The JP Morgan Effect

by Bill Bonner
London, England

What a marvelous flimflam! So obvious…and yet so effective! It’s a pleasure to watch.

Yesterday, the Dow soared over they 10,000 mark. If it keeps going at this rate – up 144 points yesterday – it will soon equal the post-’29 bounce. All we need is two more days and we’re there.

Oil rose over $75. Gold closed the day at $1,064, after a big move to the upside over the last few days. And the dollar fell – to just $1.49 per euro.

The reason for yesterday’s big move is announced on the front page of almost every financial rag this morning:

“JPMorgan profits lift the Dow.”

JPMorgan, the Wall Street firm that was bailed out by the feds a year ago, reported income of $3.6 billion in the 3rd quarter. With that kind of profit in the financial sector, it won’t be long before the whole economy is running red hot, right?

That’s what the papers seem to think. The International Herald Tribune says the bank’s profits are just another sign that a major recovery is underway. Investors seem to believe it, too. “Earnings optimism,” is behind the buying, says a broker.

But is it true? Is the real economy growing, expanding, and making money? Let’s look:

“Still on the job, at half the pay,” is a headline in The New York Times. It tells the story of an airline pilot whose position has been downgraded and whose pay has been cut in half. The fellow is now earning $30,000 a year rather than $60,000. He is not counted in the unemployment statistics but he has much less spending power than he had a year ago. Practically all his discretionary spending power has been wiped out.

The NYT:

“The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers, pilots among them, representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

“What this means,” said Thomas J. Nardone, an assistant commissioner at the bureau, “is that the amount of money people are paid has taken a big hit; not just those who have lost their jobs, but those who are still employed.”

All over the country incomes are falling. Officially, about 15 million people have no jobs. Many others have given up looking for jobs. And now, for the first time ever, more than half of those who lose their jobs run out of unemployment benefits before they find another one. Many others never get any benefits at all, because their jobs are not eliminated, they are merely cut back…either in the number of hours they can work or in the compensation itself.

Yesterday, we reported that Baby Boomers are actually working longer hours…but earning less. The boomers are in an especially tight spot. They’ve got only a few years to save money for their retirements…and it won’t be easy in this slumpy economy.

And we reported the plight of the callow youths…whom BusinessWeek has called the “Lost Generation.” Their unemployment rate is twice the national average. They’re at the bottom of the labor pool, and unless the economy begins to expand they’ll have a very hard time finding the bottom rung of the ladder.

Take all the people who are unemployed…who are working fewer hours…who have given up looking for work…whose positions have been downgraded…and add the family members who depend on them for their daily bread…and you have nearly a quarter of the population. How can companies expect to increase sales and profits with a quarter of the population forced to cut back severely?

They can’t. The earnings numbers are misleading. Most of the earnings that we’ve seen come from cost cutting, not growing top-line sales. How do businesses cut costs? By trimming employees! In other words, the earnings figures we’re seeing are contributing to the slump…not alleviating it.

You can see how, in the short run this can lead to increased profits. But it can’t go on for long. The more businesses cut costs the more their sales go down, because consumers (who are also their employees) have less money to spend.

And according to a Wall Street Journal report, with too much capacity…and falling sales, businesses “are hesitant to reinvest such profits into their businesses.”

That’s why business investment, as we reported two days ago, is falling even faster than sales. And it’s why people who are looking for a job are going to have a hard time finding one.

But let’s return to JPMorgan…after the news:

“US foreclosures jumped to an all-time high of 937,840 in the third quarter,” writes Ian Mathias in today’s issue of The 5 Min. Forecast. “That’s a 23% rise from the same time last year, says a report from RealtyTrac today. One in every 136 households received a filing – also a record. Once again Nevada takes the cake… An incredible one in every 23 households was in some form of foreclosure last quarter.

“And they tell us the economy is recovering?

