Thursday, June 4, 2009

June 4 2009: Why not let it fail spectacularly?

John Vachon Times Square in the rain March 1943

Ilargi: The FHA (re: the government) brings back the no money down mortgage. This is a sign of A) how bad the home sales situation is and B) to what extent Washington does Wall Street's bidding. It is very obvious that home purchases today are not in the best interest of prospective buyers, since prices have much further to fall. The reasons why are very clear:

Foreclosures are setting new records. One in 6 American homeowners are underwater on their mortgage. One in 6 American workers are unemployed. Unemployment is the main driver behind foreclosure filings. Today's jobless claims are widely touted as green shoots, but they should be discarded. 5000 less claims on a total of 621.000 (0.8%), as any statistician can tell you, is a meaningless stat, because A) these numbers are always revised upward, and B) margins of error should be taken into account. The same applies to continuing claims which dropped 15,000 to 6.7 million, or 0.22%.

For a glimpse of the real (non-)working life, AP has some interesting data:
The four-week average of claims, which smooths out fluctuations, rose by 4,000 to 631,250. And the number of people claiming jobless benefits through an emergency program rose by about 160,000 to 2.35 million [6.8%].

That figure, which lags initial claims by two weeks, brings the number of people claiming benefits to more than 9 million.

It's very quiet these days around Fannie Mae and Freddie Mac, except for Freddie's huge $30 billion debt issue a few days ago. That silence makes me nervous. In the last days of the previous administration, Fannie and Freddie were ordered to buy up $40 billion in loans per month. I have seen no cancellation of this. The GSE's are ready to roll.

What we would need, ideally, is 1) a complete opening of the books, in particular where they concern Fannie/Freddie issued securities (a Geithner-in-China priority hushed by the media: the Chinese don't buy these securities anymore, they buy Treasuries instead, hence the latter's "positive" numbers, and Geithner's pleas with Beijing to rethink), and we need 2) for Fannie and Freddie to be unceremoniously drawn, quartered and shot into outer space.

It will happen for sure, because you can't forever let every second American pay the bill and guarantee the risk on their neighbor's home purchase. Still, that is where we are right now, and when the next rounds of price plunges come washing over us, the bail-outs needed will risk overwhelming the entire economy in very short order. The Wash Street/Wallington interests have other plans first, though. Think: if it's set to fail regardless, why not let it fail spectacularly, dump in all you can?

So, I was thinking: the FHA starts effectively bringing down payments back to zero. I read that there are enormous amounts of REO foreclosed properties that are not put on the market. I also read reports that banks are contemplating selling large numbers of them soon. That in turn makes me think they have concluded this summer's prices are the best they'll ever get, and moreover, that this summer is the last chance to get the taxpayer to face all the downside risk.

Besides, neither the actual sales numbers nor Obama's mortgage rescue plans come anywhere near the numbers needed to clean up the mess. An order of magnitude more homes every single day, week, month enter both the actual market and the do-goody schemes. Both are bound to soon get relentlessly out of hand.

For now, we have a substantial segment of the population buying into the green shoots mantra, which provides a short term window in which home prices may hold to a certain extent. The big banks have been artificially propped up, which under brand new creative accounting standards gives them additional capital to write new loans with without setting off immediate alarm bells.

The loans are then sold -perhaps through the FHA- to Fannie and Freddie, which are conveniently opaque private corporations with full access to public coffers. They write securities, which the banks can then sell to institutional investors who don't want to miss out on the boom that enables their managers to make up for some of the losses before they are exposed. Sometimes I get the idea that schemes like these need at least months of planning.

And I think there's a solid chance that the real downfall will start for real when Fannie Mae and Freddie Mac's $6 trillion portfolio's start unravelling. Which they will do when prices start dropping for real. Which will happen this fall.

Of course this is hypothetical and to be used for entertainment purposes only.

Federal Housing Administration Loans: Return to 0% Down
The days of home buying with little or no money down may be back—this time thanks to Uncle Sam. Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing. Buyers who haven't owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter's stimulus package.

Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That's enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000. Officials hope "monetizing" the tax credit will help revive the housing market, because meeting closing costs is one of the biggest hurdles for new home buyers. The National Association of Home Builders predicts it will add 40,000 to the 160,000 sales originally expected to be spurred by the tax credit.

Supporters say the move avoids the worst effects of seller financing, in that the credit is essentially the buyer's money, and government assistance doesn't give sellers a perverse incentive to inflate prices in an unsustainable manner. But while seller financing is riskiest, buyers who get down payment help have higher default rates, whether the money comes from government or other sources. That was shown in research by Austin Kelly—who oversees risk modeling at Fannie Mae and Freddie Mac for the Federal Housing Finance Agency—published late last year in the Journal of Housing Research. FHA data on foreclosures show the same pattern.

The new program lets home buyers apply the tax-credit advance against the FHA's 3.5% down payment requirement only if the loan is handled through a state housing-finance agency; otherwise the tax advance may only be used to cover closing costs, to increase the down payment, or to buy down the mortgage's interest rate. The FHA already allows down payment assistance from family, employers, and governmental agencies, but generally bars it from sellers, mortgage writers, or others who would benefit financially from the transaction.

Ultimately, critics complain that the new program transforms a tax credit meant to reward sidelined buyers for taking the plunge into a subsidy that could goose sales to those who otherwise couldn't buy a home—and have little at stake if it doesn't work out. "Didn't we just have this big housing bust where people bought houses they can't afford?" says Peter Schiff, president of brokerage firm Euro Pacific Capital and an economic adviser to Representative Ron Paul's (R-Tex.) long-shot 2008 Presidential campaign. "We don't want people buying houses without using their own money."

Supporters counter that the benefits to the housing market and economy outweigh the risk to taxpayers. David Crowe, chief economist for the homebuilder's group, says most buyers will stay in their homes if possible, even without much money at risk. "As long as they can make the payment they'll stay, even if they're under water," he says. Still, he acknowledges that the new program "increases their likelihood of default, there's no question."

U.S. Mortgage Rates Jump to Highest Since December
Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled. The average 30-year rate rose to 5.29 from 4.91 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The last time the rate was higher was Dec. 11, when it was 5.47 percent. The average 15- year rate rose to 4.79 percent from 4.53 percent. "That’s quite a jump," said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. "The more rates go up, the more we need home prices to go down to equalize consumers’ payments. It’s those payments that have brought about a level of stability in housing unit sales."

Rising rates may deepen the U.S. housing slump and sideline consumers hoping to refinance or purchase their first house. The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, largely on cheaper financing costs, according to the National Association of Realtors. This week’s rate increase translates into an additional $31.79 a month for a buyer purchasing the median-priced U.S. home of $170,200 with a 20 percent down payment. "If people hear that rates are going up, I think they hesitate a little bit," said Tom Burris, a mortgage banker at Supreme Lending in Dallas. "After a while the reality sets in that 5.5 is much better than 8 percent that we had ten years ago. It’s a good rate, it’s a fair rate."

Yields on the benchmark 10-year Treasury note and Fannie Mae mortgage bonds are higher than they were before the Federal Reserve said March 18 that it would buy as much as $1.25 trillion in mortgage-backed securities to help drive down borrowing costs. The Fed’s program, along with a plan to buy as much as $300 billion in Treasury securities, helped push rates to a record low 4.78 percent twice in April. Policymakers may be forced to increase purchases of securities if mortgage purchase applications, pending home sales and purchases of new and existing homes fade, Rissmiller said. "They can’t want interest rates to go up a whole lot more," Rissmiller said. "The question is, what will they do to fight the trend?"

Treasury yields are climbing as investors anticipate a greater supply of government debt being sold to fund federal spending. The yield on the 10-year Treasury was 3.54 percent yesterday, compared with 3 percent on March 17, the day before the Fed announced its plan to boost mortgage-backed bond purchases and to buy Treasuries. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose to 4.53 percent yesterday from 4.22 percent on March 17, data compiled by Bloomberg show. The central bank’s purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae brought down the yields on those securities. That allowed lenders to reduce the rates on new home loans and still sell the securities at a profit.

Fannie Mae and Freddie Mac are government-chartered mortgage companies that are being supported by $400 billion of backup taxpayer capital. The Fed has bought a net $507.1 billion of mortgage bonds so far, including $25.5 billion in the week ended May 27, according to Bloomberg data. Mortgage applications in the U.S. fell last week as demand for home-loan refinancing slumped. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 16 percent to 658.7 in the week ended May 29. Purchase applications rose 4.3 percent while requests to refinance fell 24 percent.

Ilargi: James Purnell, the UK Work and Pensions Secretary, quit the Brown Cabinet tonight. Pressure mounts.

Pound drops as plotters tell ministers: Finish Brown off
Gordon Brown is tonight bunkered down at No?10 while Labour plotters beg the Cabinet to oust him. With the Prime Minister determined to tough out the biggest crisis of his career, ringleaders of the plot to topple him admitted they cannot succeed without a full-scale Cabinet mutiny. Amid rumours that a Cabinet minister will speak out after 10pm tonight when the polling stations close — and claims that more ministers are ready to resign — the pound tanked on claims sweeping the City that he was about to quit.

Sterling dropped from its daily high of $1.6433 to $1.6089 in a matter of minutes as panic gripped dealing rooms, before recovering slightly to $1.6166. But there was no hard evidence of ministerial intervention. And one key rebel admitted the bid to oust Mr?Brown will fail unless Cabinet ministers deal a killer blow. The MP, who claimed plotters would easily get 75 names on an open letter calling on the Prime Minister to quit, said: "To be honest, we are just a peasants' revolt. We can burn haystacks and destroy crops but we cannot deliver the coup de grâce. For that to happen we need Cabinet members to earn their salaries and have the cojones to do the job."

The burning question was whether senior ministers known to be dismayed with Mr Brown would go for him. Privately, some said a bad enough disaster in today's local and European elections could trigger moves. The Prime Minister, who was visited by Sir Alan Sugar, whose catchphrase is "you're fired", was phoning key colleagues to guarantee their support. He was said to be offering jobs in a sweeping reshuffle that could be brought forward to tomorrow — a move that would bind ministers into his camp before European election results are announced on Sunday.

Mr Brown cast a postal vote before the polling stations opened and was expected to remain dug in at No?10 all day, planning his moves and rebuilding alliances. The election results, however, could torpedo the fightback. Voters nationwide will choose Euro-MPs while key barometer regions are holding council elections, the biggest test of public opinion before the next general election. Labour was braced for a rout in county halls, whose results will be out tomorrow. MPs also fear being pushed into a humiliating fourth place in the European elections. The battle for Downing Street entered a lull as voting got under way. But Mr?Brown was braced for more ministerial resignations tomorrow.

There is speculation some ministers will refuse to serve, which would make his position untenable, while others are refusing to be moved from their departments. Alistair Darling is digging in his heels at the Treasury, although a friend said: "He understands these things are the prerogative of the Prime Minister." And David Miliband is determined to stay at the Foreign Office. Their stances make it difficult for Mr Brown to promote his protégé Ed Balls to Chancellor without a serious backlash. There was anger from Labour MPs at what they saw as a ham-fisted attempt by Chief Whip Nick Brown to isolate critics. He named five MPs as ringleaders of the bid to topple Mr Brown with a "go now" letter.

Two of them, Stephen Byers and Alan Milburn, were abroad. Another, Paul Farrelly, furiously hit back at what he called "black propaganda". He said: "What the Chief Whip, Nick Brown, has been saying is completely untrue. It's an unacceptable style of government. For what he has done he should really consider his position." Mr Darling was forced to deny he was the author of an email sent to Labour MPs overnight claiming he had signed a letter calling on the Prime Minister to quit. His spokesman said: "He has not signed it nor will he."

U.S. Retailers Report Continued Weak Sales
Retailers posted another month of falling same-store sales. May's figures came in below analysts' dour expectations, with results hurt by last year's federal stimulus checks goosing those sales and the malaise among consumers. But some analysts were hoping results would show some gains from the warmer-than-normal May weather across much of the country. Among the worst performers was Children's Place Retail Stores Inc., which posted a 9% drop. Analysts surveyed by Thomson Reuters, on average, anticipated flat results.

Conversely, low-price, department-store operator Kohl's Corp. reported just a 0.4% decline in sales at stores open at least a year much smaller than expected. Accessories were cited as the biggest factor. The industry's results were also the first monthly figures without Wal-Mart Stores Inc. in 30 years. The world's largest retailer said last month it would stop giving monthly sales data, following the lead of other smaller peers in recent years. But Macy's Inc. last fall resumed providing such data, saying the economic turmoil warranted its investors getting a more-frequent read on the company's performance.

Department stores, for more than a year the laggard among the various retail segments, largely held to form as Macy's had a 9.1% same-store-sales drop while J.C. Penney Co. reported an 8.2% decline. Luxury retailer Saks Inc. posted a 27% plunge, nearly double the projected drop. Discounters, which largely have been holding up amid the recession, reported largely lower results. Costco Wholesale Corp. had a 7% drop on sharply lower gasoline prices and the stronger dollar. But even excluding gas, U.S. same-store sales dropped 1% with weakness in discretionary categories. That was partially due to the average TV-set sale price slumping 39%, though most of that was made up by a 48% increase in volume.

However, smaller rival BJ's Wholesale Club Inc. continued its recent outperformance, reporting 4% same-store-sales growth excluding gasoline. Target Corp., though, maintained its ongoing woes with a worse-than-expected 6.1% decline. A similar drop is forecast for June. On the apparel side, closeout-chain operators TJX Cos. and Ross Stores Inc. reported gains of 5% and 4%, respectively as consumers gravitated to lower-priced wares. Others reported weaker results.

Abercrombie & Fitch reported another month of weak results, posting a 28% drop in same-store sales, compared with analysts' expectations of a 24% decline. The company hasn't reported growth since April of last year and is increasingly shedding its no-markdown mantra. But less-expensive rival Aeropostale Inc. maintained its recent gains, smashing expectations with a 19% jump for May. And Buckle Inc. continued its streak, generating its 22nd-straight month of double-digit growth. The 13% increase came on top of last year's 34% surge at the teen- and 20s-focused purveyor of trendy tops and edgy jeans and footwear.

Jobless benefit rolls fall, initial claims dip
The number of people on the unemployment insurance rolls fell slightly for the first time in 20 weeks, while the tally of new jobless claims also dipped, the government said Thursday. The Labor Department report provides a glimmer of good news for job seekers, though both drops were small and the figures remain significantly above the levels associated with a healthy economy. The job market likely will remain weak well into next year, according to estimates from government and private economists. The department also said U.S. workers were more productive in the first quarter than previously estimated, as rapid layoffs forced companies to make do with fewer employees.

The tally of first-time claims for jobless benefits declined to a seasonally adjusted 621,000 from the previous week's revised figure of 625,000, nearly matching analysts' expectations. The total jobless benefit rolls fell by 15,000 to 6.7 million, the first drop since early January. Continuing claims had set record highs every week since the week ending Jan. 24. The continuing claims data lag initial claims by one week. Separately, sales fell in May at many retail stores as shoppers spent cautiously, focusing on bargains and food. Discounter Target Corp., warehouse club operator Costco Wholesale Corp. and Macy's Inc. department store reported drops in sales. TJX Cos., which owns the TJ Maxx and Marshalls chains, said sales rose a greater-than-expected 5 percent.

Wal-Mart Stores Inc., the world's largest retailer, did not report monthly sales but did say it expects to hire about 22,000 people for new positions this year. Wall Street's reaction was mixed, with the markets fluctuating between moderate gains and losses. The Dow Jones industrial average added about 27 points in afternoon trading, and broader indices also edged up. The number of initial jobless claims remains stubbornly high, above the 605,000 level reached five weeks ago. That was the lowest level in 14 weeks.

The four-week average of claims, which smooths out fluctuations, rose by 4,000 to 631,250. And the number of people claiming jobless benefits through an emergency program rose by about 160,000 to 2.35 million. That figure, which lags initial claims by two weeks, brings the number of people claiming benefits to more than 9 million.

Congress approved the emergency extension last June. It adds up to 33 extra weeks of benefits on top of the regular 26 weeks provided by most states. Productivity, the amount of output per hour worked, rose at a seasonally adjusted annual rate of 1.6 percent in the January-March period, the department said, double the government's estimate last month. The increase came despite a steep drop in output, because companies laid off employees and cut hours worked at an even faster pace. Higher productivity can raise living standards because workers that produce more can earn higher wages without forcing companies to raise prices.

Labor costs rose 3 percent, down from the government's previous measure of 3.3 percent. A rapid increase in labor costs could fuel inflation, but most economists aren't worried about rising prices, as the recession is keeping a lid on wage demands. The reports come a day before the department is scheduled to release its unemployment report for May. Economists expect that report will show employers cut a net total of 520,000 jobs last month.
That's on top of 5.7 million jobs that have been lost since the recession began in December 2007. The unemployment rate, meanwhile, will rise to 9.2 percent from 8.9 percent in April, analysts forecast.

Troubles in the automotive sector could cause unexpected fluctuations in the claims data. General Motors Corp. filed for bankruptcy protection Monday, joining Chrysler LLC, which filed April 30. GM said earlier this week it will close nine factories and idle three others indefinitely as part of its restructuring. The closings, which will take place through the end of 2010, will cost 18,000 to 20,000 workers their jobs. The company already planned to temporarily close 13 plants on a rolling basis this summer. Workers affected by the temporary shutdowns are eligible for unemployment benefits. Chrysler, meanwhile, has temporarily idled all its U.S. factories after filing for bankruptcy protection, resulting in 27,000 layoffs. That decision caused claims to jump in the first week of May. The shutdowns also could affect auto suppliers, which employ 3 million workers.

Initial claims are still below the peak for the current recession of 674,000 in late March. Many economists see the decline as a sign that layoffs outside the auto sector have peaked. But the unemployment insurance data remain significantly higher than a year ago, when initial claims were 370,000 and the total benefit rolls stood at 3 million. Among the states, Illinois had the largest increase in claims, with 3,881, which it attributed to layoffs in the manufacturing and service industries. The next largest increases were in Iowa, South Carolina, Texas and Wisconsin. The state data lag initial claims by a week. North Carolina had the largest drop in claims of 3,952, which it attributed to fewer layoffs in the construction, furniture and transportation industries. The next largest decreases were in Michigan, Ohio, Tennessee and Connecticut.

The Hidden Unemployed: 25 Million Americans Can't Find Enough Work
When the monthly unemployment figures come out Friday, Greg Noel will go from collecting government statistics to becoming one. Again. Noel, 60, was among more than 60,000 Americans hired in April to help with the 2010 Census. But he's out of work once more and moving back on the unemployment rolls because his temporary gig is finished. It's a familiar predicament in today's economy, in which some 2 million people searching for full-time work have had to settle for less, and unemployment is much higher than the official rate when all the Americans who gave up looking for jobs are counted, too.

For the past month, Noel and more than 140,000 Census workers fanned out to create a map of every housing unit in the country, part of what will be the largest peacetime mobilization of civilian workers. He roamed the spine of the Green Mountains with a handheld GPS unit for several weeks, wandering down dirt roads and chatting with people whose livelihoods are also uncertain. Work was good: The sun was out, the snow was gone and the blackflies hadn't begun to hatch. Because of the surge of Census hiring, April unemployment only rose to 8.9 percent _ a much slower increase than had been feared. But the latest unemployment figures aren't likely to get similar help. Thousands like Noel who were among one of the largest segments of the work force _ people who have taken part-time jobs because they can't find full-time work _ have returned simply to being unemployed.

Consider the numbers:

• The 8.9 percent April unemployment rate was based on 13.7 million Americans out of work. But that number doesn't include discouraged workers, or people who gave up looking for work after four weeks. Add those 700,000 people, and the unemployment rate would be 9.3 percent.

• The official rate also doesn't include "marginally-attached workers," or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.1 percent.

• The official rate also doesn't include "involuntary part-time workers," or the 2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level.

Once those 9 million workers are added to the unemployment mix, the rate would be 15.8 percent. All told, nearly 25 million Americans were either unemployed, underemployed, or had given up looking for a job in April. The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland. Many economists now predict unemployment won't peak until 2010. And since employers generally increase the hours of existing workers before hiring new ones, workers could be looking for full-time jobs for some time. "You haven't seen job loss numbers like this before," said Heather Boushey, a senior economist at the Center for American Progress in Washington. "It's been such a sharp dip down that you'll see a lot of employers taking on temporary and part-time workers before they add employees."

For tens of thousands of people like Noel, a part-time job isn't their dream position, but it beats the alternative. A Pennsylvania native and veteran of the Silicon Valley boom-and-bust cycle, Noel settled in southern Vermont in 2003. He's worked a series of jobs, commuting to his latest position as an auditor for a family-owned food and beverage distributor in Brattleboro before being laid off in early spring. Vermont is in better shape than most states - but not by much. Real estate and tourism, pillars of the state's economy over the past decade, are staggering.

Many parents who were frantic last year about sons and daughters serving in Iraq and Afghanistan _ the state has sent a disproportionate share of its young people overseas _ now are relieved their children have a steady job with benefits. Financial jobs are few. "The economy?" Noel asks between bites of a bison burger in a tiny diner. "You just don't know if it's ever going to come back. We may never have it so good again." When the Census Bureau offered him a part-time job mapping houses nearly an hour from his Windham home, Noel jumped at it. The money, between $10 and $25 per hour plus 55 cents per mile, was a big factor. But Noel said he also wanted to be part of a larger community effort, and the 2010 Census is nothing if not a large community effort.

