Consumer loan delinquencies hit record highs

updated 1 hour, 7 minutes ago

NEW YORK – Delinquency rates for three key consumer loan categories hit record highs in the second quarter, according to data released Thursday by the American Bankers Association.

Rising unemployment and falling incomes were the main culprits for the higher delinquency rates for bank cards, home equity loans and home equity lines of credit, the ABA said.

Bank card delinquencies rose to a record 5.01 percent of all accounts. For home equity loans, 4.01 percent of accounts were delinquent, while 1.92 percent of home equity lines of credit were delinquent.

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The Sun Sets on the West

By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63- year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

China ought to be the world’s largest economy by then, Faber predicts. The economies of the U.S. and India, should be neck and neck for the No. 2 spot – about 60% of the size of China’s. A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan.

That’s a very different world than the one we live in now, where the U.S. is No. 1 by a large margin and the European countries, such as Germany and the U.K., still figure prominently. What interests us most, though, is not so much the destination of 2050, but the path of growth to get there.

There are as many ways to show this growth trend as there are golf balls in the water at No. 15 at my local golf course. But Faber cites the trend in motor vehicle sales to illustrate the trend.

You can see that the “emerging 16? – the largest of the emerging markets, which includes China and India – caught up and passed the U.S., the European Union and Japan in 2008 as the world’s largest auto markets. What’s interesting here is that even in this recession that gap has widened.

There are all kinds of ideas that spin out of just that one observation. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need gasoline stations and gasoline. You need a lot of oil.

Just think about oil for a minute. The U.S. eats up about 25 barrels of oil per capita per year. Even countries such as South Korea and Japan consume around 15-20 barrels of oil per capita per year. China and India are tiny compared with that. China is at 1.5 barrels of oil per capita annually. And India barely registers.

So one can only imagine that as these economies grow and take up more of a share of the global economy, their oil consumption will rise exponentially. As far as investing goes, it boils down to investing in what these economies need, but don’t have.

In other words, we ought to ask the question, “For which commodities will demand not collapse?” Faber presents a chart that provides a partial answer. The chart presents China’s proven reserves of each commodity as a percentage of the world’s total reserves.

 

This chart does not include the agricultural commodities like soybeans and potash that China has in very short supply, but the chart does include many other important (and investible) commodities like copper, natural gas, uranium, bauxite (important in making aluminum), chromium (a steel additive) and manganese (important for making stainless steels). As investors, the left-hand side of the vertical line on the chart is where you want to be.

The commodities bull market, Faber ventured, is still on, though he cautioned that the road will be bumpy.

Even in commodity bull markets, 50% corrections are common.

“Hard asset booms are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question,” Faber explains. “In this sense, commodity booms are characterized by greed based on fear.”

On the question of the dollar, Faber was emphatic that we would see it lose value against the real world of things. Faber predicted that sooner or later we would have major inflation thanks to government stimulus and money printing. Therefore, Faber is long gold and silver.

He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks. On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too.

As for what to avoid, Faber says turn your nose up at real estate and government bonds. There are also potential oversupply problems in tourism, with too many hotels, resorts and the like. Faber cautioned against these industries…and there are certainly too many government bonds as well.

We’ll see how it plays out, but I’m with Faber. The world is changing dramatically. And it’s the emerging markets that will provide the light at the end of the tunnel.

THE COFFIN SHAPED RECOVERY

THE COFFIN SHAPED RECOVERY

While often wrong, Bernanke is right about the recession. It’s almost over. But a depression is about to replace it.

There has been much discussion about this recovery, whether it will be a “U”, “V” or a “W” shaped recovery. The answer is none of the above. It is going to be “C -shaped” recovery, but not as in the letter “C” but as in coffin.

 

 

The Coffin-Shaped Recovery

It would be a miracle if trillions of dollars of debt could be wiped out with one stock market crash and be succeeded by a new bull market driven by another large offering of credit by the Fed.

But such a central bank-engineered miracle today is impossible. Capitalism’s natural cycles derive from central banker’s unnatural infusion of credit into previously free markets. The subsequent distortion causes market demand to expand (which everybody loves) only to be followed by the inevitable contraction—which everybody hates.

Usually, central banks wait until previous levels of excess credit have been absorbed in an economic downturn before embarking on a fresh round of credit creation. This time, however, it is different.

This time, the cumulative buildup of debt over previous cycles where contractions were cut short to minimize economic pain and attendant political consequences is now so large that any contraction is sufficient to bring down the extraordinary backlog of debt built up over previous cycles.

The current contraction is more than sufficient to do so as it is more severe than any downturn since the 1930s; and despite the frantic attempts of central banks to contain the cumulative forces unleashed by previous cycles of credit and debt, the enormous but fragile paper-based economy built by central bankers’ paper money is now collapsing.

To hopefully prevent the collapse from reaching its catastrophic end, central bankers have now intervened far earlier and with far more credit hoping to prevent the day of reckoning, a reckoning soon to be evidenced by an historic deflationary depression that will wipe out all accumulated unpayble debts, albeit at the cost of a functioning world economy.

Such is Ben Bernanke’s considerable task. Despite his outwardly positive demeanor, Bernanke is well aware that his desperate gamble hasn’t worked.

In these times, the last thing you want to be is Ben Bernanke’s sphincter.

(note: Martha declined to produce my relevant cartoon)

KEYNESIAN COPS, FRIEDMAN’S FOLLIES, AND THE FLAWED THEORY BEHIND THE RECOVERY

The current chairman of the US central bank is Ben Bernanke, a self-described student of the Great Depression; but, learning is limited by what is taught and regarding the Great Depression, Bernanke’s teacher unfortunately was Milton Friedman.

The reason why central bankers (and Ben Bernanke in particular) are flooding the global economy with money, i.e. borrowed, printed, or monetized out of thin air with such abandon (who would have thought bankers could act with abandon except, of course, when believing risk is non-existent and they’re betting someone else’s money), is because of Milton Friedman’s theory, to wit that economic contractions can be reversed by sufficient monetary expansion.

Laid bare, Freidman’s theory is another iteration of the Keynesian belief in the power of government intervention, albeit an intervention cloaked in Friedman’s more palatable—at least to those on the right—conservative garb.

Friedman argued that if the Fed had aggressively expanded the money supply in the 1930s, it would have then counteracted deflationary forces and prevented the Great Depression, an argument unfortunately as flawed as another of Friedman’s pet theories, i.e. thatfloating exchange rates would naturally over time bring global trade deficits into balance.

Note: When exchange rates were allowed to float in 1974 as encouraged by Friedman who also encouraged Nixon to abandon the gold standard in 1971, the US had a positive balance of trade. Thirty five years later, the US trade deficit is well over $800 billion and is growing over $20 billion each month (Hey, Milton, how much more time will it take to balance the trade deficit?).

Professor Antal Fekete warned several years ago that Friedman would someday be proved wrong and that we would collectively suffer the consequences; and, that just as during the Great Depression when banks hoarded the government’s cheap money instead of lending it, they would do so again when Friedman’s theory of monetary expansion was tried during another contraction.

Professor Fekete’s warnings have now come true. Today, US bank lending growth has entered negative territory at the same time cash reserves at US banks increased by 1,460 %.

Frank Shostak in Does A Liquidity Trap Pose A Threat, 9/23/09, on mises.org writes:

The latest data for lending in the eurozone the United Kingdom, and the United States display a visible weakening. In the eurozone, the yearly rate of growth of bank lending to the private sector fell to 0.6% this July from 9.3% in July last year. In the United Kingdom, the yearly rate of growth of lending to the private sector fell to 2.2% in July 2009 from 10.1% in July 2008. In the United States, the rate of growth of lending plunged to minus 3.8% in August 2009 from a positive figure of 8.6% in August 2008…At the end of July this year, [however], US banks were sitting on $729 billion of cash against $1.9 billion in July last year.

http://mises.org/story/3697 [bracketed words, mine]

Friedman’s theory is flawed and as suspect as the paper money Friedman and Keynes both promoted. Central banks can print all the money they want but that will not necessarily increase the money supply as central bankers are discovering.

