Wednesday, July 14, 2010

July 14 2010: Is it time to storm the Bastille again?

G. G. Bain S.L. Clemens December 20, 1909
"Samuel Clemens, a.k.a. Mark Twain, aboard the Bermudian after a trip to Bermuda, four months before his death"

Ilargi: Over the weekend, I wrote about Fannie Mae and Freddie Mac, and how they form the core of the biggest fraud and crime ever perpetrated upon the American people. And even though that was already the umptieth time I have addressed this particular topic, I want to return to it again.

After all, we're not talking about Jesse James or Billy the Kid or Charles Ponzi or Kenny-Boy Enron or any of that petty kiddy wannabe criminal stuff, this is the number one way Americans have ever been fleeced right across the entire nation. Maybe that status is best recognized by the fact that people to this day keep on begging for more of the same. Either that or another little fact: the government is at the center of the scheme.

In the July 11 post at TAE, there was an article by Michael David White, a Chicago area real estate broker who a few years ago started calling on his clients to NOT buy a home. I’ve featured many of White's articles since; I like that kind of attitude. In last week’s piece by White Pending Homes Sales Crash in a Record Fall to a Record Low as Tax Break Expires, though, something was missing. There was a line that said "see the graph below", but there was no graph. Since I had a hunch which graph he meant. I sent him a mail. And yes, he came back to me with the graph (some 6 weeks old) that can hardly be surpassed in its definition and clarity of the depth of the US housing and credit crisis.

Take a look at this baby:

That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion-, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.

Good morning America!!

And your own government is still trying to encourage homeownership? Now why would they want to do that in the face of numbers such as these? How much thought have you given that question? Over the past 4 years, the "right to own a home" has become synonymous with the "right" to lose some $25,000 a year. Why does Washington, through Fannie and Freddie, Ginnie Mae and the FHLB, continue to guarantee guaranteed losses for American citizens?

While these may seem separate issues, to me it all feels eerily in the same vein as Eric Sprott and David Franklin pointing out that every single US banking company but the 6 Too Big To Fail ones lost money in 2009, all 980 of them:
"Wither Green Shoots"
Of the 986 bank holding companies in the US last year, a total of 980 of them LOST MONEY.

And that’s even after all the government bailouts the sector received. Hmmmm. Robust banking recovery? Not a chance. However, the remaining six banks, all of which are "too big to fail", did manage to earn a combined $51 billion in 2009, sending their stocks soaring as a result. So despite 980 out of 986 bank holding companies returning nothing but red, the sector actually fared pretty well from a market perspective.

Does this make any sense to you? Here we have an entire sector that is essentially broken; where a mere handful have maintained profitability not from their own strength but thanks to the taxpayers’ bailouts; and where the government is now aiming the most powerful of their regulatory reforms – and the market decides to pile into their respective equities?

And banking is not the only sector Sprott and Franklin say is completely out of whack. It all leads back, how could it not, to housing, Fannie and Freddie, and more losses for homeowners going forward, to add on to the $7 trillion already incurred.
The banking sector isn’t the only equity space that confounds us – the housing stocks are as equally absurd. Despite what you may have heard from your local real estate agent, the fundamentals for US housing are looking dismal. Ever since the tax credits have rolled off, new home sales are now running at 300,000 on a seasonally-adjusted annual rate ("SAAR"), representing a new all time low this past May. For comparison, this is down from an all time high of 1,389,000 new home sales made in July of 2004.3 Reading this, you may expect the home builder stocks to have performed poorly. But no, not in this market!

[..] from the day that Bernanke first saw his ‘green shoots’, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April 23rd – all while new home sales were down 14% over the same time period on a SAAR basis.4 ‘The Market is Always Right’, as they say, but it simply can’t be with regard to these stocks. The housing ‘green shoots’ were the product of government initiative, rather than true fundamental improvement, and were thus short term in nature. Now that the government program has ended, the whole sector looks poised to fall apart.

And finally, for both the cherry and the icing on the cake, Bradley Keoun and David Henry at Bloomberg explain one of many ways in which banks keep the facade upright. They can book a profit when their own bonds lose value. How, you ask, why? Because it -in theory- allows them to buy back their own bonds at a lower price.
Bank Profits Depend on Debt-Writedown 'Abomination' in Forecast

The second-quarter results may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

In practice, it’s an accounting "abomination" because fluctuations in the value of the debt don’t change the amount the banks owe, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York. "Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota," Kotowski said. "The market will back it out, both on the upside and the downside."

To summarize, all US banks would have lost money last year if it hadn't been for your taxpayer dollars, and, indeed, all but the 6 biggest did. They received many trillions in public funds, all of which are a loss to you, who have also lost those $7 trillion on your home values. The balance sheets of the big banks, however, still wouldn't look good even with all your funds; they need stupid accounting pet tricks for that. Just like the government.

The overall picture is one of a ridiculous patchwork of lies and tricks and fraud and ultimately for you, losses bigger than you can bear.

Is it time to storm the Bastille again?

Ilargi: As you may have guessed, Stoneleigh and I have recently run into some serious internet access issues. We are now sitting in a McDonald’s [sic!] half an hour from Milan, where the WiFi works only intermittently. And that took us about a day to find. Apologies for the delays, but we’ll keep on trying as hard as we can.

Tonight, July 14, Stoneleigh has a talk in Carimate. I understand the mayor has invited his entire city council. Hey, maybe one of them has reliable internet access in his/her office.

Wither Green Shoots
by Eric Sprott and David Franklin, Sprott Asset Management

With the summer now upon us, the "Sell in May and Go Away" adage has proven itself true once again. The major market indexes are all turning downward, and while they haven’t dropped enough yet to warrant panic, we certainly want to be positioned properly if this trend continues into the fall. The market tea leaves are no longer sending mixed signals either – most of the new data is decidedly bearish. So what happened to all the ‘green shoots’? What happened to the strong recovery the market rally was promising?

Economic data released over the past two weeks have decimated any remaining belief in a lasting economic recovery. Slowdowns are appearing in the US, Europe, Japan and even China. Auto sales, housing starts, employment, consumer confidence, factory orders, consumer purchase intentions - just about every aspect of the economy that can be measured, is showing decided weakness.

Of particular interest to us over the past year has been the GDP forecasts released by The Consumer Metrics Institute in Colorado ("CMI"). CMI caught our attention with their real time tracking of consumer retail sales data. Consumer spending represents 70% of GDP, and that spending can provide great insight into the workings of the underlying economy. CMI’s retail sales data has indentified a long, negative contraction in the economy based on their data set for the last 180 days. This was confirmed most notably in Walmart’s poor first quarter sales results when CFO Tom Schoewe stated, "More than ever, our customers are living paycheck to paycheck."1 If that sentiment applies to other large retailers, it doesn’t bode well for 2010 GDP.

CMI also predicted 2010 Q1 GDP growth at 2.62% all the way back in November 2009. It took nearly seven months for the actual US GDP data to eventually be released, but when it finally did (after three revisions, no less) it turned out that CMI’s prediction was bang on. Interestingly, when the real data came out, CMI founder Rick Davis noted that the inventory component underlying the 2.7% Q1 GDP growth figure had moved from 1.65% up to 1.88% – meaning that the bulk of GDP growth, almost 66%, actually came from inventory swings rather than consumer demand.

No wonder factory orders fell out of bed this past week! With the re-stocking complete, there aren’t enough new orders to clear the fresh inventory. And if two thirds of Q1 growth came from inventory swings (or just plain re-stocking etc.), it makes us wonder what we can realistically expect from the next two GDP announcements. CMI provided the following guidance for the balance of the year, stating that "We expect GDP growth to be flat for the second quarter, but with inventory adjustment reversals absolutely killing the reported ‘growth’ number just four days before the U.S. mid-term elections." If that turns out to be correct, it will be unfortunate timing for the elections.

An important question to ask is whether the March ’09 rally was really justified at all. Were the green shoots real? Or was the market just looking for a way to justify the effects of government-induced ‘easy money’? The stock market is supposed to be an efficient, forward-looking indicator after all – and the rally that began in March ’09 was supposed to signal a robust recovery. So where’s the recovery? From the time the term ‘green shoots’ was first uttered by Ben Bernanke on March 15, 2009, the S&P 500 rallied 36% to June 30, 2010 and by as much as 60% to April 26, 2010. If the green shoots were really just the early indications of weeds, was the market wrong to appreciate so dramatically?

There is little doubt that much of the stock market action during the past 12 months has defied traditional market rules. Nowhere is this more evident to us than in the banking stocks. We’re still scratching our heads on the whole sector. Readers may remember an article we wrote in November 2009 entitled "Don’t Bank on the Banks" in which we discussed the hazard of leverage in the banking system. If you gauge our conclusions by what actually transpired in the banking sector as a whole, we were essentially correct.

Of the 986 bank holding companies in the US last year, a total of 980 of them LOST MONEY.

And that’s even after all the government bailouts the sector received. Hmmmm. Robust banking recovery? Not a chance. However, the remaining six banks, all of which are "too big to fail", did manage to earn a combined $51 billion in 2009, sending their stocks soaring as a result. So despite 980 out of 986 bank holding companies returning nothing but red, the sector actually fared pretty well from a market perspective. Does this make any sense to you? Here we have an entire sector that is essentially broken; where a mere handful have maintained profitability not from their own strength but thanks to the taxpayers’ bailouts; and where the government is now aiming the most powerful of their regulatory reforms – and the market decides to pile into their respective equities?

The banking sector isn’t the only equity space that confounds us – the housing stocks are as equally absurd. Despite what you may have heard from your local real estate agent, the fundamentals for US housing are looking dismal. Ever since the tax credits have rolled off, new home sales are now running at 300,000 on a seasonally-adjusted annual rate ("SAAR"), representing a new all time low this past May. For comparison, this is down from an all time high of 1,389,000 new home sales made in July of 2004.3 Reading this, you may expect the home builder stocks to have performed poorly. But no, not in this market!

As you can see in Chart A, from the day that Bernanke first saw his ‘green shoots’, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April 23rd – all while new home sales were down 14% over the same time period on a SAAR basis.4 ‘The Market is Always Right’, as they say, but it simply can’t be with regard to these stocks. The housing ‘green shoots’ were the product of government initiative, rather than true fundamental improvement, and were thus short term in nature. Now that the government program has ended, the whole sector looks poised to fall apart.

At the end of the day, nobody should be surprised by the recent economic data. The stock market rally that began in March ’09 was driven by monetary phenomena rather than anything fundamental, and based on data from CMI for 2010 it appears that we have already entered an economic contraction phase. The market is now beginning to reflect the fact that the green shoots were actually just the early signs of weeds, and it would suffice to say that virtually all the major world governments have some serious gardening to do. The recent contractions don’t necessarily mean that we’ll experience a repeat of 2008’s stock market performance in 2010, but it does suggest that investors should question the real fundamentals underlying their investments, lest the market begins to trade on them again.

Bank Profits Depend on Debt-Writedown 'Abomination' in Forecast
by Bradley Keoun and David Henry - Bloomberg

Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results. Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote.

Investor fears of a Greek default, stalled U.S. economic recovery and tougher industry regulations have rattled markets, snapping banks’ trading streaks and rekindling doubts about their creditworthiness. Prices for Bank of America’s credit derivatives -- used by traders to bet on the likelihood of the firm’s default -- rose by 34 percent during the second quarter, while Morgan Stanley’s doubled and Goldman Sachs Group Inc.’s surged 86 percent.

"What’s on investors’ minds are the macroeconomic issues, as reflected by the interbank market in Europe, the very low yields on U.S. Treasuries and recent data on economic growth, jobs and housing," Credit Agricole Securities USA analyst Michael Mayo said in an interview. "To the extent that the earnings power is less, the banks would not generate as much capital, so there’s less capital available to absorb future losses."

Statement 159
In the first quarter, the four biggest U.S. lenders -- Bank of America, JPMorgan Chase & Co., Citigroup and Wells Fargo & Co. -- produced combined profit of $13.5 billion, the most since the second quarter of 2007. That figure probably fell by 28 percent in the second quarter, based on a Bloomberg survey of analysts’ estimates. The banks are scheduled to announce results over the next two weeks, led by JPMorgan on July 15.

The second-quarter results may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

Accounting ‘Abomination’
In practice, it’s an accounting "abomination" because fluctuations in the value of the debt don’t change the amount the banks owe, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York. "Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota," Kotowski said. "The market will back it out, both on the upside and the downside."

Kotowski has been covering the banking industry since 1987 and returns on his stock recommendations over the past year have outperformed the average of peer analysts, according to data compiled by Bloomberg. He has been discounting the valuation gains from his analysis since at least the third quarter of last year, and wrote in an October 2009 report that the "after- effects of a hundred-year storm are not shaken off in a couple quarters."

Morgan Stanley probably recorded $1 billion in such debt- valuation adjustments in the second quarter, Citigroup’s Horowitz wrote. That represents 60 percent of the analyst’s forecast for the firm’s pretax income. Morgan Stanley booked $5.1 billion of gains in fiscal 2008 as its bond spreads widened, then reversed them in 2009 as markets improved and spreads tightened.
Goldman Sachs may have had $375 million of gains in the second quarter, while JPMorgan had $300 million, Horowitz wrote.

DVA Gains
Including Bank of America, the four banks probably had debt-valuation adjustments, or DVAs, amounting to an average of 18 percent of pretax income, based on Horowitz’s estimates.
Citigroup may have booked $400 million under the accounting rule, estimated Bank of America analyst Guy Moszkowski. "It’s deja vu to 2008," said Credit Agricole’s Mayo. "DVA gains are back."

In the first quarter, an unbroken string of profitable trading days helped Charlotte, North Carolina-based Bank of America post higher profit than analysts estimated, even as unemployment stayed close to a 27-year high. Goldman Sachs, JPMorgan and Citigroup also reported perfect trading quarters, while Morgan Stanley was profitable on 57 of 61 trading days. All four firms are based in New York. "The credit cycle is clearly behind us," Bank of America Chief Executive Officer Brian Moynihan told investors in April following the bank’s first-quarter earnings report.

‘Prevailing Winds’
In the ensuing months, corporate-bond yields widened, leading to a "pullback in client participation" and lower fixed-income trading results, Steve Stelmach, an Arlington, Virginia-based analyst at FBR Capital Markets, wrote in a June 30 report. Non-investment-grade bonds lost 0.7 percent last quarter, compared with a total return of 4.82 percent in the first, based on the Bank of America Merrill Lynch U.S. High Yield Master II Index. "When the prevailing winds of credit spreads tighten, they make a lot of money, and when spreads widen, they can’t make as much," said David Hendler, a senior analyst at New York-based research firm CreditSights Inc.

The Standard & Poor’s 500 Index fell by 15 percent from a 19-month high in April, curbing stock-trading revenue and prompting companies to cancel or postpone new share offerings and hold off on mergers and acquisitions that Wall Street bankers advise on to generate fees. U.S. bond sales fell to $335.8 billion in the second quarter, down 37 percent from both the first quarter and the second quarter of 2009, according to Bloomberg data. It was the lowest amount since the fourth quarter of 2008.

Lackluster Demand
The weaker trading environment highlights how banks are suffering from lackluster demand for their basic products: loans to companies and consumers. Loans and leases held by U.S. banks shrank for the sixth consecutive quarter to $6.88 trillion as of June 30, according to Federal Reserve data, which include an accounting change. Delinquencies on commercial real estate loans rose to 7.5 percent in May from 6.42 percent in March, according to Moody’s Investors Service.

Citigroup, which is 18 percent owned by the U.S. Treasury Department, probably had net income of $1.54 billion in the second quarter, the average of eight analysts’ estimates in a Bloomberg survey, down 65 percent from the prior quarter and 64 percent from a year earlier. "Our near-term performance will continue to reflect the pace of economic recovery and the level of activity in capital markets," Citigroup CEO Vikram Pandit, 53, said in April after the bank’s first-quarter profit almost tripled from a year earlier.