“But here’s the kicker – a theme that should be no surprise to 5 Min. loyalists: This isn’t about subprime anymore. The most recent data from the Mortgage Banker’s Association claims subprime mortgages currently account for hardly a third of foreclosure starts, down from 50% last year. Prime loans – the gold standard of the mortgage biz – now take up a 58% share.

“Even the foreclosure scene in terms of home prices has been turned on its head. Check it out:

“About 35% of home foreclosures occur in the bottom third of the housing market, says zillow.com, down from 55% in 2006. In June, the most recent data available, 30% of foreclosures were in the top tier – nearly double the rate from the year before.

“And the icing on this rotten cake: Option ARMs. This pending rate reset crisis – which just about everyone ‘in the know’ saw coming in early 2008 – looks like its really going to happen. 46% of option ARMs are currently 30 days past due, despite the fact that just 12% have reset to higher payments. Resets for the rest of those ARMs are right around the corner.”

And back to the House of Morgan:

How did JPMorgan earn so much money in such a bad economy?

We begin with a bit of skepticism. After all, we know consumers aren’t borrowing. Consumer credit is going down. So they can’t be making money there. And we know businesses aren’t expanding, so they can’t be making money by lending to corporations either.

Wait a minute. JPMorgan is a bank, right? Don’t banks make money by lending money? Yes…that’s what we thought. Then who is JPMorgan lending to?

The only net borrower is the government.

The Financial Times confirms that Morgan’s “US consumer businesses continued to bleed, with its credit card unit losing $700 million in the quarter and its retail bank…barely breaking even.” It wrote off $7 billion in uncollectible consumer loans – more than twice as much as last year.

Its mortgage group lost money too. And it surely didn’t make any money helping US business build new factories and expand payrolls.

So what does that leave? All the components of the business that have to do with the real economy are losing money or barely breaking even. What’s left?

The news reports attribute the huge profits to “trading.” But trading is a broad category. And our guess is that if you look more closely you will find that JPMorgan made its money the old fashioned way – by ripping off the government.

‘You mean, JPMorgan took the feds’ money and now is showing huge profits because it is just lending money back to the people they got it from? ‘

Yes. But not only that. They’re also probably speculating on gold, oil and stocks…along with everyone else. The feds’ money has pushed all these speculative trades into profit.

‘And now, they’re going to pay themselves big bonuses, aren’t they?’

Yes. The papers tell us, “bonuses explode on Wall Street to a new record.”

‘So, then…when the next crisis comes…they won’t have any money in the banks, will they?’

Nope.

‘So they’ll have to get bailed out again.’

Yep.

‘But maybe the next time the feds will wise up and just let them go broke.’

Not a chance. Wall Street has plenty of friends in the highest places in Washington. A report in today’s media tells us that “Geithner Aides Reaped Millions Working for Banks, Hedge Funds.” The aides earn about $150,000 for their government work. On the side, they advise the financial firms they’re supposed to be regulating, and get paid millions.

Such a nice relationship. They make sure Wall Street prospers – even when it does stupid things. Wall Street makes sure they prosper – even when they advise the government to do stupid things. And when their gig is over in Washington they go back to Wall Street where they earn millions more. America’s centers of political and financial power have a cozy little game going. It won’t end any time soon. It’s too profitable for both of them.

It’s PRIME TIME: Stage 2 of the U.S. Collapse

Dave “Dave From Denver” Kranzler

To listen to our political leaders, the mainstream media and financial bubblevision t.v. programs, you would think that the financial crisis has stabilized and the housing market is bottoming. But if you un-spin the data fed to us by the Government and the media, the facts show that the financial system is on the precipice of another very large crisis. As the housing market collapse spreads into the prime-rated mortgage sector, a veritable avalanche of foreclosed middle to high-end homes will flood the market, triggering a much larger credit and economic crisis than what was experienced during the past 18 months.

