Thursday, June 18, 2009

Morning Update/ Market Thread 6/19

Good Morning,

The futures are up overnight with the /ES in the 920 area:

A break over 926 or so would put prices above the little channel that’s formed over the past two days, but a break beneath 912 will put it below.

From a technical perspective, we did not receive the large movement that Wednesday’s small movement in the McClelland Oscillator called for, and thus I would expect a large movement for quadruple witching Friday.

The 30 and 60 minute stochastics are now overbought so the odds would favor seeing some more downside soon. When I count the waves from the June 11th peak, it looks like a clean 5 wave pattern, one of the first countable wave patterns in the past several months, wave 5 ended at 905. From that low, it appears that we have made a shallow wave 2 with a clean abc pattern that may be complete already – you can see that in the SPX chart below in the small upsloping channel

If that EW count is correct, then wave 3 down should start sometime soon – Friday sometime or Monday at the latest. You’ll know that’s happening if the 903 low is taken out. There are also several divergences that lead me to believe another move down is not too far around the corner.

Yesterday was nothing short of a bloodbath in bonds… with the market up less than 1%, the 10 year fund (TNX) rose 5.1%... Why? Could the fact that we learned that the Fed is going to auction off $165 BILLION in ONE WEEK next week have anything to do with it? Could be! Limitless supply, constricting demand, and the growth in governmental debt is just exponential at this point.

Lucky us, now the government is going to subsidize those who have been the biggest users of natural resources by offering up to $4,500 for vehicles that get less than 18 m.p.g., but nothing for those who were responsible enough to keep the size of their vehicles down. Naturally, this spending of money we don’t have was attached to a war spending bill, LOL! It doesn’t get any funnier than that or any less of a free market.

$1 billion 'cash for clunkers' passed

Here’s a short piece on the airlines. Combined they lost $9 billion, TWICE what analysts expected. Just another example of analysts overestimating earnings in this environment:

Have a great weekend,


Administrative note: I will be out of town from Friday morning until Sunday afternoon… Again, I appreciate everyone’s comments and keeping everyone up to date on the current events. Investing and dealing with the economy is a team sport… only without the steroids or big money television endorsements!

Charles Biderman - "Short the Market"

Here's Charles Biderman, CEO of Trim Tabs with his bearish case for the market:

Rockefeller Institute – State Revenue Report...

States that have income taxes are experiencing a CRASH in tax revenue which fell 26% in the January through April timeframe this year! The effects of this crash in revenue will be far reaching and is already having a dramatic effect on education, infrastructure projects and maintenance, taxes, retirement plans, bonds, etc.

The effects will be tremendous over time and will not turn around quickly in my judgment, again it’s because of the debt that saturates the people, the corporations, and every layer of government. But here’s what most people fail to understand… corporations and governments are not people, they derive their incomes from the labor of real people who must work for their money. Thus, the same 306 million people in the U.S. are ultimately responsible to pay back all the debt at all levels – and the math does not work! Personal debt is too high! Government is too big! There are too many corporations taking too much money, especially in the financial world! Thus, we are going to experience pain like never before in this country, it’s no longer coming, it’s here!

Nice of the Rockefeller Institute to put together this report. The drop in revenue here is commensurate with the drop in national income tax and the cliff diving in corporate income tax which is far worse in percentage terms.

Look for taxes to zoom, but just remember that those taxes come from the same 306 million Americans who are already in debt (article ht, Comrade wb): 6 States Hitting Residents With Big Tax Hikes

Morning Update/ Market Thread 6/18

Good Morning,

Futures are up slightly with the /ES near the 910 level:

Bonds are lower and the dollar is about even.

In a Jimmy Carter moment, our fearless Secretary of State, Mrs. Clinton fell on her way to the White House and broke her right elbow. I’m sorry, but that does strike me as humorous and, yes, I know there are far more important distractions going on in the world, like Iran or Looney Tunes North Korea…

And in Economic news, Jobless Claims remained stubbornly above 600k, coming in at 608,000, up from 601,000 last week (which was revised upward to 605k). Interestingly continuing claims fell for the first time in a very long time… Still, at 6.687 million, it’s in an area that simply cannot be called good (although the greenshoot crowd will try). My take? I think this crisis has been going on for so long now than some of the people who lost work over a year ago are now falling off the roles. Jobs are not being created to hire them off the roles.

Econoday’s spin is so tainted that I simply cannot even show it to you in good consciousness, but here’s their chart:

Leading indicators and the Philly Fed Survey come out at 10 Eastern. Tomorrow is Quadruple witching and there are no meaningful reports tomorrow, but there are several bond auctions.

The S&P reached the 200dma yesterday and failed to close underneath. The 50dma is just beneath 900 and rising. The DOW is in between the 50 and 200, while the Transports pinned the 50dma yesterday and closed just above it. So this is an area of support and with the short term stochastics oversold would not be surprised by a meaningful retrace of the selling at some point soon. That said, if we slip beneath those moving averages, the outlook will get more bearish in a hurry. The XLF, by the way, pinned the 50dma and the lower Bollinger Band before closing just above it.

Yesterday’s down, up, down, action produced a small change in the McClelland Oscillator. Thus we can expect a large price movement most likely today or tomorrow, direction unknown from that indicator. Again, the short term oscillators favor upside here, but I am definitely bearish with the economic data that’s been coming out.

I think a lot of people are expecting the lows to not be tested and that we’ll just have a shallow pullback and then go roaring higher again. I’m not so sure of that, although I am cognizant of the fact that summer time does not favor the crash like scenario.

Long term bonds did find support by bouncing off that long term TLT uptrend line as I suggested was likely. I keep reading where a lot of people believe that bonds are going to go all the way back to where they were or even lower in terms of interest rates. I DON’T THINK SO. The long bonds experienced a parabolic blow off top and collapsed… bubbles do not reflate once revulsion has occurred. The reason is that blow off tops need outsiders to create the bubble… once the bubble pops the outsiders are the ones who get burned and they do not come back. Thus Bernanke has a problem. When, not if, equities tank again, you will not (I believe) see interest rates get all the way back down to where they were. That’s why I believe that instead of seeing equities go down hard with money flowing into bonds, the next round may see equities go down, bonds stay in a range, and money flee the United States sending the dollar lower or keeping it in a range instead of stengthening as much as the last bout of deleveraging. We’ll see, but that would be my guess, it won’t be pretty regardless.

