Signs of the Economic Apocalypse, 5-14-07

From Signs of the Times:

Gold closed at 672.30 dollars an ounce Friday, down 2.6% from $689.70 at the close of the previous Friday. The dollar closed at 0.7391 euros Friday, up 0.4% from 0.7358 at the previous week’s close. That put the euro at 1.3530 dollars compared to 1.3591 the Friday before. Gold in euros would be 496.90 euros an ounce, down 2.1% from 507.47 for the week. Oil closed at 62.51 dollars a barrel Friday, up 0.9% from $61.93 at the close of the week before. Oil in euros would be 46.20 euros a barrel, up 1.4% from 45.57 for the week. The gold/oil ratio closed at 10.76 Friday, down 3.5% from 11.14 at the close of the previous Friday. In U.S. Stocks, the Dow Jones Industrial Average closed at 13,326.63 Friday, up 0.5% from 13,264.62 for the week. The NASDAQ closed at 2,561.91 Friday, down 0.4% from 2,572.15 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%, up three basis points from 4.64 for the week.

The big news in the U.S. economy last week was the surprising drop in retail sales. The result was a surprise because analysts had predicted a small rise. It shouldn’t have been that surprising, though. Consumption in the United States has been driven by the housing bubble. Now the bubble is bursting, consumption must decrease. Rising energy prices (and soon, food prices) will make it worse.

Retail sales take surprise drop in April

May 11, 2007

WASHINGTON (Reuters) - Sales by U.S. retailers fell 0.2 percent to a seasonally adjusted $372.03 billion in April as soaring gasoline prices and a slumping housing industry sapped consumers' appetite for spending, a Commerce Department report on Friday showed.

The report offered persuasive signs that the combined stress from costlier fuel and falling housing prices were turning consumers cautious - spending on building materials took the biggest tumble in more than four years and new-car sales fell by the largest amount since mid-2006.

…The sales figures came in much weaker than Wall Street economists had forecast and will reinforce worry that consumers will have difficulty sustaining their spending punch that fuels two-thirds of national economic activity.

Total retail sales had been forecast to rise 0.4 percent, instead of decline, and sales excluding automobiles also had been predicted to gain 0.4 percent rather than being flat.

The 0.2 percent April sales drop contrasted with a 1 percent March gain. It was the first outright drop in monthly sales since last September when they fell 0.6 percent although total sales were flat in both January and last October.

The declines were widespread in April. Building material sales plunged 2.3 percent - the biggest decline since February 2003 when they were down 5.1 percent -- after rising 1 percent in March.

New-car sales were down 1 percent in April after rising 0.4 percent in March. It was the biggest drop in monthly car sales since last June when they were down 2.4 percent.

In fact, the world’s largest retailer, Wal-Mart had it’s worst decline in 28 years as same-store sales dropped 3.5% in April.

Wal-Mart Sales Decline Is Worst in 28 Years

By Kris Hudson
May 10, 2007

DALLAS -- Wal-Mart Stores Inc. posted its worst monthly same-store sales results in at least 28 years, tallying a 3.5% decline in April due to this year's early Easter as well as generally challenging economic conditions for consumers.

Wal-Mart's 3.5% drop in the four-week period ending May 4 at U.S. stores fell below its earlier forecast of "flat" sales to a 2% decline. In a recorded phone message Thursday, Wal-Mart blamed bad weather last month in most U.S. regions and the early Easter on April 8, which pushed many Easter sales into March.

Same-store sales measure sales gains or losses at stores open for at least a year. They are a key indicator of the returns a retailer reaps on the capital it spends, and thus an influence on its profitability. Most publicly traded U.S. retailers are reporting their April results Thursday.

Wal-Mart's chief financial officer had warned a month ago that the retailer's earlier guidance for earnings per share of 68 cents to 71 cents for its latest quarter would be "a challenge" to achieve given what the company foresaw as a difficult April. The retailer didn't provide an update. It did, however, predict a sales gain for this month of 1% to 2%. Wal-Mart will report its results for its first quarter ended April 30 on Tuesday.

