneuvers often don't make it into bond presentations. Like New Jersey, Illinois used extensive borrowing—including a whopping $10 billion offering in 2003—to make its pensions appear well-funded. The state then skipped contributions into the system for several years, creating additional funding problems. A recent study by Joshua Rauh of Northwestern University projects that Illinois's pension system is among a handful that, like New Jersey's, could run out of money in the next decade.

Yet a presentation made by Illinois officials to potential investors in June mentioned the pension borrowings only briefly, then painted a rosy picture of the state's fiscal practices. "Does the state have the Will To Govern needed to address its challenges?" the presentation asked. "YES" it answered in big, bold letters. The presentation then touted modest pension reforms that the state had enacted, even though legislators are doing little to ensure the system's long-term viability.

The SEC should demand, at the very least, that states acknowledge the unease of their own in-house experts. There is nothing in the nearly 200 pages of New York's current disclosure document for investors, for instance, that hints at the state comptroller's concerns over the direction of the state budget. In refreshingly candid language, Mr. Napoli describes in his report a growing lack of transparency, which hides the state's true fiscal condition, as a "deficit shuffle." If that's a new dance step, it's one that investors and taxpayers everywhere need to work harder to ban. The SEC should help.

Pension Fraud in New Jersey Puts Focus on Illinois
by Mary Williams Walsh - New York Times

The federal government’s crackdown on the State of New Jersey this week for misrepresenting the condition of its pension funds raises a question: Who else might have pension numbers that could draw regulatory fire? Cities and states are scrambling to make sure their pension disclosures are in order, and investors in distressed debt — who make money off financial trouble — are scrambling too, sensing opportunity.

"No one knows exactly how to attack this market yet, but people are going to be watching the New Jersey case and others like it very closely from an investment point of view," said Jon Kibbe, a lawyer who specializes in distressed debt. Though some advisers are urging caution, New Jersey and other states have continued to issue new debt at reasonable rates as investors clamor for high-grade securities in a low-rate environment.

Harry J. Wilson, a Republican candidate for New York State comptroller, said Friday that New York was not compliant with the standard that the Securities and Exchange Commission established in its cease-and-desist order against New Jersey. Dennis Tompkins, a spokesman for the current New York comptroller, Thomas P. DiNapoli, who is running for re-election, said that "it’s ridiculous, it’s wrong and it’s reckless to make those accusations" and added that the state’s financial disclosures were complete and correct.

After two prominent S.E.C. pension cases, the American Bar Association’s new disclosure bible for municipal bond lawyers is selling briskly. "The cease-and-desist order has heightened awareness of the importance of accurate pension disclosure," said John M. McNally, a partner at the law firm Hawkins Delafield & Wood, and the project coordinator of the newest edition of "Disclosure Roles of Counsel," a treatise telling municipal bond lawyers what is expected of their clients.

Mr. McNally has also been serving as a special disclosure counsel to San Diego, the first government accused of securities fraud by the S.E.C. for faulty pension disclosures. New Jersey was the first state. The S.E.C. and other regulators found that San Diego had numerous pension problems, but in general, regulators said its government did not adequately describe the size of its obligations to retirees. In addition, there were discrepancies between the pension numbers in the official statement distributed to bond buyers and the pension numbers in other documents.

Mr. McNally said it was important to give consistent information and to explain the status of the pension fund’s condition in plain English. "One of the critical disclosure points would be, what are the implications for an entity’s annual budget," he said. Instead of bristling with acronyms, he said, pension documents should tell an investor how much the government must put in the pension fund every year and whether it can afford the payments. At the moment, the municipal bond market’s players — advisers, investors and underwriters — are more concerned about Illinois than any other state. Its credit was downgraded this year, and all the main ratings agencies said the poor condition of its public pension funds was a primary factor.

A spokeswoman for Gov. Pat Quinn’s Office of Management and Budget, Kelly Kraft, said Illinois believed its pension disclosures were complete and accurate. The state has not hidden the fact that its pension funds have big shortfalls, she said, and there was no reason to think the S.E.C. might lodge a complaint against it, as it did with New Jersey. She added that investors had been calling with questions in the wake of the S.E.C.’s action against New Jersey, but said that Illinois had been telling them not to worry — the regulator had not contacted state officials. She said the state had no plans to revise any of its financial documents. Still, some actuaries are deeply concerned about Illinois’s pension numbers, particularly because of a pension law enacted earlier this year.

State officials claimed the measure had sharply lowered costs by cutting the benefits that will be earned by workers hired in the future. (The current work force will continue to earn the same benefits as before.) When it enacted the reform, Illinois issued a report, explaining in detail how it would work. Actuaries who have reviewed the numbers say that report is at least misleading and appears to be based on a type of calculation not authorized for pension disclosures. The state has not issued new audited financial statements since the law was passed.

Numbers in the report show that the state will be able to reduce its contributions to its pension funds, saving the state money, starting with $300 million in its first year and adding up to tens of billions of dollars over time. That’s because Illinois could make smaller pension contributions, on the assumption that its work force would over time consist of people earning smaller pensions. Paradoxically, even though the state will make smaller contributions, the report forecasts that Illinois will get its pension funds back on track to a respectable 90 percent funding level by 2045. It projects that costs will increase slowly and an economic recovery will make cash available for the state to make the contributions it has failed to do in the past.

Whether that is even possible is contested by some actuaries who note that its family of pension funds is now only 39 percent funded. (If a company let its pension fund dwindle to that level, the federal government would probably step in, but federal officials have no authority to seize state pension funds.) Some actuaries who have reviewed the state’s plans said that shrinking contributions would make the pension funds shakier, not stronger. Indeed, one of them, Jeremy Gold, called Illinois’s plan "irresponsible" and said it could drive the pension funds to the brink.

Further, Mr. Gold pointed out that Illinois’s official disclosures said that its pension calculations used an actuarial method known as "projected unit credit," but that the pension reform report used another method, which had not been approved for disclosure. "According to Illinois statute, the prescribed contributions are determined under a method that may not be in compliance with the pertinent actuarial standards of practice," Mr. Gold said. Actuaries from the two big firms that help Illinois with its pension funds conceded that the report relied on another methodology. Larry Langer of Buck Consultants said that a law allowed the state to use the alternate method outside of bond offering documents. Investors can look at both sets of numbers and draw their own conclusions, he said.

He acknowledged that using the latest pension reforms would lead to a lower funding level but said state officials were not concealing the magnitude of the problem. "They almost laud it," he said. Brian Murphy of Gabriel, Roeder, Smith & Company, another of Illinois’s actuarial consultants, said the numbers were for illustrative purposes only and unlikely to reflect what the state would actually do in coming years. "They’re going to fund it at the proper level," Mr. Murphy said.

Zillions for Wall Street, Zippo for Barack's Old Neighborhood
by Robert Kuttner - Huffington Post

"The best lack all conviction, while the worst are full of passionate intensity."
-- W.B. Yeats

On Friday, the government moved to seize and temporarily shutter one of the truly heroic banking institutions of this dismal era for American finance -- ShoreBank of Chicago. More precisely, ShoreBank of Barack Obama's old neighborhood. Over the years, since its founding in 1973, ShoreBank had enabled thousands of moderate income residents to become homeowners, and thousands of small businesses to get credit, without ever playing the subprime game or making a single predatory loan. It was a model bank that earned a modest profit by delivering on a social mission.

In the end, ShoreBank succumbed to the aftermath of a financial crisis made on Wall Street. Yet while the Treasury Department found hundreds of billions of dollars to rescue giant Wall Street institutions, it refused to come up with the $75 million for which ShoreBank qualified under the TARP program. A number of stories that I've reported about the wrongheaded priorities of the Obama administration leave me bewildered and exasperated. This one leaves me really angry.

The bank will continue under new ownership and a new name, the Urban Partnership Bank, to be run by some recently hired ShoreBank executives, and which has pledged to keep the bank open and continue its basic philosophy. But owners of ShoreBank stock, which include many socially responsible investors, will have the value of their shares wiped out and the directors dismissed. And it remains to be seen whether some of ShoreBank's social commitment will be compromised.

Today, there is a whole category of bank known as a community development financial institution. This category did not exist until it was invented in 1973 by ShoreBank, then known as the South Shore National Bank. But ShoreBank did not set out to create a banking category, only to help a distressed community. Its idealistic president, Ron Grzywinski, now emeritus, had seen the effects of racial redlining first hand as a banker and community activist, and resolved to create a bank that could help the depressed South Shore neighborhood of Chicago regenerate by providing normal banking services to creditworthy borrowers.

I first met Ron in 1975, when I was staffing hearings on redlining for my boss, Senator William Proxmire, then the new chairman of the Senate Banking Committee. When community groups helped us draft legislation requiring banks to disclose by zip code where they had loans, a bill that Congress passed as the Home Mortgage Disclosure Act, we had the entire banking industry lobbying against the bill. The sole banker we could find to testify in favor was Ron Grzywinski.

Over the years, Ron and his colleagues built a model institution, and helped to transform South Shore and other depressed communities. In 1994, the Clinton administration, impressed by the achievement, enacted legislation to help create other community development banks. ShoreBank was the alternative to the predators that worked low income neighborhoods--the subprime sharpies, offering deals that were too good to be true, preying on the dreams of working people.

Fast forward to 2009. ShoreBank is caught up in a crisis not of its own making. Loans that were perfectly well collateralized when they were made are now under water because housing values have dropped. Borrowers who had bankable credit ratings are now behind on their payments because they are out of work. ShoreBank booked a loss of $36.9 million in the first half of this year.

In 2009, the Treasury Department, having dumped hundreds of billions through the TARP program to rescue Wall Street--$45 billion to insolvent Citigroup alone-- grudgingly created a very modest refinancing and recapitalization program to help distressed community development banks. But almost immediately, Herb Allison, the assistant treasury secretary in charge of TARP, set standards so high that hardly any can qualify.

