Sunday, November 29, 2009

November 29 2009: Growth Industries

Dorothea Lange Wayfarers May 1937
"Mother and child of Arkansas flood refugee family near Memphis, Texas. These people, with all their earthly belongings, are bound for the lower Rio Grande Valley, where they hope to pick cotton"

Ilargi: It is nice for the United Arab Emirates’ central bank to say they stand behind the country's banks, but it's doubtful that the story ends there. Many if not most of the losses that are beseeching Dubai are there to stay. It’s about solvency, not liquidity, you might say. And who in Abu Dhabi (which is where the money will have to come from) is willing to throw their cash into a bottomless pit? Another aspect of the problems in what until recently was known as the "land of nothing but sand and flies", one that is easily overlooked, is that the "poor" folks who've bought property in "la-la land in the desert" have already seen the "value" of their purchases plunge by 50%. Even before the current trouble started. Think those prices will rebound anytime soon? That's many thousands of people who lost half a million, a million, that sort of money. Poof, gone. Forever.

We’ll see in the days to come how the markets react to both the debt and the Abu Dhabi "guarantees". The smarter investor will have felt an oops upside the head, scratched her/him self behind the ears a time or two and resolved to get the heebeejeesus out of there. Christmas will soon be here and the uncertainty just ain't worth the pain. Try to collect what bonus you can and lay low until at the earliest the new year. There's an avalanche of earnings numbers, losses and writedowns coming soon and they promise a very substantial risk of very substantial pain. Dubai is but an itch compared to that. Banks in the EU and the US need to raise hundreds of billions of dollars 2010, much more than Dubai could ever lose, while their governments need many trillions.

To see how things really stand, look no further than the other side of the poor folk spectrum, where the real people live. Today, one in four US children get at least part of their nutrition from food stamps. Food banks and pantries report a 30% increase in demand. And sure, there will always be a plethora of voices who proudly proclaim that only the lazy will ask for food for their children. None of these voices need to. Nor have they ever had to declare bankruptcy because of their medical bills, another one of America's few remaining proud growth industries.

Even if you "believe" in a recovery, don’t you think the people who presently hold the power would prepare for the unfortunate eventuality that maybe that recovery will not succeed? What do you think they would do to keep their hands on the wheel regardless? Bob Chapman thinks he knows what the next steps will be, and claims to have insider information to support his assertions. Cut commercial lending, abolish both the FDIC and the US dollar in a years' time, and leave no government guarantees in place other than bonds. Chapman is a bit strange perhaps, but he's also a lifelong broker and trader and not a complete fool. Chapman advises to get out of life insurance policies and annuities, since they are invested 80% in stocks and 20% in bonds. And I agree there. Your fund managers expect to turn profits in the stock markets? Supported by what? Yes, there's the herding instinct that's kept them in until now. But that same instinct can drive them out real fast too. As in any day now.

The flow of events and the reasoning behind it all is summed up once more by our perhaps soon-to-be contributor VK, who begs to differ with Chapman's conclusion that hyperinflation is the chosen path. As do we.

  1. Easy credit money leads to speculative boom.

  2. Excess overcapacity is built, asset prices soar, general feeling of goodwill and trust. People more willing to go into debt as future looks all rosy.

  3. Cash flow problems occur, as credit growth far outstrips wage growth.

  4. Minsky moment reached and the greatest fool is left holding the bag, asset prices plunge due to declining liquidity as borrowers refuse to borrow due to exorbitant costs of servicing the interest.

  5. Banks reduce lending sharply as asset price decline leads to a balance sheet recession and lots and lots of losses. Further liquidity drained from the system.

  6. Now Government steps in to fill in the gap caused by massive deleveraging. It's sole goal is to reflate, reflate, reflate.

  7. If the gap between debt to income is sufficiently small, the Government can kick the can down the road but once it grows larger, they can no longer do so.

  8. Wage price deflation takes hold as the economy simply can't handle the debt. Wages fall, asset prices fall, debt burden soars as money goes down the proverbial black hole, banks collapse as does government revenue and the cost of servicing debt soars. Unemployment shoots up thus removing any wage pressures.

  9. The Government has two options at this point, one is to print its way out, thus destroying its currency and isolating itself from the broader international community or it can allow massive deflation to occur through which it is not isolated and the value of its currency rises. In both scenarios the middle class is F***ED but in the deflation scenario the elites are saved.

  10. The elites would prefer an outcome whereby there is massive deflation; as Ilargi once mentioned, if you lose 50% of your net worth but asset prices fall 80%, you're up 30%! Buying back the country for cents on the dollar is a delicious outcome and lets the game be carried on for a little while longer.

Hyperinflation carries more risk then deflation for the elite. Both pose risks to social stability and the possible collapse of society but in a deflationary collapse the elite would have more of an advantage.

Farreaching Decision of the Federal Reserve: Banks which received TARP funds are to restrict commercial lending
by Bob Chapman

Bob Chapman reports that his source at the top of the banking industry has told him that 2000+ banks are in imminent danger of collapse, the FDIC will be closed or collapsed by Sep 2010 or year end and official devaluation will happen by the end of 2010. The source has been queried about making room for a new currency.

The following information may be the most important we have ever published. One of our Intel sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received TARP funds have been informed by the Federal Reserve that they must further restrict any commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which is a compensating balance.
The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by June, which would collapse the economy, or face hyperinflation. This is why the Fed has instructed banks to inform them when and how much of the TARP funds they can return. At best they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.
We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they cannot risk allowing the undertow of deflation to take over the economy. The system cannot stand such a withdrawal of funds. They also must depend on assistance from Congress in supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such funding would send the economy and the stock market into a tailspin. Even with such funding the economy cannot expect any growth to speak of and at best a sideways movement for perhaps a year.
We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which means no more deposit insurance. This follows the 9/18/09 end of government guarantees on money market funds. Both will force deposits into US government bonds and agency bonds in an attempt to save the system.
This will strip small and medium-sized banks and force them into shutting down or being absorbed. This means you have to get your money out of banks, especially CDs. We repeat get your cash values out of life insurance policies and annuities. They are invested 80% in stocks and 20% in bonds. Keep only enough money in banks for three months of operating expenses, six months for businesses. Major and semi-major banks are being told to obtain secure storage for new currency-dollars. They expect official devaluation by the end of the year.
We do not know what the exchange rate will be, but as we have stated previously we expect three old dollars to be traded for one new dollar. The alternative is gold and silver coins and shares. For those with substantial sums that do not want to be in gold and silver related assets completely you can use Canadian and Swiss Treasuries. If you need brokers for these investments we can supply them.
The Fed also expects a meltdown in the bond market, especially in municipals. Public services will be cut drastically leading to increased crime and social problems, not to mention the psychological trauma that our country will experience. Already 50% of homes in hard hit urban areas are under water, nationwide more than 25%. That means you have to be out of bonds as well, especially municipals.

Global sovereign debt to hit $49.5 trillion
Global sovereign debt is expected to hit $49.5 trillion by year end, a 45 percent climb since 2007 as the credit crisis takes a toll, Moody's Investors Service said on Tuesday. The expected $15.3 trillion increase in worldwide government debt is more than 100 times the inflation-adjusted cost of the Marshall plan, Moody's said in a report.

The Marshall Plan, a U.S. effort to rebuild Western Europe after World War II, cost an estimated $13 billion in unadjusted dollars. Sovereign debt ballooned during the global credit crisis as countries funded massive bailouts, shifting risk from corporate to government balance sheets. "Not surprisingly, the G7 countries account for 78 percent of the increase, as their fiscal accounts have been hit hardest by the crisis," Jaime Reusche, associate analyst in Moody's sovereign risk group, said in the report. The G7 or group of seven major industrial nations are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

Moody's said it expects global government debt to total 80 percent gross domestic product in 2010, up from a 10-year low of 63 percent in 2008. Debt will also be less affordable, as measured in terms of interest payments relative to revenue, Reusche said. For advanced industrial countries, interest payments are expected to total 6.1 percent of revenues in 2010, up from 4.3 percent in 2007. "As growth turns negative in 2009 for most countries, the relative debt load becomes harder to bear," Moody's said. In the United States, government debt is expected to rise to $14.48 trillion in 2010 from $12.29 trillion in 2009 and $10.27 trillion in 2008, the Moody's report said.

Big U.S banks will be forced to raise more capital soon
Most big U.S. banks may be forced to make public offerings soon if the Treasury demands payback of the funds it issued under the Troubled Assets Relief Program, veteran banking analyst Richard Bove said. The U.S. Federal Reserve this month asked banks that were part of its "stress tests" to submit plans to repay government money, if they have not already repaid it.

"Virtually all of the banks can easily redeem their TARP preferreds from current cash holdings. However, it may be that only 3 of the top 30 would have an adequate Tier 1 Capital ratio if they redeemed these preferreds," Bove said in a note to clients. The Rochdale Securities analyst said burgeoning fiscal deficit, which is expected to touch 9.5 percent this fiscal, and a plunging dollar are forcing the U.S. government to obtain money from wherever it can find it.

Repayment of the TARP funds would be one available source, Bove wrote. Many U.S. banks are eager to repay money borrowed under the government's $700 billion TARP. Participation in the program comes with limitations on pay, dividend payouts and share repurchases. It is believed that the Treasury was looking for Tier 1 Capital ratios of 12 percent at U.S. banks, and the banks would be forced to raise capital, without government assistance, before they are allowed to repay their TARP preferreds, Bove said.

"This raises the specter that a number of banks will be making public offerings soon despite the fact that their earnings remain under a cloud." The U.S. Treasury Department said on November 19 it would auction off stock warrants it received from three big banks that received taxpayers' funds from the government's financial rescue fund.

U.S. Treasury to Push Lenders to Finish More Home Modifications
The U.S. Treasury Department will step up public pressure on lenders to finish modifying more home loans to troubled borrowers under a $75 billion campaign against the record tide of foreclosures. More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

"We are taking additional steps to enhance servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications," Treasury spokeswoman Meg Reilly said in an e-mail yesterday. The Obama administration plans to announce additional steps tomorrow, including new private-public partnerships and resources for borrowers. The modification program was announced in February as a way to combat a surge in foreclosures that has pushed property values lower and curtailed economic growth. It hasn’t stopped foreclosures, which are now being driven by unemployment that was at a 26-year high of 10.2 percent in October.

The Mortgage Bankers Association, the industry’s largest trade group, predicts foreclosures won’t peak until after unemployment rates crest, some time in the second half of next year. The administration’s initiative provides a cash incentive of $1,000 to the mortgage servicer once a loan is converted from a trial to a permanent modification plus annual payments of $1,000 for as long as three years provided the loan remains in good standing.

Bank of America Corp. was among the worst performers in the program, with 14 percent of loans in modification in October, according to the Treasury. The bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury’s list. A spokesman for the Charlotte, North Carolina-based bank, Dan Frahm, has said the eligibility data may be overstated. "As many as one-in-three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31 percent or is unemployed," Frahm said in a Nov. 10 interview.

Eligible loans under the program are at least 60 days past due, in foreclosure or bankruptcy, and originated before 2009. The underlying property must be owner-occupied and conform to Fannie Mae and Freddie Mac loan limits, which can be as high as $729,750 in some areas. The data excludes Federal Housing Administration and Veterans Affairs loans. A borrower’s mortgage payment must be 31 percent or more of their gross monthly income to qualify.

Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co. led the pack of U.S. banks modifying home loans to troubled borrowers through October under the foreclosure prevention plan, the Treasury Department said. Citigroup, the third-largest U.S. bank by assets, began 88,968 trial modifications, or 40 percent of its eligible mortgages. JPMorgan, the second-largest U.S. bank, has started 133,988 modifications, or 32 percent of those eligible, the Treasury said.

Morgan Stanley’s Saxon Mortgage Services had begun trials for 44 percent of its 80,477 eligible loans. In all, 20 percent of eligible U.S. homeowners have received trial modifications through the government program, according to the data. Bank of America’s modifications started rose to 136,994 in October from 94,918 in September. The bank also accounted for 30.7 percent of the 3.2 million loans eligible for the program and about 22 percent of the 919,965 modification offers extended to borrowers by all the participating banks combined.

The administration program requires banks that received federal aid from the Treasury’s Troubled Asset Relief Program, or TARP, as well as mortgage-finance companies Fannie Mae and Freddie Mac to lower monthly payments for borrowers at "imminent risk" of default. Banks can lengthen repayment terms, lower interest rates to as low as 2 percent and forbear outstanding principal, among other methods.
President Barack Obama announced the program in February, and final criteria for administering the modifications on loans owned by Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government, were released in April.

Specific program guidelines for loans owned by other investors were provided in June and the Treasury later gave new details for loans backed by the Federal Housing Administration. The administration’s $75 billion Making Home Affordable program includes the mortgage modification initiative and loan refinancing through Fannie Mae and Freddie Mac.

Black Friday results: Minimal growth
All the hope and hype that went into Black Friday preparations this year didn't give us much. Year-over-year, retail sales grew only 0.5%, from $10.61 billion to $10.66 billion, according to ShopperTrak. This follows a 3% gain last year, when the world was gripped by the panic triggered by the global financial crisis. In 2007, the situation was much better, with Black Friday sales leaping 8.3%.

The slight gain this year came even with the extra efforts retailers made, which included, in some cases, opening on Thanksgiving Day and making an extra push via social media. These measures effectively helped retailers tread water. Worries about the momentum from Black Friday fading through the holiday season are even tougher, now that we know there isn't much momentum on which to rely. Shopper traffic was heavy this year, according to ShopperTrak, which led to much of the early optimism. But, the lookers weren't converting at the rates retailers had hoped.

The action came online this year, even ahead of Cyber Monday. Internet shopping increased 35%, with the average order reaching $170.19, according to online retail analytics company Coremetrics. Despite the difficult results last week, ShopperTrak is maintaining its holiday season growth estimate of 1.6%, with co-founder Bill Martin saying in a company statement that the forecast "remains intact."

Richest 1% of Britons hold 70% of wealth
I missed this report yesterday but it’s an interesting one. According to consultants AT Kearney, the richest 1pc in the UK hold some 70pc of the country’s wealth. That there is this divide between rich and poor is not exactly new – but the scale of it, and the likelihood that it is not being narrowed by the financial crisis, is a big worry. Indeed, according to the report, in the US the amount of financial assets owned by the richest 1pc in the US is far, far lower at 48pc, and only 34pc in Australia.

This must, to a large degree, be due to the fact that the UK set itself up in recent years as a haven for the super-rich, with its relatively generous rules on capital gains tax, because the income tax system itself is rather more redistributive than in the US. But the Kearney report is interesting because, unlike the traditional measure of inequality, the gini coefficient, it focuses not on income (the flow of money) but on actual substantive wealth (the stack of it that sits beneath us).

