Monday, April 30, 2007

Signs of the Economic Apocalypse, 4-30-07

From Signs of the Times:

Gold closed at 684.70 dollars an ounce Friday, down 1.6% from $695.80 at the close of the previous Friday. The dollar closed at 0.7325 euros Friday, down 0.5% from 0.7359 at the previous week’s close. That put the euro at 1.3652 dollars compared to 1.3589 the Friday before. Gold in euros would be 501.54 euros an ounce, down 2.1% from 512.03 for the week. Oil closed at 66.46 dollars a barrel Friday, up 3.7% from $64.11 at the close of the Friday before. Oil in euros would be 48.68 euros a barrel, up 3.2% from 47.18 for the week. The gold/oil ratio closed at 10.30 Friday, down 5.3% from 10.85 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,120.94 Friday, up 1.2% from 12,961.98 for the week. The NASDAQ closed at 2,557.21 Friday, up 1.2 % from 2,526.39 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.69%, up two basis points from 4.67 for the week.

There were more troubling signs for the U.S. economy last week in spite of record-high stock prices. GDP growth weakened sharply and the dollar hit a record low against the euro. And, not only did growth stall, but prices went up as well:
GDP growth weakest in four years

By Glenn Somerville

Fri Apr 27, 12:11 PM ET

WASHINGTON (Reuters) - Economic growth during the first quarter was the weakest in four years, hurt by a slumping housing market and deteriorating international trade, the Commerce Department reported on Friday.

At the same time, one price gauge in the GDP report posted its biggest jump in 16 years, sending a jolt of fear through financial markets that official interest rates will stay high.

Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3 percent annual rate in the three months from January through March.

That was half the fourth quarter's 2.5 percent rate and well below the 1.8 percent that Wall Street analysts had forecast. Vital consumer spending held up relatively well but there were signs in a later report that costlier gasoline and lower housing prices might cast a shadow on the outlook.

The Reuters/University of Michigan Surveys of Consumers sentiment index showed a reading of 87.1, down from 88.4 in March and the lowest in seven months. It was the third straight monthly fall in the index but the final April reading was not as low as forecast.

The U.S. economy powered ahead at a 5.6 percent rate in the first quarter of 2006, but has been slowing in recent months as a hard-hit housing sector has led to rising defaults and caused builders to scale back until inventories are reduced.
Residential spending shrank by 17 percent in the first quarter following declines of 19.8 percent in the fourth quarter and 18.7 percent in the third quarter last year.

The dollar continued its fall:
Dollar sinks to record low vs euro

By Kevin Plumberg

Fri Apr 27, 6:00 PM ET

NEW YORK (Reuters) - The dollar dropped to a record low against the euro on Friday after the weakest reading of U.S. economic growth in four years suggested the economy could be at danger of falling behind the rest of the world.

For the first time since its launch in January 1999, the euro rose above $1.3680 and was on track for its largest monthly gain since November.

Against the yen, the euro zone currency climbed to an all-time high above 163 yen, as solid expectations for economic growth in Europe contrasted with the mediocre pace of expansion in the United States and Japan.

Growth in U.S. gross domestic product was below its long-term trend for the fourth consecutive quarter in the first three months of the year, while a measure of inflation posted its largest rise in 16 years.

The data did little to shake the view among investors that the Federal Reserve will likely have to cut U.S. interest rates at least once this year, compared with forecasts for higher rates in the euro zone and Britain, among others, thereby reducing the relative appeal of U.S. fixed-income assets…


The weakening dollar in the face of economic strength in Europe and Asia independent of U.S. demand unearthed the greenback's long-term enemies -- diversification of dollar-denominated central bank and portfolio holdings and concerns about financing the U.S. current account deficit.

"The U.S. is still trying to fund a $200 billion-plus quarterly current account deficit but the new twist is that growth has moved to a sub-2 percent pace," said Brian Garvey, senior currency strategist with State Street Global Markets in Boston.

"This could serve as a wake-up call to foreigners who have recently shown an increasing appetite for U.S. equities and U.S. corporate bonds," he said in a research note.

U.S. financial markets need to attract $3 billion every working day to cover the outflow of money due to the world's largest economy's trade deficit.

Next week, investors will have a steady flow of U.S. economic data to measure the dollar against. In particular, investors will likely focus on the March core PCE price index -- the Fed's favored gauge of inflation -- due on Monday and the monthly payrolls report due on Friday.

Significantly lower-than-expected jobs growth could seal the near-term fate of the struggling U.S. dollar.

"The new kid on the block is the potential for a weak labor market," said a money manager with a large currency overlay manager in London. "There's more dollar weakness to go."

It is increasingly clear that the United States’s economy is heading towards recession (at least), the rest of the world has been doing extremely well. The question becomes, will a collapsing dollar and a crashing U.S. domestic economy bring the rest of the world down with it, or will the rest of the world be able to cushion the impact?

After strong growth, world economy at a “turning point”

Nick Beams

24 April 2007

The latest reports on the state of the world economy by both the International Monetary Fund (IMF) and the World Bank paint a picture of a global boom, the like of which has not been seen in almost four decades.

The IMF’s World Economic Outlook (WEO), published earlier this month, predicts that the average world growth rate of 4.9 percent in the period 2003-2006 will continue at least for the next two years. According to IMF statistics, the only stronger spurt was the period 1970-1973, when world growth averaged 5.4 percent. If the current rate is sustained it will represent the most powerful six-year expansion of the world economy in the period since 1970.

The conclusions of the Global Economic Prospects report, published by the World Bank in December 2006, are not essentially different. While its figures are slightly below those of the IMF, due to different measurement techniques, the World Bank points to a “strong global performance” reflecting a “very rapid expansion in developing countries, which grew more than twice as fast as the advanced economies.” This was not just a result of the impact of the Chinese economy, which grew by 10.4 percent, but extended across the range of developing countries. Altogether 38 percent of the increase in global output originated in these regions, well above their 22 percent of world gross domestic product (GDP).

The World Bank noted that if the past 25 years were divided in two periods—1980-2000 and 2000-2005—average growth in developing countries had accelerated from 3.2 percent in the first period to 5 percent in the second. While this acceleration was not shared by all countries, neither was it merely the result of increased growth in China and India.

The IMF’s WEO was filled with similar reports of economic success. Economic activity in Western Europe had “gathered momentum” in 2006 with GDP growth in the euro area reaching 2.6 percent, almost double the rate for 2005 and the highest figure since 2000. “Germany was the principal locomotive, fuelled by robust export growth and strong investment generated by the major improvement in competitiveness and corporate health in recent years,” it stated. Overall the unemployment rate had fallen to 7.6 percent in the euro area, its lowest level for 15 years.

There was even good news from Japan, where the economy was virtually stagnant for more than a decade following the collapse of the share market and real estate bubble in the early 1990s. Despite an unexpected decline in consumption in the middle of 2006, the “economy’s underlying momentum remains robust with private investment expanding—supported by strong profits, improved corporate balance sheets, and the resumption of bank lending—and rising export growth.” Real economic growth in Japan was expected to remain at above 2 percent.

While the growth rate in Latin America was expected to ease to 4.9 percent this year, from 5.5 percent in 2006, the years 2004-2006 were “the strongest three-year period of growth in Latin America since the late 1970s.”

In so-called “emerging Asia” economic activity “continues to expand at a brisk pace”, supported by “very strong growth in both China and India.” In China, real GDP expanded by 10.7 percent in 2006, while in India the growth rate was 9.2 percent, the result of increased consumption, investment and exports.

Growth in Eastern Europe accelerated to 6 percent in 2006, while in Russia the growth rate of 7.7 percent in 2006 was expected to ease only slightly to 7.0 percent in 2007 and 6.4 percent in 2008.

The report described the economic outlook for Africa as “very positive” against a backdrop of strong global growth, increased capital inflows, rising oil production in a number of countries and increased demand for non-fuel commodities. “Real GDP growth is expected to accelerate to 6.2 percent this year, from 5.5 percent in 2006, before slowing to 5.8 percent in 2008.”

One area of immediate concern was whether this expansion in the rest of the world would be pulled back by the slowing of the US economy due to the significant decline in the housing market. Latest figures showed that housing starts and permits were still headed downwards, with stocks of unsold new homes at their highest levels in 15 years. It has been estimated that over the last three quarters of 2006 the sharp contraction in residential construction took an average of 1 percentage point off real GDP growth in the US.

With the US economy having “slowed noticeably over the past year”, the central issue concerning the IMF was “whether this weakness in growth is a temporary slowdown ... or the early stages of a more protracted downturn.” It concluded that a “growth pause still seems more likely at this stage than a recession”. While the growth forecast for the US has been lowered to 2.2 percent (compared to a prediction of 2.9 percent last September), the economic expansion was “expected to gradually regain momentum, with quarterly growth rates rising during the course of 2007 and returning to around potential by mid-2008.”

Financial instability

While setting out what one well-known economist called “the single most optimistic official forecast I have ever seen for the global economy,” the IMF report did voice some concerns, especially with regard to financial markets.