When the first numbers are released in December 2010, the Census Bureau will have spent more than $11 billion and hired about 1.2 million temporary employees. The government conducts its Census every decade to determine the number of congressional seats assigned to each state, but the figures collected also help the government decide where to spend billions of dollars for the poor and disabled, where to build new schools and prisons, and how state legislative boundaries should be designed. It hasn't been the perfect job - that would be a full-time position with benefits _-but Noel says the Census job worked out well. It eased the pain of being unemployed, giving him something to do, and made him realize his entire life doesn't have to be about financial management. "It's just statistics," said Noel, "but it's important."

But last week, he was unemployed again, a victim of the Census Bureau's efficiency. Since the government was able to draw from a well-qualified but mostly out-of-work pool of applicants, the work done by more than 140,000 field employees went far more quickly than expected. "We've always done well, but this time around was amazing," said Stephen L. Buckner, a Census Bureau spokesman. "It's a tough economic time." For some temporary workers, the outlook is brighter. Ian Gunn spent five weeks "being paid to hike. It was great." Gunn, an 18-year-old high school senior heading to Renssalaer Polytechnic Institute next year to study computer science, hopes for a better economy when he graduates, one that offers more security than a series of part-time jobs. "It's going to take time," he said, "but I've got four more years."

Noel, though, is uncertain about the future. It's possible he'll be called back to work later in the fall for the final push. The Census Bureau expects to send roughly 1.2 million workers out to count people who don't return their questionnaires; the hiring will push down unemployment numbers for several months during that period. For now, Noel says, he and his wife are living without frills. He looks for another job and she runs Green Mountain Chef, a catering business near Stratton Mountain. Demand has slowed dramatically since the economic meltdown began, as it has for most tourism-dependent businesses in Vermont. Noel hopes to avoid being a statistic for too long. Unemployment insurance will give him about $425 per week _ enough to pay the mortgage, and maybe the health insurance bill. Right now, the couple pays about $280 per month, but that will climb to $850 in September, when his government-subsidized COBRA policy expires. "I hope something comes up," he says. "But there's not an awful lot out there."

US bankruptcy filings rise to 6,000 a day as job losses take toll
Consumer and commercial bankruptcy filings are on pace to reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records. While well below the record 2 million filings in 2005, the number of filings is up sharply from last year's 1.1 million, says Robert Lawless, professor of law at the University of Illinois. Bankruptcy filings took a dramatic nose dive after a 2005 bankruptcy reform measure was signed into law to curb bankruptcy abuse and make it harder to erase debts.

But filings are surging back in part because of rising job losses. The unemployment rate could hit 10% this year. And tighter credit, dwindling 401(k) accounts, smaller paychecks and less savings have left unemployed workers and those who are working but struggling with fewer financial resources to keep creditors at bay. Over the past decades, consumers who were hurting financially could rely on credit cards to help them tread water. "The fact that consumer credit has tightened and shrunk explains why bankruptcy filings have now gone up so dramatically," Lawless says.

In May, the number of bankruptcy filings reached 6,020 a day, up from 5,854 in April, AACER says. More debt-laden consumers are turning to consumer credit counseling services for assistance. But credit counselors say that it's harder than ever to help them. "People are coming to us in much worse shape than they used to be," says David Jones, president of the non-profit Association of Independent Consumer Credit Counseling Agencies. "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%."

Even the commercial bankruptcy rate is soaring, driven by shrinking sales and tight credit markets. Last month, commercial filings hit 376 a day, up from 255 in May 2008. Hartmarx, which manufactures and markets apparel, and Silicon Graphics, a manufacturer of computer workstations and storage products, were among the filers. The wave of corporate bankruptcies will cause a secondary wave in consumer filings, says John Pottow, University of Michigan bankruptcy law professor.

Bankruptcy filings are not climbing at the same rate in every state. Nevada, Michigan and California had the biggest per-capita increase in bankruptcy filings in May, according to AACER. "Nevada doesn't surprise me," Pottow says. "It is ground zero of the housing crisis." And California also has suffered from the boom and bust of the housing market. By contrast, Michigan is dealing with the collapse of the auto industry. The recent bankruptcy filings of Chrysler and General Motors, along with plant closings and job losses, will spark even more consumer bankruptcy filings, Pottow says.

Illness, medical bills linked to nearly two-thirds of bankruptcies
Medical problems contributed to nearly two-thirds (62.1 percent) of all bankruptcies in 2007, according to a study in the August issue of the American Journal of Medicine that will be published online Thursday. The data were collected prior to the current economic downturn and hence likely understate the current burden of financial suffering. Between 2001 and 2007, the proportion of all bankruptcies attributable to medical problems rose by 49.6 percent. The authors' previous 2001 findings have been widely cited by policy leaders, including President Obama.

Surprisingly, most of those bankrupted by medical problems had health insurance. More than three-quarters (77.9 percent) were insured at the start of the bankrupting illness, including 60.3 percent who had private coverage. Most of the medically bankrupt were solidly middle class before financial disaster hit. Two-thirds were homeowners and three-fifths had gone to college. In many cases, high medical bills coincided with a loss of income as illness forced breadwinners to lose time from work. Often illness led to job loss, and with it the loss of health insurance.

Even apparently well-insured families often faced high out-of-pocket medical costs for co-payments, deductibles and uncovered services. Medically bankrupt families with private insurance reported medical bills that averaged $17,749 vs. $26,971 for the uninsured. High costs – averaging $22,568 – were incurred by those who initially had private coverage but lost it in the course of their illness. Individuals with diabetes and those with neurological disorders such as multiple sclerosis had the highest costs, an average of $26,971 and $34,167 respectively. Hospital bills were the largest single expense for about half of all medically bankrupt families; prescription drugs were the largest expense for 18.6 percent.

The research, carried out jointly by researchers at Harvard Law School, Harvard Medical School and Ohio University, is the first nationwide study on medical causes of bankruptcy. The researchers surveyed a random sample of 2,314 bankruptcy filers during early 2007 and examined their bankruptcy court records. In addition, they conducted extensive telephone interviews with 1,032 of these bankruptcy filers. Their 2001 study, which was published in 2005, surveyed debtors in only five states. In the current study, findings for those five states closely mirrored the national trends. Subsequent to the 2001 study, Congress made it harder to file for bankruptcy, causing a sharp drop in filings. However, personal bankruptcy filings have soared as the economy has soured and are now back to the 2001 level of about 1.5 million annually.

Dr. David Himmelstein, the lead author of the study and an associate professor of medicine at Harvard, commented: "Our findings are frightening. Unless you're Warren Buffett, your family is just one serious illness away from bankruptcy. For middle-class Americans, health insurance offers little protection. Most of us have policies with so many loopholes, co-payments and deductibles that illness can put you in the poorhouse. And even the best job-based health insurance often vanishes when prolonged illness causes job loss – precisely when families need it most. Private health insurance is a defective product, akin to an umbrella that melts in the rain."

"For many families, bankruptcy is a deeply shameful experience," noted Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard and a study co-author. Professor Warren, a leading expert on personal bankruptcy, went on: "People arrive at the bankruptcy courts exhausted – financially, physically and emotionally. For most, bankruptcy is a last choice to deal with unmanageable circumstances." According to study co-author Dr. Steffie Woolhandler, an associate professor of medicine at Harvard and primary care physician in Cambridge, Mass.: "We need to rethink health reform. Covering the uninsured isn't enough. Reform also needs to help families who already have insurance by upgrading their coverage and assuring that they never lose it.

Only single-payer national health insurance can make universal, comprehensive coverage affordable by saving the hundreds of billions we now waste on insurance overhead and bureaucracy. Unfortunately, Washington politicians seem ready to cave in to insurance firms and keep them and their counterfeit coverage at the core of our system. Reforms that expand phony insurance – stripped-down plans riddled with co-payments, deductibles and exclusions – won't stem the rising tide of medical bankruptcy."

Dr. Deborah Thorne, associate professor of sociology at Ohio University and study co-author, stated: "American families are confronting a panoply of social forces that make it terribly difficult to maintain financial stability – job losses and wages that have not kept pace with the cost of living, exploitation from the various lending industries, and, probably most consequential and disgraceful, a health care system that is so dysfunctional that even the most mundane illness or injury can result in bankruptcy. Families who file medical bankruptcies are overwhelmingly hard-working, middle-class families who have played by the rules of our economic system, and they deserve nothing less than affordable health care."

Slump Pushing Cost of Drugs Out of Reach
A year or so ago, when customers buttonholed the pharmacists at Almand’s Drug Store here the questions were invariably about dosing or side effects. These days, they are almost always about cost. Can I get this as a generic? Is the co-pay really that high? Will you match Wal-Mart’s $4 price? "I’m out of Lexapro," a woman pleaded one recent Tuesday, speaking of her antidepressant. "Can I just have four pills until payday on Friday?" Some customers request prices for a fistful of prescriptions, and then say they can fill only the cheapest two. Others ask which are most important.

"It can be a hard question to answer," said Traci W. Suber, the head pharmacist. "The only thing I can do is let them know what they’re for, get them the cheapest available and encourage them to come back for the others when they can." Even with the Medicare drug benefit, even with the prevalence of low-cost generics, even with loss-leader discounting by big chains, many Americans still find themselves unable to afford the prescription medications that manage their life-threatening conditions.

In downtrodden communities like Rocky Mount, where unemployment has doubled to 14 percent in a year, the recession has heightened the struggle. National surveys consistently find that as many as a third of respondents say they are not complying with prescriptions because of cost, up from about a fourth three years ago. Many customers at Almand’s Oakwood neighborhood store, particularly those too well off for Medicaid but unable to afford insurance, simply pick and choose among risks. They weigh not taking maintenance medications against more immediate needs like shelter and food.

The pharmacists see it every day. About eight months ago, they stopped automatically preparing refills for regular customers because they found that more than half were not being collected and had to be restocked. One recent Wednesday, James S. Crawford, newly discharged from the hospital after his third heart attack, fanned six green slips across the counter as if showing a hand of cards. There were a pair for high blood pressure, one each for angina, cholesterol, and acid reflux, and a renal vitamin for his kidney disease. "I need to know the prices," he said.

Ms. Suber, the pharmacist, explained what each drug was for and listed the co-payments under Mr. Crawford’s Medicare plan, ranging from $8.25 to $18.49 for a one-month supply. The renal vitamin, at $21.89, was not covered. Mr. Crawford, 61, who makes do on $1,800 a month in Social Security and veterans’ benefits, decided he could afford only the heart, blood pressure and acid reflux pills. "If I can rob a bank," he said, chuckling, "I’ll be back for the others." Before leaving, he handed over yet another prescription, just for safekeeping. It was for Plavix, an anticlotting drug that helps coronary patients avoid new blockages, and it had been written in early February after Mr. Crawford’s second heart attack. At $160, the co-payment was so high he had never considered filling it.

Some customers get by through a patchwork of assistance programs offered by governments, charities and drug makers. The only hospital in Rocky Mount, Nash General, donated about $60,000 in medications last year, and a newly established free clinic is spending up to $600 a month on discounted prescriptions at Almand’s. But the need is much greater, and the impact is already felt downstream in clinics and emergency rooms where the ailing seek treatment when their diabetes or blood pressure spikes out of control.

Dr. John T. Avent, a physician at a low-income clinic near Almand’s, estimated that at least 80 percent of his patients were not taking prescribed medicines. "They’ll say, ‘Well, Doc, I just couldn’t afford it; I’ve been out of it for a month now,’ " Dr. Avent said. "By that time, of course, their blood pressure is highly elevated and their hemoglobin A1C is two to three times what it should be." Dr. Daniel C. Minior, who directs the emergency department at Nash General, said he was increasingly hearing from patients that they had lost jobs and could not afford medications. "The worrisome aspect is that it’s even occurring among younger and working-age people," Dr. Minior said. "That’s not something we saw before."

Rocky Mount, planted amid tobacco fields in eastern North Carolina, has seen the closings of mills and an exodus of jobs, compounding the devastation caused by flooding from Hurricane Floyd in 1999. The Almand family once owned a dozen pharmacies in the area, but only two survive. The Oakwood store, in the heart of the African-American community, faces growing competition from mail orders. But business remains steady thanks to discount programs, partnerships with neighborhood clinics, while-you-wait service, $1 delivery and a friendly, familiar staff. Each morning, the pharmacy fills with the aroma of popcorn from the machine on the counter and Gloria Mabry, who runs the cash register, greets customers by calling them Baby or Sugar, whether she knows them or not.

More than 70 percent of the store’s patrons are covered by Medicare or Medicaid, and the pharmacy offers $4 generics to the uninsured. But customers taking a dozen or more medications may still struggle to afford even the modest co-payments under government plans (as low as $3 in the case of Medicaid). Lisa A. Hylton, 29, from nearby Sharpsburg, said she had skipped twice-monthly refills three times this year on an albuterol inhaler for her asthmatic son, Hunter. Her husband, a pipefitter, had been working only intermittently and could not afford insurance during the idle stretches, Ms. Hylton said. "It makes me feel like I can’t supply for my young-uns."

Jimmie L. Bryant, 56, had been laid off for a month when he walked into Almand’s with swollen glands and a one-time voucher from the Edgecombe County Department of Social Services. For the first time since he lost his job, the voucher enabled him to fill prescriptions for Synthroid, to control his hypothyroidism, and Xanax, for depression. Mr. Bryant said he had tried to get refills from his physician, but was told he would have to schedule an office visit for $120, which he could not afford. Even when he was working and had insurance, Mr. Bryant said, he would alternate between the two prescriptions, week to week.

"At the end of the month, I’d have a little bit of what I need in my system," he explained. Similarly, Robert E. Brown, 60, who has heart disease and emphysema, said he regularly told the pharmacists at Almand’s to reshelve his prescriptions after being quoted prices of $100 or more. "I just hand them back," he said. "I take the ones I can afford, and then trust in the Lord."

Rising Interest on Nations’ Debts May Sap World Growth

As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt. Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the United States, Britain and Germany. Even a single percentage point increase could cost the Treasury an additional $50 billion annually over a few years — and, eventually, an additional $170 billion annually.

This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, homeowners and consumers. "It will be more expensive for everybody," said Olivier J. Blanchard, chief economist of the International Monetary Fund in Washington. "As government borrowing in the world increases, interest rates will go up. We’re already starting to see it."

Since the end of 2008, the yield on the benchmark 10-year Treasury note has increased by one and a half percentage points, rising to 3.54 percent from 2 percent, the sharpest upward move in 15 years. Over the same period, the yield on German 10-year bonds has risen to 3.57 percent, from 2.93 percent. And British bond yields have increased to 3.78 percent, from 3.41 percent. Concern over the long-term effect of greater debt prompted Ben S. Bernanke, the Federal Reserve chairman, to say in testimony before Congress on Wednesday, "Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance."

For now, the cost of more debt is the price government is willing to pay to spend its way out of recession, hoping that a return to fiscal health will increase tax revenue and repay the debt. But in the last three weeks, the pace of the increase in the 10-year Treasury note’s yield has quickened, spurred by a Congressional Budget Office estimate that net government debt will rise to 65 percent of the gross domestic product at the end of fiscal 2010, from 41 percent at the end of fiscal 2008.

In 2009 and 2010, Washington will sell more than $5 trillion in new debt, according to Citigroup. A decade from now, according to the Congressional Budget office, Washington’s outstanding debt could equal 82 percent of G.D.P., or just over $17 trillion. Governments borrow money in part by getting investors to buy their bonds, which are essentially i.o.u.’s. To attract investors for all the new debt, governments will have to compete with stock and corporate bond markets for investors’ money, hence the rising yields. Although interest rates remain low by historical standards, the recent spike in rates comes at a critical juncture, threatening to damp the positive effects of new stimulus spending by governments around the world.

Under President Obama’s 2010 budget, total interest payments by the federal government could rise to $806 billion in 2019, from $170 billion this year, according to the Congressional Budget Office. Much of that projected increase is a result of higher government borrowing, but the forecast also assumes that the average 10-year note yield will increase to 4.7 percent. Some of the increase in rates earlier this year actually stems from rising confidence in an economic recovery and growing tolerance for risk, as investors abandon government bonds for higher-yielding but riskier corporate bonds and stocks.

Now the threat posed by the rise in government debt is getting increasing attention from investors and traders. "It’s a gigantic issue," said Kenneth Rogoff, a Harvard professor and the co-author of a forthcoming book, "This Time is Different: Eight Centuries of Financial Folly." "It leaves us very vulnerable to a global rise in interest rates that might be substantially beyond our control." Mr. Rogoff estimates that if the budget office’s debt estimate proves correct, every one percentage point increase in rates could eventually cost Washington an added $170 billion a year. The long-term situation is particularly perilous, because the added interest costs will worsen what have become record deficits as Washington has rushed to bail out industries and stimulate the economy.

A year ago, under old budget and policy assumptions and before the financial crisis escalated, the Congressional Budget Office projected that outstanding federal debt would hit $5.3 trillion in 10 years. "It’s an exaggeration of course, but it’s a little like what happened to the subprime borrowers," Mr. Rogoff said. "People are just assuming the funding will always be there." These assumptions may not hold over time. Spending could be reduced, economic growth could be greater than predicted or interest rates could be affected by other factors. In the meantime, Europe is also turning to the markets to replenish overstretched coffers. In 2009 and 2010, according to Citigroup, the 16-nation euro zone will sell nearly 1.6 trillion euros ($2.6 trillion) in new debt, while Britain plans to offer £490 billion ($799 billion) in new debt.

Britain’s debt sales might seem less alarming than the multitrillion-dollar offerings from the euro zone and the United States. But Mark D. Schofield, global head of interest rate strategy at Citigroup in London, said, "It’s a huge increase in percentage terms, and it dwarfs anything else." Standard & Poor’s caught some traders and investors off-guard last month when it warned that Britain’s sovereign debt was in danger of losing its AAA rating, lowering the outlook to negative from stable. It was the first time since Standard & Poor’s initiated coverage of British debt in 1978 that the country received a negative outlook.

Britain’s government debt now equals 55 percent of G.D.P., but Standard and Poor’s estimates it could approach 100 percent by 2013. "It wasn’t just a message for the U.K., but they were the easiest of the G-7 to target," said Mark Wall, chief euro-area economist at Deutsche Bank in London, referring to the seven largest industrial nations. "The global financial markets took this as a message as much for the U.S. as the U.K." While still worrisome, the short-term debt picture within the euro zone is better than that in either Britain or the United States, Mr. Schofield said.

Over the long term, however, he said that higher rates could compound Europe’s larger problem of prolonged economic weakness and slow its recovery from the current recession. Even regions that are unlikely to issue substantial amounts of new debt — like South America and Eastern Europe — will be affected by rising rates as they refinance their existing debt. Asian economies have the least to fear from the prospect of increased rates. "Asia is in much better shape with lower levels of debt and they can afford larger deficits without the market penalizing them," Mr. Blanchard of the I.M.F. said. "China, for example, is in a very strong position to pay for its stimulus."

Fed’s Role in AIG May Be First Target of GAO Audit
Congressional auditors may soon examine the Federal Reserve’s role in the U.S. bailout of American International Group Inc. after gaining authority to review Fed documents under a law that took force last week, Acting U.S. Comptroller General Gene Dodaro said. "We’re in the process now of developing our future work plans and certainly we’ll use our authorities," Dodaro, head of the Government Accountability Office, said in his first interview on the topic since President Barack Obama signed the Fed audit powers into law on May 20. "In terms of exercising the newest authority, AIG will be the first entity."

Audits by the congressional watchdog are part of intensified scrutiny by lawmakers concerned about costs to taxpayers from the Fed’s unprecedented expansion of credit to nonbank financial firms. The central bank, seeking to revive lending and end the worst recession in half a century, has invoked emergency powers and doubled its assets the past year. The GAO’s first report using the new powers may come within a few months, Dodaro said. "We can report any time we find something significant," he said. The Senate voted 95-1 on May 6 to add the Fed clause to a bill that revamps a federal mortgage-aid program and helps the Federal Deposit Insurance Corp. rebuild its insurance fund at a faster pace. The law gives the GAO power to examine Fed emergency aid to specific companies, such as AIG, Bank of America Corp. and Citigroup Inc.

In congressional hearings in March, Dodaro called for a "carefully crafted" and possible temporary rollback of limits on GAO audits of the Fed so the agency could examine the AIG rescue and other programs. The new law doesn’t remove limits from a 1978 law that prohibits the GAO from peering into Fed activities involving monetary policy or discount-window loans to banks. The GAO produces about 20 reports a year that touch on other Fed activities, such as bank regulation. "We needed to have this authority in order to comply with our responsibilities under the Economic Stabilization Act," which in October authorized the Troubled Asset Relief Program, Dodaro said.

AIG is getting as much as $70 billion of the $700 billion Congress approved for TARP, while the Fed has separately extended $85 billion in credit in connection with the bailout. The new law is designed to give the GAO access to records and people at the Fed’s Board of Governors in Washington as well as the 12 district banks, such as the New York Fed, which has been the government’s lead day-to-day supervisor of AIG. The GAO has been examining the Fed and government’s approach to AIG. In a March report, the agency said the U.S. Treasury should demand that the company seek concessions from employees, creditors and derivatives counterparties as a condition of its aid.

"We’ve covered these things all to a certain degree," Dodaro said. "Now we have the ability to cover them more in depth." "We remain vigilant to determine whether we need additional authority," he said. The new Fed audit law differs from more intrusive legislation introduced in the House by Ron Paul, a Texas Republican, and in the Senate by Bernie Sanders, a Vermont independent. Those bills, which haven’t made it past the initial stage of being introduced in Congress, would remove limits on GAO audits of the Fed and direct the agency to issue a report on the central bank by the end of next year.