Even so, ShoreBank managed to exceed the standards set by its prime regulator, the Federal Deposit Insurance Corporation. It raise some $150 million in new private capital, ironically much of it from the very institutions rescued by TARP, including Citigroup, Goldman Sachs, Bank of America, and Wells Fargo. Goldman's CEO, Lloyd Blankfein, eager to show that he's a white hat, personally worked the phone to raise money for ShoreBank.

The money raised more than met the capital target that the FDIC had set as a condition for ShoreBank to get $75 million in TARP money (when Citi got TARP money, private investors were fleeing.) In the meantime, ShoreBank has had an exemplary record of modifying loans so that borrowers could avoid foreclosure. But in the end, the Treasury refused to put up its share of the money, requiring ShoreBank to be seized, closed, and reopened under new ownership?

Why did the Treasury Department, which found almost unlimited sums for insolvent mega-banks on Wall Street, not cough up a relative pittance for ShoreBank, which was a going concern that had gotten a seal of approval from its primary regulator, the FDIC? There are a few explanations. One is that people like Tim Geithner and Herb Allison have their eyes focused on the big picture and don't have much time or money for small fry like ShoreBank. A second is that after all of bad publicity for the first round of TARP credits to Wall Street, they have belatedly tightened their standards when it comes to community banks.

But the saddest explanation is that the Treasury is bending over backwards not to help an exemplary community bank in Barack Obama's old neighborhood, lest somebody accuse the administration of favoritism. And in fact, for weeks Republican congressman have been using Shorebank as a whipping boy. Fox News has been full of broadsides against ShoreBank. But the sacrifice of ShoreBank has done nothing to quiet the rightwing propaganda. Since the investors in the successor bank include some of the very same Wall Street banks that got aid from TARP, the rightwing storyline continues that Obama's buddies on Wall Street are doing the administration a favor, and that this is a sweetheart deal.

None of the explanations for the decision to let ShoreBank fail reflects credit on the administration. If the Treasury had one standard for the Wall Street and another for the south side of Chicago, shame on them. And if the administration failed to extend aid to a model institution serving the victims of the subprime mess in Obama's old neighborhood for fear of Fox News, shame on the president. Appeasing the right does nothing except whet their appetite. When will the best--not the worst--display conviction, passion and intensity on behalf of a decent America?

Income Inequality and Financial Crises
by Louise Story - New York Times

David A. Moss, an economic and policy historian at the Harvard Business School, has spent years studying income inequality. While he has long believed that the growing disparity between the rich and poor was harmful to the people on the bottom, he says he hadn’t seen the risks to the world of finance, where many of the richest earn their great fortunes. Now, as he studies the financial crisis of 2008, Mr. Moss says that even Wall Street may have something serious to fear from inequality — namely, another crisis.

The possible connection between economic inequality and financial crises came to Mr. Moss about a year ago, when he was at his research center in Cambridge, Mass. A colleague suggested that he overlay two different graphs — one plotting financial regulation and bank failures, and the other charting trends in income inequality. Mr. Moss says he was surprised by what he saw. The timelines danced in sync with each other. Income disparities between rich and poor widened as government regulations eased and bank failures rose.

"I could hardly believe how tight the fit was — it was a stunning correlation," he said. "And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?"

Professor Moss is among a small group of economists, sociologists and legal scholars who are now trying to discover if income inequality contributes to financial crises. They have a new data point, of course, in the recent banking crisis, but there is only one parallel in the United States — the 1929 market crash. Income disparities before that crisis and before the recent one were the greatest in approximately the last 100 years. In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent earned a strikingly similar percentage: 49.74 percent.

In 1928, the top 1 percent received 23.94 percent of income. In 2007, those earners received 23.5 percent. Mr. Moss and his colleagues want to know if huge gaps in income create perverse incentives that put the financial system at risk. If so, their findings could become an argument for tax and social policies aimed at closing the income gap and for greater regulation of Wall Street.

This inquiry is one that some conservative economists are already dismissing. R. Glenn Hubbard, for instance, who was the top economic advisor to former President George W. Bush, said income inequality was not the culprit in the most recent crisis. "Cars go faster every year, and G.D.P. rises every year, but that doesn’t mean speed causes G.D.P.," said Mr. Hubbard, dean of the Columbia Business School and co-author of the coming book "Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity."

Even scholars who support the inquiry say they aren’t sure that researchers will be able to prove the connection. Richard B. Freeman, an economist at Harvard, is comparing about 125 financial crises around the globe that occurred over the last 30 years. He said inequality soared before many of these crises. But, Mr. Freeman added, the data from different nations is difficult to compare. And Professor Freeman says he has found some places, like the Scandinavian countries, where there were crises without much inequality, suggesting that other factors, like deregulation, may be the best explanations.

For his part, Mr. Moss said that income inequality might have complicated links to financial crises. For instance, inequality, by putting too much power in the hands of Wall Street titans, enables them to promote policies that benefit them — like deregulation — that could put the system in jeopardy. Inequality may also push people at the bottom of the ladder toward choices that put the financial system at risk, he said. And low-income homeowners could have better afforded their mortgages if not for the earnings gap.

(Mr. Hubbard has a different take: He says many lower-income homeowners should not have had mortgages in the first place. The latest crisis, he says, was caused by policymakers who decided to "democratize credit" by expanding home ownership. Their actions were driven by a desire to address inequality, but those policymakers were misguided and should have improved education instead, he adds.)

Scholars who study inequality often focus on people at the bottom. But, Mr. Moss said, the incentives of people at the top also deserve more scrutiny. He pointed to the recent work of Margaret M. Blair, who teaches at Vanderbilt University Law School and is active with the Tobin Project, the nonprofit organization Mr. Moss founded a few years ago to study issues like economic inequality. She is researching whether financial workers promote bubbles and highly leveraged systems, even unconsciously. Ms. Blair said that because financial bubbles often lead to higher returns, financial workers have the potential to make more, and this pattern can influence their trading strategies and the policies they promote. Those decisions, in turn, drive even greater income inequality, she said.

After the 1929 crash, the income gap narrowed dramatically and remained low for decades, because of the huge wealth lost by people at the top and the sweeping financial reforms introduced in the 1930s that reined in Wall Street. So far, the results are not as dramatic in the wake of the recent financial crisis. The income gap narrowed slightly in 2008, according to the most recent data available, but it remains unclear if it will continue shrinking.

This time, after all, the system did not collapse as it did in 1929. The status quo on income inequality looks like it was essentially maintained. Mr. Moss said he supported the government intervention in 2008, though he noted, "Financial elites made off rather well."

They Still Don't Get It
by Eliot Spitzer - Slate

The art of the "big lie" is to repeat something often enough, and with a powerful enough megaphone, such that your distortions are not challenged. So it is with the Wall Street Journal's obsession with attacking and misrepresenting the multiple cases that I brought against both AIG and its former chairman and CEO, Hank Greenberg.

At stake is much more than the particular cases at issue. By trying to rewrite the narrative of the economic cataclysm we have lived through, the deniers are attempting to challenge the common-sense conclusions that flow from an accurate understanding of history. They are desperately trying to protect a particularly rabid, and ultimately damaging, anti-regulatory philosophy that has dominated the past 30 years. They are trying to protect a broken and misguided understanding of how markets really function, a view now openly rejected even by such staunch free-market advocates as Judge Richard Posner and former Fed Chairman Alan Greenspan. Acknowledging the propriety of any government prosecutions of corporate wrongdoing would make impossible their current effort to push back against even the government's minimal responses to the financial crisis.

So, in view of the Journal's recent editorial, a few facts are in order: Greenberg was removed as CEO of AIG by his own board—of its own volition—after his refusal to answer questions about his involvement in fraudulent reinsurance contracts that his company had created. Five people were convicted by a jury in Connecticut in 2008 for their role in these frauds. The federal prosecutor, in his summation, called Greenberg an unindicted co-conspirator in the scheme. In New York, the judge who will hear the case based on these facts, brought by the state when I was attorney general, called the case "devastating" and referred to AIG as a "criminal enterprise." AIG as a corporate entity settled the case with my office in 2006 by restating its financial results and paying a fine of $1.6 billion. Shareholders are now awaiting judicial approval of an additional $750 million settlement to compensate them for damages they suffered from these accounting frauds.

Contrary to the claims of the Journal's editorial, the cases against Greenberg and AIG have been both proper and successful. More to the point, perhaps, they have been necessary to the vindication of justice and ethics in the marketplace.

The Journal's editorial also seeks to disparage the cases my office brought against Marsh & McLennan for a range of financial and business crimes. The editorial notes that two of the cases against employees of the company were dismissed after the defendants had been convicted. The judge found that certain evidence that should have been turned over to the defense was not. (The cases were tried after my tenure as attorney general.) Unfortunately for the credibility of the Journal, the editorial fails to note the many employees of Marsh who have been convicted and sentenced to jail terms, or that Marsh's behavior was a blatant abuse of law and market power: price-fixing, bid-rigging, and kickbacks all designed to harm their customers and the market while Marsh and its employees pocketed the increased fees and kickbacks. Marsh as a company paid an $850 million fine to resolve the claims and brought in new leadership. At the time of the criminal conduct, Jeff Greenberg, Hank Greenberg's son, was the CEO of Marsh. He was forced to resign.

What does it mean that supposedly thoughtful voices in the corporate world continue to deny the simple fact that irresponsible behavior should be addressed head on, and the rules of conduct altered sufficiently to permit a sound foundation for future economic growth?

I fear that we have still not constructed a social contract or general understanding of the role of government in the marketplace that will bring things into balance—in terms of both individual behavior and collective responsibility. Maybe we are still living in the remaining hours of a fading regime, still addled by the warped perspective of too many who have done perhaps too well over the past decade or two. A case in point is Steve Schwarzman, the founder and CEO of Blackstone, a private equity firm. Schwarzman recently compared the attempt to tax the often astronomical fees earned by private equity managers as ordinary income—as they should be—to Hitler's invasion of Poland. This horrific statement, from someone who spent millions of dollars on his own birthday party, is an unfortunate reminder of the mind-set of at least some pockets of our corporate leadership. It is time for more enlightened voices in the corporate world to use their own megaphones.

Debt’s Deadly Grip
by Gretchen Morgenson - New York Times

It’s one of the toughest lessons an investor has to learn: while the value of assets can plummet posthaste, it takes forever to shrink the debt that was used to buy them. Last week, this harsh truth was made clear yet again, in a report on consumers’ financial well-being by the Federal Reserve Bank of New York. The first of a Fed series to be published quarterly on household debt and credit, the 38-page report shows just how tapped out the consumer remains three years after the borrowing bubble burst.

To be sure, the data indicates that consumers are doing what they can to kick their debt habits. But the process is slow. For example, total consumer debt stood at $11.7 trillion on June 30, down just 6.5 percent from its peak in the third quarter of 2008. The number of open credit card accounts was down considerably — 23.2 percent — from the highs reached during the second quarter of 2008, while mortgage obligations have fallen 6.4 percent from the peak that was seen almost two years ago.

Many consumers, though, are still very much in a vise. Halfway through this year, 11.4 percent of outstanding consumer debt was delinquent, up slightly from 11.2 percent a year earlier. An astonishing $1.3 trillion of consumer debt is delinquent, with $986 billion seriously so — 90 days late and counting. While delinquent balances are down by about 3 percent from the same period last year, serious delinquencies are up a bit more — 3.1 percent.

Here are some other troubling statistics from the Fed: a half-million people had a foreclosure added to their credit reports between March 31 and June 30, an increase of 8.7 percent over the first quarter of the year. And the numbers of consumers with new bankruptcies appearing on their credit reports rose 34 percent during the quarter, to 621,000. That increase is significantly bigger than it has been in the last few years, according to the Fed.

Per capita debt balances are staggering, as well — and for many consumers, the assets underpinning these obligations have collapsed. Reflecting the heavy burden that mortgages represent for most consumers, these debts are highest in states where the real estate mania went craziest. In California, for example, the average per capita debt balance among consumers with a credit report is $78,000, the Fed said; in Nevada, it is $73,000. The nationwide average is $49,000.

Adding to the weight of these debts is the fact that consumers’ income statements aren’t exactly flush right now, thanks to high unemployment and rock-bottom interest rates. The misery of a balance sheet deleveraging is being exacerbated by a dearth of income opportunities. Of course, this is what happens after a spectacular asset bubble bursts. Nevertheless, for consumers who are cutting debt and trying to save, it is dispiriting indeed that they generate so little on their money. Those living on fixed incomes are also in a bind.

It is not lost on these consumers that their minuscule returns are a direct result of the Federal Reserve’s attempt to shore up troubled banks’ financial standing. Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers. As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.

Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near. In short, the Fed’s interest rate policy may be causing more economic problems than it’s solving.

Here’s how Mr. Petzel calculated the amount that savers are losing: Some $14 trillion in debt issued by the Treasury, federal agencies and municipalities is held by investors here and overseas. Rates are currently near zero on short-term Treasuries, compared with an average of 3 percent over time. Therefore, Mr. Petzel says, it is reasonable to estimate that rates are too low by 2.5 percentage points. On $14 trillion, that’s $350 billion a year in lost income.

Yes, we’re talking real money. It’s more than 2 percent of gross domestic product and almost 3 percent of disposable personal income, Mr. Petzel noted. "If we thought this zero-interest-rate policy was lowering people’s credit card bills it would be one thing but it doesn’t," he said. Neither does it seem to be resulting in increased lending by the banks. "It’s a policy matter that people are not focusing on," Mr. Petzel added.

One reason it’s not a priority is that savers and people living on fixed incomes have no voice in Washington. The banks, meanwhile, waltz around town with megaphones. Savers aren’t the only losers in this situation; underfunded pensions and crippled endowments are as well. Of course, the federal government is a huge beneficiary of low rates; if they were higher, our already ballooning deficits would be heftier still. Nevertheless, raising interest rates a bit would be beneficial on several counts, Mr. Petzel maintains. It could help increase consumption and would reduce the appeal of higher-yielding and dicier investments.

The Fed may be fearful, Mr. Petzel surmised, that higher interest rates could push some teetering banks off the cliff. "But saving a few more zombie enterprises with strong Washington voices at the expense of millions of savers’ consumption may be missing the forest for the trees," he said. As the midterm elections approach, expect to hear arguments that the recent bailouts have not been that onerous, when all is said and done. But such contentions are unlikely to include the costs of near-zero interest rates, a sizable line item on any accurate reckoning of the bailout bacchanal.

Grim future for young workers in 'pensioner ghettos'
by Emma Simon - Telegraph

Parts of Britain could become retirement ghettos within a generation with three retired people for every four in work, a report warns. Rural areas, particularly in the South West of England, will be the worst affected by a significant increase in the number of those aged 65 and over, placing a growing financial burden on councils trying to pay for care of the elderly.

The highest concentration of retired people will be in West Dorset, West Somerset and Berwick-upon-Tweed – where almost a third of the population will be over the retirement age by 2030, the research says. They are among the 10 council areas that will have three retired people for every four in work by 2030, the report warns. They will also have just two people aged under 16 for every person aged over 85.

The research, by the annuity providers Partnership, is based on population data compiled by the Office for National Statistics. Chris Horlick, the managing director of Partnership, said the impact of the ageing population on the worst-affected councils would be extreme. "This means that direct taxation and local council taxes will have to rise, or services to the elderly will have to be cut," he said. These "virtual retirement communities" faced a vicious circle, where the cost of providing services for the elderly could lead to higher council tax bills, potentially driving out younger workers.

It is the growing number of those aged 85 and over that will put a particular burden on social services, Mr Horlick warns, as people in this age bracket are more likely to need costly long-term care. At present, most people who own property have to pay for this themselves – usually through the sale of their home – but as their resources are depleted, the local council has to meet these costs.

Many people underestimate the cost of nursing home care: figures show that the average care home costs £36,000 a year, with many private nursing home places in the south of England costing more than £50,000, comparable to a year-long cruise on the Queen Elizabeth liner. Mr Horlick said: "An ageing population will mean more people will need long-term care. And as medical technology improves, people will live even longer in care, which will present a real challenge for these local authorities. 'Younger people in particular face an enormous burden to meet the costs of those who are in retirement."

The Government has set up a Long Term Care Funding commission, which is due to report next year. To help meet the costs of an ageing population the state pension age will be raised to 66, possibly within five years. The ONS figures show the current ratio is four working adults for every pensioner but this will fall to just three working adults by 2040.

In Japan, a Debilitating Lack of Options to Fight Deflation
by Hiroko Tabuchi - New York Times

The economist Milton Friedman once famously proposed scattering money from a helicopter to get consumers to spend their way out of deflation — the debilitating decline in prices and wages that can act as a deadweight on economic activity. Copter cash may not yet be among the tools considered by the Japanese central bank in its quest to lift the country out of a long deflationary slump. But pressure is mounting on the Bank of Japan for more drastic action.

Last week, the deflation doldrums that have becalmed the Japanese economy for much of the past decade helped knock Japan from its long-held ranking as the second-largest economy. (China edged up to No. 2, behind the United States.) And recent signs of a Japanese recovery now seem to be fading: The economy grew an anemic 0.1 percent between April and June. Meanwhile, a strengthening yen, which hurts Japan by making its exports less competitive, has many people calling for the bank to further ease its monetary policy to shore up the economy — if not outright government intervention in currency markets.

But on Monday, hopes for decisive action were dashed when Prime Minister Naoto Kan and the governor of the Bank of Japan, Masaaki Shirakawa, opted not to hold a widely anticipated meeting, but instead engaged in a 15-minute phone call in which the two did little more than agree to "communicate closely with each other." "There was absolutely no talk" of currency intervention in their conversation, said Yoshito Sengoku, the government’s top spokesman.

Following Mr. Sengoku’s comments, the Nikkei stock index slipped 0.68 percent, to 9,116.69, its lowest close this year, . The yen continued to hover close to 15-year highs, or around ¥85.35 to the dollar. "The government has again taken a wait-and-see attitude," said Norio Miyagawa, asenior economist at Mizuho Securities Research and Consulting. "The truth is, there are no quick fixes, but markets are disappointed that they got nothing at all." Indeed, while Japanese economic officials have long been accused of moving too slowly and timidly, they now seem to have few good options, whatever their will for pursuing them.

In the United States, there has been considerable debate about whether the U.S. economy faces a similar deflationary risk and whether the Federal Reserve should be doing more to guard against falling into the same trap. Some of those fears may well be overblown, but a widely read paper by James Bullard, the Fed’s regional bank president from St. Louis, has warned that the U.S. economy faces a risk of becoming "enmeshed in a Japanese-style deflationary outcome in the next several years."

Japan’s experience shows that deflation can creep up on an economy — and can be extremely difficult to shake. In Japan, companies remain unsure of how much to invest, because deflation makes it unclear how much they can sell — and for how much. Households have little incentive to spend, knowing goods and services will get cheaper the longer they wait. That lack of spending, in turn, is deepening Japanese deflation, as companies are forced to decrease prices in a desperate bid to attract buyers.

An aging, dwindling population has further sapped demand. So have widely held fears over jobs, wages and pensions, which are prompting consumers to hunker down and save instead of spend. "Zombie" companies, propped up by rigid regulations and comfy ties with banks, leave little space for newer companies that might take more investment risks, offer more innovative products and services, and stimulate demand. "Japan’s deflation is not caused by a lack of liquidity or high interest rates," said Masaaki Kanno, chief economist at JP Morgan Securities Japan. "The problem is that people and firms do not want to spend money."

Any opportunity for fresh stimulus spending is limited by a $10 trillion public debt that is twice the size of the Japanese economy, as well as an impasse in the country’s Parliament. Mr. Kan appeared to back away Friday from recent talk of more stimulus, instead indicating that he would lean on the central bank to do more to sustain Japan’s recovery. "We need to think more about ways to boost the economy that don’t rely on pump-priming," Mr. Kan said.

The central bank’s options are also limited. With the main interest rate under its control — the so-called policy rate — at 0.1 percent, the bank has little leeway to lower rates further. That limits the bank to measures like buying up long-term government bonds, or pumping more short-term financing into banks, an approach it introduced in December. But consumer demand in Japan has become so weak — and deflationary expectations are now such the norm — that the economy seems no longer to respond to such monetary tools.

After Japan’s storied economic run-up of the 1980s became a speculative bubble that burst in 1990, it took about four years for its economy to hit the bottom. It then took another four years for deflation to take hold. Not until 1999 did the Bank of Japan respond by lowering its policy interest rate to zero. By that time, however, the economy was so depressed that not even zero interest rates could induce recovery.

Only when the central bank in 2003 began sharply increasing its purchases of financial assets to flood the economy with more money was the stage set for a gradual recovery. And yet, despite stable economic growth of 2.5 percent from 2004 through 2007, the deflation glacier did not completely melt: The decline in the consumer price index, a measure of deflation that tracks the average price for a basket of goods, slowed but did not disappear.

Still, emboldened by a nascent recovery, the Bank of Japan began raising its policy rate in July 2006, bringing it to 0.5 percent by the following March — a controversial step that some economists and politicians, called premature. Before that debate could fully play out, the global economic crisis ravaged Japan’s export markets, plunging the country into its worst recession since World War II. In 2008, the Bank of Japan again slashed interest rates, to 0.1 percent.

Now, an upward swing in the value of its currency is adding to the country’s woes by threatening its export-led economy, making Japanese goods more expensive overseas and eroding the value of Japanese corporate earnings. The yen tends to strengthen against other currencies despite weaknesses in the Japanese economy because the country continues to chalk up current-account and trade surpluses. The yen has risen about 8 percent against the U.S. dollar in the past three months, and it recently hit a 15-year high of ¥84.73 before weakening slightly.

The Bank of Japan could mitigate the yen’s damaging rise by further easing monetary policy, lowering long-term interest rates, buying up long-term government bonds or supplying banks with more short-term financing. The lower interest rates are in Japan, the bigger the potential difference between rates in the nation and elsewhere, giving market players more incentive to sell the yen to invest in other currencies. But as long as rates are nearly as low in other countries, including the United States and the euro zone, there is little motivation for currency traders to abandon the yen.

In recent days, government ministers have openly called on the central bank to do more to ease the rise in the yen. "The monetary authorities should send a strong message that the yen is too strong," Seiji Maehara, the influential minister of land, infrastructure and transport, said Friday. But analysts doubt how aggressive the central bank will be, given its widely known discomfort for a monetary policy that has stayed so easy for so long. "We think that the market is pinning rather too many hopes on countermeasures" to deflation and the yen’s rise, Taisuke Tanaka, a strategist at Nomura Securities in Tokyo, wrote in a note to clients this week. "The market may soon realize just how few options Japanese authorities have left."

Credit-Card Rates Climb
by Ruth Simon - Wall Street Journal

Levels Hit Nine-Year High as New Rules Limiting Penalty Fees Help Fuel Rise

Interest rates continue to tumble for the U.S. Treasury, companies and home buyers alike. But for a large portion of 381 million U.S. credit-card accounts, borrowing rates have been moving only one way: up. And average rates are likely to climb further in the near future. New credit-card rules that took effect Sunday limit banks' ability to charge penalty fees. They come on top of rule changes earlier this year restricting issuers' ability to adjust rates on the fly. Issuers responded by pushing card rates to their highest level in nine years.

In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001. Those figures look especially stark when measuring the gap between the prime rate—the benchmark against which card rates are set—and average credit-card rates. The current difference of 11.45 percentage points is the largest in at least 22 years, Synovate estimates.

By comparison, the spread between 10-year Treasurys and a standard 30-year fixed-rate mortgage is just 1.93 percentage points, near historical averages, according to mortgage-data provider HSH Associates. The moves are driven by a combination of forces. The Credit Card Accountability Responsibility and Disclosure Act of 2009 has given card issuers less flexibility to raise interest rates as they wish. At the same time, issuers are still dealing with credit-card delinquencies that remain above historical levels. "The rules have changed and the goalposts of risk have changed," says Paul Galant, chief executive of Citigroup Inc.'s Citi Cards unit.

Banks used to boost rates in a hurry on borrowers who fell behind on payments or otherwise turned out to be surprisingly risky. However, under the Card Act, financial institutions must warn customers at least 45 days before making substantial changes to rates or fees. People can avoid future rate increases and pay off existing balances over time. As a result, most changes affect only new credit-card purchases. New rules that took effect Sunday limit what banks can collect in penalty fees, too.

Now bank executives say they need to be smarter when setting the initial interest rates on credit cards. In many cases, that means starting off with a higher rate. "We can't come up with penalty pricing or if we can, quite frankly, it's too late to do much good," says Stephanie Keire, head of consumer credit-card risk management at Wells Fargo & Co. The sponsor of the Card Act, Rep. Carolyn Maloney (D-NY), said that despite the rising rates, the law benefits consumers because it eliminates unwelcome surprises and provides them with a clear picture of the costs they will face. "Better that consumers should know up-front what the interest rate is, even if it's higher, than to be soaked on the back-end by tricks and hidden fees."

At Discover Financial Services, a diminished ability to boost rates is causing the Riverwoods, Ill., company to offer fewer interest-free balance transfers for new customers, says Discover President Roger Hochschild. Balance transfers have declined 60% from last year. A typical offer might include 0% interest on the transferred amount for a year, with customers paying a balance transfer fee. More increases are looming as card issuers respond to the new penalty-fee limits, says Ken Paterson, vice president of research at Mercator Advisory Group.

Many banks rushed to boost rates before limits on increases for existing customers took hold in February. Some lenders have recently raised rates for new borrowers. For example, Capital One Financial Corp. in June increased the rate on its Classic Platinum for Young Adults card by 2.9 percentage points from the previous 16.9%, and increased the rate on its No-Hassle Cash Rewards card by 1.9 percentage points.

In May, Wells Fargo & Co. increased the interest rate on new Cash Back Home Rebate, Platinum and College cards by one percentage point. Citigroup boosted the minimum rate on its Platinum elect card by two percentage points in July. The higher rates apply to new accounts. Besides raising, rates, increasingly stingy lenders are revamping some of their underwriting techniques. Banks are relying more heavily on what is known as trend analysis to determine which borrowers are showing signs of improvement or weakness in their financial condition, says Steven Wagner, president of Experian PLC's Consumer Information Services unit.

A credit-card applicant might be considered too risky if he used much of his existing credit in recent months. That could increase the chances that the borrower might be denied a new card or charged a higher rate. Some issuers want to better use their data on existing customers. Bank of America Corp. says its move in March to merge its deposit-gathering and credit-card units was aimed partly at weighing existing relationships with the Charlotte, N.C., company more heavily in credit decisions. Bank of America now is more likely to offer customers with large deposits at the bank a lower rate, higher credit limit or better rewards than similar borrowers it knows less about.

Meanwhile, lenders are quicker to reduce credit lines at the first signs of financial stress, including late payments on other bills, a pay cut and unemployment. Several large U.S. banks have begun parsing employment and income data for changes that could affect the riskiness of existing customers, says John Cullerton, vice president at Equifax Inc. He declined to name the lenders. In an effort to better manage risk, card issuers are handing out less credit, too. The credit limit on new bank cards averaged $3,923 in May, the latest month for which data are available, according to Equifax. That is down 11% from an average of $4,422 a year earlier.

Rising interest rates on many credit cards won't necessarily lead to more profits for issuers. "The interest-rate increases are designed to improve and protect profitability," says John Grund, a partner with First Annapolis Consulting Inc., but stubbornly high delinquencies and Card Act curbs will eat into those gains, at least in the short term. Most cards now carry variable rates, meaning any increase in the prime rate is likely to be quickly passed along to borrowers. "Consumers will end up getting squeezed" when the Federal Reserve begins to raise rates as the economy recovers, says Ben Woolsey, director of marketing and consumer research at

Still, some bank executives say the interest-rate trend is likely to reverse as the U.S. economy recovers. "This is a very competitive industry," says Kenneth Clayton, senior vice president at the American Bankers Association, a trade group. "Somebody will take advantage of lower defaults to drive prices down."

Peak oil alarm revealed by secret official talks
by Terry Macalister and Lionel Badel - The Observer

Speculation that government ministers are far more concerned about a future supply crunch than they have admitted has been fuelled by the revelation that they are canvassing views from industry and the scientific community about "peak oil". The Department of Energy and Climate Change (DECC) is also refusing to hand over policy documents about "peak oil" – the point at which oil production reaches its maximum and then declines – under the Freedom of Information (FoI) Act, despite releasing others in which it admits "secrecy around the topic is probably not good".

Experts say they have received a letter from David Mackay, chief scientific adviser to the DECC, asking for information and advice on peak oil amid a growing campaign from industrialists such as Sir Richard Branson for the government to put contingency plans in place to deal with any future crisis. A spokeswoman for the department insisted the request from Mackay was "routine" and said there was no change of policy other than to keep the issue under review. The peak oil argument was effectively dismissed as alarmist by former energy minister Malcolm Wicks in a report to government last summer, while oil companies such as BP, which have major influence in Whitehall, take a similar line.

But documents obtained under the FoI Act seen by the Observer show that a "peak oil workshop" brought together staff from the DECC, the Bank of England and Ministry of Defence among others to discuss the issue. A ministry note of that summit warned that "[Government] public lines on peak oil are 'not quite right'. They need to take account of climate change and put more emphasis on reducing demand and also the fact that peak oil may increase volatility in the market."

Those comments were written 12 months ago, but a letter in response to the FoI request written by DECC officials and dated 31 July 2010 says it can only release some information on what is currently under policy discussion because they are "ongoing" and "high profile" in nature. The letter adds: "We recognise the public interest arguments in favour of disclosing this information. In particular we recognise that greater transparency makes government more open and accountable and could help provide an insight into peak oil.

"However any public interest in the disclosure of such information must be balanced with the need to ensure that ministers and advisers can discuss policy in a manner which allows for frank exchanges of views and opinions about important and sensitive issues." Yet the note of the workshop distributed last year talks about secrecy around the topic being "probably not good", although it also suggests officials stick to the line that the "International Energy Agency is an authoritative source in this field" and stresses how the IEA believes there is sufficient reserves to meet demand till 2030 as long as investment in new reserves is maintained.

But the Paris-based organisation has come under increasing scrutiny from a growing group of critics who believe the IEA's optimism is misplaced. Last year the Guardian revealed that the IEA was also riven with dissent over the issue with senior staff members privately telling newspaper they thought the official numbers on future global oil supply were over-optimistic. The IEA predicted in the 2009 World Energy Outlook published last November that oil demand would grow from 85m barrels a day today to 88m in 2015 and reach 105m in 2030. The organisation presumes the challenge of meeting that demand can equally be met by a mixture of higher Opec production and considerably more output from unconventional sources.

But an internal IEA source said: "Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible, but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources." The IEA has denied the claims of internal dissent and sticks by its figures. But Kjell Aleklett, a professor of physics at Uppsala University in Sweden and author of a report The Peak of the Oil Age, claims crude production is more likely to be 75m barrels a day by 2030 than the "unrealistic" 105m projected by the IEA.


memphis said...

from the previous post D. Benton said:

Or, to mix metaphors (which I really love to do) those two pervs are always going to wind up in the same bed.

Um...could you have meant "perps"?

And at Bluebird,

yes, I'm looking for a Stoneleigh stop in Ohio.

rcg1950 said...

"First we deflate into the abyss: then we inflate hard rates to get out again. At some point the "euthanasia of the rentier" will wear off. Misjudge the sequence at your peril." Ambrose Evans Pritchard quoting Albert Edwards

Did EAP/Edwards mean anaesthesia or is there something I'm not getting.

Greenpa said...

"Ilargi: Americans, or a large part of them, have -correctly- given up on the notion of the home as a nest egg, or even an ATM. They will increasingly be reluctant to put what's left of their wealth there. So where does their money go? Not in stocks either, say both Bernard Condon at AP :"

As a matter of mild amusement; I left a comment today on an article regarding the fall of Anne Frank's chestnut tree; a latter commenter replied: "wow, great. Do you know anything about investments?"

Sign of the times.

Greenpa said...

Oh, and. I was tempted to reply; "Why, yes, I do. Don't."

But didn't.

bluebird said...

@memphis - I thought I had remembered that you would be interested in hearing a Stoneleigh presentation in Ohio. Fuser has been setting up the details with Stoneleigh. I have added my email address to my bluebird profile where you can send me an email.

scandia said...

The article from the Observer and Peak Oil raised a chuckle. No need for the freedom of information act. All folks have to do is go to The Oil Drum or read the work of Matt Simmons. Or talk to any green supporter or...jeez, folks can get any information they want on Peak Oil for free on the web.
Anyone waiting for the gov't to figure things out let alone inform the public are behaving foolishly.
Kind of scary that the gov't is just starting to hold secret talks now when the warning bells have been clanging for years. Stoneleigh and Ilargi are mucho,macho bell ringers from way back.
If the Brits had more sense and less ego they'd call in Stoneleigh and Ilargi to consult on energy.
Any readers from the UK should suggest that to their MP. That's if Stoneleigh and Ilargi are willing,of course:)

Greenpa said...

"I could hardly believe how tight the fit was — it was a stunning correlation," he said. "And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?"

I am finding it difficult to express the extent to which the remnants of my mind are boggled. My field is ecology/evolution; the study of systems resource flow over time.

That anyone pretending to study such things could ask such a question is staggering. Though I am not surprised, of course; I knew. Still. I literally; physically, shudder.

It's all best taken, really, as further evidence of the canoe/waterfall position. Way, way, past any chance of recovery; the upper echelons of macademia are riddled with the most astonishing inanities- which are written in stone.

Should we attempt to converse with this fellow? I shudder again. For fruitful to converse with fruitbats, about the future of nuclear fusion.

Greenpa said...

And a little Polka Dot Gallows material right here:

"Still, some bank executives say the interest-rate trend is likely to reverse as the U.S. economy recovers. "This is a very competitive industry," says Kenneth Clayton, senior vice president at the American Bankers Association, a trade group. "Somebody will take advantage of lower defaults to drive prices down."

Howling on the floor! The part of the interview they left out: "Look; off the record, of course, the obvious reason we HAVE an 'American Bankers Association' is to make damn sure we don't compete, or ever cut each other's profits. Like, Duh!! Just look at all past history! When was the last time bankers ever competed so that our profits got hurt?? "

Fuser said...

Hi all,

I'm hosting Stoneleigh for a talk in North Olmsted, OH. September 9th at 7:00PM. Please send me an email if you're interested -along with the number of people attending.

fuserwellman at

I'm trying to get an idea of the headcount.

Bigelow said...

Hussman: Bernanke's Quantitative Easing Is About To Trigger A Collapse In The US Dollar

Ilargi said...

" Bigelow said...
Hussman: Bernanke's Quantitative Easing Is About To Trigger A Collapse In The US Dollar"

Hussman has no clue.

It would all make sense if the USD were the only weak currency, and America the only weak economy. But none of that is the case. Hussman reasons from some weird vacuum, and misses real life by a mile and a half.


Linda said...

I stared slack jawed at the TV tonight as Brian Williams had people on to say that the cure for the egg scare is to pasturize those half a billion eggs. Hey! How about backyard chickens? Morons. I put a coop in this summer and a fence. Lawyers called me on the black chain link fence in our "luxury" (not so much) sub-division. Idiots. I'll let the fence go until spring, then get my chickens. If they argue, maybe they can supply me my samonella free eggs! Sharon A.--what do you think?

Ventriloquist said...


Timing is everything.

So much of all the prognostications, speculations, predictions, etc., that we see every day here, and on many other sites that deal with the same subject . . . have to do with an unstated (but alluded to) timeline when all the suggested activity will happen.

I am as admiring of our noble hosts as anyone else here, but as we all know, they got themselves into a litte bit of trouble awhile ago by committing to a definitive timeline by which certain near-historical events would take place.

This is all a veritable quagmire of potential personal de-credibility . . . naming a time period, only to find it pass by without your predictions coming to pass.

Tough pick.

On the one hand, one is very certain of a certain sequence of events taking place . . . and has a plethora of data, opinions, observations, and logic to defend that position.

On the other hand, it is VERY difficult to assign a specific timeline to ANY event sequence and then expect it to take place at EXACTLY the point in space/time that you posit.

Very tough.

You may be 100% on the prediction . . . . .

and 99% wrong on the timing.

As much as I admire Mr. Celente (and I very much do) he has really placed his bollocks on the line in picking the timeline for all the events he has predicted happening in the sequence (2010 - 2012 specifically) he is focussed on.

Gerald, I wish you all the success in the world. I am cheering that you are
bringing the word of your keen observations to the general masses.

I am very worried, however, that if your proposed timeline does not pan out, you will be discredited.

I'm worried that many people will be picked apart for being too early in their predictions.

Yet, when all is said and done, the old quote applies . . . "I'd rather be 2 years early, rather than 1 day late."

Say Lah Vee.


westcoastliberal said...

I understand the consensus of our hosts is we're heading toward deflation, and I generally agree.

However here's a well thought out, plausible scenario for a "hyper" inflation future.

Comments, please!

Bukko Canukko said...

Stoneleigh, I like your patient explanation of why prices won't necessarily fall, or fall fast, in deflation. You told people twice in the previous thread:"...remember that deflation makes things less affordable even as prices fall. For those who have preserved capital as liquidity, things will be cheaper. For most, who will not have done so, everything will be less affordable even as prices fall..." You're so nice about it.

My curt way of saying that is "By the time prices go down, deflation will make sure that you won't have any money to buy anything with anyway." I would not make a good teacher, but my classes would be short.

The way I explain it to myself, oh ye deflation doubters, is that there are two meanings to the word. One is "price" deflation, the cost of stuff you buy. You see it every day, but that's the Little Picture. The Little doesn't keep exact time with the Big Picture. But the Big matters, even if you're a small fry.

The Big Picture is "money supply" deflation. That's the kind that Mish, Ilargi and other macro-mavens mean. It's when there is less money in a society. The haystack of dollars shrinks to a leaf pile. That's because "money" in the macroeconomic sense is imaginary -- it's puffed into existence by bank loans. When the loans blow up -- people welsh on the mortgagess; bond issuers say "we can't pay off those notes," countries default on their "sovereign" debts -- all that imaginary money vanishes. It goes to "credit heaven" as Mish said back when he was funny, before he became a sour anti-union screecher.

Even if you're an average person, Big Picture deflation is going to concern you. When the imaginary money vanishes, the are fewer dollars to go around for everyone. Especially if the rich people have already stolen a lot of the money that's left. Their bonds will evaporate, but so will your Social Security (if you're an American.) It hurts you a lot worse than it hurts them, because they were sitting on a bigger pile to begin with.

The other way I like to think of "deflation" is "collapse." When the air goes out of the deflating money-balloon, the life goes out of the economy. When a lot of people lose their jobs, a lot more people lose their jobs because of THAT, which causes a lot more people...

We're in the middle of that now, mate. It's ON! The sticker price might not be going down (prices are sticky) but the econo-balloon we live in is collapsing around our heads. Focusing on prices now is like complaining "The weeds are growing too high RIGHT NOW" when there's a landslide coming down toward your village that will sweep everything away.

True dat -- the weeds ARE high. But when the weeds are laid low, you will be buried in mud. Unless you prepare yourself accordingly.

D. Benton Smith said...

(from the New York Times)
"David A. Moss, an economic and policy historian at the Harvard Business School... [blah, blah blah]... possible connection between economic inequality and financial crises ... two different graphs ...Income disparities between rich and poor widened as government regulations eased and bank failures rose... stunning correlation...causal links between financial deregulation, economic inequality and instability in the financial sector. ARE ALL OF THESE THINGS CONNECTED?..."

Ya think?

That the idiocy itself goes unremarked by the journalist who reports it means that she and the Financial editorial staff at the New York Times are as clueless as Moss and his Hahvawd colleagues.
The definition of IQ will have to be rewritten to include negative numbers.

I thought that my acceptance of hopelessness was behind me, but apparently I have not yet begun to plumb the depths.

snuffy said...

It keeps getting stranger...

I am going back on the road again,and,being as I don't do well with a teeny-tiny keyboard,my posts will be minimal.Something of a pity,really,as things are shaping up to be "interesting",as the Chinese would say.
I am sure of major fractures showing in the system this fall,things that the powers-that-be will be unable to paper over as they have done with every crisis to date.All that paper they have used will make a nice fire once things get rolling.

I have thought long and hard about what sort of conflagration will result from this "papering".
My best guess is a combination of most camps.Think wild fluctuations past all the computer trading perimeters...out there,in days of old, where they would put on a map"[there be dragons here]"...[!]
Think of a corkscrew, moving faster and faster till it hits the immovable object...
And when its over,we all start what will be a very new style of living....
Bee good,or
Bee careful


zander said...

Disparity and peak oil articles "are all of these things connected?" and "We recognise the public interest arguments in favour of disclosing this information".

So hopelessly out of touch and behind the curve it beggars belief.
Laughable really.


Ant Whisperer said...


Don't know if anyone else has seen 'Overdose - The Next Financial Crisis' yet.

Pretty much a 101 video primer... nothing hugely technical... but I'm putting it in my quiver of things to use to convince loved ones to hold no debt:

Contains some footage of Gerald Celente telling it like it is.


Jb said...

"Americans will end up putting their money, if they have any left at all, in their mattresses, not in homes, not in stocks or bonds, not even in banks."

This is EXACTLY what I started doing almost a year ago. Why would I spend any money on my home if I think the bank is going to get it in the end?

Great post; thanks.

Verdandi said...

Hey there Ant Whisperer and all,
Whilst multi=tasking late this Tuesday night I have been watching Overdose (for the second time) while reading todays tasty offering from TAE and you all.

I agree with your outline - a smack in the face for those who won't look. Celente is impactual as usual and the rest of it is very accessable - ammunition for convincing those who think you've lost your mind!!

Here is a link to the 4 Corners programme on Australian ABC. It is available on iview for the next two weeks.


Greenpa said...

Ventriloquist said...

Timing is everything."

Well, maybe not everything. :-) You HAVE put your finger on a significant factor, for sure.

But there are layers, and layers, to it all. Yes indeed, the " common" opinion of Paul Erhlich these days, cited over and over, is that he was "wrong'.

Well, no, he wasn't. He was just way early, as far as common perceptions go. And you will find that opinion also, quietly repeated among many professional ecologists. He was not not wrong.

It's a common difficulty for the highly intelligent; those able to actually put current trends together, and extrapolate where they will lead; and the courage to speak up about it.

Just as for Ehrlich, who could see the forces quite clearly, it is easy to become deeply involved in that half of the analysis, and not see, so easily the counter forces.

Particularly when, as is the case in the economic world, the counter forces can be intentionally hidden and kept secret, by very large and difficult powers.

At present- I'll stick very tightly to my Canoe of Civilization being 90% over the Waterfall of Whoops. It is. You ain't doing nothing that can paddle it back upstream.

However. There are an unknown number of Invisible Webs Of The Masters, still preventing the canoe from actually precipitating.

Really hard to tell when the webs will break; or when the Masters will decide to let go.

Greenpa said...

Vent; The other thing to keep in mind; the pressure on those who see to prognosticate is very high.

Oh Thou Who Seeist; Tell Us! Save Us! Do Not Leave Us To Die In The Dark!

Very hard for those with hearts to ignore the pleas.

And, just out of curiosity; if you found yourself in that situation; would you tell them "oh, who knows, far off; don't worry"; or, with all the unknowns; "remember, we can't tell for sure (a phrase always included, and always ignored), but - it COULD be pretty soon- so your best bet, is to get ready, now."

jal said...

And now ... for some positive news ...

Will the Archaeologists of the future be able to tell if our civilization fell because of the failure of our financial and social structures?

The doomers will say ... there will not be any Archaeologists ... there will only be story tellers.

Therefore, here is a story.

Mohenjo-Daro and Harappa
Archaeologists discovered two 4000-year-old cities, 400 miles apart, along the banks of the Indus River in Pakistan. These expertly constructed cities were parts of an advanced civilization comparable to ancient Mesopotamia and Egypt. We don’t know what the ancient people of the Indus River Valley called themselves. Archaeologists named the cities Mohenjo-Daro, which means “hill of the dead,” and Harappa, after a nearby city.
The people of Mohenjo-Daro and Harappa lived in sturdy brick houses that had as many as three floors. The houses had bathrooms that were connected to sewers. Their elaborate drainage system was centuries ahead of their time. Archaeologists have found the remains of fine jewelry, including stones from far away places. This shows that the people of the Indus Valley civilization valued art and traded with other cultures.
We don’t know what happened to the Indus River Valley civilization. It seems to have been abandoned about 1700BC. It is possible that a great flood weakened the civilization. The moving tectonic plates that created the Himalayas may have caused a devastating earthquake. It is also possible that the people may have been defeated by another culture.
What we know about the Indus civilization is evolving. Archaeologists are continuing to find new artifacts. In time, we may learn how this amazing civilization developed, how they learned to create an advanced ancient civilization, and why they suddenly disappeared.

Kurt said...

Jesse's latest:

US Money Supply Figures: Dude, Where's My (Monetary) Deflation?

While not a hyperinflationista, Jesse is clearly a deflation skeptic. He's stated several times that in a purely fiat regime, deflation is ALWAYS a policy choice.

Ilargi said...

US existing home sales down 27%.

Wonder what the brokers are doing these days.


Ilargi said...

"Kurt said...
Jesse's latest:

US Money Supply Figures: Dude, Where's My (Monetary) Deflation?

While not a hyperinflationista, Jesse is clearly a deflation skeptic. He's stated several times that in a purely fiat regime, deflation is ALWAYS a policy choice."

No it is not.

What Jesse misses, and untold others with him, is that there comes a point when people will simply stop spending, because their debt levels are up and their faith levels are down, and that is a mechanism that self-reinforces. Treasury and Fed are powerless when faced with these dynamics.

We see that now: no matter how many trillions are fed into the system, spending goes down. 27% less home sales in the US is a clear enough indication. That this happens at record low mortgage rates makes it all the more poignant.

Those trillions all remain stuck in the banking system, they don't reach the economy. Or does anyone see home sales rev up significantly in the next 6-12 months?


Greenpa said...

Ilargi said...

"US existing home sales down 27%.

Wonder what the brokers are doing these days."

You missed that one!

They're being bullied, they say; and required to WORK, instead of collect fat fees; and, they're whining about it.

The schadenfreude is so thick out there you could spread it on toast points, instead of caviar.

soundOfSilence said...

Ilargi said...

US existing home sales down 27%.

Wonder what the brokers are doing these days.

Dang ... I just saw that over on Yahoo and thought I'll toss a comment out about it over on TAE but you beat me to it.

How do you do it? You're like a "Borg" plugged into everything financial.

Rumor said...

I think it's much more telling when speaking of "deflation" in our consumer-based economy to look at wages rather than prices, for all the reasons that have been hashed out here already. Speaking of which, here is Canadian deflation in action.

Greenpa said...

"What Jesse misses, and untold others with him, is that there comes a point when people will simply stop spending, because their debt levels are up and their faith levels are down,"

Astonishing, isn't it, that the Fiat believers just totally can't see that they day comes when the Fiators yell all they want; and the public just doesn't listen any more.

Not that we want to go back to the Fascist Fuss; but perhaps it would be a useful image for the Fiat Pushers to review the Final Fiat Fotos of Mussolini, Ceauşescu, and remember the Fiat Fate of good old Marie "Let Them Eat Fiats" Antoinette.

History is so clear on this point. You just really can't pretend forever.

Greenpa said...

As the Empires Crumble Dept:

A traffic jam in China is now into day 6. No end in sight.

In my own work; one of my biggest problems is dealing with people who utterly refuse to understand that process X, currently adequate - WILL NOT scale up. And assuming it does, will lead to disaster.

Here we are. Pizmo Beach. But no clams.

ben said...

ilargi said,

"US existing home sales down 27%.Wonder what the brokers are doing these days"

some of them, at least, are continuing to live in denial.

this from a text fest yesterday with my upstairs neighbor, who is a real estate agent, regarding my mentioning of the dreadful july figures to be released today:

"I already got those. Want me to email them to you? They don't look that bad."

life in the NAR bubble I guess.

Toby said...

Just watched Overdose - The Next Financial Crisis, great short doc. Had to download it via torrent, I don't live in AU so Verdandi's link didn't help and couldn't find it anywhere else. I highly recommend watching if you can find it.

Like few people already said here, it discusses the exact same issues that TAE does. It also helped me to understand better how the housing bubble was built in US and how everything came down, went up and is coming down again, harder than ever.

Nice to see that Australian TV shows docs that are more critical towards TPTB.

carpe diem said...

Party poopers!

The Green shoots are everywhere. EVERYWHERE!


Ric said...

Here we are. Pizmo Beach. But no clams.

There's a Pismo Beach in California. If you're in California and plan to come south toward Joshua Tree and want a tourguide--I'll buy your family dinner at the restaurant of your choice and show you around. rwilliams23atthatyahooplace

It's currently 116 degrees F. You'd be nuts to come, but some of us love it. We've the place to ourselves. :-)

Iconoclast421 said...

I have been cautious about calling a top to this bogus rally, but I think the technicals are tipping pretty heavily on the bearish side. We have an extraordinary number of confirmed Hindenberg observations. Dan Murphy's smart money indicator turned bearish. The 20W moving average is about to cross below the 50W.

Here is a rather large chart I compiled to help analyze the 20W/50W cross:

I place a lot of emphasis on this cross because it never throws false positives, when you allow for a margin of 1%. (ie, the 20W has to fall 1% below the 50W before the signal is valid.) As the spreadsheet on the right shows, IF we close this week at the current level, then we still get a valid 20W/50W cross even if we rally 5% per week for the next 5 weeks. Obviously that is not going to happen. So a major selloff must be imminent. Major moves always coincide with this cross. My money is on BAC Nov $10 puts, Ford Dec $9 puts. AA and PFE look like good shorts to me also. But simply put, anything cheap and out of the money looks good to me, based on what I'm seeing now. All of these are potential 10 baggers. Watching this rally slowly unfurl over the last 15 months has been agonizing and frustrating, but I feel now is the time to take a real risk and reward myself for having patience.

Hecla (HL) Dec $6 calls are 22 cents, and look to be a very good hedge in case Bernanke launches a fleet of helicopters in the coming weeks. But since he needs to move RIGHT NOW, HL Sept $5 calls make more sense to me as a more immediate hedge. And of course, Citigroup $4 sep calls are just 4 cents, and they always make a great hedge. I do think the greatest risk to be had (if you're short) is this week. The market simply must rally hard this week or we get a confirmed 20W/50W cross. Couple that with 3+ hindenbergs, and we have a disaster in the making.

ogardener said...

OK. Who put Roundup® on the green shoots of recovery?

ben said...

i don't suppose wikileaks has a copy of the stoneleigh dvd, with a nice, low production value, preferably grainy but with good audio.

i should talk since i'm still trying to sell the apartment. apparently three people have failed to get financing in the last six weeks. i blame myself for belatedly learning of the FHA building-approval process, that i understand is an important tool for the entry-level market, which is now underway.

is there some sort of online pay per view option that could be uploaded? youtube and website version in conjunction with a fundraising drive?

sorry to be a pain and state the obvious. i'm sure you guys are all working hard. jonesing here for the 'stoneleigh effect' in all its splendor, with loved ones and others in mind.

on the bright side i just got the owner of the coffee shop across the street, who made his money selling annuities, (he's a really good guy), sit on the sidelines today. tomorrow (figuratively) i will tell him about treasurydirect.

onwards and downwards!

sorry again for the clamor.
i'm still your fag.

Punxsutawney said...

Deflation Indeed!

I know this pertains to one small part of the world, but....

Oregon's lumber industry faces 'once in a century' situation, says WWPA executive, as harvests near Great Depression levels, prices return to early-year lows

LOS ANGELES, August 24, 2010 (Forestweb) – Oregon’s timber industry is in a depression rather than a recession, say mill owners and analysts as they digest the findings of a report issued on Friday by the Oregon Department of Forestry.

The report, by state forest economist Gary Lettman, found that Oregon’s timber harvest in 2009 was the lowest since 1934, the middle of the Great Depression, at 2.75 billion board feet (bbf), The Register-Guard reported. Lettman expects figures for 2010 to be around the same.

Butch Bernhardt, spokesman for the Western Wood Products Association, said market conditions were “very scary,” and a "once in a century" situation.

At the start of this year, hurricane season, an expansion of the Panama Canal and the reconstruction of Chile following its major earthquake led to a rapid increase in demand, pushing prices higher. The Random Lengths framing lumber composite price started the year at US$251 per thousand board feet (mbf) and peaked in April at $367/mbf - a 46% gain.

But the price of framing lumber fell 29% between April and July, and continued to slide in August, according to Random Lengths editor Shawn Church. Church said prices were now returning to the “historical trough” levels seen at the start of the year.

Bryce Ward, a senior economist at ECONorthwest said that, with mortgage rates at 4%, the housing market should be in high gear. But fewer homebuyers are interested in building or buying new when there are so many houses on the market, many at reduced foreclosure prices.

In monthly annualized projections, builders broke ground nationally at a pace of 679,000 houses in April, 588,000 in May, 537,000 in June and 546,000 in July. Bernhardt noted that there was a time when one million housing starts was considered a really bad year.

Today, western lumber mills are running at 55% capacity, Bernhardt said.

Robbie Robinson, part owner and CEO at Starfire Lumber Co. in Cottage Grove, said he cut 25 jobs from the mill’s workforce of 75 in October, reduced operations to four days a week, and cut remaining workers’ pay by 10%. “We’re running the sawmill one week, the planer the next week, trying to do everything with the same crew to keep working at all," the newspaper quoted. "We didn’t even do that in the ’80s,” said Robinson, who is nearing 50 years of experience in the industry.

Greenpa said...

Ric said...
Here we are. Pizmo Beach. But no clams.

There's a Pismo Beach in California. If you're in California and plan to come south toward Joshua Tree and want a tourguide--I'll buy your family dinner at the restaurant of your choice: "

:-) I'm filing that for future use, and thanks.

I'm embarrassed to admit my comment was an extremely obscure reference to an ancient Bugs Bunny cartoon; where he emerges from his migratory burrow to announce, incorrectly, to Daffy Duck who is following him (in the burrow), "Here we are! Pismo Beach, and all the clams you can eat!" Followed, I think, by the famous and oft repeated "I knew I shoulda taken that left turn at Albakoiky."

It has currency here among my grown children, anyway; and it kind of slipped out... :-)

I'll remember the correct spelling in future.

carpe diem said...

o'gardner -

I was asking myself that same question and gosh darnit where the dickens is cheryl and her husband? We all need a pep talk!
Alas and alack, the 'truth' is knocking at the door. Optionally, as an opiate as Fleetwood Mac put it:

'Tell me lies, tell me sweet little lies'.

Anything but this!!

Tom said...


Tis true, in my rural Oregon town the parking lot at the local mill is almost empty most days. One out of the 3 banks in town shut by Feds and sold to another. Even worse, I read articles last month about the pot price taking a big dive due to partial legalization.
However, the Twain(?) reference to "damned statistics" comes to mind. It is amazing how normal everything seems. The building supply just hired another worker and they claim business is fine,(tho not like 2007) as do other businesses I frequent. Just as much car traffic(too much) and the tourist R.V's as annoying as ever. Go to the vet, and the crowd is just as big. Not there for euthanasia due to poverty like you might expect. People still going to restaurants. So barring a black swan, it seems like the collapse is a good bit off. Quite a cognitive split between what you read and what you see. Are others experiencing this?

Alexander Ac said...

Hi all, worth looking (!) at these exellent graphs regarding food/arable land/global population, see here:

scandia said...

On a lighter note, or perhaps darker note, has anyone been following the story of the woman in Britain who picked up a kitten and dumped it into a garbage bin?

She says it was just a joke. I have been wondering where she works. She works for A BANK- The Royal Bank of Scotland to be precise.
Now that I know she works long hours in a crime culture I might someday be able to forgive her.

For more on banks and kittens see:
" Banks To Be Broken Up Into Kittens "

Kurt said...

Tom : So barring a black swan, it seems like the collapse is a good bit off. Quite a cognitive split between what you read and what you see. Are others experiencing this?

I live in western NY and the economy seems like its booming. Seriously. Restaurants are packed every day of the week, parking lots are filled, a ton of new commercial development is in progress, new stores are opening everywhere, the traffic is awful, and you'd be hard-pressed to find a For Sale sign in a front yard that doesn't already have a Sold sign on top of it. Real estate is moving. Its still a buyers market for expensive houses (all the McMansions that sprouted up like weeds over the last 10 years), but cheaper houses are moving fast.

Tell someone around here that we're heading into depression and you'll be looked at like a crackpot, since we seem to be in one helluva recovery.

For a variety of reasons I think this is one of the least hard-hit areas in the country, and it really has bounced back. For now.

Greenpa said...

Alexander Ac said...
"Hi all, worth looking (!) at these exellent graphs regarding food/arable land/global population, see here:"

Yep, good graphs; nice summary of all the problems. Then they hit you at the end: "So, profits are going to go way up!"

A massive, inhuman disconnect from the realities of "need".

There is likely to be only one solution to that disconnect; and it's going to mean lots of death and blood. Very very grim.

Stoneleigh said...


I have been cautious about calling a top to this bogus rally, but I think the technicals are tipping pretty heavily on the bearish side.

Indeed the bearish signals are increasing. The major rally ended on April 26th though, not recently ;)

Since then we've been building momentum, albeit slowly, to the downside, with plenty of short counter-trend moves thrown in for good measure (as is the nature of fractals). That's how swings of positive feedback work. To the downside they build up to cascade moves. We seem to be approaching one at the moment.

Stoneleigh said...


We're working on the DVD, putting the final touches on the graphs. It should be available soon. Sorry it's taken so long. It was difficult to do the graph work while we were traveling this summer.

Stoneleigh said...

By the way, it appears that I will be returning to Europe sooner than expected. I was invited to participate in an EU biodiversity conference in Brussels, Nov 16-17th. That means that if anyone would like me to do some talks while I'm there it would be possible. I could arrange to be there until perhaps mid-December, and I will be returning at some point after Christmas as well.

jal said...

"Quite a cognitive split between what you read and what you see. Are others experiencing this?"

The sun is still shinning in BC.

Greenpa said...

my guess is the DOW will close below 10K today; and it's Wednesday.

COULD be a precipitating factor for a good drop.

or, not. :-)

g-minor said...


my guess is the DOW will close below 10K today; and it's Wednesday.

COULD be a precipitating factor for a good drop.

or, not. :-)

Is that investment advice?


Ilargi said...

".... my guess is the DOW will close below 10K today;"

Far too early in the day to call. Trading is very light and very easy to jinx, no matter how bad the housing numbers are.


Punxsutawney said...

Re: Cognitive Split

One of the things I look at is rush hour traffic around here and it has picked up in the last 12 months but is not at 2007 levels, and the other is how long homes in my area have “For Sale” signs on them. The “For Sale” signs were out for months in many cases this winter but now seem to have mostly disappeared in my neck of the woods.

On the positive side, there have been two positive major announcements regarding jobs here in the last couple of weeks. On a negative note, my wife has been unable to find jobs posted in the area that she is qualified for in over a year. There just simply aren’t any open here at this time.

But I think the big picture is more important. We have world trade, fiscal and consumption policies that are unsustainable in the long run. I personally am not willing to say when it will all come apart in a big way. There is still a lot of wealth here at least that can be destroyed or consolidated first. There may be a “Black Swan” event that sends things off the rails or we may just gradually go grinding down into dysfunction and tyranny, bumping up and down at times.

But if you want to hurry it along, give more power to the Authoritarian and Dominionist leaders in your countries and help them fight their wars of aggression and religion. That will destroy what’s left in a hurry imho.

Greyzone said...

Denninger notes Durable Goods Collapsing. In particular he points to electronics and machines. Machines especially because these are the "engines of production" whereby other goods are made but new machine orders are off badly.

We aren't at bottom yet, folks, not by a wide margin. And this collapse in durables is going to mean a bad Christmas season which means more retailers going bankrupt either this fall or next winter as we continue the slide downwards.

Perhaps the only good thing so far is that this entire slide has been a slide, rather than a single simple precipitous drop.

No, Santa isn't even going to be leaving coal in many stockings this year.

Ahimsa said...

Very insightful!

David Kirby on "The Looming Threat of Industrial Pig, Dairy and Poultry Farms on Humans and the Environment"

carpe diem said...


My understanding at least here in New England is that houses are NOT selling. A lot of people take them off the market after a year or two and rent them out just to have some income coming in. That from the horses mouth - i.e. a big realtor in the area. Here there are countless homes up for sale and as I mentioned before lots of cars/motorcycles/boats outside people's houses that are up for sale. Restaurants seem to be doing well but every else in retail is way down.
Nobody spending on non-essentials.

Andrew said...

I spent an unbelievable $23 last night to see "The Other Guys" at the local megaplex (just for two tickets - no munchies). The movie was quite funny, and I recommend it, but the reason I mention it is that as the credits rolled, there was a nice slide show sort of thing showing how CEO pay has increased over the last twenty or thirty years, how much money was spent on TARP, how much went to AIG, etc. It went on for a few minutes. I did not expect it at all. Anyone else see this?

Ahimsa said...

Hi Carpe Diem,

Prices around Montpelier, VT are still high. Maybe they've come down 10 percent since 2008. In SWFL, though, things are very different. A friend of my son recently purchased a foreclosed Cape Coral home (2,200 sq. ft. and 2-car garage; good condition, built in 2005) for $60,000. It sold originally for $250,000.

scandia said...

Re anecdotal evidence on the economy a friend of mine stayed with her friend in Riverdale, Toronto. Agents are knocking on the friends door offering to puchase her row house-2 bedrms,1 bath, no parking, enough backyard for 2 lawn chairs, old working class neighbourhood. Latest offer for cash was %650. Incredible!The agent said parents with cash are eagar to buy a house for their children.
They then went to lunch( $18 martinis) in upscale Yorkville. Restaurants and designer shops full of people spending lots of money as in $1200 for a Hugo Boss suit,$650 for a matching pair of shoes. Looks like the rich are still rich....

I've been thinking about California and the IOU's issued last year. Does anyone know if they have been paid off in advance of a new issue of IOU's for 2010?

Greenpa said...

".... my guess is the DOW will close below 10K today;"

Far too early in the day to call. Trading is very light and very easy to jinx, no matter how bad the housing numbers are."

:-) Absolutely, which is why I labeled it "guess". I HAVE been known to use the word "predict" here. But not today.

Andrew said...

Here's a thing on the closing credits animation sequence from "The Other Guys". I think you can watch the animation (about the bailouts, CEO pay, etc.) here.


Ric said...

Re: California. The word I hear is there is little political pressure for a budget. No budget seems almost like BAU. Everyone is terrified--everyone smiles. Everyone is sure a rabbit will be pulled out of the hat.

California faces another budget crisis

Our social, business, and technological systems are designed to protect us from reality.

ben said...

sorry, stoneleigh and ilargi, for the poke to the ribs regarding the dvd. and i could've just asked, instead of adding my own prescriptions. it was a gracious response. i get a little hyper sometimes. summer developments giving me the willies.

i don't know how you do it. all of it. thanks.

Nimrod said...

There seems to be some big money that doesn't want the Dow under 10,000. Since most of the "regular people" have been scared out of the stock market now, I guess that just leaves the usual suspects. How many more crappy economic reports will it take before they can't prop it up any more, or maybe it has become so disconnected from reality now that there is no real correlation.

Justin Greger said...

Best explanation of how we've already experienced hyperinflation the past decade....

"Greenspan and Bernanke both failed to spot the massive increase in inflation in the early 2000's because liquidity flowed into assets as opposed to wages and consumer prices. We are now in the aftermath of the credit bubble bust."

People correlate hyperinflation with a wheel barrel full of money....NOPE.

zander said...

@ Nimrod

Large volumes of would-be bulls (Cheryl and hubby et al) will have automatic buys triggered for 10k on the drop. maybe?
Always a bounce expected at a big round figure such as this IMO.


scandia said...

@ Ric, thanks for the California news. I guess I can't grasp what this means on the ground. Will folks be given IOU's instead of paychecks or is it the suppliers that have to wait to be paid?
Can a person use an IOU at a grocery store for instance? Do they come in denominations?
I am quite ignorant about how IOU's work.

Dormouse said...

A new one to add to the silly 'flations' list ...

'STAPLFLATION....inflation in STAPLE ... food, energy, taxes, rates etc but deflation in ASSETS and Equities...'

Never heard that one before. lol. Just read it on a local (NZ) website.

jal said...

Here is a nice long story, (court stories are always long), about trying to make the banks modify your mortgage instead of seizing your property.–-homeowners-can-sue-for-breach/

“A San Diego homeowner, by the name of Ademar Marques, was applying for a loan modification, and, although it might be hard for many readers to believe, his servicer, Wells Fargo, dba, America’s Servicing Company, wasn’t being very nice about it, or even cooperating at all.  It seems that Wells Fargo wanted to just skip all of those messy and time-consuming formalities required when considering someone for a loan modification, and just jump straight into foreclosure.”

Ric said...

I don't have experience with IOU's myself--but expect them in the coming months/years. The board of my college has already voted to take out a loan to meet the shortfall the state is not paying this week.

Last year, many state workers were paid with IOU's--some banks redeemed them for a short while, other banks wouldn't. When the budget passes, workers can turn them in for cash plus interest.

Many workers are currently furloughed 3 days, which means they lose about 15% pay. If you go to a courthouse, the lines are horrible. I waited for hours to pay a traffic ticket a few months ago. The court house in my town had been closed.

Collapse is death by a thousand cuts, occurring one person at a time, when suddenly someone realizes they have no money, no job, and no prospects. School started last week and I'm now asking all my classes how many are looking for work--in all classes about half the hands go up. I ask who has family who has lost work last year--ALL THE HANDS GO UP.

Forget the media. Plan for the worst and help each other. On the surface, everything looks the same--but most everyone I meet now understands to some degree that the American Dream is now over. The job now seems to be helping people wake up and get out of bed.

Nassim said...

Ric and any other teachers,

The following is an interesting article on education

Let's Talk About What's Really Required..... for K-12 education

I have no idea what K-12 means

scandia said...

@Ric,I would think those who are paid with an IOU are living off savings until a budget passes? Or taking out loans themselves to make ends meet? Or running up CC debt?
I am assuming from your comments that when the budget was finally passed last year the IOU's were paid off?
One reads of the debt that students carry. I often wonder about the debt that institutions of education carry? Would be an interesting graph to see...Are corporations actively funding primary and secondary schools in the way they fund/bequest universities?

Glennjeff said...

Few weeks old but me thinks someone is trying to address the core issue, which is spiritual / philosophical in natue.

Stefan Molyneux-Max K

Bigelow said...


"I have no idea what K-12 means"

American schooling officially progresses from (K)indergarten then through grades 1-(12). More education beyond that is possible via vocational training or college programs.

memphis said...

Jal wrote:

"It seems that Wells Fargo wanted to just skip all of those messy and time-consuming formalities required when considering someone for a loan modification, and just jump straight into foreclosure.”

I try not to let my paranoia get the best of me, but could the banks actually be TRYING to turn America into renters? I understand that initially, it'd be a legal confiscation of the home's value (and wealth) but in the long term scheme (there's a choice word) of things, forcing people to rent-- and be subject to rent increases--could restrict people in all kinds of ways. They'd be forced to pay "the Company Store," never building any kind of wealth in their home, and be kept off balance by the threat of eviction.

Naw, that'd have to be a plot for a novel.

soundOfSilence said...


Kindergarten through 12 grade.

Ilargi said...

New post up.

In America, housing IS the economy