Monday, December 31, 2007

Signs of the Economic Apocalypse, 12-31-07


Gold closed at 842.70 dollars an ounce Friday, up 3.3% from $815.40 for the week. The dollar closed at 0.6795 euros Friday, down 2.3% from 0.6954 at the close of the previous week. That put the euro at 1.4716 dollars compared to 1.4380 the Friday before. Gold in euros would be 572.64 euros an ounce Friday, up 1.0% from 567.04 at the close of the previous Friday. Oil closed at 96.16 dollars a barrel Friday, up 3.1% from $93.31 for the week. Oil in euros would be 65.34 euros a barrel, up 0.7% from 64.89 at the close of the Friday before. The gold/oil ratio closed at 8.76 up 0.2% from 8.74 at the close of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 13,365.87 Friday, down 0.6% from 13,450.65 the week before. The NASDAQ closed at 2,674.46 Friday, down 0.7% from 2,691.99 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.07 Friday, down ten basis points from 4.17 for the week.

Even though today is the last day of 2007, let’s take last week as the last week of the year and look at the quarterly and annual numbers. Gold rose 12.4% from $750.00 for the quarter and 31.9% from $638.80 for the year. The dollar fell 3.1% from 0.7009 for the quarter and 11.5% from 0.7576 for the year. The euro rose from 1.4267 for the quarter and from 1.3200 for the year. Gold in euros rose 8.9% from 525.69 for the quarter and 18.3% from 483.94 for the year. Oil rose 17.7% from $81.66 for the quarter and 57.5% from $61.05 for the year. Oil in euros rose 14.2% from 57.23 and 41.3% from 46.25 for the year. The gold/oil ratio fell 4.8% from 9.18 for the quarter and 19.4% from 10.46. In the U.S. stock market the Dow fell 5.2% from 14,066.01 for the quarter and rose 7.2% from 12,463.15 for the year. The NASDAQ fell 4.0% from 2,780.32 for the quarter and rose 10.7% from 2,415.29 for the year. The yield on the ten-year U.S. Treasury note fell 15.0% from 4.68 for the quarter and 15.5% from 4.70 for the year.

Here are some charts:

The most striking change of the past year in the markets is the sharp rise in gold (32%) and oil prices (57.5%) and the 11.5% drop in the value of the dollar against the euro. The past year also saw the end of economic optimism in the media as the housing bubble finally burst. The consequences of the collapse in housing prices have not fully played out. The aftershocks in the credit system will likely shape the economy in 2008. Looking ahead, it looks likely that 2008 will differ from 2007 far more significantly than 2007 differed from 2006.

Elite management of the economy has deteriorated so much in the past year that the political scene in the United States seems to be in a process of creative disintegration with the appearance of more than one grass-roots populist movement cutting across traditional ideological lines. The first was a constitutionalist, nativist movement surrounding the presidential candidacy of Ron Paul. The second is an evangelical, economic-populist movement following the candidacy of Mike Huckabee. Ron Paul’s campaign has drawn much support from the libertarian right and left because of it’s emphasis on the Bill of Rights and a dismantling of the U.S. Empire. Mike Huckabee’s campaign has sliced the Republican coalition down the middle by running and anti-corporate, anti-economic elite campaign appealing to religious conservatives. Both candidates seem to have disturbed the elite and both have had some of there more divisive proposals brought forward by the mainstream, corporate media to blunt their momentum.
Huckabee's Rise Drives Wedge Between Wall Street, Evangelicals

Matthew Benjamin

Dec. 27 (Bloomberg) -- Wealthy Republicans have a new political nightmare that may be scarier than Hillary Clinton: Mike Huckabee.

The former Arkansas governor has surged in Republican presidential-preference polls, winning the support of Christian fundamentalists while peppering his campaign rhetoric with jabs at the financial industry. He calls himself the candidate who isn't a “wholly owned subsidiary” of investment banks, decries large executive-pay packages and says the party needs to shift its focus from Wall Street to Main Street.

In doing so, he threatens the uneasy if effective coalition Republicans have counted on for three decades: abortion opponents and other social-issue activists supplying foot soldiers, proponents of tax cuts and business-friendly regulatory policies putting up the money and getting the biggest economic benefits.

“Huckabee puts this long-simmering feud between the social-conservative wing and the country-club and business crowd into starker contrast,” said Stuart Rothenberg, publisher of the nonpartisan Rothenberg Political Report in Washington.

Polls show Huckabee, 52, leading in the first Republican electoral contest, the Jan. 3 Iowa caucuses. In national polls, he is within striking distance of former New York Mayor Rudy Giuliani.


The stronger he gets in the polls, the stronger the intra- party backlash against him. “He's sort of a populist, and that doesn't sell too well on Wall Street,” said David Hedley, a retired managing director at Donaldson Lufkin & Jenrette who raised at least $100,000 for George W. Bush in the 2000 presidential election.

The Club for Growth, a Washington-based group that advocates tax and spending cuts, has mounted a campaign against Huckabee in Iowa and South Carolina, which holds its Republican primary on Jan. 19. The group said Dec. 14 it is doubling advertising purchases and urged taxpayers to call Huckabee and challenge him on his tax policy.

The group says Huckabee's tax increases while governor from 1996 to 2007 far surpassed reductions, with the average tax burden for state residents increasing 47 percent during his tenure.

“Mike Huckabee is not an economic conservative,” said Pat Toomey, a former Pennsylvania congressman and the club's president. “He's the only Republican in the field who really is truly a big-government liberal.”


The Wall Street Journal editorial page has repeatedly attacked Huckabee in recent weeks, and the National Review magazine warned Republicans against committing “Huckacide.”

“These guys don't like Huckabee because he's not one of them,” said Ed Rollins, the Huckabee campaign chairman. “They have enjoyed the reins of power a long time, and he's a threat.”

Rollins, who ran Ronald Reagan's re-election campaign in 1984, recalls that some economic conservatives were initially suspicious of him too: “Ronald Reagan wasn't one of them, and he also had raised taxes to fix problems.”

After Huckabee finished second in an August Iowa straw poll, he said in an interview that his biggest asset going into the contest “was the negative attack ads that the Club for Greed, excuse me, the Club for Growth was running.”