The continued drive for increased yield had resulted in greater risk-taking in less well understood markets and financial instruments. “While this strategy has been successful when markets remain buoyant, price setbacks, rising volatility and emerging loan losses could lead to a reappraisal of investment strategies and a pull-back from positions that have become overextended. Such an unwinding may have serious macroeconomic consequences,” it stated.

The report also sounded a warning about the recent upsurge in leveraged buyouts often led by private equity firms, but in the end concluded that the risks to global growth “now seem more balanced than six months ago.”

Without providing a great deal of analysis, both the IMF and the World Bank pointed to the integration of the global markets, the opening up of the economies of China and India, the expansion of the world labour supply and the impact of information and communications technology as the main factors behind the upturn in world economic growth.

According to the World Bank, over the last quarter century, a time of unprecedented integration for the global economy, sharp falls in transport and communications costs, together with reductions in barriers to trade, have paved the way for productivity increases associated with the integration of emerging markets into global markets.

…In the special section devoted to the globalisation of labour, the IMF report estimates that the effective global labour force has risen fourfold over the past two decades—a “growing pool of global labour [which] is being accessed by advanced economies through various channels, including imports of final goods, offshoring of the production of intermediates [partially completed goods], and immigration.”

Most of this increase in labour supply took place after 1990 with East Asia contributing about half and South Asia and the former Eastern bloc countries accounting for smaller proportions. While most of this cheaper labour comprised less-educated workers, the report noted that the relative supply of workers with higher education increased by about 50 percent over the last 25 years, mainly from the advanced countries, but also from China.

Neither the World Bank nor the IMF draw any historical parallels, but the vast structural changes associated with the latest phase of capitalist globalisation recall the opening of the 20th century when profit rates and economic growth in the major capitalist countries received a significant impetus from the cheap raw materials, minerals and other resources that came from the colonies.

Together with the introduction of new technologies, the vast expansion in the global labour force over the past two decades has resulted in a significant boost to profits. Since the beginning of the 1980s, it is estimated that in the advanced capitalist countries the share of GDP going to labour has declined by about 8 percentage points.

Both organisations regard the latest upswing in growth as a sign of the health and stability of world capitalism ... but there are some nagging doubts. In the words of the World Bank: “While the soft landing is the most likely scenario, the global economy is at a turning point following several years of very strong growth—and such periods are fraught with risk. Indeed ... the last century began under similar auspicious circumstances characterised by an extended period of strong growth buoyed by technological change and ample liquidity. Rather than continuing forward as anticipated by leading economists at the time, the world plunged into the Great Depression. Thus, while much in the current environment is reassuring, a note of caution is merited.”…

I think a lot more than “a note of caution” is merited. So does Mike Whitney who discusses the reasons why a collapse in the U.S is likely and why it will threaten economic growth world-wide:
"Is It Too Late to Get Out?" Housing Bubble Boondoggle

Mike Whitney

April 24, 2007

Treasury Secretary Henry Paulson delivered an upbeat assessment of the slumping real estate market on Friday saying, "All the signs I look at" show "the housing market is at or near the bottom."


Paulson added that the meltdown in subprime mortages was not a "serious problem. I think it's going to be largely contained."

Wrong again.

Paulson knows full well that the housing market is headed for a crash and probably won't bounce back for the next 4 or 5 years. That's why Congress is slapping together a bailout package that will keep struggling homeowners out of foreclosure. If defaults keep skyrocketing at the present rate they are liable to bring the whole economy down in a heap.

Last week, the Senate convened the Joint Economic Committee, chaired by Senator Charles Schumer. The committee's job is to develop a strategy to keep delinquent subprime mortgage holders in their homes. It may look like the congress is looking out for the little guy, but that's not the case. As Schumer noted, "The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act."

Schumer's right. The repercussions of millions of homeowners defaulting on their loans could be a major hit for Wall Street and the banking sector. That's what Schumer is worried about---not the plight of over-leveraged homeowners.

Every day now, another major lending institution unveils its plan for bailing out the housing market. Citigroup and Bank of America have joined forces to create the Neighborhood Assistance Corporation of America which will provide $1 billion for the rescue of subprime loans. This will allow homeowners to refinance their mortgages and keep them out of foreclosure. The new "30- year loans will carry a fixed interest rate one point below the prime rate, putting it currently at 5.5 percent. There are no fees, and the banks pay all the closing costs."

But why are the banks being so generous if, as Paulson says, "the housing market is at or near the bottom." This proves that the Treasury Secretary is full of malarkey and that the problem is much bigger than he's letting on.

Last week, Washington Mutual announced a $2 billion program to slow foreclosures (Washington Mutual's subprime segment lost $164 million in the first quarter) while Freddie Mac committed a whopping $20 billion to the same goal. In fact, Freddie Mac announced that it "would stretch the loan term to a maximum of 40 years from the current 30-year limit."

40 years!?! How about a 60 or 80 year mortgage?

Can you sense the desperation? And yet, Paulson says he doesn't see the subprime meltdown as a "serious problem"!

Paulson's comments have had no effect on the Federal Reserve. The Fed has been frantically searching for a strategy that will deal with the rising foreclosures. On Wednesday, The Washington Post reported that "Federal bank regulators called on lenders to work with distressed borrowers unable to meet payments on high-risk mortgages to help them keep their homes".


When was the last time the feds ordered the privately-owned banks to rewrite loans?

Never--that's when.

That gives us some idea of how bad things really are. The details of the meltdown are being downplayed in the media to prevent panic-selling among the public. But the Fed knows what's going on. They know that "U.S. mortgage default rates hit an all-time high in the first quarter of 2007" and that "the percentage of mortgages in default rose to a record 2.87%". In fact, the Federal Reserve and the five other federal agencies that regulate banks issued this statement just last week:

"Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrowerInstitutions will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers."

Translation: "Rewrite the loans! Promise them anything! Just make sure they remain shackled to their houses!"

Unfortunately, the problem won't be "fixed" with a $30 or $40 billion bailout scheme. The problem is much bigger than that. There is an estimated $2.5 trillion in subprimes and Alt-A loans---20% of which are expected enter foreclosure in the next few years. Any up-tick in interest rates or unemployment will only aggravate the situation.

Kenneth Heebner, manager of CGM Realty Fund (Capital Growth Management), provided a realistic forecast of what we can expect in the near future as defaults increase.

Heebner: "The Greatest Price Decline in Housing since the Great Depression" (Bloomberg News interview)

"The real wave of pain and foreclosures is just beginning.subprimes and Alt-A are both in trouble. A lot of these will go into default. The reason is, that the people who took these out never really intended to fully service the mortgage---they were counting on rising home prices so they could sign on the dotted line without showing what their income was and then 2 years later flip into another junk mortgage and get a big profit out of the house with putting anything down

"There's a $1.5 trillion in subprimes and $1 trillion in Alt-A the catalyst will be declining house prices which is already underway. But as we get a large amount of these $2.5 trillion mortgages go into default, we'll see foreclosed houses dumped on an already weak market where homebuilders are already struggling to sell there houses. The price declines which have started will continue and may even accelerate in some of the hotter markets. I would expect that housing prices in "2007 will decline 20% in a lot of markets".

"What you are going to see is the greatest price decline in housing since the Great Depression. The one thing that people should not do, is go near a CDO or a residential mortgage backed security rated Triple A by Moody's and S&P because these are going to get down-graded by the hundreds of millions---because they are secured by subprime and Alt-A mortgages where there'll be massive defaults".

Question: "Will the losses in the mortgage market exceed those in the S&L crisis?"

Heebner: "They're going to dwarf those losses because the losses could easily approach $1 trillion---that dwarfs anything that has ever happened. Enron was $100 billion---this will be far greater than that..The good news is that most of these loans are owned by Hedge FundsYou hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit And the hedge fund you are running, the manager is going to get 20% of the gain---so even if it's a year before you go broke; you get rich until the fund is shut down".

Heebner added this instructive comment: "The brokerage firms created "securitization" they know the products are toxic. I don't think they are going to suffer losses; they simply passed them on to everyone else. The only impact this will have is the profits that flow from it will get less.But it is less than 3% of revenues in even the most exposed brokerage firm so THEY'RE NOT GOING TO GET CAUGHT."

Although Heebner believes the brokerage houses will do fine; the same is not true for the small investor. Nearly 70% of subprimes have been securitized. That means that the vast number of shoddy "no down payment, no document, interest-only" loans (that are headed for default) have been transformed into securities and sold to hedge funds. As the housing market continues to falter, these funds will plummet at an inverse rate to the amount of leverage that has been applied. That may explain why, (according to Bloomberg Markets) the "wealthiest Americans have been bailing out" of hedge funds at an alarming rate. A report in last Thursday's New York Times stated:

"Americans with a net worth of at least $25 million, excluding the value of their primary homes, reduced their exposure to hedge funds in 2006"-- The amount of money held by wealthy investors in hedge funds has dropped dramatically-- "The average balance, which was $2.8 million in 2005, was just $1.6 million last year, a 43 percent decline".

So, what do America's richest investors know that the rest of us don't?

Could it be that the over-leveraged hedge funds industry is about to get hammered by the subprime implosion?

If so, it won't be the brokerage houses or savvy insiders who get hurt. It'll be the little guys and the pension funds that take a drubbing.