Here’s a 1 year chart of TLT which has opened lower again today:

The Rolling Stones – Gimme Shelter:

Wednesday, June 17, 2009

Martin Armstrong – Is Fortuna Going to Change Course for Obama?

Subtitled, “Will a new third party arise in 2012?” Martin sets off to explain why he believes that CHANGE is coming. As he says, “The question is not whether change will come but how and when.”

Wikipedia on Fortuna: Roman Mythology - Fortuna...

To PRINT, click “more,” then “print.” You can also click "more" then "save document" to open in YOUR .pdf viewer where you can either save or print.

*Note: This is a very large file and printing from "print" may result in an enlarged image. Try to save the document first, then open the .pdf and print from that.

Obama Unveils Regulatory Revamp…

The Central Bankers/ Planners have been busy.

Busy robbing America blind and now consolidating power even further in their hands, if that’s even possible.

And Obama is a terrific puppet and mouthpiece for them. Listen for all 19 minutes, you will be awed at the ease that he spins the Fed power grab into a positive that is going to save the people in America. He even badmouths his own puppet masters to win the people over. Just remember that ACTIONS are what matter, not words!

What you’ll hear is first and foremost consolidation of power, then you will hear talk about regulating hedge funds and ensuring that the issuers of debt have a stake in that debt. These regulations will have a TIGHTENING effect on credit. Remember, debt went parabolic… these actions will further hasten the collapse. In order for the economy to grow, each subsequent year of credit/ debt must be larger than the last. With new regulations getting in the way of the securitization of debt process, there is simply no way that is going to happen. Were it not for the consolidation of power into the fed’s hands, I would support some of these initiatives. The Fed needs to be dismantled, not given more power. Enjoy the 19 minutes of Central Banker spin:

Yes, Mr. President, we do have laws on the books to handle the failure of companies like AIG. They are called bankruptcy laws. Those same laws apply to banks and to auto manufactures.

And if you’re a real glutton for punishment, here is the “near final draft” of his proposals. Remember that everything he is proposing must first be made into law. Thus he needs the help of people like the dishonorable Barney Frank and others to get it done.

No, the Great American Heist is not yet complete, but they are certainly getting ready for the next round:

Martin Armstrong – Letter to Senate Judiciary Committee Re. Judge Sotomayer…

Below are two letters written by Armstrong on his own behalf, one sent to Patrick Leahy regarding the appointment of Sotomayer (and his case), and the other to the U.S. Court of Appeals. Preceding those letters is a hand written note asking for others to write in asking for an investigation. I think that is most appropriate given his circumstances and ask all who follow his writings and appreciate his work to please do so, the addresses are provided.

It is my understanding that Armstrong has received virtually NO RESPONSE to the arguments he made to the SEC and Appeals court. I have asked for their responses and am being told that there has been no response to his arguments, although I’m still trying to get all legal documents associated with his case.

He has written another article that should be out by tomorrow. Evidently it deals with what he views as what will be the end of the Obama Presidency and the possible rise of a new third party. Should be interesting as all his thoughts are…

St. Louis Fed – Latest Monetary Trends…

Someday this report will be, or should be, included in the history books. Two charts in particular are very pertinent to the here and now… The first being the Velocity chart:

This is exactly why the stimulus and money creation has no effect. Money that is created is needed and used to service or pay down the massive debts. MZM is the broadest measurement of money supply and a velocity of 1.5 is DEAD. This is exactly what you would expect to see in deflation and the current number coupled with the PPI and CPI data are beginning to look like we’ve entered a deflationary spiral.

The next chart of immediate importance is the chart showing the Price to Earning’s ratio of the S&P 500. The ratio is spiking because earnings are collapsing – COLLAPSING, as in HISTORIC. Market bottoms do NOT occur at P/E’s in the 50’s! They occur at P/E’s less than 10.

Below is the entire release. The charts regarding required reserves and reserves are pure FANTASY. The banks have no, as in ZERO, real reserves. What they have is borrowed money lent to them against worthless collateral. The rest of the report shows economic history being made:

Bonus chart:

Frontline – Breaking the Bank…

Haven’t seen this yet, but will watch it sometime today. Maize says it’s worth your time and I trust him!

(55 minutes)

Morning Update/ Market Thread 6/17

Good Morning,

Futures are down a little this morning, bonds are up and the dollar is down. Here’s the DOW and S&P overnight action:

The big economic data this morning is the CPI reading. It came in very similarly to the PPI numbers yesterday, below the inflation reading expected, slightly higher month over month, but lower still year over year which is the reading that matters. EconoPRAY flat out said this reading was good for the Fed and good for bonds. Whoever is writing those reports is insane, so here’s what CNN said about it, hello, the most deflationary reading in 59 years:
Consumer price index: Largest drop in 59 years

Key measure of inflation fell 1.3% over past 12 months, the sharpest drop since April 1950.

NEW YORK ( -- A key index of prices paid by consumers showed the largest year-over-year decline since April 1950, primarily due to sinking energy prices, the government said Wednesday.

The Consumer Price Index, the Labor Department's key measure of inflation, has fallen 1.3% over the past year. That's the largest decline in nearly 60 years, and is due mainly to a 27.3% decline in the energy index.

On a monthly basis, CPI rose 0.1% in May, after remaining flat the previous month. Economists surveyed by expected a 0.3% increase.

The even more closely watched core CPI, which excludes volatile food and energy prices, increased 1.8% on an annual basis.

Core CPI rose 0.1% in May compared with April, matching forecasts.

Index-by-index: The indexes for shelter, new and used motor vehicles, and medical care posted increases in May. Energy -- which had declined the previous two months -- also rose, climbing 0.2%.

Many other indices slipped. The food index decreased for the fourth consecutive month with a decline of 0.2%.The tobacco and smoking products index fell 0.3% in May after rising sharply in the two months prior. The increase in March and April was due to an increase in the federal tax.

The indexes of public transportation and apparel also fell.

