Friday, August 14, 2009

August 14 2009: Distort, rinse, repeat

National Photo Co. Volt’s ancestor 1920
Lanza Motor Co., Greenwich Village Girls, Washington, D.C.
Somewhere under this mass of pulchritude is the Metz Master Six automobile

Ilargi: Distort, rinse, repeat. All you really need to do is adequately amplify the news of Germany and France's positive numbers, and before you know it, the world economy is on a tear. No matter that their neighbors don’t have similar numbers, or that Germany’s annual GDP is still set to fall over 7%. The least positive words you can get out of the experts these days is "we fear that the recovery will be relatively slow and protracted". No doubts anymore about the fact that the recovery is here. Oh, no, sirree.

But all they've done is they've whipped each other into a frenzy. They want that recovery so much it'll be in everything they see.

As for Europe, what they should really be looking at, however, is the plunge into full-blown deflation in the region. And give their expert opinions on what that will mean for the world economy. That would be useful. But it would make for much less cheerful tidings.

150 US banks are in immediate danger because over 5% of their loans are toxic. I don't think that's news.

You go find me 150 banks that DON'T have more than 5% toxic loans. That would be news.

Not in the least because you'd have to open their books to make sure. I'd venture it's a toss-up if you can find 150. You just might, out of a total of 8500. It would be an interesting and revealing process, that much is certain.

California stops issuing IOU's, and starts borrowing money to pay its bills. Yeah, what a great idea. If you're up to your neck in debt, why not just borrow some more? What kind of interest are they going to pay on that? It doesn't really matter anymore, does it, now that we're in a recovery? It's all uphill from here.

Russia's GDP is down 11%. The recovery news must have somehow missed them. Like it did the record number of Americans who received foreclosure filings, and the 558.000 who filed for initial jobless claims. That's still 7 million a year. Half of which are poised for long term claims. And a substantial part of those will run out of all claims after a year and change. But does it matter? After all, we have a solid recovery.

When Congress and state governments decide there'll be no more benefit extensions, and the legions of hungry hopeless jobless homeless will start to swell for real, we'll know what to tell them. Don't worry, we're in a recovery. Oh, and there's more good news: deflation makes everything cheaper. Stop complaining, look at the silver lining.

And when US retail sales fall, so much that even WalMart, the cheapest store of all, is losing out, that's not because people have no more money and credit for purchases. No, it's because they sit on their money. Deflation is good for you!

Look here: the new American Dream, spreading fast among the entire world's broke and bankrupt: If you're willing to work hard enough, you can build your own reality. Just make it up as you go along.

If you can't find a job, and you lost your home and you can't get any benefits to feed your unwashed and hungry children, that's an incentive to go out there and conquer the world, to shape your own destiny. Just like the boys and girls on Wall Street do on a daily basis, with money that could have been used to give your child a meal.

Think positive! That's not a tent-city or an Obamaville you're living in, it's a Christmas holiday resort.

150 US Banks May Reach Point of No Return as Toxic Loans Exceed 5% of Holdings
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival. The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re "well-capitalized" by regulatory standards, which means they’re considered financially sound. "At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition," said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of "problem banks," which stood at 305 in the first quarter. Nonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators. Three lenders with nonaccruing ratios of at least 6.2 percent as of March were closed last week. Chicago- based Corus Bankshares Inc., Austin-based Guaranty Financial Group Inc. and Colonial BancGroup Inc. in Montgomery, Alabama, each with ratios of at least 6.5 percent, said in the past month that they expect to be shut.

"This is a fairly widespread issue for the larger community banks and some regional banks across the country," said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit. Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them.

Bloomberg’s list was compiled by screening U.S. banks for nonperforming loans of 5 percent or more, and then ranked by assets. The list excluded U.S. territories and lenders that have already failed. Also left out were the 19 lenders that underwent the Treasury’s stress tests in May; they were deemed "too big to fail" and told by regulators that government capital was available to keep them in business. Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.

About 2.6 percent of the $7.74 trillion in bank loans outstanding in the U.S. at the end of March were nonaccruing, the highest in 17 years, according to the most recent data from the FDIC. Nonaccrual loans peaked at 3.27 percent in the second quarter of 1991, during the savings and loan crisis, and averaged 1.54 percent over the past 25 years. "These numbers are off the charts," said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the "ability to try and earn their way through the cycle," said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp.

Corus, with more than two-thirds of its loans nonperforming, has the highest rate among publicly traded banks. The company said last month that it’s "critically undercapitalized" after five consecutive quarterly losses tied to defaults on condominium construction loans. Randy Curtis, Corus’s interim chief executive officer, didn’t respond to calls for comment. Marshall & Ilsley, Wisconsin’s biggest bank, reduced its nonperforming loans last month to 5.01 percent from 5.18 percent after selling $297 million in soured loans, mostly residential mortgages in Arizona, the Milwaukee-based company said Aug. 10.

The bank has "been very aggressive in identifying and tackling credit challenges," Chief Financial Officer Greg Smith said in an Aug. 12 interview. Smith said 26 percent of loans classified as nonperforming are overdue by less than the industry’s typical standard of 90 days. With those excluded, the ratio would be around 3.7 percent, he said. Synovus, plagued by defaulting construction loans in the Atlanta area, said nonperforming loans rose to 5.4 percent in the second quarter from 5.2 percent the previous period. Disposals of nonperforming assets reached $404 million in the quarter ended in June, the Columbus, Georgia-based company said.

Synovus is selling troubled loans and will continue its "aggressive stance on disposing of nonperforming assets" as long as the level is elevated, spokesman Greg Hudgison said in an e-mailed statement. Flagstar is based in Troy, Michigan, the state with the nation’s highest unemployment rate. Flagstar has $16.4 billion in assets and reported last month that 11.2 percent of its loans were nonperforming; about two-thirds were home mortgages. Flagstar CFO Paul Borja didn’t return repeated calls for comment.

The bank’s allowance for loan losses was 5.4 percent of total loans at the end of the second quarter, compared with 3.3 percent at Synovus and 2.8 percent at Marshall & Ilsley, according to company filings. All three reported at least three straight quarterly deficits. The FDIC doesn’t comment on lenders that are open and operating and doesn’t disclose which banks are on its problem list. The agency will probably impose an emergency fee on the more than 8,200 banks it insures in the fourth quarter to replenish the insurance fund, the second special assessment this year, Chairman Sheila Bair said last week. The FDIC attempts to sell deposits and assets of seized banks to healthier firms to avoid eroding the fund, said agency spokesman David Barr.

To determine which banks are most troubled, regulators compare the ratio of nonperforming loans to the percentage of equity a firm has relative to its assets, said Barth, the former OTS economist. A company with 5 percent nonperforming loans and equity of 8 percent is better positioned than one with the same amount of troubled loans and equity of 4 percent, he said. Flagstar’s equity-to-assets ratio in the second quarter was 5.4 percent, Synovus’s was 8.9 percent and Marshall & Ilsley, which raised $552 million through a stock sale in June, was at 11 percent, according to the banks.

The three lenders that failed last week -- Florida’s First State Bank and Community National Bank and Oregon’s Community First Bank -- all had nonperforming loans above 6 percent and equity ratios below 4.5 percent. "The nonperforming ratio, in and of itself, should be a great concern," said Barth, a professor of finance at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica, California. "It becomes even more troublesome when it goes above 3 percent and the equity-to-asset ratio is quite low."

While 5 percent can be "fatal" for home lenders, commercial real estate lenders may be able to withstand higher rates, said William K. Black, former lawyer at the Federal Home Loan Bank of San Francisco and the OTS. Commercial loans carry higher interest rates because they’re riskier, he said. "At the 5 percent range, you’re probably hurting," said Black, an associate professor of economics and law at the University of Missouri-Kansas City. "Once it gets around 10 percent, you’re likely toast."

Colonial Bank on 'brink of collapse'
Southern regional bank Colonial Bank is on the verge of failure, a federal judge said in granting a request made by Bank of America to freeze Colonial's assets. U.S. District Judge Adalberto Jordan ruled Thursday in favor of Bank of America, which had requested a temporary restraining order to keep Colonial from liquidating or transferring assets worth $1 billion. Depositors are protected through the Federal Deposit Insurance Corp.

"Viewing Colonial's contractual breach in conjunction with the fact that Colonial is on the brink of collapse and is suspected of criminal accounting irregularities, the potential for immediate substantial injury to Bank of America is clear," the judge said in his order. The lawsuit filed by Bank of America involved more than 6,000 mortgages issued by its subsidiary and held in trust by Colonial. According to the motion, Bank of America is owed more than $1 billion in assets but Colonial has failed to pay the amount owed.

Trouble has been brewing recently for Colonial, which is owned by Montgomery, Ala.-based parent Colonial BancGroup. Last month, the bank said in a statement that it had "substantial doubt about Colonial's ability to continue" due to uncertainties about its ability to increase its capital levels. As of the end of June, Colonial had assets of $25.5 billion and liabilities of at least $24.2 billion, which includes deposits of $20 billion. Colonial was among two banks raided earlier this month by federal agents in Florida acting on search warrants issued by the office of Neil Barofsky, the special inspector general for the Troubled Asset Relief Program. Last week Colonial said it was informed by the Department of Justice that it was the target of a federal criminal investigation relating to its mortgage warehouse lending division and alleged accounting irregularities.

So far this year, 72 banks have failed, according to the Federal Deposit Insurance Corporation. The closures have cost the FDIC $16.58 billion in 2009. Colonial BancGroup says it has 340 branches in five states: Alabama, Florida, Georgia, Nevada and Texas. In the event that regulators shut down Colonial, customers' deposits are protected: The FDIC's insurance fund guarantees up to $250,000 per person per account. And, the agency said on its Web site, it historically "pays insurance within a few days after a bank closing either by establishing an account at another insured bank or by producing a check." 

Next Bubble to Burst Is Banks’ Big Loan Values
It’s amazing what a little sunshine can accomplish. Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion. So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as "well capitalized."

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules. The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.

The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies. Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion. Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

When a loan’s market value falls, it might be that the lender would charge higher borrowing costs for the same loan today. It also could be that outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment. The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index, including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

History provides some lessons here. A common problem at savings-and-loans that failed during the 1980s was that they relied on short-term funding at market rates to finance their operations, which consisted mainly of issuing long-term, fixed- rate mortgages. When rates rose sharply, the thrifts fell in a trap where their assets weren’t generating sufficient returns to cover their liabilities. The accounting rules also left open the opportunity for gains-trading, whereby companies post profits by selling their winners and keeping losers on the books at their old, inflated values. Had the thrifts been marking loans to market values on their balance sheets, their troubles would have been clearer to outsiders much sooner. (The FASB didn’t require annual fair- value footnote disclosures until 1993.)

If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in. Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly. The problem with relying on management’s intentions is that they may be even less reliable. At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them.

Record 0.7% fall for eurozone consumer prices in July: EU
Consumer prices in the 16 euro countries fell a record 0.7 percent in July over one year, after dropping for the first time last month, according to official EU figures released Friday. The new figures show a significant price fall and mark the second straight month that the inflation rate has been in negative territory, the European Union's Eurostat data agency said. The inflation rate was recorded at minus 0.1 percent in June, as the credit crunch took its toll, the first time that eurozone prices had dipped since the euro bloc was formed in 1999 and even before statistics for the area began to be compiled in 1996.

Most economists have expected that eurozone inflation would dip briefly into negative territory but they have ruled out a longer Japanese-like bout of deflation, a pernicious downward spiral in prices. While the prospect of falling prices may delight consumers it can wreak havoc on the broader economy as households put off purchases hoping for future bargains, undermining demand and in turn investment in new production. That then puts further pressure on employment, causing further falls in demand and so setting up a dangerous vicious circle which can potentially cripple an economy. The July figure was also down on the 0.6 consumer price drop which Eurostat had given as an initial estimate for July.

Retail Sales Fell in July Despite Clunkers Program
U.S. consumers reined in spending in July, exposing a vulnerability in an economy that appears on the cusp of recovering from the worst recession in 70 years. The Commerce Department said Thursday that retail sales fell 0.1% last month, surprising analysts, after making gains in May and June. The "cash for clunkers" program, which rewarded qualified owners of old cars with $3,500 to $4,500 in vouchers, boosted sales of autos and parts by 2.4%, but it wasn't enough to prop up losses in other categories. Excluding autos and parts, sales dropped 0.6% as a result of declines in gasoline prices and building-material sales. Overall, retail sales have fallen 8.3% in the past year, not adjusted for inflation.

The grim data serve as a reminder that consumers weigh on the economy, despite expectations of improved gross domestic product this quarter, and signs that the battered manufacturing and housing markets are beginning to stabilize. Macroeconomic Advisers revised its third-quarter GDP forecast downward to 2.8% from 3.4%. "The consumer was never going to be the lynchpin of the first stage of a recovery," said Stephen Stanley, a RBS Securities Inc. economist. "While it's disappointing that retail sales were softer than anticipated, it's not necessarily a deal killer for a positive GDP number in the third quarter."

Growth in the second half of the year is expected to be primarily dependent on the clunkers program and stabilization in business investment and the housing market. Separately, initial claims for jobless benefits rose to 558,000, an increase of 4,000, for the week ended Aug. 8, the Labor Department said Thursday. The four-week average of new claims, which aims to smooth volatility in the data, rose by 8,500 to 565,000. Stagnant wages and job uncertainty have prompted Americans to save rather than spend, a trend that's likely to continue through the second half, excluding bumps provided by government programs such as cash for clunkers.

"I checked the savings account and realized I better slow down a bit here," said Gary Wasielewski, who recently returned from a family vacation to Disney World. The 34-year-old high-school teacher, of Havre De Grace, Md., is keeping back-to-school expenses for his three school-aged kids to around $200, down from the usual $500. "Normally, we would buy a new backpack if the old one showed signs of wear and tear," said Mr. Wasielewski. Now, though, "it goes until it falls apart."

July provided no light at the end of the tunnel for Waltham Floor Covering, a family-owned business in Waltham, Mass. "We were off for the month and off for the year," said Donald Parrella, one of the owners. Business is down by about $300,000 from the same period last year, which ended with sales totaling $1.2 million. Floor-installation orders in July were volatile, said Mr. Parrella, with upticks in the beginning and at the end of the month, and a slump in the middle. To cut costs and ride out such fluctuations, Mr. Parrella and his two brothers laid off all the floor installers on payroll by March and now rely on outside contract labor.

Declines in retail spending bruised nearly every sector from electronics and appliances to department stores and home furnishings. Clothing stores, bars and restaurants, and personal-care stores experienced slight gains. Business inventories fell 1.1% in June to a seasonally adjusted $1.35 trillion, the Commerce Department said Thursday. A 0.9% increase in business sales, to $975.8 billion in June, was the latest reminder that companies may have to begin restocking shelves soon as demand rises.

The country's larger chain stores see little relief on the horizon. Last week, retailers posted July sales that showed the greatest declines since January. Still, in an effort to bolster profits, most have done a good job cutting inventory to better align with diminished sales expectations. Estée Lauder Cos. forecast Thursday full-year profit that could fall below Wall Street's expectations, as it faced frugal shoppers. A drop in the number of people traveling hurt the company's retail sales, which includes airport shops, Chief Executive Fabrizio Freda said. Meanwhile, import prices fell 0.7% in July, the Labor Department said Thursday, partly driven by a 2.8% decrease in the price of imported oil.

U.S. Initial Jobless Claims Rose to 558,000 Last Week
The number of Americans filing first-time claims for jobless benefits unexpectedly rose last week, while the number of people on unemployment rolls dropped to the lowest since April, signaling the labor market may be stabilizing as the recession eases. Applications rose to 558,000 in the week ended Aug. 8 from a revised 554,000 the week before, the Labor Department said today in Washington, while staying under 600,000 for a sixth time. The number of people collecting unemployment benefits fell by 141,000 in the week ended Aug. 1 to 6.2 million.

Better-than-anticipated reports on manufacturing, housing and employment indicate the deepest job cuts may have passed. At the same time, while analysts surveyed by Bloomberg News say the government’s stimulus spending will spur economic growth as of this quarter, they predict it won’t stop the jobless rate from reaching 10 percent and restraining consumer spending. "The job market is no longer skidding out of control," Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York, said before the report. Nonetheless, he said, "while the stimulus is helping the economy gain traction, we’re not going to see a massive ramp-up in hiring because of it."

Economists forecast claims would drop to 545,000 from a previously estimated 550,000, according to the median of 42 projections in a Bloomberg News survey. Estimates ranged from 526,000 to 590,000. The four-week moving average of initial claims, a less volatile measure, rose to 565,000 last week from 556,500. Sales at U.S. retailers unexpectedly fell last month, the first decline in three months, as concern over jobs and stagnant incomes caused consumers to cut back on other items after taking advantage of the cash-for-clunkers program. The 0.1 percent decrease followed a revised 0.8 percent gain in June that was larger than previously estimated, Commerce Department figures showed today in Washington.