For the first quarter, Wal-Mart, Bentonville, Ark., reported a preliminary sales tally of $85.4 billion. Its 3.5% decline in same-store sales was comprised of a 4.6% decline at its flagship U.S. Division -- which includes its more than 3,200 supercenters, discount stores and Neighborhood Markets -- and a 2% gain by its Sam's Club division.

Technically, Wal-Mart's 3.5% April decline ranks as Wal-Mart's worst monthly showing in the 28 years it has reported such figures, handily outpacing the previous worst 0.6% decline in April 1996. In a broader context, the result was pulled down by scheduling quirks in addition to Wal-Mart's increasing difficulty in topping its own year-ago numbers…

According to Mike Whitney, a drop in retail sales will be the signal for foreign investors to pull the plug on the dollar and the U.S. stock markets:

The Harder They Come ...A Stock Market Post-Mortem

Mike Whitney
May 3, 2007

"There's class warfare, all right, but it's my class that's winning."
--Investment tycoon, Warren Buffett

The real estate market is crashing faster than anyone had anticipated. Housing prices have fallen in 17 of 20 of the nation's largest cities and the trend lines indicate that the worst is yet to come. March sales of new homes plummeted by a record 23.5% (year over year) removing all hope for a quick rebound. Problems in the subprime and Alt-A loans are mushrooming in previously "hot markets" resulting in an unprecedented number of foreclosures. The defaults have slowed demand for new homes and increased the glut of houses already on the market. This is putting additional downward pressure on prices and profits. More and more builders are struggling just to keep their heads above water. This isn't your typical 1980s-type "correction"; it's a full-blown real estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won't be limited to housing--they will rumble through all areas of the economy including the stock market, financial sector and currency trading. There is simply no way to minimize the effects of a bursting $4.5 trillion equity bubble.

The next shoe to drop will be the stock market which is still flying-high from increases in the money supply. The Federal Reserve has printed up enough fiat-cash to keep overpriced equities jumping for joy for a few months longer. But it won't last. Wall Street's credit bubble is even bigger than the housing bubble---a monstrous, lumbering dirigible that's headed for a crash-landing. The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed's cheap "low-interest" liquor. One wrong step and he'll plunge headlong into the ether.

The stock market cheerleaders are ooooing and ahhing the Dow's climb to 13,000, but it's all a sham. Wall Street is just enjoying the last wisps of Greenspan's low interest helium swirling into the largest credit bubble in history. But there are big changes on the way. In fact, the storm clouds have already formed over the housing market. The subprime albatross has lashed itself to everything in the economy ---dragging down consumer confidence, GDP and (eventually) the stock market, too. The real damage is just beginning to materialize.

…The big question now is how long will it take before foreign creditors wise up and see the maxed-out American consumer is running out of steam. As soon as consumer spending slows in the US; foreign investment will dry up and stocks will tumble. China and Japan have already slowed or stopped their purchases of US Treasuries and China has stated that they plan to diversify their $1 trillion in US dollars in the future. This has lowered demand for the dollar and decreased its value in relation to other currencies. (The dollar hit a new low just last week at $1.36 vs. the euro)

A slowdown in consumer spending is the death-knell for the dollar. That's when there'll be a stampede for the exits like we've never seen before--with each of the world's central banks tossing their worthless greenbacks into the jet-stream like New Years' confetti. According to Monday's Washington Post that moment may have already arrived. As the Post's Martin Crutsinger says, "Consumer spending rose at the slowest rate in five months in March while construction activity managed only a tiny gain, weighed down by further weakness in housing".

The connection between housing and consumer spending is critical. Housing has been the main engine for growth in the US in the last 5 years accounting for 2 out of every 5 new jobs and hundreds of billions in additional spending through home-equity extractions. A downturn in consumer spending means that foreign investors will have to look for more promising markets abroad, which will trigger a steep reduction in the amount of cheap credit coming into the country via the $800 billion trade deficit. This will slow growth in the US while further weakening the dollar.