Here’s a chart from Econoday:

Again, this is getting very close to a deflationary spiral. Despite the Fed’s QE and all the other “stimulus” prices continue to fall in a historic collapse. That’s exactly what happens on the backside of parabolic curves.

And for those greenshoot tokers who didn’t pay attention to the bond market, here’s the result:
MBA's purchase applications fell back a disappointing 3.5 percent in the June 12 week to 261.2. The refinance index fell back very sharply, down 23 percent to 2,605.7. Both reflect the dampening effect of rising interest rates along with still limited credit availability. Mortgage rates dipped back in the latest week but still remain much higher than a month ago, about 75 basis points higher for 30-year loans which averaged 5.50 percent in the latest week. Yesterday's strong gains in housing starts were a big plus, but sagging mortgage applications and indications of limited buying interest in Monday's housing market index point to disappointing home sales data at month end.

Refinance index down 23% in one month!

And we also got the Current Account Deficit for the first quarter. It came in lower than expected which is good from the longer term perspective of not over-consuming, but it is another clear indication that exports and imports are falling in an overall general depressed environment. Again from Econoday:
The nation's current account gap narrowed dramatically in the first quarter, to $101.5 billion vs. a revised $154.9 billion in the fourth quarter ($132.8 billion gap first reported). But the improvement reflects the drop in domestic demand for foreign products as the balance on goods improved by more than $50 billion to -$124.0 billion. The gap in the current account represented only 2.9 percent of GDP, the lowest rate in 10 years and what is a silver lining of sorts for the recession. But an easing outflow of dollars is a definitely plus for the dollar which rose in immediate reaction to the data.

This is still money that must ultimately be financed. Foreign governments and investors see how riddled with debt we are and now want higher interest rates for that debt.

I think the past two day’s worth of economic data is a great lesson in how all these data points are connected and how they all are influenced by the massive overhang that is our debt. So many people didn’t understand even before the market melted down in late ’07 and in ’08, and they STILL don’t understand which is simply amazing to me. I guess that’s all part of the Economic Mass Psychosis and why nothing ever moves in a straight line.

Despite what I see here as nothing but bad news, stocks are very oversold in the short timeframes and could bounce at any point in time. We’re also, however, getting to that point where we could keep descending in oversold conditions, too. So the ultimate destination for equities is lower but it may not get a lot lower today so be careful.

Have a good day,


David Bowie – Ashes to Ashes:

Tuesday, June 16, 2009

High End Homes to Lose 60% of Value…

According to analysts from JPM, homes in the upper crust will lose more value than those in the lower strata. This is exactly what I’ve been forecasting based upon the fact that the Baby Boom generation is moving beyond their peak earning/ spending years and are now becoming empty nesters like me.

The Boomers ran up the price of luxury homes and built FAR TOO MANY of them. The size of the population behind them is not near as large and thus will produce a huge hangover of big, expensive houses that most people are ill equipped to pay for much less maintain and heat or cool.

While 60% sounds reasonable to me, 2012 may be too quick. The demographic trend does not bottom until 2016 and the next wave up, the Echo Boomers, will not come on strong until they reach their peak earning/ spending years (age 48.5) in the year 2022 (Damning Demographics…). My best case scenario for housing is a bottom around 2012 with flat to very slow price increases until the mid to late 20teens…

The Bloomberg article below did not contain the Chart of the Day mentioned so here it is... I believe there is a glut of "shadow inventory" waiting to come on the market still. Many people would like to sell but have been waiting in false hopes for the market to turn, thus inventory conditions are probably worse than this chart depicts:

Millionaire Homes’ May Lose Value Until 2012: Chart of the Day

By Jody Shenn

June 16 (Bloomberg) -- Prices for the most expensive U.S. homes may not reach bottom for another few years, according to JPMorgan Chase & Co. analysts.

The CHART OF THE DAY shows the supply of unsold homes by price in California, data that the mortgage-bond analysts including John Sim and Matthew Jozoff used in a June 12 report to illustrate the weakening market for the most-expensive residential properties. The supply of homes priced $750,000 to $1 million held steady while the supply of more expensive properties increased.

“Tighter lending standards and the lack of cheap financing for these borrowers continue to be key issues,” the New York- based analysts wrote, referring to “jumbo” mortgages. That’s after so-called interest-only and option adjustable-rate loans were a “major driver” of soaring values, they said.

The government’s moves to aid the housing market include the Federal Reserve’s mortgage-bond purchases to drive down interest rates; President Barack Obama’s “Home Affordable” loan modification and refinancing programs; and new tax credits for some first-time buyers. None of the U.S. initiatives “directly focused on helping the sales of these so-called millionaire homes,” the analysts wrote.

“Currently, we have national home prices bottoming in 2011,” they said. “However, prices for more expensive homes may not bottom out until 2012, and ultimately result in peak-to- trough declines in excess of 60 percent (compared to 40 percent nationally).”

“California is probably worse than other states, but higher-priced homes in general are going to be a problem,” Sim said in a telephone interview today. The state’s median sales price for existing single-family homes fell 37 percent in April from a year earlier, to $256,700, according to California’s Association of Realtors.

Nationwide, the price fell 15 percent to $169,800, according to the National Association of Realtors.

Yes, Commercial Real Estate will follow the entire way...

The Mamas & The Pappas - California Dreaming:

Morning Update/ Market Thread 6/16

Good Morning,

Futures are up a little which is to be expected after yesterday’s 90% down day. Right now the /ES is right around the 922 area, just beneath what was support yesterday and just 10 points above the 912 pivot area:

If you can stand listening to little Timmy Geithner, here he is attempting to explain how our economy is “too unstable, fragile” and thus we need more “reform.” Of course you may not understand anything about anything after listening to him which is obviously his point. What you will learn is that on Wednesday Obama is going to announce a new “Financial Products Safety Commision,” LMAO, that is going to “protect” consumers.

Now that was painful! Talk about an incompetent bureaucrat… But I did love the part about how they were going to make a chart with all the government agencies on it, but there are too many and thus they couldn’t! THAT is exactly the problem. Well that and the fact that the central bankers are using the crisis to launder your money into their pockets as well as to grab power via this supposed “regulatory reform.”

