Fri Post #2: Non Farm Payroll tanks (Updated)

The US Labor Dept. released it's non-farm payroll numbers this morning and the results are sending precious metals higher as expectations explode for QE3.

Nonfarm payrolls were unchanged last month, the Labor Department said. It was the first time since 1945 that the government has reported a net monthly job change of zero!

The August payrolls report was the worst since September 2010, while nonfarm employment for June and July was revised to show 58,000 fewer jobs.

“The bottom line is this is bad,” Diane Swonk, chief economist with financial services firm Mesirow Financial, told CNBC.

The numbers indicate employment growth ground to a halt in August, as sagging consumer confidence discouraged already skittish U.S. businesses from hiring, keeping pressure on the US Federal Reserve to provide more monetary stimulus to aid the struggling economy.   

Updates as the day moves along.

UPDATE

Gold and silver have been highly resilient in the face of the traditional bear raids that normally are executed ahead of the Non-Farm Payrolls number that was released today.

While many observers are now looking for a strong showing next week remember that Obama is making an economic announcement in a joint speech to Congress and the Senate.

Caution should be exercised as ammunition might be set aside by the banking cartel to support the Presidential Address with a bear raid on the metals.

Silver is poised to break and there is speculation we will see $60 - $70 this fall. We'll talk about this a little more on Sunday.

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A significant day of reckoning is coming.

If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.

Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.

If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.

You'd be dead wrong.

Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.

You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.

You will have no doubt, after watching this, about the direction that the economy will ultimately follow.

A couple of quickly transcribed excerpts:

• "It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.
  
  We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."

Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...

• "... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."

Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.

• "I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."

The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.

As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.

We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.

Are you ready for double digit interest rates yet? They're coming.

Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.

Hey... speaking of fearmongering about interest rates, Bank of Canada Governor Mark Carney sent out another warning to Canadians yesterday.

In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.

And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."

How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?

Apparently not.

• "Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."
  
  "The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."

Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.

• "However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."

Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:

• “Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”

Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?

What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?

Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.

Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'

Now why would Carney hike interest rates this time around when he didn't in the last crisis?

The source of the problems all stem from from other countries, the bank said.

(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)

The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.

Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.

The good news?

Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.

Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.

Speaking of what's coming, did you catch this Globe and Mail article profiling the musings of Stephen Jarislowsky, billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd?

Jarislowsky offered his thoughts on the next lurking financial disaster.

• "In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."

What drivel, eh?

You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.

If you do dismiss them, tho, don't say you weren't warned.

And remember... buy now or be priced out forever!

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Itsy Bitsy Spider... the impact of the US Foreclosure Crisis explained

If you follow this blog you know I tend to write about four things.

Real Estate, the Economy, the Banking System and Gold/Silver.

The four are inter-connected.

Lately I have spent a lot of time on the looming Foreclosure Crisis in the United States. I cannot stress enough how major and significant this story is.

A website I like to follow, Pragmatic Capitalism, recently sumarized the significance of this story. I hope you will indulge me with this condensed summary of the issue.

By the end I am confident you will have a crystal clear understanding of it's significance.

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We are currently sitting on the precipice of a dangerous cliff. The confluence of a looming bank credit crisis in the US and a sovereign debt banking crisis in Europe could lead to another full-blown world banking crisis.

The potential is there.

Right now the housing recovery in the United States is stalled. Lending is tighter, as is reasonable. Banks actually expect you to have the ability to pay back the mortgage you take out (solid FICO scores) and want reasonable down payments. Only 47% of applicants have the FICO score to get the best mortgage rates.

Enter the Foreclosure Mess. What is actually happening here?

Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper. Only the note-holder has legal standing to ask a court to foreclose and evict. This is important. It is not the mortgage that is important here. The note, which is the actual IOU that people sign, promising to pay back the mortgage loan is what is crucial.

Before mortgage-backed securities (MBS), most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street.

But once mortgage loan securitization became a part of the industry, things got sloppy... they got sloppy by the very nature of mortgage-backed securities.

The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

Therefore, as everyone now knows, the loans were ‘bundled’ into REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then “sliced & diced”... split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing created ‘senior tranches,’ where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created ‘junior tranches,’ where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)

These various tranches were sold to different investors, according to their risk appetite. That’s why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.

But here’s the key issue: When an MBS was first created, all the mortgages were pristine ...none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full... but which ones specifically would default? No one knew, of course.

So in fact, it wasn’t that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.

But who were the owners of the junior-tranche bond and the senior-tranche bonds?

Two different people.

Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn’t be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.

So how do you make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?

This is where the famed MERS, the Mortgage Electronic Registration System, comes into play.

MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein’s operating table, where the beast got put together.

However, legally... and this is the important part... MERS didn’t hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.

But the REMICs didn’t own the notes either, because of a fluke of the ratings agencies: the REMICs had to be “bankruptcy remote,” in order to get the precious ratings needed to peddle mortgage backed securities to institutional investors.

So somewhere between the REMICs and MERS, the chain of title was broken.

Now, what does ‘broken chain of title’ mean?

Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the ‘chain of title.’

You can endorse the note as many times as you please... but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

Read that last sentence again.

The broken chain of title might not have been an issue if there hadn’t been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn’t have bothered to check to see that the paperwork was in order.

But as everyone knows, following the housing collapse of 2007-2010 (and counting), there has been a boatload of foreclosures... and foreclosures on a lot of people who weren’t sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.

These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that’s when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.