‘Extraordinary Disconnect’

Huckabee said he represents Republican voters who feel estranged from the party. “There's an extraordinary disconnect between people who have sort of had a traditional leadership role in the Republican Party and the folks on Main Street,” he said. “There's a difference between Wall Street Republicans and Main Street Republicans.”

For the moment, the shots at Wall Street are helping Huckabee among Republican voters, said Costas Panagopolous, director of the Center for Electoral Politics and Democracy at Fordham University in New York. “In rural America and most of the country, Wall Street is a big, bad bogeyman, and he's tapping into this perception.”

Chuck Hurley, president of the Iowa Family Policy Center, a nonprofit pro-family organization in Des Moines, said that “it wouldn't surprise me that there's some antipathy for the Goldman Sachs bonuses among rank-and-file stockholders in rural Iowa.” Hurley has endorsed Huckabee, though his organization remains neutral…
The expatriate journalist David Seaton finds himself fascinated by Huckabee lately. Seaton cites Martin Wolf of the Financial Times in a piece he wrote on limits to economic growth and concludes:

Martin Wolf is the chief economist of the Financial Times and a wonderful journalist. In his work: at international conferences, and over a thousand dinner tables and at countless coffee sessions, he comes into daily contact with some of the most wealthy and powerful men and women in the world and those that serve them. Wolf hears them speak and most of all picks up their body language, their silences and vibrations. His article on "limits", which I am quoting abundantly is the cri de coeur of a man who, though not wealthy and powerful himself, knows the ways of the wealthy and powerful as no other does...

If we examine what Martin Wolf is saying logically, not even really reading between the lines, this supremely informed man is declaring that he knows that, before they ever pay Scandinavian like income taxes, drive small cars and wear sweaters around the house on cold winter days, the elites of the United States will create a police state and go to war endlessly to dominate the resource rich areas of the world. Hyperbole? Examine George W. Bush's presidency in that light and perhaps Dubya may not really be as dumb as he looks.. Or maybe he is more like what May West said about Ronald Reagan, "dumb but willing."

At this juncture, the elites of the Republican Party begin to separate from the middle class and working class base and the only way to keep them on board would be endless war and endless fear. Terror and paranoia may be the key to 2008 election. What moldy old Marxists used to call, "false consciousness". The Republican Party, to use another worn but useful Marxist term, has entered into contradiction with itself and using Wolf's analysis as our text, is clearly going to tear itself apart…

It is a timeworn, but evergreen cliché, that keeping working class white people from realizing how much they have in common with working class black people is one of the secrets of American capitalism's stunning success... And Huckabee is playing with that. He is against tax breaks for the rich, he attacks Bush's "arrogance". The Cato Institute gave him an "F" as governor of Arkansas, because of his taxing and spending on education and he calls the ultraconservative political action committee, "Club for Growth" the "Club for Greed". He even makes positive noises about the environment.

What is Huckabee after?

My reading is that he wants to take control of the political and social juice of the American Evangelical movement and that includes the black Evangelicals too... The mind boggles.

It should be remembered that Southern Evangelical Protestantism is resentful and anti-elitist before it is anything else. It is against any "expert" opinion. They feel that these "experts" look down on them with contempt and they are probably right...

Both poor white people and poor black people face this kind of contempt all their lives. The Evangelicals love for creationism and the literal reading of scripture is because the Bible trumps the "experts"... any hick quoting the good book is superior to a PhD from MIT quoting Darwin. The same psychology holds true for "Rapture" enthusiasts, they will be saved, taken directly up to heaven and all the people who have ever treated them so shabbily here on earth will suffer indescribable torment and humiliation, which the chosen will be able to watch from heaven. It is interesting to note that Tim LaHaye the author of the "Left Behind" series has enthusiastically endorsed Huckabee. This has all the signs of being a "movement", not just another primary campaign.

I titled this post, "Huckabee tickles my inner Lenin" and what I mean is this:

The entire American economy is based on making people feel bad about themselves, making them feel poor, ugly, sick, helpless, stupid, inadequate and then offering to sell them something to relieve the pain of rejection and failure. What, despite all its grotesque fanaticism, is truly healthy about all this Evangelical, rapture, mishegoss is that it is a real rebellion against the basic, inhuman tool of the system... Its unhappiness factory.

What these political movements signify is that people in the United States may actually be beginning to connect the dots, may be seeing the connection between trillions spent on global conquest and the crumbling infrastructure at home, between the vast sums of money controlled by a few and the impoverishment of the middle class. The problem is that religion is more of a problem and less healthy of a response than Seaton acknowledges. And, if religion doesn’t work, the elite seem willing to institute global war and global lockdown to maintain their position.

The solution won’t come from the normal political process. The corporate elite publish the polls, count the votes, and report on the elections. They have proven that they will steal the vote if they have to. The elite wasn’t very happy with Franklin Roosevelt during the last depression and it doesn’t look like they want another one this time. It may be that they may now think that fascism was premature in the 1930s, that the technology was not sufficiently developed.

If the mainstream media now acknowledges the probability of a recession in 2008, you can bet that an actual depression is much more likely than anyone is willing to let on. In the 1930s the rural areas were the hardest hit. Now it may be the suburbs:
Tent city in suburbs is cost of U.S. home crisis

Dana Ford

Friday December 21 2007

ONTARIO, Calif., Dec 21 (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.

The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.

As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say.

"They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high.

"House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

'Squatting In Vacant Houses'

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments.

"It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes.

She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send.

The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said.

"And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."

Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

'Trickle-Down Effect'

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA.

"Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues.

And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late.

Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help.

"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."
No wonder everyone is afraid of the future now in the United States. Even in the better times we were products of what Seaton calls “the unhappiness factory.” And now we are about to lose our comforts and the dignity that comes from just making ends meet and having a roof over one’s head. Next week we will look more closely at just how the unhappiness factory of capitalism works.