Says Penney Frohling, a partner at AT Kearney: "To understand the impact of the market crash, though, you need to look at wealth – not just how much people hold, but how it is held across different asset types.  This is harder to do but drives quite different insights about how deeply and how widely the market crash and subsequent recovery have affected investors across age and wealth bands." "On an income basis, the UK and Australia have similar levels of equality according to the UN, with the US having proportionately more very high- and very low-earners. But in terms of the distribution of what people own rather than what they earn, the UK picture is more like an emerging market – though of course at a higher level."

In the latest UN report on the gini coefficient (in which a score of 0 means absolutely equal income across the population and 100 means one person has all the income), the UK scored 36.0, Australia 35.2, USA: 40.8. In part the poor score for the UK is due to its relatively ungenerous pension provision, compared with Australia where there is a compulsory pension savings scheme.

But what I find particularly intriguing (and this is something which won’t be clear for another year or more) is the question of whether this crisis has levelled out those inequality gaps. The Great Depression and its aftermath most certainly did, but despite the fact that the gini coefficient (certainly in the US, probably in the UK) are at levels comparable with the late 1920s and early 1930s, we haven’t yet seen any kind of dramatic social backlash as a result.

Food Stamp Use Soars, and Stigma Fades
With food stamp use at record highs and climbing every month, a program once scorned as a failed welfare scheme now helps feed one in eight Americans and one in four children. It has grown so rapidly in places so diverse that it is becoming nearly as ordinary as the groceries it buys. More than 36 million people use inconspicuous plastic cards for staples like milk, bread and cheese, swiping them at counters in blighted cities and in suburbs pocked with foreclosure signs.

Virtually all have incomes near or below the federal poverty line, but their eclectic ranks testify to the range of people struggling with basic needs. They include single mothers and married couples, the newly jobless and the chronically poor, longtime recipients of welfare checks and workers whose reduced hours or slender wages leave pantries bare.

While the numbers have soared during the recession, the path was cleared in better times when the Bush administration led a campaign to erase the program’s stigma, calling food stamps "nutritional aid" instead of welfare, and made it easier to apply. That bipartisan effort capped an extraordinary reversal from the 1990s, when some conservatives tried to abolish the program, Congress enacted large cuts and bureaucratic hurdles chased many needy people away.

From the ailing resorts of the Florida Keys to Alaskan villages along the Bering Sea, the program is now expanding at a pace of about 20,000 people a day. There are 239 counties in the United States where at least a quarter of the population receives food stamps, according to an analysis of local data collected by The New York Times. The counties are as big as the Bronx and Philadelphia and as small as Owsley County in Kentucky, a patch of Appalachian distress where half of the 4,600 residents receive food stamps.

In more than 750 counties, the program helps feed one in three blacks. In more than 800 counties, it helps feed one in three children. In the Mississippi River cities of St. Louis, Memphis and New Orleans, half of the children or more receive food stamps. Even in Peoria, Ill. — Everytown, U.S.A. — nearly 40 percent of children receive aid. While use is greatest where poverty runs deep, the growth has been especially swift in once-prosperous places hit by the housing bust.

There are about 50 small counties and a dozen sizable ones where the rolls have doubled in the last two years. In another 205 counties, they have risen by at least two-thirds. These places with soaring rolls include populous Riverside County, Calif., most of greater Phoenix and Las Vegas, a ring of affluent Atlanta suburbs, and a 150-mile stretch of southwest Florida from Bradenton to the Everglades. Although the program is growing at a record rate, the federal official who oversees it would like it to grow even faster. "I think the response of the program has been tremendous," said Kevin Concannon, an under secretary of agriculture, "but we’re mindful that there are another 15, 16 million who could benefit."

Nationwide, food stamps reach about two-thirds of those eligible, with rates ranging from an estimated 50 percent in California to 98 percent in Missouri. Mr. Concannon urged lagging states to do more to enroll the needy, citing a recent government report that found a sharp rise in Americans with inconsistent access to adequate food. "This is the most urgent time for our feeding programs in our lifetime, with the exception of the Depression," he said. "It’s time for us to face up to the fact that in this country of plenty, there are hungry people."

The program’s growing reach can be seen in a corner of southwestern Ohio where red state politics reign and blue-collar workers have often called food stamps a sign of laziness. But unemployment has soared, and food stamp use in a six-county area outside Cincinnati has risen more than 50 percent. With most of his co-workers laid off, Greg Dawson, a third-generation electrician in rural Martinsville, considers himself lucky to still have a job. He works the night shift for a contracting firm, installing freezer lights in a chain of grocery stores. But when his overtime income vanished and his expenses went up, Mr. Dawson started skimping on meals to feed his wife and five children.

He tried to fill up on cereal and eggs. He ate a lot of Spam. Then he went to work with a grumbling stomach to shine lights on food he could not afford. When an outreach worker appeared at his son’s Head Start program, Mr. Dawson gave in. "It’s embarrassing," said Mr. Dawson, 29, a taciturn man with a wispy goatee who is so uneasy about the monthly benefit of $300 that he has not told his parents. "I always thought it was people trying to milk the system. But we just felt like we really needed the help right now."

The outreach worker is a telltale sign. Like many states, Ohio has campaigned hard to raise the share of eligible people collecting benefits, which are financed entirely by the federal government and brought the state about $2.2 billion last year. By contrast, in the federal cash welfare program, states until recently bore the entire cost of caseload growth, and nationally the rolls have stayed virtually flat. Unemployment insurance, despite rapid growth, reaches about only half the jobless (and replaces about half their income), making food stamps the only aid many people can get — the safety net’s safety net.

Support for the food stamp program reached a nadir in the mid-1990s when critics, likening the benefit to cash welfare, won significant restrictions and sought even more. But after use plunged for several years, President Bill Clinton began promoting the program, in part as a way to help the working poor. President George W. Bush expanded that effort, a strategy Mr. Obama has embraced.

The revival was crowned last year with an upbeat change of name. What most people still call food stamps is technically the Supplemental Nutrition Assistance Program, or SNAP. By the time the recession began, in December 2007, "the whole message around this program had changed," said Stacy Dean of the Center on Budget and Policy Priorities, a Washington group that has supported food stamp expansions. "The general pitch was, ‘This program is here to help you.’ " Now nearly 12 percent of Americans receive aid — 28 percent of blacks, 15 percent of Latinos and 8 percent of whites. Benefits average about $130 a month for each person in the household, but vary with shelter and child care costs.

In the promotion of the program, critics see a sleight of hand. "Some people like to camouflage this by calling it a nutrition program, but it’s really not different from cash welfare," said Robert Rector of the Heritage Foundation, whose views have a following among conservatives on Capitol Hill. "Food stamps is quasi money." Arguing that aid discourages work and marriage, Mr. Rector said food stamps should contain work requirements as strict as those placed on cash assistance. "The food stamp program is a fossil that repeats all the errors of the war on poverty," he said.

Across the country, the food stamp rolls can be read like a scan of a sick economy. The counties of northwest Ohio, where car parts are made, take sick when Detroit falls ill. Food stamp use is up by about 60 percent in Erie County (vibration controls), 77 percent in Wood County (floor mats) and 84 percent in hard-hit Van Wert (shifting components and cooling fans). Just west, in Indiana, Elkhart County makes the majority of the nation’s recreational vehicles. Sales have fallen more than half during the recession, and nearly 30 percent of the county’s children are receiving food stamps.

The pox in southwest Florida is the housing bust, with foreclosure rates in Fort Myers often leading the nation in the last two years. Across six contiguous counties from Manatee to Monroe, the food stamp rolls have more than doubled. In sheer numbers, growth has come about equally from places where food stamp use was common and places where it was rare. Since 2007, the 600 counties with the highest percentage of people on the rolls added 1.3 million new recipients. So did the 600 counties where use was lowest.

The richest counties are often where aid is growing fastest, although from a small base. In 2007, Forsyth County, outside Atlanta, had the highest household income in the South. (One author dubbed it "Whitopia.") Food stamp use there has more than doubled. This is the first recession in which a majority of the poor in metropolitan areas live in the suburbs, giving food stamps new prominence there. Use has grown by half or more in dozens of suburban counties from Boston to Seattle, including such bulwarks of modern conservatism as California’s Orange County, where the rolls are up more than 50 percent.

While food stamp use is still the exception in places like Orange County (where 4 percent of the population get food aid), the program reaches deep in places of chronic poverty. It feeds half the people in stretches of white Appalachia, in a Yupik-speaking region of Alaska and on the Pine Ridge Indian Reservation in South Dakota. Across the 10 core counties of the Mississippi Delta, 45 percent of black residents receive aid. In a city as big as St. Louis, the share is 60 percent.

Use among children is especially high. A third of the children in Louisiana, Missouri and Tennessee receive food aid. In the Bronx, the rate is 46 percent. In East Carroll Parish, La., three-quarters of the children receive food stamps. A recent study by Mark R. Rank, a professor at Washington University in St. Louis, startled some policy makers in finding that half of Americans receive food stamps, at least briefly, by the time they turn 20. Among black children, the figure was 90 percent.

Across the small towns and rolling farmland outside Cincinnati, old disdain for the program has collided with new needs. Warren County, the second-richest in Ohio, is so averse to government aid that it turned down a federal stimulus grant. But the market for its high-end suburban homes has sagged, people who build them are idle and food stamp use has doubled. Next door, in Clinton County, the blow has been worse. DHL, the international package carrier, has closed most of its giant airfield, costing the county its biggest employer and about 7,500 jobs. The county unemployment rate nearly tripled, to more than 14 percent.

"We’re seeing people getting food stamps who never thought they’d get them," said Tina Osso, the director of the Shared Harvest Food Bank in Fairfield, which runs an outreach program in five area counties. While Mr. Dawson, the electrician, has kept his job, the drive to distant work sites has doubled his gas bill, food prices rose sharply last year and his health insurance premiums have soared. His monthly expenses have risen by about $400, and the elimination of overtime has cost him $200 a month. Food stamps help fill the gap.

Like many new beneficiaries here, Mr. Dawson argues that people often abuse the program and is quick to say he is different. While some people "choose not to get married, just so they can apply for benefits," he is a married, churchgoing man who works and owns his home. While "some people put piles of steaks in their carts," he will not use the government’s money for luxuries like coffee or soda. "To me, that’s just morally wrong," he said.

He has noticed crowds of midnight shoppers once a month when benefits get renewed. While policy analysts, spotting similar crowds nationwide, have called them a sign of increased hunger, he sees idleness. "Generally, if you’re up at that hour and not working, what are you into?" he said. Still, the program has filled the Dawsons’ home with fresh fruit, vegetables, bread and meat, and something they had not fully expected — an enormous sense of relief. "I know if I run out of milk, I could run down to the gas station," said Mr. Dawson’s wife, Sheila. As others here tell it, that is a benefit not to be overlooked.

Sarah and Tyrone Mangold started the year on track to make $70,000 — she was selling health insurance, and he was working on a heating and air conditioning crew. She got laid off in the spring, and he a few months later. Together they had one unemployment check and a blended family of three children, including one with a neurological disorder aggravated by poor nutrition.

They ate at his mother’s house twice a week. They pawned jewelry. She scoured the food pantry. He scrounged for side jobs. Their frustration peaked one night over a can of pinto beans. Each blamed the other when that was all they had to eat. "We were being really snippy, having anxiety attacks," Ms. Mangold said. "People get irritable when they’re hungry." Food stamps now fortify the family income by $623 a month, and Mr. Mangold, who is still patching together odd jobs, no longer objects. "I always thought people on public assistance were lazy," he said, "but it helps me know I can feed my kids."

So far, few elected officials have objected to the program’s growth. Almost 90 percent of beneficiaries nationwide live below the poverty line (about $22,000 a year for a family of four). But a minor tempest hit Ohio’s Warren County after a woman drove to the food stamp office in a Mercedes-Benz and word spread that she owned a $300,000 home loan-free. Since Ohio ignores the value of houses and cars, she qualified.

"I’m a hard-core conservative Republican guy — I found that appalling," said Dave Young, a member of the county board of commissioners, which briefly threatened to withdraw from the federal program. "As soon as people figure out they can vote representatives in to give them benefits, that’s the end of democracy," Mr. Young said. "More and more people will be taking, and fewer will be producing."

At the same time, the recession left Sandi Bernstein more sympathetic to the needy. After years of success in the insurance business, Ms. Bernstein, 66, had just settled into what she had expected to be a comfortable retirement when the financial crisis last year sent her brokerage accounts plummeting. Feeling newly vulnerable herself, she volunteered with an outreach program run by AARP and the Ohio Association of Second Harvest Food Banks.

Having assumed that poor people clamored for aid, she was surprised to find that some needed convincing to apply."I come here and I see people who are knowledgeable, normal, well-spoken, well-dressed," she said. "These are people I could be having lunch with." That could describe Franny and Shawn Wardlow, whose house in nearby Oregonia conjures middle-American stability rather than the struggle to meet basic needs. Their three daughters have heads of neat blond hair, pink bedroom curtains and a turtle bought in better times on vacation in Daytona Beach, Fla. One wrote a fourth-grade story about her parents that concluded "They lived happily ever after."

Ms. Wardlow, who worked at a nursing home, lost her job first. Soon after, Mr. Wardlow was laid off from the construction job he had held for nearly nine years. As Ms. Wardlow tells the story of the subsequent fall — cutoff threats from the power company, the dinners of egg noodles, the soap from the Salvation Army — she dwells on one unlikely symbol of the security she lost. Pot roast. "I was raised on eating pot roast," she said. "Just a nice decent meal."

Mr. Wardlow, 32, is a strapping man with a friendly air. He talked his way into a job at an envelope factory although his boss said he was overqualified. But it pays less than what he made muscling a jackhammer, and with Ms. Wardlow still jobless, they are two months behind on the rent. A monthly food stamp benefit of $429 fills the shelves and puts an occasional roast on the Sunday table. It reminds Ms. Wardlow of what she has lost, and what she hopes to regain. "I would consider us middle class at one time," she said. "I like to have a nice decent meal for dinner."

Food banks nationwide report more 1st timers
Prentice Jones worked construction jobs around Chicago for most of his 60 years and is quick to boast of a foreman job he once held at a revamped city college and 23 years at a steel company. But these days, work has been so scarce that the man with a penchant for cowboy hats has been forced to move in with his mother and do something this week he never expected — visit a food pantry. "There's no work now," Jones said while waiting in line at St. Columbanus Parish for a frozen turkey and bags of apples, bread and potatoes. "I pray it's temporary."

A surge in first time visitors has contributed to the greatest demand in years at food banks nationwide, according to Feeding America, a Chicago-based national food bank association. Many of the first timers were middle class but lost jobs or had their wages cut. "They were doing pretty well," said Ross Fraser of Feeding America. "They've completely had the rug pulled out from under them."