Lawmakers from both political parties have called in recent months for stronger congressional oversight of the Fed, which has used Depression-era powers to expand its balance sheet while bailing out AIG and Bear Stearns Cos. Fed Chairman Ben S. Bernanke indicated in testimony May 5 that he wouldn’t object to GAO audits of the central bank as long as there was no examination of monetary policy. Fed officials are wary of political interference into their ability to tighten credit and contain inflation.

"If Congress needs more information about the operations that we are doing, exactly how we manage our collateral, how we manage our lending, those sorts of things, I think we can talk to you about providing more information about that and, if necessary, working with the GAO," Bernanke said at a Joint Economic Committee hearing at the time. "I certainly would resist any attempt to dictate to the Federal Reserve how to make monetary policy," Bernanke said. Senator Charles Grassley, the Iowa Republican who sponsored the amendment allowing the Fed audits, said May 6 that while the authority was narrower than he would have liked, "it is a reasonable step in the right direction, and it does not threaten monetary policy independence."

SEC charges ex-Countrywide CEO Mozilo with fraud
The government is charging Angelo Mozilo, the former chief executive of mortgage lender Countrywide Financial Corp., and two other company executives with civil fraud. The Securities and Exchange Commission's case also accuses Mozilo of illegal insider trading, an agency spokesman said Thursday. Countrywide was a major player in the subprime mortgage market, the collapse of which in 2007 touched off the financial crisis that has gripped the U.S. and global economies.

Mozilo is the most high-profile individual to face formal charges from the federal government in the aftermath of the crisis. Mozilo has denied any wrongdoing. His attorney did not immediately return an e-mail message for comment Thursday afternoon. Civil fraud charges also were filed against Countrywide's former chief operating officer David Sambol and ex-chief financial officer Eric Sieracki. Paul Kranhold, a spokesman for Sambol, declined to comment because he hadn't seen the charges yet. An e-mail message to Sieracki's attorney, Shirli Fabbri Weiss, was not immediately returned.

The SEC and federal prosecutors have undertaken wide-ranging investigations of companies across the financial services industry, touching on mortgage lenders, the Wall Street investment banks that bundled home mortgages into securities sold to investors, and other market players. The SEC's scrutiny of Mozilo's stock sales began in the fall of 2007 with an informal inquiry. The filing of the agency's civil lawsuit in federal court in Los Angeles is a striking turn for Mozilo, the man who 40 years ago co-founded what grew into the nation's largest mortgage lender. He moved the company in 1969 from New York to the housing hotbed of suburban Los Angeles, guiding Countrywide through numerous boom-and-bust housing cycles.

After the mortgage crisis hit, Calabasas, Calif.-based Countrywide was forced to cut thousands of jobs and saw its shares plummet. Its downward spiral ended in it being bought by titan Bank of America Corp. in July 2008 for about $2.5 billion. Countrywide itself is the target of multiple lawsuits related to the mortgage meltdown. Mozilo's influence stretched from the California real estate market through the corridors of power in Washington. The Democrats were roiled a year ago by revelations that Sens. Christopher Dodd, the chairman of the Senate Banking Committee, and Kent Conrad, head of the Budget Committee, got mortgages at favorable rates through a VIP program dispensed by Countrywide for so-called "friends of Angelo."

Dodd insisted that the controversy over the two loans he received did not compromise his ability to lead Congress' efforts to address the effects of the subprime mortgage meltdown. Mozilo sold about $130 million in Countrywide stock in the first half of 2007 through a prearranged 10b5-1 trading plan. These plans, popular among corporate executives, allow a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of significant nonpublic information.

North Carolina's state treasurer, who asked the SEC in 2007 to investigate Mozilo's stock sales, raised questions about changes made to Mozilo's plan in the months before the company's stock plunged, which allowed Mozilo to significantly increase his sales of Countrywide shares. Mozilo had sold company shares through prior arrangements since 2004; the pace of his sales began to quicken in October 2006 when he put a new plan into effect. Mozilo has said that he did so to reduce his stake in Countrywide and diversify his personal investments in an orderly fashion before his retirement, which was slated for December 2009.

Happy 75th Birthday SEC
On June 6, 1934, FDR signed into law the Securities Exchange Act of 1934 which bright the Securities and Exchange Commission to Life. Roosevelt then appointed Joseph P. Kennedy to be its first head which caused some to think this was "setting a wolf to guard a flock of sheep." (Incidentally, Georgetown hosts the poorly named Joseph P. and Rose F. Kennedy Institute of Ethics).

This hasn't been a good year for the SEC. Regulators continue their war against efficient markets. Last year's shorting ban in financial stocks was a bust (financials underperformed the broader market). The SEC completely missed the Madoff scandal after being told what was happening. The agency's own inspector general said they bungled the Pequot Capital thing ("raised serious questions about the impartiality and fairness"). It gets even worse. Check out this Dow wire story from earlier this week:
The internal watchdog at the Securities and Exchange Commission revealed Monday his office is investigating several employees, including one top SEC official, after receiving complaints alleging they improperly disclosed non-public information. One pending investigation by SEC Inspector General H. David Kotz comes in response to an allegation that a top SEC official improperly disclosed non-public information to a large investment bank.

In another case, Kotz reported that his office is investigating two enforcement attorneys for possibly disclosing non-public information from an internal SEC database to a corrupt FBI agent and short seller who was later convicted of fraud, racketeering and conspiracy. Then, in yet a third case, the inspector general said he's looking into whether a former SEC attorney may have revealed confidential investigative information in a book he wrote. Kotz said the attorney may have provided the privileged information to a company where he worked as a lobbyist after leaving the SEC.

Separately, his office is also trying to determine if non-public information may have been disclosed to a national news outlet. Kotz, who is leading the internal investigation into the agency's failure to detect Bernard Madoff's Ponzi scheme, disclosed some details about his pending investigations in his newly published semi-annual report to Congress on Monday. In it, he said he has 19 pending investigations, one of which is tied to the Madoff failings.

Here's to 75 more years!

Executives' Stock Deals Preceded Price Drops
New research suggests complex stock-sale arrangements designed to protect executives from declines in their company share holdings often are struck not long before such declines occur. The deals have long been criticized as opaque and hard for investors to understand. Now, a new study, which jibes with other recent research, shows that after executives strike these favorable deals, share prices tend to decline disproportionately.

The contracts "appear to be used opportunistically because they are followed on average by a share decline and unusual levels of negative corporate events," said Carr Bettis, chairman of Scottsdale, Ariz., research firm Gradient Analytics and co-author of a recent report on the subject. Known as prepaid variable forward contracts, the arrangements are usually made between an executive and a brokerage firm. The executive typically agrees to deliver to the brokerage a number of shares at a date several years in the future in exchange for upfront cash often equal to between 75% and 90% of the shares' value at the time of the agreement.

If the share price falls in the contractual period, the brokerage absorbs the loss. If it rises, the executive shares in the gains up to a point. In any case, the executive locks in some value, minimizes losses and retains a shot at some gains, all while maintaining voting rights for a time. Researchers say they have no specific evidence that executives who use such deals are motivated by knowledge that isn't public. The New York attorney general last year sought information from some companies that permit the arrangements and looked at how they were disclosed. To date, investigators haven't brought any charges or given any public indications of suspected securities fraud at any of those companies.

One trend that could help explain the results: Executives often enter such deals when their company's stock has been rising, research suggests, and so may be due for a fall. But researchers say they accounted for that phenomenon and concluded the price declines in these cases were statistically significant. A report by Gradient, released to clients in April and reviewed by The Wall Street Journal, showed that shares of companies whose executives entered into these hedging contracts fell about 8% more than a peer group of similar companies about a year after the contracts were entered into. The report covers 474 contracts spread over 363 firms from 1996 and 2006. Gradient's Mr. Bettis, a professor at Arizona State University, has pursued the research for years with colleagues at Portland State University and Southern Methodist University.

A 2007 study of about 100 contracts by Stanford University finance professor Alan Jagolinzer and two colleagues also found correlations between weakness in companies' shares and the contracts. Some companies, such as Pitney Bowes Inc., have banned the arrangements. "We think it is inappropriate for senior employees to, in effect, bet against the company," said Johnna Torsone, Pitney's chief human-resources officer. The company instituted the ban about three years ago. The contracts have been used by roughly 400 publicly traded companies, according to Gradient, and aren't as common as share sales as a way for executives to reduce their exposure to their company's fortunes.

Supporters of the contracts say they help executives with concentrated exposure to company stock diversify while retaining voting rights for the shares until the contract ends. Another way for executives to diversify share holdings is to sell shares on the open market. It is transparent, but can draw the attention of shareholders, and also costs executives voting power. The tax treatment of the contracts has also come under scrutiny from the Internal Revenue Service, since executives are allowed to cash out their share holdings, but defer capital-gains taxes for years on that cash. Several years ago, the SEC looked into disclosure issues surrounding the contracts. The IRS didn't comment and the SEC didn't respond to a request for comment.

One company that saw a steep decline after its chief executive entered into one of the contracts is shipping company Horizon Lines Inc. In November 2006, Chief Executive Charles Raymond entered forward contracts in which he committed shares at a price of about $27, according to regulatory filings. In exchange, he was given $5.3 million. By the time the contracts matured in early 2009, the stock had fallen to below $5 a share.
A company spokesman said he wanted to diversify "holdings without losing out in the anticipated growth of the company."

Gold Panic Inside The Oval Office
I was watching the NBC special called "Inside the White House" last night and was struck by a meeting with Larry Summers and the President.

It was touted as an "all access" day in the life of the President but at 7:15 minutes into Part 1 Larry Summers and a man who I believe is Austan Goolsbee come into the Oval Office for a call with "the Germans".  Summers is obviously on edge and shuts down the cameras when he begins to discuss the problem.

  • Summers: "Life has changed..ahh..since the briefing…ahh"
  • Obama: "For the better or for the worse?"
  • Goolsbee: "Net-net for the better…wouldn’t you say Larry?" (Goolsbee speaks loudly and unconvincingly for the cameras.)
  • Summers: "(nervous laugh)..there’s elements of both. The Germans...actually we should stop (the cameras) here."

The cameras and staff are quickly "ushered out" of the Oval Office.

For those who don’t know, Austan Goolsbee is on the Presidents Council of Economic Advisers and is touted as Larry Summers’ "Economic Internet Guru". In that capacity there is no doubt in my mind that he monitors all the gold internet sites as well as being in charge of coordinating all the "gold disinformation" articles. Like Summers, Goolsbee believes in a kind of "Psychological Tendencies Economic Model" touting that it is perception that steers the worlds economic markets not necessarily fact. Having fought the gold manipulation battles for so long we all know perception can be managed and manipulated as I discussed in my articles "Operation Confidence Con" and "Geithner Plan=Sustained Manipulation".

On May 28th, the night before the White House taping, Jim Willie of posted an article called "The Hitman Cometh" where he claimed the Germans are trying to withdraw all their physical gold from US control and several "hit men" have been hired to take down the COMEX and the LME: "The Germans have demanded that gold bullion held in US custodial accounts be returned to their owners, with physical gold shipped back to Germany ."

I'll bet my last gold Kruggie that the Oval Office phone call was a desperate plea to buy more time before the Germans destroy the physical gold manipulation scheme. This together with rumblings of China, Russia, Saudi Arabia and Dubai scrambling to get their hands on physical gold has put the Obama Manipulation Team in major gold panic mode. It's amazing to see these few people in the White House scrambling to prolong a failed policy of trying to manipulate the gold markets of the world. What a sad state we find ourselves in.

Barclays pensions scrapped, US investment bankers exempted
Barclays is withdrawing gold-plated pension benefits from all its staff except 1,500 investment bankers based in the US, including Bob Diamond, the bank’s president and best paid director. The bank on Wednesday unveiled plans to shut its final salary scheme to existing members. The move will affect 17,000 staff, but exclude roughly 1,500 of its top earners. Affected members will retain benefits accrued to date but earn future entitlements under Barclays’ "Afterwork" defined contribution scheme, which does not link retirement payments to salaries. Actuaries estimated the move would save Barclays about £150m a year.
Mr Diamond, who is among Britain’s best-paid bankers after earning £21m in 2007, is in a separate US pension scheme that has been closed to new members but not to existing staff. Barclays said the US scheme was not affected because the bank had only undertaken "a UK pensions review". It is thought Barclays will move to shut down other final salary schemes to existing members, but has outlined no plans to date. The US scheme is "non-contributory", which means it is entirely funded by the bank, and guarantees members an annual pension of up to $175,000 (£110,000). The annual report shows Mr Diamond currently has a £280,000 pension pot that will pay him £45,000 on retirement at the age of 65.

Rob MacGregor, national officer of union Unite, said: "There will be deep anger among the staff. Unite views this proposal as a break in the promise by Barclays that they will not put profits before people. This attack on the pensions of the loyal and hard-working staff at the bank is utterly alarming." John Varley, Barclays’ chief executive, said the decision was taken because the current arrangements were "untenable". In a letter to staff, he explained that the UK scheme, which was closed to new members in 1997, had a £2.2bn deficit in September that "is likely to have worsened".

Barclays’ staff will be better off than employees of other companies that have shut their scheme to existing members, such as Rentokil and WH Smith. John Ralfe, an independent pensions consultant, said: "The Afterwork scheme is more generous and less risky for individuals than typical defined contribution schemes but nothing like as good as they’ve been getting." Barclays’ annual report shows that servicing the final salary scheme cost £299m last year. Actuaries estimated the bank would save about half that amount, though Mr Varley said: "Our intention is to reinvest any one-off savings from the proposed changes into [reducing the deficit]."

John Ball, at actuaries Watson Wyatt, said: "We anticipate more high-profile closures over coming months... we are working with many who think this could be the year they bite the bullet." Separately, Barclays’ Abu Dhabi investor, Sheikh Mansour bin Zayed al-Nahyan, followed his sale of 1.3bn Barclays shares on Monday by offloading £1.25bn of capital instruments. Credit Suisse sold them for a £12.5m profit, adding to his £1.45bn gain on the stock. It also emerged that Temasek, the Singaporean investment fund, offloaded its £1.2bn Barclays stake in December, crystallising a loss of about £500m. Barclays’ biggest shareholder, Qatar’s sovereign wealth fund, which sold 35m Barclays shares in April, said it remained "supportive" of the bank.

GM Retirees Face an Uncertain Future
Nearly half a million retired autoworkers and surviving spouses worry about the future of their pensions and health benefits. Robert and Joan Allen, 83 and 79 respectively, have what is known in Detroit as a mixed marriage. Both spent their careers with General Motors, but he worked a union job as a shipping clerk in a GM warehousing facility, while she held a salaried position as a senior analyst for the Chevrolet division. Now with GM having filed for bankruptcy, the Allens worry that neither will retain benefits or pension payments adequate to sustain them in their condominium in South Lyon, Mich. "I don't think my husband's union benefits are safe.

Maybe they'll take away all of it, or maybe just dental and eye," says Joan. "And I don't know about our pensions either. You hear this, and you hear that, but you don't know what to believe. I retired from GM in 1985, paying nothing for my benefits. Then they started pecking away at them." The Allens receive a combined monthly pension of $1,900 from GM. Worrying about the future isn't new to GM's 493,000 retirees and surviving spouses, who have watched the automaker lose market share for years. But with the company's Chapter 11 bankruptcy filing on June 1, retirees have entered a new, uncertain zone. GM's restructuring will affect salaried retiree health care, some executive pensions, and retiree life insurance, the company says. But details are incomplete.

On June 2, GM spokesman Tom Wilkinson acknowledged that there's no solid answer for retirees yet, although GM filed a first-day motion to continue employee benefits, including the pension plan. "But that's not certain until the judge approves the sale of GM," Wilkinson explained. "I believe the assumption everyone has is that those [employee benefits] will be moved to the new company, but there probably will be some reduction in those benefits." He added that those reductions are more likely to involve health-care and life insurance benefits—rather than pension payments—for salaried retirees. That won't reassure the Allens, who have already seen one change this year.

In January, GM revoked all health benefits for salaried retirees older than 65, replacing them with a $300-a-month payment to cover the costs of private-market insurance to supplement Medicare. Joan Allen was paying $138 for the combined medical, dental, and vision insurance GM once promised would be free for life. Now she's on Medicare and has purchased a $192-per-month health insurance policy from AARP to cover what Medicare doesn't; she dropped dental insurance altogether because it stretched her budget too far. Plus, she's had to figure out which specialists are on her new medical plan, and which aren't. While both salaried and union retirees are likely to face changes, benefits offered to salaried retirees—who are not covered by collective bargaining agreements—appear to be most at risk under the transition.

For the moment, pensions appear safe. "We were assured that GM would move our Salary Retirement Plan—which is the formal name of what we call 'pension'—into the new GM and there will be no disruption," says Jack Dickinson, president of Over the Hill Car People, a Hoover (Ala.) membership organization that looks out for the interests of salaried GM retirees. "It appears that GM has taken the proper steps to protect it. The fund is in excellent shape. And they've indicated it will take care of retirees for years and years to come."

However, according to GM's figures, pensions for hourly workers and salaried employees were both underfunded at the end of 2008, by a total of more than $12 billion. Dean Gloster, a lawyer hired by the GM Retirees Assn., doubts GM's ability to replenish the pension fund within the next few years. "I'm deeply worried because, while statements from the White House and GM indicate it will be a leaner, meaner company, that is in part because more employees will be pushed into retirement early," says Gloster, a partner in the San Francisco law firm Farella Braun & Martel. "There is the possibility that the business will not be capable of contributing enough to the pension fund.

One thing we as baby boomers are poor at is math. We refuse to realize that fewer people are putting money in than are taking it out." David Certner, AARP's legislative policy director, feels more optimistic about the pension prospects. "GM's pension plan is in relatively good shape, decently funded. Every pension fund in the U.S. is underfunded because of the market's being bad," Certner says. As a last resort, pensions are somewhat guaranteed by the Pension Benefit Guaranty Corp., a federal outfit. Pensions for retirees 65 and older are guaranteed for up to $54,000 a year. Coverage is lower for younger retirees.

Of more concern is the future of health benefits. The United Auto Workers, which represents nonsalaried employees, will administer health-care benefits through the new Voluntary Employees' Beneficiary Assn. trust that is being established as part of the restructuring. For hourly workers, their union—not their former employer—will determine what health-care benefits they receive. Union retirees are already scheduled to lose vision and dental coverage and will have prescription-drug benefits cut under an agreement reached last month between GM and the union.

For salaried retirees, GM possibly could cancel health benefits for those who are under 65, according to Gloster. "The precedent has been set," he says. "It's a matter of the 'weasel words' contained in 'summary plan descriptions' that employees receive every year. The weasel words give the company the option to 'amend, modify, and terminate' the benefits employees have been promised. Back in the 1970s and 1980s, those weasel words weren't even in the summary plan description booklets. Yet in 1998, the Sixth Circuit Court of Appeals gave GM the right to enforce them." However the scenarios play out, Kathleen Buczko, the Allens' niece, says she and her husband are preparing for the worst.

"We're worried my aunt's white collar pension will disappear now that GM has gone bankrupt, and they won't be able to afford to stay in their home," says Buczko, a Los Angeles consultant who says the Allens acted as parents to her after her own mother and father died. "We're trying to figure out whether we can keep them in their condo in Michigan or move them here to California. So we'll take care of my aunt and uncle, but what about the other retirees who don't have anyone to help them? They're going to be out there, competing with teenagers for jobs to stock the shelves at Wal-Mart."

GM, Chrysler Wrong to Shut Dealers, Lawmakers Say
General Motors Corp. and Chrysler LLC were "just plain wrong" to take taxpayer funds and leave local dealers and their customers to fend for themselves, Senator Jay Rockefeller said as lawmakers faulted the automakers today. Rockefeller, leading a hearing on dealership closings, said Chrysler is eliminating 40 percent of its retailers in his state of West Virginia, and GM is cutting more than 30 percent. "Chrysler gave its dealers less than one month’s notice prior to termination, which is truly unbelievable," he said.

The cuts are part of plans to trim costs and return to profitability at GM, which filed for bankruptcy June 1, and Chrysler, seeking to emerge from an April 30 filing. Opposition from lawmakers to factory and dealer closings may make it more difficult for President Barack Obama to keep his promise to let management rather than government make car-company decisions. Auto executives "must have a terrible conscience" about what they are doing, said Senator Frank Lautenberg, a New Jersey Democrat. "There has been double-dealing here," he said, referring to Chrysler retailers being asked to buy more cars and then being told they would close. GM Chief Executive Officer Fritz Henderson and Chrysler President Jim Press defended their plans to cut dealerships by about 3,000 combined, saying the steps are needed for the automakers to compete.

"This effort is vital to creating a new GM," Henderson said in testimony. "GM needs to have fewer, better dealers selling at higher volumes." GM has a list of dealers that it intends to close and hasn’t made public, according to Henderson. He said he will provide the roster to lawmakers. Chrysler’s dealer network isn’t profitable, Press said. "This has been the most difficult business decision I have ever personally had to make," Press told the panel. "There is simply not enough business to go around."

Chrysler has said it plans to close 789 dealerships. Henderson said in his testimony that dealerships for GM will go from about 6,000 today to 3,500 to 3,800 by the end of 2010. Toyota Motor Corp. has 1,240 dealerships, Henderson said. Senator Kay Bailey Hutchison, a Texas Republican, told the auto executives she wanted to hear about what "mitigation" the companies were offering for the closings. "It’s a huge burden," Hutchison said. "We’re talking about 40,000 families" of workers affected by the closings, she said. "We’re talking about communities."

