Saturday, May 16, 2009

Bill Maher With Elizabeth Warren - Yet more head shaking stupidity...

"There's a little problem with the first 350 billion dollars. It left and no one knows where it went".

Bill Maher With Elizabeth Warren May 15, 2009 (10 minutes):

BTW, Usury didn't just "go away," it went away because Volcker raised rates following inflation caused by leaving the gold standard and then the central bankers couldn't profit, so THEY saw to it that usury laws went away. Washington State, for example, until 1980 had a 12% usury law - no one could charge a higher interest than that.

Friday, May 15, 2009

Howard Davidowitz - "If the Consumer isn't petrified, he or she is a damn fool."

"The Worst Is Yet to Come": If You're Not Petrified, You're Not Paying Attention

Davidowitz is a real estate expert who has been very right about this entire crisis. I'll let him explain what's happening, he makes it very clear:

Martin Armstrong – Understanding the Real Economy

Here is yet another mind blowing article by Martin Armstrong this time covering his cycle theory in great depth. He takes you to the eighth dimension where waterfall collapses are born and explains why Elliott Wave works until it doesn’t.

Remember that we just went past his April 19th mid-point in his Confidence Model and he adds some color to that.

He also includes market forecasts for the DOW, the Nikkei, the Hang Seng, the London FTSE 100, and the German DAX. Remember, top financial firms and even nations used to pay great sums to read his forecasts, we are privileged to receive his insights, too bad it’s not under better circumstances for him and us!

Here is a link to upload a .pdf document of Understanding the Real Economy.pdf (To print a hard copy via Scribd, simply click on “more” and then “print.” To open a .pdf to print or save, click on "more" and then "save document." You will be prompted to open or save. Once open you can then print if your system is not able to print via the Scribd "print" button.).

While I can't imagine what it's like to live in prison, I can imagine what it's like to be a debt slave! Martin's work reminds me why I accompany my pieces with music (EconoTunes... Economic Redemption!)...

The Animals - We've Gotta Get Out Of This Place (1965):

Morning Update/ Market Thread 5/15

Good Morning,

Nothing but greenshoots this morning, comrades. Here is a picture of the overnight action with the futures down but recovering a little:

Yesterday we learned that Chrysler is axing 789 dealerships, 15 of them right here in Washington State. AND, we learned that GM is closing a whopping 2,600 dealers nationwide – is all. What was that Obama said? Nuts.

Meanwhile WE, comrades, agreed to bailout 6 more – SIX MORE – insurance firms, each one another AIG!

Considering a short sale, comrade? No problem, the treasury will now give you some of my money too! Congratulations, and I do encourage you to take full advantage! Here’s a snipet of the details from CNN:
Treasury Dept. is giving 'cash-for-keys'

…If that is unsuccessful, the final step is a "deed in lieu of foreclosure," when borrowers voluntarily forfeit the deed and the debt may be erased.

Under the new initiatives, for short sales and deeds in lieu, borrowers will get up to $1,500 to assist with relocation expenses. Treasury will also pay the servicers $1,000 to complete a short sale or deed in lieu.

A deed in lieu can be the least painful way of ending a mortgage default nightmare, according to Pamela Simmons, a real estate attorney in California.

"Borrowers often prefer to end it quickly and cleanly," she said. "They just want to get it over with." And it's better than just walking away from a mortgage, a situation where the debt still looms.

A deed in lieu might also be better for the banks. Banks acquire the properties back from delinquent borrowers faster and more easily, saving them legal, financial and other costs associated with going through the entire foreclosure process.

Not every deed in lieu involves "cash for keys," but motivated lenders will often pay borrowers something, typically about $1,000, to vacate by a fixed date and to not vandalize the homes or strip it of fixtures.

So, there’s a lot of economic data out this morning, let’s start with manufacturing in the New York area, which improved from -14.7 to “only” a -4.7 in May. What improvement! It is no longer in freefall, a real honest greenshoot of contraction! But wait… Econoday adds this:
Now the bad news. New orders, the life blood of course of any business, show a deepening rate of contraction, at -9.0 vs. -3.9. The employment index continues to show severe rates of month-to-month losses with improvement marginal, at -23.9 vs. -28.0. Prices received offers especially bad news, at -27.3 vs. -18.0 suggesting that the improvement in shipments will not be fully reflected on firms' top line.

Dang, I knew someone was smoking and toking too many greenshoots.

And Industrial production fell another .5% in April after falling 1.5% in March. An improvement or further contraction? Sorry greenshoot tokers, it is no greenshoot:
Econoday: Industrial production continued its downward spiral in March, falling 1.5 percent, matching the decline the previous month. But the manufacturing component was even more negative, falling 1.7 percent, following a 0.6 percent decrease the month before. Declines were broad-based with the exception of motor vehicles, which advanced slightly. However, there are signs that the contraction in manufacturing may be slowing. The ISM manufacturing index for April rose to 40.1 from 36.3 in March. The April rate was still in negative territory. Markets likely need to start paying attention to manufacturing excluding autos as Chrysler and GM have both been shuttering plants. According to the employment report for April, aggregate production hours in manufacturing dropped 0.9 percent, indicating a likely sharp drop in manufacturing output for the month. Capacity utilization hit a record low of 69.3 in March and likely will slip even further in April.

Okay, now let’s get to the important, if not highly manipulated, data, the CPI. Here we find that on an annual basis, prices are falling at the fastest pace in the past 54 years…
Consumer price drop is biggest since '55

Government says 0.7% annual decline is the largest in nearly 54 years. Monthly prices unchanged.

NEW YORK ( -- A key index of prices paid by consumers fell at the sharpest rate since August 1955 due to historically low energy prices, the government said Friday.

The Labor Department said the Consumer Price Index declined 0.7% on an annual basis in April, only the second year-over-year decline in nearly 54 years following March's 0.4% drop.

On a monthly basis, consumer prices were unchanged, in line with the consensus estimate of economists surveyed by

But prices excluding food and energy, the so-called core CPI, rose 0.3% in April, after a 0.2% rise the month before. Economists were expecting a 0.2% gain.

This is an important piece of information as shows that we are indeed encountering a declining price environment. I’ll have more on this later, meanwhile we need to look at the TIC data.

March TIC Data

The bottom line is that NET TIC flows were reported as being positive by $23 billion which is a much better REPORT than for February. Although I trust government reports about as far as I can throw them, it is possible that February was positive as when I look at the treasury and bond markets for that month they were flat. They are also flat in the month of March, so we may get one more month of in the ballpark, but then the month of April should be net negative in a big way. Too bad this data is delayed by 3 months!

So, on a technical basis, we are still inside the latest descending channel. This channel is not very wide and thus it could be corrective only unless it widens out:

People are still living in a greenshoot world, they are not thinking clearly. Just look at all the dealerships that are closing and what that means for unemployment, and for tax revenue. A disaster is occurring and it was inevitable. I believe you’ll see housing data get worse and then all these pressures will begin to turn up in future data which will show us back in a near freefall again.

I’m late getting this posted so will end here – more technicals inside the daily thread, appreciate the technical contributions…


PS - hey, it's Friday, again you are all invited for a BBQ, we could all be heros there and will have a great time! BBQ invite…

David Bowie – Heroes:

Thursday, May 14, 2009


Well, this Craigslist “Best of” pretty much sums up one person’s thoughts on the economy and the American Dream. Normally I wouldn’t post such things, but what the heck, there’s just too much good emotion, misspelled words, and foul language that make it worth your time to read.

Please play the song below FIRST, then follow the link to read the whole thing (it'll open in a new window), it’ll take you about two minutes:

Get it while it’s hot, he’s only asking $1,000,000! (ht Arno)

The Rolling Stones – Beast of Burdon:

Jim Rogers - "Bail on the Dollar & Equities..."