Severe monetary contractions that cause deflationary depressions are so powerful they, like monetary black holes, can destroy money faster than central banks can create it.

The on-going monetary contraction is now clearly evident. Ambrose Evans-Pritchard, columnist for The Telegraph UK, points out the glaring truth that Bernanke and most of his paper-weight brethren would like to avoid:

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months… the M3 ‘broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

“Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March…. shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

http://www.telegraph.co.uk/finance/economics/2795017/Sharp-US-money-supply-contraction-points-to-Wall-Street-crunch-ahead.html

This is not your mother’s contraction. Instead, this is the mother of all contractions, a contraction far greater than even that which sent the world into the Great Depression in the 1930s.

This time, the amounts owed are exponentially greater than what was owed in the 1930s; and, the greater the debts, the farther the fall. Debt does not just disappear without consequences, nor can it be outrun, sic outgrown, as economists are desperately hoping, especially today when economies are contracting, not expanding.

Economic contractions cannot be reversed by expanding the money supply any more than wishful thinking by itself will change the world. Despite the best efforts of central bankers like Ben Bernanke, Friedman’s flawed theory cannot save the world from what is now about to happen—the mother of all depressions that may be capitalism’s last.

Keynes and Friedman, both brilliant, were both believers in paper money. Paper money has many powers, not the least of which is the power to mislead and delude.

Milton Friedman thought a lot Of paper money and more Like Keynes and others who thought the same Milton showed gold the door And now our gold is spent and gone And so is Milton too And now we’re left bereft and broke Not knowing what to do But Ben Bernanke’s at the helm Of the sinking ship we’re on And soon like Milton and our gold We, too, will soon be gone So let’s make a toast while we’re still here To those who caused our ruin To those convinced that they were right But didn’t know what they were doing

WHO BENEFITS FROM THE FRAUD OF PAPER MONEY

The substitution of paper money for gold and silver has always been imposed by those who govern upon those governed; and, in the US it was done so illegally. The US Constitution explicitly defines the US dollar in silver, not paper money. The current regime of fiat money in the US is not only a monetary abomination, it is de jure unconstitutional.

The imposition of fiat money in the US was done without the consent of the governed. However, those who govern approved it. This is because the advantages of paper money accrue to those who rule; and it is in their interests, not society’s, that paper fiat money becomes the coin of the realm.

The disadvantages of paper money are borne by society-at-large, i.e. entrepreneurs, workers, businesses, retirees, savers, etc. who pay retail for the credit dispensed wholesale to those better connected, e.g. are you able to leverage your investments 50:1 as can JP Morgan Chase, Goldman Sachs, etc.; and, can you to carry your underwater investments at full book value and borrow against them as it does Wall Street? And were you bailed out last year as were the banks?

I have always been amazed at those who identify with a system that primarily serves the needs of others and only incidentally theirs. I can only conclude that such identification is symptomatic of low self-esteem, as self-interest alone would dictate otherwise.

We are now headed towards a rendering so extreme that such divisions will become clear and perhaps the many will finally cease identifying with a system that benefits the few closest to the fountainhead of credit while penalizing the many farther downstream which usually includes them.

Modern economics is a sophisticated Ponzi-scheme cross-pollinated with a shell game designed for the advantage of government, banks and those at the front of the line wherein money is created out of thin air to be loaned to others who will in the end be indebted beyond their means to repay and whose economic futures will be destroyed by the inevitable confluence of the bankers’ compounding interest and their constant inflation of the money supply.

 

If you doubt this is so, an article The Event by Eric Andrews, is a must read, especially the areas directly concerned with money and its creation. If you already believe this is so, Eric Andrew’s article is even more important. Clear, concise, and conclusive, it points out the inherent problems with our debt-based system of paper money, a system that contains its own seeds of destruction, seeds which are now flowering, www.financialsense.com/fsu/editorials/2009/0921.html.

Andrews also points out where we are and perhaps headed without guessing when we will arrive. We face a minefield of possible scenarios as deflation, inflation, hyperinflation, or a combination thereof may soon be in our future as the bankers’ paper money is now about to self-destruct.

THE BARRICKADE TO GOLD CRUMBLES

We are in the final stage of the paper-boys’ efforts to preserve their crumbling fiefdoms against gold’s advance. In truth, gold is not advancing at all. It is standing still. It is the constant decline in the value of paper money that makes it appear that gold is rising. Extant virtue needs no movement.

While I am in deep admiration of Professor Fekete’s insights on gold and money, I do not envy the price he paid for his learning. Professor Fekete’s understanding of monetary chaos derives from a childhood in Hungary beset by a hyperinflation more severe than even that of the Weimar Republic or Zimbabwe.

Professor Fekete then escaped communist oppression in Hungary to make his way to Canada where he received a front-seat look at the central bank and corporate collusion underpinning capitalism’s fraudulent paper-money scheme.

Upon retirement, Professor Fekete had invested his savings in Barrick Gold Corporation, a Canadian gold mining company. But instead of an expected return on his savings, the professor got an unexpected education in how Barrick assisted central banks in suppressing gold.

Barrick’s forward selling of unmined gold from 1988 to 2003 put thousands of ounces of paper gold on the market which forced down the price of physical gold. For years, the forwards sales of Barrick and Anglo-Gold Ashanti were responsible for the downward spiral of gold’s price, a goal desired by investment banks doing the bidding of central bankers.

Professor Fekete, as a shareholder, clearly understood that Barrick’s forward selling (or so-called hedging operations) came at the expense of shareholders. It did, however, directly benefit the central banks who wanted to cap the price of gold. Today, the “Barrick-cap”, a major “Barrickade” against gold’s rise is no more.

This month, on September 8, 2009, Barrick Gold Corporation announced it was taking a $5.9 billion charge against 3^rd quarter earnings in order to buy back all its forward contracts, a considerable sum to pay for succumbing to the wishes of those in power.

Once again, Professor Antal Fekete was right. Sponsored by the Gold Standard Institute, Professor Fekete will be in Canberra, Australia, November 2-5 speaking on “The World Financial Crisis and the Vanishing Gold Basis”, see http://www.professorfekete.com. I consider the Professor to be a light in these dark times. I and others will also be speaking.

It is absurd to discuss the price of gold without discussing central bank or government efforts to force the price of gold down, an effort that may soon be ending due to the imminent advent of the end-game.

In my Youtube video, http://www.youtube.com/watch?v=5o36Dj-ukPo, I discuss the possibility of whether or not the US will again confiscate gold. I wish the possibility were not so.

But, today, governments cannot see an alternative to that offered by central bankers, the merchants of debt who have enslaved nations with their fraudulent debt-based paper money. As yet, there are no alternatives to the bankers’ offerings. But after bankers and governments fall—and they will—alternatives will then become clear

Buy gold, buy silver, have faith.

Darryl Robert Schoon

Clock ticking on first-time homebuyer tax credit

As days tick off the calendar, the life span of the much-ballyhooed tax credit for first-time homebuyers is drawing to an end — unless Congress decides to extend it.

There have been more than a dozen bills introduced in Congress to prolong the life of the tax credit past the Nov. 30 deadline, and on Thursday Senate Majority Leader Harry Reid endorsed the idea of extending the credit for an additional six months. The housing market has been devastated in Reid’s home state of Nevada.

This week, the White House said its economic team is evaluating the credit’s impact on home sales and will make a recommendation to President Barack Obama.