Now, the banks had hired ‘foreclosure mills’... law firms that specialized in foreclosures... in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

Well, what do you know, it turns out that these foreclosure mills started to fake and falsify documentation so as to fraudulently repair the chain-of-title issue, thereby ‘proving’ that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills even began to forge the loan note itself.

Again, let's repeat that.

The foreclosure mills deliberately, and categorically, faked and falsified documents in order to expedite these foreclosures and evictions. Bloggers have even uncovered a price list for this ‘service’ from a company called DocX, a price list for forged documents.

Talk about your one-stop shopping!

So a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud. There has been the guy who got foreclosed and evicted from his home in Florida, even though he didn’t actually have a mortgage, and in fact owned his house free and clear. And there was the family that was foreclosed and evicted, even though they had a perfect mortgage payment record.

Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it... that would have been nice, but it isn't what happened.

No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.

In every sale, a title insurance company insures that the title is free and clear... that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because, of course, they didn’t want to expose themselves to the risk that the chain of title had been broken, and that the bank had illegally foreclosed on the previous owner.

That’s when things started getting interesting: that’s when the attorneys general of various states started snooping around and making noises.

The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem...obviously.

Banks that size, with that much exposure to foreclosed properties, don’t suspend foreclosures just because they’re good corporate citizens who want to do the right thing, and who have all their paperwork in strict order... they’re halting their foreclosures for a reason.

The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act, was all about the banking lobby.

They wanted to shove down that law, so that their foreclosure mills’ forged and fraudulent documents would not be scrutinized by out-of-state judges. The spineless cowards in the Senate carried out their master’s will by a voice vote... so that there would be no registry of who had voted for it, and therefore no accountability.

And President Obama’s pocket veto of the measure? He had to veto it... if he’d signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order.

As soon as the White House announced the pocket vet, the very next day the Bank of America halted all foreclosures, nationwide.

Why do you think that happened? Because the banks are in trouble... again. Over the same thing as last time... the damned mortgage-backed securities!

The reason the banks are in the tank again is, if they’ve been foreclosing on people they didn’t have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.

And it won’t matter if a particular case... or even most cases... were on the up and up: It won’t matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.

The full import of what this means is only starting to seep into the collective consciousness.

And as it does, it won't be long before enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free. Once they realize this, that’s basically a license to halt payments right now, thank you. That’s basically a license to tell the banks to take a hike.

What are the banks going to do... try to foreclose and then evict them? You can already hear the cries of "show me the paper, Mr. Banker."

This is a major, major crisis.

The Lehman bankruptcy could be a spring rain compared to this hurricane. It has the potential to bring the system down.

Who will want to buy a mortgage that is in a securitized package with no clear title? Who will get title insurance? Some judge somewhere is going to make a ruling that is going to petrify every title company, and the whole thing grinds to a halt.

Let’s be very clear. If the banks in the US cannot securitize mortgages, there is no American mortgage market. To go back to where lenders warehouse the notes will take a decade for the infrstructure to be built. In the meantime, housing prices are devastated. Whatever wealth effect remains from housing gets worse, and the economy rolls over.

Meanwhile all those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses.

But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties.

There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks.

And all this coming as European banks are going to have to sort out their own sovereign debt problems.

Shades of 2008? It’s all inter-connected. And if you are have stocks in anything related to the financials in any way, you may want to take steps to protect yourself.

Oh what a tangled web has been weaved.

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Turbulence

So, it's been an interesting week.

Let’s take a moment to consider a few things.

Given the U.S. government’s $13 trillion accumulated debt, its continuing $1 trillion annual deficits, its failure to deal with a rapidly approaching explosion of entitlement spending, increased healthcare costs, State and city obligations to retirees which are in many cases too sizable for many localities, the near-total state of political gridlock, and now a looming massive funding issue of unknown proportions with this foreclosure crisis, and what do you have?

I suspect the full range and scope of what is going on still has not been realized. We are entering the second act of the 2008 crisis and I sincerely believe it will eclipse anything we have seen yet because of the shear size of this OTC derivative disaster.

The reaction from the US Federal Reserve is not hard to predict. Last Monday (before the fervor of the Foreclosure Crisis) we saw this commentary from New York Fed President William Dudley:

"Fed action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long... The outlook for US job growth and inflation is unacceptable. We have tools that can provide additional stimulus at costs that do not appear to be prohibitive."

When you have the New York Fed President openly stating that subdued inflation is unacceptable, it doesn't take a PhD in economics to decipher what is coming.

What we are waiting for now is a tipping point, an incident that will trigger a flood of actions. The stage is set for panic and when it is triggered, I suspect you will see Gold move a couple of hundred dollars in a manner of days and Silver move $5- $10 in the same time frame.

Olympic Village

Meanwhile on the real estate front, the Olympic Village story is another unfolding disaster.

If it interests you, this link will take you to a media briefing on the Olympic Village by City Manager Penny Ballem on September 30, 2010.

As noted in the comments section of VCI, there are some interesting facts in this report.

Number of market units put up for sale: 737
Number of presales: 264
Number of presales closed: 223
Number of presales that have not closed: 264-223 = 41
Number of post-Olympic sales closed: 36
Number of units with closed sales: 259
Number of units remaining unsold: 454
Number of units with pending sales: 737-259-454 = 24

Breakdown of the 259 closed sales by price:
under $1 million: 202 (78%)
$1 to 2 million: 54 (21%)
over $2 million: 3 (1%)

Breakdown of the 454 unsold units by price:
(Prices as of May 15, 2010)
under $1 million: 48%
$1 to 2 million: 24%
over $2 million: 28%

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If Greece Is Bear Stearns, Will the UK Be Lehman?