Latest by Jim Rogers, more bearish on the dollar, "Time for a currency crisis..."

Gerald Celente – The Bubble to End all Bubbles…

Here, Celente is touching upon what I like to call, “the events that tend to follow economic events,” especially collapsing credit bubbles (ht Yabs)…
The Bailout Bubble - The Bubble To End All Bubbles…

By Gerald Celente

KINGSTON, NY -- The biggest financial bubble in history is being inflated in plain sight, said Gerald Celente, Director of The Trends Research Institute. "This is the Mother of All Bubbles, and when it explodes," Celente warns, "it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world."

Either unwilling or unable to call the bubble by its proper name, the media, Washington and Wall Street describe the stupendous government expenditures on rescue packages, stimulus plans, buyouts and takeovers as emergency measures needed to salvage the severely damaged economy.

"All of this terminology is econo-jargon," said Celente. "It's like calling torture 'enhanced interrogation techniques.' Washington is inflating the biggest bubble ever: the 'Bailout Bubble.' "This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the 'Bailout Bubble' explodes, the system goes with it."

The economic framework of the United States has been restructured. Federal interventionist policies have given the government equity stakes, executive powers and management control of what was once private enterprise. To finance these buyouts, rescue and stimulus packages -- instead of letting failed businesses fail and bankrupt banks and bandit brokerages go bankrupt -- trillions of dollars are being injected into the stricken economy.

Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the "Bailout Bubble." Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the "Bailout Bubble" pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another.

With no more massive economic bubbles left to blow up, they'll set their sights on bigger targets. "Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war," observed Celente.

Since the "Bailout Bubble" is neither called nor recognized as a bubble, its sudden and spectacular explosion will create chaos. A panicked public will readily accept any Washington/Wall Street/Main Stream Media alibi that shifts the blame for the catastrophe away from the policy makers and onto some scapegoat.

"At this time we are not forecasting a war. However, the trends in play are ominous," Celente concluded. "While we cannot pinpoint precisely when the 'Bailout Bubble' will burst, we are certain it will. When it does, it should be understood that a major war could follow."

I think Celente is correct in that the government stimulus, when it fails, will signal the end of the “stimulus bubble” that has been blown really ever since Bretton Woods and since Keynesian deficit spending became vogue.

Regarding the possibility of war, on this point he has a high probability of being correct. If you look back in history, approximately one decade following major economic collapses you will repeatedly find a major conflict. Are we smarter this time? Better informed with information moving at light speed?

I would sure like to think so, but the truth is that if anything we are displaying more of a herd mentality now than ever before! The vast majority of people are tuning into their televisions for their propaganda, and yes, the internet and the truth is out there, but very few are willing to seek it out. If you are reading this, you are a very slim, but well informed, minority.

I hope Celente is wrong – I don’t think he is. This talk is so far out there for the mainstream that he may sound radical. He is simply telling the truth about people and about history and extrapolating that into possible future outcomes. This is something we need way worse than the lies and manipulation that are brought to you by your own government, the latest example being the “stress test.” Now there’s RADICAL and INSANITY. This article is far more lucid than that!

Morning Update/ Market Thread 5/14

Good Morning,

The market is still in the range where it finished yesterday, but slightly higher at the open:

This action is producing what appears to be a bear flag. If so, and if it breaks in the correct direction, it is worth about 31 points and that would target the 850 area on the SPX. There’s nothing noteworthy in that area, it would be in between the 23.6 and 38.2 fibs. It would be, however, pretty close to the bottom of the tentative channel I have sometime in the next couple of days.

Of course we are oversold on a short term basis already so this is an area to be careful.

Okay, so now that Goldman has decided to sell the market a little, I just happen to think it’s amazing that this jobless claims report is released:
Jobless claims surge

Government says 637,000 people filed for first-time unemployment benefits last week. Continuing claims at all-time high for 15th week in a row.

NEW YORK ( -- The number of people filing initial claims for unemployment benefits rose more than expected last week, while the number of people filing claims on an ongoing basis rose to a record high for the 15th straight week, according to a government report released Thursday.

A total of 637,000 people filed new claims for jobless benefits in the week ended May 9, said the Labor Department. That's up 32,000 from an upwardly revised 605,000 in the previous week.
Economists surveyed by had forecast 610,000 initial claims.

The 4-week moving average of initial claims, which smoothes out volatility in the measure, rose 6,000 to 630,500.

In the week ended May 2, the most recent data available, 6,560,000 continuing claims were filed. That's the highest number since the Labor Department started tracking the data in 1967 and an increase of 202,000 from the previous week.

I’m just going to say once again, that I don’t trust any of the government statistics and if it were up to me I would replace everyone at the BLS and start over with a system that cannot be manipulated.

Speaking of numbers that are manipulated, the inflation reporting is likewise unreliable, especially when looking at month to month numbers. But again, you cannot make long term comparisons because they have changed their calculating procedures so many times over the years.

So, the Producer Price Index, PPI, just came in at .3% for the month of April which is a big increase over March’s -1.3%.

Like yesterday’s import/export prices, here it is more telling to look at the year over year numbers. And that came in at -3.5% versus -3.6% in March, a slight improvement. I would attribute most of the monthly increase to energy, let’s see what Econoday says:
Producer price inflation in April made a comeback – and this time it was not energy causing the price hike. The overall PPI rebounded 0.3 percent, after falling 1.2 percent in March. The April increase was above the market forecast for a 0.1 percent rise in the headline PPI. Leading the boost was a 1.5 percent jump in food prices, following two months of decline. Meanwhile, energy actually slipped 0.1 percent, following a 5.5 percent drop in March. The core PPI rate also firmed – to a 0.1 percent rise after no change in March. The core gain matched the consensus projection.

The 1.5 percent surge in food prices was led by a 43.7 spike in eggs prices with other foods also contributing to a lesser degree. Energy costs inched down 0.1 percent despite a 2.6 percent jump in gasoline prices in April. Residential gas dropped 6.2 percent in the latest month while electricity slipped 0.6 percent.

Helping the core rate to firm were gains in prices for light trucks and passenger cars – up 1.1 percent and 0.2 percent, respectively.

For the overall PPI, the year-on-year rate rose to minus 3.5 percent in March from down 3.6 percent the month before (seasonally adjusted). The core rate year-ago pace eased to up 3.4 percent from up 3.8 percent in March.

This data is probably just good enough to prevent a deflationary spiral, but not so hot that the Fed needs to worry about raising rates. “Just right” which makes my cynical mind suspicious once again. It would not be if the system was transparent and consistent, but it’s not.

Bonds are headed down…

Have a good day,


PS, if you ask me I think Major Tom must be heading up statistics at the BLS, sure is a lot of timely "Space Oddity" in there!

David Bowie - Space Oddity:

Wednesday, May 13, 2009

Naked Short Selling - Redefining Systemic Risk

This is all about the type of manipulation that occurs daily in our markets, especially the small cap markets. Many forms of this game occur, naked shorting is just one (ht Ryan - 17:55):

Gerald Celente – Truth Telling You May Not be Ready to Hear…

Follow the links to listen to Gerald Celente. He is more bearish than ever, and I believe his basic premise is correct. His details may not be, but the premise of being worse off than the depression is correct.

Follow the links and click on the small speaker button at the bottom left of the page (ht Comrade Wanna-be):

Gerald Celente: $2000 Gold and the Break up of the US

Gerald Celente: The Greatest Depression in History

Roubini – Bear Market Rally…

Notice the reporter tries to get him to put a positive spin on his comments. Doesn't work, but Roubini is wrong, in my opinion about his depression comments. In my opinion we will only avoid depression via government statistic manipulation. If the statistics were kept in the same manner as past data, there is no doubt we would get there. Also keep in mind that there is no firm definition of economic "depression."