The onset of the financial crisis in this country last year was largely precipitated by the inevitable bursting of the housing and mortgage bubble. In what was an unregulated multi-trillion dollar Ponzi scheme, the price of houses rose to unsustainably insane valuation levels, fueled by the reckless and tragic use of no-holds-barred mortgage financing. This “Stage 1″ of the financial collapse was triggered by an escalation in defaults and foreclosures primarily in the subprime and Alt-A mortgage sectors. The associated collateral damage from this reverberated into the implosion $100′s of billions of off-balance-sheet assets and derivatives, many of which were fraudulently rated by the rating agencies and recklessly pumped into investors by Wall Street. This took the Dow from 14,000 to 6,440 and was addressed by the Government/Fed with as much as $24 trillion in direct monetary injections and financial guarantees. During this Stage 1 we saw the Government takeover of Fannie Mae, Freddie Mac, the de facto Government takeover of AIG, the collapse of Bear Stearns, Lehman, Merrill Lynch, Countrywide, Washington Mutual, Wachovia; the U.S. auto industry, among many any other corporate failures and smaller regional bank collapses (64 smaller bank failures this year as of 7/24/09).

Stage 2 of the financial collapse of the U.S. is being triggered by the accelerating rates of default/foreclosure in the prime-rated mortgage market, as well as the collapse of commercial real estate. I am going to focus on the residential mortgage component, as it is three times as large as the commercial real estate mortgage market. Whereas the subprime and Alt-A mortgage markets are roughly $1.5 trillion combined, the prime-rate mortgage market is in excess of $10 trillion, depending on your source of data. For purposes of my analysis, I am using data presented by Mark Hanson of Field Check Group in his “7-19 Mortgage Default Crisis – Brutal Past Two-Months” article posted here (any housing/foreclosure data I use comes from this article):

http://www.fieldcheckgroup.com/2009/07/19/7-19-mortgage-default-crisis-brutal-past-two-months/

I have been asserting that the housing collapse would not end until prices fall enough to balance out the supply/demand equation. This includes the inventory of new and existing homes for sale, the inventory of foreclosed homes either on the market or being held by banks but not listed for sale AND the inventory of rental units. Data released this past week show that the rental unit vacancy rate surged to an all-time high. This will put downward pressure on rental rates, of which I am already seeing evidence in Denver. As rental rates decline, it becomes relatively more attractive to rent rather than to own, putting more downward pressure on the price buyers will be willing to pay to buy a home vs. rent.

The biggest problem, however, facing the housing market, is the impending surge in bank foreclosure inventory, fueled by the rapid increase in defaults and foreclosures in the $10 trillion prime mortgage sector of the market. Delinquencies surged in May and foreclosure inventories hit new highs. The May foreclosure rate hit 2.79% of all mortgages. This foreclosure rate increased from April to May by 6.2% and surged from May 2008 by 88.3%. Further troubling is the 5% spike in the rate of delinquencies from April to May. This compares to the April to May average increase in delinquencies over the past four years of 1.1%. The increase in delinquencies from May 2008 to May 2009 spiked up by 50%.

What’s most troubling about this data is that the main source of these horrific foreclosure/default numbers is the rapid increase in defaults in Prime-rated mortgages over the last six months. Once a mortgage defaults, it typically takes 12 to 18 months for the property to be foreclosed and either listed for sale for held in suspense by banks hoping for a miracle in the condition of the housing market.

The default/foreclosure statistics for Prime mortgages are starting to follow the same statistical path experienced in the subprime and Alt-A markets. Currently, over 12% of all subprime mortgages and 8% of all Alt-A mortgages have been foreclosed. Let’s assume that the total foreclosure rate for the prime mortgage market eventually hits 5%. I believe this is a conservative estimate given what has already occurred in subprime and Alt-A, the surging rate of delinquencies in the prime sector and the rapidly escalating rate of unemployment, which directly correlates to mortgage defaults. Assuming 5% means that $500 billion in prime mortgages will be foreclosed. This equates to the entire size of the subprime mortgage market. Imagine the damage this is going to cause to the entire financial system in this country. And my guesstimate may well be way too low (it is not too high, I can assure you of that).