Russell Whatley, a Chrysler dealer in Mineral Wells, Texas, told the panel that "to be arbitrarily closed, with no compensation, is wasteful and devastating." Senator Amy Klobuchar, a Minnesota Democrat, said the planned closing of successful dealers was "puzzling" and that some Chrysler dealers were given 26 days to close. Rockefeller asked West Virginia dealer Peter Lopez at the hearing if he could close in 26 days. The answer was, "No way." The senator asked Press if he could close that quickly if he were a dealer. "I would have to find a way," Press said.

Lawmakers also have promised this week to fight factory closings that affect their constituents. Senator Carl Levin, a Michigan Democrat, said his office will do "everything we can" to persuade GM that a plant in Orion Township, Michigan, which will be idled, should be reopened later. "We’re going to do what every other representative and member of the Senate will do from these states and districts," Levin told reporters June 1. "There’ll be plenty of jawboning, persuasion." The efforts by Congress may make it difficult for Obama to deliver on his June 1 statement that GM’s board and management, "not the government, will call the shots and make the decisions about how to turn this company around."

Majority Leader Steny Hoyer said today that at least five House committees may have jurisdiction over the GM and Chrysler bailouts. "We will certainly be exercising oversight," Hoyer, a Maryland Democrat, told reporters at the Capitol. The second-ranking Democrat in the Senate, Richard Durbin of Illinois, said lawmakers "don’t want to become too involved in the day-to-day business" while at the same time making sure "our investment in General Motors is going to be protected." "If General Motors becomes Government Motors, we are in big trouble," Durbin said. "We want this company to be a competitive company in the private sector."

GM May Depart Bankruptcy in 60 Days, CFO Young Says
General Motors Corp., seeking to sell most of its assets to a newly formed company through bankruptcy, said the process is going well and it may leave court protection in 60 days. "Frankly, with the way things are going, we’d like to be out in 60 days," Chief Financial Officer Ray Young said in a Bloomberg Radio interview today.

GM, which declared bankruptcy on June 1, is seeking to shed assets in court by selling the majority of the company to a newly created entity. It is following the same path as Chrysler LLC, which filed for court protection a month earlier. GM is trying to sell its Saab, Saturn and Hummer brands, which won’t be included in the new company. Young said GM would consider selling its Pontiac brand as well. GM had previously said the brand would be just phased out.

What's bad for General Motors is good for the world
Some companies go bust because of bad management, and some get crushed by unrelenting recession. But once in a while you get a business whose death is about much more than supply chains or sales targets; it sounds the death knell for an entire era. And the funeral bells surely tolled this week when General Motors filed for bankruptcy. Start talking about GM, and the superlatives soon run out. What's now the largest industrial failure in US history was for so many years the biggest company in the world. More than that, the 100-year-old giant was the corporate embodiment of the American Century.

Everyone knows the one about how a former boss of General Motors (nearly) said that what was good for his company was good for America, and vice versa. Today the statement is used for easy irony, but at the time Charles Wilson was voicing a truism. He was speaking a few years after the second world war, during which carmakers supplied the US military with hundreds of billions of dollars-worth of planes, tanks and other military equipment.

The management theorist Peter Drucker said it was not the generals but General Motors who "won the war for America". And they were rewarded handsomely, with cosy regulation and ridiculously low taxes on fuel. The gasoline-industrial complex, you could call it, and for much of the postwar period it held up well enough. Not any more. Of the Detroit Three, GM and Chrysler are now enfeebled, on an IV-drip of government money. Only Ford has avoided the same fate, by taking out a giant loan three years ago and beginning its own painful restructuring.

The official line is that GM is not dead, it's just regrouping. Even as he administered the last rites this week, Barack Obama heralded "the beginning of a new GM". Yes, and I'm sure we all look forward to the continued banking success of Sir Fred Goodwin. If there are no second acts in American life, the world of business is barely more forgiving. Even optimists admit that whatever emerges from Detroit will be a shrunken, modest thing, shorn of its pomp and might. Just as Detroit's rise was about more than business, so too is its demise. When people talk about the rising economic might of Asia, they normally paint it in genteel, gradual terms – photo? calls at international summits, say. But sometimes this slow shift of power becomes more of a lurch. Sometimes it's marked by an industrial humiliation.

For Porsche, BMW and other luxury marques, Shanghai is already the second most important market in the world. And this year, for the first time ever, the Chinese are set to buy more cars than recession-hit Americans. But the developing countries of Asia are not just consuming more, they are closing the gap in manufacturing. In doing so, they are on a well-trodden path to industrialisation, following Japan and South Korea. Those countries pioneered cheaper, small cars; this time, the new frontiers of globalisation are leading the way on electric cars.

Yes, you read that right: the green auto, the will-o'-the-wisp of the motor industry, is already being made in smoke-belching Asia. The world's bestselling plug-in car, the G-Wiz, was invented and built by an Indian firm, Reva. The company that has got the furthest in developing a battery-powered auto which can go for long distances is called BYD (short for Build Your Dreams) and is based in Shenzen, southern China. True, the little G-Wiz is a funny-looking thing, more milkfloat than motor. Then again, the Americans used to laugh at Toyota – and now it's the world's no 1. When pleading for Washington aid, GM execs made much of their new electric vehicle, the Volt – but that's still years from going on sale. Such slow-footedness is hardly a surprise from a company whose vice-chair, Bob Lutz, last year reportedly described global warming as "a crock of shit".

Once a petrolhead, always a petrolhead. And that's the other big ?difference about the electric brigade – strikingly few of its leaders are motor men. Reva's founder comes from the solar-power industry; BYD used to make mobile-phone batteries, and only got into cars this decade; Shai Agassi, the leading designer of a system for charging electric vehicles, is an Israeli who used to be big in accountancy software. "The car industry is heading for a showdown between discipline and imagination," says John Wormald, a British consultant to auto firms for over 30 years. "The old giants have plenty of discipline and heft; but the start-ups have got far more imagination." Or, as a Chinese car executive put it to the New Yorker not so long ago: "We have no brand name, no recognition, nothing. We are simply aggressive."

Plenty of people will read all this as a triumph of free-market economics: the old overtaken by the new, the public good served by an eager private sector, and creative destruction writ large. I'm not so sure. Anyone who's ever been to India and China knows that what they really need is fewer cars and more cheap public transport, powered as cleanly as possible. And all that is far more likely to come now that America's Big Three have less of a stranglehold on the auto sector. From this week, the car industry is ?living in the AD era: After Detroit.

World's airlines face grim financial forecast, industry body warns
Losses across the world's embattled airlines will exceed the previous forecast of $4.7bn (£2.8bn), the industry's leading body has warned. "We are going to revise them for the worse because the numbers we have seen in passengers and in freight are not showing any improvement," the managing director of the International Air Transport Association (Iata), Giovanni Bisignani, told Reuters. "Freight has probably touched the bottom, it is minus 21% [year-on-year] since the last two or three months ... but we do not see any kind of improvement.

"But the passenger [sector], where we generate 90% of our revenues, is still roughly 10% down," he said. Bisignani said it would take three to four years before revenues recovered to where they were before the financial crisis. The world's airlines lost $8bn between them in 2008. Bisignani warned that plane manufacturers Boeing and Airbus would see orders for new planes down 30% next year as airlines struggled to find the financing required to augment their fleet. The warning from Iata follows a series of grim financial results that have underlined the pressure facing airlines.

Last month, British Airways slumped to its worst ever financial performance, reporting an annual loss of £401m, while earlier this week Ryanair posted its first loss in 20 years because of a writedown on its investment in Irish flag carrier Aer Lingus. In another sign of the pessimism pervading the industry, Sir Richard Branson, the Virgin Atlantic president, has warned it is unlikely all the major US airlines will survive the next 12 to 18 months.

How many homes do banks really own?
Housing analysts and Realtors have long speculated about how many foreclosures are lurking in the Las Vegas market. Foreclosures have dominated the housing market with more than 60 percent of the sales each month being bank-owned properties. That continues to drive down prices. With sales at their highest level since June 2006 and first-time homebuyers and investors gobbling up inventory, it has raised the question of whether lenders will flood the market with a backlog of foreclosures.

Some analysts have suggested that banks may have as many as 25,000 homes in foreclosure inventory that they have been holding back to prevent prices from dropping too far. Dennis Smith, president of Home Builders Research, says the inventory of existing homes continues to be a hot topic. He says that if you supplement the Multiple Listing Service data with daily anecdotal information that comes from Realtors, it appears the inventory of existing homes has reached the point where major banks will soon start releasing some of their foreclosure properties that they have been holding back.

That could mean thousands of homes that banks will want to clear from their books, Smith says. "Realtors who specialize in foreclosures and bank-owned properties are certainly gearing up for a flood of listings during the upcoming weeks," Smith says. Based on a recent calculation by a Realtor friend of Smith, there are about 11,100 single-family homes for sale without an existing offer, he says. That translates into about a three to four months of inventory, Smith says.

There were 5,276 bank-owned single-family homes listed for sale in the valley and of those 2,623 had contingent offers, Smith says. That leaves an inventory of 2,653. About half of those homes don’t have offers. "This substantiates what we have been hearing for weeks," Smith says. "There are very few (bank-owned) single-family homes that are currently available without offers to buy. If this is what the banks are waiting for, it has arrived. It is not going to change the downward pricing trend of the resale segment for some time yet. However, it is the first real positive sign that there is definitely a light at the end of our tunnel."

How many homes will be released because of this limited supply is yet to be determined, Smith says. The question is whether there will be enough demand to absorb that inventory. "Some of the Realtors I respect believe there are plenty of investors and demand from out-of-town people," Smith says. "However, I believe it is too early to make that call, and they are basing their opinion on hope. Until we know how many properties are going to be released in the marketplace, it is impossible to forecast how long it will take to absorb them."

Although there are a lot of investors who are active in Las Vegas to take advantage of the low prices, Smith points out that UNLV reports 30,000 vacant homes. Many investors have been able to get a 12 percent return from rentals, Smith says. But because the sales to investors have increased the rental supply, that return has dropped to about 10 percent. "If the return on their investment continues to soften, we will see many of the investors stop buying homes," Smith says. "Although it would hurt the short-term numbers, it might be for the good of the long-term status of the housing market."

Why Bernanke is right to be worried
by Pimco CEO Mohamed El-Erian

Fed chairman Ben Bernanke’s congressional testimony on Wednesday warrants careful attention by market participants – this at a time when policy measures play an unusually large role in determining both absolute and relative values in many markets. In his prepared written remarks, Mr Bernanke correctly points to the ongoing healing in critical elements of the financial markets, including inter-bank and commercial paper transactions. He also notes the improved functioning of the corporate credit market which has enabled many companies to raise needed and precautionary capital. Yet, the most interesting aspects of his testimony are elsewhere. They relate to his more nuanced outlook about the economy and his attempt to place fiscal issues in their proper place.

Mr Bernanke acknowledges that, despite the "green shoots", there are still question mark over which components of demand will kick into gear once the cyclical inventory pick-up runs its course, as it will inevitably do so over the next few months. Indeed, the chairman notes that "businesses remain very cautious and continue to reduce their workforces and capital investments." Concerns about a sustainable recovery are not limited to the dynamics of the immediate cyclical recovery. Mr Bernanke also notes that "even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilisation will increase further."

Yet he stops short of addressing what, increasingly, will be on many people’s minds going forward. Specifically, the longer-term question goes well beyond the notion of a prolonged period of below-potential growth. The level of potential growth itself is likely to decline. Indeed, this is a central element of what we, at Pimco, call the "new normal". When it comes to fiscal issues, the chairman is not timid about worrying about longer-term questions – and rightly so. He is explicit about the need for greater clarity on how fiscal sustainability will be restored after this period of emergency policy actions. Mr Bernanke states that "even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs."

He does not stop here. He goes on to warn that "near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth." These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns. Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar. The chairman’s challenges on this count are neither easy nor amenable to quick solutions.

Moreover, as markets increasingly look into the underlying factors, as inevitably they will, they will recognise the difficulty that the government faces in credibly committing to the needed primary fiscal adjustment in the absence of high economic growth. The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration. He is correct on both counts. He would have been justified on Wednesday in being even more forceful; and he mostly probably will be in the next few months.

Holes in the China Recovery Story
by Michael Panzner

On Monday, China reported that its manufacturing sector had expanded for a third straight month. Along with Premier Wen Jiabao's plan to revive growth with a $586 billion stimulus package, the news bolstered hopes that one of the world's fastest growing economies was back on track, which would in turn help to put the worst of the global economic crisis behind us. But is the China recovery story all it's cracked up to be? Evidence suggests that might not be the case, and that the economic outlook remains less-than-upbeat, to say the least. Ironically, another report published on Monday by the China Banking Regulatory Commission offers one reason for pessimism.

According to the CBRC (via Dow Jones), "the country's economy faces growing downward pressure as the global financial crisis has yet to run its course." The regulator added that "the banking industry faces 'serious' credit and market risks as the domestic economy encounters its 'most difficult year in the new century.'" That's not all. In a statement released today, a Chinese government official noted signs of trouble in a key sector. Vice Minister of Commerce Zhong Shan warned "exporters were facing 'unprecedented difficulties' at present and that the situation would not improve amid the global economic downturn," Reuters reported. 'It is increasingly difficult for us to make a quick turnaround, and the trade situation will not be optimistic in the second half of this year,' Zhong said in a statement on the ministry's website."

At least one closely watched data series also casts doubt on the notion that an economic revival is at hand. Last week, Reuters wrote that "the decline in China's power output accelerated in the first 10 days of May to 3.9 percent from a year earlier, the influential Caijing Magazine reported on Monday, providing the latest evidence that the Chinese economic recovery still lacks a solid footing." In addition, "nationwide electricity consumption via major grids had fallen 4.3 percent in the first 10 days of May, also 0.7 percentage points sharper than that for the last 10 days of April, it said, confirming earlier local media reports. The power data is considered by some as more of a leading indicator than manufacturing and export data."

Still, some insist that other developments tell a more bullish story. They cite, for example, the rebound in commodity prices and reports of strong demand from China for oil and other natural resources as a sign that economic conditions are improving in that country. But, again, there seems to be less there than meets the eye. According to the London Evening Standard, a leading energy analyst found strong evidence that the run-up in oil prices in recent weeks stemmed from stockpiling, or hoarding, by the Chinese. Neil McMahon of Bernstein Research concluded that the rise "'reflects not strengthening demand, but rather China's efforts to boost its strategic petroleum reserve."

Even businesses with potentially more of a direct stake in China's domestic economy are questioning the Asian nation's near term prospects. Citing the latest issue of Woman's Wear Daily, Bloomberg reported that U.K. luxury retailer Harvey Nichols plc is "staying away from mainland China as most consumers don't earn enough to buy its fashions and real estate prices in big cities are too high." In sum, while the nation's growth strategy and comparative advantages may eventually prove the optimists correct, right now, at least, the China recovery story seems to have lots of holes in it.

Bank of England, ECB hold interest rates low
The Bank of England left interest rates on hold for the third month in a row today, amid growing evidence that the worst of the recession may be over. The Bank's monetary policy committee (MPC) said after its latest monthly meeting that the Bank rate would remain at a historic low of 0.5% and it would not increase the scale of its quantitative easing (QE) programme to boost the money supply, which currently stands at £125bn. It said that QE would take another two months to complete and its scale would be kept under review.

David Kern, the chief economist at the British Chambers of Commerce, said: "Most expected interest rates to be kept on hold, so the real debate is over the success, size and scope of quantitative easing. The positive mood in the financial markets should not lull anyone into a false sense of security. Tackling the recession must remain the priority, especially with unemployment rising and firms continuing to slash investment. "The MPC must up the tempo at which they execute quantitative easing, while increasing the scheme's size beyond £125bn."

The MPC is now widely expected to keep rates at 0.5% for the next few months and continue its policy of buying back government bonds, until it is convinced that the green shoots are genuine. Halifax reported earlier today that house prices rose by 2.6% in May, compared with April – the biggest monthly rise in more than six years. The annual fall has narrowed markedly to 16.3%. However, the mortgage lender warned that market conditions remained difficult. The Chartered Institute of Purchasing & Supply (Cips) said earlier this week that activity in the crucial services sector had expanded for the first time in more than a year. This led analysts to predict the economy could soon return to growth.

Colin Ellis, European economist at Daiwa Securities SMBC, said: "It will bolster hopes that the UK economy as a whole can start growing sooner rather than later – GDP may well still fall in Q2, but a rise in the third quarter is looking more likely by the day." However, he added that problems could mount in the UK next year. "With credit growth still constrained, unemployment set to rise much further, and sterling showing signs of life, it is hard to believe that the economy will bounce back strongly in 2010. Indeed, there remains a risk that consumer spending in particular could take another leg down towards the end of 2009 as job losses really start to bite," he said.

The Bank's governor Mervyn King has repeatedly downplayed suggestions that the worst is over, warning recently that the road to recovery would be longer and harder than anticipated. "It is clear that the bank has major concerns and uncertainties about the strength and sustainability of any potential economic recovery," said IHS Global Insight chief economist Howard Archer. "These concerns and uncertainties are likely to persist, despite recent data and surveys indicating that the economy could even be close to stabilising."

The European Central Bank (ECB) also left its benchmark interest rate on hold at a record low of 1%. At a press conference following the bank's announcement, its president Jean-Claude Trichet said that he expects an even sharper contraction in the eurozone economy in 2009 than they had previously forecast. The bank's new staff forecasts predicted the eurozone economy would now shrink by up to 5.1% this year and signalled it would also struggle to grow in 2010. "Following two quarters of very negative growth, economic activity over the remainder of this year is expected to decline at much less negative rates," said Trichet.

Giving more details of its plan to purchase covered bonds, Trichet said the bank would spread the purchases across the eurozone, buying bonds rated at least AA or equivalent, in both primary and secondary markets. He said the purchases would be completed by the end of June next year. Covered bonds are primarily corporate bonds, but holders have access to assets that secure or "cover" the bond if the company that issues them becomes insolvent. In response to German chancellor Angela Merkel's comments earlier this week that the ECB has bowed to international pressure with the purchase of covered bonds, Trichet said: "All that we do is done without bowing to influence or pressure."

Hedge funds may quit UK over draft EU laws
Some of Britain’s biggest hedge funds have warned the UK Treasury they will be forced to leave the country unless a draft European directive is radically changed. Some have already begun back-up preparations to move to Switzerland in case the rules – described by one manager as a "French plot against London" – are not rewritten. New York is also a possible destination, according to another. The warnings come as hedge funds step up their campaign against the draft directive on alternative investment fund managers, which was modified at the last minute to require the European Commission to set a limit on borrowing. Private equity firms are also fighting the rules. Ian Wace, co-founder of hedge fund manager Marshall Wace, told the Treasury this week it should modify tax rules to allow the thousands of Cayman Islands-based funds to move to be fully regulated in London, rather than have much of the industry abandon Europe.

"If this directive goes through as drafted, large chunks of the industry will be leaving Europe, whereas we have the opportunity today to have large chunks of this industry coming to Europe," he said. At a meeting organised by Dan Waters and Henry Knapman of the Financial Services Authority and Tom Springbett, a Treasury representative, officials reassured almost a dozen of London’s top managers they would fight for changes. Managers present included Mr Wace, Jon Aisbitt, chairman of Man Group, Hugh Sloane, co-founder of Sloane Robinson, David Stewart, chief executive of Odey Asset Management, and executives from the London arms of America’s Tudor Investment Corp, Citadel and Och-Ziff.

People present said the FSA officials accepted that the "killer" rules limiting borrowing – and defined to include the implicit borrowing built in to derivatives – would make popular strategies such as global macro, made famous by George Soros, impossible. But the FSA and Treasury argued the definition of borrowing was so "obviously ridiculous" it was bound to be rewritten, one official said. Lord Myners, City minister, accused the European Commission of producing "naive" proposals. Speaking to MPs, he said the draft directive "did not conform with the best practice of consultation" and he was confident it could be improved.

Britain must save and rebuild to prosper
How did the UK get into such an economic mess? There are many causes, but central to any explanation is that consumption has been unsustainably high, at least since 2000, and this excess has been based upon ever-higher levels of private and public debt. In simple terms, we have been writing a large mortgage on future generations, without bequeathing them a compensating set of assets. The implication is that a sustained economic recovery depends upon a major rebalancing of the economy – less consumption, more savings and more investment. But current economic policy is exactly the reverse: to try to boost consumption and borrow unprecedented sums: an even greater mortgage. This is what "crass Keynesianism" in economic policy amounts to – short-term consumption against long-term sustainability.

The scale of the rebalancing necessary to get back on to a sustainable consumption path is considerable. Given the unfunded public sector pensions, the precarious state of private pensions, the ageing population and the squeezing of the productive base, the economy might need in the medium term to save perhaps 7 per cent of gross domestic product. Add in the mountain of debt inherited from the structural deficits since 2000 and the borrowing just embarked upon, in the last Budget, and that might push higher.

Then there are big structural challenges. Most of the North Sea oil and gas has been depleted, without any serious regard for future generations. The current selfish generation had all the benefits, allowing consumption at a higher level supported by a higher exchange rate. The City of London, too, has dimmer prospects, with the rest of the economy having to take up the slack. Not surprisingly, a devaluation has already hit living standards. Finally, there is the environmental dimension. The economy needs to decarbonise: put another way, we are not paying the full costs of the damage we are doing, so our consumption is higher than is consistent with a path towards a greener future. Contrary to claims by politicians and the recent Stern Review, this is likely to cost significantly more than 1 per cent of GDP every year.