Federal agencies and national organizations have just started tracking first timers. But anecdotal evidence and statistics from individual pantries is clear: More and more new faces are appearing among the approximately 25 million Americans who rely on food pantries each year. St. Columbanus Pantry, which serves about 500 people a week on Chicago's South Side, has had up to 50 new people sign up each week since February. The Friendly Center in Orange, Calif., serves 80 families a day, with about 20 new people trying to qualify each day, far more than last year. And at the Community Kitchen and Food Pantry of West Harlem, N.Y., about 250 of the 1,000 people who show up each day — up from 750 this time last year — are newcomers.

"The line has grown so long that when you walk outside, it's overwhelming," said Jesse Taylor, senior director at the pantry. "A lot of people are coming out in suits, they're carrying brief cases." Food banks across the country report about a 30 percent increase in demand on average, but some have seen as much as a 150 percent jump in demand from 2008 through the middle of this year, according to Feeding America. Reliance on food banks and the number of Americans using food stamps — at least 35 million currently — are two indicators of hunger. The U.S. Department of Agriculture said earlier this month that 49 million people, or 14.6 percent of U.S. households, struggle to put food on the table, the most since the agency began tracking food security levels in 1995.

First timers to food banks have worries others might not experience. For starters, they may not know what to do. "Some don't have the coping skills, they've never been in this situation," said Elizabeth Donovan, a director at the Northern Illinois Food Bank, which serves 13 counties. "Asking for help is difficult." Jones was cajoled into coming into the food pantry by a friend who knew where to go, where to wait and how to apply for services. But others say the experience is fraught with shame, confusion or anger.

"We're hearing from more and more middle class who have never in their life gone to a food pantry," said Diane Doherty, an executive director at the Illinois Hunger Coalition. "They're very, very frustrated and angry." About half of the almost 40,000 families who have been fed at Holy Family Food Pantry in Waukegan, Ill., about 40 miles north of Chicago, are new, services director Barb Karacic said. They include Gail Small, a 55-year-old school bus driver who got laid off from her $16 an hour job at the Waukegan Public School District earlier in the year and hasn't been able to find work since.

"It was very embarrassing," Small said. "I didn't tell my children. I didn't tell my dad." Others say at some point, the need to survive trumps emotions. Linda Herrera, 59, went to All Saints Parish on Detroit's southwest side for the first time this week. Herrera, who is on state assistance, said the embarrassment of having to pick up food was offset by her empty cupboards. "We were down to practically nothing," she said, carrying out bags containing juice, mashed potatoes, dried milk, rice and beans. "I'm trying to just make it now 'til the end of the month, until I get my check."

From the Hospital to Bankruptcy Court
Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick. Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.

Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs. "I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it," said Mr. Mullins, a 16-year veteran of the Dickson police force. "But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight."

Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing. In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.

President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those "who live every day just one accident or illness away from bankruptcy." He added: "These are not primarily people on welfare. These are middle-class Americans." The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill. The legislation moving through Congress would attack the problem in numerous ways.

Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually. How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.

Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance. But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.

At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt. "This has really become the insurance system for the country," said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.

Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings. "You can’t believe how many people discharge medical debts," Ms. Limor said. "It’s a kind of trailing indicator of who’s suffering in this economy." Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. "They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well," he said.

That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities. "The medical bills put me over the edge," said Ms. Phillips, who lost her health insurance along with her job. "I had no money for food at this point. How was I going to do it?"

It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. "But the medical problem is what took us down," said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. "Everything was due, they wanted their money now, now, now, and it just became overwhelming."

For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt. After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.

Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family. As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars. Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. "I tell my wife that we beat the economy," he said, "but health care beat us."

Taxpayers face a generation of pain
Fiscal stimulus was the economic tool, so long disparaged by the policymaking community, that came into its own during the economic crisis, playing its part alongside monetary easing and bank bail-outs in warding off a depression. But the result of fiscal stimulus in almost every Group of 20 economy has been the rise of deficits to levels never seen in peacetime, debt so high there is not the ammunition to fight another economic war and a bill to clean up the mess that will be felt by tax?payers for a generation to come. The latest estimates from the International Monetary Fund show that advanced countries’ deficits averaged 1.9 per cent of national income before the financial crisis started in 2007. This year they are expected to hit 9.7 per cent, followed by 8.7 per cent in 2010.

Public sector gross debt is expected to explode from an average across advanced economies of 78 per cent of national income in 2007 to 118 per cent in 2014. Emerging economies with their faster economic growth and greater constraints on borrowing expect much lower build-up of debt. The greatest effect on deficits and debt has come not from discretionary stimulus measures but lost tax revenues and increases in public expenditure as unemployment has risen. The problem for advanced economies is that plans for a great fiscal consolidation are needed at the same time as they are expected to cope with the retirement of the postwar "baby boomer" generation. Few are under any illusion that this will be a difficult task. Jørgen Elmeskov, acting chief economist of the Organisation for Economic Co-operation and Development, argues that "stopping the rot is clearly necessary and will call for fiscal consolidation that is substantial in most cases and drastic in some".

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said this week that fiscal consolidation should be the "top priority" for the medium term in advanced economies once recovery was firmly established, because "the threats are greater, the politics are more complicated and the machinery of adjustment is more unwieldy". The IMF chief was speaking in London, which was apt as the UK has potentially one of the most difficult feats of fiscal consolidation to perform. Its tax revenues were heavily dependent on financial sector profits; public spending had been set to rise rapidly until 2011; and the country has very strong automatic stabilisers and an extensive means-tested system of state support, which automatically kicks in as people become unemployed.

The UK’s budget deficit is projected to rise from 2.6 per cent of national income in 2007 to 13.2 per cent in 2010, according to the IMF. Gross debt is forecast to more than double from an internationally low 44 per cent of national income to 98 per cent in 2014. The UK has records on government borrowing and debt stretching back to 1691. The expected 50 percentage point rise in the debt-to-national-income ratio is similar in proportion to that experienced during the many wars Britain fought in the 18th century and is the biggest peacetime explosion of government liabilities. In cash terms, the government expects to borrow more in 2009 and 2010 than the entire borrowing of centuries of British governments between 1692 and 1997. The pressure mounted this week when Mervyn King, the Bank of England governor, reiterated his view that official plans to reduce the deficit by half over the next four years were insufficient and not credible.

Instead, he called for "something where a really significant reduction in deficits to eliminate a large part of the structural deficit should take place over the lifetime of a parliament". Plans for deficit reduction are central to the domestic political debate, but neither main UK party has come close to providing a detailed programme for public expenditure curbs of the scale needed to cut the deficit and control debt. The scale of the cuts is, however, already clear. Under the government’s existing Budget, it is planning to halve the annual level of capital expenditure between 2009-10 and 2013-14. Road, hospital and school building will bear the brunt. Day-to-day expenditure will also be hit hard.

Over the three years from April 2011 government departments will face cuts of 1.9 per cent a year in real terms, compared with the annual rises of more than 4 per cent they were used to in the previous decade. "This would be the tightest squeeze in spending on public services since the UK was negotiating its spending plans with the IMF in the late 1970s," says Robert Chote, director of the independent Institute for Fiscal Studies. The main difference between the parties is that Labour believes that doing too much deficit reduction too soon might threaten the anaemic recovery, while the Conservatives claim that doing too little might lead to higher borrowing costs. But the big issue confronting Britain and governments in all advanced economies is that the current level of public borrowing is too high but few know when to start consolidation, or how fast it should be. Whatever happens, people in Britain will have to get used to paying much more for their public services and receiving much less.

Professor advises underwater homeowners to walk away from mortgages
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong. That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike. Doing so, he suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says. "Homeowners should be walking away in droves," White said. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits."

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure." Better yet, homeowners can default "strategically": Buy all the major items they'll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender. "Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.

What kind of law school professorial advice is this? Aren't mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners' assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.

The main point, he said, is that too often people's emotions get in the way of clear financial thinking about mortgages, turning them into what he calls "woodheads" -- "individuals who choose not to act in their own self-interest." Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so. Buttressing these emotions is a system that White labels "the social control of the housing crisis" -- pressures and messages continually sent to consumers by the "social control agents," namely banks, government and the media. The mantra that these agents -- all the way up to President Obama -- pound into owners' heads, White said, is that "voluntarily defaulting on a mortgage is immoral."

Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts. Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed.

How does White's 52-page manifesto go over with mortgage lenders? Predictably, not well. Officials at Fannie Mae and Freddie Mac -- investors who fund the bulk of all new mortgages in the country -- disputed White's characterization of how quickly after foreclosure a walkaway borrower can obtain a new loan. It's not three years, they said, it's a minimum of five years, absent extenuating circumstances such as medical or employment problems that caused the foreclosure.

"Borrowers who walk away from their mortgage obligations face serious consequences," including severely depressed credit scores for extended periods, said Brian Faith of Fannie Mae. In addition, he said, "there's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community."

A Faith-Based Recovery
by Joel Bowman

Today we have something extraordinary for you to ponder. We call it, in the prescribed, politico-doublespeak of the times, a "recovery." Allow us to elaborate for just a moment…

A "recovery," as defined by the same economic talent that led us into mass speculative temptation in the first place, is a magical reversal of fortunes for the global economy.

What is this recovery based on? Glad you asked, because here comes the extraordinary part…it is underpinned by the hysterical, back-slapping delusion that comes from accepting that there is, in fact, a recovery. It is real, in other words, because we are told it is real.

Convinced yet?

As the late astronomer, Carl Sagan, was fond of saying, "Extraordinary claims require extraordinary evidence." In the absence of such evidence, let us examine the faith-based foundation on which the stability of the world’s largest economy now rests.

Below are a few tenets all sworn Recoverites must accept, any and all evidence to the contrary be damned:

1. That a consumer economy can continue to grow exponentially, even as the consumers themselves are forced to economize…

Where once manufacturing, innovation and a solid savings base held sturdy the US economy, there is now consumption, a waning service industry and a fiscally constipating accumulation of debt.

With household liabilities as a percentage of disposable income running at almost 130% for the average American family, and official unemployment bubbling over a 26-year peak of 10.2%, it’s tough going at the mall…even for the mighty US consumer…and even after the government has bribed him to go out and spend!

Already GDP estimates for the September quarter were revised downward – from 3.5% to 2.8% – after it became clear that the effects of the Cash for Clunkers program – the governmental equivalent of economic Viagra – had worn off sooner than expected. Barely had the poor consumer got his pants off and his wallet out when his many embarrassing deficits became all too apparent.

2. That the notices of liability printed by the Feds – commonly referred to as "greenbacks" – will enjoy the infinite confidence and unyielding patience of the nation’s foreign creditors…

For the past year we have heard rumblings from the BRIC nations, in particular China, over the government-sponsored debasement of the greenback. Most recently, Liu Mingkang, the Middle Kingdom’s chief banking regulator, argued that the combination of a weak dollar with persistently low interest rates had encouraged a "huge carry trade" that was having a "massive impact on global asset prices."

It is no secret that "dollar alternatives" are openly discussed among large holders of US paper. So shaky is the dollar, in fact, that even a (briskly discredited) rumor in an English paper about OPEC nations ditching the buck sent the world’s "reserve" currency into a tailspin, tipping off gold’s current trailblazing rise – itself another indicator of fear and loathing of the once almighty buck.

(As we were jotting these few words, midweek, the greenback had just fallen below one Swiss franc for only the second time ever, reaching a 15-month low on the dollar index and approaching a 14-year low against the yen.)

3. That those creditors will continue to reinvest said monies back into the increasingly regulated and overtaxed US securities exchanges…

And that’s to say nothing of the growing minority of American citizens and companies already, wisely, looking for ways to flee their own shores with the hope of doing business in more accommodating, less intrusive arenas.

4. That extorting money from current and future workers in order to allocate it to the nation’s least efficient industries is a positive long-term strategy…

Over the past year, the government of the United States of America has pumped more money into its flailing economy than the total value of all the gold ever mined in world history…doubled.

Before we go on, let us remember that each and every one of those dollars – and the trillions more splashed around by the do-gooder interventionalists of the world – are dollars that are NOT now available to private citizens or the thousands of small businesses that might have benefited from a little extra cash during this whole crisis.

The true opportunity cost of this gross misallocation of vital resources will, of course, never be known. What is known, however, is that said bailouts helped the federal budget deficit along to a post WWII record of more than $1.4 trillion in fiscal 2009. Treasury officials warn the national debt limit of $12.1 trillion may be reached and breached by as early as December.

5. That those still purchasing stocks are better informed than the industries’ insiders…

Insider selling increased during the latest week from $960 million in sales to over $1.39 billion. That compares with "buys" totaling just $160 million. The ratio of selling to buying has, at times during this stock market rally, stretched to as much as 31:1.

Is there something outsiders know that insiders don’t? Unlikely.

6. And, that the geniuses who missed the warning signs of the biggest bust up in modern financial history are the most qualified to guide us out of it…

Even up until the very eve of the crisis, elected and unelected politicians assured those who knew better that the vast and plentiful risks to the financial industry were contained. Clearly, they were not. At every juncture since then, those leaders and others have sought to impose the very measures – currency debasement, deficit spending, increased state intervention, bailouts, nationalizations etc. – that history tells us lead to outright ruin.

Sir Isaac Newton – himself a man of faith…and a devout student of alchemy – once wrote, "If I have seen further it is only by standing on the shoulders of giants."

What is perhaps the most galling of this entire financial debacle is that, with the abundance of insightful economists history has granted us, today’s leaders should appear proud to be seen standing on the shoulders of earthworms.

Get Ready for Half a Recovery
A robust economic recovery in 2010 is certainly on most investors’ wish lists as this year draws to a close. A return to prosperity would not only mean an end to our long financial nightmare, but it would also buttress a rebounding stock market, one of 2009’s few bright spots.

The news out of Dubai late last week, however — that its investment company is struggling to meet repayments on some of its $59 billion in debt — reminds us that we are far from finished with a ferocious deleveraging process that began last year. And the weight of debt that still must be worked out is one reason that Ian Shepherdson, chief United States economist at High Frequency Economics, estimates that growth in the United States’ output for 2010 will be no better than 2 percent.

Mr. Shepherdson — whose economic forecasts have been more right than wrong throughout the credit crisis — says that while cost-cutting has produced enviable productivity figures and rising earnings at large companies, continued growth in corporate output will be much harder to come by. “Looking further ahead, you can’t survive on cost-cutting forever,” he says. “We will have to see decent volume growth but we won’t see that immediately.”