In Henry C K Liu's "Why the Subprime Bust will Spread" (Asia Times) the author states that the bursting housing bubble will trigger a major pension crisis. After all, who are the "institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages". (Liu)

The origins of the housing bubble are complex, but they are worth understanding if we want to know how things will progress. The housing bubble is not merely the result of low interest rates and shabby lending practices. As Liu says, "the bubble was caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifted all US house prices beyond levels sustainable by household income in otherwise disaggregated markets". The deregulated cross-border flow of funds (via the yen low interest "carry trade" or the $800 billion current account deficit) have played a major role in inflating the US real estate market.

Liu adds, "Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally."Since nearly 50% of "securitized" mortgage debt is owned by foreign investors; the subprime meltdown is bound send tremors through the entire global financial system.

The housing decline is further complicated by Wall Street innovations in derivatives trading which has generated trillions of dollars in "virtual" wealth and is affecting the Feds ability to control inflation through interest rate manipulation.
As Kenneth Heebner said, "You have hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit."

In other words, low interest foreign capital has flooded US markets and contributed to distortions in housing prices.

In her recent article "War Drags the Dollar Down", Ann Berg refers to Wall Street's "swirling galaxy of exotic finance" which has "worked magic for the government and the elite", but has yet to weather a severe downturn in the economy.

But how will market deal with sudden downturn in the hedge fund industry? Will the dodgy subprimes and shaky collateralized debt obligations (CDOs) trigger a crash or has the risk been wisely dispersed through derivatives trading?

No one really knows.

As Berg says, "Derivatives numbers are staggering. The Bank for International Settlements estimates that the notional amount of derivatives traded on regulated exchanges topped a quadrillion dollars last year and that the outstanding unregulated off-exchange (called over-the-counter OTC) amount stood at $370 trillion in June 2006. Because the OTC market is composed of endless strings of bilateral transactions the systemic risk is unknown."

The comments of the President of the New York Fed, Timothy Geithner, help to clarify the abstruse activities of the modern market:

"Credit market innovations have transformed the financial system from one in which most credit risk is in the form of loans, held to maturity on the balance sheets of banks, to a system in which most credit risk now takes an incredibly diverse array of different forms, much of it held by nonbank financial institutions that mark to market and can take on substantial leverage."

Geither's right. The markets now operate as unregulated banks generating mountains of credit through massively leveraged debt instruments---a monster credit bubble larger than anything in the history of capitalism.

So, where is all this headed?

No one really knows. But when the housing bubble crashes into Wall Street's credit bubble,; we can expect the "big bang". That may explain why America's wealthiest investors are running for cover before the whole thing blows. (A number of investors have already cashed out and put their holdings into foreign funds and currencies)

One thing is certain ---time is running out. With $1 trillion in subprimes and Alt-A loans headed for default the system is facing its greatest challenge. US- GDP has been revised to a measly 1.8%, foreign investment is down, and the dollar is losing ground to the euro on an almost weekly basis.

Falling home prices have already precipitated a number of other problems. For example, Gene Sperling reports in "Housing Bust Meets the Equity Blues" that "The Fed data showed an amazing expansion (in Mortgage-Equity Withdrawal). In 1995, active MEW had been $37 billion. By the fourth quarter of 2005, it soared to $532 billion annualized, a 14-fold expansion". These equity withdrawals have translated into consumer spending which accounts for at least 1 full percentage point of GDP. Declining house prices means that extra boast for the economy will now disappear.

Foreclosures are soaring and expected to get worse for the next two years at least. In California foreclosure filings jumped 79% in March alone. Other "hot markets" are reporting similar figures.

The glut of new homes for sale on the market has slammed sales of the nation's major builders; most are reporting profits are down by 40% or more.

The collapse of the subprime mortgage market is also pushing some big U.S. homebuilders toward Chapter 11. According to Bloomberg News, "Some builders are staying out of bankruptcy by relying on the profits they made when sales boomed" in 2004 and 2005. Starting next year they must begin to repay $3.6 billion in public debt in what will certainly be a falling market. The prospects don't look good.

Also, Credit card debt is way up (nearly 7% in one year) and economists are predicting that the trajectory will continue now that home equity is vanishing. Americans savings rate is in negative numbers and the steep increase in credit card debt (with its high interest rates) only compounds the problem. The American consumer has now compiled more personal debt than anytime in history.

The Grim Reaper Meets the Housing Bubble

Those who follow developments in real estate have heard many of the wacky anecdotes related to the housing bubble. Stories abound of young people buying homes just to pay off tens of thousands of dollars of collage loans with their "presto"-equity ---or low paid construction laborers securing 105% loans without any proof of income and a poor credit history. One of the stories that got national attention was about Alberto and Rosa Ramirez, who worked as strawberry pickers in the fields around Watsonville each earning about $300 a week. They (somehow?) qualified for a loan of $720,000 which paid for a "new" four-bedroom, two-bath house in Hollister.

It's sheer madness!

Obviously, those days are over. The speculative frenzy that was generated by the Fed's low interest rates, the banks lax lending standards, and the deregulated global credit market is drawing to a close. The fallout from the collapse in subprime-loans will roil the stock market and hedge funds, but, as Heebner says, the investment banks and brokerage firms will escape without a bruise.

Where's the justice?

Despite Hank Paulson's cheery predictions, we are no where "near the bottom". In fact, a recent survey showed that only 1 in 7 Americans believe that house prices will go down. Even now, very few people grasp the underlying issues or the potential for disaster. We're on a treadmill to oblivion and they think it's a merry-go-round.

As housing prices tumble, more homeowners will experience "negative equity", that is, when the current value of their home is less than the sum of their mortgage. This is the very definition of modern serfdom.

We can expect to see an erosion of confidence in the market, a rise in inventory, and a steady increase in defaults.More and more people will walk away from their homes rather than be hand-cuffed to an asset that loses value every day. This could transform a "housing correction" into a nation-wide financial calamity.

Many peoples' futures are linked directly to the "anticipated" value of their homes.It is impossible to determine how shocked they'll be when prices retreat and equity shrivels. The housing flame-out has all the makings of a national trauma"another violent jolt to the fragile American psyche.

So far, we're still in the first phase of a process that will probably play out for 10 years or more. (Judging by Japan's decades-long decline) None of the bailout plans are large enough to make any quantifiable difference.The numbers are just too big.

Housing prices are coming down and the real estate market will return to fundamentals. That much is certain. The law of gravity can only be ignored for so long.

Just don't count on a "soft landing".

Last week a milestone in the decline of the United States was reached: Toyota surpassed General Motors as the world’s largest auto manufacturer:

Toyota surpasses GM in global auto sales

Jerry White

26 April 2007

During the first three months of 2007, Toyota sold more cars and trucks worldwide than General Motors for the first time ever, as the Japanese company moved closer to becoming the world’s largest automaker in terms of annual global sales. With the exception of individual years in the 1970s and 1980s when production was cut due to labor strikes, General Motors has held the number-one spot for every year since 1931—during the depths of the Great Depression.

The long-awaited eclipsing of General Motors is symbolic not only for what it says about the demise of the once-mighty manufacturing giant, but also for what it reveals about the historic decline of the world position of American capitalism.
For most of the twentieth century, GM was synonymous with the power and innovation of US industry. Today, the Detroit-based auto manufacturer—which has been steadily losing market share for three decades and posted more than $12 billion in losses over the last two years—is retrenching its operations, shedding tens of thousands of jobs and shuttering its factories.

In 1955, GM accounted for half of the American auto market, at a time when four out of every five cars in the world were being produced in the US. Emerging from war-torn Japan, Toyota was a small company that only produced 23,000 cars, compared to 4 million manufactured by GM in the US. Today, Toyota is increasing its production worldwide and in North America, where the Japanese auto company first introduced its vehicles 50 years ago. Toyota is steadily grabbing market share from the US carmakers, including GM.

Toyota’s first-quarter sales rose 9.2 percent to a record 2.35 million vehicles, the company reported Tuesday. Last week, GM reported it sold 2.26 million vehicles in the January-to-March period. Fifty years after Toyota entered the all-important US market, the company controlled 15.6 percent of the share, up from 9.3 in 2000, while GM’s share fell to 23.1 percent in 2006—its lowest percentage since the 1920s—down from 28.1 percent just seven years ago.

Globally, GM outsold Toyota 9.1 million to 8.8 million in 2006. But the Japanese auto company’s sales rose 8 percent last year, and it expects to sell 9.34 million vehicles in 2007, in large measure due to growing demand in the North American market. Toyota has six assembly plants in North America with a total production capacity of 1.8 million vehicles a year, and it expects output to rise to 2.2 million by 2010 as two more new plants come on line. Meanwhile, GM is cutting North American production by 1 million units.

While expanding sales in some emerging markets, particularly in China, GM officials have resigned themselves to a permanent loss in US market share. In November 2005, GM launched a major restructuring that called for closing 12 plants by 2008 and slashing its workforce by more than 34,000 employees.

At its peak, GM employed more than 600,000 American workers, including 459,000 members of the United Auto Workers (UAW) union. With the new round of cuts, GM will reduce its blue-collar workforce to 86,000 US hourly workers by the end of 2008, roughly the number of people it employed in Flint, Michigan, alone in the 1970s.