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Tuesday, December 25, 2007

Signs of the Economic Apocalypse, 12-24-07

From Signs of the Times:

Gold closed at 815.40 dollars an ounce Friday, up 2.2% from $798.00 for the week. The dollar closed at 0.6954 euros Friday, up 0.3% from 0.6930 at the close of the previous week. That put the euro at 1.4380 dollars compared to 1.4430 the Friday before. Gold in euros would be 567.04 up 2.5% from 553.01 at the close of the previous Friday. Oil closed at 93.31 dollars a barrel Friday, up 2.1% from $91.41 for the week. Oil in euros would be 64.89 euros a barrel, up 2.4% from 63.35 at the close of the Friday before. The gold/oil ratio closed at 8.74 up 0.1% from 8.73 at the close of the previous week. In U.S. stocks, the Dow closed at 13,450.65 Friday, up 0.8% from 13,339.85 the week before. The NASDAQ closed at 2,691.99 Friday, up 2.1% from 2,635.74 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.17%, down six basis points from 4.23 for the week.

The big story last week continued to be the credit meltdown. The crisis is turning out to be much worse than we were told it would be at the beginning. And, if any fool could have predicted this, and if the bankers are by no means fools, why did they let it get this bad? Is it part of a larger plan?

The following two pieces by Clive Maund and George Ure suggest some possibilities.

No Way Back - the Horrible US Economic Morass

Clive Maund

Dec 13 2007

Like a petulant child raging around because it got one candy when it expected two, the market threw a tantrum yesterday when it only got a quarter of a percent rate cut yesterday when it was hoping for more - but what good would it have done if rates had been cut by half a percent, or even a full one percent? Is it really wonderful to undermine the dollar so much that it completely collapses? Is that what the stockmarket really wants, or is simply that like the spoiled brat that doesn’t get the instant gratification it seeks, the market can’t see past the end of its nose? Whatever, the news from the Fed yesterday caused a nasty convulsion that may mark the end of the “Santa Claus” rally - it was unspeakably cruel to withhold treats like this in the runup to Christmas.

In recent years the US economy has morphed into a vast sinkhole for international finance and savings. Like some giant industrial vacuum cleaner with its brush removed the nozzle of this voracious beast has found its way into every nook and cranny of the world’s economy, hungrily sucking up any loose funds that are not securely nailed down. What have the funds been used for? - to balloon already gargantuan Federal and State deficits and to maintain an orgy of consumer spending at home by citizens who are actively encouraged and enticed to spend every last penny they have and to borrow to the hilt and spend still more, to increase military spending to unimaginable levels that exceed that of the rest of the world combined, this purportedly to defend the Homeland from a bunch of discontented eccentrics who occasionally cause explosions, and to finance wars of occupation in far flung lands.

The reason for the financial earthquakes this Summer and Fall, which are but mild tremors compared to what is looming, is that the rapacious nozzle of the vacuum cleaner has not been able to locate and suck up sufficient funds to meet its exponentially expanding needs, as foreign hosts, growing tired of having the lifeblood sucked out of them and realizing that they have been conned over the sub-prime mortgage paper and are never going to be repaid, have started to choke off the supply of funds. The result is that extraordinary emergency measures have had to be taken to prevent the banking system going into instant seizure and collapse, which have only been partially successful to date - and they had better be successful, because if we see a credit gridlock and major banks failing, the consequences could push the world economy over the cusp from a highly inflationary environment into a deflationary implosion, which needless to say would be disastrous.
These emergency measures have principally involved a dramatic and hyperinflationary ramping of the money supply, the catastrophic consequences of which will emerge later. This is the reason for the unfolding collapse of the US dollar, which has two key advantages for the United States - it progressively diminishes the real debts owed to overseas creditors and it makes other economic power blocs, such as the European Union, much less competitive in world markets. A stark example of this is provided by EADS, the makers of the Airbus aircraft. EADS was severely wounded by the superjumbo delays fiasco, and the otherwise glamorous image of this aircraft has been dented by Singapore Airlines’ laughably prissy decision to ask its customers who pay a grand sum for a double bed on the flight to refrain from doing what comes naturally, on the grounds that other passengers or crew might overhear them. It recently emerged that EADS, which has always had its production centered in Europe, might partially relocate it into dollar zones or even the US itself - Boeing must be really laughing about this - hats off to a falling dollar! The weakening of the European Union is a way to ultimately undermine the Euro, which is the only currency that presents a serious alternative to the US dollar, and must therefore be crippled. A low dollar will make US business, what’s left of it after outsourcing that is, suddenly competitive, and turn up the heat on Europe. Faced with a suddenly plunging dollar, other countries and power blocs are scrambling to pump up their own money supply, in order to weaken their own currencies and maintain a competitive advantage. Thus the rate of competitive devaluation around the world has moved up one whole order of magnitude on the Richter scale, with huge inflationary implications, an effect of which must be a flight into hard assets such as gold and silver...

There is an old saying that goes something like “If you owe the bank a large amount of money you have a problem, but if you owe the bank a huge amount of money the bank has a problem”. This neatly sums up the situation now existing between the world superdebtor, the United States, and the rest of world. By suddenly ramping its money supply still further and dropping interest rates in an effort to avert a credit crunch, the US has thrown down a gauntlet to the rest of the world and has effectively said “The collapsing dollar is your problem - and if we go down we’ll take you all with us, so you‘d better help out or it‘s your funeral” The US is testing the resilience of the world economy to the limit and the world is already starting to crack. Evidence of this was provided by an Abu Dhabi fund stepping in to partially bail out the ailing Citigroup about two weeks ago, a surprise development that ignited the just ended strong rally on US stockmarkets. The timing if this move is thought to be no coincidence - the broad US stockmarket was on the point of breaking down completely. The driver for this unusual move was that Mid-Eastern fiefdoms have vast amounts invested in the London and US stockmarkets, and have a lot at stake if they should plunge, and it is therefore easy to get them to come running to the rescue. Scrupulous German savers meanwhile look on with dismay, realizing belatedly that they have been conned, the money that they assiduously stashed away for many years having been sucked up rapidly by the giant vacuum cleaner and blown by the US government on military expansion and overseas adventures and by US consumers on property speculation, giant flat screen TVs, SUVs and the good life generally…

[T]here is now no way out of the enormous hole that they have dug for themselves, the towering sides of which are now starting to collapse in upon them. What we are currently witnessing is a fascinating process of procrastination and obfuscation, with everyone right up to, or should that be right down to the President getting involved. The chief purpose of this is twofold - to allow the many spread across the Mortgage and Real Estate industry, the rating agencies and Wall St involved in the fraudulent aspects of the sub-prime scam time to cover their tracks and destroy as much evidence as possible, and to try to hatch a way to renege on the contractual obligations pertaining to the original loans, perhaps by issuing “updated” versions whose small print protects the issuer from liability relative to the original loans, in the hope that the gullible foreigners who are belatedly wising up won’t read it. Finally lawyers can be expected to feast on everyone involved, producing documents extending to thousands of pages and dragging the whole sordid business out possibly for years, which of course plays into the hands of the perpetrators of the scam, some of whom will probably have died of old age before the legal processes are concluded, if they ever are.