Great little piece on CNBC yesterday which posed the above titled European debt contagion question.

Sunday’s news of a 750 billion euros ($951 billion) stabilization fund and European Central Bank assistance for the European bond market averted a full fledged liquidity crisis, but many remain sceptical that the crisis has past.

Can the governments in Greece and Portugal live up to their end of the bargain and significantly cut government spending in the face of bitter opposition from voters?

“The big question I am asking myself is whether Greece is Bear Stearns,” Anthony Fry, senior managing director at Evercore Partners, said. “What I really fear is that if Greece is Bear Stearns then the UK is Lehman Brothers.”

Fry, it should be noted, worked for Lehman before its collapse.

There is an insistance that the UK will be alright because it has the ability to sell government bonds internally.

Steven Barrow, the head of G10 Research at Standard Bank, holds that opinion. “I am confident about the prospects for the pound,” Barrow said.

The difference between the UK and Greece, according to Barrow, is that Britain has more room for maneuver. “The UK can devalue and print money, the UK will not default, the UK will not need the IMF,” he said.

Sounds like a recipe for currency collapse to me.

And Anthony Fry is adamant that such analysis is nonsense.

“I can’t believe (the UK) can avoid trouble," he said. "The current coalition talks are like arguing over a birthday cake. Once they decide how much of the cake they get they realize no one bothered to bake the cake.”

Fry makes the exact same point I have been making the past few months; with a lot of money needing to be raised over the coming months and years, UK borrowing costs are going to move sharply higher.

“My big fear is that after (Chancellor of the Exchequer) Alistair Darling refused to support the EU/IMF/ECB bailout of the euro zone bond market, the euro zone may stand by and do nothing when the UK gets into trouble,” Fry said.

Fry remains worried about the problems facing Greece will spread to Spain and Portugal despite Sunday night’s unprecedented support.

“Tuesday was a correction post Monday’s huge short squeeze," Gallagher said. "The big question now is whether institutional investors will return to the European bond market.”

Meanwhile Pimco, the world’s largest mutual fund, made the decision to stay clear of a proposed Greek dollar-denominated bond auction last month and that decision was one of the key moments leading up to Sunday’s rescue package. The coming weeks and months, July in particular, will be crucial. That's when €227 billion redemptions come up in the euro zone and with Spain needing to refinance significantly that month.

“What we are likely to see is a two-tier Europe," Michael Gallagher, director of research at IDEAglobal, tpld CNBC. “A double-dip recession in Southern Europe is increasingly likely. Core Europe will slow, but do OK. The outlook to the South is far worse.”

All these agreements are predicated on the EU governments meeting strict budget targets and stepping up debt consolidation efforts. Which means the Achilles Heel in Sunday's agreement is governments resisting expansionary, deficit financing once its economic fortunes begin to falter.

The United States has been unable to break that cycle, what makes anyone think the PIIGS will be able to?

So, if if Greece is Bear Stearns and the UK is Lehman, who will be AIG?

“No comment," Fry said.

I'm willing to be it will be California.

As I said last week: first the PIIGS, then the UK and then... the United States.

Are you prepared?

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Economic Abyss

Came across some succinct snippets yesterday that perfectly summarize the looming economic crisis in America.

David Walker, the former comptroller general of the United States and CEO of the Peter G. Peterson Foundation, is the author of 'Comeback America'.

'Comeback America' is a book detailing Walker's belief that if significant fiscal reforms aren't immediately enacted in the United States, interest rates on the national debt will rise, and federal taxes could easily double from current levels by 2030.

You can read Walker's take on the USA's current financial woes and his explanation of how America got there at this link.

"We're on an imprudent and irresponsible path," Walker says. "We must start making tough choices, sooner rather than later, and before we pass a tipping point."

Walker, who led the U.S. Government Accountability Office for almost 10 years, says that despite the many current economic pressures that America faces — war, recession, bailout — their recent budget deficits may pale in comparison to the economic disaster that looms if we don't take action.

"What threatens our [country] is the structural deficits that will exist after we are out of the recession, after unemployment is down, after the wars are over, and after we get past the current crises," he says. "Structural deficits represent a fundamental imbalance between projected revenues and projected expenditures even when the economy is growing, even when the wars are over, even when unemployment is down. And in that circumstance, we face — because of known demographic trends — the retirement of the baby-boom generation primarily and rising health care cost — large, known and growing structural deficits that could swamp our ship of state."

Walker says that unless spending is controlled, the country will enter an "economic abyss."

"The things that are growing the fastest are health care — which would be Medicare, Medicaid and other federal health care programs. Social Security is growing, but not as fast — but you also have to look at the fact that before we even entered the recession, we were spending more money than we took in," he says.

"There are three key points with regard to spending. Spending more money than you make on a reoccurring basis is irresponsible. Irresponsibly spending someone else's money is unethical; and if you're a fiduciary, a fiduciary breach. And irresponsibly spending someone else's money when they're too young to vote and not born yet is immoral. And all three of those things are going on right now, and they threaten America's future."

He is, of course, bang on.

The economic crisis is only just starting. The full depth and breadth of the financial earthquake of 2008 still isn't fully appeciated (or understood) by Americans or Canadians.

And it's not all that surprising. On October 29th, 1929 the world changed, but most wouldn't be fully aware of the depth and breadth of that change (or exactly what had happened) until the end of the 1930's and into the early 1940's.

It's going to be the same this time around too.