Roubini only talks for first half...

Roubini on Bloomberg (5 minutes):

Merrill Lynch – Muzzling Zero Hedge and Rosenberg.

Please follow the link to the full article and be sure to read page two:
Merrill Tries To Muzzle a Blog
…Today Zero Hedge's anonymous lead blogger, who goes by the name Tyler Durden, received a Digital Millennium Copyright Act Takedown Notice for six posts in which he cites Merrill Lynch reports authored by Rosenberg or his staff. The reports are indeed proprietary—but for journalists and bloggers, their widespread distribution has long been a helpful way to decode movements in the markets. "It's their prerogative to impugn that there has been infringment," Durden told me. "But there are intangibles. Rosenberg is leaving the company and is soon to be replaced by someone who has a slightly more upbeat feel."

… Durden believes that as Zero Hedge's readership has grown to 100,000 hits per day, Merrill Lynch felt it could not longer ignore his impact on that readership. He is taking the offending posts down this evening—but hasn't yet ruled out consulting a lawyer on his options.

So, Zerohedge’s traffic gets too big and they get muzzled. This is becoming a trend, remember this story? Goldman Sachs Seeks to Silence Blogger Mike Morgan!

Note that Rosenberg is too negative for Merrill’s taste. No kidding, this is exactly how our system works. Anyone who is grounded in reality is painted as negative and is left to fend for themselves. This is all a part of the grand deception and exactly why we are were we are, which is in the middle of an economic collapse that is following the greatest credit bubble in the history of mankind.

It seems to me that if you seek the truth there is only one source left for it, and that is in the Blog world and small online media outlets. When that is gone, true free speech will be rare indeed.

Swine Flu “Human Error?”

I have seen a lot of articles suggesting that the recent swine flu wasn’t necessarily born in nature. Some of those articles are so far out there that they are just hard to take seriously. Of course, that doesn’t mean that they are not true, as sometimes life can be stranger than fiction. However, I have been reticent to start a discussion on the subject because all the “conspiracy theorists” will climb out of the woodwork.

Well, maybe they should – I know they should in regards to the central bankers who absolutely are conspiring to control the world’s resources and labor through the use of debt. Of that, there is NO doubt.

But here’s an article from a mainstream researcher that is located in a mainstream source, Bloomberg, where he is making the claim that the swine flu may have originated in a laboratory, and not in nature.

Note how the “officials” when confronted with evidence immediately attempt to discredit that evidence. That’s typical as is calling it “tinfoil” or a “conspiracy theory.” Once the public hears those words, they immediately discount what the messenger is saying. While I don’t know the truth, I present this article simply to raise awareness and point out that this story is in a mainstream source:

Swine Flu May Be Human Error; WHO Investigates Claim

By Jason Gale and Simeon Bennett

May 13 (Bloomberg) -- The World Health Organization is investigating a claim by an Australian researcher that the swine flu virus circling the globe may have been created as a result of human error.

Adrian Gibbs, 75, who collaborated on research that led to the development of Roche Holding AG’s Tamiflu drug, said in an interview that he intends to publish a report suggesting the new strain may have accidentally evolved in eggs scientists use to grow viruses and drugmakers use to make vaccines. Gibbs said he came to his conclusion as part of an effort to trace the virus’s origins by analyzing its genetic blueprint.

“One of the simplest explanations is that it’s a laboratory escape,” Gibbs said in an interview with Bloomberg Television today. “But there are lots of others.”

The World Health Organization received the study last weekend and is reviewing it, Keiji Fukuda, the agency’s assistant director-general of health security and environment, said in an interview May 11. Gibbs, who has studied germ evolution for four decades, is one of the first scientists to analyze the genetic makeup of the virus that was identified three weeks ago in Mexico and threatens to touch off the first flu pandemic since 1968.

A virus that resulted from lab experimentation or vaccine production may indicate a greater need for security, Fukuda said. By pinpointing the source of the virus, scientists also may better understand the microbe’s potential for spreading and causing illness, Gibbs said.

Possible Mistake
“The sooner we get to grips with where it’s come from, the safer things might become,” Gibbs said by phone from Canberra yesterday. “It could be a mistake” that occurred at a vaccine production facility or the virus could have jumped from a pig to another mammal or a bird before reaching humans, he said.

Gibbs and two colleagues analyzed the publicly available sequences of hundreds of amino acids coded by each of the flu virus’s eight genes. He said he aims to submit his three-page paper today for publication in a medical journal.

“You really want a very sober assessment” of the science behind the claim, Fukuda said May 11 at the WHO’s Geneva headquarters.

The U.S. Centers for Disease Control and Prevention in Atlanta has received the report and has decided there is no evidence to support Gibbs’s conclusion, said Nancy Cox, director of the agency’s influenza division. She said since researchers don’t have samples of swine flu viruses from South America and Africa, where the new strain may have evolved, those regions can’t be ruled out as natural sources for the new flu.

No Evidence
“We are interested in the origins of this new influenza virus,” Cox said. “But contrary to what the author has found, when we do the comparisons that are most relevant, there is no evidence that this virus was derived by passage in eggs.”

The WHO’s collaborative influenza research centers, which includes the CDC, and sites in Memphis, Melbourne, London and Tokyo, were asked by the international health agency to review the study over the weekend, Fukuda said. The request was extended to scientists at the Food and Agriculture Organization in Rome, the World Organization for Animal Health in Paris, as well as the WHO’s influenza network, he said.

“My guess is that the picture should be a lot clearer over the next few days,” Fukuda said. “We have asked a lot of people to look at this.”

Virus Expert
Gibbs wrote or co-authored more than 250 scientific publications on viruses during his 39-year career at the Australian National University in Canberra, according to biographical information on the university’s Web site.

Swine flu has infected 5,251 people in 30 countries so far, killing 61, according to WHO data. Scientists are trying to determine whether the virus will mutate and become more deadly if it spreads to the Southern Hemisphere and back. Flu pandemics occur when a strain of the disease to which few people have immunity evolves and spreads.

Gibbs said his analysis supports research by scientists including Richard Webby, a virologist at St. Jude Children’s Research Hospital in Memphis, who found the new strain is the product of two distinct lineages of influenza that have circulated among swine in North America and Europe for more than a decade.

In addition, Gibbs said his research found the rate of genetic mutation in the new virus was about three times faster than that of the most closely related viruses found in pigs, suggesting it evolved outside of swine.

Gene Evolution
“Whatever speeded up the evolution of these genes happened at least seven or eight years ago, so one wonders, why hasn’t it been found?” Gibbs said today.

Some scientists have speculated that the 1977 Russian flu, the most recent global outbreak, began when a virus escaped from a laboratory.

Identifying the source of new flu viruses is difficult without finding the exact strain in an animal or bird “reservoir,” said Jennifer McKimm-Breschkin, a virologist at the Commonwealth Science and Industrial Research Organization in Melbourne.

“If you can’t find an exact match, the best you can do is compare sequences,” she said. “Similarities may give an indication of a possible source, but this remains theoretical.”

The World Organization for Animal Health, which represents chief veterinary officers from 174 countries, received the Gibbs paper and is working with the WHO on an assessment, said Maria Zampaglione, a spokeswoman.

Genetic Patterns
The WHO wants to know whether any evidence that the virus may have been developed in a laboratory can be corroborated and whether there are other explanations for its particular genetic patterns, according to Fukuda.

“These things have to be dealt with straight on,” he said. “If someone makes a hypothesis, then you test it and you let scientific process take its course.”

Gibbs said he has no evidence that the swine-derived virus was a deliberate, man-made product.

“I don’t think it could be a malignant thing,” he said. “It’s much more likely that some random thing has put these two viruses together.”

Gibbs, who spent most of his academic career studying plant viruses, said his major contribution to the study of influenza occurred in 1975, while collaborating with scientists Graeme Laver and Robert Webster in research that led to the development of the anti-flu medicines Tamiflu and Relenza, made by GlaxoSmithKline Plc.

Bird Poo
“We were out on one of the Barrier Reef islands, off Australia, catching birds for the flu in them, and I happened to be the guy who caught the best,” Gibbs said. The bird he got “yielded the poo from which was isolated the influenza isolate strain from which all the work on Tamiflu and Relenza started.”

Gibbs, who says he studies the evolution of flu viruses as a “retirement hobby,” expects his research to be challenged by other scientists.

“This is how science progresses,” he said. “Somebody comes up with a wild idea, and then they all pounce on it and kick you to death, and then you start off on another silly idea.”

Okay, post your articles and theories, but let’s keep it to this thread!

Blue Oyster Cult – Don’t Fear the Reaper:

Import & Export Prices – Going their Own Way…

This week is Inflation/deflation report week. It kicked off today with import/export data, and tomorrow we get the PPI followed by the CPI on Friday.

Let’s look at the trade price data for April:

Export prices in March -.6%.... in April +.5%, which shows PRICES increasing on the export side month over month.

On the Import side we find:

Import prices in March +.5%... in April +1.6% which shows that for the MONTH both import and export prices were rising.

Now, let’s look at YEAR over YEAR data:

This is the important story because it is year over year data that takes out the noise of monthly seasonal factors.

Year over Year EXPORT prices are -6.8% after being down -6.7% in March which shows that prices are falling faster on a year over year basis.

Year over Year IMPORT prices are down an AMAZING 16.3% (!!!!) after being down 14.9% year over year in March, again showing acceleration in price declines. Not the stuff of inflation, in fact quite the opposite. This is showing a historic price collapse.

So, let’s see how Econoday spins the data:
Price inflation is a story split in two, one is a commodity story, most notably energy, which is accelerating quickly, and the other is finished goods, which for now continue to contract. Import prices for April rose 1.6 percent, a fierce looking rate but reflecting energy where prices for petroleum imports jumped 15.4 percent. Judging by ongoing increases in oil, next month's report is also likely to show a major increase for petroleum. But excluding petroleum imports, prices fell 0.4 percent to extend a long run of declines connected to the global recession.

On the export side, export prices rose 0.5 percent but reflecting increases for another commodity sector, agriculture. Excluding a 3.6 percent jump in agricultural import prices, prices rose 0.3 percent.

So yes, commodities and especially oil has risen sharply in the past couple of months with this trumped up rally. BUT, prices have absolutely collapsed over the past year. These figures are very close to indicating a deflationary spiral. Let’s see what the PPI and CPI look like, it’s going to be interesting.

To me, there is no debate about what’s occurring right now given inflation or deflation. Deflation is occurring, the criminals are trying their hardest to rob you through inflation, but they are not succeeding – so far. So, you can believe whatever you want regarding inflation/deflation, but the data is not supporting the inflation thesis. Keep in mind that inflation/deflation is a monetary phenomena, not a PRICE phenomena. While the Fed’s monetary graphs show increasing money supply, it’s what they don’t show that has so many people fooled. That being the collapse of the shadow banking process and CREDIT (not to mention collapsing velocity!).

I just wish the central bankers would go their own way!


Morning Update/ Market Thread 5/13

Good Morning,

Well not so good if you were long at yesterday’s close, here’s the overnight action, you can see some cliff diving this morning as economic reports came in worse than expected. Bonds are shooting higher, the dollar is about flat, gold is down, and the /ES fell all the way from the 912 pivot area that stopped the advance last night to about the 889 level:

So, we learn that the ECB is going to up the ante on their quantitative easing! That’s NOT good, that’s the circle I’ve described in a couple of articles where once you start you get into an ever escalating circle. The U.S. is also heading in that direction, very bad and very sad.

But what got the futures moving down was the retail sales report:
U.S. Retail Sales Unexpectedly Fall for Second Month

May 13 (Bloomberg) -- Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that the rising unemployment rate is prompting consumers to boost their savings.

The 0.4 percent decrease followed a revised 1.3 percent drop in March that was larger than previously estimated, the Commerce Department said today in Washington. Excluding auto dealers, sales fell 0.5 percent.

Fewer jobs, falling home values and the biggest loss of household wealth on record may limit consumers’ ability to spend for years, analysts said. As long as the biggest part of the economy is constrained, any recovery from the worst recession in at least half a century is likely to be subdued.

“The consumer remains in a difficult situation,” Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, said in a note to clients before the report. “It remains unclear how they will proceed forward as credit access fades alongside further home price deterioration and an increasingly difficult financial environment.”

Stock-index futures slid and Treasuries climbed after the report. Contracts on the Standard & Poor’s 500 Stock Index dropped 1.8 percent to 890.50 at 8:37 a.m. in New York. Benchmark 10-year note yields fell to 3.13 percent from 3.18 percent late yesterday.

Not improving and worse than “expected.” But only by the people who cannot see that the consumer is SATURATED with debt and that all the government’s reaction to give the consumer’s money away to the banks (robbery & theft) cannot help the situation we’re in, it can only worsen it. So keep buying those greenshoots, because they need to steal your money, they don’t have it all… YET.

And speaking of consumers that are on the verge, we have also known that a second wave of foreclosures is coming and that this wave will be much worse than the subprime wave because they are on the higher end homes as all those option arms reset. We are right at the beginning of that wave now.
Foreclosures: 'April was a shocker'

A record number of foreclosure filings took place during April, but the number of repossessions fell 11%.

NEW YORK ( -- Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.

The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. "We had been predicting 3.4 million filings for the year," he said, "but we'll blow those numbers out of the water."

The lion's share of April's filings were ones in the early stages of the process, such as notices of default, according to James Saccacio, RealtyTrac's CEO.

And guess what? Ben isn’t doing as good a job at keeping rates low as the public seems to think:

Real Rate Shock Hits CEOs as Borrowing Costs Impede Recovery

By Bryan Keogh

May 13 (Bloomberg) -- The highest inflation-adjusted borrowing costs since the 1980s are hindering U.S. companies’ ability to build their businesses.

Customers of Airgas Inc. are reducing purchases of industrial gases such as nitrogen and acetylene because of rising real interest rates, said Chief Executive Officer Peter McCausland. Real rates account for inflation or deflation.

“There is no question” high real rates have aggravated Airgas’s sales decline, he said in an interview.

The climb in rates “really reflects a risk aversion,” said David Rickard, chief financial officer of Woonsocket, Rhode Island-based CVS Caremark Corp. “People are afraid to lend.”

Annualized consumer prices fell by 0.4 percent in March, the first decline in 54 years, and Treasury yields jumped to a five-month high. That pushed real investment-grade corporate borrowing costs to 8.34 percent, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co. Price declines accelerated in April to 0.6 percent, according to 28 economists surveyed by Bloomberg.

Rising real yields may deter companies from borrowing to invest in new products or factories because deflation will erode cash flow and make it harder to service debt, said John Lonski, chief economist at Moody’s Capital Markets Group in New York.

Deflation Hurts
“That’s almost guaranteed to delay an economic recovery and perhaps very much risks intensifying the current economic slump,” Lonski said in a telephone interview.
Deflation hurts businesses in two ways. First, it suppresses sales. When prices are falling, buyers have reason to delay purchases and wait for a better deal.

The second way deflation hurts is by increasing real interest rates, making borrowing more expensive. A $100,000 loan at a 5 percent rate with 2 percent deflation translates into a real yield of 7 percent. When prices are going up, the opposite happens. If inflation is 2 percent, the real rate on that loan is 3 percent.

“Deflation hurts borrowers and rewards savers,” said Drew Matus, senior economist at Banc of America Securities-Merrill Lynch in New York, in a telephone interview. “If you do borrow right now, and we go through a period of deflation, your cost of borrowing just went through the roof.”

Ahhhh, I don’t hear talk of inflation in there, I hear talk of deflation. We’re going to get the PPI and then CPI later this week, those will be important.

So, we now have a broken rising wedge on both the SPX and DOW. Gee, I hope you’re not long, because that’s the queue I’ve been waiting for and we’re below 900 again (I would not stay short above 903). The 30 minute fast stochastic finished yesterday overbought and so it has room to fall. The 60 minute is midpoint and the daily is just issuing a sell and coming out of overbought, except for the NDX which is over half way to oversold.

The next lower pivot is at 848, the 23.6% is at 869, the 38.2% is at 830 and the 50% is at 799. Rising wedges typically retrace to their BASE. With all the monkey business, this may not be typical, however, so again be careful. McHugh believes that a descent now means higher later. Maybe… but I wouldn’t count on that – at all.

So, now we have expectations that are set much too high and what appeared as greenshoots really were just the usual spring optimism over hyped by a criminal financial industry and fanned by a complicit media and government – all designed to separate you from your life’s labors/ dollars.

The debt has America and the World in a stranglehold, and we’re not going to get out of it until we force the central bankers out of the country and separate corporations and their money from state:

Ted Nugent – Stranglehold:

Tuesday, May 12, 2009

David Tice - More Truth Telling...

That is he sees the S&P going down to 400 (ht Glass)...

Bears and Bulls hit…

…the target on occasion. But you know what they say, “bulls make money, bears make money, but hogs get slaughtered. Are you being a hog?

The BEARS say that the economy is riddled with debt and that the debt must be cleared to renew growth again – if that’s the desired objective, as misguided as that objective may be. The bears just don’t think this rally is for real:

The BULLS, meanwhile, spew forth hopes and dreams of greenshoots and passed “stress tests.” Why heck, the “experts” at Oppenheimer are all over the television this morning touting that any rally greater than 20% is a bull market! Oh really? The largest uninterrupted rally in modern history sent the S&P 500 up 40 amazing percent off the devilish 666 low, true, but here’s a chart of the past two years in the SPX… does that look like a bull market to you? We haven’t even made a new high! After a 40% rally, LOL!

Yes, I’m pretty sure Satan can be found in there somewhere, most likely in the basement of the Golman Sachs headquarters!

But don’t think you’re going to be getting fat eating greenshoots any time soon. The data just doesn’t support that notion. The only thing that DOES support that notion is FALSE ACCOUNTING, and it is RAMPANT.

Just last night we learn that monoline insurer MBIA (remember them?), reported amazing “earnings” from “insured credit derivatives.” Here’s how Schwab is reporting MBI’s earnings:

MBIA (MBI $7) reported 1Q EPS of $3.34, including a $1.6 billion pretax unrealized gain and a $31.8 billion pretax realized gain, both on insured credit derivatives. This ended a string of five straight quarterly losses for the firm, ahead of the loss of $0.33 that had been expected by analysts polled by Reuters. MBIA, the country's largest bond insurer by outstanding guarantees, said it did not write any new policies during the quarter as a result of downgrades to the company's credit ratings by major ratings agencies in the last year. Management does not expect to write a significant amount of new business until the company's ratings are upgraded, although MBIA's president and CFO Chuck Caplin said the company's balance sheet is strong and the firm has "ample resources to meet all expected obligations" in spite of the tough environment and mortgage-related risks they now face.

Please, let me translate this for you;

“we have marked up our worthless derivative portfolio because if we die all the big financials die with us and thus we can get away with anything we want. The SEC and government not only now let us mark to fantasy, they encourage it, so we took full advantage! Heck, they even look the other way as we spin off companies in a shell game to hide bad assets. Again, while that used to be illegal, in today’s environment it’s encouraged! And thus we are "making" billions while we fleece current investors and hope that you will donate your fiat dollars to us too!”
Yep, that’s really all you need to know, and that translation sums up this entire financial branch of government led rally.

What, you weren’t taught about the Financial Branch of Government in your Civics class? It’s true, there’s the Executive, the Legislative, the Judicial, and then there’s the Financial which actually runs the entire shooting match! All the “politicians” and “judges” in those other branches simply work for the Financial branch!

But before you ride their little experiment with money into a bullish sunset, I suggest you review history and the current facts closely.

When you do, you will find that tax revenues are collapsing while government spending skyrockets. You will find exports and transportation that is collapsing. You will find that the equity markets, the commodity markets, the residential and commercial real estate markets are crashing. You will find a bond bubble that by all appearances has already been pricked and that could easily spell higher interest rates for a world saturated with debt.

Greenshoots? How’s this headline that just came out this morning:

Home Prices in U.S. Drop Most on Record in Quarter

May 12 (Bloomberg) -- Home prices in the U.S. dropped the most on record in the first quarter from a year earlier, led by California and Florida, as banks sold foreclosed properties.
But it’s all good. Just look at Advanta who just announced huge losses and is going to shut down credit to more than one million consumers. Mish just did a good article summarizing this situation: Credit Card Issuer Advanta Has Huge Losses, Halts Lending.

Oh, and it seems that the current darling of the American auto industry, Ford, is a couple BILLION short in their retirement fund. Nothing to concern a bull munching on greenshoots.

Neither are the insiders at GM who are selling shares like crazy, but that’s no problem according to their spin master/ Spokeswoman Julie Gibson who says “the sales don't show a lack of faith in the company."

And I believe her too, primarily because I’m sure she has a degree in marketing or communications, and that means she knows of what she speaks (or is told to speak by the six executives who just sold their stock).

And on the very same day that CNN publishes this story in the morning, The forgotten fiscal problem , we get this story in the afternoon: Recession hits Social Security hard.

The Associated Press sums that mess up thusly:
WASHINGTON - The financial health of Social Security and Medicare, the government's two biggest benefit programs, worsened in the past year because of the severe recession.

Trustees of the two programs said Tuesday that Social Security will start paying out more in benefits than it collects in taxes in 2016, one year sooner than projected last year, and the giant trust fund will be depleted by 2037, four years sooner.

The trustees said Medicare was in even worse shape. They said that the trust fund for hospital expenses will pay out more in benefits than it collects this year and will be insolvent by 2017, two years earlier than the date projected in last year's report.
Nice. It’s funny how that math thing just keeps coming back to hound you no matter how upbeat you “feel.”

So, as you can see, I think our economy is the picture of health despite the more than $300,000 of debt for every man woman and child in this country. And besides, I just read this by a guest contributor on Zerohedge’s site which explains how he believes the markets really work:

Now, the economy isn't like the weather: If the weatherman says it'll be sunny tomorrow, the weather don't grow cloudy to spite him. The weather don't care what the weatherman say. But in macroeconomics, if enough people say that things are going to suck canal water, well then, things will suck canal water—hell, they'll suck turpentine. Macroeconomics is the ultimate example of the Heisenberg Uncertainty Principle, only magnified: If some observers say it'll get better, it'll get a lot better. If enough observers say it's going to get worse, it'll get a LOT worse. A relatively small group of influential market participants—the MSM and some key people, not even necessarily powerful people—can literally create self-fulfilling prophecies.
Ah, that explains it for me! So, if enough people put their powerful positive thoughts together then the market will rally onward in a new bull market! Just like that, viola, all that debt, graft, and corruption goes away.