What makes the current situation so profoundly dangerous is that the US stands to gain the most, or rather lose the least, from a global economic meltdown in the near future. Furthermore, from the standpoint of the maintenance and enhancement of global Anglo-US hegemony there are two threats that require to be dealt with urgently. One is the alternative currency to the US dollar, the Euro, which, as mentioned above, can effectively be undermined and crippled by first laying economic siege to the Eurozone with a weak dollar. Saddam paid the price for trying to trade oil in Euros by losing first his country and then his life. The other is the rapid ascent of China which promises to become a global superpower in its own right. The way to deal with China therefore is simply to pull the plug on its economy before it has weaned itself off dependence on the US as a primary export market. According to the logic of the chess game they are playing there are thus compelling reasons for the Anglo-US elites to let the world economy implode now. In a situation of chaos, they have the military capability to impose their will virtually anywhere in the world, except China and Russia, and have established a vast network of hundreds of military bases around the world, and particularly in Asia, to do just that. The takeover of Iran with its enormous oil reserves, is only a matter of time, with the fabrication of it presenting a threat as the pretext. Iran has recently upped the stakes by only accepting payment for its oil in Euros - treading the same path as Saddam. It will be easy to come up with a pretext to invade Venezuela and secure its vast oil reserves - this is also only a matter of time. Russia cannot be attacked directly because of its arsenal of aging nukes, so it will be encircled and placed under prolonged economic siege. CNN recently aired many times a program by “The Mistress of Pathos” Christiane Amanpour, titled “Czar Putin”, which depicted Russia as a one-party country, effectively a dictatorship, with a tightly controlled media. This, of course, is in marked contrast to the US, which is a two-party country with a syndicated media in the control of those closely affiliated with the government. With the US dollar collapsing, the vast US debts will simply evaporate, and the currency crisis and general confusion will provide the perfect opportunity to amalgamate the US, Canada and Mexico into a single economic trading entity, in effect one country, with the dollar being ditched in favor of a new currency, the Amero. The Mexicans, who are currently regarded by many Americans as a nuisance will, with their cheap labor, become important bedrock support for the new enlarged country, and viewed in this context the prolonged influx of Mexican immigrants makes sense. The Constitution of the United States has already been overwritten and thus consigned to the dustbin of history by the Patriot Acts, under the provisions of which dissenters at home will be dealt with very harshly indeed.

Those in power in the United States who were responsible for creating the conditions that led first to the stockmarket boom of the 90’s, then to the Tech Bubble, and then compounded the accumulating problems by dropping interest rates almost to zero, creating the environment that bred the carry trade speculative mania, the derivates pyramid and the housing bubble must have known the consequences of their actions, must have known that it would ultimately lead to an almighty train wreck - they are not that stupid, so the question is why they allowed these things to happen. Either they were guilty of short-termism - let’s party today and to hell with tomorrow - or these developments were part of a grand plan that was meant to lead to the major crisis facing the world today. The writer has not - as yet - been invited to listen in on meetings of the inner sanctum of the Federal Reserve or the Pentagon, or MI6 in London, and therefore does not know for sure what the “grand plan” is and can only speculate on what their ultimate intentions are. Thus it is not known, for example, if the Federal Reserve will continue to expand the money supply exponentially and continue to drop interest rates in an effort to bail out the major US banks, which would cause the dollar to collapse further leading to hyperinflation, or whether they will suddenly and unexpectedly ramp interest rates in the not too distant future, purportedly to support the dollar, causing credit gridlock and an economic meltdown, but whichever track they send the train down it will still end up going over a cliff…

George Ure also sees a North American Amero replacing the dollar, something that can only be after the dollar has lost most of its value.
What's really going on is that the banksters, who are supposed to be running a fractional reserve banking system, have conned the whole world. The fractions are gone.

Where's the fraction that could stave off things like bank runs? Oh, embarrassing question!

The banks have what are called "sweeps" where they take every nickel not at rest and "sweep" them into short-term "investments" in order to keep every possible farthing at work. The problem is that when money is demanded by depositors, you get all kinds of banking problems (under the headline 'liquidity crisis') and the bankers scream for relief, and until now, have pretty much gotten what they wanted.

"Putting the money in overnight deposits somewhere is the same as having cash!" it could be argued. Well, no, not quite. When I go to my bank I can't get a measly $5,000 in cash without going through an interrogation, and neither can you. Go ahead and try it. Limits on free wire transfers, limited on travelers checks - the pot has been turned up but like frogs, few protest.

The Banksters are trying their best to phase out cash and quickly get to an all electronic world where you'll be totally auditable, and they will be able to tack on all the zero's they want. "Why, it will be Nirvana, don't you see?" they wonder privately.

Except, of course, that food, gold, or paper can be counted. The new system - if they can get it installed quickly enough hidden by a new North American Currency - allows for unlimited monetary expansion. Of course, comes a power outage, we're all broke, but that's part of the plan somewhere, I'm sure.

The markets this morning are set to open on the downside. This excuse or that will be given for the day's price action, but off in the distance there's the problem of millions of Baby Boomers all wanting money out of banks and stocks for their retirement, and no way to pay them interest/gains while the bankers want to hold those for their shareholders. It's a titanic mess, but thanks to the miracle of media saturation, we aren't supposed to notice. Just keep on spending.

The New Currency will be along soon enough, and if it's not coming fast enough, some staged 'terrorist' event or other will be ginned up with a significant money component, or cash will be further demonized by a flu pandemic as the most dangerous vector,. and there we will be.