To put this in perspective, Stage 1 of the financial collapse primarily affected the middle to lower income demographics who purchased a home using subprime and Alt-A financing. A lot of these properties are being purchased and turned into rentals, fueling the rental inventories. In what will be a much larger and more severe Stage 2, accelerating defaults in the prime mortgage sector will cause foreclosures to balloon in the upper-middle (think of overbuilt suburban McMansion developments or overvalued renovation homes in trendy urban areas) and high income neighborhoods. Anecdotally, as I drive through all the trendy renovated urban enclaves around Denver, I see “for sale” and “for rent” signs popping up like uncontrolled weeds as homeowners attempt to avoid foreclosure by selling or renting. It’s one thing for an investor to scoop up several low-priced homes and rent them out, hoping for future price recovery. But how will the housing market ever absorb a massive increase in larger, overvalued homes which would never have been built in the first place if a housing bubble never occurred?

As this prime mortgage-financed foreclosure inventory balloons, it is going to drive prices down to levels thought unimaginable. As the value of the collateral for the mortgages declines, banks and investors who own the associated mortgage and mortgage-related paper will suffer massive hits to the value of their assets. Even worse, we will see another round of derivative-related bank and insurance company implosions, some of which will vaporize into thin air the way Bear Stearns and Lehman did, and Countrywide, Wash Mutual, Wachovia and Merrill should have, were it not for the taxpayer financed bailouts of these firms. This Stage of the financial collapse will likely bring down several large State and corporate pension plans as well.

And finally, how will the Federal Reserve and Treasury deal with this impending financial explosion? If it took $24 trillion of direct and indirect financial support and monetary printing in order to “stabilize” the shock of Stage 1, how much money-printing will it take in order to hold the system together as Stage 2 materializes and engulfs our system with multiple financial disasters? It can be argued that the collapse of CIT is the first sign of Stage 2 hitting. It will be interesting to see which other financial firms hit the wall. We know that Bank of America – which sits on Countrywide and Merrill Lynch’s subprime mess, Wells Fargo – which sits perched on Wachovia’s $122 billion of explosive Pay-Option ARM paper, and GE Capital – a giant-sized CIT – are prime candidates to be vaporized by their nuclear balance sheets.

To conclude, based on the spin-free data presented above, a bottom to the housing market is nowhere in sight. In fact, I would argue that housing prices have at least another 30-40% to fall from where they are now. This is a guesstimate based on all of the above evidence. I don’t know what general level of valuation will mark the end of the housing market freefall. I do know that all the so-called experts (like Ben Bernanke et. al.) who said less than 18 months ago that the financial crisis would be contained to the subprime mortgage market and would top out at $200 billion were tragically wrong in their assessment. I also know that I am on record saying prices will revert to 1981 levels and that this crisis would end up costing $5-10 trillion. Looks like the jury is out on home prices and I was way too low on the dollar cost. I also know that, not only are we nowhere near a bottom, but that the worst is yet to occur.

Clearly, the above analysis means that investors should be taking advantage of this bear market stock rally to sell their stocks, sell all of their bonds except for maybe Treasury TIPS and start moving as much money as possible into physical gold, silver and mining stocks.

REVENUE BREAKDOWN – Obama’s Spending Spree

REVENUE BREAKDOWN – Obama’s Spending Spree

By Stephen Wellman
June 5, 2009

 

This will cover spending and tax revenues for the week starting June 1, 2009. It was a busy week for the US TREASURY and one of the highlights was Tim Geithner’s meeting in China. Laughing students aside, he had a tough act to sell! Yet he kept to the same script the US FED and US TREASURY have been saying for decades now their mantra of STRONG DOLLAR … STRONG DOLLAR. Its their mantra but not their practice.

BLS WAGES

BLS data for wages that was released on June 4th to NO FANFARE … The FANFARE that moved the DOW that day was for the small dip in unemployment claims. Meanwhile if you read the hidden details, like I do, you see that there has been some massive hour cuts for American workers for the Q1 2009. That reflects perfectly with my collapse scenario for the US PAYROLL WITHHOLDING TAX REVENUES. If workers work less hours then there will be less tax revenues. Even here in Hawaii Governor Lingle is making State employees take mandatory three day furloughs(no pay) every month in order to cut costs.