In economic news, the ICSC store sales for last week were weaker than the previous week, falling .6%. Year over year sales were down 1.5%. The Redbook same store sales fell 4.8% in the week, yoy, which follows another very weak reading the week prior (-4.4% yoy). Here’s what Econoday says about it:

For a second week, Redbook is reporting extreme weakness in chain-store sales, weakness that is not explained by year-ago comparison problems with 2008 tax rebates. Redbook reports a giant 4.8 percent year-on-year decline for same-store sales in the June 13 week compared to the year-ago week. Month-to-date, Redbook reports an unrealistic 4.5 percent decline compared to May -- that would signal one of the great retail sales collapses ever. Year-on-year stimulus comparisons also hurt this past May, not just this month: the month-to-month comparison effect of stimulus checks for this May and this June is limited. One factor that may explain the plunge is the removal of Wal-Mart from Redbook's sample, a necessity given Wal-Mart's data blackout. Redbook's text, like last week, is mild, citing a shift in Father's Day for the week's weakness -- another factor that will not affect the May-to-June comparison. In any case, the bottom line, supported by other weekly retail sales reports to a more limited extent, is that June is shaping up to be a big disappointment.

Nice attempt to explain it away, remember that they tried to do the same last week blaming it on Wal-Mart. “One of the greatest retail collapses ever” is exactly correct.

The very important PPI data came out this morning showing less inflation than expected, up .2% in May (month over month) which follows a .3% gain in April. The consensus was for a .7% jump – wrong. However, the big news here is that the year over year data shows an acceleration of DECLINING PRICES which fell 4.7% yoy following a -3.5% reading in April. This means that the RATE of DEFLATION is accelerating, exactly the opposite of what the “consensus of economists” were expecting.

This data along with the bond market collapse leads me to believe that we are getting dangerously close to critical mass for equities and a possible deflationary spiral. Note that Econoday can’t even believe the sales data it’s so bad, yet the PPI confirms that the reinflation people were expecting is not happening anywhere besides equities and a few commodities. But when you look year over year at commodities, they are still way down.

And how about Industral Production? OMG!! Talk about more confirmation of collapse, here’s Econoday:

Manufacturing fell significantly further in May with declines widespread. Industrial production in May dropped 1.1 percent, following a 0.7 percent fall in April. The May decrease was close to the consensus forecast for a 1.0 percent plunge. The manufacturing component dropped 1.0 percent after declining 0.6 percent the prior month. For the other major nonmanufacturing components, utilities in May fell 1.4 percent while mining output decreased 2.1 percent.

Overall, the largest source of weakness was motor vehicles & parts which plunged 7.9 percent after slipping 1.2 percent in April. Excluding motor vehicles, industrial production decreased 0.9 percent after a 0.7 percent fall in April. Manufacturing ex autos fell 0.6 percent in May, matching the prior month's decrease.

Overall capacity utilization in May fell further into new record territory, dropping to 68.3 percent from 69.0 percent in April. The May rate was marginally lower than the market forecast for 68.4 percent and once more set an historical low for this series which goes back to 1967.

On a year-on-year basis, industrial production in May worsened to down 13.4 percent from down 12.7 percent the prior month.

Overall, the industrial production numbers were in line with expectations and should not offset the positive news in housing starts and producer prices. The industrial production report should be a neutral for the markets, leaving intact likely positive effects on equities from the earlier reports. But for broader perspective, manufacturing outside of autos maintained a moderate decline, still basically a neutral outcome relative to expectations. Manufacturing is still in contraction but not at a worsening pace.

What greenshoots are these guys smoking? Not down at a worse pace? Look at the data, it's DOWN 13.4% yoy?!! And that’s ACCELERATING from down 12.7%! Are you kidding me? Industrial Utilization is just plain old in the gutter.

Recession over? Not hardly, more like accelerating deeper into depression.

But oddly, when I read my summary from my broker or look at CNN, the first thing I see is that there’s good news for the economy! You see housing starts SURGED 17.2% after falling 12.9% the month prior! But, shhhhh, wouldn’t want to point out the year over year figure for May which was down ONLY 45.2%!!! The numbers are crazy large, but just remember that big percentage comebacks (in springtime) are not as meaningful following 50%+ yoy losses… Also, it’s important to keep in mind that adding new houses into a depression is just plain STUPID. The very last thing the housing industry needs now is more inventory.

Here’s Econoday’s positive greenshoot spin:

Housing starts in May showed surprising strength-even in the single-family component. Starts rebounded 17.2 percent, following sharp 12.9 percent drop the month before. The May pace of 0.532 million units annualized was down 45.2 percent year-on-year and was above the market projection for 0.500 million units. The rebound in May was led by the multifamily component which posted a 61.7 percent comeback after falling 49.4 percent in April. But the single-family component gained 7.5 percent, following a 3.3 percent rise the month before.

By region, the rebound in starts was led by a monthly 28.6 percent surge in the West. Other regions also saw gains with the South up 16.8 percent, the Midwest rising 11.1 percent, and the Midwest gaining 2.0 percent.

Permits also made a comeback, gaining 4.0 percent in May after slipping 2.5 percent the month before. The May permit pace of 0.518 million units annualized was down 47.0 percent on a year-ago basis.

Markets had expected some rebound in the multifamily component in starts but the increase was notably more than expected. But the really good news was the sizeable rise in the single-family component. This is good news for the green shoots advocates and should provide lift to equities. But before equity markets open in the U.S., we have to get past the industrial production release at 9:15 a.m. ET.

Market Consensus Before Announcement
Housing starts in April fell another 12.8 percent to a pace of 0.458 million units annualized-a new record low for a series going back to 1959. The April pace of 0.458 million units annualized was down 54.2 percent year-on-year. April's decrease was led by the multifamily component which plunged 46.1 percent while single-family starts edged up 2.8 percent. Looking ahead, we may see a rebound in multifamily starts pulling up the headline number. But single-family starts are still constrained by heavy supply of unsold homes-which stood at 10.1 months in April for newly constructed homes.

LMAO, “This is good news for the green shoots advocates and should provide lift to equities.” Jeez, it’s no wonder we are where we are which is most certainly NOT coming out of recession. Do you see the “green shoot” in question on that chart? Would building more houses in this environment be good or bad?