About then, the Congress which has already abdicated on things like The Bush Wars, will sit with its thump in the pie as the bankers not only steal the Constitutionally mandated role of Congress to control money, but they will turn it over to the Mexican-Canadian-USA consortium that will run the new Super Government. A few more regional trading blocks, and then the stage is set for the one world rule...

In the United States, the areas that until recently enjoyed the fastest growth are now getting a taste of a much darker future:
This Is the Sound of a Bubble Bursting

Peter S. Goodman

December 23, 2007

Cape Coral, Fla.-- TWO years ago, when Eric Feichthaler was elected mayor of this palm-fringed, middle-class city, he figured on spending a lot of time at ribbon-cuttings. Tens of thousands of people had moved here in recent years, turning musty flatlands into a grid of ranch homes painted in vibrant Sun Belt hues: lime green, apricot and canary yellow.

Mr. Feichthaler was keen to build a new high school. He hoped to widen roads and extend the reach of the sewage system, limiting pollution from leaky septic tanks. He wanted to add parks.

Now, most of his visions have shrunk. The real estate frenzy that once filled public coffers with property taxes has over the last two years given way to a devastating bust. Rather than christening new facilities, the mayor finds himself picking through the wreckage of speculative excess and broken dreams.

Last month, the city eliminated 18 building inspector jobs and 20 other positions within its Department of Community Development. They were no longer needed because construction has all but ceased. The city recently hired a landscaping company to cut overgrown lawns surrounding hundreds of abandoned homes.

“People are underwater on their houses, and they have just left,” Mr. Feichthaler says. “That road widening may have to wait. It will be difficult to construct the high school. We know there are needs, but we are going to have to wait a little bit.”

Waiting, scrimping, taking stock: This is the vernacular of the moment for a nation reckoning with the leftovers of a real estate boom gone sour. From the dense suburbs of northern Virginia to communities arrayed across former farmland in California, these are the days of pullback: with real estate values falling, local governments are cutting services, eliminating staff and shelving projects.

Families seemingly disconnected from real estate bust are finding themselves sucked into its orbit, as neighbors lose their homes and the economy absorbs the strains of so much paper wealth wiped out so swiftly.

Southwestern Florida is in the midst of this gathering storm. It was here that housing prices multiplied first and most exuberantly, and here that the deterioration has unfolded most rapidly. As troubles spill from real estate and construction into other areas of life, this region offers what may be a foretaste of the economic pain awaiting other parts of the country.

Cape Coral is in Lee County, across the Caloosahatchee River from Fort Myers. In the county, a tidal wave of foreclosures is turning some neighborhoods into veritable ghost towns. The county school district recently scrapped plans to build seven new schools over the next two years. Real estate agents and construction workers are scrambling for other lines of work, and abandoning the area. As houses are relinquished to red ink and the elements, break-ins are skyrocketing, yet law enforcement is resigned to making do with existing staff.

“We’re all going to have to tighten the belt somehow,” says Robert Petrovich, Cape Coral’s chief of police.

FLORIDA real estate has long been synonymous with boom and bust, but the recent cycle has packed an unusual intensity. The Internet made it possible for people ensconced in snowy Minnesota to type “cheap waterfront property” into search engines and scroll through hundreds of ads for properties here. Cape Coral beckoned speculators, retirees and snowbirds with thousands of lots, all beyond winter’s reach.

Creative finance lubricated the developing boom, making it easy for buyers to take on more mortgage debt than they could otherwise handle, driving prices skyward. Each upward burst brought more investors — some from as far as California and Europe, real estate agents say.

Joe Carey was part of the speculative influx. An owner of rental property in Ohio, he visited Cape Coral in 2002 and found that he could buy undeveloped quarter-acre lots for as little as $10,000. Nearby, there were beaches, golf courses and access to the Caloosahatchee River, which empties into the Gulf of Mexico.

Builders were happy to arrange construction loans, then erect houses in as little as six months. Real estate agents promised to find buyers before the houses were even finished.

“All you needed was a pulse,” Mr. Carey said. “The price of dirt was going up. We took that leap of faith and put down $10,000.”

Backed by easily acquired construction loans, Mr. Carey’s investment allowed him to buy three lots and top off each with a new home. He flipped them immediately for about $175,000 each, he recalls. Then he bought more lots, confident that Cape Coral and Fort Myers — the county seat across the river — would continue to blossom. From 2000 to 2003, the population of the Cape Coral-Fort Myers metropolitan area grew to nearly 500,000 from 444,000, according to Moody’s

“Jobs were very plentiful,” Mr. Carey said. “The construction trade was up, stores were opening up, and doctors were coming in. It kind of built its own economy.”
In 2003, Mr. Carey became a real estate agent. The next year, he opened a title company. Then he teamed up with seven others to open a local office for Keller Williams Realty, the national realty chain. They hired 40 agents.

By 2004, the median house price in Cape Coral and Fort Myers had shot up to $192,100, according to the Florida Association of Realtors — a jump of 70 percent from $112,300 just four years earlier. In 2005, the median price climbed an additional 45 percent, to more than $278,000.

Lots that Mr. Carey once bought for $10,000 were now going for 10 times that. During the best times back in Ohio, he once earned about $100,000 in a year. At the height of the Florida boom, in 2005, he says he raked in $800,000. “If you just got up and went to work,” he says, “pretty much anybody could become an overnight millionaire.”

National home builders poured in, along with construction workers, roofers and electricians. But as a kingdom of real estate materialized, growth ultimately exceeded demand: investors were selling to one another, inflating prices. When the market figured this out in late 2005, it retreated with punishing speed.

“It was as if someone turned off the faucet,” Mr. Carey said. “It just came to a screeching halt. When it stopped, people started dumping property.”

By October this year, the median house price was down to $239,000, some 14 percent below the peak. That same month, he and his partners shuttered his real estate office. In November, he closed the title company. On a recent afternoon, he went to his old office in a now-quiet strip mall to take home the remaining furniture. He was preparing to move to the suburbs of Atlanta.

While speculators may find it easy enough to pack up and move on, they are leaving behind an empire of vacant houses that will not be easily sold. More than 19,000 single-family homes and condos are now listed on the market in Lee County. Fewer than 500 sold in November, meaning that at the current rate it would take three years for the market to absorb all the houses.