What stuck out was this report on the MANUFACTURING SECTOR:

Manufacturing

Productivity decreased at a 2.7 percent annual rate in the manufacturing sector during the first quarter of 2009, reflecting a 21.7 percent decrease in output and a 19.5 percent decrease in hours (tables A and 3). These were the largest-ever declines in the output and hours series, which begin with data for the second quarter of 1987. Over the last four quarters, manufacturing productivity fell 3.2 percent, the largest four-quarter decline in the series (tables A and 3). This contrasts with the 3.7 percent average annual increase from 2000 to 2007. In the durable goods manufacturing subsector, output declined 31.0 percent and hours fell 23.0 percent, yielding a productivity decline of 10.4 percent. In nondurable goods industries, productivity rose 1.9 percent as the decline in output of 11.6 percent was less than the 13.2 percent decline in hours.

Hourly compensation in manufacturing grew 13.4 percent during the first quarter of 2009, reflecting a 15.8 percent rise in durable goods industries and a 10.1 percent rise in the nondurable goods industries (seasonally-adjusted annual rates). Real hourly compensation, which takes into account changes in consumer prices, increased 16.1 percent for all manufacturing workers. Unit labor costs rose 16.6 percent in manufacturing during the first quarter of 2009, after increasing 17.1 percent in the fourth quarter of 2008. Over the last four quarters total manufacturing unit labor costs increased 12.0 percent, the largest increase in the series.

These moves represent the BIGGEST moves since 1987. So things are falling off a cliff for America’s manufacturing base. I have also reviewed this same info for the State Of California and it is confirmed. The biggest drops in payroll for California are Construction and Manufacturing. The reports don’t really say why, but I imagine it is due to closing doors or moving out! Interesting the two sectors which show the least decline in employment are mining and healthcare. Healthcare in California is stable.

So productivity decreases while wage costs increase. Hummmmm??? NEXT!

US TREASURY DAIIY STATEMENT

Well on June 3rd, 2009, the US TREASURY spent $22.332BIL USD on Social Security benefits in 24 hours. That put our SPEND RATE up to 6.00. The US TREASURY only took in $7.559BIL USD in tax revenues on June 3rd and out of that $7.449BIL was from US PAYROLL TAX REVENUES. How much tax did the US corporations pay? $52mil. Those rich people with their Estate taxes only paid in $3mil USD that day.

Here is the LINK to the US TREASURY DAILY STATEMENT for June 3, 2009.

So how much have we spent on Social Security for FY 2009 so far? Around $385.7BIL USD and how much on TARP? Around $321.4BIL USD … not much difference. But on UNCLASSIFIED we have spent way over what we spend on Social Security at $413.6BIL USD. Between OTHER and UNCLASSIFED we have spent a combined total of $1.777TRIL USD and the media is dead silent. There’s so much money in the system on a daily basis the US TREASURY can’t even line item it!

TRUST FUND IOUS IN LAYMAN’S TERMS

There has been much talk about how the US TREASURY “borrows” from the Social Security Trust Fund. If only that were the only Trust Fund they hand IOUs to!

On every US TREASURY DAILY STATEMENT is a term called GOVERNMENT ACCOUNT SERIES. First TABLE III-B refers you back to TABLE III-A where there is a breakdown of both “marketable”(bills, notes and bonds) and “nonmarketable”(intergovernment debt). As anyone with eyes can plainly see the vast majority of “debt” is in the “Government Account Series” line item in the “non-marketable” section of both TABLES III-A and III-B. Just think of that BIG number as the UNFUNDED LIABILITY number for US CONgress to borrow from the Social Security and Medicare Trust Funds and many other trust funds you probably have never heard of. This is the magic hocus-pocus of IOUs that are suppose to be repaid in our lifetime.