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Washington on the Economy: The Big Con

By Al Walsh

Obama, Geithner, Bernanke and the rest of the Washington cast of characters are basking in the afterglow of the G-20 summit and parading around the country:  patting themselves on the back for “saving civilization” and pronouncing that “the Recession is over”.

Yeah?  Really?      Let’s reconsider that.

The derivatives mess that was key to bringing the whole house-of-cards down is still with us.   One recent article valued it at over one quadrillion dollars.  We can’t know for sure, because it’s unregulated and no one’s talking.

The banks are still insolvent.  Creative accounting, with the government’s blessing, hides the extent of the rot.  Many experts say that more bank bailouts are coming.

The bank bailout created a whole new debt element that Main Street is expected to pick up the tab for.  One article predicted that the interest alone on the debt could amount to more than our total Gross Domestic Product.

Unemployment is awful and getting worse.  The true figures are much worse than the intentionally deceptive government data says.  The last estimate I saw was 16%+ nationally.  While Obama beats his chest and crows, fresh layoffs are being announced; such as Eli Lilly’s announcement of 5,500 more layoffs over the next two years.  I suppose that when we’ve finally all lost our jobs, the statistics will look great because there won’t be anyone left to get laid off.

The housing market has stabilized a bit, but there are more mortgage resets coming that will drag it down further.  Commercial real estate just continues to decline.

Consumers are expected to pick up demand and buy us out of the recession – but how?  They’re up to their necks in debt, out of work, and broke.  Adding insult to injury, the very banks who created this mess are gouging them with new banking & credit card fees.

There’s good reason why Gold & Silver are rising in value; despite government’s best covert efforts to hold them down.  The dollar’s been trashed, and is becoming a laughing-stock globally.   I just laugh when the Fed ”suits” keep talking about a “strong dollar policy”.  I’m starting to feel like a ”banana republic” citizen.

Wall Street pundits cheer whenever the stock markets show an uptick.  Keep in mind that the vast majority of market trading is institutional; by the very people who have the biggest vested interest in fooling the rest of us.  Gee, there couldn’t be any market-rigging going on, could there?  Nah, we only have free and open markets here in America (and if you believe that I’ve got the proverbial bridge to sell you).  I’m reminded of the time last year or the year before when Goldman Sachs was publicly recommending that investors sell their Gold (while secretly buying it for their own account).

I won’t even get into the growing “anti-business”, socialist tendencies of our government for decades that have done so much damage.  We voted these successive administrations in, and we deserve what we get.

Apparently Obama thinks that he can talk us out of recession by spreading rosy messages.  Mr. President, even if you could pull the wool over America’s eyes - they have few assets left to do anything with.

For decades, the Fed has been pulling our economic “butts out of the fire” of each bubble by pumping out even more money and creating new bubbles.  I think they’ve finally run their string.  Now we have a long way to go to dig ourselves out; the hard way.

I respectfully disagree with you President Obama, and consider it insulting that you think we’re so ignorant as to buy into your big con.

By the way, I sure would like to see that audit of the Fed which has been getting kicked around in Congress.  Actually, I’d like to see the Fed be audited, and then disbanded.  They’ve screwed up our economy and stolen from the pockets of the citizens long enough.  It’s time to put U.S. monetary policy into the hands of a true government agency; and out of the hands of self-serving bankers. While we’re at it, how about an audit of the Gold reserves.  Why all the secrecy?  What do you have to hide?  What have you “gentlemen” been up to for decades that you don’t want America to know?

I love America and don’t want to see the country endure any more pain, but I have to “call ‘em as I see ‘em”, and the fundamentals just don’t add up to the same story as the ‘Washington speak”.

Protect yourselves the best you can fellow citizens.  It’s going to be a long and bumpy ride.

Borrowing from the immortal words of Dennis Miller:   “It’s just my opinion.  I could be wrong.”

Of course, according to former President Carter, I’m just being a “racist” for daring to disagree with President Obama.  I actually feel sorry for the President that he has to endure this buffoon speaking in his name.  There seems to be no end to the silliness.  If only it wasn’t so expensive.

Mortgage market bound by major U.S. role

In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history.

Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.

While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government’s newly dominant role — nearly 90 percent of all new home loans are funded or guaranteed by taxpayers — has far-reaching consequences for prospective home buyers and taxpayers.

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Economy… Deficit Spending… Treasuries… Jobs… China… Real Estate… Government… and more

Chuck Butler…

Well, no data yesterday left the markets drifting about the open waters. Stocks rebounded, which gave the risk assets a bias to be bought, but for the most part, the day was much like being a drift in the ocean, with no direction or cares!

That will all change beginning today with the Nonfarm Productivity report for the 2nd QTR… Long time readers know my dislike for this data, as I believe it simply shows that one person works longer hours! The Fed Heads used to be all over this data like a cheap suit, and probably still trip over themselves to see the data when it prints… But to me, it’s not what Big Al Greenspan made it out to be…

Tomorrow is the big data day this week with both the Trade & Monthly Budget Balances printing for July… The Trade Deficit should tick up some, as Oil prices have gained in recent weeks, and the Monthly Budget Deficit? Oh my! It is forecast to be $180 Billion in the red! Which annualized would be more than $2.1 Trillion! But don’t worry about it folks, no biggie according to the folks in Washington D.C. The Treasury will just issue more bonds, and the Fed will buy up any that don’t get bought, and pay for them with money they printed up fresh that day!

You know that I’m be facetious with the “don’t worry” talk… I’ve been talking about this deficit spending for quite a few years now… I like the fact that others have joined in now that the numbers have gotten so large they are as obvious as a man with a hatchet in his forehead, but at least they’ve joined the “stop the deficit spending movement”…

Speaking of The Treasury issuing Bonds… This week alone the Treasury will auction $37 Billion of 3-year Notes, $23 Billion of 10-year notes, and $15 Billion of 30-year bonds… Even using “new math” that brings this week’s issuance to $75 Billion! That sound? That sound you hear is foreigners choking on all this issuance! Does anyone know how to apply the Heimlich maneuver?

I’m doing some research on the years around the depression, looking at market movements, and confidence levels… It’s amazing the things that were being said right up and to the stock market crash about how everything was fine… Then skip ahead to the 80′s and you had the same things going on with lofty praises for the S&L industry, especially one by Big Al Greenspan, and then the S&L industry circled the bowl… Makes you wonder, and I’m not talking about wondering who wrote the book of love… No, I’m talking about how this should make you wonder, or question, what’s being said about how great stocks are right now… When the President makes comments about “a good time to buy stocks”, you’ve got to stop and think folks… Just stop!

I also wanted to follow up on the Jobs Jamboree data we talked about yesterday morning… I had a very nice reader tell me that I “hadn’t fallen off turnip truck” as the participation rate fell! That’s right! As she said to me… “So, all those poor men and women that were hit at the beginning of the recession have the great pleasure of no longer being counted as either employed or unemployed.”

OK… Enough of that! China came out with some data today… While exports continue to suffer the stimulus that the Gov’t put into the economy, which made sense due to the fact that the Gov’t had a war chest of cash to put into the economy, which is the exact opposite of the situation in most countries including the U.S.  Chinese Industrial Production growth was strong, marking three consecutive months of improvement in Industrial Production. The ongoing recovery of domestic demand is good, while consumer demand keeps holding up well with July retail sales growth up 15.2% year-on-year…

Now, I fully understand how there can be questions about the validity of Chinese data… But come on! We don’t live there, we have no idea! And they don’t have a John Williams (Shadow Stats) to show everyone that the Gov’t's official data prints are misleading and most times inaccurate!

I saw this report on the Bloomie this morning from Zillow… “Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb.”