Stock-index futures pared gains and two-year Treasuries erased their losses after today’s reports. Contracts on the Standard & Poor’s 500 Stock Index were up 0.6 percent at 1007.70 at 8:41 a.m. in New York after climbing as much as 1.3 percent earlier. Two-year yields were at 1.15 percent after reaching 1.19 percent before the figures were released. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, fell 0.1 percentage point to 4.7 percent in the week ended Aug. 1. Sixteen states and territories reported an increase in new claims for the week ended Aug. 1, while 36 reported a decrease and one was unchanged. These data are reported with a one-week lag.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows. The economy has lost 6.7 million jobs since the recession started in December 2007. At the same time, gross domestic product contracted at a less-than-expected 1 percent annual rate in the second quarter, and the pace of U.S. job losses slowed more than anticipated last month. Payrolls fell by 247,000, after a 443,000 loss in June, Labor said Aug. 7. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent, the first decline since April 2008. The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg survey.

Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003. Businesses announcing staff reductions range from Jacksonville, Florida-based Fidelity National Financial Inc., the largest U.S. title insurer, to New York-based phone provider Verizon Communications Inc. US Airways Group Inc., the smallest full-fare U.S. carrier, will cut 600 airport service and baggage-handling jobs to reduce costs after the peak summer travel season ends in September. The cutbacks, announced in July, build on the Tempe, Arizona-based company’s request in June for 400 flight attendants to take voluntary leave.

California to Stop Issuing IOUs, Borrow $10.5 Billion
California will stop using IOUs to pay its bills in early September, lifting a burden on businesses, taxpayers and municipalities that received $2 billion of the registered warrants instead of cash as the recession pushed the most-populous U.S. state toward insolvency.

Controller John Chiang said the use of IOUs will stop on Sept. 4, pending approval by a panel of state finance officials, and the state would begin redemptions a month ahead of schedule. State Treasurer Bill Lockyer said he plans to sell $1.5 billion of notes by Aug. 28 to meet cash needs, followed by $10.5 billion of such short-term loans in mid-September. Lawmakers enacted a revised budget last month that closed California’s $24 billion deficit and paved the way for the state to borrow money. "Along with short-term loans that are routinely obtained in the fall, this spending plan should provide sufficient cash to meet all of California’s payment obligations through the fiscal year," Chiang said in a statement.

California, with the world’s eighth largest economy, issued IOUs for the past six weeks to pay for everything from tax refunds to health-care clinics and to avoid missing payments on items, such as bonds, deemed a priority under state law. California’s largest banks, including Bank of America Corp. and JPMorgan Chase & Co., stopped accepting the IOUs last month, straining businesses in a state that’s among the hardest hit by the nearly two-year-long recession. Gloria Freeman, president of a medical staffing company, Staff USA Inc., said before Chiang’s announcement that the end of the IOUs will have little immediate effect on her business. Based in Rocklin, California, the company fired five of its 12 administrative employees because of the IOUs, she said, and anticipates that her payments will be delayed by backlogs, as they were after prior budget battles.

"I’m stuck with the warrants and the fact that they’re not going to pay for a long period of time even once they do get this straightened out," she said. "You’re basically dealing with a bankrupt vendor." The use of IOUs drew speculators who offered to buy them at a discount on Internet sites before they even arrived in the mail. The U.S. Securities and Exchange Commission moved to halt such trading by advising that the IOUs were securities akin to bonds, confining the market to registered brokers.

SecondMarket Inc., a New York brokerage that arranges trading in hard-to-sell assets such as auction-rate securities, tried to foster trading in IOUs. None were ever executed because sellers didn’t want to take less than face value, in part because of the chance that California could redeem them early, as the state is now planning to do, said Mark Murphy, a company spokesman. "Sellers are, with good reason, reluctant to sell for less than par -- or 100 cents on the $1 -- if the state turns around and says ‘we’ll redeem them now,’" he said.

California began issuing the securities on July 2 as politicians remained deadlocked over revising the budget through June 2010 to compensate for a plunge in tax collections. The stalemate was resolved on July 28, when Republican Governor Arnold Schwarzenegger signed a package of bills that cut spending to schools, prisons and welfare programs -- and imposed accounting maneuvers and other one-time changes -- to balance the books.

The scope of the deficit and funding crisis rattled investors, as credit-rating companies downgraded California’s bonds and investors demanded higher returns to compensate for the risk of holding them. With passage of the revised budget, the premium demanded by investors has eased and officials are reviving plans for the short-term note sale -- needed to pave over temporary mismatches between spending and revenue -- that they previously said would be too costly.

The difference between a 10-year California bond and a top- rated municipal security was as high as 1.71 percentage points on July 1. The spread slipped to 1.16 percentage points yesterday, the lowest since April 24. The controller has issued about 327,000 IOUs worth $1.95 billion since July 2. The registered warrants were set to mature in October and pay an annualized interest rate of 3.75 percent. Marketing Plans Lockyer said he plans to borrow the $10.5 billion in mid- September. Proceeds will be used to repay the $1.5 billion initial loan. No decision has been made on what investment banks would manage the sale, treasury spokesman Tom Dresslar said.

When the state sought a cash-flow loan last October, Lockyer lowered the yield range on the debt by a quarter- percentage point and boosted the size of the offering by 25 percent to $5 billion after a marketing campaign targeting individual investors helped draw more than $3.9 billion of orders, an all-time high. California still paid a yield of 4.25 percent on the notes due June 22, 2009, the most on record at the time relative to Treasuries.

Growth in France, Germany boosts global economy
Reports showing positive growth in France and Germany are the latest evidence that the global recession is winding down – and may even have ended. The downturn has taken an even bigger toll on economic activity in Europe than in the US, but on Thursday two nations at the Continent’s core – Germany and France – reported positive growth of 0.3 percent for the year’s second quarter. Greece and Portugal also showed rising gross domestic product, while the negative numbers in Italy and Britain were much less severe than in the first quarter.

It’s hardly a blockbuster performance, but economists generally don’t expect hard-hit Europe to show a strong recovery until the rest of the world does. The world’s largest economy, the United States, is at best beginning to rebound, suggesting that important momentum is coming from emerging-market economies. "It certainly looks as though this global recovery has gotten a lift without US leadership," says Ed Yardeni, an economist and investment strategist at Yardeni Research in Great Neck, N.Y. "The emerging economies are leading the way here," he says, and "the old-world countries are following."

He believes the global recession is over, in a shift foreshadowed this spring by rising prices for oil and some other commodities. He expects the global recovery to be slow, and he’s not alone in that forecast. The International Monetary Fund (IMF) last month revised its forecast, saying that the world was beginning to pull out of a recession "unprecedented" since the 1930s, but that "the recovery is expected to be sluggish." Still, the outlook has become more optimistic. The IMF now sees the world economy growing by 2.5 percent next year – cooler than in some recent years, but better than the IMF’s April forecast of 1.9 percent growth.

Exports, including to emerging markets such as China, helped France and Germany turn in surprisingly strong numbers for the second quarter. The shift was also driven by consumer and government spending. The bottom line is that Europe, after declining at twice the pace of America over the past year, may be turning a corner. But the strength in the global economy now resides in nations that Mr. Yardeni calls the "new world," from China to commodity-rich countries such as Australia.

In fact, the IMF’s latest forecast calls for the European Union economies to shrink slightly next year (by 0.1 percent), while economies roar ahead in China (8.5 percent growth), India (6.5 percent), and even sub-Saharan Africa (4.1 percent). One challenge in Europe remains weak banks, which by some estimates still have lots of bad loans on their books. But at least forecasters have shifted into "upward revision" mode on both Europe and the world. Economists at Merrill Lynch recently boosted their forecast for Europe and said unemployment there should top out at about 10.8 percent early next year. They are also more optimistic than the IMF about prospects for the rest of the world.

Euro-Area Economy Contracted 0.1% in Second Quarter
The euro-region economy barely contracted in the second quarter as Germany and France unexpectedly returned to growth, suggesting Europe’s worst recession since World War II is coming to an end. Gross domestic product fell 0.1 percent from the first quarter, when it plunged 2.5 percent, the most since the euro- area data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. Economists had estimated GDP declined 0.5 percent in the three months through June, the median of 32 forecasts in a Bloomberg survey showed.

Stocks rose and the euro climbed after today’s figures added to evidence the worst of the global slump has passed. Demand for European exports is improving just as government rescue packages and lower interest rates support spending at home. While the data suggest the European Central Bank won’t need to add to stimulus measures, rising unemployment across the region may still stifle consumer spending. "There is a more-than-decent chance that euro-zone economic activity has now hit a bottom and will expand again in the third quarter, as many other economies follow Germany and France out of recession," said Martin van Vliet, senior economist at ING Bank in Amsterdam. "However, we fear that the recovery will be relatively slow and protracted."

In Germany, Europe’s largest economy, second-quarter GDP rose a seasonally adjusted 0.3 percent from the first quarter, when it dropped 3.5 percent. The French economy also expanded 0.3 percent in the latest quarter.Italy and the Netherlands were a drag on the euro-area economy. Italy’s economy contracted 0.5 percent and Dutch GDP declined 0.9 percent in the second quarter. The economic improvement in Germany comes as Chancellor Angela Merkel campaigns for a second term ahead of national elections on Sept. 27. Merkel’s Christian Democratic bloc and her preferred coalition partner, the Free Democratic Party, held at 51 percent in a Forsa poll for Stern magazine released on Aug. 11. The Social Democrats had 21 percent support.

"Merkel will be in a position to exploit the early return to growth, but I would be surprised if she did it in strong words," said Laurent Bilke, a senior economist at Nomura in London. "Some caution is still warranted as long as the labor market continues to weaken." The figures highlight shifting fortunes across Europe’s largest economies. In the U.K., where Prime Minister Gordon Brown is struggling to shore up his popularity before elections due in June, GDP contracted 0.8 percent in the second quarter, more than twice what economists forecast. Economies in the Czech Republic, Hungary and Romania also continued to shrink.

Euro-area GDP has declined for five straight quarters, the longest contraction since the data series started 14 years ago. The statistics office is scheduled to publish a breakdown of second-quarter GDP on Sept. 2. While signs of a global recovery have prompted speculation about central banks’ exit strategies, the ECB is showing little willingness to depart from its current strategy of offering banks unlimited cash and keeping rates at a record low. ECB President Jean-Claude Trichet said last week that council members "never pre-commit in any respect on the timing of various measures" after the bank last month started buying covered bonds. Federal Reserve policy makers yesterday signaled they will avoid any rush to end their own efforts to strengthen a U.S. recovery.

"The ECB won’t make a big mistake if they exit a little later," said Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London. "They don’t need to rush." The global economy may already be past the worst of the slump. Confidence in the world economy surged to a 22-month high in August, a Bloomberg survey of users on six continents showed yesterday. The U.S. economy, the world’s biggest, contracted at a less-than-forecast 1 percent annual rate in the second quarter after shrinking 6.4 percent in the previous three months. In Japan, household sentiment rose for a seventh month in July.

The ECB, which kept its key interest rate at a record low of 1 percent last week, has offered unlimited cash to banks over 12 months and started buying covered bonds to fight the slump. The Frankfurt-based central bank predicts the euro-area economy will shrink about 4.6 percent this year and around 0.3 percent in 2010. It will release revised forecasts next month. "The better-than-expected GDP figures, taken together with recent firm monthly indicators, will almost certainly lead to upward revisions to the ECB’s growth forecasts next month," said Nick Kounis, chief euro-region economist at Fortis Bank in Amsterdam. That "would make additional monetary-policy easing even less likely and start to focus market attention on an exit strategy," he said.

Anheuser-Busch InBev NV, the Leuven, Belgium-based brewer formed in a $52 billion takeover last year, today reported a 13 percent gain in second-quarter earnings. Walldorf, Germany-based SAP AG, the world’s largest maker of business-management software, on July 29 raised its forecast for 2009 profitability. "These are short-term positive signs, but the French and the Germans have thrown a lot at it. They’ve got the cash-for- clunkers program and subsidies in the labor market," former Bank of England policy maker David Blanchflower said today in a Bloomberg Television interview from Hanover, New Hampshire. "My view is: early days; one quarter doesn’t make a trend."

With some of the region’s largest companies including Amsterdam-based ING Groep NV and Germany’s Siemens AG cutting jobs, consumers may keep spending plans on hold. European retail sales unexpectedly declined in June. The European Commission forecasts unemployment will reach 11.5 percent next year. From a year earlier, the euro-area economy shrank 4.6 percent in the second quarter, after a 4.9 percent contraction in the first three months of the year, today’s report showed.

Spain's Economy Shrinks Again
The Spanish economy contracted sharply in the second quarter, official data showed Friday, confirming that a nascent recovery in Germany and France has yet to percolate throughout the euro area. Gross domestic product declined 1 percent from the previous quarter, when it shrank 1.9 percent, the Madrid-based National Statistics Institute said in a preliminary estimate. From a year earlier, G.D.P. contracted 4.1 percent.

The statistics stood in contrast to data Thursday showing stronger-than-expected performances by the French and German economies, each of which grew 0.3 percent in the second quarter from the first quarter. Within the euro area, France and Germany are helping balance out weaker performances in Italy, a perpetual laggard, and Spain, where a collapsing housing market and rising unemployment have brought an acute recession. Economists remain guarded about the potential strength of the rebound across the region, and the release of the Spanish data Friday reinforced that caution.

Nick Kounis, chief European economist at Fortis Bank in Amsterdam, said the prospect remained for a gradual recovery in Europe into 2010, with Germany and France being helped in the near term by the global recovery and fiscal incentives, especially for car sales. Other countries whose economies are more dependent on household consumption rather than exports and manufacturing like Spain, Ireland and the Netherlands, are lagging, he said.

"It’s a gradual recovery story rather than a robust V-shaped rebound," he said of the euro zone. "Domestic demand is likely to stay subdued because of weakness in the labor market and because wages are still relatively high and have room to decline." Data released Thursday showed that the economy of the 27-country European Union shrank 0.3 percent in the three months ended June 30 from the first quarter. The 16 countries that use the euro registered a 0.1 percent decline for the second quarter, according to the Eurostat statistics agency.

Spain in particular is suffering from the collapse of a debt-fueled construction boom that has left swaths of newly built homes unsold. The pain in the property sector has had ripple effects across the economy. In response, Madrid has pumped money into the economy and is putting builders to work on public projects. Unemployment in Spain stood at 18.1 percent in June, according to Eurostat. In France it was 9.4 percent and in Germany it was 7.7 percent.

Another release Friday showed output in Finland shrank in June for the eighth consecutive month. Seasonally adjusted output contracted 0.8 percent from May and was down 11.1 percent from a year earlier, Statistics Finland said. The country does not release preliminary G.D.P. estimates and will not publish growth data on the second quarter until September. The Czech Statistical Office said Friday that the nation’s economy rebounded in the second quarter, growing 0.3 percent over the previous three months. Analysts had expected a drop of 0.4 percent. G.D.P. fell by 4.9 percent from a year earlier, a record annual decline.

Russia's economy contracts 11% as Putin model hits 'dead end'
Russia's economy shrank at an annual rate of 11pc in the second quarter and has yet to show any signs of durable recovery, despite the rebound in the price of oil. President Dmitry Medvedev blamed the country's reliance on energy and commodity exports, saying the economy "crumbled" as the global crisis hit. "We can't develop like this any further. It's a dead end," he told party leaders. "We're hovering in place, and the crisis brought this home. We will have to make decisions on changing the structure of the economy. Otherwise our economy has no future. The situation is outrageous and has been for a long time. We continue to ship raw timber for export, and processing isn't being developed."
The slump has played havoc with state finances. The Kremlin's war chest is vanishing fast as the budget deficit rises to 9.4pc this year. While there are still funds to cover $80bn (£48bn) of stimulus measures, the picture could turn ugly if there is a second leg to the global downturn. The World Bank says unemployment may reach 13pc this year as household spending "collapses". President Medvedev's comments are a veiled attack on the policies of his predecessor – and now prime minister – Vladimir Putin, who has long viewed Russia's energy resources as the spearhead its return to superpower status.

Critics say the Putin years were wasted, leaving Russia's economy deformed. The "resources curse" of over-reliance on oil and gas exports pushed the rouble to uncompetitive levels, throttling what remained of Russian industry. The International Monetary Fund last week highlighted serious concerns about the stability of the financial system. "The central bank should... be more willing to compel bank closures and consolidation. A more pro-active approach should include mandatory, bottom-up stress tests of larger banks, as banks' capital deteriorates and the level of problem loans increases." It added: "Absent a more determined policy intervention, there is a risk banks will continue to struggle to adjust balance sheets, stifling credit expansion and impeding a recovery."

Citi’s dirty pool of assets
Hard as it may be to believe, shares of beleaguered Citigroup are on fire. The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March. The over-caffeinated stock maven Jim Cramer keeps calling Citi a "buy, buy, buy" on his nightly CNBC television show. Even the more sober-minded writers at Barron’s are pounding the table a bit, predicting Citi shares could double in price in three years."