So this stuff is “ON-BUDGET” and “OFF-BUDGET”. The “OFF-BUDGET” debt did not start until 1937 during the Great Depression, under FDR, but it has steadily grown since then just like everything that BIG GOVERNMENT does. Once again both DEMS and REPS have been guilty of growing the gross DEBT; both are experts at fiscal irresponsibility.

Back to the Government Account Series. These are non-marketable securities, implicit debt, guaranteed by the US government. They are mainly TRUST FUNDS. This chart of TRUST FUNDS is from the Financial Management Service, a bureau of the US TREASURY. I think it is important to get a perspective on just how widespread this addiction to SPEND has become. It has infested all manners of solvent entities and turned them into IOU ridden wards of the state.

The following TABLE FD-3 is only reported monthly, so March 2009 is the last data point.

Here is the LINK to the website that publishes these tables. Click on “Federal Debt”.

You can see that the US government owes these Trust Funds a total of trillions.

I found this statement from the FMS … “Government account series (FD-2)—Certain trust fund statutes require the Secretary of the Treasury to apply monies held by these funds toward the issuance of nonmarketable special securities. These securities are sold directly by Treasury to a specific Government agency, trust fund, or account. Their rate is based on an average of market yields on outstanding Treasury obligations, and they may be redeemed at the option of the holder. Roughly 80 percent of these are issued to five holders: the Federal Old-Age and Survivors Insurance Trust Fund; the civil service retirement and disability fund; the Federal Hospital Insurance Trust Fund; the military retirement fund; and the Unemployment Trust Fund.”

The BIG FIVE!!

I’ll bet they are “special”! I just hope we never find out just how “special” they really are!

There are also “marketable bonds” as per Table III-B of the US TREASURY DAILY STATEMENT. Every BOND issued by companies or governments has a “Redemption Value” upon maturity whereby the company, or in this case the government, pays to redeem it.

So in the end should the US TREASURY count these securities or “IOUs” when they borrow from a multitude of Trust Funds? The idea is that these “IOUs” will be made good when they are due or “mature”. So in theory as these IOUs mature the government must print money to pay them if there are no tax revenues to cover them. I personally am not counting on getting any checks from Social Security by time I retire. I also doubt I am going to have Medicare, but instead some Third World version of UNIVERSAL HEALTHCARE that is tantamount to a Medicare default.

Just because all this is listed on the US TREASURY DAILY STATEMENT don’t get the idea that all these numbers add up and make sense … THEY DON’T! Try to add up the OTHER total with the breakdown that is listed for OTHER, it never adds up.

This is the stuff that the GAO has been complaining about for decades now and is the main reason that David Walker(former GAO Chief)quit.

So next time when you hear someone compare the US government to ENRON, you’ll know why. More to the point you’ll know where ENRON got all their ideas from! Yet the S&P gives out their AAA rating … AAA is virtually worthless in my opinion, but then again I am not CHINA or the millions of people out there sitting in cash on the sidelines using Treasuries or FDIC accounts. By the way the US government even borrows from a trust fund entitled “Deposit Insurance Fund”. Hummmmmm??? I wonder if that is related to the FDIC.

All this info is available to the public so feel free to do your own research. When was the last time any of this was discussed in the SITUATION ROOM or on SQUAWK BOX or on OPRAH? Nobody wants to know the real truth and even after going on 60 MINUTES, David Walker walked away completely convinced that the US CONgress is just that … a CON!

None of this data supports a STRONG DOLLAR POLICY. Strangely enough it all comes from the same entity that Tim Geithner heads, the US TREASURY.

Gold is the only durable hedge against this enormous monetary fraud of the irredeemable currency Ponzi scheme.

GOVERNMENT IS ONLY AS HONEST AS ITS MONEY …

An Often Overlooked Issue – Cash Flow

An Often Overlooked Issue!

Professor von Braun
The Rocket School of Economics

May 22^nd, 2009.