That’s depressing stuff… Very depressing… So! I’ve got to find a “feel good” story… Of course if I were the Gov’t I would have a pocket full of those, to pull out whenever the consumers needed one! HA! But, I’m not the Gov’t! thank goodness! Whenever I think of the Gov’t, I think of those words that Ronald Reagan spoke regarding the scariest words a person can hear… “I’m from the Gov’t and I’m here to help”

Sell REITs Some More

By Dan Amoss

Economic distress is metastasizing throughout the commercial real estate market.

As I mentioned last week, Kilroy Realty’s (KRC) earnings were ugly. The stock soared anyway. Apparently, investors are focusing on hope rather than substance. Kilroy’s conference call after the earnings announcement did not provide any evidence of a turnaround, only hopes and wishes. CEO John Kilroy describes his hopes for recovery in profitable rental activity on the call:

“Certainly there’s some pent-up demand. We’ve seen a lot of folks that had been close to signing an LOI and then backtracked and decided to stay and do a one-year lease in their existing space. So we do think there’s some pent-up demand with regard to improving people’s facility structures, but there clearly has been a wait and see attitude, as Jeff mentioned, amongst the broad number of tenants throughout Southern California, given the economic conditions.”

That wait-and-see attitude will be around for a long time. “LOI” stands for letter of intent, and it’s an early stage, non-binding agreement about the terms of a potential lease deal. Kilroy management is trying to paint a bullish picture about “pent-up demand” for office space, but this is a ridiculous notion. Potential tenants are just testing the water, and very few of Kilory’s LOIs will be converted into signed leases.

Consider that Kilroy’s core San Diego market is now over 20% vacant. Why on earth would any potential tenant be in a rush to sign a new lease? The signs of a turnaround in demand for commercial real estate are as bogus as the “green shoots,” and are only being temporarily boosted by the government’s destructive fiscal and monetary policies.

We are very far from seeing capacity utilization in office space stabilize, let alone turn back up — especially in Southern California. The analyst covering Kilroy at Stifel Nicolaus hit the nail on the head with this comment in a post-conference call note:

“The primary issue is large tenant move-outs in small tenant markets: Accredited Home Mortgage vacating roughly 182,000 square feet, Epicore moving out of 173,000 square feet, Boeing out of 113,000 square feet of Orange County industrial and Boeing on the fence for 290,000 square feet of El Segundo office space in mid 2010.”

Meanwhile, the only way to explain the recent moon shot in all REIT stocks is short-covering.

According to Goldman Sachs Research, U.S.-listed REITs have raised roughly $13 billion in capital year to date; yet they still need an estimated $40 to $60 billion, even without further reduction in REIT values. There simply is not this amount of dedicated REIT mutual fund money in existence. Those REITs who can raise new equity will keep doing so, flooding the market with new, dilutive shares.

The number of REIT shares outstanding is soaring at a time when property values are plummeting. The MIT Center for Real Estate maintains databases on property values. You can find the data at this link. The estimates of supply and demand for each type of commercial property paint a very bleak picture for rents. MIT notes that the second quarter of 2009 saw an 18% sequential decline in commercial property prices — not year-over-year, but quarter over quarter.

Distressed sellers are pushing down comparable prices, which marks to market every REIT’s portfolio. Furthermore, crashing rental yields are becoming less reliable as indicators of property value. Prospective property buyers — real investors, not the momentum traders chasing after REITs in recent weeks — will adjust rents downward by anywhere from 20% to 30% over the next year or two to factor in the massive excess capacity in commercial space. Finally, the REIT stocks have not even begun to discount the bearish impact of higher Treasury bond yields, which will increase their cost of future refinancing.

Despite the mountains of bearish evidence, the REIT index continues to rally. This has the feel of a blow-off top. I did not expect something like this to happen – a situation in which money would start to flow into the REIT sector, setting off a short squeeze. But I continue to recommend shorting REIT stocks (as well as the lenders who hold large quantities of commercial real estate loans). Specifically, I like SRS, the UltraShort Real Estate ProShares ETF (NYSE: SRS. Current price $11.63) as a way to profit from weakness in the REIT sector. But fasten your seatbelt! SRS is volatile. It delivers twice the INVESE return of the Dow Jones U.S. Real Estate index. In other words, when REITs fall, this ETF goes up a lot. But when REITs rise, this ETF falls a lot.

This ETF isn’t for everyone, just for those investors who believe the commercial real estate sector is ripe for a fall.

REVENUE BREAKDOWN – Obama’s Spending Spree, August 7, 2009

REVENUE BREAKDOWN – Obama’s Spending Spree

by Stephen Wellman
August 7, 2009

 

This is for the week of August 3, 2009. As an American, do you know where your DEBT is? If not, then click HERE …

Well, the big news this week was the improving jobs market. Less people are losing their jobs according to the July results the BLS published on Friday. My response would be to look at US WITHHOLDING TAX REVENUES and they look really bad for July no matter what the BLS says.

The last work day in July and this is what we see for US Withholding tax Revenues, a complete rout! Over a 17% quarterly growth decline.

But somehow Unemployment benefits keep going up, up another $473MIL USD for the day, August 6^th, bringing the total for FY 2009 to $94.7BIL USD so far. I looked back to this same time last year for FY 2008 and total spent for the year was only $33.5BIL USD, so Obama is spending 2.8 times more than Bush did, so that means the unemployment rate must be 2.8 times more than in 2008 at this time. Back in August 2008 the official unemployment rate was 5.7%, so times that by 2.8 and based on spending alone the unemployment rate right now should be closer to 16%. The official rate of 9.4% does not look accurate when measured against outlays. I doubt benefits have gone up much, if at all, within a one year time span, so the cost of living adjustment(COLA) or inflationary adjustment would be negligible.

While we’re on “labor market” line items I also checked the data for Federal Salaries and Federal Employee Insurance Payments compared to 2008. Both are up as last year Bush spent $135.8BIL USD at this time on Federal Salaries and he spent $48.4BIL USD on Federal Employee Insurance Payments. The Wednesday numbers for those line items found Federal Salaries up about 9% at $148BIL USD and Federal Employee Insurance Payments up about 5.4% at $51BIL USD. No “deflation” there in terms of the number of Federal employees getting paid! So where are all the Obama government spending cuts?

As we found out last week Washington DC’s version of “Pay As You Go” is “GO” and then pay ten years later. I would rename that strategy “Don’t Pay As You Go Broke”! Is there any common sense left in Washington DC any more? How about “integrity”? Any “shame”? What does reside in Washington DC these days is the complete opposite of what this country needs in order to have a “real” recovery and that is fiscal and moral responsibility.

US TREASURY DAILY STATEMENT

July 31, 2009 – In one word … WOW! Massive debt would be an understatement for Friday, July 31, 2009. The biggest numbers were for the US PUBLIC DEBT, which rocketed skywards by $88BIL USD in one day! Let me repeat $88 BILLION! Not $8.8 but $88!! That is HUGE …

Next we get another HUGE number for Medicare, some $17.2BIL USD spent for Friday alone. If we add in Medicaid and Social Security and SSI the one day total is $20BIL USD.

Now look at the US military spending on Friday. If we add Defense Vendors and Military Active Duty Pay along with Veterans Benefits we get a one day outlay of $8.4BIL USD.

Then we can see we had to pay interest on Treasuries (US DEBT) of $3.5BIL USD on Friday.

Add in some $16BIL USD for the two mystery line items “Other” and “Unclassified” and the two line items total up to $2.04TRIL USD for FY 2009, that’s only ten months worth of spending.

August 3, 2009 – On last Friday the US Treasury spent $17.2BIL USD, now on Monday, August 3, its Social Security’s turn. The US Treasury spent $22.4BIL USD on benefits in one day, while Medicare got another $1.1BIL USD.

It seems to be “retirement day” as Civil Service Retirement Fund and the Military Retirement Fund got a combined total of $8.3BIL USD on Monday.

