Monday, May 19, 2008

Debt Rattle, May 19 2008: A new breed of American

Dorothea Lange: Family Trip, August 1939.
Agricultural migrants. "Family who traveled by freight train. Toppenish, Washington. Yakima Valley."

Ilargi: A new breed of American? I’m not so sure they’re all that new. Not when looking for instance at the photographs I’ve been posting, especially the ones commissioned by the Farm Security Administration to document the Great Depression. It all looks eerily familiar.

If there is a new breed of American, (s)he's a slave, blind to what really goes on in the world, and even in her own street, a fat blind amputated diabetic debt slave begging for scraps of processed food, as (s)he lets her few remaining resources, and those of her children, be stolen behind her back, while worrying about empty headed celebrities in rehab and fake "elections" featuring candidates that are all on the same payroll of the same slave masters.

I've asked it before: what "civilization" are we trying to save here? And why? What makes it worth saving?

New breed of American emerges in need of food
Philomena Gist understands why it hurts so much to be on food stamps. After all, she's got a master's degree in psychology. "There's pride in being able to take care of yourself," says the Columbus, Ohio, resident, laid off last year from a mortgage company and living on workers' compensation benefits while recovering from surgery. "I'm not supposed to be in this condition."

Neither are many of the 27.5 million Americans relying on government aid to keep food on their tables amid unemployment and rising prices. Average enrollment in the food stamps program has surpassed the record set in 1994, though the percentage of Americans on food stamps is still lower than records set in 1993-95. The numbers continue to climb. Gist, 51, is the new face of hunger in the USA. She says she spent most of her adult life working as a mental health counselor before deciding to try real estate.

"I'm a professional person," she says. As economists nationally debate whether the country is in recession and policymakers discuss ways to drive down gas prices, a new category of Americans combats hunger. Since 2006, soaring food and fuel prices have combined with lost jobs and stagnant wages to boost the number of Americans needing food aid. More than 41% of those on food stamps came from working families in 2006, up from 30% a decade earlier, according to the latest Agriculture Department data.

They are real estate agents and homebuilders hit by the housing slump, seniors on Social Security, parents of students whose free breakfast and lunch programs don't solve the problem of dinner. Increasingly in recent months, they have signed up for food stamps and shown up at food pantries, trying to make ends meet.

"This last year's been the worst," says Gladys Pearson, 76, a retired corrections officer, as she leaves a Bread for the City food pantry in Washington, D.C., a three-day supply of staples in the basket of her walker. She likens it to the 1950s, when her husband would come home with a small can of milk for their newborn daughter because a big one was too expensive. Officials on the front lines say the need is growing.
  • At food banks, demand is up 15% to 20% over last year. Pantries are serving "folks who get up and go to work every day," says Bill Bolling, founder of the Atlanta Community Food Bank. "That's remarkably different than the profile of who we've served through the years."
  • In schools, the school breakfast and lunch programs are serving more than 31 million students, which soon will give way to summer programs that serve just 3 million.

Even with one in every 11 Americans receiving food stamps, millions who don't qualify also need help. They are joining food stamp recipients at food pantries nationwide, where they receive bags of food intended to last a few days. Donations are down, particularly from the federal government as well as private companies. Farmers are selling their crops on the open market at record prices, rather than giving them to the government through price-support programs.

To compensate, the Agriculture Department has traded raw commodities for finished goods that can be provided to food banks. Earlier this month, it chipped in with $50 million in frozen pork patties. Costs are up, particularly for diesel fuel needed to deliver food to pantries by truck. Nearly half of the food banks now buy some of their food or are considering doing so, rather than relying on donations.

"It's really a perfect storm," says Maura Daly, Second Harvest's vice president of government affairs.

Power unleashed by emerging markets threatens to upset West's economic plans
The force is extraordinary. The gravitational pull is almost irresistible. Yet our understanding of the black hole which threatens to upset all our best-laid economic plans is remarkably poor. The black hole stems from the power now being unleashed by the emerging world, by countries like China, India, Russia and Brazil.

For a while, we rather patronizingly thought these countries would simply produce cheap goods for the benefit of the western consumer. Now, we're discovering that their power and influence reaches much further. Mervyn King, the Governor of the Bank of England, will be writing a lot of letters to the Chancellor of the Exchequer in the months ahead explaining why inflation in the UK is so high. Mr King's focus should be on the emerging world.

Relative to the US, none of the emerging economies is, on its own, particularly large. Each of them has only a modest individual gravitational pull. That, though, is a bit like saying Texas, South Dakota or Wyoming is too small to count. The US economy as a whole, however, has a huge influence on the rest of us. The same conclusions apply to the countries in the emerging world. They're all growing rapidly. Their inflation rates are rising furiously. And, collectively, they're about the same economic size as the US.

Unlike the US, however, their policymaking institutions are immature. Most of them tie their monetary policies to those of the Federal Reserve through the use of currency pegs or managed floats against the US dollar. When, therefore, the US cuts interest rates – as it has been doing over the last few months – it is loosening monetary conditions not just in the US but also in many parts of the emerging world as well.

Emerging markets, though, aren't suffering from a sub-prime crisis. They're not wilting in the face of a credit crunch. They haven't seen their housing markets topple over. As a result, looser US monetary policy, while rescuing beleaguered US households and banks, is also lifting emerging world inflation.

ECB's Trichet says worst of crisis may be ahead
Jean-Claude Trichet, the head of the European Central Bank, has indicated that the worst of the credit crisis may not be behind us. Mr Trichet said that we were seeing "an ongoing, very significant market correction."
He compared the recent hikes in energy and food prices to the oil crisis of the 1970s, when higher wages undermined Europe's ability to compete, resulting in widespread unemployment. He warned that despite the economic slowdown, central banks should not be tempted to cut interest rates because that could lead to more serious problems.

While the Bank of England and the US Federal Reserve have made a series of interest rate cuts since the crisis in the financial markets began, the ECB has held interest rates at 4pc in response to inflation. In an interview with the BBC today, Mr Trichet implied that the ECB was unlikely to cut interest rates in the short term.

He said however that high inflation "will not last forever." He added that since the onset of the crisis freeze, there had been "an enormous convergence" of central banks, which had come together to inject liquidity to ease the situation as far as possible.

More awful housing and inflation data expected this week
U.S. consumers won't really feel comfortable until home values stop falling. They could be in for a rough year because there's no sign that home-price declines are letting up. And with home prices falling, fewer buyers are willing to take the plunge.