Goldman, Morgan Stanley
Profit probably fell 25 percent at Bank of America from the second quarter of the previous year, 18 percent at San Francisco-based Wells Fargo and 47 percent at Goldman Sachs, the Bloomberg survey shows. JPMorgan’s profit, which probably rose 17 percent from a year earlier, may be 4.5 percent lower than it was in the first quarter. Morgan Stanley’s second-quarter profit, depressed a year ago by a $2.3 billion debt-valuation charge when its CDS spreads were tightening, probably rose sevenfold, according to the survey. Compared with the first quarter, Morgan Stanley’s profit probably fell by 35 percent.

At the same time, banks are adding jobs for the first time in two years in a bet that recent market turmoil will prove temporary and fewer U.S. consumers may fall behind on loan payments. In New York, 6,800 financial-industry positions were added from the end of February through May, the largest three- month increase since 2008, according to the New York State Department of Labor.

‘Unusually Weak’
JPMorgan last month reported that credit-card loans more than 30 days late fell to 4.22 percent from 4.4 percent the previous month. That was the lowest since July 2009. None of the six largest banks is forecast to report a loss for the second quarter, a contrast with the fourth quarter of 2008 when they had combined net losses of $25.3 billion.

Any optimism was lost on the market for bank stocks. The KBW Bank Index, which tracks the 24 biggest U.S. banks, fell 11 percent in the second quarter after climbing 22 percent in the first three months of the year. "The first quarter was unusually strong, and the second quarter feels like it is going to be unusually weak," Moshe Orenbuch, an analyst at Credit Suisse Group AG in New York, said in an interview.

States Can’t Count on Bailout, Obama Appointees Say
by Michael McDonald - Bloomberg

States can’t count on the federal government for more budget bailouts, the heads of President Barack Obama’s debt commission told governors. States expecting Congress to authorize more assistance are "going to be left with a very large hole to fill," said Erskine Bowles, co-chairman of the National Commission on Fiscal Responsibility and Reform. States including New York and California have urged Congress to extend stimulus spending authorized to combat the recession, including extra Medicaid funding and money to pay public school teachers.

"I don’t think we can count on the federal government again," Bowles, White House chief of staff under former President Bill Clinton, said yesterday at the National Governors Association meeting in Boston. "They just do not have the financial resources." While the economy has been expanding, states have yet to recover from the longest recession since the Great Depression. The rout cut into tax collections and led them to raise taxes and slash spending on schools, social services and other expenses. States have projected total budget deficits of $127 billion through 2012, according to a report last month by the governors association and the National Association of State Budget Officers.

Call for Help
The governors of New York, Pennsylvania and Michigan on June 30 led states pressing Congress to extend higher financing for Medicaid, the health-care program for the poor whose use surged during the economic crisis. David Paterson of New York, Edward Rendell of Pennsylvania and Jennifer Granholm of Michigan and three other governors, all Democrats, traveled to Washington to appeal for funds after the Senate failed to approve $16 billion in extra financing for Medicaid and extended jobless benefits. Congressional Republicans opposed the measure’s cost.

"We need more help from Washington to protect against job cuts and health-care cuts," Illinois Governor Pat Quinn, a Democrat, said on July 10 at the Boston gathering. "If we don’t do that, we’re following Herbert Hoover economics." Earlier this year, 47 Republican and Democratic governors urged Congressional leaders to extend the Medicaid help, signing a letter asking for a six-month extension. Fewer are demanding a bailout now because the stimulus is unpopular, West Virginia Governor Joe Manchin said in an interview yesterday. "People are concerned that the amount of debt we’ve incurred hasn’t really stimulated the economy," said Manchin, a Democrat.

Recommendations Due
Forty-three percent of voters think the American Recovery and Reinvestment Act hurt the economy while 29 percent think it helped, according to a national telephone survey of 1,000 likely voters conducted July 1 by Rasmussen Reports, which has a margin of error of plus or minus 3 percentage points. After championing deficit spending to counter the economic downturn, Obama this year formed a commission to recommend ways to reduce the federal debt, which is projected to reach 90 percent of the U.S. economy by 2020. The panel’s recommendations are due Dec. 1, after the midterm elections in November.

Former Republican Senator Alan Simpson of Wyoming, the panel’s other co-chairman, told governors yesterday that the depth of the federal government’s spending imbalance is "shocking," which limits the help it can provide for strained state budgets. "The pig is dead," said Simpson, referring to so-called pork-barrel spending that Congress directs to states. "There’s no more bacon."

Tax Collections Drop
State fiscal woes will be "just as tough" next year because the economy is on pace to grow at a "lackluster" rate of about 3 percent a year, Yolanda Kodrzycki, an economist at the Federal Reserve Bank of Boston, told governors July 10 at the gathering. The budget pressure will be compounded by the need to help cities and towns faced with a drop in property-tax collections, she said. Property-tax collections fell in the first quarter for the first time since the onset of the real-estate market’s crash, to $107.7 billion from $108.4 billion a year earlier, the Census Bureau said on June 29.

South Carolina Governor Mark Sanford said the "worst is yet to come" for the states because the economy is bound to fall back into a recession as government spending contracts both in the U.S. and elsewhere. Kodrzycki said researchers at the Fed have become "much more sensitive" to the prospect of a so-called double-dip recession. She said the economy needs to grow at an annual average rate of about 4 percent in order for the unemployment rate to fall back to 5 percent by 2015. "The road to economic recovery is a long one," she said. "It’s a sobering picture."

Froth and stagnation
by The Economist

In recent months several countries have experimented with measures to cool bubbly property markets. Yet since The Economist’s global round-up of housing markets was last published in April, house-price inflation has accelerated in some of the very countries where the authorities have intervened to slow its rise. Asia has been at the forefront of such interventions. In February Singapore’s government raised down-payment requirements and imposed stamp duties on all residential properties sold within a year of purchase in a bid to curb speculation. Despite these steps prices in the island nation rose by nearly 40% in the year to the end of the second quarter, after a rise of just over 25% in the year to the end of the first quarter.

Singapore has overtaken Hong Kong to become the frothiest housing market among those we monitor. House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009.

More concerning, however, is our analysis of "fair value" in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track. A frothy property market was one of the reasons for the Reserve Bank of Australia raising interest rates six times between October and May. Since then, the bank has become more sanguine about the state of the market. It cited "some signs that the earlier buoyancy in the housing market was easing" when keeping interest rates on hold in June.

China’s property-cooling measures, meanwhile, which were similar to Singapore’s, were announced in April. Our house-price figures for China now extend to the end of May. They help explain why the Chinese government had become more concerned. Year-on-year house-price inflation peaked in April at 12.8%, but has since moderated a bit.The prospect that house prices in China are about to fall sharply worries some. Kenneth Rogoff, a Harvard professor, said this week: "You’re starting to see that collapse in property and it’s going to hit the banking system." But Sun Mingchun, chief economist for China at Nomura, an investment bank, reckons that high down-payment requirements and the preponderance of cash purchases by Chinese homebuyers will help to limit the effects of any falls on the real economy. 

For America the balance of evidence points to a renewed housing slowdown. Although both the Case-Shiller national and ten-city indices are up year-on-year, the national index fell during the three months to the end of March. The FHFA index, which excludes houses that are financed with large mortgages, was still down compared with a year earlier. More recent home-sales data have been similarly downbeat. Sales of new homes declined by 33% from April to May, thanks to the expiry of a tax credit. Just 28,000 new units were sold during May, the lowest total on record for that month. In Asia policymakers are trying to prick a bubble. In America they are still dealing with the consequences of the last one.

The IMF Is Coming for Your Social Security
by Dean Baker - Huffington Post

A few years back, there was a fear in some parts about black UN helicopters that were supposedly taking part in the planning of an invasion of the United States. While there was no foundation for this fear, there is basis for concern about the attack of another international organization, the International Monetary Fund (IMF). Last week, the IMF told the United States that it needs to start getting its budget deficit down. It put cutting Social Security at the top of the steps that the country should take to achieve deficit reduction. This one is more than a bit outrageous for two reasons.

First, the IMF deserves a substantial share of the blame for the economic crisis that gave us big deficits in the first place. The IMF is supposed to oversee the operations of the international financial system. According to standard economic theory, capital is supposed to flow from rich countries like the United States to poor countries to finance their development. In other words, the United States should be having a trade surplus, which would correspond to the money that we are investing in poor countries to finance their development.

However, the IMF messed up its management of financial crises so badly in the last 15 years that poor countries decided that they had to accumulate huge amounts of currency reserves in order to avoid ever being forced to deal with the IMF. This meant that capital was flowing in huge amounts in the wrong direction. One result of this reverse flow was that the United States ran a huge trade deficit instead of a trade surplus.

The trade deficit in the United States was a big part of the story of the housing bubble. The trade deficit cost millions of workers their jobs. This was one of the main reasons that economy was so weak coming out of the 2001 recession. This weakness led the Fed to keep interest rates at 50-year lows, until the growth of the housing bubble eventually began to generate jobs in the fall of 2003.

The IMF both bears much of the blame for the imbalances in the world economy and then for failing to clearly sound the alarms about the dangers of the bubble. While the IMF has no problem warning about retired workers getting too much in Social Security benefits, it apparently could not find its voice when the issue was the junk securities from Goldman Sachs or Citigroup that helped to fuel the housing bubble.

The collapse of this bubble has not only sank the world economy, it also destroyed most of the savings of the near retirees for whom the IMF wants to cut Social Security. The vast majority of middle-income retirees have most of their wealth in their home equity. This home equity largely disappeared when the bubble burst. Maybe the IMF doesn't have access to house price series and data on wealth, because if they did, it's hard to believe that they would advocate further harm to some of the main victims of their policy failure.

The other reason that the IMF's call for cutting Social Security benefits is infuriating is the incredible hypocrisy involved. The average Social Security benefit is just under $1,200 a month. No one can collect benefits until they reach the age of 62. By contrast, many IMF economists first qualify for benefits in their early 50s. They can begin drawing pensions at age 51 or 52 of more than $100,000 a year. This means that we have IMF economists, who failed disastrously at their jobs, who can draw six-figure pensions at age 52, telling ordinary workers that they have to take a cut in their $14,000 a year Social Security benefits that they can't start getting until age 62. Now that is real black helicopter material.

Chinese rating agency strips Western nations of AAA status
by Ambrose Evans-Pritchard - Telegraph

China's leading credit rating agency has stripped America, Britain, Germany and France of their AAA ratings, accusing Anglo-Saxon competitors of ideological bias in favour of the West. Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to "wealth creating capacity" and foreign reserves than Fitch, Standard & Poor's, or Moody's. The US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.
Meanwhile, China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year. Dominique Strauss-Kahn, chief of the International Monetary Fund, agreed on Monday that the rising East is a transforming global force. "Asia's time has come," he said. The IMF expects Asia to grow by 7.7pc in 2010, vastly outpacing the eurozone at 1pc and the US at 3.3pc. Emerging nations hold 75pc of the world's $8.4 trillion (£5.6 trillion) of reserves. Dagong rates Norway, Denmark, Switzerland, and Singapore at AAA, along with the commodity twins Australia and New Zealand.

Chinese president Hu Jintao said in April that the world needs "an objective, fair, and reasonable standard" for rating sovereign debt. Dagong appears to have stepped into the role, saying its objective was to assess countries using methods that would "not be affected by ideology". "The reason for the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor's repayment ability," said Guan Jianzhong, Dagong's chairman.

The agency, known in China for rating companies, said its goal is to "correct the defects" of the existing system and offer a counter-weight to Western agencies. Dagong appears to base growth potential on past performance but this can be misleading, especially in states enjoying technology catch-up. Japan was a high-flyer in 1970s and 1980s before stalling when the Nikkei bubble burst. It has been trapped in near perma-slump ever since.

China may start to face some of Japan's demographic problems by the middle of this decade when the working age population peaks. The Western rating agencies put a high value on a long-established rule of law and government institutions that have proved resilient over many decades, or even centuries. China's political system may appear strong – as did the Soviet Union's – but only time will tell whether its foundations are brittle. The violent upheavals of the Cultural Revolution are still a very fresh memory.

Chinese credit firm says US worse risk than China
by Joe McDonald - AP

A Chinese firm that aims to compete with Western rating agencies declared Washington a worse credit risk than Beijing in its first report on government debt Sunday amid efforts by China to boost its influence in global markets. Dagong International Credit Rating Co.'s verdict was a break with Moody's, Standard & Poors and Fitch, which say U.S. government debt is the world's safest. Dagong said it rated Washington below China and 11 other countries such as Switzerland and Australia due to high debt and slow growth. It warned the U.S. is among countries that might face rising borrowing costs and risks of default. 

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs — a criticism echoed by some foreign analysts. At June's G-20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system. Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially. But in a sign of official support, its announcement Sunday took place at the headquarters of the Xinhua News Agency, the ruling Communist Party's main propaganda outlet.

Dagong's chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe's debt woes. He said it "provides the wrong credit-rating information" and fails to reflect changing conditions. "Dagong wants to make realistic and fair ratings," he said. Beijing has more than $900 billion invested in U.S. Treasury debt and has appealed to Washington to avoid hurting the value of the dollar or China's holdings as it spends heavily on its stimulus. 

Dagong's report covered 50 governments and gave emerging economies such as Indonesia and Brazil better marks than those given by Western agencies, citing high growth. Along with the United States, some other developed nations such as Britain and France also received lower ratings than those of other agencies. Dagong rated U.S. government debt AA with a negative outlook, below the firm's top AAA rating. It warned that Washington, along with Britain, France and some other countries, might have trouble raising more money if they allow fiscal risks to get out of control. "The interest rate on debt instruments will run up rapidly and the default risk of these countries will grow even larger," its report said.

Dagong said it hopes to "break the monopoly" of Moody's Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007. Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China's government might try to influence Dagong's decisions, there is room in the market for a Chinese agency because Western firms' credibility is badly tarnished. 

"As long as there is another opinion and it is backed up, I don't really think a China-based company will have an incentive to rate, say, Indonesia any better than a U.S.-based rating agency," Kulkarni said. "If it comes to Chinese government-related companies, maybe there might be a conflict of interest, and investors would have to be aware of that fact," he said. Chinese leaders have appealed repeatedly to Washington to safeguard their country's U.S. holdings and avoid taking steps in response to the global crisis that might weaken the dollar or the value of American assets.

Dagong rated China AA-plus with a stable outlook — higher than Moody's A1 and S&P's A-plus — due to rapid growth and relatively low debt. Ahead of it were seven countries including Switzerland, Australia and Singapore that received the top rating of AAA, the same as those from Western agencies. Canada and the Netherlands also ranked above China. Dagong's stronger ratings for emerging economies echoed market sentiment toward some countries such as China and India. They are seen as better risks than their credit ratings suggest and pay lower rates. SJS Markets' Kulkarni noted that Western agencies give the two Asian giants a lower credit rating than Spain, despite their strong growth and the Spanish government's debt problems. Developing countries "tend not to get full credit" for their economic performance, he said. "Ratings are basically lagging."

Small Investors Flee Stocks, Changing Market Dynamics
by E.S. Browning - Wall Street Journal

Many individual investors were tiptoeing back into stocks in the spring. Now, they're running for cover again. Karen and Roger Potyk, a comfortably retired couple in San Antonio, Tex., had clung to some stock mutual funds despite their anxiety following the financial crisis of 2008. But the renewed market volatility following the "flash crash" of May 6 proved too much to bear.

"We just didn't want to put up with it any more," says Karen Potyk. She and her husband sold the last of their stock holdings on May 20, moving the money to bonds, certificates of deposit and bond-like annuities.
Small investors' faith in stocks, which surged in the 1990s, has collapsed since the technology-stock debacle and the Enron and WorldCom scandals of 2000-2002. The 2007-2009 financial crisis only made things worse. Now, the pullback among ordinary investors means they are a declining force in a market that is increasingly dominated by professionals. Some were tantalized by equities during the 70% rally that began in March 2009 and ran through April. But mutual-fund data and other clues suggest that that brief infatuation has ended.

In 2002, investors withdrew more money from mutual funds that invest in U.S. stocks than they put in. Then from 2007 through 2009 they withdrew money for three consecutive years. That marked the first three-year period of withdrawals since 1979-1981, according to the Investment Company Institute, a mutual-fund trade group. This year, U.S.-stock funds saw inflows in January, March and April, but net withdrawals resumed in May.

Investors talk of a growing disillusionment with big institutions, including corporations, government, banks and political parties—as well as fears about the nation's heavy debt. Some people's confidence in stocks was seriously shaken by the volatility that returned in May. They worry that the May 6 flash crash, when the Dow Jones Industrial Average fell 700 points in eight minutes before rebounding, is a sign that ordinary people are increasingly at the mercy of anonymous companies that trade with powerful computers.

Individual investors were important market pillars in the 1990s, but their flight from stocks is changing the market dynamic. By adding money to mutual funds, individuals helped push stocks higher in the 1990s and to a lesser extent from 2003 through 2006. Now they are moving money out again on balance, making them a drag on the market. Ordinary investors are returning to the cautious mentality they developed during the 1970s. That was the last extended period of stock weakness, after which it took many people a decade or more to get comfortable with stocks again. "I feel like the tail of the dog that is being wagged by institutional investors who are taking a lot of risk, playing a lot of games and just have these computerized orders that affect me a lot," says Simeon Thibeaux, a semi-retired businessman from Alexandria, La.

History suggests that individuals eventually will return to stocks, as they did in the 1980s and, even more strongly, in the 1990s. But rebuilding their confidence could take time, says Brian Reid, chief economist of the Investment Company Institute. Historically, it has taken an extended period of stock success to lure individuals back after long periods of disaffection. Rebounding after a two-month slump, the Dow Jones Industrial Average jumped 511 points, or 5%, to 10198.03 last week, its biggest weekly gain in almost a year, although it remains down 9% since topping out on April 26.

"We have gone through two of the worst bear markets since the Great Depression, and it has given investors a better sense of the risks and dangers of investing" in stocks, Mr. Reid says, referring to the bear markets of 2000-2002 and 2007-2009. The gradual dissipation of investor confidence can be seen in mutual-fund investing patterns.

After getting hurt in the 2000 tech-stock crunch, individuals came back to U.S.-stock funds in 2003, as stocks were entering a new bull market, ICI data show. But the buying proved tepid and turned to net selling in the latter part of 2006, even before the bull market ended in 2007. Despite occasional periods of inflows to U.S.-stock funds, the selling trend has continued since then. Individuals removed a net $7 billion from stock funds in the seven days ending May 12 and $13 billion two weeks later, eclipsing the deposits from earlier in the year.

Recent volatility has certainly shaken the Potyks' confidence. Mr. Potyk, a 68-year-old pharmacist, spent 25 years as an army officer and 11 years with Pfizer before retiring. His wife, 63, is a retired real-estate broker. The Potyks stuck with their stocks through the tech wreck, the Sept. 11 attacks and Enron. They were willing to take risks to get stock-market returns. By 2006, he and his financial adviser say, the Potyks' portfolio was 50% stocks and 50% bonds and other fixed-income investments.

The big blow to their confidence was the 2008 collapse of brokerage-firm Lehman Brothers, in which they lost $75,000 on a Lehman bond. Although it was a bond that hurt them, the Potyks' faith in all potentially risky investments was shattered. "In the military, you learn that you want people you can respect, trust—who have integrity," Mr. Potyk says. "Over the last five years or so, I find that our financial institutions have no shred of the character I describe."

The last straw was the May market volatility, accompanied by widespread fears about European government debt. On May 20, the Potyks asked their financial adviser to sell the last of their stock mutual funds. Now that their portfolio consists entirely of fixed-income investments, "I won't make 8% on my money. I will make 4% or 5%, but the money will be there," says Mr. Potyk.

Stocks had developed an almost cult-like following in the 1980s and 1990s, when they were among the best investments available. But in the past decade, big U.S. stocks have had the worst performance of nine major investment classes tracked by investment research firm Morningstar. The Standard & Poor's 500 stock index has fallen at an annualized rate of 3% a year over the past 10 years, including dividends and controlling for inflation. Long-term Treasury bonds show a gain of 5% a year during that same period, after inflation. Gold is up 10% a year and real-estate investment trusts 8% a year. The S&P 500 index itself, without adjusting for inflation and dividends, is stuck today at a level it first reached 12 years ago, meaning it has gone nowhere in more than a decade, scaring a legion of people in the process.

Reflecting their flight from risk, individual investors appear to be losing faith in an investment strategy called buying on the dips. In times of stock strength, people learn to buy stocks after a decline, when they are cheaper, because the stocks have a tendency to recover. Lately, investors have been reversing that behavior, selling on dips for fear the declines will continue. The Yale School of Management maintains an index, designed by Professor Robert Shiller, that tracks individuals' willingness to buy on dips, based on a monthly survey of wealthy investors. The index topped out in 2002. While it has moved up and down since then, it has been falling since the start of 2009.

Some investors, haunted by the continuing credit crunch and unemployment fears, are being driven to pull money out of stock funds to make up budget shortfalls. Also eating away at risk tolerance is demographics: Baby boomers are aging, making them think more about preserving their holdings' value. This is only part of the story, however: The Investment Company Institute data show lower risk tolerance among younger people, too. In surveys of mutual-fund owners, the ICI found that just 30% said in 2009 that they were willing to take above-average or substantial risk in the stock market, down from 37% in 2008. The number willing to take only below-average risk or no risk at all rose to 20% from 14%.

Mr. Thibeaux of Alexandria, La., sold one-third of his stock mutual funds late in April at the suggestion of an investment adviser, who warned him that stocks were due for a pullback. The problem was where to put the cash. A money-market fund at his mutual-fund company or a short-term certificate of deposit at his bank would yield almost nothing, he says. He finally decided simply to pay off the mortgage on a second home, on which he was paying 5% interest. "I think there is no investment strategy now except to buckle up and hope that you don't get hit too hard," Mr. Thibeaux says.

Long-term investors have been showing a distinct change in behavior since 2008. Jay Pestrichelli, who monitors client behavior at online brokerage firm TD Ameritrade, has noted a change in the traditional buy and hold strategy. "People who once made few changes to their accounts have begun trading more frequently," he says. He saw the trend especially clearly on May 6, when there was an uptick of selling.

"A higher percentage of our trading was coming from our longer-term investor base," he says. People who might log into their accounts regularly, but not necessarily trade, were selling heavily that day, he says. "The next day, those clients were all buying back in," he says, often losing money on a trade where they had sold low and bought higher. "To see that kind of a move in such a short period of time, it certainly can shake their trust."

James Rotenstreich, a businessman in Birmingham, Ala., says the May flash crash damaged his confidence in stocks as a store of wealth. Mr. Rotenstreich has received offers for some real estate he owns in the Birmingham area, but so far has been reluctant to sell, he says, in part because he doesn't know what he would do with the money. He notes that corporate bonds and other alternatives also suffered severely in the market decline.

Reflecting on his options, he says that if he sold the real estate, "I really think I would put it in the bond market. So maybe I have lost some faith in the future of the stock market." Some investment advisers are telling clients that, for long-term investors, this summer will turn out to have been a great time to buy stocks on the cheap. So far, not many clients are listening.

Deutschland über alles does not mean a trickledown recovery in EMU
by Ambrose Evans-Pritchard - Telegraph

 Germany is sizzling, for now. Manufacturing output grew at an annual rate of 26pc from March to May. Mercedes, BMW, and Audi are ramping up overtime. Economic growth in the second quarter may top 5.2pc. Jean-Claude Trichet, head of the European Central Bank, last week cited thisWirtschaftswunder as evidence of durable recovery in Europe. It is no such thing. The OECD's leading indicators for June rolled over in Italy and France, as well as China and India. The IMF expects Spain's economy to contract by 0.4pc this year. It has lowered its forecast for the eurozone from 1.5pc to 1.3pc in 2011.

"Downside risks to the recovery have risen sharply," it said. The ECB is barely on speaking terms with the IMF – the "Inflation Maximizing Fund" as it was dubbed in a Bundesbank memo. "The IMF has not caught up to the reality in Europe," said ECB über-hawk Jürgen Stark on Friday. Beware, this is the same insular ECB that raised rates in July 2008 on the eve of the Lehman crisis when half of Europe was already in recession, mistaking the deflationary oil spike for an incipient 1970s inflation spiral. Can one ever trust their judgment again?

Yes, Germany is on the cusp of EMU "outperformance", but that is more curse than cure for Club Med laggards. Germany is benefiting from a currency that is as misaligned as China's yuan, though this mercantilist advantage is disguised within Europe's monetary union. Crudely, Germany is doing to Spain, Italy, and increasingly France, what China has been doing to the rest of the world – but more so – by holding down its exchange rate. In Europe's case, this captive arrangement is written into EU Treaty law. This is not a German conspiracy. The German people never desired the euro. The countries that are now caught in the EMU trap were the ones that foisted the project onto Berlin. 

Be that as it may, we now have an untenable socio-strategic situation in which German unemployment has been falling for 12 months in a row to 7.5pc, while Spain's unemployment has vaulted upwards to just under 20pc. This immense gap – with everything it implies about the state of a society – has surfaced in little over two years. The delayed effect of German wage discipline over the years has at last hit EMU with volcanic force. The same time-lag is underway in Spain with opposite effect as the property slump grinds deeper. Wishful thinking lingers, but the harsh truth is that the Spain's housing crash has barely begun. The Madrid consultancy RR de Acuna sees an implicit overhang of 1.6m housing units. It will take six years to clear.

By cruel contrast, Hans Werner Sinn from Germany's IFO Institute said his country is on the cusp of a property boom. "Germany is the winner of this crisis," he said. This contrast will become even crueller because Germany is also benefiting from a devalued euro against the dollar, yuan, yen, rouble, and even sterling (lately). The euro has fallen by 20pc or so. This has rescued Germany's 80,000 strong solar industry – for example – from annihilation by Chinese competitors. The EMU effects of a weak euro are asymmetric. Germany's export machine is highly-geared to Asia and America. Spain has low gearing.

With a closed economy, it would require a euro at 80 cents to enjoy much relief. We are seeing a mirror-image of 2008 when ECB hawks drove the euro to $1.60 against the dollar. That episode led to a sharper fall of industrial output in Germany than in Spain or France. Besides, Germany makes products for the rich, a profitable niche in a world of asset bail-outs. Statistically, the rich are better off now than two years ago. Mercedes enjoyed its best month ever in June. Sales in the US jumped 25pc from a month earlier. The S-Class model was up 106pc. Meanwhile, a million people have dropped out of the US labour force in the last two months alone. Labour arbitrage under globalisation has not been good for Western workers.

The Gini Coefficient measuring income inequality is at or near all-time high in almost every Western country. Democracy will correct this as the political pendulum swings, but for now Germany is the ultimate Gini export play. A vibrant Germany must, in the end, lift Spain and Italy as German firms source contracts their way, but process will be painfully slow. The risk is that the North-South gap widens further before the stimulus trickles down. Much political mayhem can occur in the meantime. The ECB's German members are not inclined to do any favours for Club Med. Dr Stark swept aside the IMF's call for "scaling up" ECB bond purchases after buying €59bn (£49bn) of Greek and Iberian bonds so far. "If the situation improves further there is not a reason any more to continue with this programme," he said. I

f so, he dooms Spain to deeper depression. The IMF is frankly in a muddle as well on the big picture. Its World Economic Outlook said the surpluses of Germany, China, and Japan, will rise from $586bn (£377bn) last year to $758bn by 2015, perpetuating the imbalances that led to the credit crisis. Brian Reading from Lombard Street Research said that if this occurs, it assures a global slump because the deficit states of the Anglosphere and Club Med cannot keep the game going by adding further debt. They must retrench, and therefore global demand must implode.

The IMF evades the conclusions of its own logic. As for Berlin, it eyes the world through a provincial lens, as a pseudo-morality tale. This childish view did not matter as long as market forces could impose a currency revaluation on Germany every few years to keep relations with the rest of Europe in kilter. It matters a great deal now. EMU has shut the escape valve.

European Banks Poised to Win Reprieve on Basel III Capital Rules
by Yalman Onaran and Simon Clark - Bloomberg

European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules.

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.

Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.

"Politicians in France and Germany are worried about the impact of the rules on their economies," said Chris Bates, a regulatory lawyer at Clifford Chance LLP in London. "Basel has managed to bring diverging banking systems and economies together. It’s more than just a capital regime. It’s a showcase of global cooperation. So the U.S. and the U.K. cannot let it break down."

G-20 Request
The 36-year-old Basel committee, a body of central bankers and regulators that sets capital standards for banks worldwide, was asked by the Group of 20 nations to draft new rules after the worst financial crisis in 70 years caused firms to write off $1.8 trillion. G-20 leaders urged the committee to improve the quantity and quality of bank capital, strengthen liquidity requirements and discourage excessive leverage. They set a deadline of December for making the rules and originally gave countries until the end of 2012 to implement them.

Three months ago, European leaders and finance ministers, including those from Germany and France, were as adamant as their American and British counterparts in pushing back against banks’ objections to proposed rules that UBS AG estimated could force banks to raise $375 billion of capital, according to the regulators and bankers, who asked not to be identified because they weren’t authorized to speak. Fifty-five percent of that would have to be raised by European banks, UBS said. Then Greece’s debt woes unnerved investors, making European leaders more receptive to what the banks were saying, according to the people.

‘Wiggle Room’
At their meeting in Toronto last month, G-20 leaders hinted at delays. While continuing to urge stricter capital and liquidity standards, they said implementation could take economic conditions of member states into account. "The challenge of the eurozone crisis clearly played into the Toronto document," said Barbara Matthews, a former bank lobbyist and now managing director of BCM International Regulatory Analytics LLC in Washington. "It gave wiggle room on implementation."

Even if they’re softened and delayed, the new capital rules, known as Basel III, will force banks to take fewer risks and be better capitalized, said Paul Miller, an analyst for FBR Capital Markets Corp. based in Arlington, Virginia. "There’s a misperception out there that Basel III isn’t going to happen, or if it does it will be so watered down it won’t matter," Miller said. "Even with the tweaks in the next few months, they’ll come up with a pretty strong framework."

Fixing Basel II
The Basel III proposal attempts to fix the shortcomings of an earlier revision, known as Basel II, which was initiated by lenders in the late 1990s and lowered capital requirements by as much as 29 percent for some banks. The new rules would tighten control of what goes into the banks’ calculation of risk, redefine what counts as capital and impose higher charges against holdings such as derivatives.

The committee is expected to decide on the definition of capital this week and defer issues such as capital ratios until its meetings in September and October, according to members.
One part of the definition would exclude minority interests that banks hold in other financial institutions when calculating common equity on the theory that they can’t readily withdraw the capital. Many European lenders, which have lobbied against the rule, have non-controlling stakes in emerging-market banks that would no longer count as the highest level of capital, while the assets of the subsidiaries would have to be included in the banks’ risks.

BNP Paribas, HSBC
The change would have the largest impact on European lenders of all the proposed capital rules, UBS said in a March report. BNP Paribas SA, France’s largest bank by assets, would see its capital lowered by $10.7 billion, more than any lender, if it couldn’t count minority interests, analysts at JPMorgan Chase & Co. wrote in February. London-based HSBC Holdings Plc would have its capital reduced by $6.9 billion, and Societe Generale SA, the third-biggest French bank, $4.7 billion.