Housing and Urban Development(HUD)got $2.3BIL USD on Monday.

The two mystery line items “Other” and “Unclassified” append a combined total outlay of nearly $13BIL USD.

August 4, 2009 – The big spending was in Defense and the Dept of Education. On Tuesday the US Treasury spent $1.6BIL USD on Defense Vendors like Lockheed and they spent $1,7BIL USD on Education.

August 5, 2009 – More Defense spending for Wednesday, another $1.6BIL USD for the day. It seems Defense stays at the $1.5BIL level every day.

August 6, 2009 – Some $2.7BIL USD in outlays for Social Security, Medicare and Medicaid. Another $1.3BIL USD spent on Defense Vendors. Not much changes in spending.

The Thrift Savings Plan (TSP) sits at $17.5BIL USD in outlays for FY 2009 so far. See this in the line item review below.

There were some huge moves in the US DEBT department in terms of short term US Treasuries like Bills, which have maturities of one year or less. The Bills issued were Regular Series and Cash Management Series, which is where some, not all “sweep accounts” end up. Total issued was $131.788BIL USD and total “redeemed” was $131.790BIL USD, so practically the same amount of Bills were issued as there were redeemed, so which came first? That is not divulged by the US Treasury on the DAILY STATEMENT. Isn’t it interesting that we always hear in the financial media about the auction results but we never hear the stats on “redemptions”. To me that’s like buying a house and never meeting the seller or even the real estate agent! Are we supposed to assume that nobody ever redeems US DEBT or that they constantly roll it over?

I thought up this interesting scenario in my head about “sweep accounts”. These are accounts used for Wells Fargo checking and your ETrade or Charles Schwab accounts when your cash is sitting idly by. The sales pitch says that you should make interest while your money sits in a non-interest bearing account, which most checking accounts are and cash accounts for brokerages. It is a good benefit, but it also benefits the banks as it lowers their reserve requirements since a large portion of the deposit is swept outside the bank. One down side is that not all “sweep funds” are covered by the FDIC in an instance where the sweep bank fails. The FDIC does not cover those funds if they are in a commercial account.

The other side of this equation is the “money market funds” that receive these “sweep account funds” use those sweep funds to buy short terms US Treasuries so that they can pay you interest. Next week I will ascertain what percentage of those “sweep funds” make up the overall US Treasury Bills. I have a feeling it is a significant part, but how much?

.

September is the last month of the third calendar quarter but it is the last month of the fourth quarter of FY 2009, which ends September 30^th. On October 1^st the US Treasury starts FY 2010. We are less than 2 months from the end of FY2009. Perhaps now is a good time to look back to the first year of George Bush in 2001 and compare what Bush spent in his first year compared to the first year of Obama. Granted Bush did not face the monumental crisis that Obama now faces but some items like Medicare and Social Security do not really reflect the financial crisis, so lets look at those line items first.

YEAR	FY 2001	FY2008	FY 2009	%
	in $bil	in $bil	in $bil	INCREASE
	GB 1st YR	GB last full yr	BO 1st YR	2001-2009
Social Security	324.9	491.2	477.8	47.06%
Medicare	237.5	448.9	425.1	78.99%
Medicaid	129.3	198.9	208.5	61.25%
NOTE: Obama outlays as of 08/04/09

Clearly Medicare leads the pack, not so much on purely outlay levels but from an increased percentage basis. If Medicare was a private company it would be bankrupt.

As you can see there has been quite an increase in entitlement outlays from 2001 to 2009. While part of that is the Obama administration another part of the increase is what I call “embedded inflation” over a nine year period. This embedded inflation exists simply because of big government and its decades of promises and guarantees that has created a huge malinvestment in every American family. Now health insurance is like another house payment. What we now pay for car loans used to be a home loan and so it goes as people struggle to create enough income in order to just pay for basics. This means both parents must work, maybe even the kids as well. These DEBT ATTRITION circumstances eat away at the moral fabric and what’s left of the nucleus of the family. Many times the stress is unbearable and one of the two wage earners ends up sick in a hospital or injured or incapacitated in some way, either physical or mental. The root cause of family stress and the malinvestment of DEBT ATTRITION can be directly linked to the massive spending that is the hallmark of big government, crony socialism gone wild …

It is part of our conditioned belief system here in America that “prices always rise”. This has been true for 95% of my life. Look how much real estate has gone up over the last 50 years. Gasoline is up a lot and so is health insurance. Electricity cost more and so does food. Americans have been conditioned to believe prices always rise and they have. Ask any stock broker who works for Morgan Stanley and they will show you a chart of the DOW going back to 1900 and it is UP. In the few times in my life when I have seen prices go down, like they have been lately, people in America go into a panic mode. The government has to PRICE FIX or else they would be out of office on the next election. In essence that is what Obama and the DEMS and REPS are doing now is PRICE FIXING. They are trying to stop the downward spiral by using the only weapon they have and that is inflating the money supply. There really exist only two strategies the US FED will employ to deal with the money supply of America. One is NO BRAKES and the other is MORE GAS! How else could a Lobster Dinner cost me $45USD today when in 1939 it was 85 cents! Any guys here have any idea what it cost for a Filet Mignon Dinner Show at the Los Angeles Playboy Club in 1970, served by Bunnies? A grand total of $3.50USD! How about an oceanfront hotel room at the Outrigger Reef hotel in Waikiki Hawaii in 1970? $18USD per night … I was alive back then and I was 17 years old and if it weren’t for the Vietnam War and the likes of LBJ and Nixon, life would have been even better! Those of you alive back then may want to think back and consider if all this BIGGER government and BIGGER banks we have now is really worth it. I personally do not think it is …

LINE ITEM REVIEW

Last week I started a line item review, where we focus in on specific line items in more detail than just simply reporting the numbers. I selected line items in no particular order. Last week as you recall we started with the GSA line item.

This week we will focus on a reoccurring line item labeled THRIFT SAVINGS PLAN (TSP). This line item has nothing to do with the Savings & Loan crisis of the 1980s. Many of you get these mysterious e-mails from time to time that talk about how government workers do not have the same retirement funds we do, well this is one of those retirement plans. The Thrift Savings Plan website is HERE … The website has this brief description of those who participate in this plan:

“The TSP is a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services. The Federal Retirement Thrift Investment Board, administers the Thrift Savings Plan (TSP).”END

This is the equivalent of a 401k for federal employees …

In my research of the Thrift Savings Plan (TSP) I found out that the plans “asset administrator” who collects around 2% in fees is a foreign bank, Barclays, based in the United Kingdom. HERE is one of the six plans offered. This is “C FUND”, which invests in medium and large US company stock. The 12 month performance return is at a loss of (37%).

How Barclays, a foreign based bank (London, UK) ended up managing US Federal employees and US military retirement accounts is the classic US government story of failure. Prior to Barclays managing these funds the asset manager was Lehman Bros, who are now bankrupt. HERE is Barclay’s information.

As I pointed out previously pointed out US Taxpayers have contributed some $17.5BIL USD to the TSP so far for FY 2009. That is $17.5BIL USD that made some entity a 37% return, only it was a 37% loss for government workers and the US military personnel who invested as well as a 2% gain for Barclays so that they could manage the 37% loss. Who knows maybe Barclay’s shorted the fund?

When you retire from civil service you are paid through an annuity program for your pension. If you recall those of us Americans who were getting Social Security checks with a 2.3% COLA increase, during the October 2008 the following was reported for government retirees.

