Monday, January 29, 2007

Signs of the Economic Apocalypse, 1-29-07

From Signs of the Times, 1-29-07:

Gold closed at 651.80 dollars an ounce Friday, up 2.5% from $636.10 at the close of the previous Friday. The dollar closed at 0.7743 euros Friday, up 0.3% from 0.7717 at the end of the week before. The euro, then, closed at 1.2916 dollars compared to 1.2959 at the close of the Friday before. Gold in euros would be 504.65 euros an ounce, up 2.8% from 490.86 for the week. Oil closed at 55.57 dollars a barrel Friday, up 6.9% from $51.99 at the end of the previous week. Oil in euros would be 43.02 euros a barrel, up 7.0% from 40.12 for the week. The gold/oil ratio closed at 11.73 Friday, down 4.3% from 12.24 at the close of the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 12,487.02 Friday, down 0.6% from 12,565.53 at the close of the previous Friday. The NASDAQ closed at 2,435.49, down 0.6% from 2,451.31 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.87%, up nine basis points from 4.78 for the week.

Bush gave his State of the Union address last week. The newly-elected senator from Virginia, James Webb, gave the Democratic Party’s rebuttal. Webb’s speech, aside what he said about Iraq, was remarkable for his strong words on the rising economic inequality in the United States. Not surprisingly, that part of Webb’s speech was virtually ignored by the mainstream press:

A warning from Senator Webb: Democrat cites danger of deepening “class lines” in America

By Patrick Martin

25 January 2007

The official Democratic Party response to President Bush’s State of the Union speech Tuesday night was delivered by newly elected Senator James Webb of Virginia, a former Republican and secretary of the Navy in the Reagan administration.

Webb’s eight-minute speech dealt with two issues: the war in Iraq and the growth of economic inequality within the United States. Webb’s criticisms of the Bush administration’s conduct of the war in Iraq were typical of the congressional Democrats. He criticized Bush’s incompetence and cast the Iraq war as a diversion that weakened the position of the US in the global “war on terror,” although he was more scathing than most of his counterparts about the war’s toll on the United States, in both human and financial terms. (See: “Bush’s State of the Union speech highlights crisis of US ruling elite”).

The senator’s discussion of the economic conditions in the United States, however, went considerably beyond the pallid quasi-populist rhetoric normally employed by many Democrats. He spoke bluntly about the widening divide between rich and poor and the vast chasm that separates corporate CEOs from ordinary workers.

In beginning his remarks, Webb said there were other urgent issues beyond the scope of his brief speech, including “such domestic priorities as restoring the vitality of New Orleans.” This was an attack on Bush, who made no reference whatsoever to the greatest natural disaster in American history, an omission that exposed the utter indifference of the White House to the needs of the vast majority of the American people.

Webb continued: “When one looks at the health of our economy, it’s almost as if we are living in two different countries. Some say that things have never been better. The stock market is at an all-time high, and so are corporate profits. But these benefits are not being fairly shared. When I graduated from college, the average corporate CEO made 20 times what the average worker did; today, it’s nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day. Wages and salaries for our workers are at all-time lows as a percentage of national wealth, even though the productivity of American workers is the highest in the world.”

After hailing the passage by the House of Representatives of an increase in the minimum wage—a drop in the bucket compared to the actual social need—Webb turned to the subject of the Iraq war. He returned to the theme of economic inequality towards the end of his speech:

“Regarding the economic imbalance in our country, I am reminded of the situation President Theodore Roosevelt faced in the early days of the 20th century. America was then, as now, drifting apart along class lines. The so-called robber barons were unapologetically raking in a huge percentage of the national wealth. The dispossessed workers at the bottom were threatening revolt.”

In his description of the deepening social divisions in America, Webb was stating facts that are well known throughout the media and political elite, but almost never referred to publicly or seriously analyzed outside of the World Socialist Web Site.

He used language, including the phrase “class lines,” that has been virtually banned from official bourgeois politics for many decades. Right-wing pundits and politicians regularly denounce any explicit reference to the socioeconomic polarization of American society as “class warfare,” in effect declaring that the class contradictions in America are so severe that even to acknowledge their existence is impermissible.

A man of the military and state apparatus, Webb is himself an ardent anticommunist. The former Marine officer and Vietnam War veteran held high political office in the Reagan administration. But he is one of the more thoughtful representatives of the US ruling elite, and, as a successful war novelist, able to articulate his concerns.