Fresh data on housing to be released in the coming week should show further declines in both sales and prices, economists said. None of the top-tier economic indicators are on the calendar, so investors will turn their attention away from the economy and back toward markets, especially commodities, currencies and interest rates.

We'll also get a better idea of what the Federal Reserve's policy committee is thinking. On Wednesday, the Federal Open Market Committee will release the truncated minutes of its April 30 meeting. Following a quarter-point interest-rate cut in April and heightened rhetoric about inflation, the markets are persuaded that the FOMC won't cut rates again for fear that it could fuel higher prices. If there's anything in the minutes to dispute that conclusion, it could have a big impact on the market.

The minutes will come out a day after the producer-price index, which should add to the worries about commodity inflation and questions about whether higher prices for raw materials could be seeping into prices for finished goods. Economists surveyed by MarketWatch expect that the PPI rose 0.5% in April, which would bring the inflation rate over the past year to nearly 7%.

The core rate - which excludes food and energy prices - is expected to have risen 0.2%. Unlike in last week's seasonally adjusted consumer-price index, the impact of higher energy costs is expected to be seen in the PPI. The core rate has risen 2.8% in the past year, suggesting that "manufacturers are passing at least some of their input costs down the supply chain," wrote Drew Matus, an economist for Lehman Brothers.

Other economists say higher commodity prices aren't a major worry in a slowing economy. "While these increases may catch the market's attention, it is highly unlikely that inflation pressures build in an environment of slackening demand," wrote economists for Citigroup Global Markets. In any event, markets are less apt to react to the PPI when it's released after the CPI.

The housing data probably won't have much market impact, either, because no one expects a recovery in the sector any time soon. Sales of existing homes likely fell again in April, to a seasonally adjusted annual rate of 4.84 million from 4.93 million in March, according to a survey of economists conducted by MarketWatch. That would be another cyclical low. The pending-home-sales index fell 1% in March, pointing to a decline in closings in April.

The inventory bears watching. Spring is the big season to put a home on the market, and the Realtors' data on inventories of unsold homes are not seasonally adjusted. Inventories usually rise 7% in April. If they rise that much this year and sales fall as expected, the inventory-to-sales ratio could rise to a cyclical high of 10.7 months, wrote Michael Feroli, an economist for JPMorgan Chase.

Foreclosures are also adding to supply pressures. The Realtors' inventory data include only homes listed for sale; many foreclosures are sold through auctions, and not on the multiple-listing service. The true inventory of homes on the market is likely understated. One of the two major home-price indexes will be released this coming week. The Office of Federal Housing Enterprise Oversight index will be released Thursday, while the Case-Shiller index will come out next week.

The Case-Shiller index has been particularly weak recently, with prices falling at a 25% annual pace over the past three months.

"We're not even halfway through"
I've been bullish in the past and I've been bearish too, and today I'm more bearish than ever," Oppenheimer & Co. analyst Meredith Whitney said at the opening of her presentation at the Oppenheimer Israel 9th Annual Investor Conference in Tel Aviv yesterday. Talking to journalists earlier, Whitney justified her reputation as Wall Street's new prophet of doom.

"The banks will be under pressure for the rest of the year, and will have to raise capital to survive," she said. "It may sound crazy, but we're not even halfway through the crisis."

Whitney covers banks and financial institutions at Oppenheimer, one of Wall Street's smaller investment banks. She won glory last November when she downgraded Citigroup, after reaching the conclusion that the bank would be forced to cut its dividend, or raise capital, or both. "At the time, we wrote that Citigroup was short of capital to the tune of $30 billion, and people were astonished. Since then, they've raised $40 billion, and also cut the dividend," she says.

The downgrade led to a sharp fall in Citigroup's stock price, which dragged the rest of Wall Street down with it. "I knew my recommendation would affect Citi," Whitney recalls, "but I didn't imagine that it would have such an impact on the entire market."

Can you understand why other analysts didn't see what you saw?

Whitney: "There were other analysts with sell recommendations, but none of them focused on Citigroup's shareholders' equity or cast doubt on the dividend. That was a sacred cow. But math is math it was clear to me that they were short of capital and couldn't distribute a dividend like that.

"But there's no doubt that there's more pressure on analysts in the research departments of large firms. Other firms are more involved in banking and are scared of arousing controversy."

And what about the role of the rating agencies?

"The rating agencies still haven't downgraded some of the financial institutions. The agencies are paid by the institutions they rate, and that can clearly be a problem. They lost a lot of credibility after the Enron affair, and lost so much more in the current crisis, to the point that the bond market no longer takes any notice of them. On the other hand, the market needs some kind of institution like the rating agencies to maintain such a high volume of trading."

And what about rating of the financial products themselves?

"Here there's another problem. I called it "the ring of fire." Under regulatory rules, the banks are obliged to maintain a certain amount of shareholders' equity for all debt they hold. As soon as a debt instrument that a bank holds is downgraded, the bank needs more equity. And then, either the bank raises capital externally, or it cuts its dividend, or it has to sell the problem assets, and as soon as it sells them, asset prices fall further, and the cycle repeats itself.

"No-one knows how much capital the banks will have to write off and raise from other sources, and so I say, even if it sounds crazy we really aren't even midway through the crisis. At the moment, the banks are raising capital just to fill holes, and I estimate that it will take the financial institutions between nine and eighteen months to deal with the crisis."

On the other hand, in the past month or two, stocks have started rising again.

"That can't go on, certainly not in financial stocks. The banks' profit estimates continue to fall, actual profits continue to fall, and if stock prices don't fall accordingly that means that multiples are rising. When risk rises, multiples are supposed to fall, not rise. I predict that, in the near future, financial stocks will only become cheaper."[..]

Where do you see the next bubble?

I'll give you an unorthodox answer: the next bubble is a regulation bubble. This isn't a bubble in the accepted sense, as in technology or commodity stocks, but it's a bubble in terms of a mistaken concept. The regulators will now overreact to everything they missed for five years."

TIPS Show Bonds See Bubble Burst for Commodity Prices
Treasury bond traders are telling Americans to stop fretting about inflation. Consumers expect prices to rise 5.2 percent in the next 12 months, according to a monthly survey by the University of Michigan in Ann Arbor, the most pessimistic they've been since 1982.

Treasury Inflation Protected Securities, or TIPS, show traders anticipate inflation of about 2.95 percent by January, in line with its average of 3.1 percent the last 20 years. The disparity has never been wider. While consumers grapple with gasoline above $3.70 a gallon, record rice prices and the escalating cost of wheat, TIPS say the commodities market is a bubble about to burst.