Time out! It’s far too soon for anyone but stock flippers and fast money hedge funds to buy Citi right now. That’s because there’s still a world of hurt for Citi in the $83.2 billion in subprime mortgage-backed securities, corporate loans, home loans and commercial real estate mortgages that the bank’s finance team has stuffed neatly into something called the "Special Asset Pool." But there’s nothing special at all about these assets. This cesspool of toxic securities and floundering loans is the worst of the stuff that’s been stinking up Citi’s balance sheet. And these rotting securities and loans represent a good chunk of the $300 billion in problem assets the federal government is guaranteeing under its bailout of the giant bank.

Yet what the cheerleaders for Citi sometimes forget is that the struggling bank must absorb up to $39.5 billion of the "first loss" on those troubled assets. To date, Citi says it has incurred $5.3 billion in losses on this pool of toxic assets — meaning the bank has another $34 billion in losses to soak up before the taxpayers start footing the bill. And the way things look today, Citi is looking at a good deal more losses to come from its Special Asset Pool. For starters, Citi still sits on a rather sizable portfolio of subprime-backed collateralized debt obligations — the dubious securities that helped spark the financial crisis.

At last count, Citi valued its CDO portfolio at $9.6 billion, a 56 percent decline from the value the bank placed on those securities last summer. To protect itself against a potential default on those CDOs, Citi has hedged its exposure with some $4.5 billion in credit default swaps. But unfortunately for Citi, it didn’t buy those insurance-like derivatives from American International Group, another big bailout recipient. If Citi had been shrewd enough to have done business with AIG, it would have been able to sell its CDOs at face value to an entity set up by the Federal Reserve, just like Goldman Sachs, Deutsche Bank and Merrill Lynch and other big banks did. In a flash, Citi’s CDO problem would have disappeared.

Citi, however, had the misfortune of purchasing its CDS from Ambac Financial Group, a bond insurer that many see as being on its last legs. The bond research firm CreditSights says Ambac "may run out of capital sometime in 2013." Many others think Ambac’s demise could come much sooner. On August 7, Ambac, which trades around $1, reported a larger than expected $2.4 billion second-quarter loss. A collapse of Ambac would render the CDS that Citi holds on its CDOs all but worthless. To date, Citi, which declined to comment on its CDO exposure, has written down the value of those insurance-like derivatives by more than $1 billion, according to regulatory filings.

Even if Ambac survives in some fashion, Citi is likely looking at additional write-downs on those contracts, and potentially on the underlying CDOs they are supposed to insure. Citi also could take more hits on some $6.2 billion in private equity investments and $8.5 billion in loans that financed debt-laden buyouts. The bank also reports having some $10 billion in Alt-A mortgages — a home loan that’s a step above subprime — and $8.3 billion in still largely untradeable auction-rate securities.

To be fair, Citi has been aggressive in writing down the value of its $10 billion in so-called Alt-A home loans to $1.7 billion. The bank has been equally aggressive in reducing its exposure to commercial real estate loans. The bank has marked down the bulk of its $28 billion in commercial real estate-related assets to $5.1 billion. So it would require substantial defaults in both categories of loans for Citi to incur large losses. But to say Citi isn’t going to suffer any more losses in this pool of toxic assets is way premature. And none of this analysis has focused on the $183 billion in loans to cash-strapped consumers on Citi’s books that could still go bust. In short, the safest bet on Citi shares is still a short one.

'A Recovery Only a Statistician Can Love'
The pile of economic data indicating that the worst of the recession is over just keeps growing. In the past few weeks, the government has reported that businesses last month shed the smallest number of jobs in nearly a year. The savings rate, after rising rapidly, held steady at levels not seen in at least five years. And from April to June, productivity surged to a six-year high.

But the same data also explain why any recovery isn't going to feel like one anytime soon for millions of Americans. Its existence will be confirmed by statistics, but, over at least the next year, the benefits are unlikely to materialize in the form of higher wages or tax receipts or more jobs. "It's going to be a recovery only a statistician can love," Wells Fargo senior economist Mark Vitner said.

A few recent pieces of data offered reasons for both hope and trepidation. The Labor Department reported Tuesday that business productivity jumped in the second quarter to a seasonally adjusted annual rate of 6.3 percent, far higher than the annual average of 2.6 percent from 2000 to 2008. Higher productivity helps raise living standards in the long run and is good for corporate profits because it allows companies to produce more without paying higher labor costs. But the boost in productivity was largely due to businesses slashing hours faster than output. Labor costs per unit fell, but so did the buying power of workers, further constraining already weak consumer spending, which accounts for 70 percent of the economy.

Increased productivity, combined with other factors, could also bode poorly for employment because as long as businesses can do more with fewer people, they can delay hiring. Adding to that potential delay is the fact that employers have slashed hours to an unprecedented degree to survive the recession. The average time spent working each week is at a record low, and just under 9 million people are working part time for economic reasons. "Before you see hiring, firms have an awful lot of latitude to increase hours," said Richard Moody, chief economist for Forward Capital, an investment research firm.

As a result, many economists said, a jump in productivity increases the odds that the recession will be followed by a "jobless recovery," similar to what followed the 2001 recession. That downturn had similar productivity gains. Once it was officially over, it took 55 months before a greater share of Americans had jobs than when the recession ended, compared with 29 months after the 1990-91 recession and just seven months after the 1981-82 recession, according to an analysis of government data by University of California economist Brad DeLong.

Another piece of encouraging news -- the July jobs report -- showed the unemployment rate edging down to 9.4 percent from 9.5 percent as the pace of layoffs slowed. But the rate also fell largely because more than 400,000 people dropped out of the labor force and therefore were not counted as unemployed. Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed.

That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won't be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure. "Economists are using one concept of recession that is at total variance of how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you're in a hole, you're in a recession," said Lawrence Mishel, president of the Economic Policy Institute. "Economists think of [a recession's end] as . . . when the economy stops shrinking."

Job loss or simply the prospect of it has motivated Americans to save more after years of spending beyond their means, a development hailed by civic leaders, personal finance gurus and some economists as vital to more sustainable economic growth in the long term. But in the short term, it is bad for the economy because it is yet another constraint on consumer spending. Weak spending is one of the major reasons economists cite in their forecasts for a sluggish recovery.

With fewer people and businesses willing to buy things, it will take longer for the economy to work off all the excess capacity that was built up during boom times. Think of thousands of idled factories, acres of empty strip malls and ports packed with unsold automobiles, not to mention millions of workers who lost jobs as business scaled back production to keep up with falling demand. "We have excess capacity and high unemployment across the board," Mishel said. "What we need is customers."

Recession Pushes More Into Part-Time Work, Discouragement
Unemployed Americans are so discouraged about the prospect of finding a new job that they're checking out of the labor force at the highest and fastest rate in nearly 10 years. Further, the recession has forced more full-time workers into part-time slots than at any time over the past 15 years.

Those are the sobering conclusions drawn from some data analysis we did here at The Ticker, pegged to last week's unemployment report that showed July joblessness actually ticked down a little.

Despite this small reduction in the unemployment rate, our data show that things are no better for Americans who want full-time jobs but can't find them. For this analysis, we compared two unemployment rates over the past several years: the official rate and the unofficial rate, which we write about every month here at The Ticker. The resulting chart shows the gap between these two rates has widened to its highest level since 1994 during the current recession:

First, a word on the difference between the two rates:
  • The official rate -- which dropped to 9.4 percent in July from 9.5 percent in June -- is determined by a rotating monthly survey of 60,000 U.S. households performed by the Labor Department's Bureau of Labor Statistics, combined with jobs data sent in by employers. According to this measure, you are marked as "unemployed" if you're jobless and you meet certain criteria, including whether you looked for work in the previous four weeks.
  • The unofficial rate starts with the official rate and then adds in everyone else who should be working full-time but is not, including those whose hours have been reduced from full-time to part-time, those who have become so discouraged they have given up looking for work and others who are "marginally attached to the labor force." Many economists believe this rate is a truer measure of the health of the economy. In July, the rate dipped to 16.3 percent from its historic high (since 1994) of 16.5 percent in June.

Notice that the chart only goes back to 1994, so it covers only the two most recent recessions. I wanted to go back to 1970, which would have covered seven recessions, but the BLS changed the way it counts the unofficially unemployed in 1994, so that's as far back as I could go with a strict, apples-to-apples comparison. Based on that, here's what our chart shows: The gap between the officially and unofficially employed in 2000 -- just before the recession caused by the dot-com crash and 9/11 -- was at its smallest. This means that if you were unemployed at this time, you were the most encouraged you'd been since 1994 that you'd find a new job.

That gap peaked in March of this year, and has backed off just a little since then. This means that more people who are unemployed now have checked out of the labor force and just given up looking for work. It also means that more full-time employees have been reduced to part-time workers, as we will see in a moment. Official unemployment has risen swiftly from the beginning of the recession in December 2007 to now: From 4.9 percent to 9.4 percent in July. But the rise in unofficial unemployment has been jaw-dropping: From 8.7 percent in December 2007 to 16.3 percent in July.

The rate has nearly doubled and the gap between the two measures has increased more swiftly than it did during the previous recession. (The main reason I wanted this chart to go back farther was to capture the 1982-83 recession, when the official unemployment rate shot up to nearly 11 percent, the highest in nearly 40 years.) So this chart is startling, to be sure. But what does it mean? We pinged Harvard economist Lawrence Katz, a former chief economist at the Labor Department, to get his take on the data. His takeaway: This recession has been so bad, that even after businesses have laid off workers, they've been forced to reduce many of their remaining employees from full-time to part-time status. That's what happens when you have to cut to the bone. And then keep cutting.

"Workers on short hours (the underemployed or the involuntary part-time) account for 5.6 percentage points of the 6.9 percentage point gap between the unofficial and official unemployment rate measure," he wrote us by e-mail, "while those who have dropped out (discouraged and other marginally attached workers) account for only 1.3 percentage points in the gap." While it may be "only 1.3 percentage points," that still translates to 796,000 people, an increase of 335,000 from last year. That's a lot of people checking out of the labor force.

This number "is larger than the 2001 recession," Katz writes, "but we don't have comparable data for the 1982-83 recession since BLS tightened up on the definition of what is a discouraged worker" in 1994. He did add, however, that if you look at the unofficial data from the 1982-83 recession (not an apples-to-apples comparison) it indicates that there were "much larger levels and increases" in discouraged workers in that recession than in this one. So, at least we've got that going for us. As you may remember, unemployment benefits were extended earlier this year as part of the $787 billion stimulus bill. We wondered if this would disincentivize the jobless from looking for work because the unemployment checks keep rolling in.

But Katz says just the opposite is true. "The increase in the length of unemployment benefits actually leads more people to continue to call themselves unemployed [as opposed to "discouraged"] and to stay connected to the labor force and searching for jobs," Katz writes. The unemployment benefit "extensions seem to be succeeding in keeping the unemployed attached to the labor force and not dropping out and going onto, say, disability programs."

Even if the recession ends in this quarter -- meaning positive growth in GDP -- unemployment is likely to continue to climb to at least 10 percent, economists and the White House say. Unemployment has continued to rise for several months after six of the past seven recessions. That's just what it does as a lagging indicator. What we'll be watching for, however, is whether the gap between the officially and unofficially unemployed continues to grow. If it does, this recovery will take even longer than people think.

Cause for caution on US earnings
The US second-quarter earning season is now ending, apparently on a good note as nearly three quarters of US companies have beaten consensus expectations. But a closer look at these earnings shows there is cause to be more cautious about the health of corporate America than the headline numbers would suggest. The cloud of euphoria that followed recent results had more to do with extraordinarily low expectations, than to any meaningful and lasting improvement in prospects, which still require a rapid recovery in economic activity. This suggests the recent equity rally off the back of these results is overdone.

Every quarter, US companies publish their results under the defined US GAAP accounting rules. These results are labelled "reported earnings". However, the most commonly looked at form of earnings are adjusted "operating earnings" on which companies prefer to focus as they consider these better capture the underlying trend in activity. Adjusted operating earnings exclude non-recurring expenses such as restructuring charges, asset sales gains, major litigation charges, goodwill right downs and other write-offs. While reported earnings are based on strict accounting rules, adjusted operating earnings are at the discretion of companies because there is no defined set of exclusions. Neither measure is perfect but with adjusted operating earnings, exclusions are currently so large that information about the true state of companies (and therefore the market as a whole) is being excluded.

These exclusions have reached the level where the gap between adjusted operating earnings and reported earnings is so wide that they deliver different messages on the state of US corporates. There is plenty of evidence to show that the exclusions in adjusted operating earnings are not one-off or non-recurring items. Often they contain useful information pointing to weaker cash flows ahead. Messrs Doyle, Lundholm, Soliman, in their "Predictive value of expenses excluded from pro forma earnings" 2003 study found that the three-year return for companies in the top decile of "other exclusions" is 23 per cent lower than for those in the bottom decile for exclusions. One dollar of exclusions in a quarter predicts $4.17 less of cash from operations over the next three years.

Today reported earnings per share for the S&P 500 companies gathered by Standard & Poor’s is $7.2 per share, down 91 per cent from the 2007 peak. On an adjusted operating basis, earnings are $61.2, down 34 per cent from the 2007 peak. This $54 gap is a record. How has this come about? Much of the difference between adjusted operating earnings and reported earnings is caused by massive write-downs in the financial sector. However, outside the financial sectors write-offs are also at record highs as corporates are eager to toss out impaired assets during periods of stress. Furthermore, when looking at adjusted operating earnings, it seems that most US corporates managed to beat their analyst estimates thanks to production and job cuts.

Indeed, sales figures for the companies that make up the S&P 500 are down 10 per cent year-on-year and net income margins are closest to their lowest levels on record. While financials remain by far the largest contributor to these declines, most sectors have contributed, with non financials’ sales and net income margins continuing to decline. Margins and most other profitability ratios outside the financial sector still have room to fall before they breach the lows of the past two recessions. US gross domestic corporate profits were 6.1 per cent of GDP in the first quarter of 2009. Previous recessions saw lows of 5.5 per cent in 2001 and 5.3 per cent in the early 1980s.

There is no doubt that strong earnings numbers several years ago reflected extraordinarily high, debt-fuelled margins that are difficult to imagine again, particularly in a deleveraging and deflating economy. Investors should not expect a rebound in earnings or profitability and certainly not to previous elevated levels. Why? Because earnings growth must entail some combination of increased profit margins, rising turnover or greater leverage. Increased leverage is currently unacceptable to managements and investors alike. Wider profit margins and higher turnover may be achievable in the short term, but are much less attainable in a deleveraging cycle.

Those assessing the health of corporate America seem to be assuming a substantial, and above normal, recovery in reported earnings, alongside a return to above-trend GDP growth over the next 12 months. They are in danger of looking at the prospects for economic recovery, revising earnings expectations higher, but without considering how this might happen. In the meantime, the elephantine gap between adjusted operating earnings and reported earnings sits quietly in the room.

RBS uber-bear issues fresh alert on global stock markets
Three-month slide could hit record lows, Royal Bank of Scotland chief credit strategist Bob Janjuah predicts. Britain's Uber-bear is growling again. After predicting a torrid "relief rally" over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears. "We are now in the middle of a parabolic spike up," he said in his latest confidential note to clients.
"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets." The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice. He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.

Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a "very nasty period is soon to be upon us" as – indeed it was. Lehman Brothers and AIG imploded weeks later. This time he expects the S&P 500 index of US equities to reach the "mid 500s", almost halving from current levels near 1000. Such a fall would take London's FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1250. Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September.

While media headlines have played up the short-term bounce of corporate earnings, Mr Janjuah said this is a statistical illusion. Profits were in reality down 20pc in the second quarter from the year before. They cannot rise much as the West slowly purges debt and adjusts to record over-capacity. "Investors are again being sucked back into the game where 'markets make opinions', where 'excess liquidity' is the driving investment rationale. "The last two Augusts proved to be pivotal turning points: August 2007 being the proverbial 'head-fake' when everyone wanted to believe that policy-makers had seen off the credit disaster at the pass, and August 2008 being the calm before the utter collapse of Sept/Oct/Nov… 3rd time lucky anyone?"

The elephant in the room is the spiralling public debt as private losses are shifted on to the taxpayer, especially in Britain and America. "Ask yourself this: who bails out Government after they have bailed out everyone?" Mr Janjuah said governments might put off the day of reckoning into the middle of next year if they resort to another shot of stimulus, but that would store yet further problems. "If what I fear plays out then I will have to concede that the lunatics who ran the asylum pretty much into the ground last year are back in control."

Over at Morgan Stanley, equity guru Teun Draaisma thinks we are through the worst. "We were on course for a Great Depression in February, but Armageddon was avoided. Governments did not repeat the policy errors of the 1930s." "We have seen the lows of this crisis. This is a genuine rebound rally, and it has been short by historical standards so far," he said. Mr Draaisma, who called the top of the bull market almost to the day in mid-2007, has crunched the worldwide data on 19 major stock market crashes over the last century.

They show that the typical rebound rally (as opposed to bear trap rallies, when markets later plunge to new lows) lasts 17 months and stocks rise 71pc. The 1993 rally in the US was 170pc over 13 months. Finland's rally in 1994 was 295pc. Hong Kong rallied 159pc in 2000. This rebound is only five months old. The key indexes have risen 49pc in the US and 42pc in Europe. Mr Draaisma advises clients to stay in the stocks for now, but stick to telecom companies, utilities, and oil.