What a bunch of bafoons… our economy is in very serious doodoo. The math of debt simply does not work. Sure, if we had a reasonable amount of debt overhead we would recover from a slow down just fine. But that’s NOT the reality. The debt could have been cleared by allowing market forces to force the weak hands into default EARLY. No, that was not allowed to happen. Thus the DEPRESSION we are IN was CAUSED by the very actions of those who say they are here to help.

Those looking for immediate inflation still don’t realize that inflation is what happened over the past 30 years of falling interest rates. Debt went parabolic during that time period and fueled the greatest credit bubble in the history of mankind. That bubble is now collapsing, just read the last two or three articles I posted yesterday, especially regarding the FLOW OF FUNDS. Equities are in BIG, BIG trouble here. Yes, we may get reinflation IF our currency and governmental system survive the deflation first, but that will come LATER, AFTER the malinvestement has been swept away.

Eagles – Already Gone:

Monday, June 15, 2009

Yves Lamoureux - Bond Market Analysis Comparing Now to 1987…

Correction: Earlier I failed to give credit to Yves Lamoureux of Blackmont Capital who provided the bond research to Jack Crooks...

It is Yves who just produced the following short analysis comparing the bond market today to the bond market just before the 1987 stock market crash.

Click here for an interesting audio interview with Yves Lamoureux on bonds and markets… Yves' charts above are also very interesting and help you visualize what he's saying.

I also note that during this timeframe prior to October 1987, the dollar was declining just as it has been now. Will we reach the “critical mass” necessary to reach an all out equity crash like the one in 1987? Well, we have certainly crashed all ready, but the markets are right now WAY overvalued by historic standards, and as I’ve been saying all along, a crashing bond market will absolutely pressure equities in an environment of debt saturation.

Anyway, it’s a very interesting comparison and adds to the evidence I have compiled regarding the bond market in the past few months:

Bond Market Hide & Seek – A Domed House & 3 Peaks...

Interest Rate Update…

Interest Rates and Equities Diverging…

A Tale of Two Depressions…

Sales – Still More Economic Cliff Diving…

Historic Bond Market CRASH Underway…

Liars! Follow the Money…

What THEY DO is way more important than what THEY SAY!

And let’s face it; we are being so loaded up with pure bull lately that you can almost count on the fact that THEY ARE DOING THE EXACT OPPOSITE OF WHAT THEY SAY.

How do I know? The underlying math and the flow of money does not lie – only people lie. There is a preponderance of evidence that the ratio of lies coming from the current crop of politicians and central bankers is at an extreme high.

This weekend we got lip service from both the Japanese and the Russians regarding their “faith” in America’s debt and her Dollar. Yet the long end of the bond market has collapsed since the beginning of the year which means that somebody’s selling… or at least no longer buying. (See article: Japanese and Russians Playing Games with Bonds & Reserve Currencies…)

This morning’s Treasury International Capital data (TIC flows) for April shows that foreigners, including Japan and Russia have been net sellers of our debts, exactly the opposite of what they just professed!

International Demand for U.S. Assets Slowed in April

By Vincent Del Giudice

June 15 (Bloomberg) -- International demand for U.S. financial assets grew more slowly in April as China, Japan and Russia trimmed holdings of Treasuries, a shift that may reinforce concern demand for American debt will wane amid record deficits.

Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. International holdings of Treasuries increased a net $41.9 billion, compared with the $55.3 billion gain in March. Including bills, the holdings fell a net $2.6 billion.

Chinese, Brazilian and Russian officials have expressed an interest in developing an alternative to the dollar as the world’s main reserve currency. Treasuries have tumbled since March in part because of worries about ballooning federal deficits, according to Federal Reserve Chairman Ben S. Bernanke.

“China and Russia both indicated a desire to diversify out of dollar denominated instruments, and April seems to have emphasized their current position,” Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp. in New York, said. “That came as a surprise.”

Net Sales

Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month.

Analysts had anticipated international net purchases of long-term U.S. assets of $60 billion, according to the median of nine estimates in a Bloomberg News survey.

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.

Foreign investments in U.S. agency debt slumped for the eighth time in 10 months, by $2.5 billion in April. Net purchases of American equities slowed to $4.6 billion in April from $13.2 billion the prior month. Holdings of corporate bonds tumbled a net $9.7 billion, the biggest decline since November.

China, the biggest foreign holder of U.S. Treasuries, trimmed its holdings of federal notes and bonds by $4.4 billion to $763.5 billion. Russia’s holdings slipped by $1.4 billion to $137 billion and Brazil’s by $600 million to $126 billion. Japan, the second-biggest international investor, saw its total drop by $800 million to $685.9 billion.

For those so inclined, here is a look at April’s TIC report: Treasury International Capital (TIC) Data for April

Previous months can be found here: (TIC) Data Monthly Releases. What you’ll find is that TIC flows have been steadily declining over the past year and a half. Many months have been outright negative, yet we have been running $30 billion plus trade deficits each month. That means that we are failing to finance our consumption, it’s that simple.

So what do we do? Cut back on our spending like rational beings? NO, our Keynesian politicians and central bankers will do ANYTHING to keep never ending growth growing including printing money from thin air and buying our debts with it, as well as flat out lying. Of course never ending growth is a mathematical FANTASY, and we are not growing despite the inflationista fear. No, our debt based economy grew in parabolic fashion and now the debt is collapsing. Not a believer? Let’s take a look at the first quarter Flow of Funds as Martin Weiss just did so that we are looking at the money and what they are actually DOING, not just listening to what they are SAYING:

I am taking the liberty to post the Federal Reserve’s Flow of Funds Report highlighted by Martin Weiss so that you may follow along with his article if you desire:

For some reason some of the highlighted numbers may not be viewable in Scribd. This link will provide a clean copy: Flow of Funds Accounts of the United States.

New, Hard Evidence of Continuing Debt Collapse!

by Martin D. Weiss, Ph.D. 06-15-09

While most pundits are still grasping at anecdotal “green shoots” to celebrate the beginning of a “recovery,” the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions.