Mr. Shepherdson’s 2 percent estimate for gross domestic product growth next year is roughly half what he would normally expect for a solid economic recovery. And a crucial reason is the fact that bad assets on personal and institutional balance sheets are the equivalent of a ball and chain strapped to the economy, he says. “You can pick up that ball and walk with it,” he says, “but you have to walk slowly.”

All that debt overhanging consumers and organizations is the pivotal reason we are still seeing a free fall in bank lending. And small businesses, which account for half of all jobs in this country, are taking the brunt of this credit contraction. Smaller banks are especially worried about their own balance sheets and aren’t making loans. This puts small businesses — important engines of growth — squarely on the brink.

Investors may be celebrating data that points to improvements in economic activity — this month, for example, the Institute for Supply Management said manufacturing had expanded for three months in a row. But Mr. Shepherdson worries about what he sees in monthly figures put out by the National Federation of Independent Business, a trade group representing small businesses. The N.F.I.B. data was far more prescient than that of the I.S.M. in predicting the current recession, which began in December 2007, Mr. Shepherdson says. The N.F.I.B. survey signaled a downturn in the spring of 2007, while I.S.M. studies didn’t point to a recession until after Lehman Brothers failed in September 2008.

In its survey, the N.F.I.B. asks small businesses how easy it is for them to get loans. The most recent data shows that credit tightness peaked earlier this fall — the worst levels in 23 years, Mr. Shepherdson says. Although credit continues to remain troublingly hard for small business to come by, that phenomenon is a largely untold story. “Wall Street focuses on big companies because they are in the Standard & Poor’s 500, but small businesses are still in a very grim state,” he says. “Small-company activity according to the N.F.I.B. is still at deep recession levels.”

And while small businesses do not make up the big stock indexes, they do contribute significantly to the overall economy. The tens of millions of people who work at small concerns are, after all, customers of those big, high-profile corporations like McDonald’s, Wal-Mart and Whirlpool. What we all are enduring — and what small businesses, workers and consumers continue to be pummeled by, even as Wall Street wizards jump back into the bonus pool — is the dismantling of the great credit boom of the early 2000s. This necessary but grueling deleveraging began last year and is now in full swing. But it is nowhere near over.

Bank credit outstanding peaked in October 2008 at $7.3 trillion and is now down to $6.72 trillion. Still, Mr. Shepherdson says he thinks that banking-sector loan and lease assets have to fall by an additional $2 trillion. That could take another two years. “We are in unknown territory here,” he said. “Since the peak in October ’08, bank credit has dropped by 8 percent. That is enormous and it is accelerating. The peak-to-trough drop in the early ’90s was just 1.3 percent and that was enough to scare the pants off the Fed.”

This credit cave-in is the driving force behind the Federal Reserve’s mortgage purchase program, Mr. Shepherdson says. The last thing the central bank wants to see is a decline in the broad-based money supply, because when that happens it usually means a depression is afoot. Money supply didn’t fall in the early 1990s, but it fell by one-quarter during the 1930s. The Fed’s asset purchase program is therefore not about driving down mortgage rates, Mr. Shepherdson says, but about trying to prevent a collapse in the money supply. When the Fed buys assets it creates deposits, which, in turn, helps offset the credit pullback. If the Fed wasn’t buying mortgages with both hands, Mr. Shepherdson estimates, the money supply would be falling 1 percent a month.

The message amid this gloom, he says, is that the Fed isn’t likely to raise interest rates anytime soon. In fact, he doesn’t anticipate an increase in rates until the spring of 2011. “I would be astonished if they raised rates in the heart of the credit contraction storm,” Mr. Shepherdson says. “The credit contraction will last for a couple of years and if the Fed is interested in offsetting it, they will have to buy assets through next year.” Deflating an asset bubble is never fun, and this particular specimen is one for the record books. The binge may have been a blast, but the purge, alas, sure is painful.

Freak Show
by Bill Bonner

Governments benefit from 'teaser' rates. Wait 'til they come to an end...

There are so many breathtaking things going on around us we practically suffocate. Last week, three-month US Treasury-bills yielded all of 0.015% interest. Some yields were below zero. In effect, investors gave the government money. The government thanked them and promised to give them back less money three months later. How do you explain this strange transaction? Was there a full moon?

Moonlight on the week of November 6 must have been especially intense. Bids totaled a record $361 billion for just $86 billion worth of T- bills. This was $100 billion more than the peak set during the credit crisis a year ago. What? A third of a trillion dollars, per week, gives itself up to the hard labor of government service and asks for nothing in return?

Even lending to the government for much longer period yields little to the investor. The 10-year yield is only 3.32%. Thirty-year lenders get only 100 basis points more. And this in a currency that is melting faster than polar ice. Gold, the traditional bank reserve, is soaring in comparison. Not surprising; the US dollar money supply - measured by the US monetary base - rose 147% over the past 24 months.

The only thing rising faster than the demand for government debt is the supply of it. All major governments of the West - and Japan - are now borrowing as if their lives depended on it. The IMF predicts that Britain's ratio of public debt to GDP will rise 50% between 2007 and 2014. In America, the increase is forecast to take taxpayers nearly to the debt levels of WWII. Those estimates are probably far too low, since they depend on an economic 'recovery' that will almost certainly prove to be a disappointment. The purpose of a depression is to get rid of bad debts and correct bad investment decisions. But an economy cannot correct itself unless it is allowed to enter a correction. When you try to prevent it, you get a zombie economy in constant need of freshly borrowed blood. Debts rise, but with no recovery. As reported on this back page, former US Office of Management and Budget director David Stockman expects a zombie economy in the US, with deficits twice as great as those now projected...that is, of $2 trillion per year, not $1 trillion. This will send US debt beyond WWII levels...up to Japan- like heights.

Other governments, too, are likely to see similar swelling in their public debt limbs. All right-thinking economists and commentators have come to the same conclusion - that fiscal and monetary stimulus must continue until the 'recovery' is more manifest. Worse, they've been trapped by the logic of Keynesianism itself. Now, everything is 'stimulus.' Nothing can be cut. The boils cannot be lanced.

When you come to the end of a war, spending is naturally reduced.

Deficits can go home with the troops. Debts can be paid down. But there is no end in sight for these deficits. Because only a small part of them is the direct consequence of the war against depression. Instead, they are merely the inevitable result of governments that spend too much money. In the US this "structural deficit" is estimated by the IMF at 3.7% of GDP. In Japan and Britain it is twice that amount.

Whatever else can be said of it, this freak show cannot go on forever. The US has $2 trillion worth of short-term bills that must be refinanced in the next 12 months. It must also refinance about $1 trillion more of notes and bonds. That's without adding any additional debt! So put a deficit of $1.5 trillion on top of that and you have $4.5 trillion of financing for the US alone.

But the US is not the only one fishing in this pond. Japan's national debt already measures 200% of its GDP and is increasing rapidly. So far, Japan's deficits have been financed internally. The Japanese saved 20% of their household incomes in 1980. But the Japanese are aging. When they retire, people cease saving and begin drawing on savings to cover living expenses. At the current pace, the household savings rate should fall to zero in 5 years. Then, who will buy Japan's bonds? Who will cover Japan's deficits? The same people who are supposed to cover America's deficits?

Taken all together, the world's governments will need $1 trillion per month, in financing, over the next 12 months, according to an estimate in the Financial Times. Who has that kind of money? Total US savings are only $700 billion. Even the Chinese, if they put their entire cash pile to it, could only fund the deficits for about 67 days' worth. Warren Buffett? Less than 48 hours.

There is also the problem of paying the interest on rising debt loads. Thanks to the forgetfulness or credulity of the world's lenders, borrowers now benefit from exceptionally low rates - just like the 'teaser' rates once accorded to sub-prime lenders. But the tease will come to an end soon. Even the Obama Administration forecasts interest payments to rise from $200 billion at present to $700 billion by 2019. This assumes interest rates only regress to 'normal.' But "hot money" from the feds has acted like spent nuclear fuel; every fish in the financial pond now seems to have two heads and a bag over both of them. The freaks of November 2009 may be replaced by things perhaps no less strange, but in a different way. The last time gold was over $800 lenders to the US government demanded yields in excess of 18% in order to part with their money. That was odd too. But it had very different consequences for investors.

Arab Emirates Move to Limit Crisis in Dubai
Trying to prevent a run on its banks and possible financial turmoil, the United Arab Emirates said on Sunday that it would lend money to banks operating in Dubai amid concerns about excessive borrowing around the world. The move by the group’s central bank was an attempt to head off the kind of crisis of confidence that froze credit markets last year and brought the global economy to the brink of failure, threatening everyone from hedge fund billionaires to retirees who had their savings in supposedly safe investments.

Central bankers and government officials around the world will watch for signs that fears are spreading or are being contained as markets open in Europe and New York. They are looking to see whether investors begin taking money not just from companies and banks connected to Dubai, but also from other countries that may have taken on more debt than they can afford to repay. Asian markets in their first hours were up more than 2 percent on Monday morning.

Last week, investors fled the stocks of banks with outstanding loans to the tiny emirate and its investment arm, Dubai World. Now, analysts will be watching to see whether investors desert other highly indebted companies. While Dubai is not big enough to set off financial repercussions outside the Middle East, the main fear is that investors could flee risky markets all at once in search of safer havens for their money. As in September 2008, when the failure of Lehman Brothers heightened worries about all financial institutions, they might pull back, regardless of the markets’ strength.

Those fears were allayed only after the United States announced a huge bank bailout and began guaranteeing a variety of borrowing that slowly helped credit markets begin functioning again. That many of these measures remain in place could help contain any problems from Dubai now. But while the federation is following a similar strategy, albeit on a smaller scale, analysts expressed concern that the promise of added funds to support Dubai banks might not be enough to keep anxiety from jumping to other countries and institutions.

Indeed, an analysis from Goldman Sachs on Sunday said that the failure of federation authorities to provide a blanket guarantee for all of Dubai’s debt showed that governments worldwide were less willing to bail out overextended companies and their investors. “This episode represents a timely reminder that emergency public funding support should not be taken for granted,” wrote Francesco Garzarelli, an analyst based in London for Goldman. The extent to which the federation and its wealthiest member-state, Abu Dhabi, which has vast oil reserves, appear to guarantee Dubai’s debts could affect how investors view many other companies previously believed to have the implicit backing of their governments.

“There are plenty of people around in world capitals who are tired of bailouts,” said Simon Johnson, a former chief economist at the International Monetary Fund. As a result, banks that made big loans to some heavily indebted governments and companies might start to incur more losses. The shares of HSBC and Standard Chartered, which lent heavily to Dubai, have fallen sharply in the last week, and Mr. Johnson said that the cost of insuring against defaults by big Irish banks has surged since the Dubai announcement. A fear of contagion from Dubai would further destabilize European banks that were only starting to mend.

The Dubai crisis began last week, when the emirate said Dubai World would not be able to make on-time payments for some of its $59 billion in debt. The company invested in lavish real estate projects, including artificial islands in the shape of a palm tree and a globe, and spent heavily to acquire stakes in glittering properties like Barneys in New York and the MGM Mirage in Las Vegas. Dubai was far from alone in taking on too much debt as companies and countries around the world did the same. Investors have already been alarmed by problems in countries in Eastern Europe, in Ireland and in Greece.

Dubai’s problems are also a reminder of the lasting effects of the global real estate bubble, which remains a danger in the United States, where several big banks are encumbered by souring commercial real estate loans. There is a concern that governments have responded to the financial crisis by taking on unsustainable levels of debt that they may no longer be able to finance. Even in the United States, public debt is forecast to rise to around 80 percent, from about 40 percent, of gross domestic product, the economist Nouriel Roubini said.

“Dubai could be the beginning of a series of sovereign debt issues or crises,” said Mohamed A. El-Erian, chief executive of Pimco, the giant bond-trading firm. “What Dubai is going to do is make people think more intensely about the lagging implications of last year’s crisis. It’s going to be a wake-up call to the people who thought that the financial crisis was just a flesh wound.” Many analysts expect federation authorities to release further details as soon as Monday on how they plan to restructure the debt of Dubai and Dubai World to keep markets calm.

Analysts will be watching crucial indicators of stability or alarm. The most apparent will be if money is pulled from other investments to the safe havens. Analysts will be monitoring the amount of interest that investors demand to lend money to emerging market countries. It has already risen sharply since the Dubai crisis erupted on Wednesday. A major worry, investors say, is that the global debt crisis in private debt could metastasize into a debt crisis for governments that are running mounting deficits to pay for bailouts and stimulus packages — especially in Eastern Europe but also in Britain.

In fact, a warning sign has already started flashing: the cost of insuring debt issued by Greece, a member of the euro bloc, is now as much as insuring Turkey’s debt, an investment that was once considered much riskier. One consequence of the global financial crisis is that Greece has been forced to take on shorter-term external debt. Debt securities due within a year have risen to $24 billion in the second quarter of 2009, from $14.5 billion at the end of 2007, according to figures from international economists.

Many countries may face tests in the weeks and months to come as they try to roll over their existing debts. These countries will not be able to raise money easily or cheaply. This could put pressure on stronger members of the European Union to bail out weaker members, or at least help them restructure their debts and nurse them back to health. So strung out was Latvia this year that the country barely recovered from a speculative attack on its currency, the lat, though it is a member of the European Union. As it teetered, economists fretted about a coming “lat bath,” like the Thai “baht bath” devaluation that set off the 1997 Asian crisis.

The International Monetary Fund, World Bank and European Union stepped in to prop up the weakest countries, however, and fears of true sovereign defaults in Europe’s most vulnerable countries receded before last week’s turmoil. These institutions’ guarantees, however, do not extend to state-backed companies. Hungary, Bulgaria and the Baltic states of Latvia, Lithuania and Estonia carry foreign debt that exceeds 100 percent of their gross domestic products, Ivan Tchakarov, chief economist for Russia and the former Soviet states at Nomura bank, said in a telephone interview from London.

But the problems, if any, are likely to be limited to Europe. The tremors would not immediately spread to the United States, beyond the effects of the strengthening of the dollar, and potentially a weakening of commodity prices as investors bet on a slowdown in emerging markets. However, in the long run, a global credit crisis set off by Dubai would make the cost of financing the trillions of dollars in American debt much more expensive, Mr. Roubini said. “Even the U.S. — over time — cannot run forever unsustainable fiscal deficit,” he said. “The total financing needs of the U.S. will range in the $1.5 trillion to $1.7 trillion a year for the next decade,” he said. “That is a huge amount of public debt to issue and or roll over.”

West fears fire sale of Dubai assets that will spread across world
When an Arabian consortium bought the Peninsular & Oriental (P&O) ports company three years ago, American politicians went into uproar over the perceived terrorist threat. It emerged this week, however, that the bombshell the world should have been worried about was the debt that the group was taking on to fund its growth.