It is impossible to avoid the conclusion that we are living well beyond our means. Predictions of exactly how much further living standards have to fall to get back to a sustainable consumption path cannot be precise but if, for example, consumption was to fall back to the 2000 level – when the bubble burst, and before the first round of monetary and fiscal stimuli started to be applied – the required adjustment is at least 10 per cent – and perhaps considerably higher. Already, sterling has depreciated, house prices have fallen and pension funds have depreciated. There is probably further to go.

The appropriate transition policy might well require deficits: there is probably no other option. The, temporary, demand gap should, however, be filled with investment in infrastructure which, like the economy, is in a mess. The capital investment requirements of the next decade are considerable. Major upgrades are needed to the electricity and gas networks, smart meters, high-speed trains, upgrading the London Underground, Crossrail, new runways, new water resources and sewerage systems and broadband roll-out, to name but a few. Add new power stations, energy efficiency and renewables and it is not hard to get to £500bn.

Infrastructure investment would not only stimulate the economy but would also address its chronic productivity and competitive problems. Infrastructure networks are public goods, complementary to the rest of the economy, affecting everyone’s costs. It is one reason why countries such as France have higher productivity levels – in spite of sclerotic labour markets and nationalised industries. To finance this programme for rebuilding Britain’s infrastructure, savings, not consumption, will be required. China, with its 50 per cent savings ratio, understands this – and Beijing’s stimulus package is all about infrastructure. Borrowing requires lenders and as the recent credit warnings on the UK’s sovereign debt have brought into sharp focus, there might be increasing reluctance on their part.

There is a way forward. Instead of trying to boost consumption, the emphasis should shift to savings and investment. Britain needs to rebuild its infrastructure if it is to compete. It needs assets on its balance sheet to offset the debt. The analogy is with 1945, not the 1930s: Britain’s infrastructure was devastated by the second world war, and the remarkable recovery in the late 1940s was built not on consumption but investment. Standards of living have to adjust, savings need to rise, and it would be better to get on with this now, rather than trying to defy gravity by yet more borrowing and consumption. Keynes’ much-quoted comment, "in the long run we are all dead", accurately reflects the selfish short-termism some of his new followers have embraced. If the current policy stance remains, the neglected prospects of our children and grandchildren might be a lot bleaker

Iceland Lowers Key Interest Rate to 12%, Defying IMF
Iceland’s central bank lowered the benchmark interest rate by a percentage point, defying the International Monetary Fund, as the economy slumps into its worst recession in 60 years. The repo rate was cut to 12 percent from 13 percent, Reykjavik-based Sedlabanki said on its Web site today. The rate cut is the fourth since the island received a $5.1 billion IMF- led bailout in November. Policy makers bowed to pressure from labor unions and businesses for lower rates to soften a recession that the bank estimates will culminate in an economic contraction of 11 percent this year. IMF Mission head to Iceland, Mark Flanagan, last week advised against a cut, arguing a planned gradual easing of capital controls requires higher krona returns.

The central bank agrees with "most" of the points made by the IMF, though it was Sedlabanki’s "privilege" to set the benchmark interest rate and the decision was primarily steered by the outlook for the macro-economy, Interim Governor Svein Harald Oeygard said at a press conference. Addressing the capital restrictions, imposed at the end of last year after the failure of its biggest banks led to the collapse of the currency, Oeygard said Iceland will move toward easing the restrictions gradually this year, taking a "cautious" approach aimed at "maintaining the value of the krona."

"The concern of the IMF is that the lowering of interest rates will have an impact on inflation, which will then maintain a weak krona," said Ingolfur Bender, head of economic research at Islandsbanki hf, the state-controlled unit of failed Glitnir Bank hf. "However, there are hardly any domestic factors that can fuel inflation." Sedlabanki said yesterday interest rate decisions must "provide owners of krona-denominated bonds and deposits with sufficient incentive to continue owning them" when capital restrictions are removed. The island plans to lift them in stages over the next two years, the bank reiterated yesterday.

Non-resident investors hold about 630 billion kronur ($5.12 billion) in krona-denominated assets that capital restrictions prevent them from exchanging into other currencies. Even with controls in place, the krona’s onshore rate against the euro has slumped 14 percent since the middle of March, representing the worst performance of all emerging market currencies tracked by Bloomberg in that period. "Since there are some margins for avoidance" of capital controls "that are difficult to eliminate, preserving currency stability will continue to require a firm monetary policy stance," Flanagan said on May 29.

The central bank published a memorandum on May 28, saying holders of so-called Glacier bonds, krona bonds issued outside Iceland, can’t exchange the returns on their investments, and that other bondholders can only exchange returns accrued since they purchased the security, representing a tightening of exchange rules. At the same time, the bank is trying to ease restrictions through controlled channels. The central bank on May 6 opened a loophole for foreign investors locked into their krona holdings. Investors will be able to swap them by funding Icelandic companies, which will repay the loans in foreign currency. "It remains a key program objective to remove capital controls as quickly as possible, and in a manner consistent with currency stability," Flanagan said on May 29. "The process can likely commence later in 2009, but will be gradual."

The central bank said last month it sees scope for more interest rate cuts as inflation slows. The inflation rate dropped to a 12-month low last month of 11.6 percent. Sedlabanki has signaled it will continue to cut rates in smaller, more frequent steps, as it sees inflation reaching the 2.5 percent target by the beginning of next year. "We still believe that the Sedlabanki inflation target of 2.5 percent will be reached early next year, as inflation will continue to decrease in the upcoming months, although it is coming down at a slower pace than forecast," said Bender.

Latvian debt crisis shakes Eastern Europe
Latvia has become the first EU country to face a sovereign debt crisis after failing to sell a single bill at a treasury auction worth $100m (61m), prompting fears of a fresh storm in Eastern Europe as capital flight tests currency pegs. The central bank has been burning reserves to defend the lat in Europe's Exchange Rate Mechanism, but markets doubt whether Latvia has the political will to carry through draconian cuts in spending or whether such a policy even makes sense at this stage.

Tremors hit bank shares in Stockholm and triggered a sharp fall in Sweden's krona. Swedbank, SEB and other Swedish banks have $75bn of exposure to the Baltic states, and face cliff-edge losses if the pegs snap. "Latvia may be a small country but it has vast repercussions for the region," said Bartosz Pawlowski, of BNP Paribas. "If the currency breaks in Latvia, it is likely to break in Estonia and Lithuania as well, and perhaps Bulgaria, with effects on other countries like Romania." Fresh turbulence in the ex-Communist bloc would rattle West European banks, which have 1.3 trillion of exposure to the region.

"We haven't yet seen the full extent of the crisis in the East European banking system. Defaults are creeping higher," he said. The G20 deal in April to triple the IMF's fire-fighting fund to $750bn has reduced the risk of a currency conflagration, but while the larger reserves will buy time, it does not change the fact that some countries have taken on too much debt. Latvia's premier Valdis Dombrovskis warned against a devaluation "quick fix" but may have fuelled the flames further by admitting that the lat is overvalued by a third. "If we're talking of devaluation, it definitely won't be less than 15pc. It'll most likely be 30pc. Real incomes will shrink very fast. The immediate shock will affect absolutely everyone and everything," he said.

Latvia faces a calamitous hangover after blazing the trail of euro, Swiss franc, and yen mortgages. Fitch Ratings says foreign debt maturing in 2009 is equal to 320pc of foreign reserves. The finance ministry expects GDP to contract 18pc this year. House prices have fallen 50pc , the world's most spectacular crash. A third of the country's teachers are being fired and public salaries will be slashed by up to 35pc to meet bail-out terms imposed by the IMF and the European Commission. The policy risks a deflation spiral that defeats its own purpose.

"The level of adjustment is too extreme and it is testing the social and political fabric of the country," said Tim Ash, from the Royal Bank of Scotland. "You have to ask whether they are sacrificing the Latvian economy to protect Swedish banks. It would be better to devalue now and clear the air." Mr Ash said Latvia had crossed the Rubicon this week when the justice minister called for a debate on the peg and key adviser Bengt Dennis, ex-governor of Sweden's Riksbank, said the only question about devaluation now was "how it will be carried out". Days earlier the Riksbank said it was boosting foreign reserves by $13bn, clearly a precaution in the face of Baltic risk.

Swedish officials seem to have accepted that nothing is to be gained from prolonging the Baltic agony. SEB said it faces equal losses either way, slowly under the peg or short and sharp through devaluation. Leaks suggest that the IMF favours devaluation, the normal cure for countries that overheat. It was overruled by the European Commission, deeming retreat from the ERM peg to be a threat to Europe's fixed-exchange orthodoxy. Mr Ash said the crisis was playing out much like the final days of the Russia debacle in 1998 and the end of Turkey's crawling peg in 2001, with momentum building until a critical point of no return.

Latvian currency rises on funding hopes
Latvia’s currency strengthened on Thursday as hopes rose that the European Union and the International Monetary Fund would bring forward plans to inject more cash into the country’s battered economy. Latvia saw a debt auction fail on Wednesday as fears rose that the country would have to devalue its currency, the lat, which is pegged to the euro. It strengthened in its band against the euro, although it remains close to lows in its trading range. The country failed to raise any money in an auction of short-term treasury bills, sparking fears that other emerging nations could struggle to find buyers for a huge wave of sovereign debt issuance. The auction failure also revived concerns about the economies of central and eastern Europe and triggered a sell-of on Wednesday in other currencies in the region as well as shares of Swedish banks, which have invested in the country.

The EU and IMF are due to make a joint statement, which traders believe could involve bringing forward payment of the next tranche of a €7.5bn package of loans, which are conditional on the country sticking to economic reforms. The worries over currency were sparked by an adviser to Valdis Dombrovskis, Latvia’s prime minister, who said on Tuesday that a devaluation of the lat was just a matter of time. Latvia’s economy crashed spectacularly after a consumer-led boom, financed by foreign debt, came to a juddering halt in the wake of the financial crisis. The economy is forecast to contract by 18 per cent this year, while its budget deficit is estimated at 9 per cent of gross domestic product. The Hungarian forint, Polish zloty and the Swedish krona all strengthened against the euro and the dollar amid improved sentiment.

The Embi+, the emerging market sovereign bond index, also stabilised after selling off on Wednesday. Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: "The markets have strengthened a bit because of the expected joint statement from the EU and IMF. "However, we expect Latvia will have to devalue because of the poor state of its economy. This is likely to have a knock-on on other currencies in the region and could make it more difficult for other emerging market countries to issue debt." A devaluation by Latvia would put pressure on the currencies of the other Baltic states of Lithuania and Estonia, which are also pegged to the euro, and would probably lead to a further sell off of the forint and the zloty.

Sweden Can Handle Possible Bank Collapse in Latvia, Baltics
Sweden’s government can handle a possible bank collapse, or nationalization, sparked by the economic collapse in the Baltic states, Finance Minister Anders Borg said. "For Sweden, this means that there is a significant risk of loan losses at the banks," Borg told Swedish television broadcaster SVT in an interview last night, following a failed Latvian Treasury bill auction for 50 million lati ($100 million). Still, Sweden can weather the fallout of loan losses in the Baltics, he added.

The Baltic state’s failure to sell debt on market terms sparked concern amongst some investors that Latvia may be heading toward a default that would precipitate a devaluation of the lats as the government waits for the next tranche of an international bailout. The central bank today released a statement reiterating plans to maintain the lats peg until the country adopts the euro. The failed Treasury bill auction sparked a 16 percent decline in shares of Stockholm-based Swedbank AB, the biggest bank in the Baltic states. SEB AB, the second biggest lender in the region, dropped 11 percent, while Nordea AB decreased 5.2 percent. Those declines contributed to a 3.1 percent slump in Sweden’s benchmark index.

The coalition government is planning budget cuts so it can receive the next tranche of its loan from a group led by the European Commission and the International Monetary Fund. Prime Minister Valdis Dombrovskis said yesterday the country, which is a member of the pre-euro exchange rate mechanism, will adopt the single currency in 2013 at the earliest, compared with an earlier target of 2012. "Our primary concern is to reach an agreement with international lenders to get this loan program on track," said Dombrovskis, in an interview on CNBC last night.

"The probability that Latvia gets the next loan transfer is fairly high and should ease some concern," said Kenneth Orchard, a vice president and senior analyst at Moody’s Investors Service in London. "The rational for devaluation has diminished," according to Orchard. Though "expectations of a devaluation can sometimes be self-fulfilling." The country’s current account deficit has narrowed to 348 million lati in the fourth quarter after peaking at 960 million lati in the middle of 2007. That’s reducing pressure on the currency, according to Orchard.

The Baltic country’s Treasury is planning another bill auction today. Latvia’s currency, the lats, strengthened 0.3 percent today as of 12:34 p.m. local time after the Treasury and other market participants bought the currency, said Kristaps Strazds, head of trading at SEB AB’s Latvian unit. The country runs a quasi-currency board that allows the lats to move 1 percent around a midpoint against the euro. The Latvian central bank said today it is an independent institution responsible for the lats exchange rate, adding that the rate will remain stable until the lats is replaced by the euro.

Latvia turned to a group led by the IMF and EU for a 7.5 billion euro ($10.7 billion) bailout after its economy contracted by 10.3 percent in the fourth quarter and the state took over the second-biggest bank. The agreement calls for Latvia to keep its currency peg to the euro and restore competitiveness through wage and spending cuts. An agreement is needed "quickly" in "coming days or in the first half of next week," Dombrovskis said, and "will calm this situation down. This is not the first panic we have had with the devaluation of the lats."

The absence of bids at the auction comes after a liquidity shortage for lati helped drive up the overnight lending rate to a record 16.4 percent, asking prices show. The central bank has bought about 1.3 billion lati since the beginning of 2008, removing them from circulation and creating a market shortage of the currency. Sweden’s banks can cope with a rise in loan losses in excess of those assumed in a main scenario for this year and next, the country’s central bank said. Loan losses will total 170 billion kronor ($22.8 billion) this year and in 2010, the Stockholm-based Riksbank estimates in its main scenario. Lenders are "well-capitalized in an international comparison," the bank added.

Almost 40 percent of Latvia’s population of 2.3 million people are customers with Swedbank, which controls about a quarter of the lending market in Latvia. The Swedish bank, which has 900,000 private clients and 59,000 corporate customers in the Baltic country, has lent 65 billion kronor in Latvia. In the fourth quarter, Swedbank had loan losses and made provisions for future losses on 3.7 percent of its loan portfolio in Latvia. SEB has total lending of 39 billion kronor in Latvia, where the Swedish bank made an operating loss of 559 million kronor in the first quarter after setting aside 684 million kronor for loan losses and provisions for future losses on bad credit.

[Oil] Demand is in the toilet
Stephen Schork of the Schork Report sums up the energy demand picture in the US succinctly on Thursday:
So there you go, refiners did not make a lot of product last week because demand is in the toilet.
That assessment comes after an unexpected build in US crude inventories - the first in a month — saw oil prices do this on Wednesday:

WTI Nymex Crude prices

It’s no surprise, really, given that the weekly build in crude stocks came in at 2.9m barrels versus a market consensus for a drawdown of some 1.4m barrels. This was largely down to a large jump in crude oil imports for the first time in a month.The real issue though is the ongoing build we’re seeing in distillate stocks. These just keep on building, and worryingly, almost regularly at a higher-than-expected rate. On Wednesday, the build came in at 1.6m barrels while the market had been expecting a 1m barrel rise. The following chart from BNP Paribas neatly sums up the state of affairs:
US Distillate stocks - BNP Paribas

The distillate picture is important because it gives a good indication of the state of industrial energy demand in the US, industry being one of the main consumers of distillate product. On the flip side, gasoline demand appears to remain robust with drawdowns nearly always coming in at a larger than expected rate. This week 200,000 barrels were drawn, versus market consensus for a build of 500,000 barrels. This imbalance tells us a lot about the wider health of the US economy as it implies a relative constant picture for gasoline on a historical basis versus a massive drop in demand for distillates (relative to the overall volume of product being refined). As one barrel of oil will always produce both, refineries have for years tried to balance the proportional output of each product according to demand.  Gasoline tended traditionally to be the product maximised.

But that dynamic began to change over the last few years leading to some expensive refinery adjustments for the purpose of producing more distillates. Which brings us to today. Refineries have no doubt been switching back to their old gasoline-max settings, and yet there appears to be no slowdown in distillate overproduction. This is troubling because the greatest danger for the price of oil is the appearance of a massive mismatch in the distillate/gasoline demand picture. It skews the overall price scenario for crude. While a lot of the excess distillate can be exported out, a global industrial slowdown creates the risk that exports might not be a sustainable solution for long. What’s more, onshore storage facilities may soon run tight.

The above certainly might explain why some energy trading firms are resorting to storing distillates in floating storage, a highly unusual and expensive way to go about storage due to certain spec and maintenance-related costs. As Platts reported on Wednesday (H/T Morgan Downey, author of Oil 101):
JP Morgan and Gunvor have fixed newbuild VLCCs to store gasoil, according  to shipping reports, alleviating some of the gloom for VLCC owners by taking  some tonnage out of an oversupplied market, shipping sources said Wednesday.  JP Morgan has taken the newly built VLCC Front Queen for possible gasoil  storage in the UK Continent for 270 days at a rate of $35,000/day, according  to shipping reports.

It goes on to explain:
Storing gasoil on VLCCs is unusual and can only be done on vessels that  have not yet carried crude as the cost of cleaning so that clean products can  be stored is prohibitive.

Trading house Trafigura set the ball rolling for gasoil to be stored on  VLCCs last December, fixing the Desh Viraat for gasoil storage duty from  end-December 2008 and more recently the Desh Viraal. However it was not clear  whether the Desh Viraal would be replacing the Desh Viraat or if it would be  in addition to it.

But as Schork points out there may even be aberrations in the current gasoline demand picture:
Per last week’s report gasoline demand topped 9.5 MMbbl/d for the first time since August 2007. Then for last week, which includes the U.S. Memorial Day holiday, demand plunged 5.4% to 9.02 MMbbl/d!

He goes on:
In fact, demand for petroleum products in the aggregate fell off of the proverbial cliff. The net amount of products supplied to the market fell below 18 MMbbl/d for the first time since the week following 9/11 and fell to the lowest level, 17.7 MMbbl/d, since May 1999..

To sum up, the general point is that overall product supply is down, a massive distillate overhang exists but what gasoline is being produced is still undershooting demand. To provide an analogy for what is wrong with that picture (please bear with us); it’s comparable to the availability of a massive number of 600 sqft two-bedroom, two-bathroom flats on the market going for an average of £200,000, but demand is actually greater for two-bedroom, one-bathroom flats (people preferring to have living space over a bathroom).

In this (unlikely we know) scenario there just aren’t enough of the latter. The costs of converting a bathroom to a traditional room are c. £10,000-20,000, yet near identical flats with one less bathroom are going at £250,000. So despite there being a glut of two-bedroom flats on the market, the huge demand for two-bedroom, one-bathroom flats stops the price of two-bedroom, two-bathroom flats falling off a cliff. You can always convert them into the former, with a  delay.

But to assess where prices might be going for two-bedroom flats  (crude) generally there’s no point in looking at the overall demand/supply picture for these sorts of dwellings; you need to look at demand for two-bedroom, one-bathroom flats (gasoline) versus demand for two-bedroom, two-bathroom flats (distillates), keeping in mind the former will in this scenario drive the latter. The point is if suddenly those dynamics change, and people didn’t mind how many bathrooms they have — the price could very easily collapse to reflect the overall glut. But until they do the premium for two bedroom, one-bathroom flats (aka gasoline) is likely to only keep pushing up the price.

Oil Stored On Tankers Is Up 71% Since April
The volume of refined fuel stored on ships floating at sea has jumped nearly 71 percent since early April, industry sources said on Thursday. About 41 million barrels of gas oil and jet fuel were being stored in tankers mostly off Europe's coast, up from around 24 million barrels in April, sources said. Crude has rallied to a seventh-month high on optimism the economy would soon improve, despite the continued build in storage.
The demand for ships to store fuel has boosted freight rates for the Long Range 2 tankers mostly being used, shipbrokers said. The tankers can hold between 600,000 and 1 million barrels.

"Storage continues to be an option for traders and we see bookings running through at least the end of August, with several of them adding options to extend storage into September," a shipbroker said. U.S. investment bank JPMorgan Chase & Co has hired a crude supertanker to store gas oil off Malta's coast, a unusal sign traders were looking to take advantage of the weaker crude oil freight rates to store distillates. The ship would have to be cleaned to hold the refined fuel. Crude rallied to over $69 a barrel this week, the highest in seven months, as optimism about the global economy outweighed concern about poor fundamentals in oil markets.

Crude oil in floating storage fell in late May to around 90 million barrels from around 100 million barrels as prompt crude prices rose and narrowed the discount to prices further out. That discount was key to traders storing oil at sea to make profits by selling it later. But products storage has risen while crude storage has fallen. Despite the oil price rally and more positive sentiment about demand, distillates remain weak, said Evan Lim, an executive director from leading distillates trader and Singapore-based Hin Leong. The distillates market, which includes gas oil and jet fuel, has improved recently after underperforming for most of the year. The gas oil margin for July has risen around $2 to $8 at Thursday's Asian close.