European banks are likely to win a concession on the minority-stakes rule, according to the people involved in the talks. One possible compromise would allow a bank to count part of its stake in relation to the risk the capital is supposed to cover at the entity in which it invested, the people say. The fight over whether to count minority stakes comes as the Basel committee is trying to counter an attack by bankers who have said that harsh rules come with costs. Investors will pay with lower returns from owning securities in their firms, and Main Street will suffer as economic growth and lending slow and fewer jobs are created, bankers say.

‘Never Free’
A study released in June by the Institute of International Finance, which represents more than 375 financial companies, said the regulations could erase 3.1 percent of gross domestic product in the U.S., the euro region and Japan by 2015. About 9.7 million fewer jobs could be created over the five-year period than would otherwise be the case, the IIF said. Regulation is "never free," said Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly, who visited London and Brussels in June to meet lawmakers and regulators with the Financial Services Roundtable, a Washington-based industry group. "There has to be some impact on growth and jobs."

The Basel committee, whose members have touted the benefits of financial stability, is preparing its own economic impact study with the help of the Bank for International Settlements in Basel and the International Monetary Fund. "Preliminary results do not point to a growth problem coming from the regulation," Jaime Caruana, general manager of the BIS, said in Basel on June 28. "On the contrary, it would support resilience relatively rapidly."

The Basel committee may publish the study later this month or in August, according to a person with knowledge of the matter. The report is expected to show an impact on economic growth of about one-third what the IIF calculated, another person familiar with the research said. U.S. regulators also have been dubious about the banks’ analysis. The Federal Reserve, which is collecting data from banks for a separate impact study, has rejected some of the lenders’ assumptions and asked for changes, according to people familiar with the discussions.

The Basel committee plans to announce its rules by the time G-20 leaders gather in Seoul in November. In addition to defining capital, the group needs to determine three ratios before then: one on common equity as a percentage of risk- weighted assets; one involving Tier 1 capital, which includes securities that could help a lender cover unexpected losses; and one on Tier 2 capital, which incorporates a broader range of securities that would protect depositors and creditors in case of insolvency.

Defining Capital
Banks currently need to hold capital equal to a minimum of 8 percent of risk-weighted assets. Half of that must be Tier 1 and half of the Tier 1 needs to be common stock. The Basel committee might triple the common ratio requirement and double Tier 1, FBR’s Miller estimates. How the committee defines what counts as capital is as important as what the ratios are. In addition to the fight over whether to exclude minority stakes, there is a debate over deferred tax assets, past losses that lenders use to offset tax charges in future years.

The proposed Basel rules would prevent banks from counting these assets as part of their core capital. Japanese banks, which rely on deferred tax assets more than their counterparts in Europe and the U.S., are leading the campaign to block the exclusion, according to people involved in the talks. While the proposal might not change, the Basel committee may accept a phase-in period of between 5 and 10 years, the people say.

Liquidity Requirements
The committee may also relax the implementation of other rules by giving national regulators two years from the beginning of 2012 to come up with plans to put the regulations into effect, the people involved in the discussions say. Each part of the proposal might have its own time horizon. Final versions of some Basel rules, including new liquidity requirements for how much cash banks need to hold, may not be agreed upon before the November G-20 meeting.

A liquidity coverage ratio is designed to ensure that all of a bank’s liabilities coming due in a month can be paid with cash and other assets, such as Treasuries, that can be sold easily for cash. A net stable funding ratio extends the same concept to a year, incorporating other holdings, such as short- term loans and stocks. Banks objected to the long-term rule, which could result in new debt issuance of $5.4 trillion, Barclays Plc analysts estimated in June. The target date for publishing the rule may be pushed back to the middle of next year, four committee members said.

Counterparty Risk
Another source of disagreement between European and U.S. regulators is a change that would increase capital charges on banks to cover counterparty credit risk, or the likelihood of trading partners going bust, the people said. That portion of Basel III would create a buffer against the kind of danger posed by American International Group Inc. during the credit crisis. U.S. and European banks thought they had hedged their mortgage investments through derivatives contracts with AIG, which couldn’t keep up with increased cash demands as the values of the bonds declined. The U.S. government bailed out the insurer, concerned that its collapse would bring down banks that bought the derivatives.

The Basel committee probably won’t make a decision about counterparty risk this week, deferring the issue until October, members say. At least one said he expected the matter will be delayed to next year. Issues that can’t be resolved by the Basel committee may be settled by the G-20 leaders in November, members say. "The regulatory space has been far more politicized than I’ve ever seen it," said BCM’s Matthews, who has been involved with Basel rulemaking for two decades. "Heads of state care, have opinions and are aware of decisions at very granular levels."

One proposal European banks and regulators tried to get rid of -- and that U.S. Treasury Secretary Timothy F. Geithner advocated -- has survived and made it into the Toronto G-20 statement. That’s a plan to cap bank leverage by setting a ratio of assets to capital. While current Basel rules allow banks to assign weights to assets based on their risks, the leverage ratio would look at all assets without a risk assessment. European banks appear more highly levered than their U.S. counterparts partly because U.S. accounting rules allow more assets to be kept off balance sheets than European standards do. The two systems differ on which types of securitizations are included on the books and how derivatives contracts are netted.

Lower Returns
As envisioned in the Basel proposal, the leverage ratio will initially be used to provide guidance to national regulators in their assessments of banks’ soundness. Only later, after accounting differences between countries are resolved, would it become a requirement. BNY Mellon’s Kelly said the original Basel proposals would have forced some banks’ return on equity, a measure of profitability, to mid-single digits. "If that was true, then they effectively become government utilities, because you couldn’t really raise capital in the private markets after that," he said.

Bankers worried about maintaining existing returns may be missing the point, according to Basel committee Chairman Nout Wellink, who is also president of the Dutch central bank. The purpose of the new rules is to change the business model of banks, he said at an IIF meeting in Vienna last month. "More stable, less leveraged banks would raise average ratings, improve the terms on which banks could raise funds, and lower the required return on equity," Wellink said.

That view was reinforced in the Bank for International Settlements’ latest annual report, published June 28. "High shareholder returns in the sector were unsustainable because they were generated by high leverage and risk-taking that proved to be unmanageable in a period of stress," the report said. "Lower returns on equity could actually be a desirable outcome for the long-term investor as well as for the economy at large."

Secret gold swap has spooked the market
by Garry White and Rowena Mason - Telegraph

It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion. The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world's annual gold production and the possibility of a sell-off. 

In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month. Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market. Denominated in euros, gold has fallen 8pc since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce.

The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days. Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout. At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers' bank and its purpose to conduct transactions with national monetary authorities. 

Central banks in the troubled southern zone of Europe were considered the most likely perpetrators. According to the World Gold Council, central banks in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tons of gold respectively in June – leading analysts to point fingers at Portugal, or a combination of the three. But Edel Tully, an analyst from UBS, noted that eurozone central banks would be severely limited with what they could do with the influx of extra cash – unable to transfer it straight to governments or make use of the primary bond markets. She then listed the only other potential monetary authorities with enough gold as the US, China, Switzerland, Japan, Russia, India and Taiwan – and the International Monetary Fund.

This led to musings that the counterparty was the IMF, making sense because the lender of last resort is historically prone to cash shortages and has been quietly selling off gold in the first half of the year. Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency. "Gold swaps are usually undertaken by monetary authorities," he writes on his industry blog, MineSet.

"The gold is exchanged for foreign exchange deposits with an agreement that the transaction be unwound at a future time at an agreed price. "The IMF will pay interest on the foreign exchange received. Historically swaps occur when entities like the IMF have a need for foreign exchange, but do not wish to sell the gold. In this case, gold is a leveraging device for needed currency to meet requirements. "The many reports that characterise the large IMF gold swap as a sale of gold into the markets do not understand the difference between a swap and a lease." However, the day after original reports about the swaps, BIS emailed a statement saying that the swaps had not been conducted with monetary authorities but purely with commercial banks.

This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet. In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority. 

This would add an extra layer of anonymity. "So the BIS swaps look like a tripartite transaction," writes Adrian Douglas of the Gold Anti-Trust Association. "The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS." Analysts for Commerzbank note that in the meantime, "The price of gold is tending weaker at present."

Baltic Dry Index still falling
The Baltic Dry Index, a measure of commodity shipping costs, has fallen for the longest period in nine years, due to lower volumes of iron ore being shipped to China. Surplus steel means manufacturers are relying on stockpiles, rather than shipping in iron ore from abroad. The index of freight rates on international trade routes fell 38 points, or 2pc, to 1,902 points on Friday in its 31st straight decline. Charter rates for all types of ships fell.

Buyers angry at 'excessive' cocoa speculation
European cocoa buyers are so concerned about potential speculation in the market that they have written to the London commodities exchange threatening to move their trade to America. Talks between industry participants and Liffe, the London exchange operator, will take place this week, following concerns about the price spike in June. Futures hit a 32-year high, amid lower production due to diseased crops in Africa and higher demand. Those who signed the letter claim there has been excessive speculation by hedge funds and want greater transparency about who is buying what and how much.

Support for European spending cuts strong
by Tony Barber - Financial Times

European governments have solid public support, at least for now, for the spending cuts they are making in an effort to boost economic recovery, according to the latest Financial Times/Harris opinion poll. The survey also indicates that a majority of people in the European Union’s five largest countries disagree with the decision of governments to let their budget deficits rise in order to combat the financial crisis that erupted in 2008. The poll’s results point to a fiscal conservatism among the European public that contrasts with the eagerness with which most governments ran up high deficits to protect jobs and living standards as the crisis unfolded.
Moreover, the results suggest that the austerity measures now being introduced across Europe need not be politically fatal for governments as long as they give convincing explanations for their actions. However, the full impact of the austerity measures has yet to be felt in most countries. The poll may to some extent reflect public awareness of the debt crisis that came close to overwhelming the eurozone in May. The emergency resulted in a €110bn rescue plan for Greece and a promise of up to €750bn in funds for any other euro area countries that find themselves in refinancing trouble.
Asked if public spending cuts were necessary to help long-term economic recovery, 84 per cent of French people, 71 per cent of Spaniards, 69 per cent of Britons, 67 per cent of Germans and 61 per cent of Italians answered Yes. In the US, 73 per cent of Americans agreed. Only 38 per cent of Italians, 33 per cent of Germans, 31 per cent of Britons, 29 per cent of Spaniards and 16 per cent of French people thought that public spending cuts would harm the economic recovery. Some 27 per cent of Americans agreed. Asked if they preferred public spending cuts or tax rises as a way to reduce budget deficits and national debts, strong majorities in the five EU countries as well as the US were in favour of spending cuts.
Similarly conservative views on public expenditure emerged when people were asked if EU governments were right to engage in large-scale deficit-spending after the 2008 crisis. In all five EU countries, a majority – ranging from 68 per cent in France and Italy to 54 per cent in the UK – said the governments were wrong to have done so. According to the survey, large majorities in every country agree with the proposition that the high budget deficits and subsequent spending cuts call for a re-examination of Europe’s generous welfare state.
The survey makes clear, however, that Europeans and Americans would like to see the pain spread around. Asked which policy area should bear the brunt of the cuts, a majority in the US and every European country except the UK put aid to developing countries and defence in the first two places, although not always in that order. In the UK, respondents put development aid first, unemployment benefits second and defence third. In all five EU countries and the US, there was next to no support for cutting expenditure on police services, healthcare and education. The FT/Harris poll was conducted online by Harris Interactive among 6,164 adults aged 16 to 64 in France, Germany, Spain, the UK and the US, and adults between 18 and 64 in Italy, between June 22 and July 1.

Small Businesses Get More Pessimistic
by Michael Casey - Wall Street Journal

Small businesses continue to feel highly pessimistic about the U.S. economic outlook, according to a report Tuesday that showed a monthly indicator of their sentiment turning weaker in June.
The National Federation of Independent Businesses said its Small Business Optimism Index dropped 3.2 points to 89.0 last month, more than erasing the modest 1.6-point gain it saw in May. The report, which was compiled by NFIB Chief Economist William Dunkelberg, described the decline as "a very disappointing outcome."

In past periods following a recession, the NFIB index typically has risen back above 100 within a quarter or two of the trough in economic activity as measured by the National Bureau of Economic Research. That hasn’t been the case during this recovery. The index hasn’t broken above 93 in any month since January 2008 when the economy was in the early stages of recession, even though the NBER is expected to eventually date the beginning of the recovery in the third quarter of last year.

In 23 of those past 30 months, readings have come in below 90, an unprecedented result in the survey’s history, the NFIB said. Some 70% of the 3.2-point decline in June was explained by weaker expectations for business conditions and real sales over the next six months, the report said. And whereas seven of the 10 index components increased in May, only one rose in June. Paradoxically, that component was the question of whether it is now "a good time to expand," for which the percentage answering affirmatively rose by one point from May.

Nonetheless, the low 6% reading for that component reflects a continued broad reluctance to expand businesses. Meanwhile, a net negative 6% of respondents expected business conditions to improve over the next six months. The frequency of capital outlays over the past six months was unchanged on the month at 46% of all firms, two points above the 35-year low reached in December 2009. Meanwhile, the percentage of owners planning to make capital expenditures over the next six months fell by a point to 19%, three points above the 35-year low.

The subindex for sales deteriorated, with the percentage of small-business owners who reported higher nominal sales over the past three months falling by four points to a net negative 15%. According to the NFIB, "widespread price cutting continued to contribute to reports of lower nominal sales." The inventory picture deteriorated, with small-business owners continuing to liquidate inventories in June. A net negative 21% reported gains in inventories, which means that more firms cut stocks than added to them once seasonal adjustments are taken into account, a result that was one point less than in May.

Hiring remained weak. Only 9% of owners reported unfilled job openings, in line with May’s reading. Another 8% said they plan to cut jobs, up from 7% in May, while only 10% said they planned to create new jobs, a decline from 14% in the previous month. The subindex on earnings trends deteriorated, declining by four points to negative 28%. Without seasonal adjustments, the percentage reporting higher profits in June came in at 16%, up from 15% in May, while 47% said that profits are falling, compared with 49% in May.