Workers in dozens of GM’s manufacturing centers—such as Detroit, Pontiac, Saginaw and Flint in Michigan; Dayton in Ohio; and Kokomo and Muncie in Indiana—once enjoyed the highest pay of any industrial workers in the country and record levels of home ownership. Today, these cities are littered with empty factories and face a rash of home foreclosures, personal bankruptcies and requests for emergency food and healthcare assistance.

In addition to GM, the other “Big Three” auto companies are hanging on by a thread. Number-two carmaker Ford lost a record $12.7 billion in 2006 and is in the process of closing plants in the US and Canada and eliminating the jobs of 38,000 autoworkers.

Two months ago, DaimlerChrysler reported huge losses at its North American Chrysler Group division and said it would wipe out 13,000 jobs. The German company also revealed plans to spin off its money-losing US operation, opening the way to the carve-up of the 82-year-old company by Wall Street speculators who are anxious to slash workers’ wages and benefits and sell off the company’s most profitable assets. All told, US automakers and suppliers eliminated 150,000 jobs in the US in 2006.

The virtual collapse of the Big Three US auto companies has been a drawn-out process. In the post-World War II period—while Japanese and German industries were still rebuilding after the ruin of the war—GM and other manufacturers boasted that their costs per unit were the lowest in the world, despite paying workers the highest wages. By the 1970s and 1980s, however, profit margins began to fall, and more efficient and innovative Japanese and German manufacturers began to challenge the US monopoly over auto production and penetrate the American market itself.

The response of the auto corporations was to launch an unrelenting assault on the jobs, working conditions and living standards of autoworkers, which continues to this day. Rather than opposing this attack, the UAW collaborated in the shutdown of factories and the destruction of 600,000 Big Three jobs since 1979.

Preaching labor management cooperation, the UAW suppressed the opposition of rank-and-file workers and joined the auto bosses and Democratic Party politicians in promoting anti-Japanese chauvinism in order to divide US workers from their brothers and sisters in Japan and other countries.

US auto executives—who themselves pocketed tens of millions in compensation despite the record losses at their companies—relied on high-profit SUVs and other gas-guzzling vehicles to satisfy big investors, while driving fewer and fewer workers in the factories to produce more and more, and outsourcing production to lower-wage factories in the US and overseas. Rising gas prices and widespread economic insecurity have caused a sharp fall in demand for these bigger vehicles, eliminating a major source of profit for the auto companies. Under pressure from Wall Street investors, GM is looking to slash labor costs again, using as its model the low-wage, nonunion plants Toyota operates in the southern US.

In a speech on Monday in Louisville, Kentucky, GM Vice Chairman Bob Lutz warned that the entire automotive sector would be further hit by the downturn in the housing market and the meltdown in the home mortgage industry. “A lot of people are finding themselves in a position of reduced affordability and that has had an impact, not just on us, but across the industry.”

Add a collapse of the U.S. economy and the dollar to a military defeat in Iraq and Afghanistan, and you will get a drastic fall in the position of the United States in the world. Will the world be able to manage the collapse of the United States as peacefully and absorb the consequences as effortlessly as it did the collapse of the Soviet Union?

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Monday, April 23, 2007

Signs of the Economic Apocalypse, 4-23-07

From Signs of the TimesSigns of the Times:

Gold closed at 695.80 dollars an ounce Friday, up 0.9% from $689.90 at the close of the previous Friday. The dollar closed at 0.7359 euros Friday, down 0.4% from 0.7390 at the previous week’s close. That put the euro at 1.3589 dollars compared to 1.3532 the Friday before. Gold in euros would be 512.03 euros an ounce, up 0.4% from 509.83 for the week. Oil closed at 64.11 dollars a barrel Friday, up 1.1% from $63.41 at the close of the Friday before. Oil in euros would be 47.18 euros a barrel, up 0.7% from 46.86 for the week. The gold/oil ratio closed at 10.85 Friday, down 0.3% from 10.88 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at a record-high 12,961.98 Friday, up 2.8% from 12,612.13 for the week. The NASDAQ closed at 2,526.39 Friday, up 1.4% from 2,491.94 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.67% down nine basis points from 4.76 for the week.

The mainstream media was excited last week about U.S. stocks hitting record highs. But what does that tell us? Only that U.S. corporations are getting more efficient at exploiting people. Their stocks go up when they lay people off; it’s that simple. The media presents it as increased profits, but the cause is the same. Note in the following article that higher oil prices caused by political instability in oil-rich Nigeria also boosted stocks. That’s not good news in the real world but it was good news for Exxon-Mobil:

Dow nears 13,000 on strong earnings

Caroline Valetkevitch

Fri Apr 20, 9:46 PM ET

NEW YORK (Reuters) - U.S. stocks jumped on Friday, with the Dow closing at a record high after coming within 35 points of 13,000, as Google Inc. and Caterpillar Inc. joined the list of companies reporting stronger-than-expected quarterly results.

The Dow closed up more than 150 points, while the broader Standard & Poor's 500 index closed at its highest level since September 2000. April was shaping up to be the best month for the Dow and the S&P in just over four years.

Higher oil prices aided the rally, lifting shares of Exxon Mobil Corp. to an all-time high and boosting shares of other energy companies.

Google shares gained 2.3 percent at $482.48, which helped the Nasdaq, after reporting on Thursday after the market close a rise in quarterly profit that easily beat expectations.

"Momentum is clearly in the bull favor," said Joseph Battipaglia, chief investment officer at Ryan Beck & Co, in Philadelphia. "We're in the midst of earnings season. By and large it has come in as expected, and recent economic data keeps suggesting an economy that is slow but not slowing further."

The Dow Jones industrial average rose 153.35 points, or 1.20 percent, to end at 12,961.98, its third straight record close.

The Standard & Poor's 500 Index was up 13.62 points, or 0.93 percent, at 1,484.35. The Nasdaq Composite Index was up 21.04 points, or 0.84 percent, at 2,526.39.

The Dow hit an intraday record high at 12,966.29, and had its best daily percentage gain in a month. The average, which rose 2.8 percent for the week, has closed higher in all but one session so far this month.

On Wednesday, the blue-chip Dow hit its first record since February 20, a week before the global equities sell-off.

For the week, the S&P 500 gained 2.2 percent and Nasdaq rose 1.4 percent. It was the third straight week of gains for all three indexes.

In what analysts say is another bullish sign for the market, the Dow Jones transportation average rose 0.8 percent and hit a lifetime high during the session.

Shares of Caterpillar, a manufacturer of heavy construction and mining equipment, led advances on the Dow, ending up 4.7 percent at $71.82. Caterpillar also raised its outlook and said growth outside of North America would offset weakness in its U.S. housing and truck engine markets.

Crude oil rose on concerns that weekend elections in Nigeria, the world's eighth-largest exporter, could spark turmoil and lead to supply disruptions. Crude for May delivery gained $1.55 to settle at $63.38 a barrel.

Exxon shares rose 3 percent to $79.76, and reached an all-time high of $79.80.
More strong results came from Honeywell International Inc., whose stock rose 4.8 percent to $51.40. The diversified manufacturer reported earnings that beat analysts' estimates.

Among other companies reporting strong results this week were Merrill Lynch & Co. Inc., the world's largest brokerage, and drug maker Schering-Plough Corp.
The Dow Jones utility average hit a record after rising nearly 1 percent, helped by a 2.6 percent gain in shares of Williams Cos. Inc. The index is up 14 percent year-to-date.

Trading was heavy on the New York Stock Exchange, with about 1.94 billion shares changing hands, above last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.14 billion shares traded, above last year's daily average of 2.02 billion. The market had seen below-average volume most of this week.

Advancing stocks outnumbered declining ones by a ratio of about 13 to 4 on the NYSE and by about 2 to 1 on Nasdaq.

The two-tiered, third-world economy continues to emerge in the developed world. That is what high stock prices tell us, because the high stock prices were achieved by cutting high-paying jobs:
Factory Losses Severe for U.S. Workers -- 3.2 Million Jobs Gone Since 2000

Martin Crutsinger

Friday April 20, 3:02 pm ET

WASHINGTON (AP) -- Three weeks ago, Dawn Zimmer became a statistic. Laid off from her job assembling trucks at Freightliner's plant in Portland, Ore., she and 800 of her colleagues joined a long line of U.S. manufacturing workers who have lost jobs in recent years. A total of 3.2 million -- one in six factory jobs -- have disappeared since the start of 2000.

Many people believe those jobs will never come back.

"They are building a multimillion-dollar plant in Mexico and they are going to build the Freightliners down there. They came in and videotaped us at work so they could train the Mexican workers," said Zimmer, 55, who had worked at Freightliner since 1994.

That's the issue for American workers. Many of their jobs are moving overseas, to Mexico and China and elsewhere.

Just ask Tom Riegel.

He worked for 27 years making Pennsylvania House furniture at a factory in Lewisburg, Pa., until the plant shut down in December 2004. The production was moved to a plant in China, which kept making the furniture under the Pennsylvania House label for shipment back to the United States.