The Government of Dubai said on Wednesday that it was seeking a standstill on debt repayments for Dubai World, the vast conglomerate that bought P&O (minus the American ports) for £3.9 billion in 2006. Dubai World has liabilities of $60 billion (£36 billion) and the standstill announcement, made just before most of the Arab world stopped work for the Eid religious festival, has stunned stock and credit markets. The standstill raises the possibility that Dubai World could default on its debt.

The fear in Western markets is that banks risk losing billions, causing more paralysis in the lending markets. Dubai World’s difficulties also raise the prospect that it may be forced into a fire sale of its assets, which include some famous names in the UK. Leisurecorp, one of the many subdivisions within Dubai World, bought Turnberry, the golf course that hosted this year’s Open Championship, for £55 million last year. It also owns the Chris Evert tennis centres and more than 200 golf courses across the US — all assets that could be sold quickly to help to repay debt back home.

Dubai World’s Istithmar investment fund has $3.5 billion in businesses as diverse as Irish textbook publishers and aerospace companies. Last year Istithmar also bought a 20 per cent stake in Cirque du Soleil and the Canadian circus performers have since established a permanent base in Dubai. In the less glamorous world of ports, DP World became the third-largest operator globally after its acquisition of P&O. It owns Dubai’s Jebel Ali port and various other container terminals around the world.

In Britain DP World operates container terminals at Tilbury, near London, and Southampton, and is building a port called London Gateway. Many of the goods that are imported into Europe are, therefore, transferred through ports owned or operated by Dubai — the source of US concern when the P&O deal was struck. The Arabian group bowed to pressure after buying P&O and sold the American ports to another company. Dubai World yesterday ring-fenced DP World from the rest of the company’s debts. This was seen as an attempt to protect the profitable ports division from potential creditors.

It is Nakheel, Dubai World’s property developer, that has been causing the difficulties. The company, which built the Palm Islands in the Gulf, was due to repay a $4 billion Islamic bond on December 14. Most investors had assumed that there would be no difficulty doing so as Dubai World, the Government of Dubai and Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s billionaire ruler, were assumed to be supporting the developer. It now appears that nobody has the money to repay or refinance the bond and so the other $56 billion of Dubai World’s liabilities are also at risk.

This triggered a run on international bank stocks as investors worried about their exposure to Dubai World, which accounts for nearly three quarters of Dubai’s state debt. Falling share prices wiped £14 billion off the UK banking sector alone. Credit Suisse has estimated that European banks could have €40 billion (£36 billion) in loans to Dubai and much of this could be at risk if the Gulf emirate defaults. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai’s acquisitions and are now on the hook if the state cannot repay its debts.

Dubai enjoyed a bubble that made the boom years in the UK seem like postwar rationing. But the boom was built on debt and when credit markets tightened and the emirate’s growth slowed the property bubble burst. Prices have fallen by up to 60 per cent and more than 400 construction projects worth more than $300 billion have been shut down or postponed. Many expatriates facing negative equity and ballooning credit card bills have skipped the country rather than face debtors’ prison and Dubai’s reputation has taken a battering. If Dubai is forced to raise money to meet its debt repayments, the impact will be felt far wider than Cirque du Soleil and Turnberry golf course.

In recent years, the various investment companies owned by Sheikh Mohammed and the Government of Dubai have been buying up numerous Western assets. Dubai International Capital, the $12 billion sovereign wealth fund, bought Travelodge, the budget hotel chain. It also has a 16 per cent stake in Merlin Entertainments, which owns the London Eye, Madame Tussauds, Legoland and Thorpe Park. Sheikh Ahmed bin Saeed Al-Maktoum, of Dubai’s Supreme Fiscal Committee, said that the Government acted in full knowledge of how the markets would react and that further information would be given next week.

U.A.E. Central Bank Stands Behind Lenders, Adds Funds
The United Arab Emirates’ central bank said it "stands behind" the country’s local and foreign banks, which face losses from Dubai World’s possible default, and offered them access to more money under a new facility. Banks will be able to use a special facility tied to their current accounts that can be accessed at a cost of 50 basis points above the three-month local benchmark interest rate, the Abu Dhabi-based regulator said in an e-mailed statement today. "This is a very reassuring move by the central bank to limit the risk of any run on Dubai-based banks," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. It will alleviate any "liquidity concerns by foreign banks about the banking system, mostly those based in Dubai."

Dubai World, a state-owned holding company struggling with $59 billion of debt and other liabilities, said Nov. 25 it would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, 2010. The news led to a slump in financial markets around the world and raised prospects of new loan losses for U.A.E. and foreign banks. The benchmark three-month Emirates interbank offered rate was at 1.919 percent on Nov. 25, the last working day before a religious holiday, according to Bloomberg data. The U.A.E. has 24 local banks and 28 units of foreign lenders operating in the country, including those of Citigroup Inc. and HSBC Holdings Plc.

The cost of protecting Dubai government notes from default more than doubled to 647 basis points in three days after Dubai World announced plans to delay loan repayments, according to CMA DataVision prices. The swap contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. There are 100 basis points in a percentage point.

Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund an economic boom and diversify its economy. The onset of the global credit crisis and a decline in property prices hurt companies like Dubai World as they struggled to raise loans and forced the emirate to turn for help to Abu Dhabi, the U.A.E. capital and holder of 8 percent of the world’s oil reserves. U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’s banking system is "more sound and liquid than a year ago" and local banks’ sale of medium-term notes and commercial paper in foreign markets has declined by 25 percent over the period, the central bank said. Foreign interbank deposits make up only 5 percent of the total, it said. Dubai World, which owns property developer Nakheel PJSC, the builder of palm-tree shaped islands off the emirate’s coast, has $40 billion of debt, two bankers familiar with the company said Oct. 21, declining to be identified because the information is private. Some $18 billion of Dubai World’s debt is with companies such as port operator DP World Ltd. that have sufficient cashflow to service their loans, the bankers said. The remaining $22 billion is of greater concern, they said.

The U.A.E.’s banking industry is already the biggest among the six Gulf Arab states including Saudi Arabia, Kuwait and Qatar, with 1.54 trillion dirhams ($418 billion) in assets, central bank data show.

Dubai Debt May Be Much Higher Than $80 Billion, UBS Says
Dubai, the Persian Gulf emirate whose state-run companies are seeking to defer debt payments, may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said. “Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” Dubai- based real estate analyst Saud Masud wrote in a note. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”

Dubai, which has said it will raise as much as $20 billion selling bonds to repay borrowings, said on Nov. 25 that state- run Dubai World, with $59 billion of liabilities, would ask creditors for a “standstill” agreement as it negotiates to extend debt maturities. The request to delay debt repayment “came as a major shock” to investors, Masud and fellow UBS London-based analyst Reinhard Cluse told clients on a conference call today. Dubai World property unit Nakheel PJSC has $3.52 billion of Islamic bonds due Dec. 14. Dubai World may seek to negotiate all its liabilities as it reorganizes the business, Masud said. “The Nakheel sukuk is the largest that has ever been issued,” Cluse said on the conference call. “Markets will take some time to digest this blow.”

Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before credit markets seized up last year. The second biggest of seven sheikhdoms that make up the United Arab Emirates formed a fund to help reorganize state firms and sold $10 billion in bonds to the national central bank in February. It borrowed an additional $5 billion from Abu Dhabi government-controlled banks Nov. 25, half the $10 billion in bonds that Dubai ruler Sheikh Mohammed Bin Rashid Al-Maktoum said he planned to raise by yearend. Nakheel bondholders could demand a “significant sweetener” to renegotiate the debt and look to determine which of the real estate unit’s assets they may be able to claim, according to Masud.

There is growing interest from Persian Gulf investment funds in acquiring properties owned by Dubai entities, including Nakheel, which may be forced to sell assets to reduce debt, said Michael Atwell, head of Middle East operations at real estate broker Cushman & Wakefield. “We can sense it, and we’re hoping to have some transactions from several funds with buying requirements, some over $100 million,” he said. Potential buyers may be seeking stable cash flow from buildings with long leases. “The city is still buzzing. Dubai won’t turn into a ghost town, but there’ll be some big restructuring and reorganization, without a doubt.”

Seeking a repayment delay may indicate that Abu Dhabi, the U.A.E.’s largest sheikhdom, may not want to support Dubai further financially until the smaller emirate addresses internal problems at government-run companies, Masud said. “This could be the realization that you cannot simply buy your way out of this crisis,” Masud said. The request could also suggest that Abu Dhabi and Dubai have decided to seek to bolster long-term confidence in the market by forcing weaker parts of government businesses to take responsibility for bad decisions and could involve defaults at some Dubai firms, Masud said.

Dubai property developers may be liable for an estimated $11 billion required to build 40,000 homes that they have started, said Masud in an interview yesterday. That amount represents the off-balance sheet cost, or “funding gap” required to complete and hand over the properties, on which investors are now defaulting, by the end of 2010. Nakheel’s share of that funding gap is about $2 billion, estimated Masud. Around half of the investors in the 40,000 unfinished homes may default by the end of next year, he said. Mortgage defaults, which stand at about 3 percent of the total in the U.A.E., may increase fivefold to “the teens,” Masud said on the call today.

Greece and Dubai show the system is still unstable
by Gillian Tett

A watershed in the derivatives world could be reached this week: the cost of insuring against a bond default by Greece, using credit derivatives, may rise above the comparable metric for Turkey for the first time. Just two short years ago, that would have seemed almost inconceivable to most credit default swaps traders, never mind proud Greek politicians. After all, in 2007, the Turkish CDS spread - like that of many "emerging markets" - was trading at about 500 basis points on perceived fiscal risks.

Greece, by contrast, was nearer 15bp, because it was a member of the European Monetary Union, and its euro-denominated bonds were considered quasi-protected by other euro states. But in the past year the fiscal positions of many emerging markets nations, such as Turkey, have become more favourable relative to the western world. Meanwhile, Greece has plunged into a profound budgetary mess, notwithstanding its use of the euro.

Thus yesterday - as markets reeled from the Dubai shock and investors fled from risk - the bid-offer spread on fiveyear Greek CDSs was 201bp-208bp, according to Markit. That of Turkish CDSs was 207bp-212bp,
leaving them neck and neck (and according to Bloomberg data, in some trades the Greek CDS was even higher than Turkey). All this is a bitter blow to Greek pride. However, there is a much bigger moral here, which cuts to the heart of the Dubai saga too.

Two years ago, global investors generally did not spend much time worrying about so-called "tail risk" (a banking term for the chance that seemingly remote, nasty events might occur). After all, before 2007, when the world was supposedly enjoying the era of the "Great Moderation", the world seemed so stable and predictable that it was hard to imagine truly unpleasant events occurring. But in the past two years, a seemingly safe financial system has crumbled, and - to paraphrase Lewis Carroll - investors have repeatedly been asked to believe six impossible things before breakfast, ranging from the collapse of Lehman Brothers to the implosion of Iceland (and much else). Tail risk, in other words, has leapt into investor consciousness.

And while the financial markets have stabilised in the past six months, that lesson about tail risk cannot be easily unlearnt. The sheer psychological shock of 2007 and 2008, in other words, has left investors looking like veterans from a brutal war. Long after the fighting has stopped, the mere sound of a "bang", is apt to leave them running for cover. All this does not mean - let me stress - that it is correct to expect the world to melt down imminently. The fact that the CDS spread for Greek bonds has swung from 5bp to 200bp, in other words, should not be interpreted as a sign of an imminent Greek default, or a likely break-up of the euro. The CDS market is pretty illiquid and prices can swing on low volumes.

But what the CDS market does capture is the perception of tail risk, or low-probability outcomes. Or, to put it another way, the market projects what could occur if the current fiscal and political situations were taken to logical extremes. Much of the time investors are tempted to ignore those logical extremes. After all, investors have known for months that Dubai World was dangerously over-leveraged. They assumed that this would not be too dangerous, because they thought that foreign investors would always be protected.

Now, however, that assumption has been challenged. Tail risk has resurfaced with a vengeance. Little wonder that the CDS spreads of some other debt-laden emerging markets, such as Hungary, swung wider too yesterday. Nor that the Greek CDS moved as well. For while investors used to assume that it was just emerging market countries that were prone to suffering truly nasty fiscal shocks, the debt fundamentals in Dubai are not necessarily so different from those in developed nations, be that Greece or even the US. Suddenly the line between "emerging" and "developed" countries is becoming more blurred.

So perhaps the best way to view the events in Dubai - and the Greek CDS price - is as a welcome wake-up call. In recent months, a sense of stabilisation has returned to the financial system as a whole, as central banks have poured in vast quantities of support. A striking liquidity-fuelled asset price rally has also got under way. But the grim truth is that many of the fundamental imbalances that created the crisis in the first place - such as excess leverage - have not yet disappeared. Beneath any aura of stability huge potential vulnerabilities remain. If yesterday's events prompt investors to remember that, so much the better; not just in Dubai but in Greece too.

Ports face crisis as volumes fall
The world’s container ports industry is facing a sharp reversal in its fortunes as the sector’s first ever year-on-year fall in volumes forces an abrupt change from breakneck expansion to retrenchment. The four biggest operators – Hong Kong’s Hutchison Ports, Singapore’s PSA, Denmark’s APM Terminals and Dubai’s DP World – have cut costs, including laying off staff, and delayed or cancelled new construction projects.

London-based Drewry Shipping Consultants forecasts a year-on-year fall of 10.3 per cent in containers moved this year, compared with 4.6 per cent growth in 1982, the previous worst year since 1956, when container shipping started. "Before October 2008, our industry was used to 10 to 15 per cent annual growth in global trade volumes," said Kim Fejfer, chief executive of APM Terminals. "Not only are we in the middle of a volume crisis but our customers, the container carriers, are in an even more difficult situation because of the over-capacity in that particular sector," he added.

Mohammed Sharaf, chief executive of DP World, said the industry was facing a major change. "We have to shift gears, shift our thinking process to meet the demand." The slowdown has increased the focus on cost-cutting. "We have more time to focus on specific areas such as efficiencies of the equipment, the utilisation of the equipment and the challenge of shuffling man hours," Mr Sharaf said. All the big four operators, except DP World, have cancelled port projects.

Hutchison has pulled out of projects in Thessaloniki in Greece and Manta in Ecuador, although it insisted both were a result of efforts by the authorities to make unilateral changes to its contract. PSA is known to have cancelled some projects, but declines to comment publicly. Mr Fejfer confirmed that APM Terminals had pulled out of some projects but declined to say which. "On some projects, we had to review the proposition from a cost point of view and a capital expenditure point of view," he said. "We also unfortunately had to cancel a few projects."