Merkel's Rules for Bankruptcy
by Christian Reiermann - Der Speigel

Fearing a lasting burden on taxpayers, the German government is preparing a set of insolvency rules for countries in the euro zone. It would require private investors to bear some of the financial burden and force the affected countries to give up some sovereignty. The plan is guaranteed to meet with resistance. As a physicist and an avowed admirer of the Swabian housewife, German Chancellor Angela Merkel, leader of the center-right Christian Democrats (CDU), is seeking to establish binding rules in the midst of the chaos of financial and monetary crises. Her desire for order was reinforced recently when the prospect of Greece collapsing under a mountain of debt triggered turmoil in the European Monetary Union.
The first national bankruptcy on European soil in decades was only prevented because the remaining countries in the euro zone came to the aid of their faltering fellow member with billions in loans and loan guarantees. The chancellor, determined not to allow the Greek debacle to be repeated elsewhere, proposed the establishment of a procedure to ensure "orderly national bankruptcies." The German chancellor hoped that the plan would create "an important incentive for the euro-zone members to keep their budgets under control." Finance Minister Wolfgang Schäuble, in complete agreement with Merkel, said: "We have to think about how, in an extreme situation, member states could become insolvent in an orderly fashion without threatening the euro zone as a whole."
Averting Future Problems
The two politicians have taken on a formidable task. They sense that the future of the euro is anything but certain, despite the recently approved €750 billion ($945 billion) European rescue package. In approving the emergency measure, all of those involved, including Merkel, French President Nicolas Sarkozy, European Commission President José Manuel Barroso and Greek Prime Minister Georgios Papandreou, are merely buying time, which they must utilize to work off deficits. This is especially true when it comes to Greece, which will have to restructure its budget by the time all of the bailout packages expire in 2013, but even more so for the euro zone as a whole.
To avert future problems, the Germans have asked their experts to assemble a package of reforms that could stabilize the construct of the European Monetary Union in important ways -- if, that is, the partner countries play along. And even then, it cannot be ruled out that some countries could go bankrupt in the future. The effort is necessary, because important safety measures to protect the common currency are not working. The Stability and Growth Pact, which was intended to nip excessive government borrowing in the bud, proved to be largely worthless. Some of the monetary union's ironclad principles were ignored, including a rule that prohibits member states from coming to the aid of others in financial difficulties.
It was only with political tricks of questionable legitimacy that the euro-zone countries managed to ward off the crisis in the short term, but by no means has it been overcome. German taxpayers, in particular, could face enormous burdens if the current measures fail. Under the provisions of the bailout package, Germany has pledged up to €170 billion. With her plans for orderly national bankruptcies, Merkel intends to eliminate these vulnerabilities within the monetary union. She hopes to install a procedure under which a bankrupt country could be restructured in the future. She also wants to prevent the rescue program from becoming a permanent fixture in the future and, as a result, a chronic threat to the German federal budget.
Sharing the Burden
Despite the urgency of the problem, the German government must take a cautious approach. The chancellor is worried that her deliberations could be seen as a vote of no confidence in the European bailout package, which is why she is treating the plans with such secrecy. Less than a dozen experts from various parts of the government are even familiar with the matter. Her goal is to structure the plans as a further development of, rather than an alternative to the bailout package. Work on the project has already made a lot of progress. A concept based on preliminary work carried out by the Finance and Justice Ministries is already being circulated at the Chancellery.
If the plans are implemented, banks and investors will not be the only ones bearing the burden when countries in the euro zone encounter financial difficulties. The debt-ridden countries themselves will also have to make substantial sacrifices, and their governments will cede some of their power. The experts propose a two-step procedure. In describing the goals of this approach, Schäuble says: "Whenever a company files for bankruptcy, the creditors must relinquish a portion of their claims. The same should apply in cases of national bankruptcy." The reformers expect the plan to have a deterrent effect, both for lenders and borrowers. If banks and private investors must anticipate that they may not recoup all of their investment, they will be more cautious about lending money to certain countries.
Those countries, in turn, will be forced to preserve their credit ratings if they hope to continue borrowing. The goal of the German government experts developing the plan is to straighten out a situation gone haywire in the midst of enthusiasm over the bailout program. "The private sector should be involved in the procedure, so that taxpayers are not the only ones bearing the financial burdens," the plan reads. "The bondholder receives a risk premium through the coupon, so it should also have to bear this risk."
Aggravating the Crisis?
But is this feasible? In a situation in which a euro-zone country can no longer service its debts, the government experts propose a "tailored combination of maturity extension and a suitable reduction of the face value or interest rate" of the bonds in question. In other words, creditors receive less money than they are entitled to, and they have to wait longer for it, a process experts refer to as a "haircut." The debtor country derives most of the benefit. Its financial burden declines, so that the government no longer has to incur new debts to pay off the old ones. This reduces the burden on government budgets, because the country can only borrow new funds by offering its lenders a higher risk premium. Because it blasts new holes into the government budget, this crisis surcharge can also aggravate the crisis.
But the creditors should also receive an incentive to accommodate a debtor nation. In return for waiving their claims, they are guaranteed a residual value of the bond, which would be no more than half its face value. The benefit to them is that they do not have to write off the entire bond. The debtor nation must pay a guarantee fee, which means that it also carries a portion of the burden. Because less than half of debts are usually forgiven in a haircut procedure, the bankrupt countries are left with an "original country risk." This residual amount functions as a signal, because the country's own bonds are still being traded. If this credit rating declines interest rates rise, and if it rises interest rates decline. In other words, investors, governments and bailout organizations are consistently aware of the market's assessment of the situation.
Berlin Club as 'International Guarantor'
A newly established Berlin Club would serve as the "international guarantor." The German government experts see this organization as an "apolitical and legally independent entity." The plans build on existing institutions involved in international debt settlement. While the Paris Club regulates debt restructuring among nations, the London Club specializes in liabilities between banks and countries. The German government hopes to bridge a gap with its proposal. The Berlin Club would concentrate on government bonds and the associated derivative securities. The members of the club could be recruited from within the G-20 group of industrial and emerging nations. Another possibility would be to establish the club within the framework of the euro zone.
The International Monetary Fund (IMF) would be involved in the debt refinancing from the outset. The German experts see the IMF playing a key role. If representatives of the Washington-based organization determine that debt forgiveness and restructuring have failed, then the second phase of the procedure kicks in. It amounts to a complete refinancing. According to the concept, "this will require restrictions on sovereign discretionary powers." In other words, the government of the affected country would no longer be able to fully dispose of its own treasury.
Institutionalized Disempowerment
It would be replaced with "an individual or group of individuals familiar with the regional characteristics of the debtor nation," which would safeguard the financial interests of the bankrupt country. The Berlin Club would have the authority to appoint these individuals. The concept toughens the stance, particularly toward creditors, but also toward the debt-ridden country. If it is implemented, it will amount to an institutionalized disempowerment of a debtor nation's government by the IMF and the new Berlin Club, at least in its final stage.

This prospect alone could have a disciplining effect on overspending governments. But the concepts would also represent an imposition on international donors. Until now, conventional bailout programs like the one devised for Greece have been based primarily on the notion that a cash-strapped government receives public funds from other countries, while private donors are not asked to waive their claims.

To put it simply, taxpayers in countries with reasonably healthy government finances, particularly Germany, have taken the place of banks and private investors that have extricated themselves from ailing economies. This would no longer be the case in the future. This is also the way the EU's and IMF's €750 billion rescue package works. The bailout funds provide the euro zone with planning security until 2013, but it is by no means certain that the crisis will have been resolved by then. Experts predict that by that time Greece will be burdened by a debt ratio of 150 percent of its gross domestic product. The country will have an enormous need for fresh loans, but the difficulties it faces in getting those loans will probably be just as great. This suggests that the country could quite possibly stumble from one bailout program to the next.
Resistance Guaranteed
It is also completely unclear as to whether, when and to what extent the new concept could even be implemented. Regardless of whether the government introduces its plans at the G-20 level or within the task force headed by European Council President Herman Van Rompuy, resistance is guaranteed. Countries immediately or potentially threatened by insolvency, like Greece, Portugal and Spain, will be up in arms against the proposals from Berlin. Why should they agree to rules that would make it easier for the remaining euro countries to deny them aid in an emergency?
But the German government is determined not to be the paymaster for Europe's debt transgressors in the long term. Officials at the Chancellery and Finance Ministry fear that otherwise the German public's support for the euro and the EU would be undermined. In developing their scenarios, the government experts assume that other potential donor countries share their concerns. The governments of France, Finland and the Netherlands are likely to be just as interested in private creditors and debtor nations bearing a portion of the burden.
No Way Around Emergency Planning
The concept by no means sells itself. If the project were organized under the auspices of the EU, it would face a high hurdle: The European treaties would have to be amended to establish the Berlin Club, which would require the consent of each individual member. This is not a process governments are keen to repeat after the experiences of the Lisbon Treaty. Nevertheless, there is no way around pushing ahead with emergency planning, because the situation could come to a head more quickly than anticipated. The aid for Greece is subject to the Papandreou government fulfilling the EU and IMF requirements.

The Greek prime minister is full of good intentions, but his measures have been relatively ineffective so far. Although the government is raising taxes and even introducing new taxes, revenues have fallen short of expectations. Strikes, like the one that was staged last Thursday, are constantly paralyzing public life and the economy. In other words, it is quite possible that Greece will not fulfill the conditions and thus will receive no aid from the European fund. This could lead to a consequence that European leaders have been trying to prevent at all costs: a total national bankruptcy. And, if the reform package has not been implemented by then, it could end up being anything but an orderly process.

UK public sector debt 'around £2 trillion'
by Rachel Cooper - Telegraph

The UK's public sector debt could be £1.13 trillion higher than headline figures suggest, according to research. A study by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Centre for Economics and Business Research (CEBR) has revealed that there could be a further £1.13 trillion of liabilities above the current estimate that puts public sector net debt at £932bn. Researchers said their figure incorporated liabilities that are currently considered to be "off-balance sheet" or not covered in the official national debt measure, such as public private partnerships or private finance initiatives and public sector pensions.

The researchers said that their report illustrated the need for transparency in the public finances and called on the Office for Budget Responsibility to raise awareness of why contingent liabilities are currently not considered part of public sector debt assessments. Michael Izza, ICAEW chief executive, said: "While there are important debates to be had about specific spending cuts, I believe that meaningful reform is necessary to underpin sustainable public finances over the long term and create a culture of fiscal responsibility."

Charles Davis, managing economist for CEBR, said that public sector pension liabilities were by far the biggest consideration. The Treasury has estimated the public sector pension liabilities to be £770bn. "Our research draws upon existing publicly available data and previously undertaken analysis to illustrate that the liabilities that are not included in the official public sector net debt figure are large but, in many cases, uncertain," he added.

UK dealt rating blow as economic growth fears mount
by Philip Aldrick - Telegraph

Britain remains at risk of a rating downgrade despite the tough measures unveiled in the Budget to rein in the national debt, Standard & Poor's has warned. The verdict comes as a blow to George Osborne, who has staked his reputation on getting the UK's £155bn deficit under control and preserving the country's gold-plated AAA credit rating.It added to a day of bleak news on the economy, with revised data from the Office for National Statistics showing that Britain only avoided falling back into recession at the start of the year because of the huge Government spending programme. Bank of England policymaker Adam Posen also said the UK remained at risk of a double dip. Sterling fell 0.2pc to $1.5074.
S&P said that its "medium-term economic forecasts for the UK are less optimistic than the assumptions underlying the Budget" adding: "We therefore believe there is still a material risk that the UK's net general Government debt burden may approach a level incompatible with the 'AAA' rating." It did indicate, however, that October's spending review – when the Government will provide detail on its £83bn of planned spending cuts – could restore the outlook. "We will continue to review the rating in light of further information over the coming months about the extent of the expenditure-led fiscal consolidation," S&P said.

The Treasury acknowledged the warning and said it was clear proof that more effort is needed to shore up the economic defences. "The Chancellor is very clear the job is not done," a spokesman said. "The Budget set out an ambitious plan to accelerate the reduction in the deficit and the next step will be to set out individual departmental spending totals in the Spending Review in October." S&P was the only leading rating agencies to have had the UK under review. Both Moody's and Fitch have confirmed Britain's AAA rating as stable.

Fears of a double-dip recession were compounded by ONS data showing that the economy was rescued in the first three months of the year by a 1.5pc spike in Government spending – three times larger than first thought. The revised data revealed that the spending spree added 0.4pc to national output, greater than the 0.3pc rise in GDP recorded by the economy as a whole. Capital Economics' Vicky Redwood added: "We still doubt that the economy is in good enough shape to withstand the fiscal squeeze that is about to start in earnest."

In an interview with The Journal newspaper, Mr Posen added: "There is a chance we could slip back into recession. I hope it is not the case. There is going to be a lot of drag on the economy, with the problems of the eurozone and the public sector contraction in the UK." ONS numbers also revealed that the economy contracted by 6.4pc between the second quarter of 2008 and the third quarter of 2009, more than the 6.2pc previously estimated. The fall is the largest since quarterly records began in 1955, wiping £22bn off national output. Hopes of a trade-led recovery were also dashed by ONS figures that showed that exports fell 1.6pc in the three months to March, the worst decline for a year. S&P added that the shift to export-led growth "will proceed more slowly" than current forecasts.

Disappearing Middle Class: 60-Year-Old Couple Lose Their Jobs And Home
by Laura Bassett - Huffington Post

In 2008, David LaRochelle and his wife, Debbie, owned two houses: a single-family home in Southern Florida and a double-wide mobile home in Plains, Georgia, near her parents. They both worked at a resort hotel in Islamorada, Florida and earned a combined income of $100,000 a year.

Two years and a recession later, the 60-year-old couple are both unemployed, have drained their savings and 401Ks, are depending on Social Security, unemployment benefits and COBRA health insurance to stay afloat and are in the process of losing their Florida house in a devastating short sale. Their dilemma is an increasingly common one: they can no longer afford to make their mortgage payments without an income, but they can't sell their house because they now owe more on it than it's worth.

"It's been such a nightmare," LaRochelle told HuffPost. "I tried to work something out with Wells Fargo, but they wouldn't even talk to me until I was 30 days past due. We tried a deed in lieu three times because they 'lost the paperwork' twice, and then they turned it down because they said we hadn't advertised our property at fair market value. I had no idea that our property had dropped in value from 139K to 49K, and I didn't see how we could have advertised it for less than the 120K that we owed on it."

The LaRochelles are two of the nearly 2.4 million Americans who are seriously delinquent on their mortgage payments, thanks to plummeting property values and lingering unemployment. And according to the Center for Responsible Lending, a nonprofit research and policy group, as many as 9 million homeowners could go into foreclosure in the next two years. Luckily, the LaRochelles still own their double-wide mobile home in rural Georgia, which will keep a roof over their heads for the near future while Debbie takes care of her ailing parents full-time and David searches for a new job. But he says the loss of their former middle class life hasn't been easy.

"I'm living about as cheap as you can live," he said. "I was used to stopping at the grocery store and buying whatever I wanted to buy, walking into hardware stores or Home Depot and getting whatever I wanted to get. We're definitely not middle class anymore. There basically isn't a middle class here -- there's wealthy landowners that were raised with it, and the poor people who do everything. It's like going into a Third World country." Despite his frustrations with Wells Fargo and the pain of losing his house and job, LaRochelle says he and his wife are just grateful to be getting by. "We're out here in the middle of the country, but we're making it," he said. "All our credit cards are paid off and we have nothing to complain about. We found out just how incompetent one mortgage company is."

BP builds defence in takeover threat
by Helia Ebrahimi - The Daily Telegraph

Speculation grows that ExxonMobil sought White House clearance to bid for rival oil giant. BP is gearing up to unveil a $40bn (£26.5bn) defence strategy in the teeth of growing speculation that US predators have been given the green light by Washington to swoop on the British company. BP will outline what will effectively be a defence document at its second quarter results on 27 July. Although no approach has been made, ExxonMobil of the US is understood to have sought clearance from the White House for a bid that could create a $400bn global juggernaut.

A possible bid from Chevron is also believed to have been approved. BP's fightback hinges on hopes the company will be able plug the continued oil spill in the Gulf of Mexico and stop the precipitous fall in its share price. In its Q2 statement, BP will demonstrate its strong liquidity by giving a much clearer picture of its operational and financial position. The company is expected to say it could double the $10bn figure of targeted asset disposals – with the possibility of sales bringing in closer to $20bn. These include the $12bn of assets in Alaska's Prudhoe Bay – expected to go to US rival Apache Corporation; BP's 60pc stake in Argentinian Pan American Energy – thought to be worth $9bn; assets in Vietnam, as well as BP's businesses in Colombia and Venezuela. Through its advisers Goldman Sachs, BP has studied the bond market with a view of raising $5bn bond. 

However, this option has been viewed as expensive with the coupon expected to be in the region of 6pc-8pc. Instead, BP plans to announce a bigger debt financing package than previously committed to. In June, BP's finance director Byron Grote said the company had room for more debt in its capital structure than the current $35bn. At the time, Mr Grote said BP would utilise $15bn through the long-term capital market. That figure is likely to swell to $20bn. This will include not only untapped bank facilities but also cash delivered through financing against receivables and pre-paid oil sales. The company will also show a very strong operating quarter and strong free cash flow, heightened by the fact that $2.5bn of quarterly dividend payments has been cancelled.