 

What I have referred to before in earlier articles as the great credit contraction is now well and truly underway. The credit expansion period is over and what we are seeing now is the effects of what happens when a fiat monetary system reaches the limits of its ability to both inflate the value of non productive assets and defer settlement, via the ongoing renewal of existing debt.

Attempts by governments and central banks to reinflate declining asset prices via large infusions of psuedo capital into the banking system so that the issuing of credit can be ‘kick started’ are doomed to fail.

House prices will continue to decline, unemployment will rise, tax revenues will decline further, government debt levels will continue to rise and peoples net worth will also decline. This is a given!

This is what happens when you get a major credit contraction. In simple terms it is like the tide going out prior to the tsunami coming in.

Since a monetary debacle of this size has not been seen before, there is nothing to compare it with, for not even the depression of the 1930’s comes close. Then people still had savings and the US $ was, until late 1933, pegged to gold at $20.67 per ounce.

Today all debts are now due, since the banking system can no longer lend its way out of its own dilemma and this is what needs to be clearly understood by investors. The dollar is a liability and as such being in cash is also a liability. Government securities are also liabilities but the issue of liabilities versus real assets is more widespread than that.

The precious metals are not a liability and ownership of them is a very wise move given the uncertainty surrounding everything else that is happening. We have seen calls by some market analysts for the Dow to be at 400, 600 and ‘under a 1000.’ What does that mean you may well ask?

It means that you have a collapsed banking system along with massive unemployment and no cashflow of any consequence being generated within the system itself. What will happen to brokerage houses if you have the Dow at 400? What will stock exchanges look like if there is a collapse through to these levels? How will capital be raised when there is no capital left?

Cashflow during the credit expansion period was ‘created’ by the banks themselves via home equity lines, credit cards, and a series of market bubbles. Productivity, which should have been the benchmark by which to measure cashflow went off to all sorts of different places such as Asia, India, China and now we have a situation that the holders of US dollar denominated ‘reserves’ are located outside the US. There is little by way of actual ‘reserves’ within the US itself, hence the need to issue more debt.

In addition money that has been spent within in the US by its residents has mostly been spent on items that have little, if any, appreciative value. On the contrary electronic gadgets tend to depreciate, as do autos, as do fridges, freezers, washing machines and dryers. The real estate bubble has now clearly demonstrated that house prices can and do decline. Those who have been saving for their retirement are in a double bind, since in most cases what they believed was assets are now being seen as liabilities. That second house purchase is now a liability and even the primary residence is, in many cases, under water.

The root cause of all of this is the banking system itself and its mismanagement, with some not so little help from both Congress and the Senate, along with the failure of the deregulation of the systems put in place during the 1930’s to stop this from happening. There still seems to be a complete lack of understanding of what the problem actually is, which is clearly demonstrated by the attempts so far to fix the banking systems dilemma.

The often overlooked issue is CASHFLOW! Where is your income going to come from now that the capital gains machine is broken? Even if you are sitting in cash and own high quality government securities (whatever they are), with a 3% return, what can you buy into that can offer a cashflow that is reasonably safe and secure?

What is going to be left to buy when the music stops, when Mr. Fiat finally succumbs to Alzheimer’s disease and you are left holding his empty bag of promises to pay?

Anything that has debt attached to it is a liability that won’t go away. Any sector that is dependant on people spending money on goods or entertainment that provides revenue to service their debt has a problem and all aspects of the economy are at risk. Real estate, both residential and commercial, travel & leisure, retailing, the auto industry, even the medical profession will be facing lower revenues. The economy is not something that can be easily isolated into safe & unsafe sectors as it is all interconnected via the banking system which can no longer inflate the value of the underlying assets, regardless of what they are.

The example given by President Roosevelt’s revaluing of gold in 1934 is of interest and contains pointers to the issue of cashflow. Small mining operations sprung up in many parts of the US. The reworking of tailings dumps from previous operations became common and with the increase in price gold mining became one of the few sources of consistent cashflow. Employment for miners was assured and towns that were close to producing mines did not nearly suffer the downturns and bank closures of areas that were not.