It’s all in the Fed’s Flow of Funds Report for the first quarter of 2009, which I’ve posted on our website with the key numbers in a red box for all those who would like to see the evidence.

Here are the highlights:

Credit disaster (page 11). First and foremost, the Fed’s numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

This directly contradicts Washington’s thesis that the government’s TARP program and the Fed’s massive rescue efforts began to have an impact early in the year.

In reality, the credit market shutdown actually gained tremendous momentum in the first quarter. And although it’s natural to expect some temporary stabilization from the government’s massive interventions, the first quarter was SO bad, it’s impossible for me to imagine any scenario in which the crisis could be declared “over.”

Here are the facts:
- We witnessed one of the biggest collapses of all time in “open market paper” — mostly short-term credit provided to finance mortgages, auto loans, and other businesses. Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion. (See line 2.)

- Banks lending went into the toilet. Even in the fourth quarter, when the meltdown struck, banks were still growing their loan portfolios at an annual pace of $839.7 billion. But in the first quarter, they did far more than just cut back on new lending. They actually took in loan repayments (or called in existing loans) at a much faster pace than they extended new ones! They literally pulled out of the credit markets at the astonishing pace of $856.4 billion per year, their biggest cutback of all time (line 7).

- Meanwhile, nonbank lenders (line 8) pulled out at the annual rate of $468 billion, also the worst on record.

- Mortgage lenders (line 9) pulled out for a third straight month. (Their worst on record was in the prior quarter.)

- And consumers (line 10) were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.

- The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1,442.8 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.
Bottom line: The first quarter brought the greatest credit collapse of all time.

Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year!

And even if you include all the government borrowing, the overall debt pyramid in America shrunk at an annual rate of $255.3 billion (line 1)!

Asset-backed securities (ABS) got hit even harder (page 34). This is the sector where you can find most of the new-fangled “structured” securities — the ones Washington had already identified as a major culprit in the credit disaster.

Did they make any headway in stopping the ABS collapse? None whatsoever! The total outstanding in this sector (line 3) fell at an annual pace of $623.4 billion in the first quarter, the WORST ON RECORD!

U.S. security brokers and dealers were smashed (page 36). Brokers were forced to reduce their total investments at the breakneck annual pace of $1,159.2 billion in the first quarter, after an even hastier retreat in the prior quarter (line 3)!

What’s even more revealing is that they were so pressed for cash, they had to dump their Treasury security holdings in massive amounts — at an annual pace of $424 billion (line 7)! Given the Treasury’s desperate need for financing from any source, that’s not a good sign!

Government agencies got killed (page 43). Households dumped their Ginnie Maes, Fannie Maes, Freddie Macs, and other government-agency or GSE securities like never before in history, unloading them at the go-to-hell annual clip of $1,395.7 billion (line 6).

And the rest of the world (mostly foreign investors), which had started unloading these securities in the third quarter of last year, continued to do so at a fevered pace (line 10).

Mortgages got chopped again (page 48). Home mortgages outstanding were slashed at an annual clip of $87.3 billion in the second quarter of last year, $324.2 billion in the third quarter, $271 billion in the fourth, and another $61 billion in the first quarter of this year (line 2).

A slowdown in the collapse? For now, perhaps. But the first quarter also brought the very first reduction in commercial mortgages, an early sign of bigger commercial real estate troubles ahead (line 4).

Trade credit is dying (page 51, second table). If you’re in business and you don’t have cash on hand to buy inventories, supplies, or other materials, beware! Large and small corporations all over the country have been slashing trade credit at an accelerating pace (line 3).

In the first quarter of last year, this aspect of the credit crisis was still in its early stages; trade credit outstanding was shrinking at an annual pace of just $15 billion. But by the second quarter, this new disaster burst onto the scene at gale force, with trade credit getting docked at the rate of $151.2 billion per year. And most recently, in the first quarter of 2009, it was slashed at the shocking pace of $277.2 billion per year.

And I repeat:
With ALL of these figures, we’re not talking about a decline in new credit being provided, which would be bad enough. We’re talking about a collapse that’s so deep and pervasive, it actually wipes out 100 percent of the new credit and brings about a net reduction in the credit outstanding — a veritable dismantling of America’s once-immutable debt pyramid!
For the long-term health of our country, less debt is not a bad thing. But for 2009 and the years ahead, it’s likely to be traumatic, delivering…

The Most Wealth Losses of All Time

Who is suffering the biggest and most pervasive losses? U.S. households and nonprofit organizations (page 105)!

The losses have been across the board — in real estate, stocks, mutual funds, family businesses, life insurance policies, and pension funds.

In U.S. households alone, the losses have been massive: $1.39 trillion in the third and fourth quarters of 2007 (not shown on page 105) … a gigantic $10.89 trillion in 2008 … $1.33 trillion in the first quarter of 2009 … $13.87 trillion in all, by far the worst of all time.

And these losses have equally massive consequences for 2009 and 2010:
- Deep cutbacks in consumer spending ahead, plus a virtual disappearance of conspicuous consumption…

- More massive sales declines at most of America’s giant manufacturers, retail firms, transportation companies, restaurants, and more, plus…

- Big losses replacing profits at most U.S. corporations!
Rescues That Make the Crisis Worse

The U.S. government has taken radical, unprecedented steps to counter this credit collapse. And for the moment, it HAS been able to avert a financial meltdown.

But no government, even one run amuck with spending and money printing, can replace $13.87 trillion in losses by households.

Consider just two of the government’s most egregious escapades:
- On January 7, Fed Chairman Bernanke was so desperate to revive U.S. mortgage markets that he embarked on a new, radical program to buy up mortgage-backed securities. So far, he has pumped over a half trillion dollars of fresh federal money into that market. But it has barely made a dent; despite all his efforts, mortgage rates have zoomed higher anyway, snuffing out a mini-boom in mortgage refinancing.

- Four months later, on May 17, the Fed was so desperate to revive other credit markets, it even caved in to industry appeals to finance recreational vehicles, speedboats, and snowmobiles, according to Saturday’s New York Times. But that has barely made a dent in those industries. And the expansion of direct Fed financing to these esoteric areas is not possible without greatly damaging the credibility — and credit — of the U.S. government. Result: Higher interest rates.