“The reaction was mixed last week when the government announced the highest cost-of-living increase since 1982 for Civil Service Retirement System annuitants. Margaret Baptiste, president of the National Active and Retired Federal Employees Association, told Government Executive she was concerned that short-term relief for COLA-eligible retirees would come with a hefty price tag down the road. She was worried, she said, that the 5.8 percent boost for CSRS employees and the 4.8 percent increase for Federal Employees Retirement System participants would invite scrutiny of federal employee compensation and sharp cutbacks on future COLAS.” END

Have these government employees forgotten who pays their salaries and for that matter who pays their retirement? Just like the big US Banks the federal employees are concerned about scrutiny of their retirement.

While most of us here subscribe to newsletters and follow certain financial blogs the federal employees have their own blog where they have a forum on issues that concern their well being. HERE is a link to FederalSoup.com …

It is interesting that I mentioned the C FUND and how it has lost 37%, well the G FUND is made up purely of US DEBT investments like US Treasury Bonds. It seems the G FUND is a huge source of the US governments potential IOU for trust funds and the federal employees see that HERE. The entire thread of the forum is about the TRUST FUND and the fears that it will be tapped as a “bridge loan” when the debt ceiling is reached. However what it really boils down to is the same issue I have covered here before under the “non-marketable” Government Account Series, this is the US Treasuries issued as IOUs on incoming TRUST FUND deposits.

Here is what one of the participants had to say …

“I think people misunderstand the various “Trust Funds” associated with entitlements. The government doesn’t have a way to do anything other than spend all the revenue coming into the government each year. People like to think of OASDI being somehow different from pensions because it pools and distributes and because the accounting is a little different. But, if you read the links carefully, you should have picked up on the accounting sheets and realized that all you are seeing is either “money” or “debt” movement. But it is all the same. The government spends the revenue and, if there is a surplus, a Trust Fund is issued bonds and securities to mark the spot on the paperwork. “FERS” is “pre-funded” simply means that the money is sent in the agency budget and then returned as a deduction from salary and from the agency budget, both of which are used to purchase US bonds and securities. The “money” itself is spent either way. That is why a trust fund is not found in a locked safe filled with gold for good keeping. My reading of TITLE 5, PART III, Subpart G, CHAPTER 83, SUBCHAPTER III, § 8348 is that the accounting paperwork creates tracks that show money flowing from the general budget to the agency and paycheck to the Treasury (who issues a government IOU to the sheet using government debt) and finally back to the general fund to be spent the same way all revenue from security purchases are spent. Note that each year Treasury also has to deduct and send to OMB? or someone the funds for current retirees, even if it means selling securities. The funds then accrue interest as a government security of whatever sort is purchased. Something notable, however, is the requirement that each year a status of solvency is required and, if Congress/Whitehouse changes anything that results in a greater liability, they must add this amount to the cash flow paperwork and actuarial solvency I described. (Or if I mis-stepped somewhere in the accounting, to whatever cash flow occurs.) Assuming this part of Title 5 is the most current, the actuarial balance is as accurate as they can make it and all is OK. GAO seemed satisfied as to this point, at least in 2000. It also appears that CSRS, in an accounting sense, may have some of the same legacy debt (pre-80s) similar to the legacy debt that arises from the windfall of early recipients of SS. Let’s not worry about that but just note that this is all future liabilities where the money put in today buys something like a bond that gets interest and must be redeemed tomorrow if the cash flow demands it. Long winded and longer than my reply to your actual post, but necessary. Which is – There is no money there to tap. They spend it in some way and issue bonds as it come in. When you hear that the G-fund or pension funds are being “spent”, it is, yet again, only an accounting gimmick as long as they eventually back issue the government securities. What happens is that, when the debt ceiling is close to being breached and the government needs to continue to operate, they will hold off part of the process and spend the money without increasing the debt by issuing the securities. The issuance of the securities is, after all, just a paperwork exercise. They would never permit this to be done by anyone but themselves. After they vote themselves a new and higher debt ceiling, they issue the securities at the rate the securities would have gotten had they recorded the purchase on the right date. Remember, you feel like “money” was deducted from your paycheck, but what really happens is that somewhere there is paperwork crediting you with that money. Money in the “Main Street” sense never really exists anywhere in these exchanges. Even if they turned it into money by sending it to you first so you could send it back, nothing in the relationship of “your” money as it relates to “your” pension would change. Just like your savings account at the bank it is an IOU until you ask that they give it back to you. Even at the bank, it’s spent as soon as possible as it comes in because the bank gives you 1% interest in exchange for them loaning it to someone else at 5% interest. Would that the government could profit like a properly run bank?” END

Well, is there such a thing as a “properly run bank”? So as we private citizens despair of our situation and how our government keeps taking what we earn and hands us IOUs in return, it seems the Federal employees feel that they are in the same boat.

Really we all hold a paper receipt, a US Dollar (FRN) for our years of hard work, we call accumulated wealth. In a World where everything including our money is “irredeemable” the value of our accumulated wealth is floating like the fiat currency markets (FX) where they trade. The true value of our accumulated wealth as defined by a fiat monetary system is truly esoteric, for if every man knew how valueless their remuneration becomes over time there would be a general uprising not seen since the French Revolution.

DEFENSE VENDORS LINE ITEM UPDATE

Readers of this weekly article already knew that Obama was outspending George Bush by 2 to 1 in military armament. The following chart was widely circulated at this week which verifies what I have been reporting via the US TREASURY DAILY STATEMENTS. What manufacturing the USA has left is mainly military related. Once again I will point out that if we were to eliminate US government contracts by shrinking the size of government, the Forbes Fortune 500 list would become the Fortune 5 list, surely the Defense industry would be eradicated under such circumstances.

What a massive divergence …

Let’s look at some more charts that show more massive divergence …

Here is another chart from the US FED St. Louis that puts the size of the banking crisis in perspective compared to the S&L Crisis.

Yes, 2008 was a bad year for a couple banks, mainly Lehman’s and Bear Stearns. This chart clearly shows the leverage that exists now as compared to the 1980s.

Imagine that Lehman Bros. was first founded in 1850 and it collapsed into bankruptcy in one year after 158 years … Bear Stearns was founded in 1923, so that is 85 years of business down the tubes in one year. Then there is AIG, founded in Shanghai, China back in 1919, now look at it.

Isn’t it amazing how long these banks were in business prior to the advent of derivatives? When does Congress investigate derivatives? As you recall Greenspan repeatedly told Ron Paul in Congress that the derivatives market needed no regulation.

We have all heard the comparisons to the Great Depression in various news articles but here is what the US FED St. Louis says in their very own inflation chart.

While some assets have deflated like real estate and 401ks I have yet to see any price deflation in consumables required for daily survival, like food, water, electricity, gas, telephone, health care, etc … Not even all “real estate” has deflated in price. Farmland for one still retains its value prior to 2007. Not all 401ks have lost value either. Also gold has held up pretty well had you have bought in 2007 prior to the real estate crash. With gold priced at an average of around $700US per ounce you would have had close to a 40% gain on Friday’s (Aug 7, 2009) close of $955USD. A worthy investment considering what many people have lost over that same time period by buying real estate or stocks.

IT IS WHAT IT IS …

“All present-day governments are fanatically committed to an easy money policy.”- Ludwig Von Mises (1940)

The 1929 & 2007 Bear Market Race to The Bottom, Week 94 of 149: Has Real Estate Bottomed Out? Not Yet.

Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black

Below is my BEV chart for the Bear Race.

 

The spread between 1929 & 2007 is growing wider.  This looks good, but the United States has so many internal economic problems from years of “policy abuse.” I would not trust this correction to continue until Christmas. 

In my “Axis of Evil”, the Social & Political Science Departments” of Harvard, Princeton, and all the other institutions of “higher education” would headline the list.  After an honest survey of the current political and economic situation in Washington, and seeing exactly who is doing this to us, and where they got their training from, I can’t see where these privileged institutions having done anything beneficial for the average guy, or gal, who wakes up everyday to go to work for a living.