Yet he too expects a nasty correction once this rally falters. The usual trigger at this stage of the cycle is when central bankers start to make hawkish noises, typically a couple of months before the first turn of the screw (normally a rate rise, but in this case an end to "quantitative easing". "As long as policy-makers are talking about how fragile the recovery is, equities are unlikely to go down much." This moment can be hard to judge. There has already been rumbling from some governors at the US Federal Reserve and from the European Central Bank's Jean-Claude Trichet. Markets are pricing in rates rises by early next year.

The pattern after major financial bust-ups is that the rebound rally gives way to another fall of 25pc or so, lasting a year, followed by five years of hard slog as stocks bounce up and down in a trading range, going nowhere. Mr Draaisma suggests taking a close look at the chart of Japan's Nikkei index from 1991 to 1999. Gains were zero. We are in uncharted waters, however. Monetary and fiscal stimulus has been unprecedented. Russell Napier at Hong Kong brokers CLSA says a powerful bull market is already taking shape as the American giant reawakens. Perma-bears will be left behind. He said: "It is dangerous to be in cash." When the finest minds in the business disagree so starkly, the rest of us can only shake our heads in confusion.

If the recession did not get you, the recovery might
Difficult and dangerous times lie ahead. They will test businesses to the limit. I am referring not to the recession – old news from the viewpoint of the City and the media – but to the recovery. For while the downturn has had upsides for many companies, an upturn also has downsides.

This column is a little previous. Most businesses see no signs of a bounce back. "We are bumping along the bottom," says veteran entrepreneur John Timpson, touring his 620 home service stores. But hacks are always in a hurry to be first with the news, or an angle on it. We are like party guests who arrive while the hostess is still doing her hair, eat all the nibbles and duck out just as the dancing starts. The stock market has similar tendencies, having risen about 6 per cent since the start of the year. Economists are calling a tentative recovery. David Kern of the British Chambers of Commerce, for example, expects the UK economy to grow by just over 0.2 per cent in both the third and fourth quarter following a 0.8 per cent decline in the second quarter. Most pundits are forecasting growth of about 1 per cent in 2010, rising to 2 per cent in 2011.

The problems that businesses face in a recovery are generally the opposite of those encountered in recession: coping with plentiful work, finance and optimism rather than the reverse. But in both cases the trick is to adjust the size of the company to prevailing conditions. According to business myth, as a recovery gains pace, a high roller will park his Bentley in your office or works car park. He will hop out, order a knee-jellying quantity of goods or services, then roar off again. He will leave just a whiff of Mephistophelean sulphur hanging in the air.

The danger is that the big order will impose a strain on the resources of the company that will kill it. Even so, Margaret Heffernan, the entrepreneur and writer, says: "If you have a good customer who offers you business you cannot handle I would be inclined to say yes. Figure out a solution afterwards." No one would go into business on their own account, after all, without a penchant for rash decisions. If the solution involves hiring more staff, make sure they have the right values as well as the right skills. Workplace terrorists, with their sore opinions on strategy and the boss’s taste in ties or shoes, easily abseil into a business during pell-mell expansions. Pricing is another issue. As demand grows, there is a land grab for market share in which margins can be trampled underfoot. A customer who doubles his order at half the price per unit is not doing his supplier any conspicuous favour.

Loading up with debt will compound the difficulties of contemporary Fausts. Admittedly, that problem is academic for most small borrowers. Banks are still avoiding them as adeptly as a philanderer dodging aggrieved ex-girlfriends at a wedding. Credit is available once again for larger companies, as illustrated by Tata’s success in securing commercial bank loans and guarantees for Jaguar Land Rover. In time, loans will once again be a commodity that banks pushily market rather than grumpily withhold. That will cue increased activity in takeovers, transactions whose benefits to bankers are manifest in their bonus cheques, but whose advantages to business are more debatable. Mr Timpson, who last year added 187 photo processing stores to his business through acquisition, believes missed opportunities are the main danger in an upturn.

Getting the timing right is the hard part. The recession will cease at different times in different sectors, with harbingers such as property picking up first and laggards such as support services following. Some businesses, for example low-priced brands, may paradoxically slip from boom into bust because broad economic conditions are improving. The darkest hour comes before the dawn. Business collapses are likely to rise even as healthy growth resumes. "As many companies get into financial difficulties coming out of a recession as going into one," says Peter Sargent of R3, a body representing recovery specialists. "Businesses do not have so much wool on their backs. They are down to skin and bone."

Another reason, cited by Mel Egglenton of KPMG, is that banks prefer to close damaged companies when the economy has recovered sufficiently to make asset sales worthwhile. Either that, or it becomes clear that even an upturn cannot revive a tired formula. An example is Athena, the store whose posters of bum-scratching tennis girls adorned the bedsits of male students in the 1980s. Owner Pentos regretfully rung its neck in 1994 when the mid-1990s recovery was well under way.

The UK business stock then took five years to recover from a recession far milder than the one that may have just ended. Business collapses traumatise some owners for life, according to Mr Sargent. It takes time for a new crop of hopefuls to take their place. Fans and critics of business rarely acknowledge this. But new enterprises are battlefield blooms, growing through the bones of the fallen.

Unfinished Business for Wall Street's 'Death Panel'
Wall Street is dead. Long live Wall Street. In the next few weeks the media will begin recounting the great implosion of a year ago. We will watch, read and hear again how an economic "death panel" led by Treasury Secretary Henry Paulson denied aid to flawed firms such as Lehman Brothers Holdings Inc. and Bear Stearns Cos. while companies such as American International Group Inc. and Citigroup Inc. were kept alive through extraordinary means.

Many of the postmortems will take as a given the idea that Wall Street has somehow changed. Many will argue that it's a less risky place today, more regulated and humbled. Firms are bracing for the raft of rules coming from Washington. Investment banks must now behave like doddering commercial banks. A dozen CEOs and thousands of employees have been shown the exits. We will be told, as we have been, that Wall Street as we know it ended in September 2008. Were it true, we might be on onto something like a new financial system that holds risk takers -- not the ordinary Americans who have been battered by decimated housing values, retirement accounts and lost jobs -- accountable for their mistakes. In retrospect, the great upheaval of last fall may not have been severe enough.

Recent evidence suggests not only has Wall Street survived, but it is essentially unchanged. The casino ethos is alive and well in the record value-at-risk numbers at some firms and the hand-wringing at rivals that temporarily short-leashed trading desks and suffered lower profits as a result. Bonuses are rising and banks are hiring again to capture gains in the volatile commodities and other speculation-fueled markets. There is plenty of empirical and statistical evidence, but it only reflects the root of the problem: Wall Street's rising resentment toward critics and its unabashed defense of greed over safety.

Back in the salad days before the financial meltdown, when credit was cheap and profit growth defied gravity, the biggest issue facing Wall Street was the high cost of complying with regulations. The cause was taken up by such champions as the then-head of the New York Stock Exchange, John Thain, Sen. Charles Schumer (D., N.Y.) and the industry itself through its lobbying arm, the Securities Industry and Financial Markets Association. SIFMA, which helped eliminate NYSE's regulation of some firms and brokers, is railing against regulations again. This time, the association is protesting surprise audits proposed by the Securities and Exchange Commission. The SEC has proposed the audits as a way to combat potential Ponzi schemes such as the one run by Bernie Madoff. SIFMA claims the audits could cost some firms up to $282,800.

But it's not just SIFMA. Jamie Dimon, chief executive of J.P. Morgan Chase & Co., has articulated Wall Street's resentment for the aid given by taxpayers and Washington by complaining about the government's heavy-handed approach. Mr. Dimon, who claims his bank never needed the $25 billion it returned to the government in June, seems to have forgotten the government's aid to his firm in the purchase of Bear Stearns Cos. and Washington Mutual Inc. last year, not to mention its aid to the banking industry in the crisis, which certainly would have leveled J.P. Morgan had the government not stepped in and backed Wall Street with the nation's credit.

Mr. Dimon's criticism seems to have emboldened more, shrill voices such as Richard Bove, the bank industry analyst at Rochdale Securities, who apparently slept through the past 18 months based on how he began his Aug. 6 research note. "There is a movement in this country to fine, tax, and regulate success in the financial industry," Mr. Bove wrote. "I do not like it." Arguing bailout cash "was borrowed in the open market and not taken from taxpayer funds" and that "the industry may have been able to handle its problems" had the government not stepped in, Mr. Bove, who speaks for many on Wall Street, seems to believe the bailout didn't carry the baggage of moral hazard that many believe will encourage firms to take risk. In addition, he argues fines, taxes and regulation curtail our financial competitiveness overseas.

Many would argue that fines punish wrongdoers, taxes pay for investor protections and regulation keeps our markets safe and functioning, giving us a competitive advantage -- the reputation for fair and open markets. Mr. Bove's brand of backlash isn't the only signal that Wall Street is trucking along with selective amnesia. The controversial practice of high-frequency trading and the rabid defense of its practitioners is a threat to investors' fragile trust in fair markets. Banks continue to move slowly in recognizing and shedding problem assets -- again hoping the problems will just go away just as the CEOs of Lehman and AIG hoped during the summer of 2008. If it feels like déjà vu all over again, it's because nothing has really changed. The thing about the government-run death panel is not that it put some of these firms out of their misery, it's that it let those carrying the disease live.

Oil May Fall Below $10 in Next Decade, Prechter Says
Crude oil may plunge to less than $10 a barrel in the next decade after surging to a record $147 last year, said Robert Prechter, who achieved fame for cautioning on Oct. 5, 1987, that stocks would crash. "I expect crude oil prices to fall below $10 a barrel sometime over the next decade," Prechter, founder of Elliott Wave International Inc., said in an e-mail yesterday. "It took many years for it to achieve $147.50, and it will take a long while for the full retreat to occur."

Oil should fall to between $4 and $10 a barrel based on a technical analysis called Elliott Wave principle, Prechter said in the Elliott Wave Theorist report last month. The forecast rests on a "supercycle" theory, which through a series of five waves from last century suggests a decline from last year’s peak.

Crude oil in New York reached a record in July before tumbling to $33.20 on Jan. 15 on expectations the global recession will sap demand for fuels. Oil has since more than doubled to $70.70 a barrel in New York. Brent oil rose to an all-time high of $147.50 on July 11, 2008. "The Elliott-Wave picture pretty much assures us that there will be no additional waves of advance to extend the ‘peak oil’ mania," Prechter said in the report. "On the contrary, if five waves are complete from the early 1990s, oil should fall to between $4 and $10 a barrel, which, needless to say, supports our deflationary outlook."

Commodities may have peaked last year and the next major top may be in the late 2030s, Prechter said in the report, citing wave and cycle analyst Harry Dent, who showed a 29-year cycle in commodities, with past peaks in 1920, 1951, 1980 and 2008. Two weeks after Prechter warned in 1987 that stocks would crash, the Dow Jones Industrial Average plunged 23 percent. He advised betting against U.S. equities three months before the market peaked in October 2007. In February 2009, he recommended ending that bet in anticipation of a "sharp and scary rebound." Technical analysis involves making predictions based on price and volume history.

The Elliott Wave principle is named after Ralph Nelson Elliott, an accountant who developed the concept in the 1930s, proposing that market prices unfold in specific patterns, which practitioners today call Elliott waves. Last week, a Chatham House research fellow forecast that crude oil may reach $200 a barrel in the next five years as the global economy recovers from the recession and demand for the fuel increases. Crude supply will be tight when demand rebounds because national and international companies haven’t spent enough on exploration and development, Professor Paul Stevens of the London-based research group said in an e-mailed statement.

Bond yields suppressed by quantitative easing
Long-term UK government bond yields appear to have been suppressed by about 40 to 100 basis points by the Bank of England as a result of its unorthodox monetary policies, an International Monetary Fund study has calculated. But the policies had left the Bank holding a significant chunk of the total UK government bond market, and meant the scale of this unorthodox intervention was larger than in any other western country relative to the size of its economy, the IMF added. The analysis warned it was still unclear whether the Bank's unusual policies were helping to boost the economy - even though such measures were unexpectedly extended last week, with the news of another £50bn in gilts purchases.

"It remains too early to tell whether [this] will be enough to ultimately generate the desired increase in aggregate demand," the paper by André Meier, a senior IMF economist, noted. The IMF paper will be closely read by policymakers and investors as it is one of the first pieces of independent analysis, outside the private sector, of the "quantitative easing" programmes launched by western central banks. These policies were adopted on a large scale in the wake of the credit crisis when it became clear that western central banks were running out of traditional options to loosen monetary policy, having already slashed interest rates. As a result, they started purchasing assets, such as government bonds, hoping this would prevent deflation.

The IMF calculated that between September 2008 and the end of June 2009, the US Federal Reserve revealed the biggest asset purchase scheme, pledging to acquire assets worth up to $2,100bn (£1,274bn), or 14.7 per cent of gross domestic product. The UK pledged asset purchases worth 8.6 per cent of GDP. However, in terms of actualpurchases, the Bank was most active: in the nine months to July this year, it bought assets worth 7 per cent of UK GDP, compared with 6 per cent of GDP in the US and zero in the eurozone.

Since 97 per cent of the UK purchases were government bonds, the policy left the Bank holding about 15 per cent of the gilts market, and half the outstanding issuance (excluding the recent scheme extension). Analysts said this big bond intervention was a reason why the UK had managed to keep 10-year gilt yields below 4 per cent in the past three months, even as the UK debt and issuance spiralled. "The Bank of England [has been] monetising the government debt, despite all its protestations to the contrary," said Bob Giffords, a banking consultant.

Six Lobbyists Per Lawmaker Work to Shape Health-Care Overhaul
If there is any doubt that President Barack Obama’s plan to overhaul U.S. health care is the hottest topic in Congress, just ask the 3,300 lobbyists who have lined up to work on the issue. That’s six lobbyists for each of the 535 members of the House and Senate, according to Senate records, and three times the number of people registered to lobby on defense. More than 1,500 organizations have health-care lobbyists, and about three more are signing up each day. Every one of the 10 biggest lobbying firms by revenue is involved in an effort that could affect 17 percent of the U.S. economy.

These groups spent $263.4 million on lobbying during the first six months of 2009, according to the Center for Responsive Politics, a Washington-based research group, more than any other industry. They spent $241.4 million during the same period of 2008. Drugmakers alone spent $134.5 million, 64 percent more than the next biggest-spenders, oil and gas companies. "Whenever you have a big piece of legislation like this, it’s like ringing the dinner bell for K Street," said Bill Allison, a senior fellow at the Sunlight Foundation, a Washington-based watchdog group, referring to the street in the capital where many lobbying firms have offices.

Health-insurer and managed-care stocks have gained this year, led by WellCare Health Plans Inc., based in Tampa, Florida; Cigna Corp., based in Philadelphia; and Coventry Health Care Inc., a Bethesda, Maryland, company. The three paced a 13 percent increase in the Standard & Poor’s Supercomposite Managed Health Care Index since Jan. 1. Drugmaker shares have stagnated. Health-care lobbyists said their efforts are the biggest since the successful 1986 effort to overhaul the tax code. The result is a debate involving thousands of disparate voices, forcing Congress to pick winners and losers.

"There’s a lot of money at stake and there are a lot of special interests who don’t want their ox gored," Allison said. The lobbyists are on all sides of the issue. Pharmaceutical Research and Manufacturers of America, the Washington-based trade group for drug companies such as Thousand Oaks, California-based Amgen Inc. and New York-based Pfizer Inc., has embraced a health-care overhaul.

Lobbying by Amgen, the world’s largest biotechnology company, is intended to "effectively shape health-care policy," said Kelley Davenport, a spokeswoman. Pfizer, the world’s largest drugmaker, is "dedicated to insuring that our voice is heard," said spokesman Ray Kerins. The Washington-based U.S. Chamber of Commerce, the nation’s largest business lobby, is opposing efforts to offer government-run health insurance to compete with private companies. The chamber spent $26 million in the first six months of 2009 to lobby, more than any other group.

For lobbyists, the goal is to ensure that whatever measure eventually becomes law doesn’t cripple the industry they represent. "They assume health-care reform is going to happen and they want to be protected," said John Jonas, a partner with the lobbying firm of Patton Boggs LLP in Washington. Patton Boggs, the top lobbying firm in terms of revenue, has three dozen clients in the health-care debate, including New York-based Bristol-Myers Squibb Co., and Bentonville, Arkansas-based Wal-Mart Stores Inc., more than any other lobbying firm.

Brian Henry, a spokesman for Bristol-Myers, maker of the world’s no.2 best-selling drug Plavix, said the company wants to ensure any legislation preserves incentives for innovation. "We believe the health-care system needs to be reformed and we’ve specifically supported an employer mandate and cost- containment measures," said Greg Rossiter, a spokesman for Walmart, the largest U.S. employer. The lobbyists fill the appointment books of lawmakers, and line up at House and Senate office buildings. The staff of Senate Finance Committee Chairman Max Baucus, a Montana Democrat, rotates weekly meetings among the various groups in the health-care debate, providers one week, purchasers a second, consumers a third. "We hear from lobbyists all the time," said Representative Frank Pallone, a New Jersey Democrat who chairs the House Energy and Commerce health subcommittee.