Margins for the fuel used for power generation and transportation has been mired at lows of $5-$6 a barrel for more than two weeks, hitting a six-year low of $5.45 at the end of May. Freight rates for LR2 tankers plying the benchmark route between the Middle East and Asia have risen about 29 percent since mid-May to Worldscale 70 points, shipbrokers said. "We have seen freight rates for clean tankers pick up the past month, because more and more LR2 tankers are being booked for storage," said an Asian based shipbroker. "Because of this we are seeing a ripple effect even in the medium-range (MR) tankers."

Global Storage Constraints Limit Oil Stockpiling
Global storage constraints are limiting the ability of most countries to stockpile more oil this year while China prepares to enlarge its reserves, the energy chief of the world’s third-biggest economy said. "Crude stockpile facilities at most countries have been fully filled in the first half," Zhang Guobao, director of the National Energy Administration, said in Beijing today. "It will be difficult for those countries to greatly increase crude reserves in the second half as they did in the first." Oil’s slump in New York from $147.27 a barrel last year has boosted fuel purchases for stockpiling.

Even tankers are now being used for storage because of limited on-land capacity, Zhang said. Since November, crude has risen 52 percent to as high as $68.29 a barrel -- still at a discount of more than 50 percent to the historic peak. "The crude price increases earlier this year could have been partially triggered by increased stockpiling by countries including China," Yin Xiaodong, an oil analyst at Beijing-based Citic Securities Co., said by phone today. A substantial portion of the crude-oil trade in the first half was because of increased global stockpiling, Zhang said at a media briefing today. Those importing countries weren’t actually consuming the oil they bought, he said.

"Analysts should pay attention to this phenomenon when predicting the future trend of oil prices," Zhang said. The benchmark crude-oil futures contract on the New York Mercantile Exchange rose to the highest today since Nov. 10 as China’s manufacturing expanded for a third month, signaling fuel demand in the world’s No. 2 energy consumer will increase. The contract was at $67.69 a barrel at 5:16 p.m. Singapore time. Crude climbed last week as the dollar fell beyond $1.41 against the euro for the first time this year, making raw materials such as oil and gold attractive alternative investments. "Taking the demand and dollar into consideration, a range of between $50 and $60 a barrel for this year is reasonable," Yin said. The cost of importing crude for China’s stockpiles was $58 a barrel in 2008, well below the average price of oil last year, the National Energy Administration said in a statement today.

Construction of the second phase of China’s oil stockpiles will commence "soon," Zhang said, declining to elaborate on capacity. The government started filling four oil storage sites on the east coast last year under the first phase. China plans to build underground caverns and storage bases in inland regions under the second phase. The first phase will hold the equivalent of 30 days of oil imports, China National Petroleum Corp., the nation’s biggest oil producer, said in a newsletter on April 14. China aims to build emergency crude-oil reserves to meet 90 to 100 days of domestic demand, Zhang was quoted as saying in the newsletter. China will expand purchases of important resources while commodity prices are low, Premier Wen Jiabao said in March.

Dirigisme de rigueur
It is not known whether Jean-Baptiste Colbert ever visited Saint Auban. But the spirit of the 17th-century French finance minister, whose name has become synonymous with state intervention, lives on in the battle over a factory that lies half-built on the outskirts of the small Provençal town on the banks of the Durance river. Last month, President Nicolas Sarkozy summoned local officials, bankers, investors and employees of SilPro, a solar power start-up, from Saint Auban to Paris in an effort to rescue the group from collapse. The truth was that he could do little to change the fate of this company employing just 12 people if new funds were not found.

But the president’s interest had a galvanising impact on those present. "The psychological effect was very welcome," says Laurent Vandomme, of Herbert Smith, the law firm hired to help find new investors. "Until then, everyone was waiting to see who would move first." Since Colbert’s time, France has retained a proactive approach to supporting its industrial companies – which has often sparked conflict with its European partners. Few can forget when Alstom, the turbines to trains group rescued in 2003 by a state bail-out negotiated by Mr Sarkozy as finance minister, pitched Paris into a long and heated battle with Brussels.
Yet today, governments around the world are faced with their own Alstoms: Washington this week became the biggest shareholder in General Motors, Britain has taken control of some of its biggest banks and Germany been forced to bail out its own banking and car industries. Although France has stepped in with similar aid, the damage done by the global economic crisis has been less severe than elsewhere. Many now wonder whether this is in part due to France’s tradition of Colbertisme, which has placed industry at the heart of economic planning. Lord Mandelson, UK business secretary, is among those who have been trying to find out. The former European Union trade commissioner visited Paris this year in search of inspiration for a new industrial strategy for Britain.

"We don’t have the same strategic goals and objective-setting by government," he told the Financial Times, expressing interest in the incentives France offered and the way it organised its supply chain. Officials from the US, Australia and a host of other countries have also travelled to Paris in recent weeks in search of answers to their industrial dilemmas. French officials explain their position in simple terms. "We consider it legitimate for the public authority to worry about the nature and evolution of the industrial fabric of our country," says Gilles Michel, head of the government’s new Strategic Investment Fund, set up to invest in French industry. "The state has the right to have a vision."

The fund will have €6bn ($8.5bn, £5.2bn) in cash to invest and state shareholdings worth €14bn. But Mr Sarkozy’s approach to it also raises the perennial question of whether the real purpose of French state intervention is to stimulate the new or prop up the old. When launching the fund, the president said outright that he wanted to protect French companies from foreign takeovers. Mr Michel says, however, that this is not his mandate. "We are mobilising public money to invest in private companies as a means to reinforce the competitiveness of the country," he maintains. "The desire is not to be protectionist but to give French companies with potential the means to reinforce themselves." The fund will take stakes of up to 10 per cent in companies that promise to be potential consolidators in their sectors or that have a technological edge in their markets.

"We are there to support their strategy, be it leadership or consolidation when it happens," says Mr Michel. "We are mobilising public funds with a pro-business approach and it is done under market conditions. We want to make sure we have a competitive industry in France." Certainly, the concerns are real. French industry has steadily lost ground in the race for European exports in recent years, constrained by a rigid labour market and heavy social charges. Past state intervention has, moreover, failed to help manufacturers shift their dependence away from traditional mature industries to more innovative high-tech markets.
The country nonetheless remains one of Europe’s most attractive markets for foreign direct investment and it boasts a large number of global industrial champions. A recent study from KPMG, the professional services firm, has even cast doubt on the accepted wisdom that France’s tax and regulatory handicaps deter industrial investment. Once factors such as a trained workforce, high quality infrastructure, public services and a financing system lubricated by healthy subsidies are taken into account, France is Europe’s most competitive destination for industrial production, the study says. Ironically the French themselves appear to be rediscovering their own art of economic management after a long hiatus.

Since the high water mark that came under the governments of Charles de Gaulle and Georges Pompidou, when the state felt perfectly justified in encouraging the creation of industrial champions to serve the economy, there has been a vacuum in industrial strategic thinking, French industrialists argue. In part, that is because the government no longer has as many tools as it once did to influence the direction of industry. Successive privatisations have reduced the government’s power to intervene directly. But France still owns majorities in industrial giants such as EDF and Areva and officials are unapologetic about the fact that these state-controlled companies will continue to be used to achieve wider economic goals. Nor do they blush over their role in reinforcing control at sensitive companies such as Thales in defence electronics.
In the private sector, however, the approach is less clear-cut and the reality can be obscured by a fondness for doublespeak, an important tool in the political armoury. "French industrial policy is ambivalent," says Henrik Uterwedde, head of the German- French Institute and specialist in the industrial policies of both countries. "Often in France the public likes to play with anti-liberalism. The politicians boast about it because the public wants to hear this interventionist music. In practice, France is more liberal than it says and Germany less liberal than it admits." Although Mr Sarkozy claimed in his election campaign to be a market liberal of sorts, his approach to industrial policy reflects that national ambivalence, acknowledges one of his long-time advisers: "He is a Bonapartist liberal. He has always been liberal at the macro level and interventionist at the micro level."

So when – as as SilPro – a small company that hopes one day to become a big name in solar energy runs into trouble, Mr Sarkozy will react. "He wants French public and private champions of a world class," the adviser says. "But he doesn’t have a global vision of interventionism." In fact, says Mr Utterwedde, France has in recent years adopted a far more liberal, bottom-up approach to industrial policy than politicians care to admit. But this being France, liberalism still has to be led by the state. Take for example the "poles of competitiveness" launched in 2005 under President Jacques Chirac and promoted by Mr Sarkozy as interior minister. These clusters aim to spur innovation by bringing together public research, universities and companies in a model similar to the information technology pole that sprang up around Stanford University and came to be known as Silicon Valley. In France, where public and private sectors regard each other with deep suspicion, this could not happen naturally. It took the state to convince the partners to work together.

But it was still a step-change in the government’s thinking, says Mr Utterwedde. "The state is normally about action that comes from the top. But the poles rely on a different idea. It is a recognition that competitiveness is not only national, it is regional too. This is not a return to the old direction from Paris." Since coming to power two years ago, Mr Sarkozy has introduced other Anglo-Saxon-style improvements to industrial competitiveness, aimed at creating favourable conditions for growth rather than dictating strategy from on high. These include tax breaks for research, incentives for investors to put money into small companies, labour and university reform and changes to a property tax that for decades penalised industry.
Officials say the challenge now is to help more companies grow big enough to export, creating an ecosystem that generates innovation rather than ploughing ahead with state-directed "grand projects". This will entail a deep overhaul of some of France’s most established institutions – for example, its system of elite selective universities known as the grandes écoles. "We have a research system that does not produce start-ups," says one presidential adviser. "The guy who goes to the grand école is one of the best brains of his generation. But very few go on to do research." Mr Sarkozy is also mulling the creation of a superministry of industry and innovation, an office last seen in the golden age of state industrial planning under Pompidou. Industrialists are overjoyed. "Before acting, you need to think things out.

There will be no state strategy if there is no one person to think about industrial policy," says Bernard Brun, head of the Association of Industrial Documentation, a think-tank. But even for existing initiatives such as the Strategic Investment Fund, the question now is whether political pressure will be used to force it into the role of company saviour rather than facilitator. Much could depend both on the public’s appetite for reform and on the mercurial personality of the president. "His style is bad but at at the same time he has the courage to attack certain weaknesses," says Mr Utterwedde. "That in itself is quite important. If you are implementing painful reforms but at the same time you save Alstom, you give yourself some room for manoeuvre to do more reform. Perhaps that mix is not the worst strategy in a country that can be difficult to change."


Ventriloquist said...

I would like to promulgate David's Principle of the Worker's Ever-Declining Net Worth:

To Wit --

that it doesn't make any difference WHATSOEVER whether you are in an Inflationary or deflationary monetary environment . . . your holdings WILL decline over time.

In a Deflationary environment, the value of your currency increases as the price of goods decrease. However, greedy corporate employers will tell their employees, "This year your $100. paycheck purchased as much as $200. did last year. We have no intention of giving you a 100% pay increase, so your salary will now be $50. And we are implementing a system that will reduce this dollar amount on a monthly basis to maintain the purchasing power of your salary on a constant basis." And you accept it because there are 100 people waiting in line to take your job.

In an Inflationary environment, the value of your currency decreases as the price of
goods increase. However, greedy corporate employers will simply lag the rate of pay increases to the actual rate of inflation, or will continually under-pay to the inflation rate, or will simply not increase pay at all. And you accept it because there are 100 people waiting in line to take your job.

In both environments you will continue to see people lose jobs, have jobs converted from full-time to part-time, and see actual salary reductions/givebacks implemented, along with continually decreasing real estate values.

Therefore, IT MATTERS NOT whether there is an ongoing deflationary environment, or inflationary environment -- or if they alternate back and forth.

IN EITHER CASE the overwhelming majority of workers will have to continually draw down on savings/investments in order to get by.

And the net worth of all but the wealthy will simply drain slowly out of the system.

And then, what will we do?

Leona said...

For entertainment purposes only... tee hee hee.

Do we come here for entertainment? Heck, I could be watching Jericho on Netflix on-line if I want entertainment.

VK said...

From previous thread,

@ Cowboy Payne

Bernanke talks a lot but his record speaks for itself. If he is not monetizing the debt as he puts it, then why is the FED printing 300 billion dollars? Or purchasing a trillion is it in agency debt?

I personally think there is going to be a huge problem with QE, the FED has begun a course of action that it can't get out of. If they say they are going to stop and the bond market calls their bluff by selling, then the economy tanks and they are forced to do some more QE.

If they decide to carry on, the bond market is still going to call their bluff eventually and send rates through the roof. Eventually the FED might own the whole long end of the curve, meaning greater then 1 year! It's a really nasty position to be in.

The FED is actually betting on renewed growth to be able to get out of this mess. Without growth their strategy blows apart, hence the confidence game in the economy and to increase optimism. Given enough hopium the masses might be deluded into thinking they can beat gravity and fly but the reality is that we can't beat gravity by jumping and hoping to stay afloat. It all comes crashing down.

The confidence game they are playing is especially dangerous as people delever and pay back their debts, the value of all other debt in the economy is rising. As there is less money in the system.

Ventriloquist said...

On a Lighter Note:

Ten differences between the gambling addicts in Vegas and the gambling addicts in Washington, DC:

1. The Vegas gamblers play with their own money.

2. The Vegas gamblers' moves are closely watched by security people.

4. The Vegas gamblers cannot cheat -- if they try, they are evicted (or worse).

3. The Vegas gamblers know that the odds always favor the casino.

5. The Vegas gamblers know that the casino cannot be bribed.

6. The Vegas gamblers know that the casino is not real life, but is a bubble.

7. The Vegas gamblers know that bankers are not their friends.

8. The Vegas gamblers do not have anyone picking up the tab when they lose.

9. When Vegas gamblers run out of money, they simply have to stop.

10. Vegas gamblers can possibly be rehabilitated in Gamblers Anonymous.

Where would you like to place your bets . . . Vegas or DC??

Anonymous said...

Jesse's Café Américain The Stock Market in Context with the Great Crash of 1929 - 1932

-late for dinner-

Ilargi said...

Late FD

Doug Short's graphs at do a better comparison job.

Anonymous said...

Oh no! Not the "Of course this is hypothetical and to be used for entertainment purposes only."

Anonymous said...

For entertainment purposes only.

I tend to agree. If the whole thing fails spectacularly the losers will be the banks and the government. There will be discomfort for the general populace, that is for sure. But I am getting the feeling that when things do fail spectacularly, we will all benefit greatly.

If Fannie and Freddie unravel, where does that leave homeowners? Sounds like a good deal to have the people holding your loan go tits up. It would be like owing a bookie for a bet you lose and finding out the bookie just got a life sentence. But F&F are the government you say? So, then I ask, how can they unravel? What happens to home loans if that happens?

Seems to me that those who are in cash and waiting to buy a home will be able to get a very nice deal here pretty soon. I know that is my plan.

Any way to measure how many homes are under an owner carry situation?

EconomicDisconnect said...

I am, as usual, so overwhelmed by your writings. The German concern for their gold is wisely placed. On another note, I have an essay contest up and the question is "how is higher oil (hence gas) and mortgage rates (via the 10 year yield) a "good" thing for our economy? 1 ounce of .999 fine silver to the best essay(s). Hint: There is no way but I reward creative thinking.

edward lowe said...

Yesterday I commented on the problems with margins of error and the irrational use of raw statistics to report little movements up or down in specific indicators, like the ISM reports yesterday. Ilargi points out today, and has week after week, similar problems with the weekly new unemployment insurance claims.

Another take is to look at the general direction of multiple indicators released for similar periods. This can give some sense of where things are, in reality, as opposed to Summer's "managed expectations and confidence".

To judge from this week's reports, things are definitely down, as if this readership needed to know that.

But, there is a point when people's elevated expectations that have resulted from unending propaganda give way to a reassessment of the reality they are experiencing. These are the moments when political crises emerge as people begin to lose confidence in the PR meisters.

Stoneleigh said...


Inflation or deflation matters a lot. If you believe inflation is imminent, then you'd take on all the debt anyone would let you have and change all your liquid assets into hard goods. If you think we're facing deflation you'd get out of debt and hold liquidity rather than assets.

I agree that many people will suffer greatly either way, but IMO those who prepare correctly can make an enormous difference to their prospects. The little guy always loses out in relative terms, but that doesn't mean he can't use an element of foresight to gain an advantage.

Of course salaries will fall during deflation. I wrote about that in the primer War in the Labour Markets. The purchasing power of people's salaries will need to fall, and if salaries are going to fall in real terms, they will fall further in nominal terms. Benefits will be drastically cut too. People need to plan for making very much less than they do now. Debts that appear manageable now are not likely to appear so in the future, especially once interest rates skyrocket, along with taxes.

redcatbiker said...

The Logic Freaks of Neoclassical Economics

The old-school practitioners completely missed the meltdown … is it time to paradigm shift them out of power?

by Kalle Lasn

The typical lifespan of a recession is about five years. The Great Depression lasted ten. But downtrends in the larger planetary economy can go on far, far longer. Economists are now warning us that the global economy is in danger of experiencing a lost decade, similar to the one Japan experienced after its real estate and equity bubbles burst in the ’90s. But the economists stop short of cautioning that we risk losing a century, or even a millennium, if climate change suddenly lurches out of control. The logic freaks of neoclassical economics don’t like to talk ecology – their models don’t account for melting glaciers, dying coral reefs or the possible collapse of the entire Australian continent. But the reality is that it takes centuries to restore codfish to the Atlantic or to reboot a coral reef and it takes ten thousand years to grow a single inch of topsoil. This is the kind of bio-speak that falls outside the theoretical framework of neoclassical economists. They’re much more comfortable talking money – the language of liquidity, stimulus packages and hedge fund regulation. There is no discussion within their profession of the real-world impacts of their economic philosophies.

So as we struggle through this recession, bear in mind that there is something profoundly more ominous afoot than what you see reflected in your bank account or the stock market numbers. This year might not be remembered as the beginning of the second Great Depression, but as the moment in human history when our planet started crashing and gave birth to a thousand years of sorrow. Are we in denial about this … casually going about our lives while humanity’s long-term prospects fade?

jal said...

@ redcatbiker

After 9/11, I wrote on the buletin board at work, what had happened, and it still applies today.


centiare said...

@VK - "The FED is actually betting on renewed growth to be able to get out of this mess."

The whole game has hinged on 4 key factors:
* Use QE as short-term tool to maintain low mortgage rates (30yrs triggered off 10yr Ts) and higher housing prices;
* Run a 24/7 PR campaign to influence people's perceptions ie the so-called green shoots meme;
* Channel TARP, TALF and other gov't bailout funds into equities to drive higher share values to allow banks to re-capitalize;
* Jam through Chrysler & GM BK proceedings under the guise of 'national interest', even though they violate long standing legal principles and seriously impact future bond sales.

In retrospect, it was all just a short-term play to buy some time and hope the economy turned around before the drugs wore off.

Given recent bond market action, it's obvious Ben really can't run QE over the medium to long term, nor can he monetize the entire US deficit without seriously damaging the $USD and crashing the entire system.

So here we are, even before the formal start of summer, and all the pieces that we've been discussing are starting to come into focus.

The day QE ends is when 30yrs go to 7, 8, even 9%. The hit to real estate values, and the MBS based CDO/CDS L3 assets from which they are constructed, will cascade throughout the 19 TBTF banks and take the Fed down with them.

It looks like it is going to occur sooner than later.

centiare said...

Should read:

Jam through Chrysler & GM BK proceedings under the guise of 'national interest' to **avoid spiking unemployment rolls and possibly upsetting the green shoots propoganda**, even though they violate long standing legal principles and seriously impact future bond sales.

Starcade said...

centiare: That's exactly what is going on here.

They're openly violating what Denninger calls "black-letter law" because they know if they try to play this one by the book (think about the debt structure), there's only one alternative, and it's Chapter is NOT Eleven.

It's Seven.


The fact is that there are not (and may never be again) enough monied people to sustain the economic system which has allowed the car companies (and the amount of the population at large) to grow and prosper.

So he basically burns out the debt structure to try to keep the auto industry going (preventing the real unemployment rate from hitting 25% rather instantaneously) and keeping enough people busy with make-work jobs so they get enough money and spend enough time not to further the unrest which we all know is coming.

el gallinazo said...


Well put. For once I agree with our local Libertarian.

Starcade also hits the nail squarely.

Stoneleigh said...


In retrospect, it was all just a short-term play to buy some time and hope the economy turned around before the drugs wore off.


Given recent bond market action, it's obvious Ben really can't run QE over the medium to long term, nor can he monetize the entire US deficit without seriously damaging the $USD and crashing the entire system.

Yes, QE is just a confidence trick. They can't go too far down that path without it being game-over in the bond market. Eventually that will happen anyway.

The day QE ends is when 30yrs go to 7, 8, even 9%. The hit to real estate values, and the MBS based CDO/CDS L3 assets from which they are constructed, will cascade throughout the 19 TBTF banks and take the Fed down with them.

Agreed again.

It looks like it is going to occur sooner than later.

I still think we have a little more time. I am expecting the market to fall, perhaps sharply in the near future, but, on balance of probabilities, I think we should another new recovery high after that before the whole rally is over. My best guess at this point is a late summer high.

The rally so far has reached a bare minimum retracement level for a move correcting the whole decline from October 2007. It would be much more common to see a deeper retracement than this.

Stoneleigh said...


The fact is that there are not (and may never be again) enough monied people to sustain the economic system which has allowed the car companies (and the amount of the population at large) to grow and prosper.

Agreed. The amount of pain to come will dwarf anything we've seen so far. We'll have a clearer picture when we see shantytowns around every almost city in the developed world.

el gallinazo said...

Stoneleigh's midnight post set to music :-)

PKP said...

A Structural Change in the Global Debt Based Financial and Economic System

Stoneleigh said...