“Confusion abounds because nobody knows where the bottom is,” says Gerard Marino, a commercial Realtor at the Re/Max Realty Group in Fort Myers.

Commercial builders are unloading properties at sharply reduced prices, sometimes even below construction costs, which further adds to the glut.

“It’s our goal to clear out the inventory,” James P. Dietz, the chief financial officer of WCI Communities, a Florida-based home builder, said in an interview two weeks ago. “We have to generate cash to make payroll.” Last week, Mr. Dietz announced he would leave WCI at the end of this year to pursue a career in the vacation resort business.

AT Pelican Preserve, a gated community set around a 27-hole golf course in Fort Myers, WCI has halted building, leaving some residents staring at mounds of earth where they expected to see manicured lawns. Half-built condos sit isolated in a patch of dirt, cut off from the road.

“It bugs the hell out of my wife,” says Paul Bliss, 61, whose three-bedroom town house is next to a half-built home site. “She looks out and sees that concrete slab.”

But the builder makes no apologies. “There was such a falloff in demand that it made no sense to build new units,” says Mr. Dietz, adding that the pause in construction “doesn’t in any way detract from the property.”

Throughout Lee County, a sense of desperation has seized the market as speculators try to unload property or lure renters. On many lawns, a fierce battle is under way for the attention of passers-by, with “for rent” signs narrowly edging out “for sale.”

In Cape Coral, foreclosure filings in the first 10 months of the year reached 4,874, more than a fourfold increase over the same period the previous year, according to RealtyTrac, an online provider of foreclosure information.

Elaine Pellegrino and her daughter, Charlene, see no way to avoid joining that list.
Seven years ago, Ms. Pellegrino and her husband bought their three-bedroom house in northwestern Cape Coral for $97,000, without having to make a down payment.

The land was mostly empty then. But as construction crews descended and a thicket of new homes took shape, values more than doubled. The Pellegrinos’ mailbox brimmed with offers to convert that good fortune into cash by refinancing their mortgage. They bit, borrowing against the inflated value of their home to buy two businesses: an auto repair shop and a lawn service.

“We were thinking we were on the way up,” Ms. Pellegrino says.

But last December, Ms. Pellegrino’s husband died unexpectedly, leaving her with the two businesses, both deeply in debt, and $207,000 she owed against her home, which is now worth about $130,000, she says.

Disabled and 53 years old, Ms. Pellegrino does not work. She says she lives on a $1,259 monthly Social Security check. Her daughter, a college student, receives $325 a month for child support for one child. Charlene Pellegrino has been looking on the Web for office work for months, but with so many people being laid off, she has come up empty, she says. They have not paid their mortgage in four months.

“What can we do?” Charlene Pellegrino asks, as dusk nears and her driveway lights glow into a void. The rest of the block lies in shadows, with little light emanating from surrounding homes.

“We’re probably going to lose the house,” she says.

But not anytime soon. The Pellegrinos have joined a new cohort offered up by the real estate unraveling: they are among those waiting in their own homes for the seemingly inevitable. The courts are so stuffed with foreclosures that they assume they can stay for a while.

“We figure we have at least six months,” Elaine Pellegrino says. “We haven’t heard a thing from the bank for a long time.”

As construction and real estate spiral downward, the unemployment rate in Lee County has jumped to 5.3 percent from 2.8 percent in the last year. With more than one-fourth of all homes vacant, residential burglaries throughout the county have surged by more than one-third.

“People that might not normally resort to crime see no other option,” says Mike Scott, the county sheriff. “People have to have money to feed their families.”

Darkened homes exert a magnetic pull. “When you have a house that’s vacant, that’s out in the middle of nowhere, that’s a place where vagrants, transients, dopers break a back window and come in,” the sheriff adds.

…At Selling Paradise Realty, a sign seeks customers with a free list of properties facing foreclosure and “short sales,” meaning the price is less than the owner owes the bank. Inside, Eileen Rodriguez, the receptionist, said the firm could no longer hand out the list. “We can’t print it anymore,” she says. “It’s too long.”

In late November, more than 2,600 of the 5,500 properties for sale in Cape Coral were short sales, says Bobby Mahan, the firm’s owner and broker. Most people who bought in 2004 and 2005 owe more than they paid, he says. “Greed and speculation created the monster.”

As much as anything, the short sales are responsible for the market logjam. To complete a deal, the lender holding the mortgage must be persuaded to share in the loss and write off some of what is due. “A short sale is a long and arduous process,” Mr. Mahan says. “Battling the banks is horrendous.”

Kevin Jarrett is stuck in that quagmire. In 1995, freshly arrived from Illinois, he put down $1,000 to buy a house in Lehigh Acres, in eastern Lee County.

Three years later, Mr. Jarrett left his mental health-counseling job and began selling real estate. He bought progressively nicer homes, keeping the older ones to rent, while borrowing against the rising value of one to finance the next.

Mr. Jarrett acquired a taste for $100 dinners. He bought a powerboat and a yellow Corvette convertible. (In a photograph on his business card, Mr. Jarrett sits behind the wheel, the top down, offering a friendly wave.) Last summer, he paid $730,000 for a 2,500-square-foot home in Cape Coral with a pool and picture windows looking out on a canal.

But Mr. Jarrett hasn’t closed a deal in three months. He is on track to earn about $50,000 for the year, he said. Yet he needs $17,000 a month just to pay the mortgages, insurance, taxes and utility bills on his four properties — all worth less than half what he owes. Rental income brings in only about $3,500 a month.

Mr. Jarrett has not paid the mortgage on two of his properties in six months and is behind on the others as well, he says. His goal is to sell everything, move into a rental and start over.

He is supplementing his income by selling MonaVie, a nutritional juice that retails for $45 a bottle. He recently dropped health insurance for his family, saving about $680 a month. He is applying for a state-subsidized health plan that would cover his 9-year-old daughter. “I’m in survival mode,” he says.

Many others are in similar straits, and the situation has had a ripple effect on the local economy. Scanlon Auto Group, a luxury car dealer, says it has seen its sales dip significantly — the first time that’s happened in 25 years. Rumrunners, a popular Cape Coral restaurant with tables gazing out on a marina, says its business is down by a third, compared with last year.