Can you say stagflation?

The present currency and economic crises were brought on by Bush's unfunded tax cuts, unsustainable trade deficits, and the Fed's hyperinflationary monetary policy. These policies were executed simultaneously for maximum effect. They were entirely premeditated. Many people now believe that the Bush administration and the Federal Reserve are intentionally creating an "Argentina-type meltdown" so they can privatize state owned assets and usher in the North American Union--the future "one state" alliance of Canada, Mexico and US--along with the new regional currency, the Amero.

Stay tuned.

Nevertheless, monetary policy is not the only reason the stock market is headed for a fall. There's also the jumble of scams and swindles which have been legalized under the rubric of "deregulation". New rules allow Wall Street to take personal liabilities and corporate debt and repackage them as precious gemstones for public auction. It's the biggest racket ever.

Consider the average hedge fund for example. The fund may have originated with $10 billion of its own cash and swelled to $50 billion through (easily acquired) credit. The fund manager then creates an investment portfolio that features CDOs (collateralized debt obligations) and Mortgage Backed Securities (MBS) to the tune of $160 billion. The majority of these "assets" are nothing more than shaky subprime loans from struggling homeowners who have no chance of meeting their payments. In other words, another man's debt is magically transformed into a Wall Street staple. (Imagine if you, dear reader, could sell your $35,000 credit card debt to your drunken brother-in-law as if it was a bar of gold or a vintage Ferrari. That, believe it or not, is the scam on which bond traders thrive)
So, the fund is leveraged, the assets are leveraged and (guess what) the investors are leveraged too---either buying on margin or borrowing oodles of cheap, low interest credit from Japan to maximize their profit potential.

Get the picture; debt x debt x debt = maximum profit and skyrocketing stock prices. That's why the face value of the market's equities far exceeds the world's aggregate GDP. It's all one, big debt-Zeppelin and it's rapidly tumbling towards planet earth.

KABOOM!

Deregulation works like a charm for the gangsters who run the system. After all, why would they want rules? They're not thinking about capital investment, productivity or infrastructure. They're not building an economy that serves the basic needs of society. They're looking for the next big mega-merger where two monolithic, maxed-out corporations join in conjugal bliss and create a mountain of new credit. That's where the real money is.

Wall Street generates boatloads of cyber-cash with every merger. This pushes stock prices up, up and away. Deregulation has turned Wall Street into the biggest credit-generating Cash-Cow of all time--spawning zillions through seemingly limitless debt-expansion. These virtual dollars were never authorized by the Federal Reserve or the US Treasury--they emerge from the black whole of over-leveraged uber-transactions and the magical world of derivatives trading. They are a vital part of Wall Street's house of mirrors where every dollar is increased by a factor of 50 to 1 as soon as it enters the system. Assets are inflated, debt is converted to wealth, and fiscal reality is vaporized into the toxic gas of human greed.

Doug Noland at Prudent Bear.com explains it like this: "We've entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don't even call "money" by its former name anymore is precisely because we realize at some semi-conscious level that "liquidity" is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops -- or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we'll discover that our money (the US dollar) is actually different from real wealth".

Noland is right. The market is "a pyramid scheme of revolving credit rackets and percentage spread plays" and no one really knows what to expect the flow of liquidity slows down or "reverses".

Will the stock market crash?

It depends on the aftereffects of the subprime meltdown. The defaults on existing mortgages are only part of the problem. The real issue is how the "credit dependent" stock market will respond to the tightening of lending standards. As liquidity dries up in the real estate market; all areas of the economy will suffer. (We've already seen a downturn in consumer spending) Wall Street is addicted to cheap credit and it has invented myriad abstruse debt-instruments to get its fix. But what happens when investment simply withers away?