The blitz by lobbyists carries a risk for the public, said Larry McNeely, a health-care advocate with the Boston-based U.S. Public Interest Research Group. "The sheer quantity of money that’s sloshed around Washington is drowning out the voices of citizens and the groups that speak up for them," said McNeely, whose group backs a public health plan, which Obama and many Democrats consider a centerpiece of any proposal and most Republicans oppose. The lobbying push also risks delaying legislation, said Rogan Kersh, associate dean at New York University’s Wagner School of Public Service.
"That amount of activity is inevitably going to slow down the process," Kersh said.

The quest for influence isn’t limited to lobbying. Health- care advocates have spent $53 million on commercials, according to Arlington, Virginia-based TNS Media Intelligence/Campaign Media Analysis, which tracks advertising spending. The number of lobbyists could grow once Congress returns next month and resumes efforts to enact legislation by the end of the year. "They have just decided this is serious enough and more fully understand the impact it’s going to have," Jonas said.

Tarp Surplus May Go To Stop Building Foreclosures
First it was the banks and automakers that got a helping hand from Uncle Sam -- and soon some New York City apartment complexes could get one, too. A bill winding its way through Congress proposes to prop up deteriorating apartment complexes by injecting $2 billion from the Troubled Asset Relief Program into an effort to stabilize multifamily properties in default or foreclosure. The bill, which is called the TARP for Main Street Act and was sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.) and Rep. Nydia Velazquez (D-Brooklyn and Manhattan), would use TARP funds that have been returned by banks and plow it into programs that, according to the bill, would create "sustainable financing" for the complexes as well as provide funding for property rehabilitation.

The House is considering the measure, which focuses on apartment buildings with units that are either rent stabilized or receive government subsidies. Many developers during the housing boom bought rent-regulated apartments by borrowing against the properties themselves and betting they could make hefty returns by converting them into market-rate buildings. However, thanks to the recession and the collapse of the real estate market, many developers are now struggling to make mortgage payments, let alone finance repairs and upkeep of the properties they own.

"Just about everyone who purchased an asset in 2006 and 2007 is under water, especially the rent-stabilized complexes bought in upper Manhattan, the Bronx and Brooklyn," said Dan Fasulo, managing director of Real Capital Analytics, a real estate research and consulting firm. There already have been casualties. Larry Gluck of Stellar Management and partner Rockpoint Group last October defaulted on their loan for Riverton Apartments in Harlem. More recently, developer Kent Swig lost control of Sheffield57 to hedge fund Fortress Investment Group after he defaulted on loans used to convert the former rental building into a condominium.

According to data released last month from Real Capital Analytics, 120 properties in Manhattan, including 84 apartment buildings, were considered "troubled." Dina Levy of the Urban Homesteading Assistance Board said 70,000 New York City apartments, or about 6 percent of the city's roughly 1.2 million rent-regulated units, are at risk of deterioration in part because of the market crunch. Despite those numbers, Gluck, who in addition to Riverton also bought 16 Mitchell-Lama buildings , told The Post that the situation facing developers isn't as dire as some would believe.

Indeed, Gluck said many loans don't need a bailout because large local lenders are working with developers to prevent complexes from defaulting. Nevertheless, Gluck, who stressed he maintains his properties, said the bill sounded like a good idea, and that real estate developers might as well collect from the government since everyone else was already getting handouts. "As long as there is a long list of people out there with their caps in hand, why should everyone else be getting a free run?" Gluck said. "If it staves off some bank foreclosures, it is good for real estate and good for tenants."

Buffett's Berkshire: We goofed on derivative risks
Warren Buffett's Berkshire Hathaway Inc underestimated the risks of falling stock prices to its billions of dollars of derivatives bets, yet still believes it is valuing the contracts fairly. Berkshire revealed its error in a June 26 letter to the U.S. Securities and Exchange Commission, one of several pieces of correspondence with the regulator about the company's annual report, and made public on Thursday.

It also agreed to SEC demands for more explanation on $1.8 billion of writedowns on stock investments, and $2.7 billion of auction-rate and other municipal debt holdings. On June 29, the SEC said it completed its review without further comment. The correspondence shows Omaha, Nebraska-based Berkshire, which has close to 80 businesses and ended June with more than $136 billion of stocks, bonds and cash, is struggling to comply with SEC requirements to disclose enough about its finances.

This issue had surfaced in June 2008, when the regulator demanded "a more robust disclosure" of how the insurance and investment company values its derivatives. Buffett did provide some additional disclosure, in what he called "excruciating detail," in his annual shareholder letter in February. The derivatives contracts are tied to four equity indexes in the United States, Europe and Japan, and are a big reason Berkshire's earnings fell for six straight quarters. That string ended in the April-to-June period as stocks rebounded.

In the June 26 letter, Berkshire's Chief Financial Officer Marc Hamburg told the SEC that last year's 30 percent to 45 percent declines in the equity indexes "are in excess of our volatility inputs." He nevertheless said Berkshire's expectations for stock market volatility are "reasonable" given the long-term nature of the contracts, which expire between 2018 and 2028. Berkshire ended June with $8.23 billion of paper losses and $37.48 billion of potential liabilities on the contracts.

Buffett expects the contracts to be profitable and can invest upfront premiums as he wishes. This is one reason the world's second-richest person believes the contracts are unlike derivatives that are "financial weapons of mass destruction." The $1.8 billion of "other-than-temporary impair losses" in 2008 related mainly to 12 equity securities that "generally" lost 40 percent to 90 percent of what Berkshire had paid for them, Hamburg wrote on May 22. Berkshire did not write down six other securities that fell 20 percent to 40 percent, he said.

Hamburg also wrote that Berkshire had reduced its stake in auction-rate and similar municipal debt to $2.7 billion at year end from $6.5 billion six months earlier, but that the credit crisis slowed the runoff in the fourth quarter. The auction-rate market seized up in February 2008 and has not recovered. Berkshire has said it does not plan to sell its auction-rate holdings at below face value and can hold them until they are auctioned off or redeemed. In afternoon trading, Berkshire Class A shares rose $1,750, or 1.7 percent, to $102,750 on the New York Stock Exchange.

Green Party wants debate on Irish "bad bank"
Members of the Green Party, Ireland's junior coalition partner, are calling for an internal debate on plans to create a "bad bank" in a potential hurdle for government efforts to clean up the country's financial system. Finance Minister Brian Lenihan will recall parliament on September 16 to debate legislation creating the National Asset Management Agency (NAMA) but some Green Party members want to thrash out the law's implications before it gives its support to the bill.

Ireland is planning to take property loans with a nominal value of 90 billion euros off its banks to cleanse their balance sheets and restore the flow of credit to a recession-wracked economy. "We need to explicitly understand what the party is committing to in committing to NAMA," Tony McDermott, a party member and former Green councillor, told state broadcaster RTE on Thursday. "What the Green Party grassroots are looking for is a debate before the legislation is supported or not supported by our parliamentary party."

The Greens' six members of parliament hold the balance of power in Ireland's lower chamber after defections from the main government party, Fianna Fail, over harsh spending cuts in the face of recession. But some grassroots members are unhappy about the party's continued role in government after it suffered near annihilation in local and European elections in June amid widespread voter anger about the state of the former "Celtic Tiger" economy.

The Greens' executive committee will call a special convention on NAMA if it receives requests from five constituency groups. A spokeswoman for the party said it had received three valid requests so far. There were queries about a fourth. If a party convention is held and two thirds of members vote against NAMA, parliamentary members would be blocked from supporting the legislation, throwing Lenihan's plans and the future of the government into disarray. The government, whose technical majority was wiped out following the defection of two parliamentary members earlier this month, faces a rocky autumn.

The public, already forced to swallow tax hikes and spending cuts, is unhappy about having to fork out tens of billions of euros to pay for the "bad bank" scheme. Lenihan will reveal on September 16 what sort of writedown he will demand off the banks for taking on their loans. A view that the lenders and property developers are getting off lightly will make it more difficult for the government to push through another austerity budget in December. The Greens, who have already warned that another round of fiscal pain could make their government partnership difficult, will hold a party convention later this year on their programme for government.

Stephen Hawking both British and not dead
In perhaps the most amusing effort to discredit US President Barack Obama's plan for nationalized health care - if not the most ridiculous - US financial newspaper Investor's Business Daily has said that if Stephen Hawking were British, he would be dead. "The controlling of medical costs in countries such as Britain through rationing, and the health consequences thereof, are legendary," read a recent editorial from the paper. "The stories of people dying on a waiting list or being denied altogether read like a horror script...

"People such as scientist Stephen Hawking wouldn't have a chance in the UK, where the National Health Service would say the life of this brilliant man, because of his physical handicaps, is essentially worthless." The paper has since been notified that Hawking is both British and still among the living. And it has edited the editorial, acknowledging that the original version incorrectly represented the whereabouts of perhaps the world's most famous scientific mind. But it has not acknowledged that its mention of Hawking misrepresented the NHS as well.

"I wouldn’t be here today if it were not for the NHS," Hawking told The Guardian. "I have received a large amount of high-quality treatment without which I would not have survived." The best you can say about Investor's Business Daily is that unlike US radio talk host Rush Limbaugh, it has not compared Obama's health care logo to a swastika. ®


Annonaceae said...

Dr J said @ August 14, 2009 7:39 AM

"Awhile back I met an engineer who was commuting to Denver for work. She commented on how people in her work environment there, when someone they didn't know was referred to, would ask: are they white? are they Christian? what church do they attend? Overt sorting of us and them. How deeply riven is American society by this dangerous sorting? I fear we may be surprised if and when social order breaks down and vital resources become scarce."

Have never encountered anything remotely like this in Canadian workplaces or society. Must be a much more secular country. Unfortunately, we now have our first prime minister with plastic hair, so it must be on it's way.


el gallinazo said...


Thanks, as always, for the latest predictive analysis. I am not intending to gamble more than I feel I can afford to lose. If this money weren't shorting the market, it would be sitting in 13 week T-bills earning a small fraction of a percent interest. I do not need this money in the foreseeable future, so I would have no pressure to sell it for a private, personal reason.

I really can't see the upside past 1100, and I would rather get in early even if it meant leaving a little on the table. I agree that the real downside risks involve the ETF company or the broker foundering, and as mentioned earlier, I will try to keep my ear to the ground. If Lloyd Blankfein's wife declares nation wide martial law based on a Hampton charity show meltdown, I will bail promptly. My corresponding bank to is Scotia, and I think they will be in the last tranche to go belly up.

How quickly to you see a complete freeze up of markets after the real downturn starts? I figure short ETF's will be very liquid until a piston arm goes through the head, as people will be dying to buy them. As usual, I welcome and ruminate on your opinions.

el gallinazo said...


I lived in the Denver/Boulder CO area for several years in the early to mid 90's in my science teacher days. I found what you described very prevalent. It is no accident that Colorado Springs, 50 odd miles south of Denver is the throbbing heart of the Christian, fascist movement.

bluebird said...

Stoneleigh said (from yesterday): "If the market seizes up and brokerages go under, being right on its own may not be enough. Whatever you decide to do, be careful. This risks will be far higher than anything we have experienced in our lifetimes. It is far safer to sit on the sidelines in cash, and IMO this is what most people should be doing."

So brokerages will go under as well as lots more banks will fail. What you are saying, is that we should have any available money, in cash, either safely hidden at home, or in short-term Treasury Bills?

What is the prognosis for electronic banking? Which do you see occurring first...the stoppage of auto-deposits/auto-payments or the possibility of a 'bank holiday' where everything stops?

Should social security auto-deposits be changed such that a physical check is received?


snuffy said...

Some experiences of mine with a church in that area [the colorado/mid-west]are the reason I swore never to set for in a church again...You are correct.The heartland IS the Heartland,of the church...and the description by Dr J on the money...

El G,continuing from yesterday...Should my situation become totally bad...many folks have lived in small boats for long peroids of time...Yes,I know its like living in a small wet closet...but the Columbia river system is is the pacific ocean.....

Our gentle hosts words this day, paint a increasingly grim picture.Greenpas idea of referring to us as goats has merits....My wife thinks of us as squirrels...busy putting away nuts for the coming friend Mark thinks I am a ant...and refers to himself as "grasshopper",however he has a very nice Ranger sailboat...and when pressed he says "Litttttle sailboat...BIG ocean"should the need arise to fade from veiw..

Every one in our little group here needs to start thinking of what will be their reaction to the likely events this fall.Make use of the fall seed sales...if you have none,fruit tress are always a good idea[I once gave a orchard for a wedding gift]...start hitting the Garage sails for any needed tools ect...Time for the last minute shopping/stocking of perishables like oil with a limited shelf life...

Think a very very long,bad winter that never ends....


Anonymous said...

As to putting in short ETF's, just keep in mind at all times that Sacks of Gold still has HFT servers IN-BETWEEN you and any trades you execute.

They can see what's going on at a micro-second time intervals. It doesn't get much better than that for front running.

At the very least, your trades, up or down, are providing them with real time data points as to the mental condition of the DSPA (Disunited Sheeple Prole's of Ah-merica).

The algorithms for when they release the trap door on the Gallows Economy and break it's neck are probably already programed in.

The math Wizards locked in the cellar at Gollum were given their final instructions awhile back on milking the last nickle from this Ponzi Apocalypticpalooza.

Math Wizards will no longer be needed after this final mega-scam and will be disposed of like tomb builders buried with the Edifice they helped to create.


Anonymous said...

I live in northern Minnesota and fundamentalist Christianity is everywhere here. My daughter works for the Federal government in Washington and states strong right wing Christian thinking is common. States she keeps her thoughts to herself as having the wrong religious beliefs could have a dramatic impact on career issues. As I read the numbers of Americans believing in the end days, hopeful of Middle East war, purchasing Christian video games, etc, I find the fanaticism scary and, most certainly, comparable to anything one finds in terrorist organizations. I watched a couple of the video games. Very interesting experience!!

Stoneleigh said...

Don't get too hung up on this fall. While the rally could be ending now, as I said yesterday, I think it is more likely to make a new recovery high after a scare. The cascade could easily begin this fall, but it could also happen in the new year. Fall seems quite a bit more likely to me at this point, but I wouldn't stake my life on it yet. I do firmly feel that we're very much closer to the end of the rally than to the beginning. This is a period of uncertainty (over the exact timing, not where we're going), hence be careful. As El G says, if you're going to gamble, only do it with what you can afford to lose.

Anonymous said...

The cascade could just as easily begin now, especially given the parabolic run up subsequent to March.

jal said...

Re.: News:

Monday, July 13, 2009
Canadian housing market in ‘recovery mode’: Re/Max
June housing resales (annual increase)
Vancouver 4,259 (75.6%)
Calgary 3,047 (8%)
Edmonton 2,552 (15.8%)
Regina 387 (24%)
Toronto 10,955 (27%)
Ottawa 1,895 (12.5%)
Halifax 805 (5.2%)
Newfoundland and Labrador 354 (0.8%)

Sources: Re/Max, local real estate boards

Friday, August 07, 2009
Home sales rocket to record levels

Toronto's housing market has followed a record-breaking June with its best July ever and real estate experts say sellers will have the advantage with the current limited inventory and prices edging higher.

It was the best July for sales since the board started tracking the numbers in the mid-1960s. And the average sale price was $395,414, up 6% from a year earlier.
Who can analyze what is going on in Canada?

Anonymous said...

It was the best July for sales since the board started tracking the numbers in the mid-1960s. And the average sale price was $395,414, up 6% from a year earlier.
Who can analyze what is going on in Canada?


Don't spoil the fun by analyzing it. Sell your f^#@%$* house if you got one!

Nestorian said...

Regarding Robert Prechter and his predictions:

There were a number of critical comments on his approach and track-record over the years on yesterday's (Aug. 13) DrumBeat thread over at The Oil Drum. I was wondering whether our esteemed hosts or anyone else would care to comment on these critiques? The essential elements in these critiques were as follows:

1) Prechter doesn't understand energy (a limitation Stoneleigh has already acknowledged)

2) Wave cycle technical analysis has no reference to factors actually driving the market, and you make occasional accurate predictions using it in the same way that a stopped clock tells the time correctly twice a day.

Stoneleigh said...

Anon @10:50,

The cascade could just as easily begin now, especially given the parabolic run up subsequent to March.

Even if the rally were ending now, a resumption of the downtrend wouldn't typically begin with a cascade. Cascades generally happen both in the middle of a strong move, and at the end (typically a panic-driven spike low). Don't bet on a cascade too soon.

Stoneleigh said...

South Florida,

Wave cycle technical analysis has no reference to factors actually driving the market, and you make occasional accurate predictions using it in the same way that a stopped clock tells the time correctly twice a day.

That the opinion of someone who is mistaken about what actually drives markets ;)

Greenpa said...

"Who can analyze what is going on in Canada?

It's all the Wall Street wonks; taking their ill gotten gains north, to escape global warming...

ca said...

Stoneleigh --

When you say a "new recovery high" do you mean above 1012 or above the low to which it is headed in the next few days or weeks (but not reaching 1012).

jal said...

Re.: Canada
Come on guys! What is happening is not a joke. It requires serious consideration.
Capitalism at its best!
Why would anyone call a capitalist bad names when they are doing what they are suppose to do? (In my opinion, banksters are not capitalists.)
Karl D. wants his cake and eat it too.

… lax (or absent) regulation over the last ten years in the banking sector, where "fog a mirror" loans were available for virtually any purpose.

… The FHA/Ginnie program has turned into a toxic waste dump, with the shysters from the Subprime world having moved over there.

… The Bezzle is removed from the system so its drag disappears, and organic growth can resume unencumbered by having to cover the bad bets of the scammers and frauds!

… They get money for zero from The Fed (they're a bank holding company) and want to lend it to me at 17%.
I’m I the only one who sees the difference between a capitalist and a bankster?

Anonymous said...

Can someone help me out on this? It may be econ 101 but meh.

How are bond market rates for gilts determined initially? I understand that you can tell how they have been received by the bids to cover, but are the initial rates set by gvt, or by a gut feeling that that's what the markets will go for?

A (possibly) related question - when the BoE or ECB says 'we're keeping interest rates at x%' does this translate into anything in the bond market, or is it vice versa?


Anonymous said...


Good points regarding cascades. Nevertheless, I think it's all downhill from here. Yesterday was HOY.

Anonymous said...

Carpe Diem (cd) @ 11:50 (yesterday) said:

"Indeed it would be a sad world without the 'pure' ones: Buddha, Christ, Lao Tse, Mother Teresa, the Dalai Lama, Martin Luther King, Thoreau, A.Sadat, Gandhi...just to mention a minuscule few and the countless ones who have come and gone whose names we do not know."

I'm grateful for their legacy and am continuously inspired by their words and deeds to follow the path so carefully delineated by so many before us. Yes, cd, we are not alone!


Ilargi said...

" 1) Prechter doesn't understand energy (a limitation Stoneleigh has already acknowledged)"

Does he have to in order to say something about the future price of oil?

I think lots of TOD people insist that price will depend on oil availability. We say it depends on money and credit availability

Prechter, makes a very wide and flexible prediction, i.e. "the next decade". I doubt that Prechter is willing to acknowledge the broader political, societal, implications of his own financial predictions. But that does not make that prediction wrong, even though in my view Prechter had better stay away from that minefield.

" 2) Wave cycle technical analysis has no reference to factors actually driving the market, and you make occasional accurate predictions using it in the same way that a stopped clock tells the time correctly twice a day."

The commenter, Ron Patterson, himself has no "reference to factors actually driving the market", nor to wave theory and its background.

To wit: it's funny how he writes the following and doesn't seem to understand that he describes fractals, a crucial part of the theory.

"Elliot wave charters look at waves in the chart. Not just one wave but they superimpose several waves upon each other. That is they superimpose long term waves over medium term waves and short term waves and predict that when all these waves hit a top at the same time then they will all turn down at the same time, signaling a huge drop in prices. Prechter uses five different waves as most Elliot Wave theorists do."

I'm not an Elliott Wave afficionado, and have never really read Prechter. I think the waves are not prepared for the sort of downfall we're moving into. Their charts are not big enough.

Mr Patterson makes one good point, albeit without realizing how right he is:

"In my opinion anyone who predicts crude oil to drop to $10 a barrel, based on divining the charts, is absolutely nuts. That is the most absurd prediction I have ever heard. Oil cannot be produced and shipped at that rate."

Indeed, it can't.

But that doesn't make it "the most absurd prediction". It merely points out a huge predicament.

Rick James said...

Looks like the deflation trade may be beginning. Cracks have been showing in the damn for about two weeks now.

Rick James said...

Ilargi said,

I'm not an Elliott Wave afficionado, and have never really read Prechter. I think the waves are not prepared for the sort of downfall we're moving into. Their charts are not big enough.

This made me laugh out loud.

Anonymous said...

Prechter's calls can be faded for decades. Yes, his timing is that bad.

Ilargi said...

Colonial Bank has now failed, it will be taken over by BB&T.

This is 2009's biggest bank failure. We'll get back to this later. Wonder if the FDIC has time and space for more failures in the Friday dinner schedule.

Will we ever find out what BB&T truly paid? Yeah, right.

Anonymous said...

What's hilarious about the Colonial deal is that BB&T has as much or more toxic junk on its balance sheet. We are truly in the twilight zone.

Jim R said...

If they paid what it's really worth, well heck, I could buy a few banks with what I have in my wallet. And get some change back.

It's a recipe for corruption on a scale unknown in history.

Ilargi said...

Re: Colonial,

It's the biggest failure in 11 months, since Wachovia met its maker (which turned out to be disguised as WellsFargo) in September 2008.

Aaron at ML-Implode notes that it's also probably the biggest loss in warehouse lending lines. Colonial provided warehouse facilities to an estimated 70 mortgage lenders.

It doesn't look like a "normal" FDIC failure, the FBI and HUD have raided some Colonial offices in the past few days and look heavily involved.

Anonymous said...


"That the opinion of someone who is mistaken about what actually drives markets ;)"

As opposed to Prechter, whose been wrong as often as he's been right.

Nice way to sidestep the issue, without addressing the points raised there.

Just a few weeks ago, TAE had one of Prechter's screaming headlines on the front page, saying that the market was in danger of going down. This was right before it popped up to its recent high. But, as usual with Prechter's wrong predictions, that little episode has been forgotten.

I'm glad you understand what actually drives the markets. Forgive me if I'm not impressed by the group think which you amplify here.

Anonymous said...

"In my opinion anyone who predicts crude oil to drop to $10 a barrel, based on divining the charts, is absolutely nuts. That is the most absurd prediction I have ever heard. Oil cannot be produced and shipped at that rate."

Not in today's dollar but there is always tomorrow's dollar ... or dollar equivalent:)


Anonymous said...

Gold in Sacks basic template in bank failures is to engineer consolidation of small banks into bigger ones, all the while using the opportunity to shed bad paper in the smaller banks to the public and cherry pick the pieces for inclusion into the 'rescue mergers" that result.

Since all roads eventually lead to Gold in Sacks, GS can conveniently use the whole bank failure process as a laundering mechanism so that they only have to absorb a hand full of medium large banks that have already done most of the heavy lifting on consolidating at lower levels.

"Why lift something you can drag,
why drag something you can wheel,
why wheel what you can get someone else to wheel?"

Stoneleigh said...

I think the waves are not prepared for the sort of downfall we're moving into. Their charts are not big enough.

Their stock charts go back to the 1600s. Their analysis of social mood goes back to antiquity. Prechter more than any other financial analyst does acknowledge the societal implications of his financial predictions, to the extent that he can based on what he understands. His big picture is pretty comprehensive for a finance-type, but energy is a major blindspot, along with climate change, population and ecological carrying capacity. He could do with exploring real politik to a greater extent as well. I have found his insights very valuable and recommend his work.

Anonymous said...

It was the best July for sales since the board started tracking the numbers in the mid-1960s. And the average sale price was $395,414, up 6% from a year earlier.
Who can analyze what is going on in Canada?


probly jus pisscology. Canajuns ain't affeared a unumploiment cuz dey gots commy dokturs n' sich. you jus wait til the reel wol catches ye up!

Hombre said...

"I think lots of TOD people insist that price will depend on oil availability. We say it depends on money and credit availability"

Agree. At least in this context... if there is little or no money and credit available (re: worldwide economic contraction) there will be less manufacturing and production, less transportation, less construction, less of all those things that do two things:

1 - provide income, (buying power for oil)
2 - use energy (oil)

Therefore even if oil is readily available nobody will be able to buy it at any price.

A pugilist might say it this way... it's a gigantic double whammy where just as oil was about to left hook us, the bankster expose' and fallout slammed us with a right cross. We could be down for the count!

Rick James said...

Stonleigh - You are starting coming around my way. Sometime back I suggested with all the government spending and backstops that market and economy would not start another serious leg down until the beginning of next year to the summer of 2010. This game can keep going as long as the government has access to resources of some kind whether monetization (access to the resources of the people by stealth taxing their wealth) or borrowing. This will continue until the government hits a brick wall in funding. This should happen some time around next year IMO.

Hombre said...

"He could do with exploring real politik to a greater extent as well. I have found his insights very valuable and recommend his work."

I would think so, certainly if they are a persuasive enfluence in one's field and/or especially if we are in disagreement with our first impressions of them. We have to look outside of the box in order to remain outside of the box.

That's my problem with the boxed in sectarian fundamentalists whether they reside in Colorado springs or the Arabian desert. They are afraid and of fixed belief... read dead.

Anonymous said...

Aug 14 (Reuters) - The U.S. healthcare and insurance industries, with vital stakes in President Barack Obama's healthcare debate, have paid lobbyists at least $340 million to safeguard their interests in Washington this year.

Let the beatings continue.

Anonymous said...

Most of the population's relationship with the equity markets is indirect.

Even if it crashes this October, the denial level is so high that no reaction to that collapse will result until Spring at the earliest.

Even the foreclosure and unemployment rates, as bad as they will become, simply will not 'register' in the minds of the middle class until next year, if that. The situation is incomprehensible to most people.

And you're right Rick James, the government's bag of tricks has not hit a wall yet. IMO there is still a good 6 months of delay & diversion left in the system and the MSM will pull out ALL the stops to insure that.

Up the River

Annonaceae said...

"I think the waves are not prepared for the sort of downfall we're moving into. Their charts are not big enough."

"Their stock charts go back to the 1600s. Their analysis of social mood goes back to antiquity."

While I have no experience with financial modeling, I often work with atmospheric and ocean current models. These models are greatly simplified versions of reality, and often make assumptions such as infinite depth, etc. They may be reasonably good for predicting conditions in mid ocean, but in fjords and shallow waters, not something to bet ones life on.

I'd bet we are in shallow waters at the edge of the financial model space covering the past 400 years.


Stoneleigh said...

Rick James,

You are starting coming around my way. Sometime back I suggested with all the government spending and backstops that market and economy would not start another serious leg down until the beginning of next year to the summer of 2010.

You had said you thought the rally could continue for a few more quarters, and I still disagree with that. I think we are closer to the end than to the beginning and still regard this fall as being the most likely timeframe for the next phase of the decline. I wouldn't stake my life on it though, as timing is only probabilistically predictable and corrective patterns can be very complex.

Anonymous said...

"That's my problem with the boxed in sectarian fundamentalists whether they reside in Colorado springs or the Arabian desert. They are afraid and of fixed belief... read dead."

Give me the control of the button for a few minutes and I'd be happy to give them all the rapture they crave.

Nestorian said...


Do you have any particular set of reasons for saying the rally is near its end, or is rather based more on an intuitive feel for the situation based on long experience as an observer? (And I might add that the latter basis would have significant epistemic value in my book.)

Also, how do you respond to the charges of Ron Patterson and the like that Prechter has been wrong more often than right, and that even when right he tends to be badly off in his timing?

Ilargi said...

"Stonleigh - You are starting coming around my way. Sometime back I suggested with all the government spending and backstops that market and economy would not start another serious leg down until the beginning of next year to the summer of 2010. This game can keep going as long as the government has access to resources of some kind whether monetization (access to the resources of the people by stealth taxing their wealth) or borrowing. This will continue until the government hits a brick wall in funding. This should happen some time around next year IMO."

You're just starting to see what you like. Not a good recipe. Stoneleigh is just saying nothing is cast in stone(leigh), and you derive from that what's not there. "It" can't go on as long as the government can do anything, it can only go on till the government is exposed as a non-factor, stimulus, schwimulus.

Foreclosures set records, so does unemployment, underwater loans reach 15%, today sees the largest bank failure since Lehman's demise. I.e. all government policies and measures have been embarrassing failures to date. Another 6 months + of that? Really, would you bet on that? Based on what? You're here to learn, Rick.

Stoneleigh said...

Anon @12:48,

As opposed to Prechter, whose been wrong as often as he's been right.

IMO Prechter is right about his fundamental analysis, but his timing has been off more than once. Timing is probabilistic. By way of analogy, when you are in a canoe, you know Niagara falls is up ahead and you start to hear the sound of white water, you err on the side of caution and head for the riverbank, at least until you have a chance to check things out. Bob Prechter is right about Niagara Falls IMO. Both of us are cautious as a result. It's a question of minimizing the consequences of being wrong.

Nice way to sidestep the issue, without addressing the points raised there.

The issue is that the fundamentals do not drive prices, collective social mood (ie herding behaviour) does. We are watching the ebb and flow of liquidity, which stems from confidence. When confidence is increasing, so is liquidity, and that drives stocks and oil. Once confidence is on the wane again, we will see both stock prices and oil prices decline.

Just a few weeks ago, TAE had one of Prechter's screaming headlines on the front page, saying that the market was in danger of going down. This was right before it popped up to its recent high. But, as usual with Prechter's wrong predictions, that little episode has been forgotten.

Prechter was not making a prediction of an imminent retreat. He was pointing out, in sufficient time for the warning to be worth something, that a major market fall was approaching, and he is right IMO. This is no small correction we are going to see. I is a pull-the-rug-out-from-beneath-everyone's-feet kind of event. He is right to warn people in advance. This is what we try to do as well. Warnings that are timely are generally not considered credible, as they conflict with perceived wisdom. That is a great shame, as it means that many people will wait too long to take action and will lose everything.

To reiterate: we are approaching an event comparable to going over Niagara Falls in a canoe. Most people won't even be wearing life-jackets. Watch this space.

Greenpa said...

Anon 12:48: " Forgive me if I'm not impressed by the group think which you amplify here."

As opposed to the stunning bovine analysis our brilliant "nobody could have seen this coming" "economists" indulge in?

LOL!!! Really. Many thanks for the laugh- I'm still chuckly 5 minutes later.

Rick James said...

Learn AND think Ilargi. I agree that the available information is getting worse. But think about it, what is the catalyst for the stock market surge? Government liquidity at the base of things. Why aren't employers firing more people? A sense that recovery might be around the corner, a feeling based, IMO, on the stock market. When the government stops propping up the market and true sentiment changes then the fireworks begin. Unemployment, stock market crash, the works. That is just my opinion though.

BTW, against the backdrop of all of this information the rate of job loss slows and the stock market still increases, so clearly there is something supporting the system in the face of near catastrophic news. What is that something Ilargi or Stoneleigh?

Rick James said...

Stoneleigh - That is right. Precther reminds me of Peter Schiff to some extent. Good fundamental analysis, but timing not worth a damn.

Greenpa said...

Stoneleigh: "IMO Prechter is right about his fundamental analysis, but his timing has been off more than once. Timing is probabilistic. '

It struck me at once that the complaints about his accuracy are precisely the same as those about the relevance of today's weather in regard to global climate shift.

Yep, we can still get a cold year now and then. Which mostly sets off the deniers, shouting "see! see! proof!" - when of course, it is no such thing.

I do think Elliot Waves are quite interesting- though I'm STILL having trouble digesting the Fibonacci stuff. :-)

Rick James said...

Stoneleigh said,

To reiterate: we are approaching an event comparable to going over Niagara Falls in a canoe. Most people won't even be wearing life-jackets. Watch this space.

Agree, agree. I guess the only thing we disagree on is possible timing. You say probably this fall. Maybe next year. I say probably by the middle of next year, maybe this fall.

Rick James said...

You're just starting to see what you like. Not a good recipe. Stoneleigh is just saying nothing is cast in stone(leigh), and you derive from that what's not there. "It" can't go on as long as the government can do anything, it can only go on till the government is exposed as a non-factor, stimulus, schwimulus.

Just so I am not misquoting you Ilargi, but weren't you suggesting that there is about a 99% chance of it happening this fall? If so, that is very different from the above.

Nassim said...

Here's a map of the global fibre optic network with related incidents of damage, sure a lot of communicatons does take place by satellite but fibre optic cables are what holds the whole system together.


I saw this map some time ago and my first reaction was "why is it that the Somali pirates have not tried to take advantage of it yet?"

el gallinazo said...

A dog (or even a goat) could learn Peter Schiff's analysis in one session of obedience school.

** USD bad - everything else good!

** USD - immediate hyperinflation.


Rick James said...

El G - We could have hyper-inflation off in the future. It just ain't happening right now. Schiff is way early on that one.

Rick James said...

oh and the Dollar will be toast in the next few years too. I agree with I&S completely on these points.

el gallinazo said...

Rick James said...
"El G - We could have hyper-inflation off in the future. It just ain't happening right now. Schiff is way early on that one."

I am forced to think of the tennis pro who came out for a match. The timing of his forehand was only off by a second, but he was able to figure out that the ball was headed in his direction.

Ilargi said...

"I saw this map some time ago and my first reaction was "why is it that the Somali pirates have not tried to take advantage of it yet?""

I told them to take a break for the summer.

Ilargi said...

"You're just starting to see what you like. Not a good recipe. Stoneleigh is just saying nothing is cast in stone(leigh), and you derive from that what's not there. "It" can't go on as long as the government can do anything, it can only go on till the government is exposed as a non-factor, stimulus, schwimulus.

Just so I am not misquoting you Ilargi, but weren't you suggesting that there is about a 99% chance of it happening this fall? If so, that is very different from the above."