Rigel, 48, who has had health problems, hasn't worked since he lost his job running a molding machine. He says his prospects aren't good given the number of other furniture plants in the area that have suffered layoffs.

"It started with just a few pieces of furniture made in China. Then it snowballed," he said. "Manufacturing was built on the back of the American worker and then boom -- one day your job is gone."

Even though manufacturing jobs have been declining, the country is enjoying the lowest average unemployment rates of the past four decades. The reason: the growth in the service industries -- everything from hotel chambermaids to skilled heart surgeons.

Eighty-four percent of Americans in the labor force are employed in service jobs, up from 81 percent in 2000. The sector has added 8.78 million jobs since the beginning of 2000.

Although these workers have been largely sheltered from the global forces that have hit manufacturing, that could change as satellites and fiber optic cable drive down the cost of long-distance communication. Today it is call centers in India and the Philippines but tomorrow many more U.S. jobs could move off shore.

Some economists say the United States is experiencing a normal economic evolution from farms to factories and now to service jobs.

"Every advanced economy has seen its employment in agriculture and manufacturing decline relative to services and America is no exception," said Daniel Griswold, an economist at the Cato Institute, a Washington think tank.

But others note that the loss in manufacturing jobs has been accelerating in recent years as the trade deficit has grown and America imports more and more products that used to be made here.

"It is pretty crystal clear to our members that when their plant closes down, they know where their jobs are going," said Thea Lee, policy director at the AFL-CIO.

Princeton economist Alan Blinder, who was vice chairman of the Federal Reserve during the Clinton administration, says the number of jobs at risk of being shipped out of the country could reach 40 million over the next 10 to 20 years. That would be one out of every three service sector jobs that could be at risk.

Those lost manufacturing jobs are fueling an intense debate over globalization -- the increasing connection of the United States and other economies.

That debate will play out in Congress over the coming months as the Bush administration tries to muster the votes needed to pursue its free-trade policies.

Opponents will seek increased protections for American workers against unfair trade practices and push such proposals as wage insurance and better job training for the victims of globalization.

Democrats, who took control of both the House and Senate in last year's elections, believe up to one-third of those lost manufacturing jobs are the direct result of America's soaring trade deficits, which have hit new records for five straight years.

Last year's deficit was $765.3 billion -- that is, the U.S. imported $765.3 billion more in goods and services than it exported. The imbalance with China hit an all-time high for a single country at $232.5 billion.

In 1943 and 1944, with factories working overtime to build the ships, tanks and planes needed to fight World War II, manufacturing accounted for four out of 10 jobs in the U.S. That was the peak; manufacturing has been declining ever since. Manufacturing now accounts for one job in 10 in the nonfarm work force.

Over the past 16 years, manufacturing has declined as a percentage of the work force in 48 of the 50 states. Nevada's percentage stayed the same and only North Dakota saw an increase.

The declines have been particularly painful in the industrial Midwest and rural South, which have been battered by competition from China.

"China has just exploded on the global scene since 2002. Every economy on the planet has lost jobs to China," says Mark Zandi, chief economist at Moody's, an economic forecasting company.

A Moody's analysis found 16 percent of the nation's 379 metropolitan areas are in recession, reflecting primarily the troubles in manufacturing. There have been heavy job losses in a variety of industries from textiles and apparel to paper and furniture.

Critics contend China uses a variety of unfair trade practices from widespread copyright piracy of American products to keeping its currency undervalued by as much as 40 percent to make Chinese goods cheaper in comparison with U.S. products.

On April 9, the Bush administration, responding to growing political pressure, announced the latest in a string of tough actions against China. It filed trade cases with the World Trade Organization accusing China of erecting unfair barriers to the sale of U.S.-made movies, music and books and rampant copyright piracy.

But Treasury Secretary Henry Paulson and other Bush administration officials argue that despite the yawning U.S.-China trade gap, President Bush's free trade policies are paying off in new markets that have helped U.S. exports boom.
While manufacturing jobs have declined, manufacturing output has been rising. The difference is increased productivity, which means it takes fewer workers to make more goods.

"We are evolving to a point that we are manufacturing things that are not easy to manufacture. That require skills. We believe that is our future. And those are the manufacturing jobs that pay the most," Commerce Secretary Carlos Gutierrez said in an interview.

High-tech industries, where the U.S. is still seen as having the edge, include pharmaceuticals, medical devices and airplanes.

But even high-tech industries are facing pressure from imports. The U.S. Business and Industry Council, which represents small- and medium-sized manufacturing companies, found that between 1997 and 2005, 110 of the 114 U.S. industries it studied had lost ground to imports in the U.S. market. That was the case even in such sectors as computers and telecommunications hardware.

Just the threat of moving high-paying white collar jobs such as computer programmers and graphic designers offshore will likely add to pressures on Congress to erect barriers to global competition, which many economists believe would do more damage than good.

"It is easy to see this turning into some kind of protectionist force which would be harmful," Blinder said in an interview. "We need to turn the debate in a constructive direction -- how do you prepare the work force of the future and compensate the losers?"

The result being:

Super-rich population surges in 2006: survey

Tue Apr 17, 2007 1:53 PM ET

NEW YORK (Reuters) - The number of U.S. households with a net worth of more than $5 million, excluding their primary residence, surged 23 percent to surpass one million for the first time in 2006, according to a survey released on Tuesday.

The survey by Chicago-based Spectrem Group found that the number of U.S. households with more than $5 million rose from 930,000 in 2005. In 1996, there were only 250,000 U.S. households in the "ultra-rich" category, Spectrem said.

"The past few years have been nothing but astounding for wealthy Americans," said Catherine McBreen, managing director of Spectrem, a consulting group that researches the affluent and retirement markets.

McBreen said the surge in household growth is underpinned by economic growth in recent years, which has fueled both stock market gains and also the market for private companies. She also ascribed gains to rising real estate valuations and favorable tax policies.

"The wealthiest households are the business owners," said McBreen. She also said broader ownership of stocks has helped overall household wealth.

The survey found that U.S. households that are merely wealthy, defined as having assets of more than $500,000 excluding primary residence, rose 9 percent to 15.3 million in 2006 from the year before.

The findings are based on U.S. census data, a July 2006 mail and online survey of 526 U.S. households, and 3,000 telephone interviews throughout 2006.

As for the real economy of your average person, that continues to get worse in the U.S. with more evidence of increased mortgage defaults and house foreclosures. Foreclosures rose 400% in Boston compared to a year ago. Mortgate default notices (the stage before foreclosure) are up almost 150% in California from a year ago

Where is all this leading us?
The unstructured 21st Century

Martin Hutchinson

April 16, 2007

The decline of established institutions is supposed to be a liberating process, allowing individuals to express themselves fully and society to reach its potential through temporary structures that express its needs and values at a given time. Yet for those of us who are not 28 year old hedge fund traders, the new unstructured world seems likely to be a pretty grim place. “If you want a friend, get a dog” is in the long run an unpleasant way to live life.

The public sector in this respect is less of a problem than the private. The IMF and the World Bank have lost their useful economic role (to the extent they ever had one) but it appears unlikely that they will ever be abolished. The World Bank in particular is currently going through a bout of questioning because of its president Paul Wolfowitz’s crusade against Third World corruption. This is an entirely worthy if unpopular cause that is marred by the World Bank’s arrogance in tying it to handouts of money and by Wolfowitz’s own activity in arranging an overpaid tax-free job for his mistress.

…The World Bank represents one extreme, that of a public sector bureaucracy that has become hopelessly ossified yet is unable to be put out of its misery (no international bureaucracy of this type has ever been eliminated – at best it has been replaced with another bureaucracy performing many of the same functions.) At the opposite extreme, the private sector is currently eliminating large corporate bureaucracies at the rate of four or five a week. It is the latter problem that appears more urgent.

Most people do not have the ability to turn on a dime that is required when their job is suddenly eliminated. Instead they must struggle to find further employment that may well not be as well paid or comfortable as the job that disappeared. The alternative of entrepreneurship, so alluring in principle, is in reality for 90% of the people who try it a recipe for anxiety, poverty and remuneration far below what is appropriate for their services.

It is not at present clear whether this is a phenomenon due to excessive cheap money since 1995 – but if it is, it has been remarkably prolonged – or whether the 21st century will see the death of the large corporation and its replacement by rapidly shifting aggregates of capital seeking to maximize returns. It’s worth considering for a moment what in the latter case the world of say 2030 might look like.

In terms of income distribution, there would be a small elite of very rich people, managing hedge funds and private equity funds, whose reach would be worldwide. In theory, these would be the best and brightest of each generation, a true meritocracy. In practice, judging by hedge fund management’s current practices as well as by what appears to be acceptable in a World Bank president, nepotism and favoritism would be rife. The Funds’ resources would be raised from passive investor sources, notably in the pension and insurance sectors, but they would be wholly under the control of the Fund management elite.

As well as the truly rich who ran the Funds two penumbras would exist. One would be the gilded youth, chosen by the Fund elite as their minions and eventual successors, who would be paid superbly, but would have to abandon both their integrity and all semblance of a life outside their Fund in order to qualify for their largesse.