A commodity slump would worsen losses in the $500 billion TIPS market, where investors lost 2.35 percent in April, the most since December 2006. "There's a lot of people who just don't believe the economy's going to stay strong enough to keep prices of things where they are," said Chris McReynolds, who trades TIPS in New York at Barclays Plc, the largest dealer of the securities. "Part of what's going on here is a lot of people view this price rise in oil, a lot of commodities, as being somewhat bubbleish and that they'll come off again very quickly."

Crude oil, which traded at $126.93 a barrel, has doubled in the past 12 months. The Reuters/Jefferies CRB Index of 19 commodities including coffee and corn has surged 31 percent in the 12 months ended April 30. Yet in the same period, consumer prices rose by 3.9 percent, the slowest pace since October, the Labor Department said May 14 in Washington.

"What has not been going up is housing prices, what has not been going up is electronics, what has not been going up is apparel," said Gang Hu, a TIPS trader at Deutsche Bank AG in New York. Consumers "buy food everyday, they buy gas everyday. As a result, if you ask them have you seen inflation, they will say yeah, because every day they are informed there is inflation." Short-maturity TIPS have the most to lose from an "imminent economic downturn," Hu said.

Before this year, the public and the TIPS market were most at odds in June 2007, with consumers projecting 3.4 percent inflation and TIPS forecasting a 1.48 percent rate. Consumers have been right: inflation has averaged 4.1 percent this year.
Consumers are responding to a jump in the cost of food and oil, even as prices of less-frequently purchased items like cars, plane tickets and hotel rooms fall.

American drivers pay a record $56.25 on average each time they fill their tanks, according to figures provided by AAA, the largest U.S. motorist organization. Meanwhile, new cars cost 1.3 percent less than a year ago, and plane tickets were 0.5 percent cheaper in April, according to the Labor Department. Energy makes up 9.7 percent of the consumer price index, and commodities as a category comprise 41 percent, behind only services such as housing and medical care.

The economy won't grow at all this quarter, marking the worst slowdown since the 2001 recession, according to a Bloomberg News survey of 80 forecasters. Inflation will slow to 2.5 percent by the first quarter of 2009, the least since August, according to a separate poll. TIPS, first issued by the government in 1997, pay interest at lower rates than Treasuries on a principal amount that's linked to the Labor Department's consumer price index.

Ilargi: Yeah, yeah, I’ll say it: “I told you so’. When Ballmer turned his back on Jerry Yang, I wrote here he’d be forced to come back. I don’t care that the impression is given now that Yahoo! is in danger of takeovers.

Yang understands that he’s in the driver’s seat. I think some of the players don’t see that. But the fact remains that Microsoft, as I said then, has nowhere else to turn. Their attempts at generating advertising revenue have been awful failures, rivaled only by the performance of their operating systems.

Google makes most of its money from advertising. So much of it that it threatens Microsoft’s power. And the real BIG one is still to come. While I’m convinced that the tech world will collapse along with the economy, there are frantic preparations for a situation that will become reality briefly, where software -and perhaps operating systems too- will no longer be installed locally on PC’s and PDA’s, but instead on servers. A new age of computing.

What companies will need for that new age is web presence. In that field Google is so much bigger than Microsoft, there’s no comparison. The only company that does have at least some of that presence is Yahoo!. Microsoft will have to pay whatever Jerry Yang asks, and I don’t think he’s asking all that much to begin with, given the odds. It’s more a matter of Steve Ballmer’s hurt male pride.

Well, he’s now been sent back to the table with his teenie tail between his legs, and no Carl Icahn or other hostile takeover push can stop a deal now. At Jerry Yang’s price, which is in the best interest of the shareholders. If I were him, I’d yank Ballmer’s tail a bit harder, and raise the price. Yahoo! can’t survive on its own either, but they DO have choices. Ballmer has none.

Microsoft revives talks with Yahoo!
Microsoft has resumed bid talks with Yahoo!, just days after rebel shareholders threatened to try and oust the board of the search engine for resisting the software giant's takeover attempt. Microsoft, whose chief executive Steve Ballmer abandoned a deal earlier this month after Yahoo! rejected an increased $47.5bn bid, said last night that it was considering a deal with the search engine giant.

The group said in a statement: "Microsoft is considering and has raised with Yahoo! an alternative that would involved a transaction with Yahoo! but not an acquisition of all of Yahoo!." Yahoo! confirmed the approach and said it remains open to any deal which is in the shareholders' best interests.

While Microsoft did not specify the terms of any new deal with Yahoo!, it hinted that there was still a possibility of a full takeover. It said: "Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties."

The news followed the emergence of star hedge fund manager John Paulson as one of the key backers of activist investor Carl Icahn. Yahoo!'s chairman Roy Bostock was force to defend its board on Friday, led by founder and chief executive Jerry Yang, as the "best and most qualified group" to maximise value for shareholders, after Mr Icahn's attempts to take control. Mr Icahn planned to force Yahoo!'s board to reopen its protracted takeover battle with Microsoft.

Mr Bostock hit back at Mr Icahn, claiming that the billionaire investor had a "significant misunderstanding" of the Microsoft takeover battle. In a letter to Mr Icahn, Mr Bostock revealed that the Yahoo! board had met more than 20 times to trash out Microsoft's proposal, reiterating the board's staunch belief that the deal undervalued the group.

Mr Paulson, of Paulson & Co which is now one of Yahoo!'s largest shareholders, said on Friday night that he intended to back Mr Icahn's alternative board. However, he added: "We sincerely hope that Yahoo! will negotiate an agreement with Microsoft, thereby making a proxy fight unnecessary."

Ilargi: I think the quality of toilet paper is going down fast. When these swap deals are announced by central banks, the word is always that only high grade paper need apply, and short term, to help boost liquidity.

But now, banks are creating shoddy paper that did not exist prior to the deals, with the express purpose of unloading it on the central banks, who unload it on the Treasury, who unload it on the public. And it’s all rolled over for eternity, or at least till the banks go belly up, whichever come first.

How many Europeans have you seen who protest this insane grand theft, how many Brits, how many Americans? What is going on here, y’all on drugs or something? Is that what it means, "The new breed of American"?

Hundreds of $billions of your money, and your childrens’, have already been handed to fat cat bankers behind your back, and hundreds more will follow. When are you going to look over your shoulder and face the music?