Not from my window. You said Stoneleigh came down to your point of view, and that's not only the wrong way to look at it, it's also plain wrong. If you agree you need to learn and think, then do take the time to think. As in more than two minutes before writing yet another comment. Those trees I see from my window took years to grow.

Nassim said...

I told them to take a break for the summer.

Wow, you really have influence :)

Erin Winthrope said...

Re: Timing Market Collapse

We go over Niagra Falls in October 2009.

We go over Niagra Falls in March 2010.

The difference between these two dates only has implications for folks who are crazy enough to gamble in the markets in the short term (that includes me, sadly).

However, for most folks, I imagine this timing difference is totally irrelevant. The message is clear: Get your canoe to the shoreline now, because going over Niagra Falls is going to be painful regardless of whether you do it in October or March.

Rick James said...

Well since we are going to nit pick on semantics I would point out that the position has been that we have a 99% chance of fallout in the fall. I said, meh, maybe sometime around early to mid next year. Stoneleigh says she thinks it will be this fall but she is not staking her life on it (I.e. this sounds different from 99%). I said that she is starting to come down my way (I.e. she is not hard and fast (I.e. 99%) set on fall as the start time and is acknowledging a greater than 1% chance of the fallout beginning next year). Am I missing something here?

Jim R said...

What shoreline? It all seems to be shifting sand right now.

Buy land in Canada maybe? :->

Rick James said...
This comment has been removed by the author.
Rick James said...

Incidentally, this is kind of silly Ilargi, since sunbstantively speaking I agree with what you and Stoneleigh see coming up. We disagree in terms of timing and I perceive a bit of softening on such, and this turns into a snark war. This isn't productive so I humbly suggest we just move on.

Erin Winthrope said...

Re: An Automatic Earth Book?

I'd definitely be interested in buying a book/notebook that compiles all of Ilargi/Stoneleigh's daily postings as well as their contributions to the daily comments section. I'd be willing to pay as much as $75 or so to anyone who is willing to do this. IMO, the book/notebook wouldn't need to include the daily news snippets, because they become dated rather quickly, and Ilargi's summary captures the essence of the daily events and trends. Perhaps including just the titles of daily news snippets would suffice.

I imagine I'm not the only reader who would be willing to buy a collection of our hosts' writings in book form. Those daily essays contain much more than simply market/economic analysis. I've learned a great deal about history, pyschology, ecology, and politics as well. This site truly presents the grand synthesis of events and trends from many distinct discplines, and it does so with humor and emotional depth. I know of no equal on the net.

Anyway, perhaps some form of online survey of interest among daily readers would allow the hosts or other enterprising readers to determine whether such an endeavor could be economically feasible. I'm not versed in online/blog copyright laws and I don't have the time to do this, so if anyone other than Ilargi or Stoneleigh does it, I think permission/royalty issues would definitely need to be discussed with our hosts.

Anyway, I'm throwing this idea out to the community? Thoughts?

Bigelow said...

47 percent of South Florida homeowners underwater on mortgages

DJ said...

From the Buffet article: The $1.8 billion of "other-than-temporary impair losses" in 2008 related mainly to 12 equity securities that "generally" lost 40 percent to 90 percent of what Berkshire had paid for them, Hamburg wrote on May 22.

Am I crazy, or is that one hell of a ridiculous statement? 40-90 percent? Why not just say 0-100?

Zaphod said...

Rick, you remind my of my teenage daughter, who will not let any discussion end without getting the last word in, whether wrong, right, or utterly pointless. Just let it go, mate.

$$$Dollar$$$ said...
This comment has been removed by the author.
Rick James said...

I agree Paleocon. Since I agree with them on the main ideas, arguing over this is pointless. Which is why I suggested we just move on. Ilargi and Stoneleigh have other things that they can do. As do I.

Hombre said...


Hombre said...

Today another bank, tomorrow another shipper...

Hapag-Lloyd German shipping firm

The German container line’s cumulative loss for the first six months reached $627.1 million, compared to a profit of $190 million in the first six months of 2008.

First-half revenue totaled $3.14 billion, compared to the previous year’s $4.14 billion.

Average freight rates fell by around 25 percent year-on-year in the second quarter and about 20 percent year-on-year in the first half of 2009.

Container volumes declined by around 17 percent in the second quarter and around 16 percent in the first half of the year as a result of the impact of the global financial and economic crisis.

Hombre said...

Bill Bonner getting sexist? :->

08/14/09 Ouzilly, France

How do you like this recovery? Pretty good, huh?
Except for the jobs, of course.
And except for the retail sales.
And except for the foreclosures…and house prices. And incomes. And consumer prices. And business profits.

It’s like a female impersonator…just like a real woman in every way, except for the essential ones.

Anonymous said...


I am a daily reader although I rarely comment. I am with you on the systemic issues we face and am fully aware that it does not end well.

That being said I was wondering if you could address something for me. Late last year you were predicting that we would be bleeding one million jobs per month for 2009 or 12 million total job losses.....that number is shaping up to be closer to 1/2 that amount and maybe even a third of that.

What, in your opinion, is the reason for the huge difference between your predictions and what we have seen so far this year?

Is it a case of the published figures not matching underlying reality or were your predictions just too harsh?

Thanks and keep up the great work.


Ilargi said...

Well, Rick J.,

I can but hope that you, and everyone else, understand that if you put words into Stoneleigh's mouth that are not hers, certainly when they address issues that are crucial in various ways to our readers, either she or I will have to point that out, before, and because otherwise, people would start thinking that she actually did come to your point of view. Which is simply not true.

You may call that nit-picking all you like, fine by me. But neither Stoneleigh nor I have stated what you have. And that needs to be made clear because you falsely (or erroneously) imply that she has.

As long as that is clear, no problem other than I don't think you should make statements, the ones that distort people's words, that easily. You say you want to think, here's your chance.

This is not some personal thing, I hope you see that; some things need to be made very clear, I don;'t want any confusion on the topic.

EBrown said...

Timing is tricky for sure. There were a few days back in the spring when the comments section on TAE was full to the brim with predictions of doom soon, as in by the summer we'd have bank holidays and total seizure of shipping with all the concomitant problems that would bring.

I think I fit into the caprine pen quite nicely and have a hint of doomerism too, and I think the unraveling of our systems will take years to unfold. Bringing predictions down to individual markets makes them much easier to verify or refute. As for the US stockmarket I also expect another big leg down this fall, but would not be shocked if it doesn't begin its drop until November. There are a lot of bears out there thinking that Sept is the month that markets often turn. They may join the herd if nothing much happens between now and then and drive the whole market even higher.

So I think stockmarkets will fall in the fall. I also agree that the government will continue to pull rabbits out of hats until a critical mass of observers see the sleight of hand for what it is, but I think it still has a few bunnies up sleeves as far as the FDIC and at least some banks are concerned. At some point we TAE regulars know that the banks are going to need a break, but I don't see that coming until 2010 or 2011.

Having said that, better a year or two early than five minutes too late. Make like Snuffy and get to work.

EBrown said...

And for clarity's sake, in the comments section I mentioned from the spring, neither I nor S was participating in the total meltdown predictions, just a sub-herd of goats baa-ing more loudly than the other regulars...

Bigelow said...

“There is another area where the comparison between the American and European model has serious implications for the future of the planet: climate change. "Old Europe" uses about half as much energy per capita as the US does. A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.

We estimated that the US would consume about 20% less energy if it had the work hours of the EU-15. This would have a significant impact on world carbon emissions. Furthermore, when the world economy recovers, there are a number of middle-income countries that will approach high-income status in the not-too-distant future (South Korea and Taiwan are already there). Whether they choose the American or the European model will have an even bigger impact on global climate change.

The major media in both Europe and the United States have played an important role, for decades, in helping politicians capitalise on economic mythology to push policy in economic and socially destructive directions on both sides of the Atlantic. It remains to be seen how much the Great Recession will influence the thinking and reporting of these influential institutions.”
Debunking US Economic Myths

Dr J said...

Bigelow - interesting that that article starts off on a health care issue by pointing out some further hypocrisy:

"In fact, a recent study found that the US ranks low among advanced economies in the proportion of people employed by small businesses. The likely culprit? Lack of universal health care. But you won't see that on the agenda of organizations like the right-leaning Kauffman foundation, whose mission is to promote entrepreneurship and innovation."

Rick James said...

Had a conversation with a guy today who suggested that Peak Oil should not be a problem right now since America is sitting on top of probably the largest find of oil in the history of the world (his line was hyperbolic I know)! Anyhow, I suggested I locate and take a look at the document linked below. Thoughts from those in the oil industry or have experience with it really appreciated.

PS - Ilargi, I hear you. We're cool. I never, never take things like this personally.

Rick James said...

Time for a *peaceful* revolution. I think I have had about enough now.

From Juducial Watch:

"Clearly Treasury Department officials felt strongly that the $152 billion 'investment' in AIG would not be recovered by the taxpayers. And it appears someone at Treasury did not want the risky nature of the deal to be relayed to the American people," said Judicial Watch President Tom Fitton. "These documents show that some government officials recognize their responsibility to measure the effectiveness of their TARP investments. Yet the American people are misinformed and remain in the dark about how their money is being spent.

dark_matter said...

Ed Gorey, RE:Automatic Earth Book

I have some experience in web data mining and could write something that would data mine TAE for pretty much anything you want (e.g. all intros or all comments made by any set of commenters for any given time range) and open it the results in your web browser.

Would this fill the bill? I am taking a long trip this weekend and may work on it if I get bored.

Hombre said...

Bigelow - Thanks for the link from Naked Cap. Interesting.
I wondered about this...

"In addition. the high level of US carbon production is due to a surprisingly significant degree to our lifestyle, working long hours to consume, rather than "consuming" more vacation as Europeans do."

I know transportation is not the major energy use element, but what about our widespread land area, use of automobiles, trucks, etc. and... huge agriculture operations?

Hombre said...

rick James 6:13 - re: your linked article...

Chapter 17 of what?

Anonymous said...

If we weren't on the edge of a Total Meltdown, but back in 'normal' times, and health coverage was universal and was 'decoupled' from the job in the U.S, there would be an enormous shift in people's job preferences and employers in many fields would have a harder time filling positions.

Many people I know only put up with their crappy job because it gave their families health care. If it wasn't for that, they would have quit a long time ago.

Health coverage from the job was not so much a carrot 'perk' as not having it was a nasty stick.

People working a crappy job for health coverage do not make productive, happy workers.

Hombre said...

Rick James - Take a look at the facts, from the Anchorage Daily News at the heart of the matter.

Gull Island oil is a hoax that has the geologists smirking.

Bigelow said...

The Hubble Ultra Deep Field in 3D Youtube

x marks the spot said...

"To reiterate: we are approaching an event comparable to going over Niagara Falls in a canoe. Most people won't even be wearing life-jackets. Watch this space."

OK, assuming this shuts down international trade for years (or forever). People seem to be assuming a bankster fascist or theocratic totalitarian state. If things are that bad for so many people, why wouldn't they turn to socialist totalitarianism. The US is pretty big and would be hard to hold together by force unless the majority of the people were getting some benefit (ie not starving).

Mellowg said...

Bigelow said... 6:00

“There is another area where the comparison between the American and European model has serious implications for the future of the planet: climate change. "Old Europe" uses about half as much energy per capita as the US does. A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.

We also have to concede a percentage to difference in climat. Europe is a lot warmer than USA in winter time.

Anonymous said...

Rick about that Gull Island oil find. this seems to fit:


1. to deceive, trick, or cheat.
2. a person who is easily deceived or cheated; dupe.
1540–50; perh. akin to obs. gull to swallow, guzzle

1. cozen, dupe, fool, bamboozle, hoodwink.

Max said...

“85 days to go!
Today’s incoming emails exceeded the 1200 mark, a great degree of which are asking me what is the motivation behind a countdown of days for the USDX.
There are various answers to this question of which TA is the least important.
The primary reason for this “out on the limb statement” is that the recent China/US financial Summit meeting in Washington which was requested by China, was not significantly pre-planned.
As I understand it there are two things wanted and one thing disapproved of.
The US financial leadership wants, but more so needs, Chinese buying of US Treasury offerings to remain at these levels but more so to increase to offset the wholly unavoidable increase in offering of US Federal Debt.
The Chinese wish to see the USA support the creation of a Super Sovereign Currency as an offset to dependence on the dollar for international settlements and national reserves.
The Chinese rightly feel that the greatest risk to their present dollar position’s valuation is quantitative easing. or simply put, the monetization of one’s own debt by the electronic creation of money for funding yourself.
I am informed that Chinese interests want to see both in 2009.”
The Motivation Behind The Countdown

Shadowfax said...

Hey Snuffy..when the shtf ,get down that Columbia River and turn right.

We can organize a flotilla and hang out on the coast here.
I'm on Vancouver Island,currently outfitting my catamaran with solar panels,wood stove,etc.
I love living on my boat!!Wtf a wet closet???not my boat.

Rick James said...

Coy Ote - Thanks for this. The article was suggested to me but it sounded a bit to fantastic to me.

Hombre said...

Bigelow - That hubble video is quite a humbling experience, and something I have pondered many times... that being how relatively insignificant is our little planet.

Still, our self awareness and realization of this universe says something to me. And it has to do with responsibility and stewardship. I am convinced the earth will sustain itself, even if it rids itself of us in the process.

Erin Winthrope said...

@ dark matter:

Re: Automatic Earth Book

A friend of mine showed me how to use the HTrack website copier software, so I already have the Automatic earth archives saved to my hard drive.

Basically, what I need is a book or notebook containing printouts of the news summaries along with comments by Ilargi and Stoneleigh associated with each news summary. I think it would be most useful if this information could be organized chronologically starting with the date of the first blog posting (January 2008, I think) all the way to the current blog posting.

I doubt if the time and printing costs associated with putting together a book/notebook containing this information would make sense given my meager $75 offer. It might, however, make sense if a larger number of fellow TAE readers are also interested in purchasing an Automatic Earth book. Scaling up the operation and selling multiple copies might more adequately compensate for the time and prinitng costs.

Why a book when everything is already on the net and my hard drive? I still like old fashioned tangible and portable books, and some members of my family hate sitting at the computer to read information. If I mail them a book/notebook, and ask them to read it, I might make more progress raising awareness of the financial/societal cascade that is fast approaching.

Anonymous said...


"The issue is that the fundamentals do not drive prices, collective social mood (ie herding behaviour) does."

I'd like to chime in here if I may, as I believe this is demonstrably false, depending upon what you mean by the term "fundamentals". For certain definitions, I would agree. For others, I wouldn't.

It's significant to note that Prechter was predicting a Depression after the Dot-com bust. Even his most updated version of his book claims that even the doubters would be using the term "Depression" to describe the economy by now. This hasn't happened at all.

Instead, the Fed blew the Housing bubble, followed by the Bail-out bubble. In essence, they changed the herd's view if you like. But the point is that the Fed was able to influence the herding behaviour, quite successfully, and contrary to the pure herding analysis that Prechter offers.

This is one reason why I disagree with his (and your) view that the current bubble is closer to 1938 than 1929. Another key reason is that in 1929 we saw a massive collapse in credit (from the the stocks purchased on margin). We haven't seen such a collapse in credit yet. So this is more like 1929 stretched way out, rather than progressing to 1938.

One trader who was alive in 1929 said that the Fed and Wall Street are still pulling the same tricks that they did back then. And that it didn't work then, and it won't work now.

Anonymous said...

Ahimsa @11.57 am


No we are not alone and I am even more so reminded of that as I just began a 3 day weekend retreat this evening with Deepak Chopra here in Massachusetts - Over 350 in attendance (all they can hold). I've seen him before and he is forever an inspiration stradling both the scientific as well as the spiritual world.

Another great soul trying to shine a light in the darkness.



rapier said...

The white Christian thing is tribal, or the echo of tribal. Western civilization might be said to be based on the rejection of tribalism. Well that's what I say.

Setting aside complications that get in the way of a simple crackpot argument about tribes in America,those being first Americans and Africans, America had no tribes.

Immigrants to America formed their own ad hoc tribes. People choose their tribe in America. The white Christian tribe was always there but so dominant it didn't need self indentification or justification. Then in the 1960's with civil rights and demographic trends White Christians became a political tribe.

Liberals are often fond of romanticizing tribal cultures but tribal cultures are the antithesis of Classic Liberalism.

The power of modern Amerian Conservatism is based upon its tribalism. Is it ever more anti scientific and anti rational? Sure, that's tribalism for you.

I have no big conclusion here. Just some random thoughts. Oh, except the financial sphere is not part of the White Christian tribe. This is going to be an important element in the political evolution, or is it devolution.

Anonymous said...

When I think Tribalism, I think Lord of the Flies.

Dr J said...

cd - these people you idolize, do they heap scorn and vitriol on those who hold different views or do they treat them with respect and compassion? Just asking.

EBrown said...

The image of going over Niagara Falls in a canoe is quite vivid and real to me right now. I just swamped a canoe in a class III rapid on the Delaware River at the end of weeklong trip. That was a scary experience. The power of a river is incredible once you're in it rather than on it.