Furniture dealers are folding. Hardware stores are suffering. At Taco Ardiente in Lehigh Acres, business is down by more than three-fourths, complains the owner, Hugo Lopez. His tables were once full of the Hispanic immigrants who filled the ranks of the construction trade. The work is gone, and so are the workers.

At the state level, Florida’s sales tax receipts have slipped by nearly one-tenth this year, and by 14 percent in Lee County. That is a clear sign of a broad economic slowdown, said Ray T. Kest, a business professor at Hodges University in Fort Myers.

“It started with housing, the loss of construction jobs, mortgage companies, title companies, but now it’s spread through the entire economy,” Mr. Kest says as he walks a strip of mostly empty condo towers on the riverside in downtown Fort Myers. “It now has permeated everything…”

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Monday, December 17, 2007

Signs of the Economic Apocalypse, 12-17-07


Gold closed at 798.00 dollars an ounce Friday, down 0.3% from $800.20 at the close of the previous week. The dollar closed at 0.6930 euros Friday, up 1.6% from 0.6822 at the close of the previous Friday. That put the euro at 1.4430 dollars compared to 1.4658 the Friday before. Gold in euros would be 553.01 euros an ounce, up 1.3% from 545.91 for the week. Oil closed at 91.41 dollars a barrel Friday, up 3.5% from $88.28 at the close of the week before. Oil in euros would be 63.35 euros a barrel, up 5.2% from 60.23 for the week. The gold/oil ratio closed at 8.73 Friday, down 3.8% from 9.06 at the end of the week before. In U.S. stocks, the Dow closed at 13,339.85 Friday, down 2.1% from 13,625.58 for the week. The NASDAQ closed at 2,635.74 Friday, down 2.7% from 2,706.16 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.23%, up 12 basis points from 4.11 for the week.

Last week was an eventful one for financial markets. The U.S. Federal Reserve Board cut interest rates by a quarter point, sending stocks down (traders wanted a half point cut). According to insiders, banks are in a state of panic. Analysts increasingly predict that the United States will fall into recession in 2008, and, to make it worse, inflation is rising, leading to fears of stagflation, fears that were voiced by none other than Alan Greenspan. Greenspan, formerly a hero, now haunts the world economy like the ghost of an unwelcome houseguest.

First the rate cut:

US stocks plunge on Federal Reserve rate cut announcement

Barry Grey

12 December 2007

US stocks plummeted Tuesday after the Federal Reserve Board announced a quarter-point cut in short-term interest rates and indicated in an accompanying statement that it remained concerned over the potential for an inflationary surge.

The sharply negative reaction on Wall Street, which was looking for a half-point cut in interest rates and a statement clearly giving primacy to the risks of recession and a meltdown on financial markets above inflation concerns, is a measure of the near-panic gripping big investors and some of the largest banks in the US and Europe over the implosion of the US housing market and resulting crisis on credit markets.

Immediately after the Federal Reserve Board’s Federal Open Market Committee announced its decision, at 2:15 PM Eastern Standard Time, all of the major New York stock indexes began to plunge. By the end of trading, the Dow Jones Industrial Average had fallen 294.26 points, a drop of 2.1 percent. The Nasdaq Composite Index declined by 66.60 points, down 2.5 percent, and the Standard & Poor’s 500 Index fell 38.31 points, a 2.5 percent decline.

The sharp fall on the markets came despite the fact that Tuesday’s rate cuts marked the third consecutive reduction in interest rates by the Fed since the credit crisis erupted last August. Since then, the US central bank has slashed rates by a full point, the greatest easing of borrowing costs since the recession of 2001.

The Fed cut its target federal funds rate, the overnight rate at which banks lend money to one another, from 4.5 percent to 4.25 percent. At the same time, it reduced the so-called discount rate, at which the Fed directly lends money to banks, from 4.75 percent to 4.5 percent.

These moves are aimed at cheapening the cost of loans and pumping liquidity into the credit markets. They come at a time when major banks and investment houses in both the US and Europe are reeling from massive losses resulting from the collapse of assets linked to US subprime home loans.

The depression in US home sales and prices and soaring mortgage delinquencies and foreclosures of homes purchased with high-interest subprime loans have undermined the stability of banking giants that leveraged such loans into a multi-trillion-dollar edifice of highly profitable securities that were sold to banks and other investors around the world.

According to an article in Monday’s Wall Street Journal, “Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to US homeowners.” That market has come crashing down—as it was destined to do, since it was built on the most speculative and unstable of foundations.

Facing huge losses from the collapse of these investments, and unable to determine the real value of exotic securities derived from dividing up, bundling, repackaging and reselling loans—many to subprime borrowers with shaky credit, to other investors and financial institutions—the banks have sharply cut back their lending to consumers and businesses. Lending is down, its cost is rising and the result is a credit crunch that is driving the US economy into recession, with dire consequences for the global economy.

This crisis is an expression of the increasingly parasitic and speculative character of American and world capitalism. It effects are rapidly spreading throughout the US economy, with job growth slowing, consumer spending falling off, US corporate profits tending downward and rising delinquencies on all forms of consumer credit—from home loans to auto loans and credit card payments.

Most analysts are now forecasting minimal or negative economic growth in the US for the current quarter, and some are predicting the economy will fall into recession in 2008. On Monday, Morgan Stanley became the first major Wall Street bank to predict a US recession next year.

Last week, the Bush administration announced a scheme for mortgage lenders, servicers and investors to voluntarily agree to freeze interest rates for a small minority of the estimated 2 million subprime borrowers whose adjustable-rate loans are scheduled to reset sharply higher over the next 18 months.

The plan, which will do little to relieve the suffering of millions of Americans who fell victim to predatory lending practices during the housing boom, is above all aimed at buying time for the big banks and mortgage companies and reassuring financial markets that a full-scale collapse will be averted. There is, however, little likelihood that it will prevent a deepening of the credit crunch and stave off an economic downturn that could prove severe and protracted.

The Wall Street Journal carried a front-page article Monday headlined “US Mortgage Crisis Rivals S&L Meltdown,” referring to the US savings and loans collapse of the late 1980s and early 1990s that ended with a multi-billion-dollar government bailout of Wall Street. The article had a sub-headline that read: “Toll of Economic Shocks May Linger for Years; A Global Credit Crunch.”