ECB concern over liquidity scheme
The European Central Bank on Thursday voiced its “high concern” at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.
Yves Mersch, a governing council member, said the ECB was now “looking very hard at whether there is not a specific deterioration of collateral” which the central bank is accepting in return for funds.

He was speaking amid signs of some banks creating low-rated assets specifically so they can be traded for treasuries at the European Central Bank. Central banks have become important in providing funding for difficult to sell mortgages on what is intended to be a short-term basis while securitisation markets remain frozen.

The Bank of England recently created a facility for UK banks to access funding for mortgages and the Financial Times has learnt that almost £90bn ($175bn) worth of bonds are being created to be placed there – almost twice the £50bn in?itially expected when the scheme was launched only three weeks ago.

But the ECB, which is proud of having always had in place the same system to support bank liquidity, accepts a far broader range of collateral than other central banks. It now appears to have some worries about what is being used by banks. On Thursday, however, speaking at the International Capital Market Association in Vienna, Mr Mersch said the type of collateral now being accepted was: “A matter of high concern.”

His comments come as banks, whose main centres of operations are not within the eurozone, are structuring new bonds based on assets other than mortgages in order to gain access to ECB funding. The ECB’s main mortgage-bond exposures so far are believed to be from Spanish, Dutch and some UK deals, but the central bank publishes few details on the collateral it holds.

However, this week Glitnir, the Icelandic bank, is in the process of clearing the use of a €890m ($1.37bn) collateralised loan obligation (CLO) for funding at the ECB. Similarly, Lehman Brothers recently structured a €1.1bn CLO, which it is expected to use for ECB funding. Meanwhile, Macquarie Leasing, a unit of the Australian bank, has done a securitisation of Australian motor loans, which will have a euro-denominated slice so that the investors who buy the deal can use it at the ECB.

Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover. “There is moral hazard . . . and we are not in the business of taking over the market,” Mr Mersch said. “That means there must be an exit strategy.”

The importance of central bank involvement in supporting securitisation markets has been shown again in the UK, where the Bank of England’s Special Liquidity Scheme has already attracted almost twice the level of demand originally anticipated.
According to debt market sources, the banks planning to use the scheme are the UK’s eight largest lenders.

UK banks eye £90 billion in mortgage asset swaps
The UK’s biggest banks are preparing to swap £80bn-£90bn of mortgage-backed assets for Treasury bills with the Bank of England – nearly twice as much as the central bank originally envisaged when it unveiled its scheme to unblock the frozen bank-lending market.

According to debt market sources, the banks have approached credit rating agencies about how to structure deals that will receive the triple A rating required for securities that lenders want to swap for Treasury bills that can then be used to raise cash. The move comes amid signs that lending in the interbank market is becoming particularly tight for banks that cannot post collateral to ensure their debt will be repaid.

When it set up the special liquidity scheme three weeks ago, the Bank set the level of funds available at £50bn after discussions with banks about the extent to which they are having difficulty raising cash for unsecured borrowing. However, it hinted it could increase that amount if needed.

It is not yet clear whether lenders intend to swap all their securitised mortgages for bills. But bond market participants believe that banks are looking to repackage £80bn-£90bn of mortgages into securities which will be eligible to swap under the Bank’s scheme.

The ratings agencies – Standard & Poor’s, Moody’s and Fitch – have declined to comment, saying that they do not disclose deals until they are finalised. But in recent weeks, HBOS has received triple A credit ratings for most of a £9.04bn deal while Alliance & Leicester has received similar ratings for most of a £10.37bn securitisation.

The Bank unveiled the liquidity scheme in April after it became apparent that banks were too nervous about each other’s financial position to lend cash without collateral. That has driven the interest rate for unsecured bank borrowing, known as Libor, up nearly a full percentage point above the Bank’s current 5 per cent rate. However, those with top-quality collateral can borrow much more cheaply.

There has been speculation that lenders would be reluctant to use the Bank’s liquidity facility because it has high fees attached and because of concerns that users will be marked as those who cannot borrow elsewhere. But the Bank has been encouraging all lenders to use its facility so that no one lender is singled out. Separately, the European Central Bank on Thursday voiced its “high concern” at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.

ResCap Says Bond Tender Supported, Extends Deadline
Residential Capital LLC, the distressed mortgage-finance company, said it has enough support from bondholders to proceed with its offer to exchange or buy back $14 billion of debt in an attempt to stave off bankruptcy. ResCap, owned by GMAC LLC, received the "requisite consents" from holders to move ahead with the plan, according to a statement yesterday, which didn't say how many tendered.

Minneapolis-based ResCap is offering investors as little as 80 cents on the dollar to extend maturities and reduce debt. The exchange buys ResCap time to come up with money to pay its debts and avoid a default. Record U.S. home foreclosures led to six straight losses totaling $5.3 billion for ResCap. The bankruptcy threat left bondholders with little choice but to tender, high-yield research firm KDP Investment Advisors said last week.

Even after the tender and financing from GMAC's parents General Motors Corp. and Cerberus Capital Management LP, ResCap said it needs $600 million by June to avoid default. "My feeling is they get something done," Matthew Eagan, vice president at Loomis Sayles & Co. in Boston, which manages $8 billion of high yield, said before the announcement. "Who knows what you're going to get on the other side."

Loomis owns ResCap debt, according to January and February filings. Eagan declined to say whether he still owns the bonds. ResCap also extended the early deadline for the offer until May 21. The original early deadline expired May 16, after which ResCap offered to give bondholders as little as 77 cents on the dollar's worth of new debentures. The tender expires June 3.

The exchange is contingent on the company getting a new $3.5 billion credit line from GMAC. Detroit-based GM and New York- based Cerberus agreed to guarantee the first $750 million of the borrowings. Some bondholders had initially sought to build opposition to the plan, which pushes back debt maturities until 2010 and 2015, according to Evan Flaschen, a partner and chairman of the financial restructuring group at Bracewell & Giuliani LLP in New York. No organized protest emerged, he said.

Investors holding debt maturing in 2008 and 2009 were offered as much as 100 cents on the dollar's worth of new 8.5 percent senior secured debt maturing in 2010. Bondholders owning securities that come due from 2010 through 2015 could swap their debt for 80 cents on the dollar's worth of 9.625 percent junior secured debentures maturing in 2015 by the early deadline.

Fed's Direct Loans to Banks Climb to Record Level
The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds. Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said in Washington.

Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion. Policy makers have increased the attractiveness of direct loans as they seek to alleviate the impact of the credit crunch. Fed Chairman Ben S. Bernanke said that while markets have improved, they remain "far from normal," adding that the central bank is prepared to increase its twice monthly auctions of funds to banks.