The other would be the managers employed by the Funds to asset-strip the companies they bought. These would be tough operators, probably military-trained, whose job would be to overcome the hostility of the masses whose lives they destroyed. Inevitably bomb threats and assassination attempts would be an accepted part of their existence. Their sole goal would be to extract “value” from the assets they oversaw, rather than to produce any operating improvements. They would be less well paid than the titans of the Funds, and would serve at their pleasure, but would still be hugely richer than everyone else.

There would be completely free migration around the globe, since the Fund titans would have paid off politicians to ensure that all barriers were removed, whatever the wishes of the electorate. In this way, labor would always be available at the lowest possible cost to carry out the Fund managers’ wishes. This free movement of labor and utilization of the near-infinite pool of Third World cheap manpower would be the most important weapon enabling Fund managers to “extract value” from all situations, breaking up or squeezing out any activities whose operating managers and staff appeared to be building a Fund-proof alternative power nexus.

Job security would be something that little people didn’t enjoy. Jobs would be available in most specialties, and career ladders would be dangled before the proletariat to ensure docility and hard work, but jobs would be terminable at a moment’s notice. They would be vulnerable to asset-stripping, when Fund managers wished to loot the operation for which you worked, to outsourcing, when the Funds found a cheaper source of labor for the work you did and to office politics, when the Funds or their tame top corporate managers decided you were subversive or they didn’t like your face. Once you lost your job, you might if lucky be able to find another in the same specialty, albeit probably worse paid, but most probably you would have to retrain expensively for whatever new specialty had become fashionable in the years since your last redundancy.

Naturally the masses would need to be kept in a state of passive discontent rather than outright rebellion, in spite of their modest living standards and lack of prospects. The Fund managers and their political allies would have a number of ways to achieve this.

The government would be large, supported primarily by taxing the labor force (the Fund titans would not pay taxes, like the Russian mafia and foreign bankers in today’s London.) As well as providing innumerable reasonably paid near-sinecures, the government would also provide social security and healthcare, available to all but revocable at the pleasure of the bureaucracy so that control could be maintained. Government economic statistics would be tailored to the Fund managers’ needs, disseminated by the Fund-controlled media so efficiently that any minion who attempted to disbelieve their universally sunny data would be unable to propagate his subversive opinions. Elections would be held, but only candidates acceptable to the Funds would get adequate campaign financing and access to the Fund-controlled media.

Internationally, an immensely powerful World Bank, supported by the West’s taxpayers but controlled by the Funds, would provide handouts for Third World governments to keep them in line with the Funds’ worldview and to ensure that sufficient labor was adequately educated and available for the Funds’ needs. Cooperating governments would find their people’s living standards modestly improving, and their leaders would be directly rewarded in person by Fund-controlled think tanks or the World Bank. If there were governments that refused to cooperate, they would be largely cut off from international trade and investment and World Bank subsidies. Military force would be controlled by the United Nations and other international bureaucracies, which would themselves be controlled by subsidies from the Funds and the World Bank.

Don’t like this future? Recognize aspects of it already appearing? Well then, pray that the present period of easy money and rapid-fire private equity acquisitions ends quickly. In that way a healthy recession will allow normal economic and democratic forces to retake control of the world economy, removing the more egregious capitalist cowboys to the jail cells where they belong.

Otherwise, every month of rising stock prices and negative real interest rates will increase the control of the Fund managers and lock the new dystopia more irremovably into place.

Hmm… a “healthy recession” would prevent this. Maybe that’s why we haven’t had one yet.

Monday, April 16, 2007

Signs of the Economic Apocalypse, 4-13-07

From Signs of the Times:

Gold closed at 689.90 dollars an ounce on Friday, up 1.5% from $679.40 at the close of the previous Friday. The dollar closed at 0.7390 euros Friday, down 1.2% from 0.7475 at the previous week’s close. That put the euro at 1.3532 dollars compared to 1.3378 the Friday before. Gold in euros would be 509.83 euros an ounce, up 0.4% from 507.85 for the week. Oil closed at 63.41 dollars a barrel Friday, down 1.3% from $64.25 at the close of the Friday before. Oil in euros would be 46.86 euros a barrel, down 2.5% from 48.03 for the week. The gold/oil ratio closed at 10.88 Friday, up 2.9% from 10.57 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at 12,612.13 Friday, up 0.4% from 12,560.20 at the close of the week before. The NASDAQ closed at 2,491.94 Friday, up 0.8% from 2,471.34 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.76%, up one basis point from 4.75 at the end of the previous week.

The dollar was under pressure last week, falling against the euro and gold.
Euro rallies strongly at dollar's expense

By Neil Dennis

Fri Apr 13, 5:10 PM ET

The euro rallied strongly this week as the dollar was battered from all sides and expectations about global interest rates shifted.

Expectations of further monetary tightening supported the euro and sterling while the dollar was stung by the growing perception that the next move in US interest rates will be lower.

US producer prices data on Friday added to this sentiment - core output prices were flat in March.

Wednesday's minutes from the Federal Reserve's last open market committee meeting contrasted with the hawkish language used this week by Jean-Claude Trichet, president of the European Central Bank.

The mixed tone of the Fed's statement led economists to conclude that US interest rates will either be cut later in the year or stay on hold at 5.25 per cent for the foreseeable future.

"We still expect the Fed to cut rates to 4.5 per cent by the end of the year," said Paul Ashworth, US economist for Capital Economics.

In a press conference after Thursday's ECB policy meeting, at which eurozone rates were left at 3.75 per cent, Mr Trichet said the bank would monitor inflation risks and act in a "firm and timely manner".

Although the central bank omitted the term "strong vigilance", which indicates a rate increase at the next policy meeting, the language was hawkish enough to indicate a June rise at least.

"The Fed is clearly on hold and could be lowering rates this year, while growth outside the US, particularly in Europe and the UK, gives a differing direction in monetary policy," said Michael Wool­folk, senior currency strategist at the Bank of New York.

Tensions between the US and China also weighed on the dollar this week after the US trade department complained to the World Trade Organisation over what was described as Beijing's failure to protect intellectual property rights.

A "strongly displeased" Beijing subsequently declined Germany's invitation to attend this weekend's G7 meeting in Washington.

Selling pressure on the US currency sent the euro to a two-year high of $1.3554 on Friday.

A late dollar rally pushed the euro back to $1.3509 but the single currency remained 1 per cent higher on the week.

Sterling was also up on expectations of near-term rate rises as house price inflation picked up unexpectedly while robust consumer spending and strong wage growth lent support.

The pound was up 0.8 per cent over the week to $1.9818 against the dollar.
Against the euro, sterling fell 0.1 per cent to £0.6812.

…The dollar fell 0.1 per cent over the week to Y119.10 against the yen.

The danger is not a weaker dollar but a complete collapse of the dollar. Or, if interest rates are raised to prevent the dollar from collapsing, a complete collapse of the U.S. economy. In the past, a collapse of the domestic U.S. economy would have been seen as a problem by those profiting from the economy. Now, however, those who own don’t need those who work to actually do much consuming. As Joe Bageant put it:
Free market capitalism may have been a fraud from the git-go, but at least there was once a version which accepted the notion that any market needed customers. Once upon a time business in the industrialized world needed its citizen laborers as customers, as consumers, which implied they be paid at least enough to buy the products of the businesses and corporations that beat their asses into submission along America's assembly lines and hog slaughtering plants. That was called American opportunity and prosperity and it looked pretty damned good to millions of war ravaged Urpeen furiners trying to decide whether to eat a wharf rat or the neighbor's cat for dinner. As for the Third World, they could eat dirt and do native dances for what few tourists existed then (otherwise called the rich), but mainly they should stay out of the way of "our" natural resources in their countries.

At any rate, when the citizen labor force, by their sheer numbers, held most of the dough in their calloused mitts, there was no avoiding them by the business classes. But now that so much of not just this nation's, but the world's wealth, has become concentrated in the hands of so few, that is no longer a problem for the rich. People are cheaper than ever and getting more plentiful by the minute. So work'em to death, kill'em, eat'em if you want to. Who the f*** cares? The international rich, the managers and controllers of the new financial globalism and the world's resources and the planet's labor forces, whether they be Asian "Confucian capitalists," masters of Colombian Narco state fortunes or Chinese Tongs, New York or London brokerage and media barons, or Russian oligarchs, hold increasing and previously unimaginable concentrated wealth. They look to be a replacement for the mass market, indeed even a better one with fewer mass distribution problems, higher grade demand and at top prices.

The chances of avoiding the collapse of the economy or the collapse of the dollar (which will collapse the economy, too, until the U.S. starts making things again) are slim since indebtedness at all levels are at previously unimaginably high levels. That we have reached this point is no accident of poor policy making, human nature, or unintended consequences. It was all done for a reason, according to Mike Whitney, to put all the wealth in the hands of a few:

Doomsday for the Greenback?
Dollar Madness

Mike Whitney

April 10, 2007

The American people are in La-la land. If they had any idea of what the Federal Reserve was up to they'd be out on the streets waving fists and pitchforks. Instead, we go our business like nothing is wrong.

Are we really that stupid?