Last year, BP generated $30bn of cash flow. According to analysts its assets are worth more than $250bn but the company ended last week at 364?p, valuing it at £69bn. Last week shares rose 20pc from its 302p low, half the pre-crisis price. Hopes are that if its second cap proves successful the shares could see another bounce, rising above 400p. However, until the larger cap is in place oil will again rush freely into the Gulf. "Hopefully, we have turned a corner and are moving from a position that so far has been very defensive, to one where the company is dealing with the effects of a finite event," said a source. "If the well is capped, there will be much more clarity." 

The plan for 27 July rests on BP being able to give this clearer view of its liabilities. At that point the company will be able to focus on the results of its internal review into the causes of the leak – expected in August, and the permanent fix to the well, which will happen in the same month. BP will be focused after that point on the future strategic direction of its business shorn of its non-core assets.

Spill costs to cut BP tax bill by $10 billion
by Ed Crooks - Financial Times

BP is forecast to pay about $10bn (£6.7bn) less tax over the next four years as it meets the costs of its huge oil spill in the Gulf of Mexico, hitting the revenues of Britain and the US that receive hundreds of millions of dollars from the company each year. The shortfall, representing a drop of more than a quarter in BP’s tax payments, is a particular concern for the British government attempting to cut the country’s budget deficit.

Money spent plugging the well, cleaning up the oil, and compensating people who have lost out because of the spill, can be written off against tax, the company believes, reducing the net cost to BP.
Of its principal expected liabilities, only the fines that might be imposed by the US authorities would definitely not be tax-deductible. BP on Monday reiterated the possibility that by the end of the week its leaking Macondo well could be shut off, or all the oil could be captured, using the new cap now being fitted to the well head. The suggestion sent BP’s shares surging, closing 9.11 per cent higher in London, but the company still faces huge and uncertain liabilities, estimated by analysts at about $50bn.

BP said it had installed the 40-ton containment device on the sea floor a mile beneath the ocean surface at 7pm local time Monday and "the stack completes the installation of the new sealing cap.’’ Shares in BP rose 4 per cent to 414.9p in early London trading on Tuesday, adding to the 9 per cent gain registered in the previous session, but the company still faces huge and uncertain liabilities, estimated by analysts at about $50bn.

If BP manages to seal the leaking well as planned by August, analysts have estimated that its total spending in the Gulf region could be about $30bn. That would represent about $10bn of clean-up costs and $20bn compensation for losses suffered by fishing, tourist and other industries, covered by the fund agreed with the US administration last month. With a tax rate on profits of 33 per cent in a typical year, that would cut BP’s tax bill by about $10bn.

BP paid $8.4bn in worldwide tax on profits last year, down from $12.6bn in 2008 because of the fall in oil and gas prices. Of that 2009 payment, £930m went to the British government: about as much as is paid by the UK’s entire transport and communications industries. The company does not give a full geographic breakdown of its taxes, but its payments to the US are likely to have been of a similar size.

Irene Himona, an analyst at Exane BNP Paribas, estimated that before the Deepwater Horizon accident, BP was set to pay about $37.5bn in tax during 2010-13, but the costs of the disaster would cut that to $27bn. Doug Suttles, BP’s chief operating officer for exploration and production, said on Monday that the company’s "confidence is growing" in the new cap, which is expected to allow all the oil from the leaking well to be captured. He added that the relief wells drilled to allow the Macondo well to be sealed would be effective at the "very end of this month" at the earliest.


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Anonymous said...

Hija de papi said (yesterday):

So it's possible for Mexicans living NOTB to have well-informed opinions based on a single region or group of cities, which do not apply at all to what they might consider the "lesser" strata of society - the indigenous, tribal regions. They don't just go there and make friends. It is a fissured kind of society, quite class-conscious, many who identify themselves as Spanish being entirely at odds with any indigenous blood they may have, and a lot of the more urban people never know a thing about village life. Some even openly despise "indios."

Well put!

And this applies as well to most Latin Americans who have lived in the USA for a while and are now enculturated to USA culture. Irrational demonizing of their former country is sprinkled with bigotry against blacks or native populations (quite ironic since in many instances they have been and are victims of racism in the USA). Many Cuban-Americans living in Miami do this all the time, too. (BTW, I say this as a Cuban-American myself.)

Anonymous said...

The USA property value dropped $7T.
The mortgage value dropped only $270B
The property value of $13T should include the values of properties already paid in full.
The mortgage part only refers to those properties that have NOT been paid in full.
YES, even taking this point of view, the drop in mortgage value, considering the drastic devaluation of the property value, maybe is still UNDERSTATED.

Bigelow said...

““What proof did you have that this is the true gentleman that you were trying to pursue?” the judge asked David Robinson, a lawyer for Cohen & Slamowitz, according to a transcript.

“Just his Social, his date of birth, and his address and the account,” Mr. Robinson said.

“That’s all you have?” the judge said. “So if you have somebody’s Social number, date of birth and address, you could sue them without any other information?” ”
Automated Debt-Collection Lawsuits Engulf Courts

VK said...

Oooh! So we can get a pretty good idea about how underwater the banks are - A 1000 leagues under the sea ;)

If only 270 Billion of mortgage debt has been cleared of and Home prices have fallen 7 Trillion dollars, a mark to market would mean banks would have to raise a few trillion atleast or provide a nice haircut for their bondholders to the tune of trillions.

How does it work? First owner equity is wiped out right?

Ventriloquist said...

Really superb posting on deflation here. The author does an excellent job of explaining WHY we are on the deflation path, HOW we got here, and WHERE it will eventually lead. The writing is lucid and very readable.

The fear that a sharp rise in the size of the Fed's balance sheet--the reflection of a sharp boost in the monetary base--is inflationary is misplaced for two reasons. First, such fear does not recognize that the money multiplier has dropped so rapidly that the money supply--a key determinant of inflation--has stagnated. Additionally, it overlooks the increase in the precautionary demand for money that adds to the deflationary excess demand for money.

There is a bigger risk that deflation will intensify sharply because once the price level actually starts to fall, the demand for money will be further enhanced. A deflationary spiral--a self-reinforcing, accelerating drop in the price level--can result. This is because a falling price level means that cash "earns interest" since it enhances the purchasing power of otherwise sterile cash assets that pay zero interest, just as interest on a bond adds to its value in terms of its ability to be used to buy goods and services. That is why deflation drives down nominal (market) interest rates just as inflation drives them up. The "real" return on cash rises as inflation falls, thereby further boosting the excess demand for money and, in turn, exacerbating deflationary pressure. The fact that deflationary real returns on cash are not taxed further exacerbates deflationary pressure by enhancing the demand for cash.

. . . . . . .

A combination of weakening currencies in commodity-rich nations and lower commodity prices, coupled with a move toward deflation in the G3 economies, is a troubling sign that a series of rolling financial crises may lie before us. That outcome would seriously exacerbate the balance sheet problems of commercial banks worldwide that hold substantial quantities of debt that is less likely to be repaid in an environment of global deflation.


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Gravity said...

“The resulting paper, as Dr. Verlinde himself admits, is a little vague.”
“This is not the basis of a theory,” Dr. Verlinde explained. “I don’t pretend this to be a theory. People should read the words I am saying opposed to the details of equations.”

Not a fundamental force? I feel curiously offended, identity attachment. Still, it exists enough for most purposes, though it may actually be an emergent property of more fundamental symmetries, there are attenuated perspectives that could fully describe it as an artifact of embedded fractal harmonics. The good doctor undoubtedly stumbled upon a similarly evident idea.

Gravity is a recursive algorithm.
The cause of time is relativistic mass.

Gravity said...

"Don't part with your illusions. When they are gone you may still exist, but you have ceased to live."

scandia said...

@Dreamlander, good point you make about the drop in value of paid for properties.

@HDP, I am a Cdn who supports our gun control laws. Nor do I support the death penalty.All my positions arise out of conditions a la 60's .
I was forced to re-examine my stance as I watched the police herd protestors during the G-8 summit.
M. et Mme. Citizen are at a disadvantage these days. What happened I wonder that those who we elected to serve, especially protect liberty and right to free speech all of a sudden vote in favour of a lock down, pass laws to enhance police power secretly in the dead of night?In Canada of all places!!
Something is going terribly wrong and we have no means to defend ourselves against state force.Oh yes there are reviews, law suits begun etc all taking years to come to any completion. The law is not nimble enough now to protect any citizen, certainly no longer a force to be reckoned with to stop the abuse of power by our elected representatives. So what's a Citizeness to do, no guns, no timely law,...? Just suck it up, I guess...4 out of 5 Cdns think the police lock down in Toronto was justified and that the police did a smashingly good job.
I keep hoping to hear of at least one cop who wondered aloud if it was really necessary to lock down a city, abort civil liberty, because 20 high profile politicians came for a visit? Like why didn't they just rent a big boat from Cunard, or an idle freighter, and meet in safe obsurity mid Atlantic? Surely there might have been one or two police officers to express such a sentiment in the locker room at shift's end? I sure hope so....
Yes, I still don't like to see an armed populace, yet... I am uncomfortable now without some plan of self defence. What with my views, my mouth and all....suck it up, shut up I guess....

Gravity said...

"Soap and education are not as sudden as a massacre, but they are more deadly in the long run."

"I am said to be a revolutionist in my sympathies, by birth, by breeding and by principle. I am always on the side of the revolutionists, because there never was a revolution unless there were some oppressive and intolerable conditions against which to revolute."

"No people in the world ever did achieve their freedom by goody-goody talk and moral suasion: it being immutable law that all revolutions that will succeed must being in blood, whatever may answer afterward."

Anonymous said...

@hija de papi:

I thank you for your comments yesterday but while interesting they are also statistically irrelevant. Where are most of Mexico's people? In urban areas, the worst being Mexico City itself. There are quite charming, unique, and safe rural areas in the United States as well. I know this and you know this. I've experienced Mexico rather first hand as a soccer coach, whose teams of US youth players traveled throughout much of northern Mexico during the 1990s, from Brownesville to El Paso (to give US points of reference). Any problems we had always occurred in cities, much like on the US side of the border.

The problem historically and anthropologically is that it is the large masses of humanity that define the rise and fall of civilizations. The rural regions of Mexico will likely suffer the same fate as the rural regions of the US should civilization start to come apart at the seams - and that fate would be to be overrun, unless you are (a) off the beaten track and (b) at least one full tank of gasoline away from major urban centers.

So my concern in the collapse of Mexico as a nation-state is not about the periphery but about its core, the great masses of abused humanity who are still abused and who suffer in an environment of oppression and corruption within the cities. It is that environment (which I noted yesterday is the same as the US) that will ultimately bring down Mexico. And it is that same corruption and oppression in US urban areas that will also bring down the US.

Mexico is simply a bit further along that path than the US is, given that the US is the center of the empire and the center is usually what falls last, at least in a historical context.

On the plus side, the rural regions of Mexico that escape the direct effects of collapse in the early stages may well act as wonderful "yeast" centers for the establishment of new and hopefully better cultures in the southern parts of the North American continent. In fact, the sooner Mexico fails as a nation-state, the sooner the good people of Mexico can begin to experiment with their own paths, hopefully free of the oppression that originates and emanates from Mexico City outward.

scandia said...

Thought I should let the world know that Canada has found the magic number. It is 1.2 Billion.
It was announced to-day that Canada is going to build 2 ships. Why? To go to war on the high seas in support of our allies.( Or is the real reason to protect the deep sea oil drillers in the Artic?) Cdns will be pleased to learn that the ships will be built in Canada- more jobs! The cost? You smart folks can guess. It's the magic 1.2Billion. Strange cost analysis though as " it is early days yet, too early to say where these ships will be built." How can one arrive at cost without data on shipyard,equipment,labour force? No matter 1.2 Billion is the answer.
What were the G20 security costs? Yup.You guessed it. 1.2 Billion.
I like this number afterall 1.2 is less that 2. A piddling sum. At worst 1.2 could equal 3. Still a piddling sum. Nothing for the electorate to get bothered about.Ones and twos slip in one ear and out the other.

NYC Rich said...

the housing market is dead, it just doesn't know it yet. aside from the ongoing challenges with price discovery due to government intervention/distortions, the velocity of home buying/selling is going to drop off a cliff due to people not being able to take a loss on their existing house to buy another one. this will directly impact the banks, real estate agents, title insurers, attorneys and bleed into home improvement areas via the multiplier. people that decide to stay while probably doing some things to make their place more 'habitable' will not spend much knowing the current value of their home and fearful of already lost equity and fearing more. housing in the USA is Bernie in weekend at bernie's and eventually everyone will know he's really dead.

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scandia said...

Retraction! Canada has NOT discovered the magic number!
The cost of the 2 ships is now 2.6 billion. It was also announced that the design work has yet to be done. So no design,no location,unknown labour force,a vague time frame of 2 years. Still wondering about the cost analysis and how 2.6B was arrived at.
Still 1.3B per ship is still less than 2.

Unknown said...

Afraid they'll be no Bastille to be stormed soon Ilargi. Might be vaporized if Fidel Castro is right and a global nuclear war beginning with an US/Israeli attack on Iran is in the offing.

Afraid they'll be no human beings to man the barricades. Might all lay dead if there is a massive pocket of methane beneath the Gulf of Mexico where BP is poking around.

Whatever happens your humanity, right up to the bitter end, is appreciated.

snuffy said...


Whats a non-gun-toting canadian to do?.
I love you,but its time we had a heart-to-heart about life.
Come down here to the usa,with a pocket full of usa greenies,and the ability to read the sporting goods section of the local paper,and load up on anthing anyone wants to sell that week,then quietly slip home and wait for the revolution.
Here is a hint...STOP READING POLLS.Go with your heart.Haven't you figured out yet that polls seem to always say what the powers that be...want YOU to think...that the way of polls is the way of sheep?whose poll,how was the question worded"with what Qualifiers?When I figured out that polls were basically a mild mind-control gig is when I started to discount them.
I have to be careful 'cause some other events in my life have me in a cold rage right now and am not advising you to do anything that would break any laws...really,but get real,if you are on the north American continent,you can quite legally purchase hardware slightly smaller than what was used for anti-tank weaponry in ww2.Relatively inexpensively.

They ask,"Mr scandi,why do you need a [pick your favored caliber]"Your reply"why,I am going polar bear hunting with a friend,and NEED a suitable [pick your favored caliber]."
ect. ect. ect.[winchester mod 1200,8 shot mag,200-300$US w/choat "handgrip"stock.]for "things that go bump in the night".

The only time I "suck it up"is when I have put reason aside and am getting ready to kick some ass.

I will say you have learned a very,very important lesson on "gun control"It is not for YOUR benefit.I am way,way,left of center of most of my friends with this exception.I am a strict constitutionalists,and somewhat rabid about the second amendments.As is everyone in several generations of my family.

I have some trouble to go make.
Bee good or
Bee careful


snuffy said...

Hiji papi

I think your on the mark as far as that area of the continent being a good place for whatever the next stage of human "civilization" we will see come forth...

I disagree with all who suggest that a max-totalitarian state can exist for long in America when the majority will #1be heavily armed. #2have learned to hate and fear every form of .gov.#3have watched the countries resources,and monies stripped by the "connected".
I think "the powers that be"will have serious trouble trying to run a police state...It takes lots of energy for that...and energy will soon cost dearly
So very many now have seen the true face of crony capitalism that rules this country,and where it will be taking us ,I fear the future,I honestly fear the future.
I know my countrymen and women.We have been "good little boys and girls" and sucked it up while watching the wealthy loot and loot and loot...and deny the unemployment extention "because of the deficit"...
But I also know what happens when you get the gut-sick realization that you are not "one of the cool kids"and you and yours will be left like road-kill.
Many of my generation believed in the bull that was feed about stocks,401ks and such. I never did.I was raised by a grandmother who taught us early to look out for ourselves.And Never trust "the law".
When the full circle comes,and all that is left is ashes in the mouth,and a grim realization that you will never see the retirement your parents had,and will most likely die in a cold and lonely place...This is when the rage will come and the focus will be on who ever they can get their hands on to take vengeance.Any of the 10% who are running things now will be a target.["Insider" take note}It will be a time for the wise to lay low and wait for the rage to burn out.Most of our country will probably burn in the process.
The more I see,the worse it looks to "Correct".The future will not be a fun place for the many...

Bee good,or
Bee careful


pasttense said...

"Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333."

Nonsense. The only people losing this much money are the people who bought at the peak of the market who have to sell now. For the homeowner who bought in 2000--he had a paper profit of $100,000 or so followed by his paper loss of $93,333--so he is still slightly ahead. Even the buyer who bought at the peak could still be ahead--assuming he was a previous homeowner (he bought a house in 1990 for $50,000 sold it in 2006 for $200,000 moved and bought another $200,000 house. It is now worth $125,000--he is still $75,000 ahead overall (less selling costs).

And note that a major reason total mortgage debt didn't go down much was that a lot of homeowners used their house as an ATM

ben said...

good one ilargi. been sending it out to the unwashed masses. the der spiegel article was tantalizing.


"Beware, this is the same insular ECB that raised rates in July 2008 on the eve of the Lehman crisis when half of Europe was already in recession, mistaking the deflationary oil spike for an incipient 1970s inflation spiral."

is this 'deflationary oil spike' business more evidence that evans-pritchard has ambrose reading TAE comments again? no? oh. well he better watch his lag times anyway.


for anyone interested in a good product placement, front and center on the rupture cam right now is what i can only assume is Corexit On A Stick. Anderson Cooper and his touchscreen operators don't seem to have noticed the large apparatus with three high-pressure nozzles pointed at the oil and gas cloud that is spraying white jets into the plume - or has simply failed to put two and two together.

snuffy said...

Thinking carefully,
The edit function was probably a good Idea.My apology...


Ilargi said...


You know exactly what I mean. To then say "nonsense" paints you as a clown. I expect working neurons around here.

And yeah, some people may still be ahead, but that doesn't save them from losing $25,000 per year on their properties on average.


Stoneleigh said...


On the plus side, the rural regions of Mexico that escape the direct effects of collapse in the early stages may well act as wonderful "yeast" centers for the establishment of new and hopefully better cultures in the southern parts of the North American continent.

Exactly. That is what I am trying to help build (inspire, instigate, precipitate etc) as I travel and speak to people - centres that can survive and act as a model for rebuilding something better. I think of it as comparable to The Foundation (by Isaac Asimov), where knowledge is preserved for renewal after collapse. I see this as a big part of what TAE can offer people on a larger scale.

John Hemingway said...

Ciao Stoneleigh,

I hope that you and Ilargi were well received in my former city, Milano:-) Your line about Asimov's foundation trilogy took me back. I think I read it back in the late '90s, how time flies! It does, though, provide an interesting parallel to what we're going through now with collapse, and what needs to be done.
Safe travels!

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jal said...

@ Tero

"... The real problem is the credit multiplier..."


Reword: The real problem is the ..... multiplier

Remember ... we are in a finite world.

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jal said...

64.5 million mainland houses lying vacant: economist

64.5 million mainland houses lying vacant: economist
Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.

In the overseas edition of the People’s Daily, Yi said the ”shocking” level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool.

“If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect national financial security and co-ordinated national economic development,” wrote Yi.

He wrote that the overheated property market was creating ”misallocation of resources, price distortions, squandering of wealth … and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability.”

Here are two comments that I agree with ...

Looks like so many americans simply don't understand how china works. Are they funding the bubble? yes they are. But they are not funding it through the j6p borrowers. They are doing it through the builders. So if the builders fail. The build and the banks will lose. But they really don't care. They can eat the bad loans like they have done in the past 50 years.
This is not "this time is different" or "we are different" joke. The matter of fact is it is different. True there is a massive unused apartments in China. But most of these apartments do not BELONG to those who took a loan. Most belong to RICH people who have 3 to 5 or even 10 apartments. These people don't need a loan, they DON'T HAVE TO RENT IT OUT to collect money to pay interests because they don't have a loan.  You have to go to china to see what is really going on. 
People here know this problem, but they simply can't find a better way to save their money.
The goal of the Chinese government is to raise the standard of living of the majority of their people. The goal of Western economies is to lower the standard of living for the majority of their people. Both have accomplished their goals.
The huge amount of hot money being force fed into China must be spent before it becomes worthless. The Chinese are presently losing the battle of holding down their foreign currency reserves. What appears to be foolish spending is not all what it seems. The Chinese must manage the billions of dollars flooding into the country AND must increase employment by huge amounts AND must pay increasing wages and benefits AND provide housing and jobs to hundreds of millions of peasants they must move toward urban centers. The amount of infrastructure that must be built in the next 20 years is staggering and has NEVER been done before.
The Chinese have accomplished things NO Western nation has EVER done in a fraction of the time. There are and will be huge mistakes but in the end they will have a semi functional economy and massive amounts of modern infrastructure to help them into the future. The Western countries will have decaying infrastructure, crippling debt , masive un-employment and incensed populations looking forward to a declining standard of living.
My comment ...
I would rather do as recommended by I&S, buy assets for the future, than have a big bank account in USA T-bills which could evaporate.


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Bob (Your Uncle) said...

I sure hope the "Guns are bad" vs. "Guns are good" debate doesn't last too long. Been there done that (here and elsewhere) many many times.....

Anonymous said...

hija de papi said...

post script:

Just related my posts to my husband, very experienced with guns/wars/being shot at, and he leaves us with this:

I think I'd feel safer without a gun than with one.

Briefly summarizing his thoughts on why, having a gun introduces the holder to another reality. You begin to trust in your gun. It sways your perception of reality. It easily leads to temerity.

My husband and I feel safer without a gun as well. I've observed neighbors who have guns and they feel a constant paranoia. The guy across the street sleeps with a gun next to his bed. He has three children ranging in age from 14 to 3. He sees a monster everywhere, except among the warhawk elite and predatory capitalists who rule this country. According to him, every Cuban and Mexican around is a drug dealer so one can surmise who he'll kill when collapse intensifies.

I suspect that when the time comes, most guns held by the USA masses will be used against common people, especially minorities who are/will be scapegoats -- not the banksters and those in power who will be in their gated compounds with the most sophisticated weaponry and surveillance technology.

Gandhi said: "There are many causes that I am prepared to die for but no causes that I am prepared to kill for."

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Anonymous said...

"Wall Street Is Laundering Drug Money And Getting Away With It"

Anonymous said...

Disaster capitalism in action ...

"Drill, Gamble, Loot, Starve: The Chamber of Commerce, the GOP, and the Politics of Plunder"

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ogardener said...

Life and Love after Collapse

Apologies if this has been posted previously.

On another note it's been a great gardening year thus far --many things in abundance.

snuffy said...

hija de papi

We have similar understandings of what occurs when a life is taken in the blast of a weapon...

My youngest brother was a lawman for 25 years,until he "broke"mentally[PTSD] from being the "fatals"officer for medium size city,as well as taking 3 lives in the course 3 gunfights.He was the one sent when their was bad trouble expected.Prior to that he was a embassy guard in the middle east,as a marine.[He once told me to watch a flick called "spartan"if I wished to understand his time in Israel.]...
I have more than a passing acquaintance with physical violence I wont boor you with.

I understand what is involved.

I have watched the tole it took on my brother.

I am not someone who looks for ,nor expects violent behavior from those I deal with...but I live in a place where it is a fact of life.
I don't carry a gun anymore,but I will not allow me or mine to be the prey of predators.

As I have been married to a Mestizo Latina for the last 16 years,I have more than casual understanding of Mexico.All my relatives,and in-laws are hispanic.I understand what your saying.

I disagree with your assessment,and your opinion ,and your friends opinion,concerning firearms.They are tools.[and yes I have been shot at,and returned fire]

Your mileage may vary.

Bee good or'
Bee careful


Anonymous said...


I feel your rage, bro.

I think it was about 25 years ago, long before any of the stuff we talk about on this blog were really clear, that I realized that my parent's generation (aka the "Greatest Generation") had sold everyone who lived after them in the United States down the river. That no matter how hard I worked, I would never live (and die) as easily and securely as they have.

I now have grandchildren. I wonder whether they will live to adulthood. Given their current situation (two parents without jobs, no health insurance, son-in-law with diabetes and MRSA and impending bankruptcy because of hospital bills), it certainly isn't a slam dunk. Screwed before they were out of the womb. At least I got most of a life.

I like the old bumper sticker that says "Jesus is Coming and He is Pissed". I may not be Jesus but I am pissed enough for both of us.

Gravity said...

It seems to me that mexico's assumed trajectory of collapse cascade, as per Orlov's scheme, should encounter considerable resistance at the commercial and social-cultural thresholds, so that centralised financial and political collapse in the cities need not automatically precipitate into underlying societal structures by virtue of a redundant core of decentralised humanity.
Perhaps the core-periphery dynamic should be spatially inverted for these resilient village-level communities, in terms of trophic complexity, so that they would compose the generating and creative core of mexico's social and cultural integrity, slightly feeding off the urban centres, but not dependent on their functions.

Frank said...


You're not helping your cause.

Anonymous said...

Hija de papa

Your position is unhelpful because it is made irrelevent by it's elitism. You apparently are wealthy enough to skate over the basic problem most Americans have, which is that there is nowhere to go. Few have the abundant resources (or maybe the extreme flexibility of youth) to relocate to any less violent culture, if such can be found in this world wide collapse. Moreover, there is no room for us in backwoods Mexico,etc. and the locals would not accept us if there were. Or do you imagine the hypocrisy of moving somewhere where other's protect and perhaps kill for you with their guns?(local police force). Perhaps you suggest that we attempt escape by giving up and living on the street?

So accepting your point that there is a grievious spiritual price to pay for killing, even in self defense, just what the hell are we supposed to do?. I get up and work most days because at least one main purpose of life is simply to stay alive, and to stay free. Will you accept death or slavery without a fight, even if you can not win? I doubt it, and I think you are in denial. Categorising people with guns as being stupidly propagandized by T.V is easy but stupid and a cheap shot. Your "point man" husband,(if he really exists), was faced with this choice 1000 times and chose "spiritual death" every time.So perhaps he has lost the right to an opinion?. Maybe, maybe not. Speak for yourself, brother, was this a mistake?. Do you regret it really?. Try to wipe away the decades of comfort and unreality and advise us from your pain.

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Archie said...

What Tom said @7:09 pm, +1.


Please ignore the edit button. Your posts are genuine in tone and substance to this reader. Your depth of feeling is most appreciated in these troubling times.

mistah charley, ph.d. said...

"there is nowhere to go"

I moved to a small town in the Appalachian mountains over twenty years ago, and soon after I got there I was told a joke about the difference between a Yankee and a damn Yankee: "A Yankee comes down, looks around, and goes home. A damn Yankee doesn't go home soon enough."

Four years later I left.

Anyplace you move that consists of people that have been there for generations will have some barriers to joining. If hard times come along and the "us vs. them" distinction becomes salient, it will be hard to be part of the "in crowd". Some people are better than others at winning friends and influencing people, and of course places differ. But generally speaking, one wants to "bloom where you're planted" - and if you want to TRANSplant yourself, consider carefully whether the psychosocioeconomic ecological niche you're choosing really suits you.

ric2 said...

I love the picture of Twain.

There is an awesome post at about the upcoming release of his autobiography. As he aged he apparently lost all faith in humanity, but at least kept his sense of humor. An excerpt by post author Eileen Jones:

This is not to say that reading 5,000 pages by elderly Mark Twain will be any picnic, even for his biggest admirer (me). Late-life Twain is pretty rough. By then he was, as they always say, “bitter.” Like his pal Grant, he got swept up in the get-rich-quick fever of the Gilded Age and lost his shirt, as well as his house, and had to go on endless speaking tours to try to recoup. His beloved wife Olivia died; his children kept dying too; only one of four outlived him. As his notoriously high “animal spirits” faded, his affection for reprehensible humanity dissipated as well, and he began to roast them unsparingly in prose. He’d come to hate the Christian God too, and went after him “with a pen warmed up in Hell.”

All perfectly understandable, but you still have to brace yourself a bit when a great writer attacks. Here’s what old Mark Twain thought of humanity: “Oh, we are a nasty little lot—and to think there are people who would like to save us and continue us. It won’t happen if I have any influence.”

Bless you Stoneleigh (and Ilargi - you have a streak of Twain in you which is good) for being "people who would like to save us."

Jim R said...

Couple of nice things happened today. First the engineers working on the wild well in the GoM have tweaked the final knob on their custom-build 80 ton spigot and stopped the flow of crude. It's a test, so they might have to open it up again, but for now it's under control.

And Jesse has mentioned us in his blog. Thought I'd complete the circle and mention him back:
Jesse's Crossroads Cafe.

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snuffy said...

One more note..

18th century firearms are giving our troops "warm"welcome in the middle east.It would be physically impossible to do that sort of thing here...we haven't got the troops,nor the troops the willpower to do what you suggest.

I am surprised and pleased to see the "gansta cops" of NOLA being tried for what was done down there,even at this late date.
Your experience with the "law"and .gov Might be a give you a idea why I think a serious police state simply would not work here.Too many mini-fiefdoms with too many minor idiots....

Bee good or
Bee careful


Unknown said...

I think that you overstate the losses - they are "paper losses" in the same sense that the inflation of property values over the years led to huge "paper gains" in every homeowner's apparent wealth.

In reality, houses are places to live. So if they are all going up or down in value comparably, it doesn't much matter to most people (apart from the poor sods with large mortgages of course). Anyone who is selling their house to buy another one should be able to simply exchange one devalued house with a similarly devalued house.

Butch said...

Housing and the economy are in deep trouble...a fix to consider follows:


Housing is in the dumps. It will likely remain in the dumps for the foreseeable future. Unfortunately, much of the US economy depends on a robust housing market. A simple and practical fix is for the federal government to support the following:

• Any current, performing, home or commercial mortgage loan or property secured line of credit loan may be financed (new loan) or refinanced for 2.5% without all of the associated refinancing requirements (appraisal, inspections, etc.). All other loan conditions remain the same (e.g. duration). The refinance fee would be modest and cover the cost of processing the paperwork.

• Any new purchase of a home may be made at 2.5% interest.

• Any loan so refinanced will not be allowed to deduct interest paid on federal income taxes for 5 years.

• This program will be in place for 12 months unless extended by the Congress.


Interest payments made by any entity are technically income to the receiving party. As such, historically, interest paid was therefore excluded from the taxable income of the paying party. Some viewed this as a housing subsidy. It was never a housing subsidy; it was an equitable taxation policy which stated income would not be taxed twice. Without the deduction, a taxpayer would pay taxes on his income and then the same money would be taxed again as income for the entity making the loan. By lowering the effective interest rate on all outstanding mortgages, considered capital will be freed up to stimulate economic growth. Lowering interest rates will help many home owners keep their homes and avoid foreclosure.

Not all borrowers would accept this offer for a variety of reasons, but enough would to have a significant positive economic impact. For example, borrowers near the end of their loan period might find that with only a short period left to pay, and not enough interest being paid to qualify for itemized deductions anyway, there would be no net benefit to using this program.

Higher economic activity will generate tax revenues to the federal government. Since the interest paid will not be tax deductable, tax revenues will increase. The Federal Government is presently borrowing money at 2% (5 yr, 10yr at 3.3%) and thus this program can easily be financed “at cost” without any market impact. This is a simple and straight forward economic program to help stabilize the housing market, stimulate the economy and increase tax revenues to the Federal government.

scandia said...

For the record I did not say I want a gun. What I said was I am now uncomfortable without a plan of self defense. I was hoping others might make suggestions.
So far self defense is guns or moving to a perceived safer place.
Perhaps there is no safe place, no self defence that doesn't take another life. Perhaps one can only hope the state doesn't notice me, that a little bit of luck enables survival.
At my age my personal physical survival is not the be all. My rage/fear is trigger by injustice,by the assault on ecosystems,by stacking the odds in favour of a few....My desire to live is hugely motivated to be around to witness the downfall of TPTB.
Ilargi's use of the the word " Bastille " brought back to mind the iconic painting of the old lady( citizen) knitting as heads roll off the guillotine. Her expression of satisfaction always frightened me. I thought she was crazy, a psychopath of sorts. Now I can grasp the sweet satisfaction she must have experienced to see the end of a jaded, gluttonous, ruthless aristocracy.

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bluebird said...

scandia - Where you live, are you allowed to keep a small dog? Dogs are great for warning us that strangers approach. And dogs are company to have around too!

Perhaps some lessons in karate or judo would help in self defense.

jal said...

@ scandia

“Perhaps there is no safe place, no self defence that doesn't take another life. Perhaps one can only hope the state doesn't notice me, that a little bit of luck enables survival.”

Perhaps I can jump in and help.

“... a little bit of luck”

You make your luck by preparing.


There are two people on a beach watching the water receding and a big wave coming at them.
One is obese, plus 200 lbs., one is fit.
Who will have the greatest chance of reaching the high water mark?

My spouse asked me why do you follow the market. You have no money in it. All they do is talk talk. It doesn’t change anything.
My response, ... so that I can see the train coming at me and be able to avoid it.

Next, ... you have more knowledge than your ancestors. They survived by doing something or by avoiding something. They were successful! You were born.

Try to determine the kind of mental state, physical, etc. that they needed to survive and figure out if you will need those skills for what the future will bring.

Most of all, keep things in prospective.

Why is it so important for an individual to survive?
Why is it so important for a specie to survive?

The Nautilus has survived 500 million years.
The shark has survived 400 million years.

Homo have barely made a footprint in the cycle of life.


Anonymous said...


I highly recommend a dog for love, companionship and a sense of protection. Then sit back and watch the implosion! :) Simultaneously, you might experience intense sadness and joy. Many innocent people will be be suffering worldwide as well.

zander said...


You mentioned our empathic viewpoints last week, well this comment is another cracker.

"My desire to live is hugely motivated to be around to witness the downfall of TPTB."

I'm hugely driven by this particular brand of shadenfreude, even in the knowledge it could usher in a huge downfall in my own personal existence and will probably live to regret that I wasn't careful what I'd wished for.



Anonymous said...

Matt Simmons comments on the "Big BP Cover Up."

Anonymous said...

This is better.

"MSNBC July 15- Matt Simmons still says BP covering up MASSIVE HOLE miles away, cap test is absurd"

zander said...

I'm genuinely elated the leak appears to be under control in GOM notwithstanding the ctastrophic damage already done of course.
I for one was convinced the well would spew on for ever, I've gotten it ridiculously wrong on this one and it is a salient reminder to keep ones emotions under control.


mikel paul said...


a thanx and a nod for all the times your thoughts were read by moi.
Obsession with numbers, cliches and spins aside, I find your takes much akin to the "White Men Can't Jump" line that there is a dense difference between listening and hearing.

Don't know a better way to say it. The above shall have to do.

Thank you for who you are.


zander said...

TAE gets hat tip over at Jesse's Café Américain.


Glennjeff said...

Where is your imagination folks - KNEECAPS and GUNS are a match made in heaven. No need for spiritual death.

What concerns me is that folks have an issue with firearms, be it pro or anti, they are just tools.

How many people are killed or maimed in motor vehicle "accidents
" - ban cars they are lethal weapons, ban motorists because they are all potential murderers.

Ban power tools coz they are a lethal weapon.

Dont forget screwdrivers, must ban them too.

Glass (especially if broken), toothpicks, piano wire and dental floss, string or rope of any kind, rocks, bricks, golf balls, skeletons, digeridoos, sports bats of any kind, plastic bags.....

they are all lethal weapons, BAN EVERTHING coz everything is a lethal weapon in the hands of a killer.

For the love of God, CUTLERY, there is cutlery everywhere.

CUTLERY CUTLERY CUTLERY, I can't go on. Everywhere I look there are murder weapons.

Puupy dogs, FUCK ME, someone could just pick up a puppy dog and bash me to death with it. FUCK ME, I CAN'T GO ON EVERTHING IS A MURDER WEAPON AND EVERYONE IS A MURDERER .

solarhouseca said...


Perhaps your comment is less about physical protection than about making sense of the world about you. For instance; was the gov reasonable in spending your famous 1.2B$ for twenty guys in limo's at the G20 when say for instance mental health care has been cut. What kind of protection can you possibly find against issues like this; other than egregious wealth.

An honest response to most of these issues is really it seems to me an attempt to create a socially cohesive caring responsible society. This is completely different from the individualistic society and value system of the US.

The usual answers like arming up or building a doomstead are really ultimately counter-productive to re-structuring towards a socially functioning society.

I wish I could give better positive answers, but all I have is my approach to helping my neighbours, have local get-togethers like potluck suppers, talk about our issues seriously and deeply. It's common here to pull over to the side if you see somebody you've not seen for a bit and form a road block and chat. Right now it's haying time and Don a neighbour just called to ask if I could help fix his baler before it rains. He did cement for me awhile back. Before that he asked me to talk at a regional gov meeting about re-zoning which would have screwed up his farm. So a bit of research and a talk and then a meeting with the zoning committee and voila proposal goes away.

On another more personal note a love affair fell apart and I was devastated, and all of my friends helped fix the despondent me. Fed me, carted me to a therapist, and just plain dropped in and talked or did something that helped.

Gravity said...
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scandia said...

@Zander...hope we have all just overreacted.HOWEVER, why the secrecy? Why does BP get the data from the coast guard yet the public,interested scientists aren't allowed access?
The trust is broken between me and BP, between me and any gov't spokesperson.

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Ric said...

Re: exiledonline. I live not too far from Victorville, where Yasha hails from and he's got us nailed. ;-)

Re: "there is nowhere to go."

Reminds me of the phrase, Wherever you go, there you are.

I live in the desert and often think about what the desert has to tell us about living in the coming transition. Where most people see the desert as a desolate place, many who live here see it as a paradise of abundant and vital life, where essentials appear in harsh relief and value is properly cared for. Desert insects, plants, and animals survive on almost nothing in the most beautiful way. Is their life "less" for it?

My grandfather used to say, "We grew up in a one-room house with a dirt floor, but we weren't dirty and we were happy." Any time I find myself getting freaked about the coming horror show, I tell myself life is terminal and get over it. Right-suffering is transformative. Work hard. Live fully. Grow up. Die well.

hdp--You write with fire. Sorry to hear about your mother. I'm looking after a mother with alzheimers--and for the past five years it's seemed like I have to protect, care, and guide her through an insane "system" here in the U.S. But she's comfortable and laughs all the time, so it's all good.

Gravity said...

After all the treacherous lies, I'm surprised anyone around here believes what official sources say about this. The leak 'appears' to be sealed, as ascertained by whom, under which freedom of press? Its a matter of national security, nothing concerning this event presented on the screens is even remotely realistic or fact-checkable, it would be illegal if it was.

Most likely they haven't sealed it at all, and are just making this up to facilitate another stock dump while they wait for the relief well effort or attempt a neutron pulse detonation. Maybe they plugged the televised leak, but that was never the primary source responsible for the bulk of discharge. I'm still convinced this chronic exctinction event will heavily contribute to the collapse of the US, practically sealing its fate.

Maybe some have prematurely suggested the rupture could never be sealed, depending on what fissures we're super-secretly dealing with, excessively pressurised methane-powered abysses may never be sealed by human intervention. However, the general magnitude of damage that is conceivable within the boundaries of observations and measurements loosely confirmed so far, concerning toxicity and ecological decimation, cannot easily be exaggerated or misinterpreted. This disaster has already established itself as a minor extinction event that will leave the gulf and perhaps several coastal states barren for generations, unless the fish overreacted when they decided to die, all of them, and the coastal samples mistakenly revealed harmful toxicity because the air and waters were overcome by violent emotion.

Anonymous said...

Hija de papi,

Sorry about your mother. I like your frankness and "fire"!

We also have a border collie mix, quite loving, intelligent and protective. She's mostly an indoor friend, who alerts us with a bark even when a car or person stops by the gate -- 150 ft. away. She's athletic and high energy, enjoys long walks and playing ball several times a day.

scandia said...

@solarhouse, BINGO! I am failing to make sense of the world around me! HELP!
I've read that 19,000 police officers were on duty to protect 20 leaders. Plus each leader brought along how many bodyguards?
The official reason for so much muscle power is the threat caused by those dressed in black. Doesn't make sense as the police proudly announced that they had infiltrated the troublemakers, even knew there were 400 of them. Why not put them in detention before the meeting? Why lock up citizens and leave the black shirts free to vandalize?
There was a meeting place all set up in cottage country,the famously beautiful Muskokas.New roads were built to ensure a smooth ride for the limos. So why were the leaders even brought into Toronto?
I've read that each country represented at the meeting is running a deficit,designing austerity programs for the proles. When the decisions/positions on the global economy were already taken and announced before the meeting why did they go to all this trouble and expense to come to Canada?
Canada's debt of 3 trillion tells me it is not prudent to hold big parties that require a payroll for 19,000 plus all the other expenses.
I'm serious. Can someone help me make sense of this? Is there something about governance that I don't understand?
So far I have concluded that the whole show was orchestrated in such a way, as in lockdown, to threaten the citizens of Canada, to flex state muscle in our faces. Like Bush said, " Better watch what you say." It is this state threat that I worry about most of all.

Anonymous said...

Here is a question of a slightly different sort.

I am considering running for city council. Now my "city" has 10,000 people. 30 miles away there is a city of 100,000 people and the nearest burg of more than a million is 250 miles or so.

The distances are irrelevant except they influenced my relocation a year ago in my attempts to surf this interesting wave we are all riding. I have family here but we are not generations deep, that said, I have been very accepted and welcomed and feel I have chosen well our place to establish our lifeboat.

My concern comes from some things mentioned in the comments because I see too much merit in them. Is this the better time to lay low and not risk making the decisions to come that will incur so much bitterness or do I step up and make the hard calls to allow for better options for the common wealth in my little corner of paradise and its other denizens with whom I share it?

So do I run and risk a higher more controversial profile amid a coming pissed off populous, or lay low and do other things...not that the decisions made by a city council representing 10,000 mean much in this crazy world, but it illustrates the dilemna of foment change or lay low, what parts of the tide do we fight/direct or run from.

thanks for any input.

Gravity said...

I'm sorry, its not the bp propaganda thats troubling, its how easily people can allow themselves to be persuaded by good news, and desperate, to actually believe these vaporous assessments, whereas plenty of material accounts for bp's complete untrustworthyness in perpetuity. Its not like they haven't consistently misrepresented every single aspect of this thing from day one.

If anything, one should believe the exact opposite, its worse than before. Now they've announced that they definitely capped the rupture, incidentally just after the seismic imaging, I suspect that they've found the wellbore and substrata damage to be too severe for the relief wells to work as intended.
Its possible they have made some progress with sealing whatever's down there, but they can never cap the unspeakable damage already caused, which is not apparent when their stock goes up instead of being delisted.

Brunswickian said...

Loop current breaking down?

Gianluigi Zangari
Frascati National Laboratories (LNF) - National Institute of Nuclear Physics (INFN)
Frascati 00044, Via E. Fermi, 40, ITALY
Correspondence to: Gianluigi Zangari Email:
Abstract: BP Oil Spill may cause an irreparable damage to the Gulf
Stream global climate thermoregulation activity.

The Gulf Stream importance in the global climate thermoregulation processes is well assessed. The latest real time satellite (Jason, Topex/Poseidon, Geosat Follow-On, ERS-2, Envisat) data maps of May-June 2010 processed by CCAR1,2 (Colorado Center for Astrodynamics Research), checked at Frascati Laboratories by the means of the SHT congruent calculus3 and compared with past years data, show for the first time a direct evidence of the rapid breaking of the Loop Current, a warm ocean current, crucial part of the Gulf Stream.

As displayed both by the sea surface velocity maps and the sea surface height maps, the Loop Current broke down for the first time around May 18th and generated a clock wise eddy, which is still active (see Fig. 1).

Figure 1| Real time satellites data maps. Real time sea surface height maps (above) and sea surface velocity maps (below) starting from april 22nd until June 9th processed by CCAR1,2 and checked at LNF (Frascati) by SHT calculus3. The star indicates the site of BP platform
“Deepwater Horizon”. The yellow arrow indicates the breaking of the Loop Stream.
As of today the situation has deteriorated up to the point in which the eddy has detached itself completely from the main stream therefore destroying completely the Loop Current, as in figure 2 below, dated June 12th 2010.

Figure 2| Real time satellites data maps updated. Real time sea surface height map (left) and sea surface velocity maps (right) updated on June 12th processed by CCAR1,2 and checked at LNF (Frascati) by SHT calculus3. The star indicates the site of BP platform “Deepwater
Horizon”. The yellow arrow indicates the breaking of the Loop Stream.

Since comparative analysis with past satellite data until may 2010 didn’t show relevant anomalies, it might be therefore plausible to correlate the breaking of the Loop Current with the biochemical and physical action of the BP Oil Spill on the Gulf Stream.

It is reasonable to foresee the threat that the breaking of a crucial warm
stream as the Loop Current may generate a chain reaction of unpredictable critical phenomena and instabilities due to strong non linearities which may have serious consequences on the dynamics of the Gulf Stream thermoregulation activity of the Global Climate.

1. CCAR web page:;
2. Leben, R. R., G. H. Born, B. R. Engebreth, 2002, Operational altimeter
data processing for mesoscale monitoring. Marine Geodesy, 25, 3-18;
3. G. Zangari patent SIAE-OLAF n. 9903198/1999
Acknowledgements: we acknowledge Frascati National Laboratories
( and the National Institute of Nuclear Physics (
We also aknowledge the University of Colorado, Boulder, USA: the maps
displayed in Fig. 1 and 2 were produced by the Colorado Center for
Astrodynamics Research at the University of Colorado, Boulder, USA. More
information on these data products is available at

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Anonymous said...

Those of you wondering how to survive are ignoring history, both written and in the archaeological record. The question has already been answered. Refusal to accept the answer that reality gives is your decision. Good luck with that sort of utopian nonsense.

Gravity said...

Denninger makes short work out of the doomish expectations and extinction misconceptions in his post today, seemingly convinced of bp's success. Hopefully he has better insights in economy than he has in marine biology or toxicology. Like most, he won't truly 'get' where the doom is until he becomes personally ill from the effects or is forced to evacuate, which are not unlikely outcomes, despite his insistence to the contrary. Its not entirely his fault though, this whole situation is far beyond most practical frames of reference.

Glennjeff said...

@ hija de papi

"part border collie part heeler"

" intelligent it seems he should be classified as another species than dog."

Our blue heeler, Om, recently passed away, he was like that. So very intelligent, empathetic, compassionate, kind to all other species with the exception of intruders which he terrorized and occasionally bit.

We treated him as an equal, he never had a kennel coz he lived in the house.

Often he was our better.

Ilargi said...

New post up.

Settlements and Tragedies


Ruben said...


There is never one history. Or rather. history is always local.