"The Fed is providing an extraordinary amount of liquidity through various mechanisms," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. While "credit markets are showing signs of improvement" there is "a long way to go," he said. Fed officials have reduced the cost of direct loans to a quarter-point above the benchmark overnight lending rate between banks. In March, they extended the term of the loans to commercial banks to 90 days.

The discount rate is now 2.25 percent, compared with the three-month London Interbank Offered Rate for the dollar of 2.72 percent. "The fact that banks are willing to take advantage of it may be a good sign for the market," said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. "They're willing to take advantage of cheap money and" lend it on to customers, he said.

Lowe's Says Net Falls, Sees More Declines on Housing
Lowe's Cos., Home Depot Inc.'s competitor for home-repair supplies, said first-quarter profit fell 18 percent and 2008 sales won't meet estimates, dashing hopes for signs of a turnaround this quarter.

Lowe's dropped 3.2 percent in New York trading after forecasting annual sales growth of 1 percent, trailing an earlier projection of 3 percent. Chief Executive Officer Robert A. Niblock predicted a "challenging" economy that will limit home-improvement sales this year. The slowdown has also hurt Home Depot, the biggest U.S. home-improvement retailer, which may report its seventh straight earnings decline tomorrow, according to analysts' estimates.

Lowe's forecast "is not what investors were looking for," Dan Poole, senior vice president of equity research at National City Bank in Cleveland, said in a Bloomberg Television interview today. "I think a lot of people out there were hoping to find some sign of a bottom in the housing market. They're not going to see it in this report."

Muni Bond Tax Exemptions Upheld by U.S. Supreme Court
The U.S. Supreme Court ruled that dozens of states can continue to offer special tax breaks on securities issued within their borders, deciding not to disrupt the $2.6 trillion municipal bond market. The high court, voting 7-2 in a Kentucky case, said the Constitution lets states exempt interest earned on in-state bonds while taxing the income from bonds issued elsewhere.

The decision preserves tax rules in 42 states. A ruling against Kentucky might have transformed the industry. States would have faced billions of dollars in refund claims and been forced to either eliminate the tax breaks or extend them to out-of-state bonds. Such a ruling also would have undermined the appeal of the hundreds of single-state bond funds, which held $155 billion as of 2006. The securities industry and all 50 states fought to preserve the existing system.

"Financing for long-term municipal improvements would thus change radically if the differential tax feature disappeared," Justice David Souter wrote for the court. The case affected only state tax laws, not the federal exemption on municipal bonds. The dispute centered on the so- called dormant commerce clause, a judge-created rule that bars states from discriminating against out-of-state business without authorization from Congress.

The majority said states don't violate that doctrine by using their tax laws to favor in-state bonds. Justices Samuel Alito and Anthony Kennedy dissented, calling the differential tax treatment "protectionist." The ruling didn't explicitly resolve whether states violate the Constitution by offering special tax breaks on so-called private activity bonds, those issued on behalf of businesses and nonprofit groups.

Souter said the high court would leave that question "for another day" because the lower courts hadn't addressed it. At the same time, Souter voiced skepticism that any challenge to the tax treatment of private activity bonds would succeed, saying, "We must assume that it could disrupt important projects that the states have deemed to have public purposes."

Ilargi: I don’t have time right now to go back and read up on the laws involved, but I know from doing so a few years ago that the US Endangered Species Act is a strongly defined piece of legislation. I must admit I’m somewhat surprised that the polar bear was admitted in. It makes drilling in the Arctic, for instance ANWR look completely out of the question.

Polar Bear Ruling to Bring Tsunami of Lawsuits
As expected, the U.S. Department of the Interior added the polar bear to the list of threatened species under the Endangered Species Act last week. Even with the Bush administration's attempt to render the ruling toothless, this action will almost surely go down in history as the turning point in the global warming debate.

The department concluded that the past and projected melting of sea ice in the Arctic poses an immediate threat to the polar bear's habitat. It pointed to greenhouse-gas-induced climate change as a primary cause for the recession of the sea ice, and emphasized that oil and gas development in the Arctic isn't the reason the polar bear is threatened. The polar bear's listing wasn't intended as a back door for environmental groups to bring lawsuits against greenhouse gas emitters, according to the ruling.

Interior Secretary Dirk Kempthorne said listing the polar bear as threatened can reduce avoidable losses of the animal. Yet, he said, it doesn't mean the law should be used "to regulate greenhouse-gas emissions from automobiles, power plants and other sources. That would be a wholly inappropriate use of the Endangered Species Act. ESA is not the right tool to set U.S. climate policy."

Georgetown University law professor Lisa Heinzerling summarized the Bush administration's actions aptly: "The Department of the Interior has, in short, worked very hard to make sure that its listing of the polar bear under the Endangered Species Act does not trigger the usual protections that act provides."

Such an action is logically and ethically indefensible. For the administration to determine that the polar bear is threatened, it had to conclude that global warming will melt the ice that polar bears need to survive. Having reached that conclusion, the Endangered Species Act requires them to take action to slow global warming. They can't decide not to do their job and enforce the law.

One can imagine that there is some not-so-clever polar bear skeptic in the White House who thought this was a brilliant maneuver. The fact is, if they believed that inaction was the right policy, then they should have refused to list the bear as threatened. It's ludicrous to try to have it both ways.

Historians will doubtless use this cynical decision as a canonical example of what was wrong with this administration.
In the near term then, the polar bears aren't going to be saved by this government. But don't fret. If George Bush won't save the polar bear, Perry Mason will.

UK economy will suffer as house sales hit 'slowest rate since 1974'

House sales will fall to their lowest level since 1974, causing damage to the economy, surveyors have warned. The Royal Institution of Chartered Surveyors says sales will decline by 40 per cent this year.
This dramatic fall would see the number of houses changing hands down by nearly 750,000 to 1.08 million.

With many potential buyers shut out of the housing market, property experts are increasingly concerned that this slump will have a more severe effect on the economy than any fall in house prices. The forecast comes just a week after Mervyn King, the governor of the Bank of England, warned of the possibility of a recession.

In a paper published today, the institution – one of the most influential voices in the housing market – says: "This [fall in transactions] could have important ramifications, not only hitting the property industry directly but also impacting on a broad range of the related sectors whether that is the high street purveyors of home furnishings and white goods or financial intermediaries involved in providing advice on mortgages."

The Telegraph reported earlier this month that 1,000 estate agency branches have already closed this year as the potential house buyers shy away from the market. Another new report shows the number of mortgage deals has been reduced by more than half in the past six months, making it harder than ever for homeowners to re-finance their houses.

The website Mortgage Monitor has found that the number of mortgages available has fallen from 68,000 on offer a year ago to just 16,000 today. Meanwhile, the average rate on a two-year fixed rate mortgage has hit an eight-year high of 6.44 per cent.

Last week Caroline Flint, the housing minister, revealed in Cabinet briefing notes caught by a photographer that she expects prices to fall by five to 10 per cent “at best” this year. This would knock between £10,000 and £20,000 in value off the average house price.

The institution has also revised its forecast for house prices for this year. Previously it thought house prices would stay stable; now it predicts prices will fall by five per cent. Data from Rightmove, a property website, will show today that average asking prices held up well last month, with many sellers refusing to lower their demands.

However, the Land Registry says housing transactions are already 26 per cent lower than a year ago. This lower level of activity is worrying economists, who fear it will contribute to unemployment and recession.

As he dances around a recession, the Chancellor is losing any room he once had for manoeuvre
We all knew that prospects for the UK economy were darkening, didn't we, but it was only last week that the authorities caught up. Just to recap, there were two main announcements. One, from the Bank of England, forecast that inflation would be much worse than previously acknowledged, with the strong indication that there would be little or no scope for interest rate cuts for the next 18 months.

The other, from the Chancellor, was that £2.7bn of tax cuts would come in from the autumn, as part of the package to offset the loss of the 10 per cent tax band. So we are going to have a somewhat tighter monetary policy than was on the cards a week ago and a slightly looser fiscal policy than was set out in the Budget.

The tighter monetary policy is in response to greater-than-expected inflation; the looser fiscal policy is in response to a greater-than-expected protest from Labour backbenchers. Without this concession, the Chancellor might not have been able to get the Finance Bill, which puts into law the proposals of the Budget, through Parliament.

That would have led to his resignation, which would have been a bit rough since it wasn't his idea in the first place. A tighter-than-expected monetary policy will put more pressure on the housing market. The reasons for it are shown in the first graph above, taken from the latest and previous Inflation Report.

The Bank produces its expectations for both inflation and growth in the form of a fan chart: there is a central point but with a fan on either side showing the decreasing probability of other outcomes. For clarity I have taken only the centre point but you can see how the Bank's expectations of inflation have worsened between February and May, with the consumer price index now expected to rise well above 3 per cent (where it is now) and stay there for most of next year.

The actual inflationary situation is worse, for the CPI tends to understate it – the long-established retail price index is now 4.2 per cent – so the inflation we all feel will be higher still.

UK energy firms fear summer of protests over new coal plants
Britain's leading power generating companies have put rivalries aside to draw up plans to counter the expected wave of protests against a proposed new generation of coal-fired power plants. More than 40 security and media executives from the "Big Six" energy companies, as well as an array of independent generators including Drax, met in London to discuss how to prevent demonstrators disrupting their planned expansion.

They discussed tactics for keeping demonstrators from entering power stations and potentially causing costly shutdowns. Companies fear this summer could see one of the strongest campaigns against coal-fired power stations by environmental groups for years.

"It was to help companies learn from experience and to make sure they are able to deal with protests effectively and safely so they can also maintain their responsibilities toward customers," said David Porter, chief executive of the Association of Electricity Producers, which organised the event.

How best to handle such situations from a public relations perspective was high on the agenda of the summit, held on 27 March. Some companies have already been targeted by protesters over plans to expand coal operations this year. There are at least eight coal-fired power plants – the dirtiest form of power generation – in various stages of the planning process around the country, campaigners say.
These include sites in Essex, West Yorkshire and Northumberland. Amid increasingly urgent warnings about global warming and the difficulty Britain will have in meeting ambitious emissions reduction targets, opposition to coal-fired plants has grown.

Several campaign groups have promised big protests this summer. Camp for Climate Action, the group that scaled the Houses of Parliament and a British Airways jet tailfin earlier this year to protest against the new runway at Heathrow, is one. It plans a week-long demonstration at Kingsnorth in Kent, where Eon is proposing to build the country's first new coal-fired plant in decades. Other targeted campaigns are expected.

Ilargi: The article below could be very useful for people who find themselves in situations such as these:

The Real Alternative To Walking Away Is A “Back Door Cram Down”
A lot has been written by me and others about How To Walk Away From Your Home.My blog has become more of a self-help guide to walking away in California. I get at least 25 calls and emails a week from people who want to get out from their underwater homes, but are scared they will be liable for the unpaid mortgage debt.  As I previously explained, California homeowners who used 80/20 loans to purchase their homes and have not refinanced the second mortgage, can walk away without paying anything.

But I also get many folks who have refinanced that second mortgage, or who want to keep their homes, but can’t pay for the adjusted payment on their mortgage, or don’t want to pay on a house that worth substantially less than they owe on it. They have tried to get the bank to work with them, but are frustrated because the bank won’t talk unless they are two payments behind and the only thing the bank will do is freeze their payments or add their arrears to their loan balance.

Banks will not reduce the principal amount on loans to fair market value to save a borrower from foreclosure. They just won’t do it. Once again it’s the 80/20 loan to the rescue. This beautiful piece of financial engineering genius  (you really need to click on that link, it’s hilarious!) has found yet another way to help distressed home owners. And not just in California, this trick works all over the United States.

The trick is called a “Chapter 13 Lien Strip” but I like to call it the “Back Door Cram Down.” You may have read about the proposed mortgage “Cram Down” legislation that would allow Chapter 13 judges to reduce or “Cram Down” mortgages balances to fair market value in a Chapter 13 case. This legislation has zero chance of passing until a new election and Congress are seated next January.

Instead, we are “Cramming Down” second mortgages using the old Bankruptcy code section 1322 which states:

“ Contents of plan:

(b) The plan may:

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”

What’s not obvious about this code section is a loan is not “secured” by your personal residence if there is no value or equity in your home that would go to the lender if the home was sold. That means the loan can be converted to unsecured or the lien “stripped” from the house by “modifying the rights of holders of secured claims. ”This turns it into unsecured debt, like credit card debt, which can be discharged!!!! This is why I call it a “Back Door” cram down because we are cramming down the second mortgage to unsecured status.

Here is an example. You bought your home in 2006 for $500k with 100% financing using an 80/20 loan. So your first mortgage is 80% or $400k and your second mortgage is 20% or $100k. The market is down more than 20% from its peak and your house is now only worth $375k. This means if the house was sold, the first mortgage would take all $375k and the second mortgage would get nothing. In this case the second mortgage is “wholly unsecured” and the second clause of section 1322(b) does not apply, so we can modify the rights of the second mortgage holder and turn it into unsecured debt.

What happens to the now unsecured stripped off second mortgage? It gets paid in your Chapter 13 plan but only after your other secured debts are paid. Secured debts are the first mortgage, your property taxes, and your car payments. And because a Chapter 13 plan lasts only 3-5 years (usually 5) a whole lot of that unsecured debt does not get paid. At the end of 5 years, most unsecured debts (not student loans, back income taxes, or family support payments) are discharged so you don’t have to repay them.

So at the end of 5 years, you are left with just your just mortgage payment on your house. Your cars and your back property taxes are paid off, your student loans and back income taxes are paid down, but your second mortgage and your credit card debt is gone! Beautiful isn’t it? God bless the 80/20! It just keeps on giving.

You can read more about Chapter 13 plans here so I’m not go into great detail on them other than to say they are like debt consolidation inside of a bankruptcy, they last 3 to 5 years (usually 5) and you also can include student loans and back income taxes.

So what is the downside? First off, you will have gone “Bankrupt.” Your creditors will report that for 7 years and it will appear as a public record for 10 years on your credit report. Creditors do not really distinguish between a Chapter 7 or a Chapter 13 bankruptcy so your credit will take a beating. But I like to point out to people that if they do nothing, their credit will likely take a beating anyway, so it’s not really any worse.

The other major downside is you must make every plan payment for 3 to 5 years. If you fail, everything goes back to the way it was. You owe all that debt, and the second lien is no longer stripped off. So I always tell my clients to make a budget that will work for 5 years, not just one that looks good to the Bankruptcy Court.

Economic Collapse in September?
A rumor is swirling around the Internet that an inglorious end to the U.S. economy is imminent. Unlike previous rumors to this effect, this one carries the weight of recent events in the financial realm and has many believing the rumor will come to pass.

Let's examine some of the claims being made: On March 18, 2008, a "closed door" session of Congress was held for only the fourth time in history. According to House Rule XVII, clause 9, it is forbidden for members of the U.S. House of Representatives to reveal the discussions held behind those doors. The penalty for leaking such information includes loss of seniority, fines, reprimand, censure or expulsion.

According to news sources, one purpose of the meetings was to discuss new surveillance techniques to be used by U.S. Homeland Security. Rumors continue to swirl as to what the other topics of discussion took place in that meeting. According to the Australia.TO newspaper, as reported in the May 2008 Last Trumpet Newsletter (LTM), several congressmen were so incensed about what was discussed behind those doors that they were compelled to leak the contents of the meeting. Following is what is rumored to have been discussed:

Imminent collapse of the U.S. economy by September 2008; imminent collapse of the U.S. Government finances by February 2009; possibility of civil war within the U.S. resulting from the collapse; detainment of "insurgent U.S. citizens" in anticipation of their moving against the government; the potential for violent action taken by citizens against members of Congress due to the collapses; the merger of the U.S. economy with those of Canada and Mexico as a solution to the collapse; the introduction of a new tri-national currency called the "AMERO" as another economic solution.

Needless to say, that's a lot of information to process. Unfortunately none of it can be verified and it essentially falls under the category of rumor and as such must be treated as suspect. Now before you dismiss me as a Pollyanna, let me say that there does ring a certain measure of truth to the rumor concerning an economic collapse. There wouldn't be as much fear generated over the headlines, nor would they be as widely circulated as they have been, if there wasn't.

The fact that many people even consider these stories as being potentially true is revealing of the mindset of Americans today: they are nervous about the economy, scared over high oil and gas prices and none too happy over the housing price deflation. So we can imagine how easily someone might be swayed by a rumor of this magnitude. More than anything else, the rumors of an imminent financial and economic collapse are symptomatic of a wounded mass psyche.

The next consideration is that even if the substance of the rumor is untrue (to say nothing of the projected timeline), the fact that many are inclined to believe it doesn't reflect well, nor does it bode well, for the government. When rumors like this one begin to spread, and are believed even in part, it is a vote of no confidence for the government and monetary authorities. While such problems can be remedied with short term solutions, the longer term implications are disturbing and are much harder to remedy.

The Fed may well have dodged the bullet this time but in so doing it has created for itself a new set of difficulties down the road. Those challenges can only be viewed properly through the lens of the long-term Kress cycles. Quoting Machiavelli, "It is in the nature of things that you can never escape one setback without running into another."


Anonymous said...

Hi Ilargi -

Can you comment on the "Truthiness" of the UK mainstream papers vs. the USA press? (are you posting mainstream UK stuff, I'm not too familiar with their press?)

From your rattle inclusions, it seems that the UK papers are sounding more alarms than ours here. Do you see it that way?


Ilargi said...


In -virtually- all societies the media and the political system are mutually dependent to a much larger degree than most people realize.

If and when a political group, often but not always a particular party, has a strong power base and little to fear from its opposition, journalists will not call politicians to task on much of anything.

They don't because a competing paper or TV station that is not as critical, will have the best quotes and the most access to the politician -and party- in the future.

The media need the quotes to sell papers and ads, the politician needs the media to sell his quotes. Siamese twins.

Today's political system in the US in very one-sided, differences are shallow only. The same is presently true to a large extent in Germany, Holland, France and the UK, among other countries.

What I think is going on in the UK is that the press feel they have more room to move after Tony Blair left. Gordon Brown doesn't command as much obedience, and Blair silenced the media for a very long time, so they were antsy.

I think if you look back, you will see that Blair's resignation has formed a breaking point in reporting on the economy. Of course some may and will suggest that it's getting worse fast, but the root of the problem has been there far longer.

That said, it's only moved by a few inches, while it needs to travel vast distances to reach plain honesty.

A good, documented view of economic reality in any of the countries I mentioned is something I still haven't seen. And I don't expect it either, for the same reason why no politician will tell "the people" what condition our economies are truly in.

A politician who does so will not be elected. There'll always be a competitor with a more optimistic message, and that's what people want and vote for. This is a principle with an iron grip. It's also why journalists in main media don't tell the truth. It costs revenue. There's also the problem that most journalists are not very smart, but then again, that's what makes them fit in so well.

And so we will all keep on lying, in one form or another, till the walls cave in. It's who we are, how we're put together. What can be done on an individual level, like what we try to do on this site, will never be more than a drop on a hot plate.