I agree with Mr Lasn. We cover finance here not because it's the only crisis we are facing, but because it is the most immediate. As such, people need to deal with this first if they're going to have any chance of addressing the larger problems we'll be facing later. Energy will be a strongly limiting factor moving forward, and ecological collapse is a given in many areas. Where this is close to occurring in highly populated regions (India and parts of China for instance), large-scale migration (and colonization of less degraded places) can be expected.

IMO none of us who are here now are going to live long enough to see a real and lasting recovery, even in purely financial terms (and obviously not in terms of soil regeneration and other ecological factors). Even our children's generation may not live that long. The initial depression should last at least until 2020 and likely longer, and I think we'll see nothing but anaemic rallies that basically go nowhere thereafter (at least in real terms), although some of them could last for prolonged periods. I would expect a rally (in nominal terms only) associated with a Great Inflation to follow this first depression, peaking perhaps around 2030.

The last time a massive bubble burst (the South Sea Bubble of the 1720s), the resulting upheaval lasted for decades and culminated in a series of revolutions at the end of the eighteenth century. This time, the newly dispossessed and much larger population will cause terrible additional ecological degradation on the way down in their desperate attempt to survive. IMO will also see increasing international conflict, much of it over access to dwindling resources. Tragically this is very likely to result in the destruction of much of the remaining resource base being fought over. Any recovery and restabilization that eventually comes, perhaps a century or more down the line, would be starting from a drastically lower base in terms of both resources and population.

centiare said...

Forget plastics; the new key word of the ought-10s will be "food".

I live in suburban OC. Long before homes were built in this area, it was recognized as one of the best growing regions in the world. (You should see our citrus trees - there's a reason it was named Orange county after it broke away from LA.)

If an average lot size is 6k sq ft and the average total footprint (including garage/driveway) is 3k sf (we're close to the beach, so no real McMs here), that would leave around 3k sf of growable space.

If the situation begins to get as bad as I think it might, we may begin to see the area revert back to managed household farms. There's no reason front/back yards have to be manicured lawns maintained by a roving army of illegals.

To make things really interesting, what becomes of vacant property? There's an abandoned house around the corner (which, incidentally, is perfectly maintained by a neighbor so you wouldn't know unless you lived here).

Who's to prevent someone establishing a garden on that property as well? Is it burglary, or is it just trespassing? Who calls the cops? What do the cops do? Will the cops even care as budgets are cut?

Some social studies PhD candidates are going to have a field day (yes, intended) with this area of study. I can really envision a re-establishment of pseudo-village society as everyone protects their own "crops" and respects common areas aka foreclosed houses.

Dr J said...

@ centiare 8:29 - this is what happened in Havana. However, in SoCal, in a scenario of collapsing infrastructure and climate change, where is the water going to come from to sustain those back-yard gardens?

Anonymous said...

345000 job losses??? WTF ?????

Am I the only person saying WTF ??? Wednesday's report taking data directly from the private sector found over 500000 job losses? Does the BLS even care how blatantly fraudulent this number looks?

Jim R said...


about those foreclosed houses ... the abandoned house around your neighborhood may not actually be foreclosed. I seem to remember an article the other day stating that banks are simply keeping a lot of them on the books as underperforming mortgages. if they foreclose it's like selling that stock that's down 50%, they have to realize the loss.

Stoneleigh said...


Who's to prevent someone establishing a garden on that property as well? Is it burglary, or is it just trespassing? Who calls the cops? What do the cops do? Will the cops even care as budgets are cut?

My guess, as we get deeper into the kind of circumstances where people will have to grow their own food, is that the police might protect it in return for an extortionate cut of the produce. Extortion rackets run by local police are fairly common in much of the world.

I remember studying environmental law in India in the mid-1990s, when people were wondering why a country with reasonable laws on the books never seemed to be able to manage any environmental protection. Essentially it was because the laws were nothing but a framework for kickbacks based on officials agreeing to look the other way for personal gain. Official jobs paid very little, but people would pay large sums of money to secure one because of the corruption potential. A position in charge of administering large contracts would be the most coveted. We in North America don't really know what endemic corruption looks like, but I expect we'll be finding out as the politics of the personal overwhelms our supposedly impersonal institutional framework.

Some social studies PhD candidates are going to have a field day (yes, intended) with this area of study. I can really envision a re-establishment of pseudo-village society as everyone protects their own "crops" and respects common areas aka foreclosed houses.

I think not. Respect for common areas is a characteristic of good times. And I can't see very many people doing PhDs when no one has the money to attend university, and universities end up closing in droves as a result.

Mugabe said...

Amusing that Geithner couldn't sell his house for the asking price, and decided to rent it instead. I guess he doesn't read TAE.

Rent was reported at $7,500 per month. Using the rule of 90 that landlords used to use in pre-bubble times, that translates to a value of $675K. Last asking price was $1.575 million. Say what you will about these guys, they at least seem to drink their own kool-aid.

Asmita said...

Sad news.

Brazillian Military reports the floating debris and giant oil slick found in the Atlantic Ocean are not derived from the mysterious airline crash. The search resumes.

I'm more disturbed by the fact that a random search of the ocean turns up floating debris and large unexplained oil slicks.

Ecological collapse is clearly bearing down on us.

Asmita said...

Question for Stoneleigh:

I'm confused by this paragraph that you just wrote:

"The initial depression should last at least until 2020 and likely longer, and I think we'll see nothing but anaemic rallies that basically go nowhere thereafter (at least in real terms), although some of them could last for prolonged periods. I would expect a rally (in nominal terms only) associated with a Great Inflation to follow this first depression, peaking perhaps around 2030."

What is your time frame for the conversion from deflationary depression to the "Great Inflation." Your previous writings suggested that the deflationary depression would last another 2-3 years, until the international bond markets collapsed. At that point, Zimbabwe-like inflation would begin as governments would need to print money like mad to keep the ship-of-state from sinking. The paragraph above suggests deflation could last 10 years. What is your time frame for the switch from deflation to inflation (2 years or 10 years)?

Stoneleigh said...

Dr J,

However, in SoCal, in a scenario of collapsing infrastructure and climate change, where is the water going to come from to sustain those back-yard gardens?

As you say, water will be a HUGE issue in southern California, especially as energy limitations appear. I can't see current social structures and infrastructure surviving at all in a water-constrained future. My guess is that southern California will ultimately end up being sparsely populated by hardy Mexicans who know how to live in a desert.

I can imagine a lot of northward migration from both the southwest and south east of the US - in the south west because of water scarcity and in the south east because of unbearable humid heat once air conditioning becomes unaffordable or generally unavailable.

VK said...

@ Centiare

Excellent analysis, Indeed the treasury market has pushed the 10 year up to 3.83 already!

The jobs report seems really really dodgy, 345,000 jobs lost and the market seems to love it! Now around 440,000 jobs were added in the last two months by the birth death model. Seems like small businesses have been thriving like no bodies business in the greatest depression. LOL.

The report is surreal, they were expecting 9.2% on the U3 and got 9.4% and U6 reached 16.4%. The governments numbers seem bullshit to me. You can't trust any stat it seems.

brendan said...

A sickening look behind the curtain of the oligarchy:

literally. sickening.

Anonymous said...

I need your help.
We're close to completing on our house sale and we're going to be moving to a smaller house (mrs CS well chuffed with that one as you can imagine).
Are you still recommending people in the UK buying short term gilts - or are there building societies that are safe? (the Co-op used to be till they bought a buy to let build soc for some reason!) Do things like premium bonds count as safe - as they are gvt backed? thanks in advance CS.

Ilargi said...


John Willams at Shadowstats had U6 at 20% a month ago. Today's numbers simply reflect the extent to which gullibility and botched math rule the land.

Anonymous said...

Regarding water, it's not just SoCal, but the whole US South West, which presently appears to be in the beginning stages of desertification. How far will that penetrate into the Midwest? Eventually the rest of the country won't be able to subsidize that region with money, water and energy. Isn't Phoenix now the 5th largest city in the US? These places cannot sustain even a fraction of their present populations.


Dr J said...

@ Stoneleigh - the thought of those 30 million, parched, hungry, angry and ARMED people migrating northward up the west coast gives me the willies!

VK said...

Heh??? What is going on, the household survey says 787k jobs were lost in May, while BLS says 345k?

Statistical skulduggery! I'm going to go bang my head on the wall because i'm so confused. Stocks rallying, yields up, job losses are not bad but then another survey says they are worse. U3 goes up to 9.4% even though job losses were less?? then expected.

These guys who work for the spin dept at the Dept of Unicorn Fantasy Economics could sell us puke by packaging it in silk.

Ventriloquist said...

@ Centaire,

If the situation begins to get as bad as I think it might, we may begin to see the area revert back to managed household farms. There's no reason front/back yards have to be manicured lawns maintained by a roving army of illegals.

Sharon Astyk & Aaron Newton discuss this concept at length in their new book _A Nation of Farmers_. They noted that during WWII, fully 50% of all produce grown in the US came from Victory Gardens grown in local plots, and they posit that the same phenomena could easily take place again.

VK said...

Greetings Ilargi,

Honestly, I am so confused and befuddled and scratching my head.

- Million of foreclosures across the world are taking place.
- Millions of jobs lost globally each month.
- Trillions in wealth have been poured into a blackhole
- Not an iota of the requirements for a legitimate recovery have been put into place i.e. reduced debt burden, reform of the banking structure and incentives, more regulation, overhaul of central banking and the dollar as the reserve currency, trade imbalances.
- Two of the world's biggest car companies go bankrupt in the past month or so.
- The US, EU and UK etc etc are complicit in allowing banks to fudge their books knowingly.
- The miracle engine of China is supposed to pull the world out of a recession but their own govt officials acknowledge great difficulty in this.
- World electricity usage is DOWN for the first time ever in 65 years?
- The biggest bond bubble in history, how many trillions in new issuance worldwide? If Citi says 5 trillion for the US, then that's around 7 trillion worldwide (I believe the US sucks up 70-75% of capital around the world)
- The US govt, the supposed bastion of democracy and capitalism is now the biggest interventionist and distorter of capital markets.
- Oil production has now peaked.
- The UN resolution of No Banker Left Behind and the Goldman Development Goals of 2030

And the markets go up?

Sir maybe I need to start taking prozac, hopium and some of those green shoots in Amsterdam's red light district for I simply can not fathom what is going on, maybe in the world of hallucination and delusion I will find inner derivative peace. Or better yet might as well watch CNBC Africa (Yes, 'THEY' are here now as well...cute girls all impersonating Trish Reagen)

@ El Gallinazo

Would it be possible to sawzall through the BLS? :)

D. Benton Smith said...

How's this for American Big Biz acumen:

GM's emaciated child, Delphi (the parts people) needs to be sold off quick to make Daddy digestible by its creditors in Hospice Court .

Problem is, no one in their right mind would pay the asked for $3.6 billion. They need a 'greater fool' who wants to own an Economic Implosive Device designed by the same folks who brought us the Corvair. Where is anyone that stupid going to get $3.6 billion?

GMAC and Treasury to the rescue!

The brilliant plan is for GM's 'decrepit card' company, GMAC, to use bail out money to lend two thirds ($2.5 billion) of the purchase price to a hyper-leveraged, wheelin' 'n' dealin', wunderkind juvenile takeover buccaneer (Google: Tom T. Gore, Platinum Equity) so that he can play cars with the big boys. Too bad that GM is chopped liver.

Maybe Delphi can change its motto from 'The Parts People' into 'The Smaller Parts People', because you can hear the cleaver dicing its only customer, GM, to ever smaller parts as we speak.

el gallinazo said...


"El Gallinazo

Would it be possible to sawzall through the BLS? :)"

Unfortunately, they don't make a hazard suit tough enough for that job.

jal said...

@ Stoneleigh

“We in North America don't really know what endemic corruption looks like”

That statement should be in the past tense. (Pre –TAE)

I made a trip through those dry states after they had record rainfall. (3years ago) It was beautiful.
There goes my strawberries from Cal. And mexico.

@ Dr. J. … those 30M heading north are going to be stopped by the cold and get bloated by the rains.

The heck with their water problem re. their garden.
Where are the seeds going to come from for those backyard gardens?
@ D. Benton Smith
Everyone is forgetting that the US gov. is going to add another subsidy to the big 3 … Procurement … renewing the fleet of cars
replacing their military inventory of transport vehicles
When doing the car sales numbers, are you going to include gov. purchases, (subsidies)
Again this morning I hear on the news that another company is issuing shares to raise money to payback their loans.
Has everyone been noticing that companies are transferring their debt burden to the public?
Is it the banks encouraging paying back those loans to raise cash or is it the companies preferring to issue shares to those (dumb investment advisers), who are too small to fight a ch. 11?

Ilargi said...


Don't despair, it's not (just) you.

The WaPo this morning reports that 345.000 jobs were lost, while 787.000 became unemployed.

centiare said...

And now for a message from TAE's resident California native conservative/libertarian:

Calif doesn't have a water shortage. Ever since Hoover & the Calif water project were completed (ie damns in NorCal and an aqueduct to SoCal), the state has literally been swimming in fresh water.

To this day, 80% of the state's water resources are consumed by the large central valley & other major agricultural interests. Do they use this heavily subsidized water efficiently (like the Israelis & drip irrigation), with the proper crops suited for the environment? Hell no; they grow super water intensive cotton & rice, for gosh sake!

So, dispel the notion that the large urban areas would revert back to some type of desert. When push comes to shove, the CV will get cut off. After all, who do you think voted in the last referendum? Over 50% of the state's voters live within 75 miles of downtown LA.

Secondly, and this is where I really diverge from standard doomer dogma, is that there are still vast untapped potential sources of fresh water. First and foremost of course is the delta diversion program that has been held up for 20+ yrs. Secondly, the Pac NW gets more rain than many rain forests in Brazil, Indo & the Congo.

(And our very own Sierra Nevada gets more snowfall [the melt off which fills giant reservoirs in NorCal and which is piped to SoCal] than almost anyplace else on earth.)

It would be a stupendous public works project to pipe that water south. Never happen you say? That's were many doomers err - they don't understand human nature.

Faced with pulling your pud in the mud, or getting down & busy, we revert back to the characteristics of the incredibly successful species that got us to where we are in the first place.

Ilargi said...

".... the characteristics of the incredibly successful species that got us to where we are in the first place."

That is the funniest thing a human being can say about his own species. And the most tragic. Yes, where are we?

D. Benton Smith said...

In the town where I live, every ten years or so the flooding Mississippi deals the final insult to one old house or another that just can't take it anymore.

The property is "bought out" for a pittance (from a grateful owner) and bull-dozed back into a grassy vacant lot by the state. Ownership reverts to the local (village) government, who must keep it mowed and free of debris... in return for nothing, because it's not generating property tax or anything else except luxuriant grass and springtime wild flowers.

Our town council will lease that 50' x 100' patch of incredibly fertile soil to you for $1 per year, and you take over the mowing and windfall removal. Because of the history of flooding no home or the like can ever be built there again, but trees, flowers, gardens (etc.) are perfectly okay.

Sweet deal for gardeners.

Maybe there's a similar opportunity in your town.

el gallinazo said...

The Bureau of Lying Statistic is a part of the Ministry of Propaganda. Even the Greater Fools might run for cover if the ugly truth be known, and not nearly enough pension money has been suckered in yet for the optimal sting to go down.

".... the characteristics of the incredibly successful species that got us to where we are in the first place."

it simply depends on your point of view. Is the glass 1% full or 99% empty.

D. Benton Smith said...

Hi jal,

You commented, "Everyone is forgetting that the US gov. is going to add another subsidy to the big 3 … Procurement … renewing the fleet of cars
replacing their military inventory of transport vehicles
When doing the car sales numbers, are you going to include gov. purchases, (subsidies)"

Good point, and I must confess that I hadn't reckoned the Big Green Machine as one of Delphi's prospective customers. (at least not the ORIGINAL "Big Green Machine", as in the Army)

Despite the fact the Treasury has given a whole new meaning to 'big green machine' the consumption of parts and vehicles by Uncle Sam does not really change the numbers. They were already buying stuff from auto and parts makers at a furious clip, as fast as they could wear 'em out and blow 'em up over there in the Middle East.

None of that profligate waste was enough to keep auto makers or their symbiotes alive then, so I reckon it won't be able to do it now, either.

jal said...

Our community garden has doubled to 80 plots, 10X20 with a waiting list.

We have over 1 1/2 acres of common plot for corn and potatoes.

We just received a donation of a variety of seed potatoes that will require an additional acre and another donation of 90 yards of mushroom compost.

We also got donations of flowers, which makes the place pretty like a park.

I’m concentration on growing beans for seeds. I’m just getting ready.

Anonymous said...

Ecological collapse is clearly bearing down on us.

It's ominous how much muck is surfacing.

The cruise ship industry alone produces an estimated 170,000 gallons of waste per day and has been battling/blatantly ignoring environmental protections against water pollution for decades using such excuses as "strict rules are bad for tourism."

It's certainly possible we've sacrificed so much ecological health to the idols of industry that words like carbon footprints, caps and trades are already irrelevant.

Given the chose between what's bad for what... I say the time is high for choosing what's bad for social constructs rather than what's bad for things that exist independently in physical reality. We may or may not like it much, but societies can adapt faster and easier than planets can regenerate.

Stoneleigh said...


I think the main active phase of deflation will probably last several years (until the middle of the next decade or so), but the depression should last a lot longer. For instance, the crash of 1929-1933 caused a depression that lasted until 1939 and culminated in years of world war. It wasn't until the 1950s that things really started picking up.

This time I think we should see depression conditions until at least 2020, and quite possibly longer. Deflation and depression are mutually reinforcing and there could be more than one episode of deflation as there was during the Great Depression. After the depression I would expect a Great Inflation, but that would take time to develop, which is why I don't see it peaking until perhaps 2030. When it does I would expect it to be on a Zimbabwean scale.

I don't see the coming bond market dislocation as inflationary, as it will involve the liquidation of staggering amounts of debt, crashing the money supply in the process. It is true that the final collapse of the international debt funding model will remove printing constraints from governments though. My guess is that it will take time for that final phase to be reached, although it may well depend on where you are. Peripheral countries could fall out of that model much more quickly, losing access to international debt financing permanently. Printing may therefore occur in some places much sooner than in others.

Dr J said...

@ centiare - I admire your optimism but fear it may be misplaced. I have driven through northern California a couple of times recently and have seen Lake Shasta at extraordinary low levels. I think that endless supply of fresh water is dwindling, probably due to climate change effects. The kind of public works mega-project required to bring water from further north may be thwarted by the problems of raising capital in a cratering economy. The effected area is, of course, much wider than SoCal, extending across Nevada, Arizona, New Mexico into Texas. It's all pretty hot and dry and utterly dependent on water shipped across great distances at a high energy cost. The sustainability of that is going to become more fragile as things worsen.
Having said that, I hope you are right and I am wrong.

Stoneleigh said...


When I say that we in North American don't know what endemic corruption is like I mean we have never lived anywhere where in our personal lives we had to constantly bribe all officials to do their job, or to look the other way. We still count on being able to renew a drivers license or obtain a building permit, for instance, in accordance with the rules. The predictable application of existing rules is going to go away IMO (ie say good-bye to the rule of law), in favour of the politics of the personal. I expect rules to proliferate, but their application to become nothing more than opportunities for bribery by those in a position of (mostly petty) power over others.

Endemic corruption is the norm in much of the world already. When one's position is unstable, and exists only at the whim of another by virtue of connections, one tends to milk it for all it's worth while the opportunity is still there. Tomorrow someone else may be in power and their cronies will get all the perks while you and yours could be persecuted for your connections with a previous regime. Under those circumstances, people's time horizons become very short indeed. Economists call it a high discount rate, where the future is very heavily discounted in comparison with the present. It's a recipe for disaster. If we think humans in developed countries have a short term horizon now, just wait a few years. Almost no one will be thinking much beyond their next meal. Unfortunately, life becomes very cheap under those circumstances.

Stoneleigh said...


Treasury yields are approaching a reversal IMO.

Anonymous said...

A comment on the prescricption article: I don't know what is more disgusting--the idea that Americans cannot afford all the prescriptions they are given or that a handful of prescriptions is what passes for medical care in the US.

I wonder,in particular, about two mentioned conditions. The first is high blood pressure. Several years back the definition of HBP was changed from 120/80 to 110/70. Apparently there weren't enough new customers with the old definition. More recently there was a published study which found that all the HBP meds pumped into older Americans may result in symptoms of dementia due to lack of oxygen to the brain. Has anyone ever heard the word iatrogenic? I believe the new dementia drugs cost significantly more than the old HBP drugs. I believe this is called "growth."

The second condition is that old trooper "depression." Obviously, it seems that it might be difficult to find someone not in need of that drug in that area.

It will certainly be interesting to see if the health of the American population IMPROVES when they can no longer afford to ingest all those "life-saving" chemicals.

That will probably be the one sure way to bring drug prices down.

Stoneleigh said...


Are you still recommending people in the UK buying short term gilts - or are there building societies that are safe? (the Co-op used to be till they bought a buy to let build soc for some reason!) Do things like premium bonds count as safe - as they are gvt backed?

I would stick with gilts. Building societies seem very vulnerable to me on the whole, with a few notable exceptions. As of the last time I looked, the Penrith Building Society was always very conservative and risk averse. They operate mostly in their own area, but may be convinced to do business more broadly.

Best of luck :)

Stoneleigh said...