His remarks are thus significant both for what he did say, and what he didn’t. Webb drew very tame political conclusions from the explosive social facts he cited. He praised the example of a Republican president, Theodore Roosevelt, who struck a public posture of opposition to the excesses of the wealthy (“trust-busting”), in order to safeguard the profit system from the attacks of what Webb described as “demagogy and mob rule”—i.e., socialism.

In pointing to the growing class divide in America, the Democratic senator was addressing two audiences. He was, on the one hand, attempting to pump new life into the tattered myth of the Democratic Party as a party of the working man, while channeling economic discontent along nationalist lines and protectionist lines. At the same time he was alerting the ruling elite to the dangers it confronts as a result of its unabashed rapacity.

Webb’s remarks Tuesday night were very similar to a newspaper column he wrote more than two months ago, just after his upset election victory over incumbent Republican Senator George Allen. Again, the theme was the class divide in America, and Webb chose as the venue for his column the op-ed page of the Wall Street Journal, where it would be read by very few workers but many members of the moneyed elite.

In that column, Webb cited the same figures about CEO salaries and workers’ wages as in his reply to the State of the Union speech, noting that the gap was continuing to worsen. “America’s elites need to understand this reality in terms of their own self-interest,” he warned.

“More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests.”

There is little left to the imagination here: Webb was outlining for his well-heeled audience what, to borrow Bush’s language from the State of the Union speech, is the true “nightmare scenario” of the American ruling class: the development of a mass movement from below, sparked by the ever-widening gap between the wealthy elite and everyone else, which could burgeon into a political challenge to the existing social order.

Official media and political circles responded to these comments by virtually ignoring them.
In its account of Webb’s Democratic Party reply, the Washington Post published only one paragraph on his comments on the economy, quoting a single sentence about “the middle class of this country ... losing its place at the table.” The New York Times published two paragraphs, quoting the same sentence, as did CNN’s web site.

The Chicago Tribune made no reference to the criticism of social polarization, citing only Webb’s comments on the war in Iraq. The Associated Press did the same. The Los Angeles Times reported Webb’s reference to New Orleans and his contrasting “the declining economic fortunes of the middle class with the skyrocketing salaries of corporate chief executives.”

Not a single one of these news outlets, nor any of the television networks—which broadcast Webb’s speech in full—made any comment on the significance of Webb’s comparison of contemporary America to the America of the robber barons, when “America was then, as now, drifting apart along class lines.”

It is not that the television anchormen and media pundits—most of them closer in salary to CEOs than to blue-collar or white-collar workers—are indifferent to the political implications of these social divisions. Doubtless there was plenty of off-camera discussion, and perhaps a measure of agreement that the Bush administration has been too cavalier in trampling on the social needs of working people in order to enrich the wealthiest one percent. These are matters, however, best taken up behind the scenes, rather than talked about openly before a mass audience on network television.

The growing inequality Webb pointed to will only increase with the ballooning of personal debt and the bursting of the housing bubble. The news was mostly bad on the housing front, but there was some good news mixed in:

U.S. 2006 home sales drop biggest in 17 years

By Patrick Rucker

Thursday January 25, 3:20 pm ET

WASHINGTON (Reuters) - Sales of previously owned U.S. homes slipped 0.8 percent in December and took their biggest tumble in 17 years for all of 2006, leaving in doubt whether the worst of a housing slump has passed.

The National Association of Realtors on Thursday said December sales ran at a 6.22-million-unit annual rate, lower than the 6.25 million that Wall Street analysts had forecast.

Sales for 2006 were down 8.4 percent, the biggest annual drop since 14.8 percent in 1989 when the housing sector was under pressure from a crisis in the nation's savings and loan industry and before the 1990-91 recession.

But the monthly report on sales of so-called existing homes -- as opposed to newly built ones -- also contained some encouraging news since inventories of unsold homes were down 7.9 percent to 3.508 million units at the end of December.

In addition, the median price of homes sold in December was up to $222,000 from $217,000 in November. The median marks the mid-point, with half the houses sold at a price under $222,000 and half above it.

"We are seeing some signs of stabilization, but not recovery," said economist Gary Thayer of A.G. Edwards and Sons Inc. in St. Louis. Analysts closely monitor the key housing sector because of its potential impact on consumer spending, which drives two-thirds of overall U.S. economic activity.