What is it that people don't understand about the trade deficit? It's not rocket science. The Current Account Deficit is over $800 billion a year. That means that we are spending more than we are making and savaging the dollar in the process. Presently, we need more than $2 billion of foreign investment per day just to keep the wheels from coming off the cart.

Everyone agrees that the current trade imbalances are unsustainable and will probably trigger major economic disruptions that will thrust us towards a global recession. Still, Washington and the Fed stubbornly resist any change in policy that might reduce over-consumption or reverse present trends.

It's madness.

The investor class loves big deficits because they provide cheap credit for Bush's lavish tax cuts and war. The recycling of dollars into US Treasuries and dollar-based securities is a neat way of covering government expenses and propping up the stock market with foreign cash. It's a "win-win" situation for political elites and Wall Street. For the rest of us it's a dead-loss.

The trade deficit puts downward pressure on the dollar and acts as a hidden tax. In fact, that's what it is--a tax! Every day the deficit grows, more money is stolen from the retirements and life savings of working class Americans. It's an inflation bombshell obscured by the bland rhetoric of "free markets" and deregulation.

Consider this: In 2002 the euro was $.87 on the dollar. Last Friday (4-6-07) it closed at $1.34-- a better than 50% gain for the euro in just 4 years. The same is true of gold. In April 2000, gold was selling for $279 per ounce. Last Friday, at the close of the market it skyrocketed to $679.50---more than double the price.

Gold isn't going up; it's simply a meter on the waning value of the dollar. The reality is that the dollar is tanking big-time, and the main culprit is the widening trade deficit.

The demolition of the dollar isn't accidental. It's part of a plan to shift wealth from one class to another and concentrate political power in the hands of a permanent ruling elite. There's nothing particularly new about this and Bush and Greenspan have done nothing to conceal what they are doing. The massive expansion of the Federal government, the unfunded tax cuts, the low interest rates and the steep increases in the money supply have all been carried out in full-view of the American people. Nothing has been hidden. Neither the administration nor the Fed seem to care whether or not we know that we're getting screwed --it's just our tough luck. What they care about is the $3 trillion in wealth that has been transferred from wage slaves and pensioners to brandy-drooling plutocrats like Greenspan and his n'er-do-well friend, Bush.

These policies have had a devastating effect on the dollar which has been slumping since Bush took office in 2000. Now that foreign purchases of US debt are dropping off, the greenback could plunge to even greater depths. There's really no way of knowing how far the dollar will fall.

That puts us at a crossroads. We are so utterly dependent on the "charity of strangers" (foreign investment) that a 9% blip in the Chinese stock market (or even a .25 basis point up-tick in the yen) sends Wall Street into a downward spiral. As the housing market continues to unwind, the stock market (which is loaded with collateralized mortgage debt) will naturally edge lower and foreign investment in US Treasuries and securities will dry up. That'll be doomsday for the greenback as central banks across the planet will try to unload their stockpiles of dollars for gold or foreign currencies.

That day appears to be quickly approaching as the 3 powerhouse economies are overheating and need to raise interest rates to stifle inflation. This will make their bonds and currencies all the more attractive for foreign investment; diverting much needed credit from American markets.

Just imagine the effect on the already-hobbled housing market if interest rates were suddenly to climb higher to maintain the flow of foreign capital?

The ECB (European Central Bank), Japan and China are all cooperating in an effort to "gradually" deflate the dollar while minimizing its effects on the world economy. In fact, China even waited until the markets had closed on Good Friday to announce another interest rate increase. Clearly, the Chinese are trying to avoid a repeat of the 400 point one-day bloodbath on Wall Street in late February 07.

Japan has also tried to keep a lid on interest rates (and allowed the carry trade to persist) even though commercial property in Tokyo is "red hot" and liable to spark a ruinous cycle of speculation.

But how long can these booming economies avoid the interest rate hikes that are needed for curbing inflation in their own countries? The problem is, of course, that by fighting inflation at home they will ignite inflation in the US. In other words, by strengthening their own currencies they weaken the dollar--it's unavoidable.

This is bound to hurt consumer spending in the US which will ripple through the entire global economy.

The problems presented by the falling dollar can't be resolved by micromanaging or jawboning. In truth, there's no more chance of a "soft landing" for the dollar than there is for the over-bloated real estate market. Greenspan's bubble economy is headed for disaster and there's not much that anyone can do to lessen the damage. As housing prices fall and homeowners are no longer able to tap into their equity, consumer spending will slow, the economy will shrink and the Fed will be forced to lower interest rates.

Unfortunately, at that point, lowering rates won't be enough. Interest rates need at least 6 months to take hold and, by then, the steady drumbeat of foreclosures and falling real estate prices will have soured the public on an entire "asset class" for years to come. Many will see their life savings dribble away month by month as prices continue to nose-dive and equity vanishes into the ether. These are the real victims of Greenspan's low interest rate swindle.

The Federal Reserve is fully aware of the harm they have inflicted with their low interest rate boondoggle. In a 2006 statement the Fed even acknowledged that they knew that trillions of dollars in speculation was being funneled into the real estate market:

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

"Monetary transmission" indeed?!? Trillions of dollars in mortgages were issued to people who have no chance of paying them back. It was a shameless scam. Still, the policy persisted in a desperate attempt to keep the US economy from collapsing into recession. The upshot of this misguided policy was "the largest equity bubble in history" which now threatens America's economic solvency.
Author Benjamin Wallace commented on the Fed's activities in an article in the Atlantic Monthly, "There Goes the Neighborhood: Why home prices are about to plummet"and take the recovery with them":

"Let's assume for a moment that enough people get fooled, and the refinancing boom gets extended for another year. Then what? The real problem hits. Because if you think Greenspan's being cagey on refinancing, the truth he's really avoiding talking about is that we're in the midst of a huge housing bubble, on a scale only seen once before since the Depression. Worse, the inflated housing market is now in an historically unique position, as the motor of the rest of the economy. Within the next year or two, that bubble is likely to burst, and when it does, it very well may take the American economy down with it."

Or this from Robert Shiller in his "Irrational Exuberance":

"People in much of the world are still overconfident that the stock market, and in many places the housing market, will do extremely well, and this overconfidence can lead to instability. Significant further rises in these markets could lead, eventually, to even more significant declines. The bad outcome could be that eventual declines would result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well. Another long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession".

If it is not handled properly, the housing collapse could result in another Great Depression. America no longer has the (manufacturing) capacity to work its way out of a deep recession. While the Fed was sluicing $11 trillion into the real estate market via low interest loans; America's manufacturing sector was being carted off to China and India in the name of globalization. Without capital investment and increased factory production, economic recovery will be difficult if not impossible. The so-called "rebound" from the 2001 recession was due to artificially low interest rates and easy credit which inflated the housing market. It had nothing to do with increases in productivity, exports, or paying off old debts. In other words, the "recovery" was not real wealth creation but simply credit expansion. There's a vast chasm between "productivity" and "consumption" although Greenspan never seemed to grasp the difference.

A penny borrowed is not the same as a penny earned"although both may cause a slight bump in GDP. Greenspan's attitude was aptly summarized by The Daily Reckoning's Addison Wiggin who said, "GDP measures debt-fueled consumption--it really only measures the rate at which America is going broke".


America's biggest export is its fiat-currency which foreigners are increasingly hesitant to accept.
Can you blame them?

They have begun to figure out that we have no way of repaying them and that the "full faith and credit" of the United States is about as reliable as a Ken Lay-managed 401-K retirement plan.

The fragility of the US economy will become more apparent as Greenspan's housing bubble continues to lose air and consumer spending remains flat. As we noted earlier, home equity withdrawals are drying up which will slow growth and discourage foreign investment. The meltdown in subprime loans has drawn more attention to the maneuverings of the banks and mortgage lenders and many people are getting a clearer understanding of the Federal Reserve's role in creating this economy-busting monster-bubble.

The 10% to 20% yearly increases in property values are unprecedented. They are "pure bubble" and have nothing to do with increases in wages, demand, productivity, capital investment or GDP. It was all "froth" generated by the world's greatest Frothmeister, Alan Greenspan.

As Addison Wiggin notes, "There is only one real source of wealth: a healthy and competitive environment involving the exchange of goods coupled with control over deficit spending."

Elites at the Federal Reserve and in the Bush administration have steered us away from this "tried and true" course and put us on the path to debt and catastrophe. It won't be easy to restore our manufacturing base and compete again in the open market, but it must be done. Strong economies require that their people produce things that other people want. This is a fundamental truism that has been lost in the smoke and mirrors of Greenspan's shenanigans at the Fed.

Regrettably, we are probably facing a decades-long economic downturn in which the dollar will weaken, stocks will fall, GDP will shrivel, and traditional standards of living will decline.

The trend-lines in the real estate market will most likely be the inverse of what they have been for the last 10 years. This will dramatically affect consumer spending (70% of GDP) and put additional pressure on the dollar.

The dollar is already in big trouble--the only thing keeping it afloat is foreign purchases of US debt by creditors who don't want to be left holding trillions in worthless paper.(US debt is Japan's single greatest asset!) These "net inflows" have created a false demand for the dollar which will inevitably dissipate as central banks continue to diversify.