Can Mr. Bernanke take even MORE radical steps? Can he trek where no other modern-day central banker has ever gone before?

Not without shooting himself in the foot! It still won’t be enough to avert a continuation of the debt crisis. Indeed, all it can accomplish is to kindle inflation fears, drive interest rates even higher, and actually sabotage any revival in the credit markets.

Look. The nearly $14 trillion in financial losses suffered by U.S. households has inevitable consequences. And massive, nonstop borrowings by the U.S. Treasury in the months ahead — driving interest rates still higher — can only make them worse.

My urgent warning: If you fall for Wall Street’s siren song that “the crisis is over,” you could be in for a fatal surprise.

Don’t believe them. Follow the numbers I have highlighted here. Then, reach your own, independent conclusions.

Good luck and God bless!


Indeed, follow the numbers! And when you follow the money you will see that actions are completely the opposite of the words. Excellent analysis, Martin, thank you!

Did you catch Martin’s bottom line? “The first quarter brought the greatest credit collapse of all time.”

Wow! And what exactly have you been told elsewhere, like in the media or from your own government politicians? Lies, lies, and more lies, that’s what.

Three Dog Night – Liar:

Empire State Manufacturing Survey More Deeply Negative…

The Empire State Index is one of the components of the larger Manufacturing ISM number which also includes data from the Philadelphia Fed Survey. For the month of June, the consensus was that the Empire State Index would improve from -4.6 to -2.0. What we got instead was a -9.4 print!

Here’s Econoday’s attempt to point out the positive:
The decline in the Empire State's general business conditions index deepened in June to -9.41 vs. -4.55 in May, but reflects a decline in shipments which fell to -4.84 from 1.29. New orders, which point to future shipments, were roughly unchanged at -8.15 from -9.01 -- which is about the best news to be found in the report's readings for current conditions. Month-to-month contraction in unfilled orders is steady at -10.34 vs. -10.23 with the rate of destocking picking up a bit to -25.29 vs. -21.59. Contraction in employment is deep at -21.84, but shows a bit of an improvement from -23.86 in May and is noticeably better from April's -28.09. Prices paid continues to contract month-to-month but at a slower pace, at -5.75 vs. -11.36 in a mild reflection of rising energy and commodity prices.

Future conditions actually offer good news as companies look for improvement ahead, with the 6-month outlook for general business conditions up 4 points to 47.81. They also see employment rising, with a reading of 10.34 vs. 9.09.

But actual improvement won't be evident until current new orders pick up and destocking comes to an end. Still, readings in this report are far better than they were in March and, like other surveys, do suggest that the deepest part of the manufacturing recession has passed.

Market Consensus Before Announcement
The Empire State manufacturing index improved to minus 4.6 in May from minus 14.7 in April. The shipments index actually showed a month-to-month increase, coming in above the breakeven level with a 1.3 reading. But looking ahead, the news was not all on the upside. The new orders index fell back to minus 9.0 in May from minus 3.9 the month before, suggesting a fallback in June for the overall index.

Note on this chart that it doesn’t move in a straight line – nothing does. Those who have been smoking on greenshoots were trying to make a trend that simply doesn’t exist. Just look at how long this index has been negative. That shows a contracting economy, not an expanding one - interpreting it differently is simply delusional.

Sorry, but it’s just plain old tough to turn that weed into a greenshoot! Let’s face it… we don’t manufacture hardly anything in America of value and manufacturing is not going to spring back, certainly not with the rule of law breaking down. Who is going to put their capital to work in America when the President, the Fed, and Congress can, and will, just change the rules of the game? No one, that’s who. That’s why you won’t see any new auto manufacturers sprout up – any capital looking for a place to manufacture anything simply won’t be looking to do it in America.

Too bad, this Empire Manufacturing Index has me in a New York state of mind…

Billy Joel – New York State of Mind:

Morning Update/ Market Thread 6/15

Good Morning,

Equity futures are down hard this morning with the dollar up and bonds up in a reversal of the latest trends:

The /ES is just above the 925 area that has been offering support over the past week. That area would have to fall to get excited about being short, otherwise a trip backup to resistance in the 955 area becomes likely. If 925 falls, 912 is the next lower pivot.

The markets just can’t be allowed to operate on their own, evidently. We have the Japanese yapping up our debt, the Russians yapping up our dollar, and this morning we get little Timmy Geithner just yapping. But the special treat will come when Obama opens his central banker mouth and utters their words that he has been programmed to say.

Those words will sound terrific to the untrained ear. I’m sure he’s going to “reel in the excesses, provide the oversight necessary so that this never happens again, etc., etc.,”

But to my ear, I’ll be hearing how the FED who is the root cause of the majority of the problems is going to be given even greater powers. Not only is the central bank grabbing our money, they want to completely control and monopolize the future as well. Obama is only their pretense.
Obama to present sweeping market overhaul

The president is set to announce the details of a massive reorganization of financial market oversight, according to a published report.

NEW YORK ( -- President Barack Obama is set to release on Wednesday the details of his proposed overhaul to how financial markets are regulated, according to a report published in The Wall Street Journal Monday.

The plan would grant the Federal Reserve increased power in the oversight and management of the largest financial companies in the market, according to the paper. It could also affect everything from credit default swaps to how mortgages are underwritten, according to the paper.

The proposal is also proposing another regulatory body, similar to the Federal Deposit Insurance Corp., to oversee consumer-oriented financial products, according to sources.
Once the President unveils the proposal, it would still have to pass Congress before any of the changes would be adopted. Treasury Secretary Timothy Geithner is set to testify about the plan on Capitol Hill on Thursday.

The plan will meet with opposition from parties against giving the government a more heavy hand in the financial marketplace.

The markets (except for derivatives) are already regulated. What they aren’t is FREE, nor are they policed with any REAL oversight.

To me, it’s not that we’re GIVING more power to the Fed… no, the Fed, the central bankers, are simply TAKING it.

And the true rule of law suffers yet another blow as will the debt money slaves who comprise America – its subjects. Playing in markets where the rules are changed constantly, the markets are manipulated, the criminals are in charge, and the rule of law is breaking down is totally a waste of time… Giving the Fed more power is the ultimate insult to the people of our nation.