Postscript: Great Britain is considered the canary in the coalmine for United States debt. For a UK update, I would refer you to: UniCredit Bank Warns Of Plunge In Sterling And Gilts, As Britain Is Next Country "To Be Pummeled By Investors"

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A slow motion train wreck...

So many topics to touch on... but only so much time in the day to sit down and talk about them.

So today I will focus on American events.

Bank Failure Friday returned last week when the FDIC released information regarding the first US bank closure of 2010 – Horizon Bank of Bellingham, Washington.

You can't really hit much closer to home (in relation to Vancouver) than Bellingham (Blaine is too small).

But it's the size and scope of the closure that is so astounding. If it is indicative of things to come it will be a very rough year for our American cousins and the FDIC.

According to the FDIC, Horizon Bank had $1.1 billion in deposits and balance sheet assets of $1.3 billion; yet the FDIC’s estimated cost to close the bank is $539.1 million.

Say wha???

That means the real market value of Horizon’s assets is believed to be about $561 million – 41.5% of the value claimed.

Ay carumba!

As has become the norm, the FDIC had to enter into a loss-share transaction with respect to $1.0 billion of the assets purchased, meaning there is significant concern the assets will turn out to be worth even less than presently estimated.

This cost of closing this bank amounted to 49% of the value of Horizon’s deposits – the highest relative cost seen so far in this crisis.

By way of comparison, the cost of closing the first three banks in this crisis (in late 2007) was about 5.7% of deposits.

Perhaps you now have a keener appreciation of the importance of the FDIC's 'Interest Rate Advisory' for banking institutions.

That's the FDIC's stern warning for US Banks to prepare to "manage interest rate risk." Soaring rates will further depress market values which will further undermine the real worth of the bank's assets and balance sheets.

It does not bode well for the year ahead and we will watch the banking developments with keen interest this year.

But banking isn't the only story you should pay attention to.

Last Friday also bore witness to the stunning announcement that another 661,000 jobs were lost in the United States.

This at the height of the Christmas hiring period.

The broad U6 category of unemployment statistics rose to 17.3% (that's adding all the Americans who did not show up in 'official' statistics because they have stopped looking for work).

That is the stat that really matters. It means that December was the worst month for US unemployment since the Great Recession began.

Can you see what is coming next?

The home foreclosure axe usually drops for homeowners a year or so after people lose their job, and exhaust their savings. After six months they drop off the unemployment rolls. Six months from now that axe will start dropping.

That's what 2010 is going to be all about Charlie Brown. And that's despite the fact that foreclosures are already setting new records.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February in America. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4 million homes to go this year.

Meanwhile commercial real estate is a disaster. Check on this article in Time magazine.

"It's not that everything's fine in the commercial real estate business. Everything's awful and will probably get more awful. But unlike 2008's Wall Street panic, this particular financial unraveling looks as if it will play out over a period of years, not weeks."

Headlining the news is Tishman Real Estate in New York City. They will miss payment on a commercial loan of over $5 billion on a massive New York apartment complex, the 2nd largest default in commercial real estate loans in history.

As this unfolds, California declares an economic emergency. They are the biggest concern but there are another 40 states in deep trouble. Hawaii can't even afford to hold a congressional election.

Meanwhile apartment vacancies hit record highs.

Really?

Riddle me this... if foreclosures are skyrocketing... and rental vacancies are soaring... where are the people going?

Does it suprise you that homelessness is rising dramatically?

And then there is consumer credit. Consumer credit in the US last month dropped a record $17.5 billion.

This despite the fact that many cash-strapped US homeowners are doing exactly what their UK counterparts are doing: "New research from Shelter, the homeless charity, [suggests] that as many as 1 million people have used their credit cards to pay mortgage bills or rent demands in the past year."

And what is that going to lead to?

"You would have to be relatively desperate, at least in the short-term, to go down this route. Many of those people are likely to end up defaulting on their credit card bills, or on their mortgages, or both," quotes the article.

Against this backdrop, does anyone really think American quantative easing is going to end in March?

All the talk about the US Federal Reserve draining the excess reserves is comical. That's why gold shot up on the weekend.

And that's why it's going to shoot even higher. Watch the next big spike to take the metal to over $1,650 an ounce.

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Santa Baby?

Double dipping today so you get two posts for the price of one (make sure to see the post below this one on 79.9% interest rates).

Wandered over to Garth Turner's site and caught this post on Economic Forecasting.

Garth is very bullish on the strengthening of the US dollar. He opines that with all the troubles in the world (Dubai, the European basket cases of Greece, Italy, Iceland et al), the US dollar is still the global reserve currency and perceived to be the safest of safe havens offering total liquidity and shelter from debt storms.

He insists there will be no double-digit inflation in the States, "no matter how damn much money they print" and that the US dollar will strengthen based on a growing realization stateside about the severe threat presented by the continuing accumulation of debt.

Turner notes there is "a growing political appetite to (a) raise taxes and (b) slash Washington’s spending. In some form, both of these will happen, especially if Republicans win a few key seats next year. This will be very bullish for the greenback, even though it means more years of slow growth."

Turner also says that Washington has hundreds of billions in bonds to sell each year – the majority to offshore investors. Thus the US has a huge incentive to stabilize the dollar and the easiest way to do that is with monetary policy and a quick little rate hike.

But will that do the trick? Or is there a looming problem that Bernanke and Co. have failed to plan for?

We've talked about it here before, the fact that the United States (and other western governments) need to borrow a massive amount of money to fund their deficits.

Interestingly, the Governor of the Bank of China just came out with a couple of thoughts on that issue.

He said that it is "getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing the supply of dollars overseas."

The economic crisis of the last year has played havoc on global trade.

And with with every country (especially China) keeping things going by printing money and implementing stimulus projects of their own to build bridges, roads and other internal projects; those countries are running out of non-domestic cash.

Internal infrastructure stimulus projects may fill the void at home brought about by the collapse in global trade, but they don't bring in western cash.

Exports do. And China's exports are down dramatically.

Without vibrant global trade, there aren't enough US dollars flowing in.

Where do you think China has been getting all those US dollars to plow into buying US Treasuries?

This is about to become a huge, critical issue for the United States. Now that Treasury monetization is ending, the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits.

Foreign buyers who have US dollars.

According to Shanghai Daily, this could be a big, big problem.

Bank of China's Zhu Min said,

• "The United States cannot force foreign governments to increase their holdings of Treasuries. Double the holdings? It is definitely impossible."
  
  "The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world. The world does not have so much money to buy more US Treasuries."

And that's the crux of it: in cranking up the printing presses to create trillions of assorted securities, the US Treasury has soaked up the world's dollars.

And since US banks are sitting on all this money in the form of bank excess reserves and not lending, these excess reserves can not be used to buy Treasuries and MBS. This would be literal monetization as opposed to the figurative one which is what Quantitative Easing has been.

Since none of the money is flowing out to the world (aka China), the world is running out of dollars with which to buy Treasuries.

Holy Catch-22, Batman.

This looming problem is discounted by some critics who point out that China still has trillions in foreign exchange reserves.

But China has been selling mortgage backed securities at a furious rate... and it hasn't been buying treasuries. China's Treasury holdings have been flat at exactly $800 billion since May 2009. China has been doing what millions of high frequency traders have been doing: focusing on short term investments which can be liquidated instantaneously.

In essence Zhu Min is saying that the US should no longer rely on China for funding its bottomless deficits. And because of that Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington would continue to issue more Treasuries to finance its deficit spending.

If that's the case, things are about to get much worse as the Fed has no choice but to turn the monetization machine on turbo... a development which will drive the US dollar far lower than anyone cares to admit.

Garth Turner insists the US will never allow it's dollar to drop, but America may not be able to control that destiny anymore.

Ertha Kitt crooned in her holiday classic, "I'm filling my stocking with a duplex, and cheques... sign your 'X' on the line"

But it appears China has no plans to hurry down the American chimney tonight.

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Delusional

Last Autumn, when the markets were melting down, I made an observation that I still hold to today.

What occurred in 2008 was a significant financial earthquake and we still do not completely appreciate the full repercussions of what occurred.

I believe that statement holds true today.

It's one of the primary reasons I am still extremely bearish on the outlook for real estate in the world's most bubbly city: Vancouver.

On Tuesday we saw financial markets tumble as credit-rating agencies slashed Greece and Dubai government related debt.

Looming on the horizon will be downgrades to similar debt issued by the United Kingdom and the United States.

It has too.

The fiscal imbalances and accumulated debt that has built up from trying to rescue our economy from the financial crisis is piling onto an already massive amount of government debt.

As David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, said yesterday, "Anybody who thinks we are through this credit collapse is delusional. It is ongoing."

That message was echoed by this week on CNBC by Meredith Whitney, a former analyst at the investment bank Oppenheimer & Co. Inc.

Whitney, who has her own firm now, is renowned for calling out the problems with banks' toxic assets before the issue became widespread.

And what she forecasts for 2010 is anything but positive.

Whitney said that she believes government is running out of ways to help the economy as the US faces major issues regarding credit and employment.

"I think they're out of bullets," she said.

Whitney keyed in on the main reason that all the improvement we are seeing is, in fact, a false recovery. Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace.

Consumer lending dropped 1.7% on an annualized basis in October, the ninth straight monthly decline. Whitney noted that consumers are "getting kicked out of the financial system" as the stimulus money is cycled to the banks bottom line and feeds a speculative frenzy in the stock market.

"What's so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit," Whitney said.

With consumer spending making up about 70% of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow will put a severe headlock on future growth.

And that means there will be no economic recovery - at least not on a scale both the United States and Canada need to see.

"I have 100% conviction that the consumer is not getting any better and there's not more liquidity," Whitney said.

"I don't think you can cut taxes enough to stimulate demand," Whitney said. "For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it's a real issue. You can't get around it. This has never happened before in this country."

When you combine a failed 'immaculate economic recovery' with a need to service massive amounts of government debt, you soon realize that we are in the midst of a huge paradigm shift in North America.

The average Joe simply does not appreciate what our economic future holds for us.

As Rosenberg said, "Anybody who thinks we are through this... is delusional.

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Uh-oh

Depression talk is gaining steam again.

The blog-o-sphere is a tither today about the last hour of trading on the stock market in which the market suddenly reversed course in the final hour of trading.

Analysts attribute the tumble to a downgrade of Wells Fargo & Co.

Fargo, the largest U.S. home lender this year, slid 5.1% after Bove of Rochdale Securities cut the shares to “sell” and said earnings were boosted by mortgage-servicing fees rather than improving business trends. Wal-Mart Stores Inc., the world’s largest retailer, tumbled 2.1% after saying it expects a “tough” holiday shopping season. The Standard & Poor’s 500 Index reversed a 0.9% advance as nine of 10 industry groups retreated, led by financials.

“Wells Fargo’s downgrade spooked investors,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $2 billion in San Antonio. “Investors are concerned because that’s one of the biggest in the industry and most of the recent news has been positive so far. So that could be an indication of problems ahead for other big names.”

And those 'problems' are significant.

Jobs: The United States continues to lose jobs month over month. And, while the statistics being released are showing a slow down, many are coming to the conclusion that this is basically a fabrication. There are thousands of people falling off of unemployment compensation each week — none of them are reflected in the official numbers. Shadowstats.com estimates unemployment is above 20%. These numbers are rapidly approaching the unemployment rate during the 1930s.

Credit: As we noted yesterday, credit is contracting. The last decade in America has seen credit (or debt, however you want to look at it) essentially become used as a second income. No more. The banks may be getting billions in loans, but for the individual on the street, credit is frozen. Couple this with the loss of primary income streams and you have a lot of people with no money for even essential goods.

Real Estate Foreclosures: Foreclosures in the US continue to mount. In addition to the foreclosures of the last 2 years, millions more are in play right now, regardless of the mortgage programs the government institutes. Job Loss + Credit Contraction means there is no way millions of people will be able to make their monthly payments. Nowadays, once you lose your job, you aren’t going to have an easy time finding a new one that adequately services personal debt. In real terms housing prices are not done dropping. There are some conservative down-side estimates that say an additional 15% is likely. But, what if they are underestimating? What if it turns out to be 30%, or more?

Japanese real estate lost 80% (adjusted for inflation) in the 1990’s and so did their stock market. Fears that the United States is rapidly travelling down an identical road are starting to influence observers.

Defaults: Debt defaults keep rising. Bank of America just released their numbers and lost upwards of $2 billion dollars, due in part, to credit card defaults. This is not the sign of a healthy consumer. When a consumer defaults on a credit card, that is leading indicator that they will not get easy credit if they need it in the future. A default in 2009 is a big red flag for lenders. Empirically, this seems like it may be a leading indicator for continued credit contraction on the consumer side.

Small Business: Small businesses are getting hit hard. Small business is the engine that runs the entire US economy. Right now, they have no access to loans, and the consumer is drying up. To survive, they’ve had to cut costs significantly. The next step will be to cut jobs. Many have already resorted to letting people go. As much as owners may not want to let go of their people, they realize they have no choice at this point. Incidentally, many major corporations showing “better than expected” results employed these same strategies. But, the businesses themselves, not necessarily by choice, are perpetuating the negative feedback loop. As they lay off employees, more consumer income is destroyed, leading to fewer revenues across the board for a majority of businesses, big and small.

Middle Class: The Middle Class is holding on for dear life. If small business drives jobs and production, it is the middle class that drives consumption. And the middle class is getting hammered for all of the reasons mentioned above. Many middle class families are realizing, or will realize very soon, that their lifestyle choices are going to need changes. Cut out the gym and take a jog instead. Why pay $100 for cable when you can get similar, if not better, news and movies online for $30 a month? Is organic really necessary at the grocery store when one can save 30% buying the regular stuff we grew up on? Do I really need to get a new car when my 2005 Explorer is just fine? Why go out and spend $100 when dinner and a movie at home a couple of Fridays a month saves enough money to pay the electric bill? These and other questions are going through the collective mind of middle class America. They are desperately trying to avoid becoming a member of working or under class America. The initial step to maintain stability is the same as with small businesses - cut spending.

Combine all these factors and more and more analysts are drawing parallels to 1930/1931.

Trends Forecast founder Gerald Celente, a noted business consultant and author who makes predictions about the global financial markets, is gaining followers for his conviction that these are the opening states of 'the Greatest Depression'.

And with the way the market dropped in the last hour of trading today...

...many in the blog-o-sphere are sounding the alarm that investors should be on high alert for the rest of the week.

Investor emptor!

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Economic Recovery?

Yesterday we said, "It's not hard to see that if we don’t get a dramatic recovery in the economy, Canada is going to be in deep trouble." And on the weekend 'economic recovery' was the main topic of discussion at our Rainforest Roundtable.

Despite the belief in the mainstream media that the economy is starting to turn around, we just don't see it happening.

Why?

Because access to credit in the United States, our largest trading partner, is being denied at an accelerating pace.

Large, well-capitalized companies have no problem finding credit. But small businesses, on the other hand, have never had a harder time getting a loan.

According to prominent banking analyst Meredith Whitney, available credit to small businesses and consumers has contracted by trillions of dollars since the onset of the credit crisis over two years ago.

Small-business credit has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much?

In the US, small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business.

What's more, small businesses are often the primary source of this country's innovation. Apple, Dell, McDonald's, Starbucks were all started as small businesses.

Whitney notes that, as is true in most recessions, banks' commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don't want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards.

Small businesses primarily fund themselves through credit cards and loans from local lenders.

But in the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent US Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels — the first contraction since 1993.

Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially.

Whitney believes that the US is only in the early stages of the second half of this credit cycle. She expects another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut "inactive" accounts (whether or not the customer viewed the account as a liquidity vehicle).

The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.

The relationship between the United States and Canada is the closest and most extensive in the world. It is reflected in the staggering volume of bilateral trade - the equivalent of $1.5 billion a day in goods.

But when your biggest customer can't buy your goods, it doesn't bode well for your 'economic recovery'.

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Scolding the consumer isn't working.

Bad, bad consumer.

Apparently the scolding isn't working.

On the weekend, The New York Times headline said it all: "Americans stop buying; trade deficit declines"

And for an economy that is 70% dependent on consumer spending, that's a huge problem.