Last week the IMF issued a warning that there would have to be a "substantial" decline in the dollar to bring the trade deficit to sustainable levels. That, of course, is the intention of the Fed and Team Bush"to reduce the debt-load by deflating the currency. It's a crazy idea. No one destroys the buying power of their currency to pay off their debts. It just illustrates the recklessness of the people in charge.

Also, on March 20, 2007 the Governor of China's Central Bank Zhou Xiaochuan announced "that China will not accumulate more foreign reserves and will cut a small amount of current reserves for the formulation of a new currency agency". Zhou's statement is a hammer-blow to the dollar. The US needs roughly $70 billion in foreign investment per month to cover its current trade deficit. China is one of the largest purchasers of US debt. If China diversifies, then the dollar will fall and the aftershocks will ripple through markets across the world.

The Chinese are very careful about how they word their economic statements. That's why we should take Zhou's comments seriously. Three weeks ago he issued an equally ominous statement saying, "China will diversify its $1 trillion foreign exchange reserves, the largest in the world, across different currencies and investment instruments, including in emerging markets." (Reuters)

This should have been a red flag for currency traders, but the media buried the story and the markets dutifully shrugged it off. The truth is that our relationship with the Chinese is changing very quickly and the days of cheap credit and a "high-flying" dollar are coming to an end.

70% of China's currency reserves are in US dollars. The effect of "diversification" will be devastating for the US economy. It increases the likelihood of hyperinflation at the same time the housing market is in its steepest decline in 80 years. When currency crises arise at the same time as economic crises; the problems are much more difficult to resolve.

Doomsday for the Greenback

It is impossible to fully anticipate the effects of the falling dollar. The dollar is a currency unlike any other and it is the cornerstone of American power"political, economic and military. As the internationally-accepted reserve currency, it allows the Federal Reserve to control the global economic system by creating credit out of "thin air" and using fiat-scrip in the purchase of valuable manufactured goods and resources. This puts an unelected body of private bankers in charge of setting interest rates which directly affect the entire world.

Iraq has proven that the US military can no longer enforce dollar-hegemony through force of arms. New alliances are forming that are reshaping the geopolitical landscape and signal the emergence of a multi-polar world. The decline of the superpower-model can be directly attributed to the denominating of vital resources and commodities in foreign currencies. America is simply losing its grip on the sources of energy upon which all industrial economies depend. Iraq is the tipping point for America's global dominance.

When foreign central banks abandon the greenback the present system will unwind and the "unitary" model of world order will abruptly end.

This may be a painful experience for Americans who will undoubtedly see a sharp fall in current living standards. But it also presents an opportunity to disband the Federal Reserve and restore control of the nation's currency to the people's legitimate representatives in the US Congress.

This is the first step towards removing the cabal of powerbrokers in both political parties who solely represent the narrow ambitions of private interests.

The War on Terror is a public relations ploy that is intended to disguise the use of military and covert operations to secure dwindling resources to maintain dollar supremacy. It is a futile attempt to control the rise of China, India, Russia and the developing world while preserving the authority of western white elites.

The strength of the euro portends increasing competition for the dollar and a steady decline in America's influence around the world. This should be seen as a positive development. Greater parity between the currencies suggests greater balance between the states--hence, more democracy. Again, the superpower model has only increased terrorism, militarism, human rights violations and war. By any objective standard, Washington has been a poor steward of global security.

The falling dollar also suggests growing political upheaval at home brought on by economic distress. We should welcome this. America needs to remake itself"to recommit to its original principles of personal freedom, civil liberties and social justice--to reject the demagoguery and warmongering of the Bush regime"to reestablish our belief in habeas corpus, the presumption of innocence and the rule of law. Most important, we need to reclaim our honor.

Big changes are coming for the dollar; it's just a matter of whether we allow those changes to bog us down in recriminations and pessimism or use them to create a new vision of America and restore the principles of republican government. It's up to us.

The collapse will most likely be far worse than the Great Depression that Mike Whitney compares it to. During the Great Depression of the 1930s a far greater percentage of the world’s population grew their own food. The entire world economy has reached “cliff risk” status, according to Michael Panzer, and the consequences are unimaginable. We cannot depend on historical parallels:

Cliff-Risk Nation

Michael J. Panzner

April 10, 2007

In the credit derivatives market, certain instruments are exposed to what is known as “cliff risk.” This ominous sounding phrase describes a situation where the last in a series of adverse developments obliterates the value of what was only recently viewed as a triple-A-rated security. Up until that point, however, rating agencies, investors, and bankers assume that circumstances will eventually right themselves and that the principal will be paid in full, in spite of whatever bad news might have come along beforehand.

This latter way of thinking is not confined to the nether world of complex securities with tongue-twisting names like CDOs-squared. In many respects, it describes a point-of-view that permeates many aspects of modern financial life. Increasingly, Americans have taken it for granted that good times beget more of the same and they have acted accordingly. If bad news comes along, the damage is absorbed. Unlike with some toxic derivatives, however, many believe that if circumstances do manage to take a turn for the worse, something can always be done about it.The massive build-up of public and private debts, unfunded pension promises, and other obligations underscores this perspective. Rather than coming to terms with untenable liabilities taken on because of past miscalculations, the mindset has been “don’t worry about it now.” If financial problems don’t disappear of their own accord, they can be restructured, rolled over, refinanced, or even renamed. One way or another, the thinking goes, the situation will be resolved, because there are any number of options that are readily available.

This mindset probably explains why we haven’t seen the type of response to a growing list of negatives that wizened old-timers would have expected. In the past, significant trade deficits and other unstable imbalances, myriad signs of a looming recession, talk of a subprime meltdown-inspired credit crunch, and the inevitability of down cycles following periods of historically high profit-margins and overextended uptrends would have had money managers scrambling to batten down the hatches by now.

Instead, mutual fund cash levels are near record lows, margin debt and leverage-based speculation are at euphoric extremes, and risk spreads reflect an extraordinary degree of complacency. Every data point, whether good or bad, is seen as another reason for heads-I-win, tails-you-lose optimism.

Nowadays, many would probably argue that it makes little sense to worry or even plan ahead for disaster, because there are numerous escape routes available if things do actually come to a head. Liquid markets, electronic trading and other modern technology, innovative financial products, hedging and stop-losses, and an unfailingly supportive Federal Reserve are seemingly permanent fixtures of today’s financial landscape that will no doubt counteract any unwelcome adversity.

At the same time, the belief exists that there is still big money to be made from taking out-sized risks, and incentives remain heavily skewed to the upside. Practically speaking, current performance is all that matters, with nary a thought given to longer-term returns — or concerns. What might be lost through aggressively geared-up bets on repeated rolls of the dice seems to pale in comparison to what can be realized if everything goes exactly according to plan
Many Americans have adopted a somewhat similar perspective in their day-to-day financial lives. Don’t make enough to keep up with the Joneses? Just charge the credit card. Don’t have enough to buy a home? Borrow 100% of what you need — higher property prices in future will make the extravagance worthwhile. Interest rates are too high? Sign up for adjustable-rate financing with ultra-low up-front teaser rates. Can’t afford to make all your monthly payments, or even survive on your paycheck? Refinance what you owe or simply borrow what you need.

In fact, the mantra seems to be: “Why be defensive at all?” With a support system supposedly in place that can theoretically postpone the day of reckoning more-or-less indefinitely, the rational response is to push the envelope to its extremes. Combine that with the constant bullish squawking and tom-tom thumping by banks and other financial institutions, retailers, policymakers, politicians, and the media, and it adds up a siren song of short-sightedness and self-indulgence that is hard to resist.

Governments at all levels are in the same thrall. How else can you explain politicians who talk, talk, talk about fiscal responsibility, but who continue to advocate ever-escalating spending and borrowing nonetheless? Or who insist on using almost Dickensian pay-as-you-go accounting systems that ignore mind-boggling financial obligations that our children — and our children’s children — will ultimately be responsible for? One problem, of course, is that many have drunk the Kool-Aid that says we can grow our way out of each and every mess. In that delusory state, they carry on as before.

Corporate America is also mired in the here and now, with little apparent trepidation about any challenges that lie ahead. Managers seem mainly focused on slashing costs and paring back investment, instead of longer-term planning, when they are not feathering their nests, of course. Corporate policies, including executive compensation plans, are strongly aligned with short-term performance goals. Even in economically sensitive industries, borrowing levels are going up while reserves are kept to a minimum. You would have thought the best and the brightest would know better.

Yet everywhere you look, people are unwilling or unable to stop what they’ve been doing, especially in recent years, because it seems to have worked so far and for so long and everyone else is playing along, too. Many economic and financial squalls have passed without causing serious disruptions, at least in the aggregate, and it’s hard to refute the optimists when they argue that the times are as good as they’ve every been.

And yet, one day, as is likely to happen ever more frequently with CDOs-Squared and other toxic new age monstrosities, the “event” that really matters will come along. A paradigm-killer that sets in motion a chain reaction that completely undermines the apparently never-ending stability that everyone has gotten used to. By then, people will realize very quickly that America, once viewed as the world’s foremost economic superpower, is nothing more than a cliff-risk nation.

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