Eagles – Wasted Time:

Sunday, June 14, 2009

Japanese and Russians Playing Games with Bonds & Reserve Currencies…

Less than one month ago, a Pravda report on Russian foreign holdings stated, “about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.” (See Russia Dumps the U.S. Dollar for Euro as Reserve Currency ).

Since that report Russia has been talking non-stop about replacing the Dollar as the Reserve Currency… Just on June the 10th Bloomberg reported that Russia May Swap Some U.S. Treasuries for IMF Debt.

Today the tune from the Russians abruptly changed:

Treasuries Rise After Russia Says It Has Confidence in Dollar

By Wes Goodman and Theresa Barraclough

June 15 (Bloomberg) -- Treasuries rose for a third day after Russian Finance Minister Alexei Kudrin said his nation has confidence in the dollar and there are no immediate plans to switch to a new reserve currency.

Ten-year notes extended their winning streak to the longest in a month on speculation a U.S. government report will show overseas demand for the nation’s assets increased in April. Kudrin’s comments came after Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, helping attract investors after 10-year yields climbed to the highest level in seven months.

“Overseas investors feel the current level is not bad,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-biggest bank. “We’ll see some buying.”

The yield on the 10-year note fell four basis points to 3.77 percent as of 11:54 a.m. in Tokyo, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 rose 9/32, or $2.81 per $1,000 face amount, to 94 23/32. A basis point is 0.01 percentage point.

The 10-year yield climbed to 4 percent on June 11, which was the highest level since Oct. 16, and they have risen from a record low of 2.04 percent on Dec. 18. A Bloomberg survey of economists projects the figure will be 3.65 percent at year-end, with the most recent forecasts given the heaviest weightings.

“It’s too early to speak of an alternative” to the dollar, Kudrin said in Lecce, Italy, in a television interview on June 13 after meeting with finance chiefs from the Group of Eight nations.

Trust ‘Unshakable’

Yosano said Japan’s trust in Treasuries is “unshakable,” in a Bloomberg News interview published June 12.

The comments helped ease concern that investors from outside the U.S., who hold $3.27 trillion of the $6.45 trillion in marketable debt, will stop buying as President Barack Obama borrows record amounts.
The government may sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., as it tries to end the steepest U.S. recession in half a century. Goldman is one of the 16 U.S. primary dealers required to bid at the government debt auctions.

The sales helped send U.S. debt down 5.9 percent in 2009, heading for their first losing year in a decade, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The MSCI World index of stocks returned almost 10 percent this year, Bloomberg data show.

Investors from outside the U.S. bought $57.5 billion more of the nation’s long-term bonds, notes and stocks than they sold in April, according to a Bloomberg News survey of economists before the Treasury Department issues the figures today. It would be a third straight month of net purchases.

Wow, investors bought $57 billion in April? That’s funny because we had to sell “only” $150 billion last WEEK!

And here’s the “unshakable” article:
Yosano Says Japan’s Trust in Treasuries ‘Unshakable’

June 12 (Bloomberg) -- Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales.

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

China and Russia, the largest and third-largest single holders of the debt, have said they may switch some of their reserves out of Treasuries, and economist Nouriel Roubini said yesterday the dollar won’t always be the world’s reserve currency. Treasury yields fell today after Yosano’s remarks, retreating from a seven-month high.

“Japan is, of course, mindful that selling Treasuries will cause the yen to strengthen and that would hurt corporate profits,” said Chotaro Morita, chief strategist in Tokyo at Barclays Capital Japan Ltd. in Tokyo. “Even with their strong ties, it’s possible Japan would consider selling U.S. Treasuries should the dollar say, halve in value.”
I have never heard so much baloney in all my life!

So, we have bonds that have been crashing while we issue more and more debt. Only a fraction of that debt is being sold, and when it is, it is now at higher and higher interest rates.

Now, if you held a bunch of our debt, what would you say if you saw a bond market CRASH in progress?

Uh, HUH… that’s what I thought.

Let me decode what the Japanese are saying for you… “Oh SHIT! We must get rid of some of our dollar denominated debt PRONTO! Quick, let’s stuff those secret bearer bonds in a briefcase and ship them around the world to be sold in pieces. While we do that we’ll put out a press release stating we have “unwavering” confidence in the dollar so that maybe some poor idiot sap will buy them from us!”

See, and I’ll bet you didn’t think I could translate Japanese!

Guess what, I can also translate Russian! “Now that the world knows that we own more Euros than Dollars and we are calling for a new reserve currency, the bond market is crashing, the dollar is losing value and so are our remaining dollar denominated assets! We’ll keep selling the dollar, but tell the world we have “complete confidence in the Dollar” so that we may sell our remaining dollar assets to the poor suckers who are stupid enough to believe a word we say!”

And thus the dollar rises slightly, bonds rise slightly, but equities are down in overnight futures trading.

These comments are nothing but DESPERATE GAME PLAYING and MANIPULATION by governments. This type of activity has always been around, but it never succeeds. I have never seen so much BULL flying in such a short time period. This tells me that the bull excrement is already hitting the fan. In short, the markets have got them under pressure…

ZZ Top - Got Me Under Pressure

Uncle Jay Explains the News...

It's time once again, boys & girls, for Uncle Jay to shamelessly promote his 6 month CD! Don't forget to click an ad on the way out!

Peter Schiff on the Rule of Law…

I have been harping on the importance of the rule of law and this weekend Peter Schiff wrote a good piece on it. Clear and easy to understand, this is a concept that seems completely lost on the current Administration. Note that it is their ACTIONS that matter, not their talk… (ht JQ Adams)
June 12, 2009

Property Rights Take a Hit

“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.

On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.

When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.

The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.

Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?

Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.

The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa’s body.

As if this wasn’t bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.

Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.

More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.

As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.

Unfortunately, Obama has never met the central banker he could say no to! He’s hell bent on accelerating a Catastrophic Keynesian Crash and when it comes to funneling money to those of his choosing, the rule of law simply won’t get in the way. This could be the Obama Administration’s tag line (when I say Obama Administration, I mean central bankers as they are one in the same):

Jefferson Starship – Nothing’s Going To Stop Us Now: