Tuesday, April 19, 2005

Signs of the Economic Apolcaypse 4-18-05

From Signs of the times 4-18-05:

The U.S. stock market began a steep decline last week, with the Dow closing at 10,087.51, down 3.77% from the previous week's close of 10,468.44. The NASDAQ closed at 1908.15 down 4.85% from the previous week's 2000.63. The yield on the ten-year U.S. Treasury bond fell sharply to 4.23% from 4.47% as investors fleeing stocks bid up the prices on bonds. The euro closed at 1.2924 dollars virtually unchanged from the previous week's 1.2928, that puts the dollar at .7738 euros compared to .7736.

Gold closed at $424.60 an ounce down from $429.00 Oil closed at $50.49 down 3.6% from $52.32 the previous Friday. Looking at oil in euros we see oil closing at 39.07 euros a barrel, down 5.6% from last week's 41.24 euros a barrel. Comparing gold to oil, an ounce of gold on Friday would buy 8.41 barrels of oil, up 4.5% from the previous week's close of 8.05.

Clearly, the big news this week is the sharp drop in the U.S. stock market. We are now seeing signs of a direct challenge to one of the main rosy lies of the Bush II era, that the United States economy has been in a "robust" recovery since 2001. A look at the wording of the main news services show this:

U.S. Stocks Sink to 2005 Lows
Fri Apr 15, 5:36 PM ET

By Megan Davies
NEW YORK (Reuters) - U.S. stocks finished at 5 1/2-month lows on Friday -- in the third straight day of steep declines -- as disappointing results from IBM increased investor concerns about an economic slowdown and made Wall Street skittish about the coming flood of earnings.

The blue-chip Dow average had its biggest one-day drop since May 2003, falling 191 points. Friday marked the third consecutive day of triple-digit declines for the Dow, which has fallen more than 400 points in three sessions.

Stocks have now erased the gains built up in a rally that started around November's presidential election. For the year to date, the Dow and the S&P 500 are both down around 6 percent, while the Nasdaq has fallen 12 percent. "What we're looking at is a giving up of hope on the part of investors," said Joseph Keating, chief
investment officer of the asset management group at AmSouth Bank.

International Business Machines Corp., the world's largest computer company, tumbled 8 percent, or $6.94 to $76.70, a day after reporting lower-than-expected earnings.

That sparked another sell-off on Wall Street and sent shudders through stock markets worldwide. The Dow Jones industrial average was down 191.24 points, or 1.86 percent, to end at 10,087.51. The Standard & Poor's 500 Index was down 19.43 points, or 1.67 percent, to close at 1,142.62. The Nasdaq Composite Index was down 38.56 points, or 1.98 percent, to finish at 1,908.15. The Dow and the S&P 500 closed at their lowest since early November 2004, while the Nasdaq ended at its lowest since October 2004. For the week, the Dow was down 3.57 percent, the S&P 500 was off 3.27 percent and the Nasdaq was down 4.56 percent. The Dow suffered its worst weekly decline since March 2003, while the S&P and Nasdaq had their biggest drops since August 2004.

The next level investors were focusing on for the Dow to reach is 10,000, said Warren West, principal at Greentree Brokerage Services. "We've broken through anything technicians might have said were support points and now we're looking at sentiment levels such as round numbers," West added. "We're looking at the Dow at 10,000 as the next real test of investor psychology." Economic reports contributed to the negative mood, when industrial production and University of Michigan consumer sentiment reports came in on the weak side on Friday. "Clearly the economy is downshifting because of the persistently high level of oil prices over the last year and the raising of short-term interest rates," Keating said. "That's really the issue. There needs to be recognition on the part of the Federal Reserve that they will pause before the year end (in raising rates) and not force the economy into a recession."

The benchmark 10-year U.S. Treasury note's yield slid to a seven-week low of 4.23 percent as more bad news on the economy bolstered hopes the Fed might take a break from raising interest rates. The IBM news outweighed a rise from conglomerate General Electric Co., which reported higher first-quarter profit . GE shares rose 25 cents to $35.75.

Technology stocks suffered sharp declines. "IBM is leading technology and the Dow down," said David Memmott, head of listed block trading at Morgan Stanley. "IBM touches just about every piece of tech there is." Among tech shares falling, network computer maker Sun Microsystems Inc. fell 7.6 percent, or 30 cents to $3.66 after it missed expectations. Hewlett-Packard fell 4 percent, or 91 cents to $20.84 and PC maker Gateway fell 3 percent, or 13 cents to $3.81. Energy companies' shares also traded sharply lower. Exxon Mobil Corp. slid 4 percent, or $2.56 to $56.19, while ConocoPhillips fell more than 4 percent, or $4.80 to $100.07. That came as oil prices slid further from their recent peak of $58.28. NYMEX May crude dropped 64 cents to settle at $50.49 a barrel. The market has typically rallied on declines in oil prices, but has failed to respond in recent days.

"Crude has come down significantly in the last week and it's done nothing for stocks," said John Hughes, managing director at Epiphany Equity Research. "It's almost as if lower crude is indicating softening or slowing economic growth -- it's seen as a bad thing now."

The mainstream press is forced to act surprised, because they have had to conceal the true facts of the situation from the public in the United States long enough to get Bush reelected and to get their money safely out of the country. Here are the facts, courtesy of Al Martin that, while not completely concealed, were never presented to the news-consuming public in the United States in any kind of historical context:

[O]n the day this Bush Cheney regime came to power, the total U.S. debt-to-GDP ratio was 78%. Now it is 308%. To put that into some context, the IMF considers a nation-state whose total debt-to-GDP ratio is 200% or more to be a "de-constructed Third World nation-state."

"De-constructed" in IMF terms simply means "collapse." But the IMF, for political reasons, doesn't want to use the word "collapse." Therefore they use the word "de-constructed." What "de-constructed" actually means is that a political regime in that country, or series of political regimes, have, through a long period of fraud, abuse, graft, corruption and mismanagement, effectively collapsed the economy of that country. This is precisely the definition of Bushonomics I and II.

It should also be pointed out that on the day that the regime came to power, the income dispersion index of the United States, which is nothing more than the ratio between the total income of the top and bottom 10% of the population, was a factor of 129x, meaning that the total income of the top 10% of the nation was 129 times that of the bottom 10% of the nation. To date, that statistic stands at 319 times.

Further, it should be noted that, on the day the regime came to power, the top 1% of this nation owned 61.9% of all the private wealth of the nation. That number will have grown to 70% by the end of fiscal `05 in September; also, this regime will have been the first regime in the history of the nation to run trade deficits of an average 5% or more of GDP for 3 consecutive years.

All of theses statistics are the classic numbers used by Thomas Malthus in the Malthusian economic theorem, first published in 1822, wherein Malthus pointed out that in all nation-states in the last 2,000 years, when the above-referenced statistics and numbers were reached, those nation-states first underwent a political revolution, then underwent an economic collapse. Indeed, all of the numbers now have reached that magic Malthusian level, economic numbers that have never been seen before in the history of the American republic.

This regime, by the end of fiscal `05, would have generated, on a real basis, aggregate budget deficits of $1.5 trillion, aggregate trade deficits of another $1.5 trillion dollars, and an increase in aggregate national debt of more than $2 trillion. ('Real', in this case, denoting the translation of economic statistics from BFLAP, or Bushonian fantasy-land accounting principles, to GAAP, or generally accepted accounting principles.)

This fiscal deterioration has gone on not only at the federal level, but also in all levels of government. So, whereas the aggregate unsecured public debt of the nation, states, counties and municipalities on the day this regime took power was $3.8 trillion, today that number is $5.8 trillion.

This level of fiscal deterioration in the nation's public finances, occurring at the governmental level, has also been seen throughout business and industry. For example, on the day this regime came to power, aggregate U.S. corporate pension account deficits were $263 billion; today those deficits are $1.5 trillion.

…Furthermore, when it comes to how this fiscal degradation of the nation has affected the people, it is very obvious. We have seen, because of business and industry, certain industry segments, which the Republican Party relies on to stay in business, effectively increase costs of good and services to levels never before reached.

We have seen no effort by this regime to control health-care cost. Indeed, the Kaiser Family Foundation pointed out, in its September 2004 study, that under the Bush-Cheney regime aggregate health-care costs had risen 45%. Furthermore, under this regime, some 42 million citizens
have lost their medical insurance. Also, as another tangential effect of
Bushonomics, U.S. individual personal bankruptcy filings have more than doubled under this regime and will, indeed, reach a record 2.5 million in 2005, bringing the total number of personal bankruptcy filings having occurred under the Bush Cheney regime at that time to 10 million.

Small business bankruptcy filings, which had been averaging 350,000 a year when this regime first came to power, will exceed 800,000 in 2005.

And this is what I think is the most startling statistic of all. If one asked me, What is the most startling economic statistic which points to the magnitude of the deterioration of the public finances of this nation that have occurred under the scourge of Bushonomics redux, I would point out that: On the day that the current regime came to power, the United States was contributing 16% to the planet's total net savings rate; today we are consuming 83% of the planet's total net savings rate, in order to continue to service Bushonian triple deficits–current account, budget and trade–and to otherwise service aggregate U.S. national debt.

That is simply an astounding number: to go from representing a positive 16% of the planet's net savings rate to now representing a minus 83% of it.

How is that possible? What skews the number a little bit is that this regime came in inheriting 4 years of fiscal surpluses, and then promptly, within the first year it was in office, proceeded to deplete the $158-billion fiscal surplus it had inherited from its
predecessor. That's what skews those numbers.

We have gone from a position, in the year 1999, of a $263-billion fiscal budget surplus to now, 6 years later, the year 2005, what will be, on a real basis, a federal budget deficit of $500 billion plus, on a real basis. This is a 3/4-of-a-trillion-dollar budgetary turnaround. It is almost inconceivable.

The consumption in the nation is now falling, as can be seen in the personal income and spending numbers. Another astounding statistic that bespeaks of the economic deterioration that Bushonomics has visited upon the nation is the fact that on the day this regime came to power, the national personal savings rate was 6.9%.

Now it is a negative number -.3% (minus .3%) the first time in the history of the republic that the nation has had a negative net savings rate. This has been primarily due to the enormous buildup in what is called 'consumer non-mortgage installment debt,' which, when this regime first took office, was $863 billion, and, as of now, is
$2.25 trillion.

Consumption, now falling, is likely to continue to fall; in that the nation's real wages, i.e., wages ex of inflation, have fallen in the last 13 months and will most likely continue to fall. Record consumer debt levels combined with falling real wages does not auger well for the maintenance of consumption.

The dangerous loose-money policy of Bushonomics has also created numerous speculative bubbles. Loose-money policy means "accommodative." The Fed's accommodative monetary stance under this regime has helped create numerous speculative bubbles in asset classes, most notably real estate.

We would note that one of the most dangerous statistics we find in real estate is one that is oftentimes overlooked because pro-Bush-net financial media doesn't like to remind the citizens of what they themselves have done; namely, under this regime, there has been a $500-billion draw-down in equity of residential property via home lines of credit or the placement of additional mortgages. Indeed, it has been this bleed-out in equity, although median national real estate prices, residential real estate prices, have increased 53% under this regime.

Although there is a 53% increase in property prices under this regime, the national median homeowner debt-to-equity ratio has actually fallen by 4%.

That gives you an idea of just how much money has been bled out of real estate in order to support consumption, and how dangerous a bubble this actually is, this speculative bubble in real estate. It is much more dangerous than was the speculative bubble in real estate of 1989, wherein, from the 4th quarter of 1989 to the second quarter of 1991, median real estate values in the nation fell 17%.

When this speculative bubble in real estate breaks, the decline will be greater than it was in 1991. And, indeed, no reliable estimates of a potential decline can be made; in that we are now faced with a situation of falling consumption, rising interest rates, rising inflation, a diminished home-equity-to-mortgage value, compounded by record foreclosure rates, wherein now one out of every 16 pieces of privately owned residential property in the nation is either in foreclosure or in the process thereof.

We keep seeing the phrase, "unprecedented in history" again and again. What this means is that our perceptions and our tookits of responses to what is happening will not be adequate since they were formed in historical times that can offer no model for what we are about to experience. Here is Max Fraad Wolf, who links the credit-driven housing bubble in the U.S. to the role of the United States in the world economy today:

US housing prices and consumer spending- marching in lock step- have delinked from household earnings, long term trends and sustainability. In 2003, half of the nation's $7 trillion in mortgage debt was either originated or refinanced. Credit availability, 40-year low interest rates and rising debt tolerance seized the reins from prudence and off we went. Total mortgage debt has gone up at
a pace and achieved levels for which history and international comparison offer no precedent.
Perhaps, it is just that the rest of the world and the past were populated by idiots who needlessly stifled credit expansion due to pathetic lack of innovative vision and creativity. Price inflation enabled refinancing and home equity line of credit bonanza. The cash out and borrow more feeding frenzy is being used to keep consumer spending and the economy outperforming reasonable expectation. The story of our housing bubble is inextricably the story of the US and global economic imbalances. Housing is a microcosm of the US role in the global economy. In this opera the homebuyers are America and the lenders are our
foreign creditors.

It would be impossible to over state the significance of what is at stake. The home is the only major asset most Americans posses, and the largest portfolio element for millions more. The home is fortress, symbol of American prosperity and the cornerstone of middle class society. For millions home ownership is a badge of pride, proof of middle class-dom and lender of first and last resort. The loose money policy and over extension of credit that has allowed us to ride out the explosion of past bubbles now imperils. If a worst case scenario unfolds a significant portion of the American middle class will fall.

… The parallel between this situation and the dramatically declining US net international investment position, NIIP, should be evident. The endless sale of housing equity represents the desperate attempt to trade purchasing power now for a pledge of future income. This nicely approximates the
continuing sale of future tax revenues, earnings and profits to foreign
nationals by the US economy. For consumers, this takes the form of mortgage borrowing, refinancing and home equity credit line withdrawals. For the US economy this is done by selling Treasuries, GSE bonds and corporate bonds to whomever will buy them, mainly foreign central banks and investors. It is no accident, and entirely correlated, that the domestic housing and global imbalance bubbles have been inflating together, particularly since 2000.

...Housing's parallel to the American debt position is irresistible. We are making unspectacular gains based heavily on massive capital inflows that must be repaid. Now we face prospects of much lower inflows and rising interest rates. This is creating a household and national debt fragility of epic proportion.


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