…Another gauge of strain in housing came in a report showing a 42 percent leap in the number of homes taken back by lenders last year as more people became unable to pay the mortgage. RealtyTrac Inc. said more than 1.2 million foreclosures filings were made -- about one for every 92 households.

One difficulty in assessing the health of the housing sector, analysts warn, is that some sellers may simply withdraw unsold homes from markets until sales prospects brighten.

"I don't think we've hit bottom," said Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh. "The bottom won't be hit until spring or summer. There's too much inventory around."

Despite the drop in available homes for sale from November, the inventory of unsold existing homes is still 23.3 percent above a year earlier.

Despite the bits of good news, it’s hard to see how analysts can think that the bottom has been reached in housing. With at least a year or two’s worth of insanely structured mortgages sold in the parts of the country most hit by the housing boom, a wave of foreclosures is likely. The consequences of that would be lots of houses getting dumped on a weak market. Indeed, ominous signs of the beginning of such a wave were seen this week in California:

More Californians at risk of losing homes

By David Streitfeld

January 24, 2007

The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes.

Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool.

It was the largest number of default notices in any three-month period since 1998.

Analysts said the increase was not worrisome — yet. But if the number continues to escalate, it could drag down home values in certain communities, they warned.

"So far, this isn't alarming," said John Karevoll, chief analyst at DataQuick Information Systems, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.

Home markets that are most vulnerable include the Inland Empire and the Central Valley, both of which drew throngs of first-time buyers even as the housing boom was ending.

Such homeowners are the most at risk of losing their homes because they have relatively little equity in their properties, making it harder to refinance their mortgages.

Default notices are the initial step in the foreclosure process. In the fourth quarter of last year, lenders issued such notices to 37,273 borrowers across the state, warning them that they were at risk of foreclosure, compared with 15,196 during the same period a year earlier, DataQuick said.

Not every notice of default leads to a foreclosure, when a property is seized and sold to pay the mortgage. But foreclosures also are on the rise. There were 6,078 in the last quarter of 2006, up from 874 a year earlier.

Defaults and foreclosures fell steadily starting in the late 1990s as housing prices took off. In those heady days, practically anyone needing money to pay bills could refinance, cashing out equity from what seemed to be an endlessly refilling piggy bank.

In a stagnant or falling market, that option isn't available to recent buyers or those who have visited the pig once too often. Instead, many of those who are unable to make their payments must either sell the property or let the bank take it over.

Lenders have invented all sorts of newfangled loans, many of which are reset to higher interest rates after a fixed period. The ability of borrowers to repay such loans, particularly in a weak market, is untested.

"People are living on the edge, and they can't help it with the price of houses," said Barbara Swist, a Costa Mesa mortgage broker who is helping Brown sort through his options. "They have good jobs but they bought over their heads, buying into the American dream."

That's also the opinion of the Center for Responsible Lending, a nonprofit advocacy group based in Durham, N.C.

Last month, the center issued a lengthy analysis explaining how millions of so-called sub-prime loans would soon turn bad. Sub-prime loans are made at higher rates — and include more onerous terms — to borrowers who don't qualify for lower-cost "prime" mortgages.

Sub-prime foreclosures would increase the most, the authors concluded, in states that had seen strong price appreciation during the boom. That would include New York, Virginia, Maryland and particularly California.

The following article in the New York Times suggests that the plug is being pulled:

Tremors at the Door

By Vikas Bajaj and Christine Haughney
January 26, 2007

Wall Street’s big bet on risky mortgages may be souring a lot faster than had been previously thought.

The once booming market for home loans to people with weak credit — known as subprime mortgages and made largely to minorities, the poor and first-time buyers stretching to afford a home — is coming under greater pressure. The evidence can be seen in rising default rates, increasingly strained finances at mortgage lenders and growing doubts among investors.

Now, Wall Street firms, which had helped fuel the growth in the market by bankrolling and investing in subprime mortgage lenders, have begun to pinch off the money spigot.

Several mortgage lenders have recently collapsed. While the failures so far are small in number, some industry officials are concerned that they could be the first in a wave. The subprime sector, which produced loans worth more than $500 billion in the first nine months of last year, could shrink significantly.

A sharp contraction in subprime mortgages would have ripple effects, reducing consumers’ access to credit and affecting investors like foreign central banks, pensions and mutual funds that have been big buyers of mortgage-backed securities.

The recent bankruptcy of Ownit Mortgage Solutions, a lender based in Agoura Hills, Calif., provides a cautionary tale. Even as its revenue grew by more than a third in the first nine months of 2006, to $8.3 billion, the company was losing money. It shut down after its financial backers, which included Merrill Lynch & Company and JPMorgan Chase, could not come up with a deal to save it.

In addition to Ownit, Sebring Capital Partners, based outside Dallas, closed in December, and Mortgage Lenders Network of Middletown, Conn., has stopped making loans through brokers. It also laid off more than 800 employees and is under investigation by state regulators.

“Pick a company — small, medium or large — they all have the same problem: capital,” said Marc A. Geredes, who runs a small mortgage company, LownHome Financial, in San Jose, Calif. “The economics of the business do not make sense right now.”

Wall Street firms were attracted to such lenders because they helped feed a pipeline of securities backed by the mortgages, a market bigger than the one for United States Treasury bonds and notes. Merrill Lynch, for example, securitized $67.8 billion in residential mortgages in the first nine months of 2006, up 58.4 percent from the period a year earlier.

But an increasing number of borrowers are defaulting on subprime loans earlier now than they did a year ago, often within six months of having taken the loan out, shaking Wall Street’s confidence in its subprime partners.

In one indication that investors are losing their taste for mortgages, hedge funds that specialize in mortgage-backed securities had an outflow of $1.8 billion in 2006, down from an inflow of $1.8 billion in 2005, according to Hedge Fund Research. It was the only category of hedge funds to have a negative flow for the year.

“We have been and continue to be cautious about the subprime market — its lending standards, decline in home price appreciation, other deteriorating credit fundamentals,” said Jim Higgins, chief executive of Sorin Capital Management…

Predatory lending by those who own, combined with an attack on worker rights and protections have formed a pincer movement threatening the U.S. middle class. It is no accident that union membership has reached an all-time low for the modern era:

Union membership drops to 12 percent, the lowest yet

By Will Lester

12:42 p.m. January 25, 2007

WASHINGTON – Union membership dropped to 12 percent of U.S. workers last year, extending a steady decline from the 1950s when more than a third belonged to unions.

After membership had held steady at 12.5 percent in 2005, it declined anew last year, a decrease of more than 325,000 workers, the Bureau of Labor Statistics said Thursday.

Membership had been 20.1 percent in 1983, when the bureau first provided comparable numbers. About 35 percent of American workers were union members in the mid-1950s.

The latest gloomy news for organized labor comes at a time when the group is pushing legislation in the Democratic-controlled Congress that would make it easier for unions to organize.

But labor laws aren't the only obstacle to union membership.

“Much of the decline is coming from shifts in the economy,” said Greg Denier, a spokesman for Change to Win, a federation of labor unions. Thousands of jobs are being outsourced or lost to technological changes. And employers are aggressively campaigning against the formation of unions, he said.

Labor unions are pushing legislation that would let workers form unions more readily by simply signing a card or petition, impose stronger penalties on employers who violate labor laws, and allow for arbitration to settle contract disputes.

Advocates of the legislation say they doubt that it will get signed into law by President Bush, but that they think passage in Congress would make eventual signing of the law more likely.

The continuing drop in membership has given them new motivation.

“There's no better argument for quick passage,” said Stewart Acuff, organizing director of the AFL-CIO. The federation's own research suggests many people would join unions if they had the chance, he said.

Supporters say the proposal is more fair to workers because employers can't intimidate workers to discourage formation of a union. Opponents say it deprives workers of the right to vote privately on their union preferences, and can lead to union intimidation.

The union membership rate for government workers, 36.2 percent, was substantially higher than for private industry workers, 7.4 percent.

The latest membership statistics have to be “incredibly discouraging for labor,” said Gary Chaison, a labor specialist at Clark University in Worcester, Mass.
“Before they can grow, they have to stand still,” he said. “The unions are losing so many members each year because their jobs are being outsourced and they are organized in shrinking sectors of the economy, like autos, steel and textiles.”

The pressures on organized labor led to a split starting in the summer of 2005, with more than a half-dozen unions breaking free of the AFL-CIO. The breakaway unions cited the need for more emphasis on organizing, though the split was also caused by power struggles and personality disputes among union leaders.

Much of the recent union recruitment has focused on industries unlikely to lose jobs overseas – like the hotel industry, health care and service workers.

The continuing erosion of union membership is “just another sign of the collapse of the middle class,” said David Gregory, a professor of labor law at St. John's University Law School.

“Health and medical insurance coverage and retirement pension security were the result of decades of work of the labor unions,” he said. “I think we're going to dramatically see the cutting away of the safety net for workers.”

The Roxylander blogger predicts recession in 2007:

The Recession Call

Here I would like to join those very few who predict that a recession will happen sometimes this year. It’s very unpopular to call a recession, as people hate those who properly predict bad times and ridicule those who were mistaken. As my reputation is not really important I have a freedom to say whatever I want.

Any recession has a main theme. We had recessions caused by hyperinflation and by stock market bubble bust. This recession’s main theme is credit crunch. Credit crunch means that a certain individual or institution may not keep up with servicing his debt while maintaining the usual mode of operation. It doesn’t necessary mean bankruptcy or delinquency, but it means drop in consumption and inability to borrow more funds in order to service existing debts. Universal reduction in consumption is, by definition, a recession.

It’s hard to say when exactly the recession strikes, but it’s easy to point out some essential milestones that have to be passed by in order to reach the destination.

- Milestone 1. Major troubles in subprime mortgage market, Feb-March 2007

It may seem strange, but this a first shoe to drop. Subprime mortgage application is, simply speaking, the desire of an individual to borrow money that he is unlikely to be able to pay back. So far this individual is granted such a loan, because there is a big chance that he will refinance it again before defaulting. Watch implode-meter for developments, it all should happen soon.

- Milestone 2. Some increase in delinquencies in junk bond market, March-April 2007

At this point junk bonds are too expensive. They pay only a little premium above treasuries. I don’t expect anything spectacular, but some delinquencies in manufacturing and small business will increase the cost to borrow more money. Many corporations will start operating in more cost-saving mode, decrease capital expenditures, reduce new hiring.

- Milestone 3. Housing market is depressed again after some winter optimism, April-May 2007

Too many people count that the housing market bottomed and the worst is behind us. The record warm November/December made all seasonally-adjusted numbers looking too good. When the Spring comes, the illusion will vanish. We will see record inventories, price declines, mortgage delinquencies, construction layoffs - you name it. Housing bubble bust will be worse in 2007 than it was in 2006.

- Milestone 4. Increase in unemployment, May-July 2007

That’s the last shoe to drop before people will start talking about hard landing on TV. The weekly jobless claims will climb over 350k, new hiring will go down. Retail stores will warn that consumption is not keeping up with expected levels. Consumer confidence will decline.

- Milestone 5. Stock market decline, July-October 2007

There is just too much money in the markets to expect stock market to decline too soon. It is widely believed that stock market is not a very good leading indicator of recessions. Having said that, one can conclude that there is no reason to expect stock market to decline before the recession starts. Past experience tells that stocks usually feel healthy just few weeks before the official start of each recession. As I don’t expect this recession to start at least until Summer or later, I do not expect any market crashes before that timeframe.
Then what? Debtors’ prisons? Maybe not. According to Ran Prieur there are too many of us debtors:

"When an economic crash occurs do you think they will bring back debtors prisons?"

They would love to! The problem is the sheer number of people who owe money. If debtors awaken as a political force, and get organized, they can get the government to declare that certain kinds of debts are canceled. This has been normal throughout history. Most pre-Roman civilizations had traditions of periodic debt forgiveness, because they understood that wealth concentration, if unchecked, leads to inefficiency, instability, and collapse. Since the Romans invented the idea that accumulation of money/power is virtuous, redistribution has happened only through upheaval and catastrophe.

So this time the owners will fight like hell to hold onto everything. Their strategy will be to keep debtors isolated from each other, keep the debt issue in the background, keep the amnesty option off the table, and keep quietly collecting as much money as they can. When the depression comes, and almost nobody can pay, I expect them to keep piling up the numbers to absurd heights, and then sell the inflated debt, at an apparent discount, to whatever entity has the power to keep extracting payment. Maybe Blackwater. Then, if that entity is clever, it will forgive just enough debt to make debtors a minority, and put them in work camps.


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2:24 PM  

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