According to WorldNetDaily.com Jerome Corsi that question was partially answered in a letter from the Carlyle Group's managing director William Conway Jr. Conway confirms that the rise in the stock market is related to "the availability of enormous amounts of cheap debt". He adds that:

"This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate and at all levels of the capital structure." (But) "This liquidity environment cannot go on forever. The longer it lasts, the worse it will be when it ends.Of course when ends, the buying opportunity will be once in a lifetime."

Ah, yes, another wonderful "buying opportunity"?

You can almost feel the breeze from the great birds flapping overhead as they focus their gaze on the carrion below. Once the stock market collapses and the greenback flattens out on the desert floor; they'll be plenty of smiley faces preparing for the feast.

Conway is right, though, the stock market IS floating on a cloud of cheap credit created by a humongous trade deficit, artificially low interest rates, and a 10% yearly expansion of the money supply. Like he says, "It cannot go on forever." And, we don't expect that it will.

And all this gloom and doom doesn’t even take into account the consequences for the dollar of the U.S. defeat in Iraq and Afghanistan. Add to that the prospect of an insane attack on Iran and a global economic and political meltdown is not unlikely. Last week saw some disturbing portents. The neoconservatives seem to realize that they have to make their move now: France is now in their corner (and already has an aircraft carrier in the Persian Gulf), Blair is still PM for a little while, and Bush is on life support. Cheney made threatening comments to Iran from an aircraft carrier in the Persian Gulf then went to Saudi Arabia, where he usually goes before attacking some southwest Asian country:

Cheney warns Iran to keep sea lanes open

Tom Raum
The Associated Press

May 11, 2007

ABOARD USS JOHN C. STENNIS — From an aircraft carrier in the Persian Gulf, Vice President Dick Cheney warned Iran on Friday the U.S. and its allies will keep it from restricting sea traffic as well as from developing nuclear weapons.

"We'll keep the sea lanes open," Cheney said from the hangar deck of the USS John C. Stennis as it steamed about 150 miles from the Iranian coast.

Cheney is touring the Middle East asking Arab allies to do more to help Iraq and to curb Iran's growing power in the region. With Iraq in turmoil, both Iran and Saudi Arabia are maneuvering to see who can help fill the leadership vacuum.

The vice president made clear the United States' intentions on the rivalry. "We'll stand with others to prevent Iran from gaining nuclear weapons and dominating this region," he said.

On Saturday, Cheney will make a fence-mending visit to Saudi Arabia.

The oil-rich kingdom, long a key American ally in the Middle East, recently has been shunning the U.S.-supported government of Iraqi Prime Minister Nouri al-Maliki, suggesting he is too close to Iran.

Roughly a quarter of the world's oil supplies pass through the narrow Straits of Hormuz connecting the Persian Gulf with the open waters of the Arabian Sea. Iran controls the eastern side of the straits.

With two U.S. carrier groups now in the region, the vice president declared, "We're sending clear messages to friends and adversaries alike. We'll keep the sea lanes open."

At the same time, we hear that the U.S. will continue talks about Iraq with Iran. So was Cheney just bluffing to get oil prices higher? If so, he must have had a nice welcome in Saudi Arabia, who will get continued higher oil prices without the destabilization that would come from a real attack on Iran. Or are the Iran negotiations carried out by parts of the government not under Cheney’s control? In any case, the political crisis in the United States is coming to a head. Calls for Cheney and Bush’s impeachment get louder by the day. Last week the top aide to former Secretary of State Colin Powell all but came out for impeachment. So, for the neocons, the time may be now or never. The planets are briefly aligned for them with the U.S., the U.K., France, and Germany in their hands.

While the ruling groups seems united about precipitating and benefitting from an economic collapse (a “buying opportunity” in the words of the Carlyle Group plutocrat quoted above in Mike Whitney’s article), deep divisions over the best strategy to maintain dominance are bubbling to surface, as seen in the debate in ruling circles on Bush, Iraq and Iran. It’s hard at this point to predict which side, realist or neocon, will prevail, but the economic collapse is sadly easy to predict.