Neil Davidson, ports analyst at Drewry Shipping Consultants, said that, while terminal operators had suffered falling revenue, their profit margins were "largely unchanged". Mr Sharaf said he believed the downturn could prove ultimately healthy for operators if it helped them to learn to control costs better. "I think this is something good which is happening, in a way," he said.

NYSE Invokes Rule 48 In Anticipation Of Extreme Volatility
by Tyler Durden

The NYSE hedged its bets earlier by invoking the rarely used Rule 48, which "provides the exchange with the ability to suspend the requirement to disseminate price indications and obtain floor-official approval prior to the opening when extremely high market-wide volatility could cause delay opening securities on the exchange." The full disclosure was made on the NYSE blog:
Rule 48 is intended to be invoked only in those situations where the potential for extreme market volatility would likely impair floor-wide operations at the exchange by impeding the fair and orderly opening of securities. Accordingly, the rule sets forth a number of factors to be considered before declaring such a condition, including:
  • Volatility during the previous day’s trading session;
  • Trading in foreign markets before the open;
  • Substantial activity in the futures market before the open;
  • The volume of pre-opening indications of interest;
  • Evidence of pre-opening significant order imbalances across the market;
  • Government announcements;
  • News and corporate events; and,
  • Any such other market conditions that could impact floor-wide trading conditions.

And some other "do not panic, we have nothing under control" information dissemination by the NYSE:
The invocation of Rule 48 is in effect only for today. Previously, the NYSE invoked the rule on 11 March, 2008; 23 Jan., 2008; 22 Jan., 2008; and 12 Dec., 2007. The rule was approved by the Securities and Exchange Commission on 6 Dec., 2007. Now add 17 March, 2008 to the list. I kind of had an uneasy feeling all weekend about Bear Stearns, and felt even worse upon seeing the announcement on Sunday night. To my train buddy at Bear Stearns and his colleagues, I'm sorry to see this happen.
And just for reference, here's a link to our circuit breakers. Here's hoping we don't need them today. Or any other day, for that matter.
Good luck today, everyone.

Good luck indeed. 

Keeping Derivatives in the Dark
by Floyd Norris

Opaque markets breed insider profits and abuse of investors. Sunshine can bring competition and lower costs even if regulators do little beyond letting the sunlight shine. You might think that as Congress considers just how much regulation is needed for the shadow financial system — the one that largely escaped regulation in the past — letting in such light would be an easy and uncontroversial move. But it is not proving to be easy at all, and is one part of the Obama administration’s financial reform package that is most in jeopardy.

Timothy Geithner, the secretary of the Treasury, will testify before the Senate Agriculture Committee next week in an effort to hold on to important provisions of the proposal that have come under attack by banks fearful of losing one of their most profitable franchises — the selling of customized derivatives to corporate customers. Remarkably, the banks have persuaded customers that keeping the market for those products secret is in their interest.

Last week, Gary Gensler, the chairman of the Commodities Futures Trading Commission, faced the same panel, and ran into questions that indicated at least some senators were sympathetic to efforts to keep large parts of the derivatives market in the dark. Those markets allow companies to bet on — or, if you prefer, hedge themselves against losses from — changing interest rates and commodity prices. They also allow investors to use credit-default swaps to bet on whether a company will go broke. The administration wants to standardize those products when possible, and force the trading of them onto exchanges when possible.

Banks want to whittle away the reforms if they can, and to minimize the roles of the C.F.T.C. and the Securities and Exchange Commission, experienced market regulators who have been generally kept away from over-the-counter derivatives in the past. Instead, the banks would like to leave it to banking regulators to oversee the dealers, something regulators totally failed to do in the past. Unless Mr. Geithner can persuade legislators otherwise, one of the great bank lobbying campaigns will have succeeded, in large part because some companies that buy derivatives from banks have been persuaded that their costs will rise if needed reforms were made.

The opposite is probably true. The history of nearly all markets is that customers suffer if dealers are able to keep them ignorant of what is actually going on. Until the beginning of this decade, that was true in the corporate bond market, where actual trades were kept confidential. That made it easy for bond dealers to charge big markups when they sold bonds to customers. After regulators forced timely disclosures, the bid-ask spreads — the difference between what customers paid when they bought bonds and what they could get when selling them — declined significantly. The result was smaller profits for bond dealers, and better returns for bond investors.

"It is now time," Mr. Gensler testified, "to promote similar transparency in the relatively new marketplace" for derivatives traded over the counter. "Lack of regulation in these markets," he added, "has created significant information deficits." He listed "information deficits for market participants who cannot observe transactions as they occur and, thus, cannot benefit from the transparent price discovery function of the marketplace; information deficits for the public who cannot see the aggregate scope and scale of the markets; and information deficits for regulators who cannot see and police the markets."

In the listed markets for derivative securities, like futures, there are margins that must be posted every day if markets move against the buyer of the derivative. Corporate customers of over-the-counter derivatives fear that they might face similar margin requirements if their contracts were to be traded on exchanges, and have persuaded some legislators that would be horrible.

Of course, because prices aren’t made public, we can only hope that the banks currently are pricing the credit at reasonable levels. The banks say they are. Robert Pickel, the chief executive of the International Swaps and Derivatives Association, an industry group, assured me this week that "the cost of credit is taken into account in the collateral relationship and in the bid-ask spread."

In layman’s terms, that means that customers with worse credit would face different prices than customers with excellent credit, which Mr. Pickel argued would make price disclosure of limited value. Mr. Gensler, the C.F.T.C. chairman, argues that customers would be better off if the two markets — for the derivatives and for the credit — were separated and had clear pricing. "How else," he asked in an interview, "can customers know if they are getting fair prices?"

Remarkably, big corporations like Boeing, Caterpillar and many others that use derivatives to hedge risk have been persuaded by bankers that they should not worry about that. If over-the-counter derivatives were to be traded on exchanges, or centrally cleared, or subject to margin requirements, a host of corporate trade associations and companies said in a recent letter to legislators, such reforms "would inhibit companies from using these important risk management tools in the course of everyday business operations. These proposals, which would increase business risk and raise costs, are at cross purposes with the goals of lowering systemic risk and promoting economic recovery."

Reflected in that letter is a belief that the banks, in designing and selling derivatives to customers, are acting as trusted advisers, looking out for the best interests of their customers. Every so often, one of these deals blows up and winds up in court. Then the banks argue that they were simply counterparties, with no responsibility for the wisdom, or lack of same, shown by the customers.

If, as seems likely, Congress chooses to eliminate or minimize the disclosure of customer trades, and if it allows custom derivatives to remain almost completely opaque and without visible pricing of credit, that will encourage some corporate customers to prefer customized contracts. Such contracts will probably cost them more, but the cost of credit will be hidden, and they may not have to post collateral immediately if they are losing money.

For Mr. Geithner, this legislative battle may indicate whether he still has the ability to persuade legislators, or whether he has become the political liability that at least some Republicans think he is. When he ventured to Capitol Hill earlier this month, one congressman suggested he should resign. If Mr. Geithner is vulnerable, it is because the efforts of the administration and the Federal Reserve to save the banking system worked too well. The fears of collapse that were present early this year have faded away, and been replaced by a general feeling of resentment. The banks seem to be on the verge of harnessing that feeling of resentment to preserve a major profit center. In terms of lobbying, it will be a remarkable achievement.

As one crisis recedes, the fiscal one may be only beginning
It is hard to recall a time when opinion on asset markets was more sharply polarised between bulls and bears. But then it is also hard to recall a time when the future course of the world economy looked so uncertain. The bulls point to resurgent growth in the emerging markets of Asia and Latin America, and reckon the developed world will soon be following, albeit it at a slower pace. The bears focus instead on burgeoning fiscal deficits, still shrinking private credit availability and a basic lack of demand in once buoyant deficit nations. For them, the big menace is "out of control" public debt. Yet for the moment there is no doubt which view is triumphing. Since the nadir of the crisis in March, the price of virtually all assets has risen strongly. I say virtually all, but of course one of the biggest asset classes of the lot – government bonds – has not. Bond prices are quite a bit lower than they were last March. And therein lies a large part of the bear case.

If all governments have done in fighting the crisis is replace private debt with public debt, then they have not addressed the underlying problem. The most that can be said is that they have smoothed and stretched out the adjustment, but they have not removed it. What's more, governments must soon start the process of rebuilding their finances, which in turn is going to act as a brake on demand for possibly years to come. In the meantime, fiscal deficits throughout the developed world are rising to levels which even the most sanguine of observers find truly scary. Some idea of the scale of this deterioration is given by the latest edition of Moody's sovereign debt "statistical handbook". Preliminary estimates suggest that the total stock of sovereign debt will rise by nearly a half to around $15.3 trillion by the end of next year.

Sovereign debt of such magnitude is not entirely without precedent. Britain emerged from the Second World War with debts of 240pc of GDP. IMF forecasts of around 100pc in five years' time for the UK look almost pedestrian by comparison. But for this country at least, it's still a peacetime record by a long way. Fiscal adjustment after a major war is a relatively straightforward matter. Military spending is simply switched off and things return quite quickly to normal. But when a country has been routinely spending beyond its means, then the correction in terms of tax rises and spending cuts becomes considerably more difficult and painful. Given these challenges, the wonder is not that bond prices have not risen in tandem with equities and other assets, but that they haven't fallen a good deal further. The UK Government alone plans a record £220bn of debt issuance this fiscal year and not much less in each of the next four.

This is a mere bagatelle against the trillions being raised across the developed world as a whole. There must surely be limits both on investors' appetite for such a mountain of public debt and on the ability of governments to service and repay it. And yet, despite the fact that these limits are being stretched to breaking point, bond markets remain remarkably calm. How come? After the collapse of Lehman Brothers, bond yields in the US and other countries seen as safe havens fell sharply. High demand for government debt as a result of risk aversion was reinforced by liquidity injections and in some cases, including the US and UK, outright purchases of bonds by central banks. With the return of risk appetite, investor demand for sovereign debt waned, but yields have remained substantially below pre-crisis levels. Quantitative easing, under which governments borrow with money created by the central bank, has plainly helped.

Demand is also supported by a massive carry trade which allows investors to borrow at next to nothing from central bank funds and then lend it out for more further down the yield curve. The authorities have conspired to create other artificial sources of demand too, by for instance, requiring banks to hold bigger liquidity buffers. These have to be held in so-called "risk-free assets", which means effectively government bonds. Regulatory demands for more exact liability matching has further encouraged a herd-like movement among insurers and maturing pension funds away from productive investment into government debt. Only, of course, bonds are not risk- free. The main threat is usually from resurgent inflation, which can destroy capital more effectively than even the idiocies of miscreant bankers.

For the moment, nobody's worrying too much about inflation. The margin of spare capacity in the economy – the output gap, in the jargon – is too big. That joyous moment in which output again catches up with capacity is still regrettably many years away. The other risk is fiscal, where again market perceptions are still remarkably tame. If bond markets do crack over the next year, this is where the trouble will start. Investors will demand more for their money even in conditions where there is outright price deflation if they see rising risk of default. Markets remain accommodative only because they expect governments to come up with and deliver on credible plans for fiscal consolidation. Those that show signs of failing to do so – notably Greece – are already being hammered in the bond markets.

Across the board, the cost of insuring against default on sovereign debt has risen markedly. How real is this danger? In countries which are monetarising the deficit – again mainly Britain and America – risk of default is reflected more through currency weakness than yields. Sterling depreciation means that it is now 25pc cheaper for foreign investors to buy UK gilts than it was before the crisis, all other things being equal. For higher-risk countries in currency unions (think Greece, Italy and Spain) or with inherently strong currencies (think Japan), yields are already on the march. My own guess is that fiscal risk will be one of the big defining stories of the next year, and that this in turn will create lots of difficulties for governments. Common sense alone suggests you cannot create such an oversupply and expect markets to pay the same. The key thing to watch out for is the rising burden of interest payments as a percentage of government revenues. Most major economies are still well below the danger point of 10pc, where without radical action debt begins to compound, but such is the accumulation of borrowing that some will be perilously close or even through it in four years' time.

On present projections, some smaller countries will also breach the 12.5pc level which credit rating agencies judge to be the point of no return. What makes the position doubly worrying is that it only requires interest rates to rise a bit to put Britain and others in just such a debt trap. The flip side of economic recovery would be government bankruptcy. For nearly all developed economy governments, simply allowing the fiscal stimulus of the last year or two to expire will not be enough. Nor will return to growth fix the problem. Debt would still be left on an explosive course. For the time being, nobody seems to care. Yields are still tame. But, as the IMF has remarked, markets tend to react late and abruptly to changed fiscal circumstances. Small wonder that the bears have not yet been driven back into the woods. One crisis has been averted, but the fiscal one may be only just beginning.

China, gold, and the civilization shift
Stephen Jen from the hedge fund Blue Gold Capital has a warning for those who think that gold has risen far too high, is necessarily in a speculative bubble, and must soon come clattering back down. Mr Jen is an expert on sovereign wealth funds from his days at Morgan Stanley. The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months. Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously. After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels. The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.

Mr Jen says that you know where you are in the currency markets — more or less — because there are concepts of "fair value" used by experts. Ditto for the equity markets, where you have P/E ratios (warts and all I might add, since the actual reported P/E of the S&P 500 was a record 141 in September before the agency stopped publishing the figure — a far cry from the forward earnings in vogue). How on earth do we determine what fair value should be for gold? "We have no such concept," he said. Actually, that is not quite true. You can use the dollar monetary base as a proxy. Mr Jen said China alone accumulated $150bn in reserves in the third quarter, pushing the total to $2.3 trillion. These are colossal sums. China is amassing almost as much each month as the United States ($63bn) has built up in the entire history of the country. True, the US understates the value of its gold, but you get the picture. Something big is going on.

So far, China has just 1.7pc of its reserves in gold, or 34m troy ounces. I was told by a top Chinese official that they are buying on the dips so as not to crowd out the market, which means of course that gold cannot "crash" unless you think China itself is going to crash — or stop building reserves (which is possible: Albert Edwards from SocGen says China may be in current account deficit next year, leading to a yuan move — down, not up). The gold proportions are: Hong Kong (0), Singapore (0), Korea (0.2), Brazil (0.6), India (4.8) after its shock purchase of IMF gold, and Russia (5.5). Yes, the West still has a lot in percentage terms — US (86), France (78), Italy (72), Switzerland (33), Germany (25) — but they don’t count for so much any more.

It is true that the Old World could meet demand for a while (a short while actually) by selling some of their gold. But will they do so? They did not use up their quota for the last year under the Washington accord. My own guess is that they too are wondering whether it makes any sense to keep selling metal in order to buy the fiat paper of the bankrupt peers (note that the Bank of England’s own pension fund has got rid of almost all its Gilts, buying inflation protection instead). Britain may become a net buyer of gold under the Tories, Who knows? Bottom line: "The scope for EM central banks to buy more gold is substantial, if they choose to do so," he wrote cautiously in a note to clients. Will they choose to do so? "I suspect they will," he told me. Personally, I have been feeling vertigo with gold near $1180. All my contrarian instincts cause me to dislike momentum stories — but there again, maybe this is not momentum. Perhaps it is a civilization shift. Can’t make up my mind.

ING to Raise $11.2 Billion at 52% Discount
Dutch Financial Company ING Group NV said Friday that has priced its €7.5 billion ($11.2 billion) rights issue at a hefty discount in a move aimed at repaying half the €10 billion state aid it received during the financial crisis. The company said it will issue new shares at €4.24 each, representing a 52% discount to Thursday's closing price, or 37.3% after taking into account the dilution once the new shares start trading. "This rights issue is a critical component of the measures we announced to regain our independence and to chart a clear course forward," ING's Chief Executive Jan Hommen said.

ING follows a number of other European banks that have taken advantage of more buoyant capital markets to raise funds as a way of reducing government involvement in their businesses. The U.K.'s Lloyds Banking Group, which is 43% state owned, on Thursday won shareholder approval for a £13.5 billion rights issue priced at a 60% discount. European bank rights issues have been priced at a 40%-45% discount to their share prices before the offer announcement, according to analyst estimates.

At ING, existing shareholders can subscribe for six new shares for every seven subscription rights they hold from Nov. 30 to Dec. 15. ING shares closed Thursday at €8.92. In addition to repaying half its state aid, ING has to pay a penalty to the Dutch government of up to €965 million due to early repayment as well as an extra payment of €1.3 billion related to state guarantees on its Alt-A portfolio. The€1.3 billion will be booked as a one-off pre-tax charge in the fourth quarter of 2009.

The rights issue is fully underwritten by a syndicate of banks led by Goldman Sachs and J.P. Morgan. Earlier this week ING's shareholders approved the rights issue and gave the green light for a radical restructuring of the company marking the end of its formerly praised bancassurance model. In negotiations with the European Commission over competition concerns, ING agreed to divest some of its assets, leaving it to focus mainly on its banking activities.

Bundesbank fears relapse as German banks face €90 billion fresh losses
The Bundesbank has told German banks to take advantage of renewed confidence while they can to prepare for likely losses of €90bn (£81bn) over the next year, warning that the delayed shock waves of the economic crisis still pose a major threat to global recovery and bank finance. The venerable bank said in its Stability Report that the world had narrowly averted a "virtually uncontrollable" collapse in the late summer of 2008. While the credit system has partly stabilised, the underlying problems "are still far from being overcome" and money markets are not yet functioning properly. "It is already clear that the financial system will be severely tested going forward. Downside risks remain pre-dominant," said the report.

The danger is that a long phase of stagnation and rising job loses in the West sets off "spiralling loan losses in both industry and in the residential and commercial real estate markets. In such an unfavourable scenario, negative feedback between the real economy and the financial system could gain added momentum." The Bundesbank said the next wave of bank write-downs will come from loan book losses as the default rate on lower-tier companies tops 14pc in the US and 12pc in Europe. German banks alone will have to write down €50bn to €70bn of loans over the next year. Losses from sub-prime securities are mostly in the open already. Further write-down from collateralised debt obligations (CDOs) - mostly tranches of mortgage debt packaged as securities - are likely to be €10bn to €15bn.

Dominique Strauss-Kahn, the head of the International Monetary Fund, told Le Figaro on Wednesday that banks worldwide have so far admitted to just half of the $3.5 trillion (£2.1 trillion) of likely damage. "There are still large hidden losses: perhaps 50pc tucked away in balance sheets. The proportion is higher in Europe than in America. The history of banking crisis, notably in Japan, shows that there won't be healthy growth again until the banks have been cleaned up completely," he said.

The Bundesbank report came a day after Berlin agreed to inject up to €4bn to rescue WestLB, the country's third largest state bank. Commerzbank, HSH Nordbank, and Bayern LB have all run into trouble, requiring large bail-outs that have angered German taxpayers. The state Landesbanken emerged as the most reckless, building large liabilities `off-books' through Irish-based investment vehicles. Paradoxically, Europe's bank problems help explain why the euro has risen to a 15-month high of $1.51 against the dollar. Hans Redeker from BNP Paribas said distressed banks are having to sell assets overseas and repatriate the money to shore up their capital base, pushing the euro towards the pain barrier for many European exporters.

KPMG: Brussels puts European banks on sale
Many banks are surprised by the way Europe's competition commissioner Neelie Kroes intervenes in the sector, consultants at KPMG say. "They didn't know they would be sanctioned like this because of state aid." The European Commission is turning the European banking landscape into an enormous all-you-can-eat buffet for financial institutions in the United States and Asia, according to accounting giant KPMG. "They see all these nice little snacks laid out for them," says Marcel van den Broek, a Dutch consultant at the firm.

Van den Broek and Age Lindenbergh analysed the effects of state aid on European banks and draw one clear conclusion: "The aid was initially helpful and brought stability, but the actions the Commission took after that were too harsh," says Lindenbergh. "They have gone overboard, they are pulling down banks instead of helping them." European banks have been more restricted after receiving state aid than their American counterparts. As a result of the European Commission's interference the European banking sector is now highly fragmented and weakened, the consultants say. "Anglo-Saxon investors - mainly private equity firms such as Lone Star [a Texan company that was in the race to take over part of bankrupt DSB bank] - come to us for information on future bargains. They are mostly funds that specialise in managing credit portfolios," says Lindenbergh. The KPMG consultants fear this won't contribute to a strong banking industry desired by all, including the European Commission.

Lindenbergh and Van den Broek's criticism counters the accolades antitrust commissioner Neelie Kroes has been getting for her handling of the banks. Kroes' directorate general has scrutinised the state aid for ING, KBC, Commerzbank, Lloyds, Royal Bank of Scotland and others who were thrown a lifeline by their governments. Her fans praise Kroes' approach because it helps restore competition between European banks. "Banks think they are treated unfairly," Lindenbergh says. "It is obvious they have to do something in return for the bailouts. But at the time the banks received the support, it was completely unclear what the sanctions would be. They had to wait months to learn the consequences." "The rules were only drawn up while the game had already started," Van den Broek adds. The toughness of Kroes' policies has now become clear. ING, Commerzbank and WestLB, for example, have to divest 45 percent of their assets.

That is out of proportion, according to the KPMG men. "The government interference is experienced as imperative," says Lindenbergh. Kroes does refer to existing EU treaties in her restructuring proposals, KMPG acknowledges, "but the way a company is finally broken up is subject to negotiations. There are no rules for that. The only similarity [between the different cases] is the measures are substantial and the part where the problems originated is usually hived off," Lindenbergh says, referring to ING subsidiary ING Direct USA. Furthermore, the banks are not discharged of their obligations even when they repay the state aid. "The consequences of the reform plans from Brussels will weigh on the banks for years. ING can reimburse the bailout, but it will still be cut into pieces," the consultants say, adding this will distort the banking landscape for years to come.

Lindenbergh: "The European Commission stepped in to prevent state aid from distorting free competition, but as a result a level playing field will be a long time coming." KPMG says the Commission is too focused on small banks and not enough on the risks of its policies. But despite their criticism towards Brussels, not a single bank has actively opposed the harsh measures. "They have not reported to us," says Van den Broek. But there is a logical explanation, he admits. A bank cannot file a case before the European Court; that is up to the member state where the bank has its headquarters. And although the banks feel disadvantaged, it is unlikely governments will act on their behalf right now. The damage done by the financial industry is too big to justify that.

French jobless total jumps 52,400 in October
France's headline unemployment rose 52,400 in October, the largest rise since April, data from the economy ministry showed on Thursday, confirming expectations for a worsening labour market. The monthly data showed the headline jobless total in the euro zone's second largest economy rising to 2.627 million compared with September. That was a 2.0 percent monthly increase and represented a 25.0 percent rise year-on-year.

'We have a figure for October which is not good and which confirms our diagnosis that we have exited the recession but the recover is still fragile, that the economy is still in crisis and continues to destroy jobs,' Economy Minister Christine Lagarde said at a news conference in Lyon. Lagarde has repeatedly argued the recovery was fragile and therefore it was too soon to remove economic support put in place to help economies through the financial crisis.

The rise in unemployment hit workers over 50 and under 25 the hardest. There was a 28.1 percent year-on-year increase in the number of jobseekers among under 25-year-olds and a 28.3 percent rise among over 50-year-olds. Recent unemployment data has surprised economists, many of whom had been expecting larger increases after the recession which France left behind in the second quarter. The jobless total rose 21,600 in September. Ministers had warned of further increases through 2009 and 2010.

The monthly figures reported by the economy ministry do not include an unemployment rate but according to the most recent data from the European Union statistics office, France's unemployment rate stood at 10 percent in September. Economists worry that if the unemployment rate jumps sharply, it could hurt consumer spending, the mainstay of France's economic growth. Spending on manufactured goods rose 1.1 percent in October, above expectations, boosting hopes for fourth quarter growth.

Third quarter gross domestic product showed the French economy grew by 0.3 percent between July and September, and economists expect stronger growth in the fourth quarter. But unemployment is a lagging indicator of economic health and companies have been forced to cut jobs to stay competitive. Lagarde also said on Thursday the strong euro was making it particularly difficult for European exporters. The government has said tackling unemployment is a priority and has not looked favourably on companies shifting jobs abroad.

In one current case, the planned sale of nuclear operator Areva's transmission and distribution unit, foreign bidders have made promises to protect local jobs in a bid to outweigh the perceived advantage of a French offer for the business. France's jobless data is not prepared according to the widely used International Labour Organisation standards and does not include an unemployment rate. However, it is politically significant because it is the mostly widely reported domestic jobs indicator.

Kazakh Bank Lost Billions in Western Investments
In the last few years, big banks have found many surprising ways to lose billions of dollars by making loans that turned sour. But few can match the odd tale involving Kazakhstan and a little-known bank that many Western financiers wish had remained so to them. From 2003 to 2008, the likes of Credit Suisse, Morgan Stanley, Royal Bank of Scotland, ING and others funneled more than $10 billion in loans into Kazakhstan’s largest bank, Bank Turalem, as the large Central Asian country enjoyed a growth boom spurred by its rich deposits of oil and natural gas.

So many of these loans are now bust that many foreign banks are facing write-offs of as much as 80 percent of their value, prompting investigations into why the loans went so bad so fast, according to officials at Bank Turalem, which was taken over by the government earlier this year. Hoping to become the dominant bank in the region, BTA, as the bank is known, cast its eye well beyond Kazakhstan and lent billions of dollars to finance vast real estate projects in Russia and Ukraine, as well as offshore companies with vague business plans and no trading histories to speak of, according to executives at BTA who did not want to be identified because of the sensitivity of the matter.

The money went to companies with names like Best Catch Trading and Sandown Holding, based in places as diverse as the Seychelles, the British Virgin Islands and England, that offered up little in the way of collateral, according to these executives. Among other things, prosecutors in Kazakhstan and a team of international lawyers and accountants hired by Bank Turalem are investigating whether the foreign banks may have unwittingly financed a scheme by BTA’s former chairman, Mukhtar Ablyazov, to direct between $8 billion and $12 billion worth of BTA loans — about half of the bank’s loan book — to companies that he secretly controlled, according to lawyers representing BTA as well as prosecutors in Kazakhstan.

Mr. Ablyazov denies the allegations, insisting that the loans were proper and that the investigation is politically inspired because he has been a critic of the government. Mr. Ablyazov is a longtime political opponent of Nursultan Nazarbayev, Kazakhstan’s authoritarian president, and he fled Kazakhstan for London just days before the government took over BTA this February, fearing a government crackdown.

Whether the investigation reveals the foreign banks to have been careless, naïve or hoodwinked about how the loans would be used, the losses point to a recurring problem for supposedly smart and sophisticated international bankers. In past decades, international banks have rushed headlong into hot markets like Mexico and Argentina, and later into Thailand and Russia, only to suffer huge losses.

Ignoring or forgetting lessons learned from those debacles, institutions poured billions of dollars to help finance property developments in Ireland, the global expansion of Icelandic banks and subprime mortgages in the United States, only to see much of that money evaporate. "Capital markets have no memories," said Richard Portes, a professor of economics at the London Business School. "Bankers simply charge premium spreads high enough to take defaults and still end up, on average, with profitable lending."

Currently embroiled in arduous talks with BTA over restructuring their debt in hopes of trimming their losses, foreign bankers claim they did their homework before making the loans, although none would publicly discuss their relationship with BTA and its controversial chairman. Deloitte, the accounting firm that is advising a steering committee representing the foreign banks, did not respond to a request for comment. In a statement, Credit Suisse, which lent close to $1.1 billion to BTA, the most of any bank, said its current exposure to BTA was immaterial to its financial condition and that "all transactions with BTA went through established due diligence procedures." But, while BTA may have been the flavor of the day for international lenders, questions were being raised about it closer to home.

"BTA was one of the least transparent banks here, and there were a whole bunch of transactions prior to the seizure that indicated extremely lax banking," said Michael Carter, the chief executive of Visor Capital, an investment bank based in Kazakhstan. "But Kazakhstan was very sexy at the time, and foreign banks were just shoveling in money, so much so that that banks here had more money than they knew what to do with."

Mr. Ablyazov, 46, a small, energetic man who made his first fortune importing cars from Lithuania, maintains that the loans that BTA made were legitimate. He claims that the $9 billion charge against profits that the bank declared after he left — as well as the government takeover of the bank — represent the final stage of a plot by President Nazarbayev to wrest BTA from him. "We have been a profitable and transparent bank, with $538 million in profits in 2007," said Mr. Ablyazov in an interview through an interpreter in London.

As he sees it, the robust support he garnered from international banks was an endorsement of his plan to remake BTA in the image of HSBC, the hugely successful international bank that grew from its roots as a colonial bank financing trade between China and Britain. He scoffs at the allegation that his ultimate aim was to siphon off profits. "We would do all this just to misdeal money? That would be a strange criminal to make a plan like this," he said.

It may be some time before investigations determine if Mr. Ablyazov did anything illegal at BTA or is just the target of a political witch hunt. But BTA has already filed a civil suit against Mr. Ablyazov on a narrower claim in a British court that he misappropriated $295 million in bank funds last year; a judge ruled this month that the charges were serious enough to support the continued freezing of his assets.

What is not in dispute is that, even by the loose standards of the credit boom, few banks lent as aggressively as BTA. Between 2003 and 2007, the amount of its loans outstanding grew by an extraordinary 1,100 percent. Like many other banks in less developed countries, BTA relied heavily on foreign funds, as opposed to customer deposits, to propel its loan growth — so much so that its ratio of loans to deposits peaked at 3.6 to 1 in 2007, one of the highest anywhere in the world.