Americans have been the world's champion consumers. Just lend them money and they will spend it. A least that's the way the world economy is supposed to function.

But when Americans stop spending it brings a hush to the entire planet.

The malls go quiet... trucks slow down... ships are idled... and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home.

From the Times, "For the first eight months of the year, the United States trade deficit with China is down by about 14% or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20%, and its deficits with Mexico, Canada and the European Union are down more than 40%."

Any wonder the BC government is looking at a massive deficit?

"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."

This despite the fact the US federal government is going into massive amounts of debts trying to get consumers to spend again.

They've given their citizens tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. And they have put at risk a sum of money equal almost to the entire US GDP.

Still those hardheaded consumers won't consume like they're supposed to.

Suddenly, it's the 'Age of Thrift.'

And if the consumer credit party is over, what will replace it?

Is it possible for North American businesses to grow and prosper under these conditions?

Sure it is.

North America has great businesses with great brands. And as the dollar falls, the solution is to gain global market share in some sectors.

But 70% of the economy is consumer spending. Until that changes, the North American economy is hostage to US consumer spending. When consumers stop consuming, the North American economy's wheels stop turning.

And in the contradition lies the ultimate solution.

Americans will have to cut back on their spending and it will be time for the rest of the world to do some of the buying for a while.

And since the United States has less than 5% of the world's population, it is the logical next step.

But rebalancing the world's economies won't happen overnight. Nor even in a couple years. It will take a long, long time.

In the process, North America has a very painful readjustment ahead of it. A readjusment that will affect all sectors of our society.

And real estate values are going to be very much a part of that 'painful' readjustment, even here in North America's most bubbly real estate city.

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More economic observations

Let me expand on Saturday's concerns about the economic outlook.

The most recent data on outstanding credit card and auto loan amounts was released on Friday.

US consumer credit fell for the fifth straight month as banks maintained more restrictive lending terms and households remained reluctant to borrow money for major purchases.

How can the U.S. economy expand if consumer credit continues to contract?

From Bloomberg;

• Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
• Stagnant wages and falling home values mean consumer spending, about 70% of the economy, will take time to recover even as the recession eases.
• “This string of declining credit should continue as long as the economy eliminates workers at an elevated pace,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month.”

It's important to note that consumer credit contains no housing related debt at all. So it begs the question... how sharply are outstanding home equity lines of credit and home equity loans contracting?

I bet you that they are contracting even faster than consumer credit and auto loans.

Again I urge you to ask yourself the question, how can the U.S. economy expand if consumer credit (home equity loans, home equity lines of credit, consumer credit and auto loans) continues to contract?

Speaking of homes, interesting presentation by the San Diego County Assessor/County Clerk David Butler on Notice of Defaults (NODs) and foreclosures in the county.

The following is a handout from the presentation (click on image to enlarge).

San Diego real estate broker Edgewood121 attended the presentation and advised that San Diego county is "expecting a wave of foreclosures in the near future and they are gearing up for it" (quoting Edgewood121 paraphrasing Butler).

Butler thinks the banks are holding back, probably because of the various government programs.

Edgewood 121 was left with the impression that "it is [only] a matter of time before more properties become available." And that the only reason prices appear to have stabilized "is because of the artificial choking-off of inventory, thereby creating urgency and multiple-offer scenarios."

This situation is being repeated all over the United States.

Clearly banks are hoping that the modification programs will reduce the number of foreclosures. However, as we said last week, most loan modifications just capitalize missed payments and fees (so the banks can pretend they are still whole), and reduce interest rates for a few years (so the homeowner can pretend they still own something of value).

Extend and pretend... that's all the banks are really doing right now. Which is fine until the coming wave of commericial and prime mortgage defaults hits.

Meanwhile there is the topic of personal bankruptcies.

Last week I commented that bankruptcies in the United States were up 600%. Now comes word from the UK newspaper, the Independent, that the United Kingdom registered a record 33,000 people insolvent in the second quarter of the year, the largest number ever recorded.

Insolvency experts warned that the combination of rising unemployment and the lack of stigma attached to insolvency options meant the number of people affected would go on rising.

Mark Sands, director of personal insolvency at Tenon Recovery, predicted 140,000 people in the UK would be declared insolvent during 2009, 30% more than in 2006 – the worst year on record so far – when the figure was 107,000.

"The overall record level of personal insolvencies, whilst at first shocking, hides the detail which suggests the worst is yet to come," Mr Sands warned.

'The worst is yet to come'... hmmm.

On that note, did you catch Treasury Secretary Timothy Geithner's missive to Congress on Friday?

Geithner urged elected US officials to raise the $12.1 trillion debt ceiling since, according to current projections, that limit may be reached as soon as mid-October.

Said Geithner, "It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations."

Ummm... anyone care to explain to me what is the point of having a 'ceiling' if, as you get near that limit, you simply raise it time after time again?

Seriously.

How twisted is the logic that passes for policymaking in Washington that it becomes critically important that the limit be increased before it is reached?

Geithner says its important because investors may lose confidence in the entire system if it isn't raised.

Say whaaa?

You mean to say investors won't lose confidence because the United States has a spiraling debt so large that the government has to raise the absolute 'ceiling' they have imposed on that debt every few months?

And investors won't lose confidence because there seems to be a total lack of any realistic plan that would see the money repaid?

But somehow these same investors will, apparently, lose confidence because lawmakers hadn't paid close enough attention to the relationship between the debt and the debt 'ceiling'. And if lawmakers fail to move the ceiling upward when conditions required such action, this will trigger a loss of confidence?