And why not. Alan Greenspan, bubble blower extraordinaire, says he sees improvement in our economy – as if he knows what real improvement looks like! Does anyone actually believe anything he says, or anything that any of the current crop of government CLOWNS have to say?

Yes, psychology is one aspect of the market. But the underlying fundamentals of math are real and cannot be wished away nor can they be made to go away with trick accounting. So go ahead, my wayward son, buy, buy, bye – it’s a new Bull market for sure (just don’t look at that big and ominous rising wedge pattern, you’ll “feel better” that way)!

Kansas - Carry On Wayward Son:

Carry on my wayward son
There'll be peace when you are done
Lay your weary head to rest
Don't you cry no more

Once I rose above the noise and confusion
Just to get a glimpse beyond this illusion
I was soaring ever higher
But I flew too high

Though my eyes could see I still was a blind man
Though my mind could think I still was a mad man
I hear the voices when I'm dreaming
I can hear them say

Masquerading as a man with a reason
My charade is the event of the season
And if I claim to be a wise man, well
It surely means that I don't know

On a stormy sea of moving emotion
Tossed about I'm like a ship on the ocean
I set a course for winds of fortune
But I hear the voices say

Carry on, you will always remember
Carry on, nothing equals the splendor
The center lights around your vanity
But surely heaven waits for you

Carry on my wayward son
There'll be peace when you are done
Lay your weary head to rest
Don't you cry (don't you cry no more)

Morning Update/ Market Thread 5/12

Good Morning,

The bearish trade reversed in the middle of the night – again – and sent the /ES into slightly positive territory after being down yesterday evening following Meridith’s fantastic knifing of the financials:

She’s right about what she’s saying, of course, but I have to say that my respect factor notched down a bit as PRIOR to the release of the “stress test” she did not call it what it was. My truth tellers are required to tell the truth all the time and to be consistent. The winner of that award, by the way, is Jim Shepherd (who you will not find on television).

The trade deficit widened slightly in March to $27.6 billion, but that figure is WAY below what we had been experiencing at the peak. And the reason it is down? Trade is collapsing, that’s why. And in March exports fell another 2.4% as demand fell for capital goods of all kinds. Some greenshoot, if you look REAL HARD you can see it at the bottom of this year over year chart of exports.

Then there’s Bernanke out talking up how positive the “stress test” results are. The only thing I saw positive there was how well the Treasury and Fed worked with the banks to massage every aspect! Of course I remember what most people in America do not – that is that our Fed and the banks are one in the same. And now they are more powerful than all the other branches of government – they own them all, the legislative, the executive, and the judicial. Bet you never were taught about the 4th branch of government, the financial! No checks and balances, and their money buys influence from the other three. That’s how our government really works!

And Citigroup shares “surged” after posting a trumped up, zombie, self-prescribed profit, just like the good old days! Yay, bonuses for everyone! Hey that scum worker was one day late on their credit card, jack their rate to 30% and cut off their unused line!

ICSC store sales increased .3% last week, as the Redbook same store sales did as well. This was the same increase for the ISCS as the week prior. Keep in mind that it was Mother’s day week.

Bonds rolled over last night again, but are climbing just prior to the open, the dollar is down, gold is up, and I now see the /ES is sitting right on the 912 pivot or just below it. It’s possible that it doubled topped there, but my comments and cautions about still being in that rising wedge apply. The bottom of the wedge is about 903 at the open and will be about 907 or 908 at the close, forcing prices up into that 912 pivot.

The stochastics are oversold on all timeframes up to 60 minutes, so I will not be at all surprised by a rally today that could start a little later this morning. Hey, if enough people “believe” then it will happen right? Right?

Jefferson Airplane – Miracles (if only you believe in miracles):

Monday, May 11, 2009

Meridith Whitney on the Banks...

A "constrained" truth teller, Meridith gets away with with talking more truth than most on CNBS... and still gets invited back that is (ht Frank).

Truth Tellers Seeing Brown Shoots…

Let’s start with Martin Weiss. He wrote an excellent piece this morning, very much along the lines that I’ve been discussing, but a nice summary - here it is:

Five Economic Storms Raging NOW!

Any economist fixated on so-called “signs of a recovery” needs to have his head examined.

As I’ll prove to you in a moment, the hard-nosed reality is that five major economic cyclones are in progress at this very moment.

The storms are not abating. Nor are they changing direction. Quite the contrary, what you see today is, at best, merely a deceptive calm before the next, even larger tempests.
For investors who follow Wall Street, it could be fatal.

For contrarian investors, however, this insanity opens up some of the greatest opportunities in many years: Precisely when we see plunging barometers all around us, we also have a new surge of hype on Wall Street, driving stock prices higher.

Result: The rally has lowered the cost of contrary investments precisely when their prospects are best. Consider the five storms, and you’ll see exactly what I mean…

Storm #1.
Plunging Jobs

On Friday, the Bureau of Labor Statistics announced that job losses were running at a slightly slower pace than in the first quarter. So Wall Street cheered.

But it’s a joke, and the 539,000 additional Americans out of work aren’t laughing.

Nor are the 23 million people — 15.8 percent of the work force — who are officially unemployed… are struggling with lower paying part-time jobs… or have given up looking for work entirely.

Look. In December 2007, there were 138.1 million jobs in America. Now, there are only 132.4 million.

So even if you accept the government’s tally of the narrowest unemployment measure, 5.7 million jobs have been lost.

Plot those figures on a chart and the picture is absolutely unambiguous: Jobs in America are collapsing. Right here and now!

Where’s that “slightly slower pace of collapse” they’re raving about? You’d need a microscope to see it.

Storm #2
U.S. Housing Starts Down 77.6 Percent!

Housing is the nation’s largest industry. With it, the entire global economy boomed in the mid-2000s. Without it, a recovery is next to impossible.

The big picture: Housing starts, the best measure of the industry’s health, peaked at an annual pace of 2.3 million units in early 2006.

Now, they’re running at barely more than a 0.5 million units.

That’s a decline of 77.6 percent — three-quarters of America’s largest single industry wiped out.

Yes, back in February, there was a tiny uptick: Starts rose from 488,000 to 572,000. And everywhere we heard voices cheering the “spectacular” jump in housing starts.

What they didn’t tell you is that the so-called “jump” was actually smaller than six of the seven minor upticks we’ve seen in housing starts since 2006. Nor did you hear them say much when this measure fell anew in March.

This industry is not recovering. It remains in a state of near total collapse.

The only major change: Lenders have given up waiting for a recovery that never comes. So they’re throwing in the towel, unloading huge inventories of foreclosed properties at fire-sale prices. And they’re calling that a “recovery”?

Storm #3
Auto Sales Down 44 Percent!

At their peak in February 2007, U.S. and foreign-owned companies sold automobiles in America at an annual pace of 16.6 million units.

Last month, their sales pace plunged to 9.3 million, a decline of 44 percent (including the best performers like Toyota and Honda).

Again, as with housing, we saw a tiny uptick in the prior month, hailed by high officials as a “sign” of improvement. Yet, as with housing, it was weaker than all prior “signs of a turn” over the past 26 months — each of which was followed by a sharper plunge.