Mr. Ablyazov maintains that BTA would have paid off its loans had he remained at the helm and that the enormous charge-off was a ploy by Mr. Nazarbayev to seize control of BTA and damage a political rival’s reputation. Lawyers and BTA executives contend that many of the offshore companies were controlled by Mr. Ablyazov, and BTA lawyers are now trying to determine whether the loans were used to provide billions of dollars to Mr. Ablyazov’s own real estate projects — in particular, a 4,700-acre development outside Moscow in which BTA has a $1.5 billion credit exposure.

Although his title was chairman, Mr. Ablyazov took a hands-on approach when it came to the bank’s lending, even sitting on the regional credit committee that oversaw many of the questionable loans. In its 2008 report on BTA, Ernst & Young, the bank’s auditor, highlighted this unusual arrangement, citing it as a conflict of interest that "potentially contributed to the issuance of loans to offshore companies, which became uncollectible in 2008."

Mr. Ablyazov disputes this claim, saying that he had headed this committee for three years without complaint from his auditor, and that the bank’s credit operations were transparent. Nikolay Varenko, the deputy chairman of BTA and the executive leading the bank’s internal investigation into Mr. Ablyazov’s activities, disagrees. "The bank was like an investment fund for his own personal projects," he said.

For Mr. Ablyazov, the question of how he deployed BTA’s loan book is just the latest in a series of battles he has been waging with President Nazarbayev. And while he may well have his enemies, few question his bravery. In 2001, he and several other reform-minded businessmen founded the Democratic Choice of Kazakhstan Party, the first opposition party to challenge Mr. Nazarbayev on the ground that he and his network of family insiders were monopolizing economic and political power. A year later, he was sentenced to six years behind bars on charges related to his time as head of the government electricity company. Mr. Ablyazov claims the charges were politically motivated. He served a little over a year in Kazakhstan prison, where he says he was subjected to numerous beatings and other forms of torture.

After pressure from international human rights organizations, Mr. Ablyazov was released in 2003. In 2005 he took full control of BTA. These days, he rents a 15,000-square-foot mansion on Bishops Avenue in London, one of London’s most exclusive neighborhoods, where security guards stand day and night. Unlike other oligarchs here, Mr. Ablyazov keeps a low profile in London. He says that his ultimate aim is to overthrow Mr. Nazarbayev, even though he could be caught up in British courts for years to come. "I am just here temporarily," he insisted. "In the end I will return to Kazakhstan."

Blame Larry Summers
Barack Obama's chief economic advisor, Lawrence Summers, is determined to sabotage a second round of stimulus. And, he's getting plenty of help, too. Congressional Democrats are dragging their feet because they're worried about the political backlash and midterm elections, the GOP deficit hawks are looking for a way they can derail the Obama agenda and reestablish their bone fides as fiscal conservatives, and the bailout-traumatized American people are simply opposed to anything that generates more red ink. Even Obama has joined the fray and started badmouthing stimulus stressing the importance of living within our means and trimming the deficits. So it looks like a done-deal; no more stimulus. There's only one problem, without another blast of stimulus the economy is headed for the skids.

Summers knows this because he is an extremely bright and competent economist. With Summers, the issue is loyalty, not intelligence. To prove this point, consider Summers comments in a Washington Post editorial (September of 2008) where he explains what needs to be done to put the economy back on track:
"Indeed, in the current circumstances the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.

“The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending.” ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)

To repeat: "Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system."
Bingo. Zero-percent rates don't give any traction in a liquidity trap. That's why economists push for fiscal stimulus; jobs programs, state aid, and extended unemployment benefits. That's the only way to narrow the output gap and rev up economic activity. Summers doesn't even challenge the idea; in fact, he makes the case for fiscal stimulus. Of course, that was then, and now is now. Here's another clip of Summers stirring up the masses at the Brookings Institute with his  thundering Fidel Castro impersonation:
"Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor."

Larry Summers carrying-on about "distribution of benefits"? Huh?  So how does the Redistributionist-in-Chief feel about stimulus now? Here's a clip from Thursday's Wall Street Journal:
 "The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said. “Mr. Obama is keen to avoid any measures suggestive of a second, big-ticket stimulus. With about half of the February stimulus spending spoken for, the measure has created about 640,000 jobs, fewer than the number of jobs lost in January alone.

"There is no discussion of a package like a second stimulus, but we are working closely with Congress and consulting with outside experts to determine the right policies and the right steps," said White House deputy press secretary Jennifer Psaki. ("Weighing Jobs and Deficits", Elizabeth Williamson, Wall Street Journal)

Apparently, Summers has had time to rethink his populism and do a 180. Team Obama plans to create jobs by initiating tax credits and lending to small businesses. Sound familiar? In other words, the only way that millions of dejected workers will get any relief is if private industry can be enriched in the process. That's why "there is no discussion of a second stimulus." Because Summers is an industry rep who primary task is to ensure the smooth transfer of public wealth to corporate plutocrats. He even opposed the extension of unemployment benefits believing that greater hardship would push wages down even further.

Indeed, from Summer’s point of view, the America Rescue and Recovery Act has worked out just dandy. The unions are getting walloped, 8 million people are out of work, the labor market is in the worst shape it's been since the Great Depression, and the blood-flow of stimulus is about to get choked-off sometime in the next two quarters.  Hey, it's morning in America! But, as we noted earlier, Summers is a good economist, so maybe there is an economic reason for his opposition to more stimulus. Could it have to do with the output gap? 

Since Lehman Bros collapsed, the output gap (which is the difference between an economy’s actual output and its potential output) has been at record lows. That means that there is not sufficient demand to take up the slack in the economy. The only way to resolve that problem (when the Fed is in a liquidity trap and consumers are slashing spending) is to get money into the hands of people who will spend it. That means more government spending, thus, more stimulus. But how much more?

Here's economist Robert Skidelsky with an answer:
"But how large must such a stimulus be? The United States Congressional Budget Office (CBO) estimates that American output will be roughly 7% below its potential in the next two years, making this the worst recession since World War II. American unemployment is projected to peak at 9.4% towards the end of 2009 or the beginning of 2010, and is expected to remain above 7% at least until the end of 2011.

“The US government has pledged $787 billion in economic stimulus, or about 7% of GDP. Superficially this looks about right to close the output gap – if it is spent this year . But it is in fact a three year-program. Some $584 billion is allocated for 2009-2010, leaving perhaps $300 billion of extra money for this year. Even so, it is not clear how much of that will be spent.

 “ ....A double round of stimulus packages is needed to counteract the real prospect of a double-dip recession. “The time to start worrying about inflation is when the recovery is entrenched. To pay back the debt without strain, we need a booming economy.  Talk of government spending cuts is premature. ‘A boom not a slump is the right time for austerity at the Treasury’ said Keynes. He was right." ("Is Stimulus Still Necessary?" Robert Skidelsky. Project Syndicate)

Surely, Summers made the same calculations as Skidelsky, but decided to go with a smaller stimulus package for political reasons. Fair enough. He was probably afraid that a larger bill wouldn't get through congress. That's reasonable, but it doesn't change the fact that more stimulus is needed now. The White House should be preparing itself for a major public relations campaign. But there's no PR campaign on the drawing board at all; just more blabber about cutting deficits and reducing long-term government spending. ( attack on Social Security) So as soon as this stimulus-injection wears off, the economy will slip into a coma once again. Here's Paul Krugman breaking it all down:
"Second estimate of third-quarter GDP out; growth rate marked down to 2.8%. This is really quite grim. At this growth rate it’s far from clear that we’re doing anything to reduce the output gap — the gap between what the economy could produce and what it’s actually producing. Correspondingly, there’s no reason now for even a bit of optimism on unemployment.

When the 3.5% advance number came out, I took to warning people that even if the economy continued to grow at that rate, we wouldn’t see anything like full employment until late in Sarah Palin’s second term. Given the latest number, the date at which we can expect to see a return to full employment is … never.

And that’s if growth continues at this rate. The odds are good that growth will slow down next year: the stimulus has already had its peak effect on growth and will turn into a net drag in the second half, the inventory bounce — which was a major factor in 3rd quarter growth, such as it was — will fade out. Basically, we may be in a technical recovery, but we’re not recovering. (Paul Krugman, "Gee, that’s De Pressing" The Conscience of a Liberal, New York Times)

There's no recovery. Figure it out. Bank profits went up last quarter, but lending went down significantly. Now, that's a neat trick. How did they manage that? They did it with the money they're getting from the Fed. Bernanke has provided broken banks and other financial institutions with trillions of dollars that are being diverted into high-risk assets, carry trades (with the zero-rate dollar as the funding currency) and speculative derivatives bets. The same bubble that just blew up a year ago has been reflated thanks to Bernanke's largesse and gigantic re-leveraging. Main Street is in a Depression, but Wall Street is doing just fine.

Even so, there is no sign of inflation anywhere and the government is able to borrow capital at record low costs. Last week 3-month Treasuries went negative while the 2-year T-bill has fallen off a cliff. Why? Because Bernanke ended the guarantee on money markets so investors are fleeing to safety again. Ordinary retail investors who can't do bigtime cross-border currency transactions or High Frequency Trading, need a place to hide. Hence, USTs. They're forking over their money to Uncle Sam for under 1 percent interest. It's highway robbery.  At the same time, consumer credit is shrinking, bank lending is down, and 1 out of 4 homeowners is upside-down. Money is not moving and the economy is on a ventilator. We need more stimulus.

But there won't be another round of stimulus because Summers and his sniveling companion Geithner won't allow it. They have other plans. Oh yeah, Wall Street and the banking Goliaths will still get as much monetary stimulus as they need (under the phony moniker of "quantitative easing", liquidity swaps, or excess reserves) But as for the working slob --  zilch.

Summers’ assignment is to bring the broader economy to its knees; to crush big labor by keeping unemployment high,  to force state and local and governments to privatize more public assets and services, and to generate as much human misery as possible. In short, Summers is laying the groundwork for structural adjustment within the US, a policy which reflects his ongoing commitment to multinational corporations and neoliberalism. It's the shock doctrine redux. These people are monsters.

How Social Mood Trends Define Popular Culture
Studies of the stock market and of trends in popular attitudes support the premise that trends in aggregate stock prices directly reflect the mood and mood changes of investors collectively, and by extension, society at large. The stock market is the optimum place to study mood change because it is the only intersection of mass behavior that offers specific, detailed, and voluminous numerical data. It was with such data that R.N. Elliott discovered the Wave Principle, the analytical method which reveals that mass mood changes are natural, rhythmic and precise. The stock market is a literal drawing of how mass mood unfolds.

In the following two clips from The Socionomics Institute's documentary History's Hidden Engine,you'll see how extremes in popular cultural trends coincide with extremes in stock prices: they peak and trough coincidentally in their reflection of the popular mood. Regarding music, for example, Robert Prechter said "You can almost hear the Dow going up and down over the airwaves." In this three minute video montage, see how music trends from the Beatles to Jimi Hendrix to Britney Spears reveal a startling connection between pop culture and finance:

At the theaters, Disney released another adaptation of Charles Dickens's "A Christmas Carol" this year that many parents found too dark and scary for kids. Disney's iconic Mickey Mouse himself got an edgier makeover recently. What could be behind Disney's new marketing strategy? Successful Disney films and themes have more in common with horror movies and dark themes than you might think. This three minute clip from History's Hidden Engine explains that connection -- and why it's as relevant to stock markets and broad social trends as it is to movies:

Watch the full 90-minute documentary, History's Hidden Engine, online right now. In just 59 minutes and with the help of pop songs, news footage and cultural images, you'll see how social mood drives trends in movies, music, fashion, economics, politics, the media, and even the stock market.

Martin Armstong – Forced to Move to a High Security Prison to Silence Him?
Frankly, I cannot believe that I have to write the words that follow. I just learned that Martin Armstrong is being moved, possibly as early as Monday, from his current holding facility to a much higher security facility, MDC Brooklyn, which is similar to the facility he was in when he was in solitary confinement and where he was beaten nearly to death! This goes against the prison’s own rules and is against the law as he has two Habeas cases open in the Supreme Court.

Why would this be happening now with a little more than a year before he is eligible for parole? I and others contend that it is because of his recent writing activity and because of his recent interview with the New Yorker Magazine (The New Yorker - "The Secret Cycle…"), and also because there are now several media outlets requesting to do interviews with him – the prison simply does not want, for whatever reason, the access that we have been enjoying lately to continue. I spoke directly to Martin’s younger sister, Nancy, and this is her opinion as well. She is very upset over this move as she, “fears that he may not make it out.” She claims that Martin is very much afraid of this move and for good reason…

First let’s review the facts… whatever you believe about his innocence or guilt or innocence of any crime, the facts are that he was never put on trial for any crime. He was held in contempt of court for not producing what the judge ordered him to produce, something which he claims he didn’t have. He was placed in MDC Manhattan and was basically TORTURED. According to Nancy, he was locked in solitary confinement for almost the entire duration, suffering days on end and at times was intentionally awaken every hour or so all night long, night after night, in an attempt to get him to sign a confession. He was repeatedly told that he would not get the chance to see his 91 year old mother alive again if he did not sign the confession. This took place off and on for SEVEN YEARS. Then one day a huge convict, “a known homicidal maniac” named George, was locked in his cell with him where he proceeded to beat and strangle him until he thought he was dead. Later, according to Armstrong, a fellow inmate stated that the guards watched the beating and refused to open the door to stop it. He lost most of his teeth, and now, over two years later is still missing them because the prison system only has one dentist for over 5,000 inmates. He suffered a detached retina, broken ribs and other internal injuries that left him in intensive care.

They offered him a plea agreement to TIME SERVED if he would plead guilty and after 7 years, he could take no more and agreed, obviously under heavy duress. However, after pleading guilty, the judge instead of living up to the plea agreement sentenced him to the maximum amount allowable and he is now not scheduled for release until September of 2011, first eligible for parole in March 2011. His current location is at Ft. Dix, New Jersey where he is only 20 minutes from his mother and sister, a relatively safe facility. His sister takes his infirmed mother to visit him once a week, but she will not be able to make the journey into Manhattan. He is now under great stress as he believes he may not survive while inside the new location.

Inside this facility, I am told, he will be basically strip searched with nearly every movement, and he is not granted some of the “privileges” that he currently has access to, thus producing his work will be impaired, if not eliminated all together.

The question is WHY would they break their own rules and the law to move him now?

For a refresher, Habeas Corpus is defined as follows: “Habeas corpus (Latin: You (shall) have the body) is a legal action, or writ, through which a person can seek relief from their unlawful detention or that of another person. It protects individuals from harming themselves or from being harmed by the judicial system.”