Recognizing the decades of dubious achievements of America’s “Social and Political Scientists”, the key to America’s financial markets is now in the hands of our foreign creditors.  If they got together and denied the rumors (when in fact there were no rumors) that they were going to start selling US T-Debt, the long bond’s yield would rise by a full percentage point in a few days.  God help us if they actually started to reduce their US Dollar reserves by only 10%.

In the last week, the US Treasury sold $235 billion dollars of new debt in the bond markets.  I saw lots of reports how bad the auctions were, and maybe if you’re a bond trader on the wrong side of the market last week’s auctions were awful.  But from Washington’s perspective, the ¼ trillion dollar bond sale this week went pretty well, as we can see in the chart below.

 

For the Treasury, how bad of a week in the bond market could it be when this 30 Year T-Bond’s yield was down, and its price was up?  As long as the “policy makers” can get away with their bond market scam, I expect the DJIA to do pretty well.

So who was buying?  Ask Treasury Secretary Geithner & Dr. Bernanke no questions, & they will tell you no lies!

Below is my 8-Count & DJIA BEV Chart

 

The 8-Count looks Bullish.  The following historical fact is undeniable: when the market experiences excessive 2% days (up or down, makes no difference) it’s bad for the Bulls.  So I’m not surprised to see a nice rise in the DJIA as its 8-Count falls.

 

Let’s take a look at a chart I used to post weekly.

 

This chart plots the DJIA daily volatility’s 40-&-200 Day Moving Average for the Great Depression and our current Bear Market.  The 40-Day M/A is dropping fast.  Remembering that Bear Markets are volatile markets, both of these plots of the 2007-09 Bear are still deep in bear territory.  We may currently be enjoying an excellent little rise in the DJIA, but history shows us that Bear Markets have excellent bullish corrections to the bearish primary trend.

The number of 2% days in each 200-Day M/A data point is now falling.

 

Last year’s rise (Red Plot) in 2% days is amazing.  The Great Depression’s rise (Blue Plot) pales in comparison.  Remember, 2% volatility days are uncommon, except during Bear Markets.  The starting points in the above plots marks the last 2% day during the Bull Market phase.  The plots start the day after this Bull Market 2% day.  Note that during the 2003-06 Bull Market, there was a period of 251 trading days, without a single 2% day.

The normal pattern for 2% days is as follows.  They start to increase in frequency during the blow-off phase in the Bull Market.  Note that the above plots show a rise in 2% days previous to their Terminal Zeros (last all time highs in the bull market), and then we see the big increase in 2% Days after the Bull Market has exhausted itself, and the Bear Market does its damage to stock valuations.

The question I have concerning the 2007-09 plot is whether our Bear got his 2% days out of the way early in the Bear Market, or if he is coming back for more.  Remember, volatility is a Bear Market phenomena.  With the pending problems in the credit and currency markets, I have a hard time believing this Bear’s work is finished.  But the market is going up.  So for now, enjoy!

Daily Volatility Statistics for Wk 94
	DJIA	% Move	DJIA 2% 8-Count	NYSE 70% A-D
Monday	9108.51	+0.17%	1	-
Tuesday	9096.72	-0.13%	1	-
Wednesday	9070.72	-0.29%	1	-
Thursday	9154.46	+0.92%	1	-
Friday	9171.61	+0.19%	1	-
Historical Daily Volatility is < 1.0% Source Dow Jones

DJIA Volatility Milestones
Market	Moving Average Maximum Value	Trading Days Post BEV Terminal Zero	Date of Peak Val
1929/32	40 Day M/A: 3.81%	77 Days	13 Dec 1929
1929/32	200 Day M/A: 2.50%	803 Days	17 May 1932
2007/09	40 Day M/A: 3.83%	284 Days	21 Nov 2008
2007/09	200 Day M/A: 2.12	385 Days	21 Apr 2009
*  3 Types of Daily Volatility from 1900 to 2008  *
Type 1: DJIA Close to Close Price Volatility’s 200 Day Moving Average Oscillates Above and Below 0.5%.
Type 2: DJIA Close to Close Price Volatility’s 200 Day Moving Average Ranges Between 0.5% & 1.0%.
Type 3: * Persistent Extreme Volatility * Consists of Two Parts   Part 1:  DJIA Close to Close Price Volatility’s 200 Day Moving Average Rises Above 1.0% and Stays There for Over a One Year Period   Part 2: DJIA Close to Close Price Volatility’s 200 Day Moving Average Peaks Above 1.5%.

The Lundeen Bear Box and Step Sum is below.

Since 07 July, the DJIA’s Step Sum has been rising.  It’s nice to see the DJIA going along for the ride.  But I can’t see the next 17 trading days doing likewise.  It’s in the nature of markets to challenge a trend such as we’ve had since early July.

So, sometime in the next week or two, I’m expecting a significant downward correction in the Step Sum below.  If the DJIA can keep most of its gains from last March, that’s good.  If the DJIA can keep above the 8500 level, as the Step Sum finishes its correction, and returns upwards, that is very good!  If the Step Sum declines, and market volatility returns, (an increase in the 8-Count) I would be very careful and take some profits.

So, we should expect a decline in the Step Sum, and need to see how the DJIA responds to it.

 

It’s a fact, but one that’s hard to believe: the #2 DJIA Bear Market took the DJIA down 54% on only 25 net down days from 09 October 2007 to 09 March 2009. 

 

So why did the Step Sum faithfully track the DJIA from 1995 to 2007, only to get hung up on something during a massive Bear Market?  The Federal Government got involved.  Dr. Bernanke has been talking about “injecting liquidity” into declining markets since 2002.

“…there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation. … the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
- Ben Bernanke: Federal Reserve Governor: November, 2002 at the National Economists Club, Washington, D.C.

With “monetary policy” managed by academics of the caliber of Dr. Bernanke, the day is coming when the dollar will purchase as much as it costs the Fed to create it: nothing.  You can be sure the failure of the US Dollar will be top of the fold, front page news, but only after the fact.   Don’t be surprised.  Journalists attend the same colleges as economists do.  You really should have few weeks of canned food in the house, a few thousand dollars in cash, and some gold and silver coins and bars. 

Currently, Bernanke’s “injections” are having their desired effects on the DJIA, and that is making most people happy.  Just don’t think this will go on forever.  I suspect we have not seen this Bear’s terminal selling climax in the above DJIA’s Step Sum.  When our Bear comes into his prime, and we see his terminal selling climax, you will not need me to tell you it’s happening.

The chart below is one I follow each week.  I think it’s that important!

 

When the Fed is forced to raise interest rates, it will be pure poison for the DJIA.  They will hurt the real estate market and the OTC derivative market, raise the unemployment rate, and kill profitability for America’s heavily indebted businesses.  So if we can find some way of gauging the pressure on the Fed to raise interest rates that would be a very good thing to have in timing this market.  I think the above chart gives us the interest rate pressure gauge the Fed must be watching.

Currently, the spread between Fed Funds and the US Treasury’s Long Bond is near record lows.  When we see this spread reach the -5% line, we know something big is up, something approaching that the Fed can’t control.  Currently Dr Bernanke has vowed not to raise Fed Funds or his Discount Rate for a “very long time.”  So to see this spread increase can only mean that long term interest rates are rising.  In other words, the bond market has more sellers than buyers. 

Somewhere below -5% in the above chart, the Fed must start to raise its short term Fed Fund and Discount rate or risk hyperinflation.  I expect when this chart falls below -5% we may see a break down in the DJIA as well as its Step Sum.

You may want to cut this chart out and keep it on your desk, or somewhere handy.  Here is where I get the data to update this chart every week.  Using my chart for a historical reference, a weekly update for personal use will prove handy. 