The production of gold is as close to guaranteed cashflow as you can get, even if gold is confiscated and a new ‘official’ price created, the gold that is being mined does have to be purchased and paid for by somebody. Will there be a resurgence of small privately owned gold mines?

Very few have understood the predicament the banking industry is in. The banks have been in the business of asset inflation and for a while it seemed to be working. But when it became the only game in town, everybody joined in and the ability to keep a lid on the issuance of debt was lost. Productivity was forgotten about as the technological advances gave people access to what appeared to be the goods, but was nothing other than an image.

The need for savings was ignored and now we have a compounding to the downside as assets continue lose their value. Ownership of debt is now being seen for what it is, something that can become problematic very quickly. Investors with capital are few and far between and assets that have strong cashflow potential are also few and far between.

The coming cashflow shortage will affect all entities from the Federal Government, to the states, the counties, pension plans, investors and homeowners alike.

It’s All About The Money!

As I listen to the Wall Street pundits today, their latest line is about “the inevitable rally” that they claim is coming.  One guy went so far as to pronounce on TV that “the market is severely oversold”. Anything is possible in the stock market, because it’s driven as much by emotion as fundamentals, but I wouldn’t count on seeing a substantial uptick anytime soon.  Mostly I expect that recovery will be snail-slow, after further decline, and we’ll see DOW 4000 or 5000 much sooner than 8000. I also expect that there will be many more “surprises”.  Sure hope I’m wrong – but don’t think so.

 

With all the talk about the RESULTS of the economic downturn – manufacturing drops, real estate contraction, lost jobs, etc. – it’s hard to keep track of the CAUSE.  It’s all about the money!

 

The mess the financial institutions created has frozen liquidity.  Economies run on money.  Without credit, the whole thing comes to a screeching halt.  That’s where we are now.

 

I talked in an earlier article about one analysis which has 700 US banks in trouble, with 150 in danger of failing this year.  It’s common knowledge that Citi is in deep trouble, and apparently sliding by the day.  GE’s a mess. The rumor mill has JP Morgan in deep, deep trouble.  Who knows which finance house is next?  We can’t measure the full extent of the problem because it’s a state secret – the banks, the Fed & the government aren’t talking.  We can’t even find out who already got bailouts, or how much; because the government in its infinite wisdom has decided that the info. should be confidential.  We also know that overseas banks are in trouble, and the forex/derivatives/debt mess in Eastern Europe is threatening to spill over, bringing a whole new set of problems measurable in $ Trillions.  All these banks are intertwined.  If a big foreign bank goes, what will be the effect here in the US?

 

Here’s the problem.  Without credit we can’t do business and we’ll just continue to slide.  In order to get credit moving again, the government has to spend more money bailing-out the finance houses (the bailouts so far have had little positive effect).  I strongly suspect the problem is much bigger than the public is allowed to know, and it will really come down to a question of whether the government can “print” enough dollars to break the logjam without destroying the dollar in the process.  Then there’s the little problem of getting someone to buy all the government debt created in the process.  The foreign governments that have been financing us for years are in trouble too.  Even though our economies are all intertwined, someone might decide to follow a different path of self-interest.  If that happens, we’re in big trouble.  I can’t remember a time when our country was more vulnerable to foreign “blackmail” than now.

 

Until the credit logjam is resolved, all other questions of economic health are on hold.  We, and the world at large, will continue to decline.  Obama’s plans won’t do squat without a credit thaw.  The portion of his package dedicated to the finance mess is just a drop in the bucket – barely an opening gambit.

 

There are always business opportunities; in any economy.  I mentioned one I like in my last article.  But now is not a good time to buy into the “Wall Street propaganda”.  It’s dangerous out there, and declining daily.  Be very, very careful.

 

We just need to hope that our secretive government & Fed can get a handle on the liquidity freeze.  Once they do, we need to hope that inflation & taxes don’t eat up our remaining wealth.

 

Buy Gold.