Anonymous said...

To Forrest & Ilargi,

The MSM is getting worse day after day following USA guidelines and power, but I still think that FT is better than WSJ, and The Guardian is better than NYT or WaPo.

Anyway, the FT and Torygraph articles are always anti-EU.

Anglo-saxon economies went to financial services, out of producing real goods. Then, they spread toxic financial engineering and now that their system is broke, how do you make business?

If you want to see a typical de-construction of anglo-saxon economics, here goes an example:

Good evening you all,


EBrown said...

Ilargi and Stoneleigh,
Thanks for all your compilation efforts, comments, and thoughtful responses to queries. I keep coming back to TAE because you do such a good job.

I also read the MarketTicker and Karl Dettinger seems to think that a bond market dislocation is going to be the final finacial straw at the outset of a real monetary winter. I don't know tons about money, but I do know something. I also know that Dettinger is totally out to lunch on his beliefs (faith-based, not data) on peak oil and politics.
Do you think a bond market dislocation is a likely next step? Or will the blame be laid somewhere else when the next round of bad news washes ashore? Tahnks, Edmund

Glennjeff said...

I love the way you use words Ilargi.

Crawled out of bed, hungover and feeling like shit; read your intro to today's debt rattle and now I feel great. I think it's comforting to know that at least there are a few people in the world that have a few clues and are willing to express a degree of angst about the situation.

Thanks for your efforts.

. said...

This last bit about imminent collapse ... source appears to be wingnut writings on Ron Paul's site. How credible is this?

Anonymous said...

I think we all know that any kind of a blow to this economy would knock the whole system on its ass.Its about as resiliant as a very sick cat.
I have heard rumors of the same sort.I think the players in this game are completely nuts if they try it.Way Way, too many Mexicans,and whats more,way to many Americans would object to this plan.And it takes no imagination to imagine what happens next.Snuffy

Anonymous said...


Thanks for your comments on China previously.

While I don't deny their stockmarket and property market are crashing spectacularly, I'm not sure the phrase "bad debt" is really applicable when the banks are state owned. Will banks actually stop lending? Can't the party just get the central bank to print more Yuan, hand it to the banks and say "Here, lend to your friends just like you always have"?

The reason I keep harping on about this is I expect the western middle classes to be crushed between falling asset prices and rising commodity prices, and I expect China (and Russia) to play a big part in this.

When the Han go out and build their empire, they'll be wanting plenty of steel and coal and soybeans, right?

Stoneleigh said...


The banking situation in China bears some resemblance to that in Japan in the 1980s, although there are important differences too. Both are/were collectivist societies in the grip of a bubble. The Japanese one-party developmental state was extremely dirigiste, maintaining a much higher degree of bureaucratic control than is generally thought by those on this side of the Pacific. (The best description I've come across is the book The Real Price of Japanese Money from about 10 years ago.)

Their banking system ended up hobbled by bad debt for years through a long and drawn out credit deflation that still isn't over (and nor is the larger bear market in the Nikkei IMO, despite a long rally). The state ended up spending a fortune building highways from nowhere to nowhere or handing out money with an expiry date in a vain attempt to stimulate the economy.

Although money supply measures didn't show a contraction, it was far more than just a velocity of money issue. Japan was a very wealthy country, as China is now, but credit was still a major driver of the economy. Credit deflation reduced the effective money supply considerably, and combined with a substantial decline in the velocity of money it led to a very painful end to the bubble. Not, however, anywhere near as painful as a global credit deflation is likely to be.

China could end up following in Japan's footsteps to some extent, although I would expect a less prolonged affair. The export markets that were available to Japan cushioned what would otherwise have been a huge overhang of productive capacity, but China will instead be facing a collapse of demand in its erstwhile export markets under global credit deflation. Much of their excess capacity will probably decay, and perhaps be bulldozed, before demand (probably domestic rather than international) picks up again.

When the Chinese depression, and any resulting wars (which will be greatly aggravated by an excess of young men with no prospects for either work or marriage), are over, I would expect a Han empire building phase to begin, even as contraction continues unabated in much of the rest of the world. I agree that that expansion would suck in commodities, but I think we are still many years from that point. Depressions are typically long affairs, and the broader the geographic extent, the deeper they tend to be (and the more likely war is to follow).

I think economic demand for commodities will be greatly reduced in comparison with our present bubble level for a long time (despite continued population growth), although political/military demand is a different story entirely. I fully expect resource wars and state hoarding of strategic commodities, without which nations will be defenseless at a time of great danger (as Ilargi has previously pointed out).

My guess is therefore that prices will fall initially (while becoming simultaneously less affordable due to the collapse of purchasing power), and then rise to much higher levels. A large percentage of the population will then face being priced entirely out of the market for many things currently considered essential.

Stoneleigh said...

A few people have asked our view of the bond market, given that we have posted warnings of potential upheaval.

To be more specific, what I expect is a decoupling between long and short term interest rates. The Fed has been cutting short term rates, but long term rates are a different story. It seems like the bond market might be close to declaring a vote of no confidence in America's long term finances (surprise, surprise), which would mean long bond yields could rise significantly (and prices would fall). This could lead to a sharp rise in the cost of government borrowing, and by extension all other long term debt.

The effect would be to worsen the credit crunch dramatically in a relatively short timeframe. In relation to the housing market, mortgage rates tied to long term bond rates would rise quickly, meaning that the pool of potential borrowers would shrink substantially almost overnight. This would further depress housing prices on top of the effects of inventory overhang and the expectation of further price falls keeping buyers at home. I expect real estate to become even more illiquid than it is currently.

Stoneleigh said...


In general, I have more confidence in the UK press than the US, but that's not saying a lot. When I lived in the UK I used to subscribe to the FT and the Guardian in order to get both sides of a story (hoping that the political biases would cancel each other out).

Anonymous said...


Do you foresee an index bond fund (i.e.: Vanguard VBMFX) to have any advantages over say, a specific sector of bonds? Or are all bonds to be shunned for the next few years? Thank you,
Anonymous Reader

Stoneleigh said...


I'm a fan of owning assets in your own name rather than through a fund. A lot of bonds will end up being worthless, particularly anything remotely risky or high-yielding (another way of saying the same thing), but the very safest bonds will still be worth holding. I like short term treasuries as you don't have to take a long term view on a country's finances and you don't have to find a buyer to get your money back. The yields won't be exciting, but the return OF capital is far more important than the return ON capital.