Optimist ;)

Fresh water supplies to a desert require large amounts of both money and energy. In a capital and energy constrained future I don't see much potential for new mega-projects, and even maintaining existing infrastructure is going to be very difficult. Sure there's a lot of scope for cutting back on the monumental waste of water that happens now (eg huge man-made recreational lakes in gated communities in the desert), but if the infrastructure for water delivery breaks down there would be problems very quickly.

jal said...

re: health care cost
In a more social environment (Canada), it has been a failure to control health care cost. The establishment, doctors, etc. are not willing to give up their perks and are finding new ways to “play the system”.
The USA will not succeed in lowering their cost to even match the Canadians.
You can add to the USA the cost/huge profits from the legal establishment.

ca said...

Stoneleigh --

I was wondering if you think it could be 5 years or so until a full blow depression sets in as discussed in the following:

Stoneleigh said...


Unfortunately I don't think so. I think we'll be in a full-blown depression within a year.

Dr J said...

@ anon 12:01 - the wholehearted embracing of pharmaceuticals by my profession has been a profound mistake in my opinion. To a skeptical observer it goes to bizarre extremes. For example, there are those who think we should all be on statins regardless of our cholesterol levels. And now, someone is proposing that we should all take antihypertensives even if we have normal blood pressure (

This is madness, of course.

The inter-connected epidemics of obesity, metabolic syndrome, type 2 diabetes and cardiovascular disease are all mainly diet-related and readily preventable through appropriate dietary change (and it's not what you've been told - but we won't expand on that in deference to the wishes of our gentle hosts).

IMHO drugs should be treated as merely poisons with some desirable side effects.

Unknown said...

@ VK and Ilargi. 787000 is the number that lost jobs. 345000 is supposed to be the number that lost jobs less the number that found them. I don't trust either number, but the second must less than the first.

@Centiare: You'd need the feds to get any more water from out of state. Won't happen: Northwest says no, Great Lakes decide to stop you in the Northwest not at the Mississippi, Dixie thinks you're Babylon.

Don't count on instate either. Last water grab in the 20s they sent out the LAPD to shoot it out with farmers.
Do you really think that would work north of Sacramento?

Ventriloquist said...

@ Centaire

Calif doesn't have a water shortage.

This article from the 1/30/09 SF Chronicle would tend to contradict your assertions:

California teeters on the edge of the worst drought in the state's history, officials said Thursday after reporting that the Sierra Nevada snowpack - the backbone of the state's water supply - is only 61 percent of normal.

January usually douses California with about 20 percent of the state's annual precipitation, but instead it delivered a string of dry, sunny days this year, almost certainly pushing the state into a third year of drought.

The arid weather is occurring as the state's water system is under pressure from a growing population, an aging infrastructure and court-ordered reductions in water pumped through the Sacramento-San Joaquin River Delta - problems that didn't exist or were less severe during similar dry spells in the late 1970s and late 1980s.

. . .

After two consecutive dry years and with a third on the way, Lake Mendocino, one of two main reservoirs that supply 750,000 residents in Marin and Sonoma counties, contains only 32,000 acre-feet of water - about one-third of its capacity of 90,000 acre-feet. (One acre-foot is the amount of water needed to cover one acre at a depth of one foot, enough to meet the needs of one to two families each year).

The picture is similar around the state. Lake Shasta, the largest reservoir in California, is at 31 percent of its capacity, down from 74 percent in 2007.
. . .

The saturation level of snow, or the snow's water content, is the most important factor affecting the crucial spring runoff levels, which help water planners determine water supplies for their districts each season.

Rest of the article here:

And this study from the California Dept. of Energy, concludes that the warming/decline of the Sierra Nevada snow pack is a long-term phenomena that over the long term will see the decline accelerate:

A study of the California Sierra snowpack has been conducted using snow station observations and reanalysis surface temperature data. First-of-the-month snow water equivalent measurements were combined from two data sets to provide sufficient data from 1930 to 2007.

The monthly snapshots are used to calculate peak snow mass timing for each snow season. Since 1930, there has been a trend toward earlier snow mass peak timing by 0.4 days per decade. The trend towards earlier timing also occurs at most individual stations.

. . . .

Regional mean March temperatures have increased at a rate of 0.4°C or 1.8°F per decade since 1948, and the robustness of the March temperature influence on peak timing suggests the trend towards earlier peak timing is attributable to the March temperature trend. Given scenarios of warming in California, we can expect to see acceleration in the peak timing trend; this will reduce the warm season storage capacity of the California snowpack.

Rest of the study viewable here:

Stoneleigh said...

Dr J,

I agree. I remember being told to take anti-hypertension medication, but I never did. I got in shape instead and now I'm told I have the blood pressure of a teenager (100/60 if memory serves). It was a lot more work than popping a few pills, but the side effects have been entirely positive. I'm still a work in progress, but I feel great and I'm vastly more durable than I used to be :)

Anonymous said...

I will ask again:

If Freddie and Fannie unravel, what happens to the home loans?


Anonymous said...


Your comment regarding the energy required to move water around is right on target.

In California, something on the order of 30% of the electricity consumed is used for moving water from the mountains to the deserts. This won't be sustainalbe once the price of the natural gas used to generate 65% of California's electricity goes sky high, then becomes unavailable.

Time to start paving over the Mojave Desert with solar electric installations. At least with moving water, the unavailability of solar electricity at night is not a problem as water can be released from pumped storage during that time to keep the flows going.


Stoneleigh said...

Anon @1:12,

Without Fannie and Freddie there would essentially be no home loans. That is where this credit crunch is taking us. The only ones who will be able to get credit will be those who don't need it. We aren't there yet, but I think we will be within a year or two at most.

Stoneleigh said...


I wish we were going to have the time and the money to build out renewable energy infrastructure, but sadly I don't think we will. I work in RE myself and certainly hope the projects I am fighting for will be built, but I'm not optimistic that many will get through before financing dries up, even with the new feed-in tariffs here in Ontario. I wish RE developers the best of luck though.

Anonymous said...

"It is very obvious that home purchases today are not in the best interest of prospective buyers, since prices have much further to fall."

I hope Ilargi is very VERY wrong with that statement. While I understand the logic that comes behind the statement, this would affect a VAST majority of Americans. How many people have no mortgage? Even though I have no problem paying my mortgage (since I am still employed), my home now would only sell for the value of my mortgage. A year ago I nearly had 50% equity.... If the value of my home drops any lower, I will lose my incentive to continue paying my overinflated mortgage.

How much further CAN home prices fall without completely killing America?

Alpha Beta soup -my new handle

Stoneleigh said...

Alpha Beta soup,

We have said here at TAE that homes prices will fall much further. IMO prices will decline on average by AT LEAST 90% from peak to trough, with substantial regional variation. And yes, this will ruin an enormous number of Americans, as well as people from other countries facing the same situation (or worse as in much of Europe).

As unemployment skyrockets, far fewer people will be able to keep paying the mortgages that they will be underwater on. Some will be able to walk away, but not those who have refinanced into recourse loans.

VK said...

@ Stoneleigh

"Treasury yields are approaching a reversal IMO."

True, I reckon that when the next leg of the crisis come, the market is going to flip out. And there's going to be a mighty rush to treasuries. The markets appear fractal to me, remember last year, the DOW was stuck around 11k-11.5k and oil was barreling up.

This year round it appears so similar to last year albeit at a smaller level. Oil up, markets stuck in that 8-9k range. Pronouncements of economic recovery which were so common last year as well. It wasn't until September of last year that we actually felt some of the credit crisis.

So I reckon the 10 year will go lower then 2% by November!

@ Ilargi

"The WaPo this morning reports that 345.000 jobs were lost, while 787.000 became unemployed."

It's time for some hard drinks...

Anonymous said...

Stoneleigh -- You said: "We have said here at TAE that homes prices will fall much further. IMO prices will decline on average by AT LEAST 90% from peak to trough, with substantial regional variation."

What might the regional variation be for Texas, and Austin, the capitol city, specifically?


Anonymous said...

OK Stoneleigh:

I understand that without Freddie and Fannie there would be no more home loans.

=But what happens to the people who already have a home loan who have no one to pay?

If F&F unravel, is that not a good thing for the millions of people who still have money owed on their mortgage?

Like I said, I have a feeling that all of the bad things that are described here as happening now or happening in the future, might not be all that bad for the average citizen. I hear 'ding dong the Witch is dead' in my head. While all of the bad numbers may indicate system failure, I actually welcome it with open arms because it will eliminate the bad actors in this really poor production.

With F&F gone, we have complete disarray in the mortgage world, which means that the average citizen has nobody to answer to. The bookie has a life sentence. If the government takes over for realsies, I see them devising a flat mortgage rate for the home owners. This would insure a huge injection of free money every month for government coffers which would stave off any need to cut services.

Where am I wrong?


Stoneleigh said...


I'm not in the best position to tell you what the real estate prospects are for Texas, since I've never been there. It is very dependent on the oil industry, and oil prices have further to fall before finally bottoming (ie there's much more demand destruction to come before the supply destruction phase). That's not likely to be good for home prices. Neither is a lack of air conditioning when purchasing power falls far enough to make it unaffordable. Potential hurricane damage (to both homes and energy infrastructure) that no one will be able to afford to repair won't help either.

We have some posters from your area, roughly. If Greyzone or Westexas are reading, they could give you more local flavour than I can.

Stoneleigh said...

Anon @2:13,

Some people may be able to keep a home in a chaotic readjustment, but in general the fall of Fannie and Freddie is not going to release people from their obligations. The benefit of that obligation will merely be transferred to another party. No one will be handing the little guy lots of free money - bailouts are only ever for the insiders, whatever the propaganda may say.

I think we're facing a free-for-all wealth grab down the line, where loans will be called in in the biggest margin call in history and the legal niceties will fall by the wayside. The little guy never gets a break in that sort of scenario, but if he keeps his eyes open and his wits about him, and has some luck on his side, he can minimize his losses. He who loses the least in a deflation is the winner.

Mike said...

Stoneleigh said...
Anon @2:13,

Some people may be able to keep a home in a chaotic readjustment, but in general the fall of Fannie and Freddie is not going to release people from their obligations. The benefit of that obligation will merely be transferred to another party. No one will be handing the little guy lots of free money - bailouts are only ever for the insiders, whatever the propaganda may say.

I think we're facing a free-for-all wealth grab down the line, where loans will be called in in the biggest margin call in history and the legal niceties will fall by the wayside. The little guy never gets a break in that sort of scenario, but if he keeps his eyes open and his wits about him, and has some luck on his side, he can minimize his losses. He who loses the least in a deflation is the winner.

June 5, 2009 2:26 PM

This is where it gets fuzzy for me, can a Bank do a Margin Call on a fixed Loan? If I set aside some cash for the next several years of making my mortgage payment.. can they demand payment in full on a fixed loan?

Armando Gascón said...

@ Centiare: On the whole I would agree with you, and by historical experience in Spain, -not the most dynamic country in Europe I'd say- with a climate both California and Spain very similar, my country has the most river dams in Europe, artificial lakes and irrigation going back to pre-Roman times.
There are very bad tidings at present, in that the glaciers in the Pyrenees are melting and climate change and human pressure exert a heavy toll. It will be a question of adapting to more difficult conditions in the South.

It is also interesting that societies with Hydraulic Policies tend to become very authoritarian.

el gallinazo said...

VK and Stoneleigh

Why a reversal on the long end - 10 and 30 year? Isn't the smart money going into 2 year and less? Why not even a more parabolic curve as we go out to the long end?

jal said...

Re: Freddie Fanny
If the government takes over for realsies, I see them devising a flat mortgage rate for the home owners. This would insure a huge injection of free money every month for government coffers which would stave off any need to cut services.
I think that the gov. will be very happy with any kind of revenue stream. Of course the middle men will take their "administration" fees.

Anonymous said...

Centiare wrote:

"Who's to prevent someone establishing a garden on that property as well? Is it burglary, or is it just trespassing? Who calls the cops?"

Its not the cops that the gardeners have to worry about. It would be thievies, stealing garden produce to feedthemselves or to sell to others for money.

OC as a gardeners paradise seems very unlikely. If things get that bad in OC, its likely that trash pickup, gas and water services will become unreliable. My understanding is that most of california is in a serious drought. I find it hard to believe gardeners will be able to sustain a successful garden with out ample rainfall, or municipal water. Lack of water and fire fighting services will probably level areas of OC.

Lack of trash pick up and loss of muni sewage service will bring back the return of 19th Century diseases such as collara. The best option is to get out of dodge before you can smell the trash piling up. That would be very soon. If the CA govern implements his plan to stop funding entitlements and wealthfare, their will be blood in the streets before the summer is finished.

bluebird said...

Anonymous at 12:01 - Levels have also been reduced for cholesterol. I believe normal cholesterol used to be 220, now anything above 200 is 'abnormal'. I try to eat healthy and exercise, and forego the expensive drugs.

The latest push is drugs for osteoporosis. I was always leery of them because they could change the structure of the bones, and possibility of bone cancer. Now I hear it's not cancer so much, but dental and jaw problems, and a higher incidence of hip fractures.

And I have also heard that these modern drugs could lead to dementia. So as get older thru the depression, we are going to find sicker people because of the medicines they took when they were younger. And very few will have the money or insurance to be taken care of. Very sad.

jal said...

Re: Freddie Fanny
We are in the process of seeing the birth of a new “social housing project”.
Got to minimize “tent cities”. Got to distribute potential “trouble makers” through out society to avoid social unrest.
“Pretend owners” get to stay in their house or other house based on their income, ability to pay.
“Pretend owners” responsible for ALL incidental cost with the property.
Sweet for the gov. Or would you prefer “slum landlords”/capitalists as an alternative.
@ bluebird
... And very few will have the money or insurance to be taken care of. Very sad.
There have always been ways for people with saving to pass their inheritance to their families rather than "give it to the doctors".

bluebird said...

@jal - most people in a depression don't have any money, so nothing to leave an inheritance, and nothing for doctors, either. :(

el gallinazo said...

The pharmaceuticals made in China and India get sold for one dollar in Peru (where I am most familiar with the pricing) and $8 in the USA. You pay 800% for English on the label. It's cheaper to poison yourself in Spanish or Mandarin :-)

Anonymous said...

Thanks Stoneleigh for answering so many questions. Appreciate you keeping it simple and in laymans (?!) terms for those of us who are not so au courant with economics and the terminology.

Today I am at a loss to understand WTF is going on - in general.
Sensory overload perhaps or things are getting really wierd.

Yes indeedy - time to bring out the hard drinks.


Chaos said...

Re: Real estate in Texas

So far, the declines are much less than in most other areas. The state never saw the bubble of the Left or Right Coasts, and so the ensuing drama has largely escaped state and local economies here. I read recently that Texas and North Dakota are the only two states not facing major budget crises at the moment. The job losses are gradually building, though, and the last of the previously funded commercial/retail projects here are finishing out (who the tenants of such places are going to be, one can only imagine), and I wouldn't expect more financing to be forthcoming. Still, it's a very dissonant environment to observe, having scanned the rest of the country through TAE and other sources. People still apparently have enough money to eat out, shop, and drive their ginormous vehicles.

VK said...

@ El Gallinazo

Well until this rally starts breaking down the long end of the curve will keep rising i.e. yields will keep on generally increasing. But once the stock market starts falling, I reckon we'll see a flight to safety. Sure we'll see most of the money parked in the short end of the curve but I reckon that there will be so much pouring in from the stock market and possibly the banking system that it will go into the long end as well.

People will still think that the US government can not possibly fail and the prospect of getting some returns over a period of time as opposed to hugely negative returns might see money poured into the long end.

This is purely speculation on my part but from what we saw last year, the insiders knew it was near end of the world stuff post Lehman and many articles came out on guns, ammo, food storage etc, yet the long end of the curve still went down when it really should have gone parabolic as you suggest.

Also I think the FED is going to pursue QE more aggressively once the current rally breaks down, as once again the good ol' Bernanke put will be used to save the banking system. So they'll try and save the system for as long as they can and this means QE at the long end of the curve.

It'll last for sometime until investors realize they've been duped and push into the short end later. So medium term I expect a flatter curve and longer term much steeper.

Anonymous said...

An off topic question for Stoneleigh.

I'm deciding whether to go with a masonry stove/chimney combo or the external wood burner with the hot water circulator loop system that you said you have.

What are the advantages/disadvantages of the external furnace choice?

Smoke up the Chimney

VK said...

David Rosenberg via ZeroHedge

On the jobs report,

"Moreover, the internals of today’s report, in a word, were awful. Not only are businesses still cutting jobs but they are also reducing the hours that their employees are working; the private workweek hit a new record low of 33.1 hours (from 33.2 hours in April).

So, total labour input was much weaker than the headline payroll suggests and this is vividly illustrated in the aggregate-hours worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will not like discuss since this was actually worse than the 0.3% MoM drop in April; this takes the three-month trend to a -8.6% annual rate.

Think about that for a moment because what goes into GDP is total hours worked and productivity — so the latter better continue to hang in there or else we are going to be seeing some nasty output data going forward that may well take Mr. Market by surprise.

Put another way, if companies had held hours worked constant in May instead of cutting them, to achieve the total labour input they achieved last month would have required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed."

Me thinks companies are now hanging on to their employees quite possibly because of the green shoot mantra (plus the BLS data is statistically screwed!!), just giving them fewer hours to work and hence less pay - which isn't exactly good for recovery now is it?

Stoneleigh said...

Anon @5:59,

It depends what you want to do with it and how much money you have. I would love to have a masonry stove, but they cost too much (the one my friend put in several years ago cost C$30,000). They're great for heating a home, but don't let you heat other things as well like the outdoor wood furnace does. We heat our house, hot water and greenhouse with ours. The outdoor furnace was much less expensive (about C$14,000 several years ago), but it does get through a LOT of wood. If you have a lot of wood locally that's not so bad, but if wood would be expensive for you then it wouldn't be such a good idea to go that route.

Anonymous said...

Dear Stoneleigh,

What's the meaning of life?

and I'm expecting - will it be a boy or a girl?


VK said...

Chris Martenson on the BLS(hit) numbers,

The Birth Death Model added 77,000 jobs in leisure and hospitality yet according to CR, hotel occupancy is at 51.6%, one of the lowest readings ever...

Also see the chart on the site, this year saw the HIGHEST addition of jobs according to the birth death model. Higher then the last 10 years. So in the greatest recession the BLS figures that small businesses are hiring at the highest pace in a decade!!!!!! (That's 6 freaking !, even the mogambo guru would be freaked out and terrified like never before)

VK said...

@ Ilargi - MUST READ!

Via Yves Smith

A tale of two depressions updated, with new must see graphs on industrial output from various countries. We're still doing worse then or equal to the great depression even with the green shoots. Remarkable to see the US has been slightly more resilient! The center is sucking in all it can

Persephone said...

Thank you for all the sage insight!

Happy News today!
Treasury bloodbath soaks top fund managers
Fed to bond market: "We get it"

See, things aren't so bad. :)

Persephone said...

See, things aren't so bad. :)
meant sarcastically, of course

Anonymous said...

Dr J @ 12:54

Thank you Dr J. It is always good to hear a doctor speaking sane words about the excesses of the pharmaceutical industry in modern medicine.

Brian M. said...

My understanding, which could be wrong is that it depends on the details of your mortgage contract, but that most US fixed rate mortgages don't have any clause to allow a bank to do a margin call on it. We looked through ours and found no such clause. Canada and Europe may be different on this point.

On the other hand, it isn't really that hard to imagine an administration bought and paid for by bankers adjusting the law so that the banks CAN do margin calls on mortgages whether the contract says they can or not. Or heck, just ignoring the law and doing it anyway. The rule of law in the US isn't exactly inspiring confidence, in me at the moment. If the bank demands you pay your outstanding balance now, and you don't and then they declare you in default and send the repossessors, what are you going to do? Fight them in court? Who will your local sheriffs side with? In some places, the local judges or sheriffs might side with the homedwellers, but its hard to say, and its hard to imagine the feds not bending over to accommodate whatever they feel the bankers need. So regardless of the legalities, a massive real estate margin call by desperate bankers isn't that hard for me to swallow. Although as usual, Stoneleigh or someone else around here may have a better sense of this than I do.

Ilargi said...

New post up

Starcade said...

Stoneleigh 0736: Worse than shantytowns. That will basically be the _third wave_.

The first one is where the last vestiges of the current order are lost completely and guns directly rule the day.

The shantytowns only come after the initial explosion of violence _and_ the snapback from whatever will approximate a government in that scenario, which will then wall off certain areas to try to keep certain areas left over for the rich and powerful.

The shantytowns will be kept from the media and the like as long as possible, and the life expectancies in there will not be long.

That's one of the reasons I know I am a dead man sooner than later, barring a miracle.

centiare 0829: That's basically where things start getting really interesting, because I fully expect competition between what government might survive all this and the gangs (and the legitimate people, trying to do what you suggest with the vacant lots) for vacant lots.

You're already seeing the beginnings of this with some of the actions people take to vandalize vacant properties or use them as drug/gang/rave hang-outs.

Stoneleigh 0931: Re: SoCal...

I expect that (basically, the Mexicans (and the hardy ones at that) taking over) to start up later this year. Between the continuing drought and the budget nightmare, I fully expect SoCal to fall to the Mexicans over the next few years.

VK 0941: That's why I use the Shadowstats, which last month reached 20%. (It looks like it's about 20.4% now.)

Side point: I really do begin to wonder, when credit basically is only for those who won't need it, how much longer it will be before the masses stop playing along. I assert that much of what has happened was basically the understanding that, without the 60" Plasma and the Hummer, the masses would stop playing along and the guns would come out.