Alrighty then.

As I said on Saturday, this economic maelstrom is not over, we are experiencing the calm that comes when the 'eye' of an economic hurricane passes over us.

As any weather watcher knows, once the 'eye' passes the back end of a big storm always hits harder than the front end.

Brace yourselves.

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"Eye"

US Federal Reserve Chairman Ben Bernanke recently testified to Congress that he foresaw a “jobless recovery” on the horizon.

Jobless recovery?

How can an economy burdened with double-digit unemployment recover without new jobs?

In recent decades there have been some jobless recoveries from mild recessions, but they were built upon asset booms.

Today we face a very deep recession as the asset boom has collapsed (althought in the Village on the Edge of the Rainforest this is still pending). A jobless recovery in an economy based on 72% consumer spending is an oxymoron. Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand.

But with unemployment in the US increasing at over 500,000 workers a month (and 45,000 in Canada), with wages dropping, and with hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.

Meanwhile, U.S. Treasury debt is exploding, the U.S. dollar falling, and unemployment rising.

Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks’ earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed – at considerable profit – without risk?

With the consumer still in shock and denied credit, why do some indicators appear positive?

The short answer for this is massive deficit and stimulus spending by our federal governments.

That's why some consumers have ‘handout’ money to spend. And it’s no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers’ Index to rise.

But looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the US banks in September and a huge wave of residential mortgage defaults to come.

When you combine this with the various pressures on consumers, it appears to me that we aren't on the cusp of any recovery, but that we are actually in the ‘eye’ of an economic hurricane.

When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.

US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year. But history has a parrallel to today.

March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

Don't look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP?

No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans and Canadians do not return to work, THERE IS NO RECOVERY.

Compounding all of this is another job-loss statistic.

According to Seeking Alpha, 13 million Americans will lose their benefits by years' end. And these Americans are not returning to work because they are losing their benefits, they are exhausting their benefits.

There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don't spend money. They don't buy technologies, or durables, or even pay their mortgage. US bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

When the realization comes, look for another round of collapses. I see the stock market crashing below 5,000 on the DOW.

Particularly if autumn heralds a rise in interest rates.

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Conflicting US Housing News

Last week the Vancouver Sun carried a story out of New York that proclaimed home prices in major US cities rose in May for the first time in nearly three years.

The closely watched Case-Shiller home-price index, put out by Standard & Poor’s, marked its first increase since July 2006. The index gained 0.5% in May from the previous month.

A small increase, to be sure, but after several months of sharp declines of 2% or more the increase was hearlded as a welcome sign of stability for the U.S. housing market.

This turnaround in housing market statistics is considered significant because it will help stabilize the U.S. banking system and encourage more lending, which would help get the economy on the mend.

But... as always... the news might not be as good as it appears.

This week two analysts for Barclay's (one of the leading providers of personal loans and mortgages) came out and disputed the statistics.

Barclays' analysts Ajay Rajadhyaksha and Glenn Boyd wrote that while the S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 to 15%.

"Seasonally adjusted home-price data has been skewed higher during the spring months of this year and last year by an 'amplified' version of typical patterns, according to the analysts. More homeowners sell their properties during those months, cutting the share of foreclosed homes being offloaded at distressed prices, as new buyers focus on 'desirable neighborhoods' where values hold up better."

"Data reflecting a reversal of the seasonal benefit, as well as a tide of new foreclosure sales' as a moratorium on the seizing of homes put in place by banks subsides, will lead to 'renewed weakness' in the fall," they said.

Rajadhyaksha and Boyd project that U.S. home prices will fall an additional 11% on average before bottoming next year, bringing the total decline to 40% nationally from their peak.

The Barclay's analysts are raining on the parade of some soothsayers who are seeing green shoots that indicate the recession is nearing an end. They cling to the belief that this would mean that even if prices and economic activity don’t shoot back up to boom levels, they would at least stop falling.

But the Barclay's analysts are seeing the same thing that we have been talking about on this blog... another mortgage problem looming on the horizon before this whole situation calms down.

Option ARM's.

The bulk of Option ARM's are going to reset in 2011. These are the ‘pick a payment‘ mortgage products that were marketed as perfect for sophisticated buyers with growing incomes.

The problem was they could quickly get out of hand if the buyer chooses the negative amortization route. In the US about 40% of these loans made in 2006 - 2007 are already delinquent.

New Barclay's Capital research shows that the recasts in the next year or so are expected to be a minor event. But by mid-2011, these borrowers are forecast to see payments that are 50% to 80% higher than what they are grappling with now. (Many of these option ARM's are concentrated in former hot-spot real estate markets, such as California and Florida.)

Loan modification attempts by banks don’t seem to be working with these particularly noxious loans.

In the face rising payments, borrowers don’t have an incentive to keep up with their current payments for homes that are already so horrendously under water, i.e. the loan amount is far above the current value of the property.

Barclay's says that many of the option ARM loans that do get modified turn delinquent soon afters anyway.

They’ve crunched some numbers and forecast that 95% of the loans that are slated for modification will eventually default.

If you think that sounds bad, get this: They say that 80% of the option ARM loans out there that are ok and up-to-date as of right now will eventually default, too.

The message?

There's a heap o' mortgage pain still on the horizon. Pain which is going to wreck havoc on the U.S. banking system, continue to impair lending, and further prevent the world economy from mending.

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Email: village_whisperer@live.ca
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