For Fed Funds

http://online.barrons.com/public/page/9_0210-moneyrates.html

For US Treasury Long Term Interest Rates I use the 20 Year T-Bond’s Yield

http://online.barrons.com/public/page/9_0210-adjmortbaserates.html

By the way, the data used in the chart above are from last week’s Barron’s.  So you may want to see what this week’s Barron’s has to say.

The Step Sum is an indicator of market sentiment.  When the underlying sentiment is bullish, the Step Sum will rise.  When bearish, it falls.

 

Think of the “Step Sum” as the sum total of all the up and down price “steps” in a data series over time; an Advance – Decline Line for a data series derived from the data series itself.  Logically, bull markets will have more net up days, while bear markets will have more net down days.   Understanding the Step Sum is no harder than that.

 

Has Real Estate Bottomed?  Not Yet!

People think in herds.  Once an idea becomes accepted dogma of the masses, one loses friends if he argue against it.  One dogmatic perception that really bothers me is, when someone signs on the dotted line at a home closing they become a “homeowner.”  Unless the new house was purchased with cash, this is not true.  What usually occurs at a home closing, is someone takes on a mortgage that allows them to occupy the collateral, as long as they make the payments to the bank.   People usually don’t know what they are actually purchasing when they sign on the bottom line: money, at a certain rate, for so many years, with the house as collateral.

In my mind, there is a big difference between a homeowner and someone who has the right of occupation by servicing a mortgage.  This distinction is becoming widely recognized by many former “homeowners” who “purchased” their houses from 2000-07.

The unspoken truth of the real estate market is it’s actually a market of mortgages.  The practical differences are huge.  In any market, other than the real estate market, the market functions as a price discovery mechanism for that market’s producers and consumers.  However, in the real estate market, the actual price of a house is only a secondary consideration.  The prime consideration in the mortgage market is the ability of the “homeowner” to make monthly payments for 30 years.

The chart below shows the history of US mortgage rates from 1964 to 2009.  Interest rates have a huge effect upon the valuation of real estate.

 

To see interest rates’ impact upon housing valuations, I’ve created a “what if” table below, using a constant monthly payment, at the peak and bottom mortgage rates in the chart above.  It’s very informative to see the effects of interest rates on the size of the mortgage.

House Valuation with a Constant Monthly Payment At 18.63% & 4.00% Interest Rates
30 Year Mortgage  @ 18.63% October 1981			30 Year Mortgage  @ 4.0% January 2009
* House Valuation	$92,500		* House Valuation	$300,000
Term in Years	30		Term in Years	30
Interest Rate	18.53%		Interest Rate	4.00%
Monthly Payment	$1,434		Monthly Payment	$1,432
Yearly Payment	$17,209		Yearly Payment	$17,187
Total Interest Payment	$461,281		Total Interest Payment	$224,697
Total Cost of Mortgage	$553,781		Total Cost of Mortgage	$524,697
* House Valuation Assumes no Money Down Mortgage.  Such Mortgages were rare in 1981, and too Frequent from 2000 to 2007.   Two facts should be noted in this table:   1. Financing by debt, has “Homebuyers” pay as much or more in Interest to the Bank than for Labor and Materials for the Actual Home Construction.   2.  Actual Home Values, are tied to the Bond Market.  When US Treasury Bond Yields rise, Home Values will decline.
Source Barron’s & Federal Reserve Graphic by Mark J Lundeen

It’s a point of interest that both the purchaser of the $92.5K & the purchaser of the $300K home (possibly the same house, 28 years later) paid about the same for their mortgage when interest payments are taken into consideration.  But then both mortgages have their “homeowners” pay $1400 a month for 30 years, so this is not surprising.  But people don’t think of details like this, even if bankers do.  This does not make bankers evil, but illustrates the poor quality of practical economic education Americans receive from their high schools and colleges.

We all understand there are many variables bankers and their clients have to deal with that my little “what if” table completely ignores.  Still, the table reveals truths about the real estate market.

One truth concerning the real estate market is the past bull market was primarily a function of the decline in interest rates from 1981 to 2009.  But exactly what kind of bull market was it?  In the table above, did the house’s valuation rise from $92.5K to $300K?  Or did interest rates falling from 18% down to 4% that qualify a client, with the ability to make a $1,400 a monthly payment, for a larger mortgage?  I think the answer to that question is very obvious; the real estate market’s rise in valuation was the result of a bull market in debt from 1980 to 2009.  And what the debt market gave “home owners”, the debt market will take away when interest rates once again rise.  Yes, I’m talking about home valuations. 

Can we use my “what if” table to predict future home valuations in an increasing interest rate environment?  Due to the formerly mentioned “many variables bankers and their clients have to deal with, I think not.

An unfortunate fact the real estate market’s participants must deal with in the future is that Congress expanded the Federal Government’s involvement in the real estate market in 1999.   That is never a good thing.  The Federal Government’s mandate of lowering of credit standards not only resulted in the financial ruin of many of the intended beneficiaries of “affordable housing”, but created a financial False Vacuum in the mortgage market that broke in 2007. 

For your information, False Vacuums are a Quantum Mechanics’ concept of a universal-apocalyptic readjustment where all the laws of physics change. In other words; after the False Vacuum breaks, what was once before can no longer be. 

The False Vacuum (an impossible-to-sustain situation) was created by legislation forcing the banking system to loan billions of dollars, at government subsidized rates, in 30 year mortgages, to America’s habitual credit deadbeats.  Congress then had Fanny Mae, Freddy Mac, as well as Wall Street, bundle these mortgages for sale to fiduciaries of other people’s money worldwide.  From 1999 to 2006, the False Vacuum held, as the world of high finance fell in love with “AAA-Rated, US Agency Debt.”  But the False Vacuum broke in 2007, when “AAA-rated Agency Paper” became synonymous with loosing all of your money.  The world has lost its faith in the American Debt markets.  So for the US mortgage market, what was once before in 2007, can no longer be.

The consequences of Congress’s breaking its False Vacuum in the mortgage market will have profound future implications in America’s real estate market.  One of the results of the fallout from the credit crisis is the shrinking pool of qualified buyers.  With an expanding volume of homes being placed in the market due to mortgage defaults, great downward pressure on home valuation is applied to the housing market.  A growing number of mortgage defaulters are former good credits whose only fault is becoming unemployed in a bad economy.  But, as the current credit standards have it, these unfortunate bankrupts are now disqualified for mortgage financing for many years to come.

Another consequence of the False Vacuum’s breaking is, the international market in US Agency Debt has lost much of its liquidity.   This will greatly reduce the ability of Fannie and Freddie to purchase mortgages from mortgage originators, as their ability to sell them is now greatly limited.  Recent experiences with American mortgagers have traumatized fiduciaries worldwide.  This creates a situation where banks in the future will have to use the mortgages they write for their own reserves, as they will not be able to sell them as in the past. 

But banks have never liked holding long term mortgage paper, which is why FDR created Fannie Mae and the Savings and Loan industry in the 1930s.  Congress can force banks to do ill-conceived things in the credit markets.  But Congressman Frank writing another chapter in the tale of woe, he and other American politicians inflicted upon the free markets in past decades, will not rekindle the bubble psychology in the housing market.

The future of the government-subsidized 30-year mortgage is grim when one considers:

1. the inevitability of rising interest rates
2. the damage done to individual credit standings of a broad segment of society by the recent housing bubble
3. today’s huge inventory of unsold homes, as well as homes held by banks in foreclosure proceedings 
4. the impairment of the mortgage financing network

I expect housing valuation to deflate to levels not believable today.  It’s a case of rising interest rates, a shrinking pool of qualified purchasers, to many houses for sale, and a greatly impaired financing system.  It will be this way for many years to come.

Mark J Lundeen
31 July 2009