Any lights at the end to Detroit’s dark tunnel? Only those of three speeding freight trains:

The Chrysler bankruptcy, despite all the talk of a “quick and easy” procedure, is not only frightening U.S. car buyers away from the Chrysler brand, it’s also scaring them from other U.S. and foreign makers. And it’s not only hurting auto dealers and parts suppliers, but also smacking auto lenders. Meanwhile…

GMAC, the nation’s largest auto lender, is already in its death throes, with the government now estimating it could suffer additional losses of a whopping $9.2 billion over the next two years. Will the Obama administration bail it out? Perhaps. But it would still have to downsize its operations, throwing another monkey wrench into General Motors’ sales. Meanwhile…

General Motors is now sinking even more rapidly toward bankruptcy than it was just a few months ago. According to last week’s New York Times column, G.M., Leaking Cash, Faces Bigger Chance of Bankruptcy …

“Even after receiving $15.4 billion in federal loans, General Motors is once again on the brink of financial collapse.

“The automaker’s first-quarter earnings released Thursday showed that G.M. was losing more money and sales than it was in late December, when the government began its bailout.

“With its cash reserves down to the bare minimum and its revenue plunging, G.M. seems more certain each day to be heading toward a bankruptcy filing…

“The company’s chief financial officer, Ray Young, called the drop… ‘a staggering number,’ and said consumers were showing increasing concern about G.M. products because of the potential for bankruptcy.”

General Motors’ CFO added: “Once you start losing revenues, you get yourself into a vicious cycle from which you cannot recover.”

Sound familiar? It should. It’s the same vicious cycle I’ve been warning about for many moons — falling revenues prompting mass layoffs, and mass layoffs driving down revenues.

Storm #4
Biggest Decline in Consumer
Credit Ever Recorded!

Any economist counting on the consumer to get things going again had better go back for some more Rorschach tests…

…because you don’t need a therapist to interpret the image depicted in my chart below. It shows very clearly how the nation’s lenders are dumping consumers and making a mad dash for the exits:

In the third quarter of 2007, banks dished out $44 billion in net new loans on credit cards, autos, and other consumer credit (excluding mortgages).

Then, just 12 months later, in the third quarter of 2008, that giant credit machine collapsed to a meager $8.7 billion, a decline of 80 percent!

But the collapse didn’t end there. In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion.

And they did it AGAIN in the first quarter of this year, pulling out another $12.2 billion.

It is the biggest collapse in consumer credit ever recorded.

Now do you see why I’m recommending a shrink for any economist fixated on a recovery?

They know how important credit is. They know that few Americans have the savings to splurge on consumer goods. And they’re tired of knowing that a recovery is virtually impossible without credit.

And yet here we are, with the biggest-ever collapse in consumer credit — and they’re still searching for the “signs”!

Storm #5
Big Banks!

Whether the government lets big banks fail or not, the impact on the economy is similar: A massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.

Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

The official stress test results released Thursday on 19 U.S. bank holding companies were supposed to help determine exactly how much capital they’ll need, and the total came to $75 billion.
That’s no small amount. But the stress tests will go down in history as the world’s most elaborate effort to paint lipstick on a pig.

To show you why, first, let me provide our analysis based on data from Ratings, the Comptroller of the Currency (OCC), and the banks’ first-quarter financial statements. Then I’ll show you why I believe the official results grossly underestimate how much capital the banks will need and how much pressure they’ll be under to slash lending.

We find that …

• Seven institutions — JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp — are at risk of failure and may have to cut back lending dramatically to stay alive.

• Eight institutions — Bank of America, Morgan Stanley, PNC Financial Services Group, US Bancorp, BB&T Corp., Regions Financial Corp., American Express Co., and Keycorp — are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.

• Only four institutions — MetLife, Bank of NY Mellon Corp., Capital One Financial Corp., and State Street Corp. — appear to have adequate capital to withstand worsening conditions. But even they may voluntarily cut back their lending in an attempt to maintain their current financial health.

Moreover, of the $11.6 trillion in assets held by the 19 institutions, those likely to cut back dramatically represent $6.56 trillion, or 56.5 percent, of the assets; while borderline institutions hold $4 trillion, or 34.7 percent.

Only $1 trillion — just 8.8 percent — of the assets are held by institutions with adequate capital, based on our analysis.

In contrast, the government is trying to persuade us that most have plenty of capital… the rest can easily raise it… and none will have to slash lending in a way that would sabotage the prospects for an economic recovery.

So what explains this vast discrepancy between the official conclusions and ours?

The simple answer: Three unmistakable deceptions in the government’s stress tests…

First deception: The assumptions.

To come up with estimates of future losses, the government assumed what they call “a more adverse” scenario. But their more adverse scenario is actually less adverse than the current reality!

Hard to believe? Then just look at their own numbers in the chart the Fed published recently:

- Their “more adverse” scenario is predicated on the presumption that the GDP will contract no more than 3.3 percent this year. But in actuality, the GDP is already contracting at an annual pace of 6.1 percent!

- Their “more adverse” scenario also assumes that unemployment will average 8.9 percent this year. But unemployment has already reached 8.9 percent in April, and no one — not even economists fixated on recovery signs — is anticipating anything but a further rise.
Either they’re delusional. Or they’re cheating at solitaire.

Second deception: No mention of systemic risk!

The banking regulators have published two major white papers on the stress tests — “Design and Implementation” plus “Overview of Results.” However, in these papers, they have failed to even mention the greatest risk of all: systemic risk.

This is the risk that…

- A few key players in highly leveraged instruments like derivatives could default on their trades.

- These defaults could set off a series of failures, with the most severe impacts felt by banks that hold the largest share of the derivatives in the country.

This is the giant risk that the Government Accountability Office (GAO) wrote about in its landmark 1994 study, “Financial Derivatives: Actions Needed to Protect the Financial System,” warning of “a chain reaction of market withdrawals, possible firm failures, and a systemic crisis.”

This is the giant risk that triggered the collapse of Bear Sterns, the failure of Lehman Brothers, and the $180 billion bailout of America’s largest insurer, AIG.

It’s the giant risk that AIG executives themselves wrote about in their recent memorandum, “AIG: Is The Risk Systemic?,” warning of a “cascading impact on a number of life insurers already weakened by credit losses” … and “a chain reaction of enormous proportion.”

It’s the giant risk that the International Monetary Fund is most concerned about when it warns of another $3 trillion in global losses due to the banking crisis.

It’s the giant risk that prompted former Treasury Secretary Henry Paulson to literally drop to his knees last September, begging Congress for $700 billion in bailout funds for the banking industry.

Since that day, the U.S. economy has suffered the worst back-to-back GDP declines in over 50 years, burning the nation’s fuse even closer to a blow-up.

And yet, suddenly, in a massive undertaking that was supposed to accurately evaluate the banks’ exposure to these dangers, it’s also the giant risk that has been scrupulously scrubbed from 59 pages of official white papers, a half dozen press releases, plus multiple public pronouncements — all about the stress tests, all without a single mention of systemic risk.

This omission is both deliberate and unforgivable.

It means the stress tests have failed to fairly evaluate the credit exposure of each bank to defaults by their trading partners. And it means the tests are creating a false sense of security for investors and the public that can only lead to greater mistrust, more loss of confidence, even panic.

The omission is especially misleading for large banks that dominate the derivatives market… would be at ground zero in any meltdown… and would therefore be among the first to suffer massive losses.

The prime example: The OCC reports that, at year-end 2008, JPMorgan Chase (JPM) held $87.4 trillion in notional value derivatives, including $8.4 trillion in credit default swaps.

Why is this such a big problem? For several reasons:

• Although it’s cut back a bit, JPM still has 43.6 percent of all the derivatives held by all U.S. commercial banks, or $17 trillion more than Bank of America and Citibank combined. Among the 19 bank holding companies in the stress tests, that puts JPM closer to ground zero than any other bank.