I can well imagine Bernanke and Geithner paddling all out against the river and yet the inexorable current carries them (and us) towards the giant falls. Perhaps if they listened to some well who are well informed, or had the peoples interest at heart, they could beach the canoe before going over the falls and leave the boat and gear for a very different type of expedition. Since they are intent on succeeding in their craft and keeping all their gear, they're going to go over the cliff, destroy their boat, lose all their gear, and probably die as I've seen no evidence of anyone putting on PFDs. Well, a few here at TAE and some other places have PFDs on, but that is small comfort for the terror ahead.

Anonymous said...

Call me skeptical, but most “ New Age “ gurus are workshop profiteers, making huge amounts of money flying into one town after another for short periods of time. And I am not singling out anyone in particular. Martial artists, Yoga practitioners, Visual artists and on and on it goes have all boarded the weekend workshop gravy train on their way to the Monday morning bank deposit.

People should ask themselves how much are they really going to learn in one week or weekend retreat with a large number of other participants. But then again, most people do not trust themselves and are unwilling to walk through lonely deserts in order to arrive at their own personal oasis.


argc said...

Form a pirate club and head on up to Haida Gwai to plunder Dr J's wind farm.

Avast, me hearties!! Aarrgh!

Shadowfax said...

Hey Snuffy..when the shtf ,get down that Columbia River and turn right.

We can organize a flotilla and hang out on the coast here.
I'm on Vancouver Island,currently outfitting my catamaran with solar panels,wood stove,etc.
I love living on my boat!!Wtf a wet closet???not my boat.
August 14, 2009 8:16 PM

el gallinazo said...


As far as I can recall, and that ain't very far any more, most of the regular posters here (hosts excluded) were predicting the meltdown in the fall every since the rally started in March.

Mish does a little primer on inflation/deflation. He is on exactly the same page as I&S on this. Even has the same beefs about "price inflation."

el gallinazo said...


Your plan B is Dmitri Orlov's plan A. If you haven't read his essay, The New Age of Sail, it is definitely worth it. Prime boat toys are already starting to be abandoned by owners in hard times. Their price will plummet three times as fast as housing. Keep your antennae up.

thethirdcoast said...

I work in the MI-complex in the allegedly 'englightened' lands of western NY.

Let's just say the workforce is largely 'self-selecting', and fundamentalist Christians are all over the place.

I like the creationist manager with a 'Take One' sign next to a stack of pamphlets prominently displayed in his office window.

The guy walking around with "The Complete Idiot's Guide to the Last Days" is pretty awesome too.

I'm cranky because I just spent the day driving across NY to audition left-handed acoustic guitars near JHK-ville. I actually drove through Saratoga Springs and found it to be a decaying concentration of bourgeois money.

The happy motoring dream appears alive and well, there were plenty of people out on the Thruway.

There were also state police all over the place. Sitting in speed traps, sitting in turnarounds, blasting up and down the left lane, pulling people over with lights ablaze.

I know I felt much safer with so much additional tax collection underway! You should too!

Anonymous said...

I understand and do read your columns. What has me perplexed is the lack of understanding around me here in Calgary. I sold my property 2 years ago so I wouldnit wind up underwater. Yet prices here keep going higher and higher.
Your predictions for an 80% decline in realty and a depression certainly don't be seem to occurring here. Are we insulated or what? I would think we would be seeing hyperdeflation, then perhaps hyperinflation. But nothing, just me now being a renter in an albeit expensive condo complex. I used to own a house, but felt I would lose if it rates creeped up.
But I have to admit, having a small savings, being a well educated person and living in a rental is extremy stressful and I fear I made the wrong decision. Like I said in the beginning, Calgary is just plowing along, people buying expensive real estate in bidding wars, buying fancy SUVs and planning exotic trips. I simply want a modest home over my head, in a safe area, with a back yard to grow some of my own foot. Even a townhome would do, but they've become ridiculously expensive and I sense government was things kept this way and will therefore make it happen. I am left agonizing whether I should have not sold my home.
It is not the greatest thing to be stressed about the economy, a bear turn an living in a place that seems quie insulated from the masses.
An comments will be appreciated. Like is Canada going to falter, or are we going to rise to to the envy of everyne on the planet.
Like, I am getting frustrated and feel my money in the bank is going to get hammered!
Jeannie H.

Anonymous said...

Like is Canada going to falter, or are we going to rise to to the envy of everyne on the planet.
Like, I am getting frustrated and feel my money in the bank is going to get hammered!
Jeannie H.

August 15, 2009 1:02 AM

Canada is a third world country.
Canada manufactures NOTHING. "Hewers of wood and drawers of water". The only reason it doesn't feel like a 3rd world country is the vastness of the resources relative to population, and is probably one of the last countries to go into overshoot. I get depressed when I see the ocean of suburban houses around calgary. The fact that the tar sands are (were) being developed should suggest we really are scraping the bottom of the barrel.

VK said...

@ Jeannie H.

Let's dissect the Canadian economy shall we.

Total GDP: 1.3 Trillion Dollars
Total Exports: 440 Billion
Export to GDP ratio: 34% (Similar to China)

Main Export Partners: U.S. 78.9%, UK 2.8%, China 2.1% as of 2007. So hugely dependent on the US economy!

What are the main exports?

Areas where sharp declines are Inevitable due to reduced economic and industrial activity.

motor vehicles and parts
industrial machinery
telecommunications equipment
wood pulp
crude petroleum
natural gas

Where I see some stability and demand

Fertilizer and Timber (for heating purposes)

On the plus side I was surprised to learn that Canada's Debt to GDP ratio is a paltry 180% so far, as opposed to the US's 375%. On the negative side, Canada can not escape the fate of the US economy. You can only defy the economic laws of nature for so long!

VK said...

According to John Williams at shadowstats, April saw the loss of 682,000 jobs, May 631,000 jobs, June 698,000 jobs and July 145,000 jobs!

The data can be found on page 13 of this report.

scandia said...

I am watching the Mayor of Sarnia,Canada try to defy Homeland security. Apparently a far seeing camera hanging from a balloon in the sky is floating over Sarnia, " a privacy invasion" according to the mayor. Homeland security terrorism is leaking over the border and some Cdns don't like it. Some Cdns are complacent.Some Sarnia residents think it is reasonable for Homeland security to be spying on Canadians, a reasonable defense against terrorists. Long gone is the longest open border between friendly nations.
Has anyone read anything about the Cdn gov't giving the US permission to spy on us? Has anyone read any recent complaint from Cdn MP's about this issue?
Haven't seen any press release from gov't so far.
I give 3 cheers to the Mayor of Sarnia in his efforts to nip this Orwellian sky spy in the bud!

Hombre said...

Scandia - I hope the thing bursts! What a stupid idea. Believe me, most usacos (like me) don't want the silly thing over you or us.

Anonymous said...

I have no doubt Colonial is guilty of fraud, almost all the banks are. I see the raid as a message, not to come clean but to keep those losses secret! If you force the FDIC to step in you are going to be very sorry. The bankers may think they own Washington but once they become a liability they will be sacrificed on the alter of public opinion. The Federal Reserve is nearing it's end. Within 12 months you will see federal troops at the Federal Reserve Building, not because they are needed but to send a message. The bank rebellion will have been crushed and all government funding will come directly from the printing presses via a new Federal Central Bank. There will be trials, asset seizures and made for TV movies based on actual events. "Stimulus" or "reparation" checks will be sent to states and corporations and even individuals to restart the economy. These events will mark the end of step 5 on the 10 steps to economic collapse.

el gallinazo said...


Maybe Sarnia could also get a couple of balloons and hoist a huge shower curtain in front of the border. Have a little pattern of an eagle wearing Ray Charles dark glasses :-)

Anonymous said...

el gallinazo said...


Maybe Sarnia could also get a couple of balloons and hoist a huge shower curtain in front of the border. Have a little pattern of an eagle wearing Ray Charles dark glasses :-)

August 15, 2009 8:54 AM


I was reminded of the breakfast table territorial battles of my early years. We used stacks of cereal boxes to block views.

Anonymous said...

These events will mark the end of step 5 on the 10 steps to economic collapse.


sounds like fun! can we have the rest of the list?

RC said...

Ms. Canadian

You seem to be upset that all is well where you are. Isn't that nice? As to not having a yard, that is your problem that you created and awfully easy to solve. Go to the edge of town, find a small house on a very large lot near some public transportation and sign a very long lease with a deflation rider. Or sign a somewhat shorter lease and grow in raised beds. Calgary can't have much of a growing season anyway so one wonders just how rational your decision making process is and your idea that renting in an expensive condo would be a great idea impresses me as a mistake, to be polite about it.
You're a whiner, right? You write in here now because no one will talk to you anymore? Is that it?
I happen to live in a place that has had less of a bad time than other places and that is mostly because it was already in very bad shape before 2006 and so we are not really sure what Bad really is.
Yet, as far as dirt for growing, I have vast amounts available to me for free. I am betting Calgary is the same. Sorry to inject some bile here, but I am also betting that you really aren't up to the rigors of serious dirt wrangling anyway -- few people are. Please, do yourself a favor and buy a large suburban home on a small lot NOW while prices are rising and hire a lawn service. This is all very do-able and you'll be happy.
I'd claim to be jealous of your good fortune, but I can't honestly claim I'd ever live in a condo in a cold climate. Sounds like some kind of calvary to me.
May I suggest you move far away from where you are now? Don't worry, every town has something you can find to complain about.

Anonymous said...

Take is ez RC, no point of being a hero with great English skills. This is the nonsense that goes on in Canada..people feel that they NEED to own RE to be somebody..although, they are nothing more then financial slaves. 20somthings picking up $400k mortgages with a $35k salary and thinking that they are doing a fine thing...Canada's market will implode like every other bubbly Country has.

RC said...

A marginal amount of research shows that Calgary, Canada has about 170 frost free days, is wind whipped, dry and on the positive side, the sun shines many long hours when it is doing its job. Availability of empty growing plots of small size would seem to be unlimited there.

scandia said...

@Gallinazo and Anon 8:54
Now that's what I call thinking outside the box, the cereal box that is! Any ideas as to how we can ground the drones?

el gallinazo said...


My best friends live in Shell Lake, Sask, which is a bit north (and east) of Calgary. I visited them last September. By the middle of the month we were starting to get killing frosts at night. Never the less, they had a hugely productive garden measuring perhaps 100 by 60 feet. Spent my first two days there digging out the potatoes. Half of them went to family and friends. Then it was off to catch big pike in the local lakes which we ate with delicious fresh corn and fresh, home made bread with Saskatoon berry preserves. I put on 5 kg in three weeks . And of course the venison sausages. Don didn't get a moose or elk last year, but he got two deer; one with a rifle and one with a bow. Gardening in northern Canada is different from a Caribbean island, but it can be very productive.

el gallinazo said...


"Any ideas as to how we can ground the drones?"

Freeze their MasterCards?

scandia said...

El Gallinazo said, " Freeze their MasterCards."
I'll get right on that starting with a call to China...

scandia said...

Or to down sky spy cameras and drones, we could train a flock of Black Swans.

Hombre said...

A couple notes...

On bank failures. 77 this year now.

FDIC chief bucking the Pres. Aug 15

WASHINGTON -- The head of the Federal Deposit Insurance Corp. is arguing against key pillars of the Obama administration's plan to overhaul the financial system, saying they would not survive in Congress and that she has better ideas.

Scandia, a light anecdote.
One morning (few years ago)I was walking out to the mailbox with my java when a voice OVERHEAD said... "got anymore of that coffee?" I looked up. It was from a very low flying hot air balloon! True story! (I said sure, come on down... ;-)

K LMNOP said...

Anonymous said...
"20somthings picking up $400k mortgages with a $35k salary and thinking that they are doing a fine thing...Canada's market will implode like every other bubbly Country has.
August 15, 2009 9:46 AM "

About 2 or 3 years ago a young, recently married, 20 something colleague took out a 40 year mortgage on a boring overpriced "bungalow" in a small city. I had never heard of TAE, debt deflation, great depression 2.0, peak oil, etc., but it was painfully obvious that we were in a housing bubble and nearing the top of the market, with nonsensical MSM talk of new paradigms, endless growth, etc.
Tried very politely to suggest better deals might be had a few years hence, but all to no avail. Have to let people make their own mistakes. I suspect most people open to warnings posted by I&S are those who already have some degree of independent thought (and/or sociopathic tendencies;-)

Anonymous said...

US healthcare expenditure - the biggest waste of money in the world

Here's a chart putting it into comparison:

Expenditure on Health

jal said...

@ Jeannie H.

We have lived in the best of times.

Nothing stays the same.

As you have been reading at TAE our civilizations have reached “PEAK” in many ways and that will eventually be felt by ALL.

Count yourself fortunate that you are aware of the trends of change and that you can and will have the opportunity to choose and to make changes to your lifestyle.

A few areas of Canada have felt the effects of the US madness.
Many Canadian one industry towns have previously felt what it is like to have a +10% unemployment. Those affected have learned to “take to the road” and build new life.

There are more ‘neufies” outside of NFLD. than there are in Newfoundland.

Canadians know what it is like to have lived “Future Shock”. Families and ex-friends are spread out across Canada and the world.

Adapting to changing conditions is your # 1 asset.
Don’t hug the past but rather look forward to an exciting and enriching future.

Only the homo specie think that the individual is as special as the whole. Its not so among every other species. We certainly treat other species has not having individual importance.

Therefore, in the long run you and I are nothing.

Live responsibly and be filled with the joys that the experience of life brings to you.

ps. All of the good cheerful phrases have been highjacked by the “churches and the holier than thou” .

K LMNOP said...

"Don didn't get a moose or elk last year, but he got two deer; one with a rifle and one with a bow."

Does he use a compound bow or a crossbow?

Calgary has over a million people now. If all take to hunting....

Dr J said...

Jeannie H - I think you made the right decision. I owned a modest house in Calgary in the early 80's. When the recession struck, it went from significant equity in a buoyant market to an underwater millstone so quickly that I was unable to get a for sale sign on it fast enough to bail out. The one-two punch that knocked out the market at that time was the combination of a falling oil price and rising interest rate. Both those conditions lie ahead as the current deleveraging gains momentum and governments run out of rabbits to pull from hats. The Canadian economy is so closely tied to that of the US that we will be dragged down no matter how well we appear to be doing now.

Undertow said...

Rick James,

Did you have a look at the top level site of the oil hoax story you posted?

If you check out you will find that the earth stands still and the entire universe rotates around it as that is how God made it.

Pete Deer said...

I & S;
Where is today's posting? I NEED MY FIX!
One thing I am noticing more and more; the amount of retail and commercial space that was just recently created, and lies empty, devoid of paying tenants. There is one house down the street that was built 2 years ago, and remains vacant, never lived in.
But I am sure everything will be fine. Green shoots and all that. Would those green shoots be White Widow, or Kush perhaps? I mean, a person would have to smoking some really potent weed to come up with suggesting this thing (current economic depression) is over...

Pete Deer

el gallinazo said...

K LMNOP said...

"Does he use a compound bow or a crossbow?"

He got two deer because the rifle and bow season are separate in Sask. My understanding is that a crossbow is regarded as a rifle as far as these seasons go. He uses my beautiful Cougar Martin 70 lb compound which I gave him a couple of years ago. I just used it for target archery. Got started many years ago when my 8 year old son got into Dungeons and Dragons and wanted a real bow and arrow. The range was renting bows for a dollar an hour and I got bored of reading while my son shot. It is metal flake green with yellow trim and he agreed not to smear it with camo paint. Don is 70, but he worked up the strength to use it accurately.

Ilargi said...

New post up.

RC said...

Thank you for the personal research on the viability of the North, Gallinazo. Perhaps you should put Jeanne in touch with the Don Tribe.
If "Jeanne" is for real.

snuffy said...

I have mentioned in the past my job involves looking at structural steel in new construction...One of the most "telling"things I have noticed is there exists a number of completed buildings [tilts...tilt panel construction" ]that are brand new...landscaped...and have 1 or 2 tenants...if any.We are so overbuilt here that I expect it will be a very very long time before there is any need for new buildings.

Shadowfax..It has been my intent to "look over" the islands in the Alaskan panhandle for a long time...

El G...I spend more tome on Craigslist than I should...but I have noticed someone with bucks has been buying the "good deals" a columbia 22 for $1200...and others I had a eye on.When I was in the south I came very close to buying a pearson26,trucking it to the gulf,and becoming a "gulf rat"..Boats in the 24-26 are good singlelanders usually,and with a weather eye quite seaworthy.

dreaming "off"..
back to work[new bed supports on my propane-powered flat-bed truck...


Anonymous said...

RC said...

If "Jeanne" is for real.


I was thinking the same thing. Why would she have sold 2 years ago if so ill-informed about everything else?

Garth Turner was warning about the real estate bubble several years ago, so maybe that was the inspiration to sell? He used to write a syndicated column carried across the country, before he re-entered politics.

It is possible that Jeanne H is a recent immigrant to Canada which could explain the odd mix of prescience and ignorance. Canada is probably the worlds most multicultural country.

Anonymous said...

Dr. J.

Many people just can't handle criticism.
Unfortunately you are one of them.

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