• It’s well known that credit default swaps are the highest-risk sector of the derivatives market. And yet, in this sector, JPM has 52.8 percent of the total held by all U.S. commercial banks, or nearly double the total held by BofA and Citi. This puts JPM even closer to ground zero.

• JPM execs insist they’re smart and know how to handle their risks very neatly. But if that were the case, why did they suffer a whopping $2.5 billion loss in their credit default swaps in the fourth quarter? (OCC, page 28, Table 7, line 1, last column.)

• The OCC also reports that, for each dollar of capital, JPM still has $3.82 in total credit exposure. Mind you, that’s JPM’s exposure to just one kind of risk (defaults by trading partners) in just one kind of instrument (derivatives). In addition, JPM is also assuming market risks in derivatives plus a series of risks in its other investing and lending operations. (OCC, page 13, table at bottom of page, line 1, last column.)

• Despite all this, in their “more adverse” scenario, the banking regulators estimate JPMorgan Chase’s total “counterparty and trading losses” will not exceed $16.7 billion, a fraction of the true potential losses in a financial crisis.
With the fatal omission of systemic risk from their analysis, the government concludes that JPMorgan Chase is in good shape and does not need any additional capital.

The same omission leads to a similar conclusion for Goldman Sachs, despite the fact that Goldman has over $10 in total credit exposure per dollar of capital, or nearly triple the credit risk of JPMorgan Chase.

The only realistic conclusion: Both these institutions will need huge amounts of capital, driving them to cut back massively on new lending.

Systemic risk is the elephant in the room. Everyone knows it’s there. Everyone understands the dangers. But they’re afraid of the answers. So they dare not ask the questions.

The fundamental answer, though, is clear: Systemic risk is what drove the financial markets into a deep freeze seven months ago; and it was that storm which helped drive the economy into a tailspin.

Today, systemic risk is not gone. If anything, it’s far worse.

Third Deception: Improper influence.

In its white paper, the Federal Reserve admits that the stress tests were based, to a large extent, on each bank’s self-evaluation — not only for loan loss estimates that can be derived from past data, but also for the future performance of trading accounts, which can be far more subjective.

Moreover, each institution was allowed to appeal the final results, and several banks strenuously negotiated for more favorable grades. They even got regulators to accept their projections of future revenues, treating those future revenues almost as if they were cash in the kitty.

In contrast, we never permit the companies we evaluate to influence our evaluation process or our results. To do so would defeat the entire purpose of the exercise. But much like conflicted Wall Street rating agencies, that’s essentially what the bank regulators have done — from start to finish.

Put simply, the stress tests were too easy; the banks took the exams home with cheat sheets; and if they didn’t like their final grade, they could get the examiners to give them a better one.

Yet despite all these fudge factors, the government still estimates these institutions could suffer $600 billion in additional losses over the next two years.

And this is being portrayed as another “sign” of recovery?!

My view: We will have a recovery someday. But only AFTER we honestly recognize the grave mistakes of the past and own up to the hard sacrifices still ahead.

Until that happens, I’m staying the course. And right now, that means keeping my money mostly in cash or equivalent, plus some allocation to gold and inverse ETFs for protection and profit in the next phase of this crisis.

And unfortunately, with economists virtually going nuts and government officials painting lipstick on pigs, that phase promises to be among the worst of all.

Good luck and God bless!


That’s quite a mouthful, and it is nothing but the truth. JPM is the center of the world’s derivatives, the lynchpin of financial obscuration. Pull that pin, and the system will implode. Frankly, it needs to happen to have any chance of returning to a sane and prosperous future. And it’s going to - it’s just a matter of when, not if.

And here is truth teller number 2, Karl Denninger describing how the Tsunami Is Curling Over:

The Economic Tsunami Is Curling Over

I have only one question for those who speak of "green shoots":

What are you smoking?

Let's start with a really ugly report from The Nelson A. Rockefeller Institute of Government:

The trend in state and local tax collections has been clearly downward from 2005 growth that was unusually high, and 2006 growth rates that were more in line with historical averages. Figure 1 shows the four-quarter moving average of year-over-year growth in state tax collections and local tax collections, after adjusting for inflation. Year-over-year change in state taxes, adjusted for inflation, has averaged negative 1.1 percent over the last four quarters, down from the 1.4 percent average growth of a year ago and 3.4 percent of two years ago.
There are a number of graphs in that paper, one of which shows that right around January (the latest for which they have complete data) there is an uptick in Goods consumption. This is part of where the Kudlow "green shoot" brigade is getting their information from.

However, if you look at the graph, you will see that every year there is a similar tick upward in consumption, although the exact date of it does vary by a month or two.


It's called Christmas!

State Sales Tax Revenues tell the story. California is absolutely cratering, for example:

Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%).

Fifty percent?! FIFTY?

California is responsible for thirteen percent of the total US GDP and if it were an independent nation it would be the tenth largest economy in the world.

The idea that we can have some sort of economic recovery while the sales tax receipts - which are a direct measurement of consumer activity - are down by half is pure insanity. Where is the economic activity that is going to create this "recovery"?

And let me remind everyone - sales tax receipts are not a lagging indicator, they tell you what is going on right now.

Now let's look at job losses in this recession compared to others. As written up in the NY Times:

A bottom? Where?...
...Karl goes on to discuss much more about the Tsunami that's rolling over. Simply follow the link in the title to read his entire article.

I’ve been talking about the collapse in tax revenue as well. In California it is SHOCKING. A true collapse.

And for ALL states the amount of tax receipts from CORPORATE taxes is down more than 20%, a greater decline than at any time since the Great Depression:

Okay, finally, let’s turn to a post on Barry Ritholtz’s blog, The Big Picture. There we will find truth teller number 3 (ht David):

Continuing Claims vs. Economically Lagging Unemployment

Bob Bronson took a closer look at what the Unemployment data was suugesting. His view: Continuing Claims are contradicting the widely accepted view that “Less Bad Emplyment data = end of recession.”

“Continuing Claims reported [Friday] suggest the economically-lagging unemployment rate will increase from 8.9% to 9.6% in a few months, and, of course, that will not be the peak in the unemployment rate, since the change in Continuing Claims is nowhere near zero.”

And, according to Floyd Norris, Continuing Claims are getting worse, not better (See Unemployment Grows More Painful).

Bob’s chart (below) shows that (not surprisingly) there exists a close relationship between any changes in Continuing Claims and the Unemployment rate. What many pundits seem to be unaware of is that (at least in the past 2 recessions) continuing claims plateau before new claims peak.

Hence, why Bob does not believe unemployment is anywhere near its peak, with all that this means for mortgage defaults and foreclosures.

How much worse? Bob suggests that you bullishly extrapolate the “less worse” downtick in the Continuing Claims just reported, assuming the trend continues in a straight line without interruption, which is extremely unlikely (see the dotted arrows in chart below). He reaches an Unemployment Rate of 13.0% before year end: 32 weeks times an average 0.15% increase (declining from 0.30% to 0.00%) added to 8.9% = 13.3%.

Bob’s final conclusion: “Unemployment data that leads indicates the stock market will make new lows.” Bob Bronson had a few good charts looking at unemployment/Continuing Claims versus the widely accepted view that “Less Bad = end of recession.”

So, if you made it to my blog, you are way ahead of most to begin with… but if you made it through all that then you are an exceptionally well informed individual who is obviously NOT long the “greenshoot rally” at this point! But hey, if you’re a believer in greenshoots, and buying into a rally after it has already run up 40%, you sir, are Blinded By The Light!

Manfred Mann - Blinded By The Light