The Journal wrote that an examination of the current crisis “shows that it is comparable to some of the biggest financial disasters of the past half-century.”

Developments this week appear to vindicate that prognosis. The Zurich-based banking giant UBS, the world’s largest provider of banking services to the wealthy, announced Monday that it was writing down the value of its subprime assets by an additional $10 billion. The bank had already taken a $4.4 billion third-quarter write-down. It issued a statement that the “ultimate value of our subprime holdings... remains unknowable.”

UBS said it would post a loss for the fourth quarter and possibly for the year as a whole. It further said it had received an $11.5 billion investment from a fund owned by Singapore and an unnamed Middle Eastern investor, equivalent to selling as much as 12.4 percent of the company in return for a cash bailout.

With the announcement, UBS became the biggest casualty outside of the US of the American housing slump, but banks in other countries, such as Britain and Germany, have also been hit by the fallout from the US housing and credit crisis.

“That UBS, long known as a conservative lender, could take such a financial hit suggests that the wave of industry write-downs, which so far total about $50 billion, may be far from over,” wrote the Wall Street Journal.

Just two weeks ago, Citigroup, the largest US bank, agreed to sell a $7.5 billion stake, 4.9 percent of the company, to the Abu Dhabi Investment Authority in order to shore up its capital base, after announcing write-downs of $8 billion to $11 billion related to bad subprime investments. The bank had already disclosed $5.9 billion in write-downs.

Merrill Lynch, which has $20.9 billion in remaining exposure to subprime-linked investments, may also need to take a further write-down, as could Morgan Stanley, according to analysts. Merrill already disclosed a third quarter write-down of $7.9 billion. Morgan Stanley has announced subprime-linked losses of $3.7 billion in the first two months of the fourth quarter, which could increase, based on its $6 billion in remaining subprime exposure.

Washington Mutual, the largest US savings and loan bank, this week widened its expected fourth quarter loss to $1.5-$1.6 billion due to deteriorating credit and mortgage markets. The S&L said it would abandon subprime lending entirely, close 190 of its 336 home loan center and sales offices as well as 9 loan and processing call centers, and cut 3,150 jobs. It also announced it would cut its dividend 73 percent to 15 cents a share.

Bank of America announced it was liquidating a money market fund for institutional investors that was worth $40 billion only a few months ago but now has only some $12 billion in assets. The bank said the losses were related to the subprime mortgage crisis.
Meanwhile, Fannie Mae, the US government-sponsored mortgage company, predicted house prices would continue to fall for two or three more years, with no normalization until 2010.

Wall Street is clamoring for a bailout by the Fed, in the form of drastic interest rate cuts, with scant concern for the medium- and longer-term implications for the status of the dollar and the position of American capitalism in the global economy. The Fed is attempting to balance the threat of a US banking collapse with the dangers arising from soaring energy, food and commodity prices and the relentless fall of the dollar on world currency markets.

The dollar has already lost a quarter of its value against all other currencies since 2002 and 40 percent against the euro, and further interest rate cuts can only push the US currency lower. The position of the dollar, which has been further undermined by the current US housing and credit crisis, is a barometer of the declining relative strength of American capitalism on the world market.

Gerard Lyons, chief economist at Standard Chartered in London, published a column in the December 7 Financial Times entitled “The Middle East Must Loosen its Ties to the Dollar.” In the article, he recommended that the oil-rich Persian Gulf regimes sharply revalue their currencies and cease pegging them to the dollar. He wrote: “The region should shift from the dollar peg to managing exchange rates against a basket of currencies of the countries with which they trade. The dollar would form a big part of this basket, but so too would the euro and Asian currencies. Over time, the dollar’s weight would fall.”

Commenting Tuesday on the bailout of UBS by Singapore and a Middle East investor, he said it was a “reflection of the current fragile state of the financial sector in the West” and “a further sign of how the balance of the world economy is changing.”

Greenspan urges policymakers to stand firm on inflation and let the chips fall where they may, even if it means an economic depression (he doesn’t use that word, of course).

Greenspan sees early signs of U.S. stagflation

December 16, 2007

WASHINGTON (Reuters) - The U.S. economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday.

In an interview on ABC's "This Week with George Stephanopoulos," Greenspan said low inflation was a major contributor to economic growth and prices must be held in check.

"We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.

"Fundamentally, inflation must be suppressed," he added. "It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period."

The U.S. central bank has lowered its benchmark interest rate three times since mid-September as a housing downturn, tightening credit conditions, and steep food and energy prices threaten to push the U.S. economy into recession.

But cutting rates can have the unwanted side effect of pushing up prices, so the Fed finds itself in a tricky position of trying to revive growth without spurring inflation.

Last week, U.S. data showed that wholesale inflation rose at the highest rate in 34 years, while consumer prices rose the most in more than two years.

Greenspan repeated his assessment that the probability of a U.S. recession had moved up toward 50 percent but noted that corporate America's debt levels were in good shape, which should help cushion the blow from tightening credit terms.

"The real story is, with the extraordinary credit problems we're confronting, why the probabilities (of recession) are not 60 percent or 70 percent," he said.

"Because of the decline in long-term interest rates for a protracted period of time, American business was able to fund a significant part of its short-term liabilities and take out low-cost, long-term debt, so the credit needs have not been all that large," he said.

Greenspan has drawn some criticism for keeping the trendsetting federal funds rate at a low 1 percent from June 2003 through June 2004, which some argue contributed to a housing bubble that is now bursting spectacularly.

Greenspan said real estate prices will stabilize only when the overhang of unsold new-construction homes begins to ease, and estimated that financial losses could be in the range of $200 billion to $400 billion as securities tied to failing subprime mortgages lose value.

He warned against any sort of government bailout plan for homeowners that interfered with the normal functioning of markets for home prices or interest rates, saying it would "drag this process out indefinitely." Offering cash to stricken homeowners instead would cause less long-term damage, he said.

"It's only when the markets are perceived to have exhausted themselves on the downside that they turn," he said. "Trying to prevent them from going down just merely prolongs the agony."

So the man who more than anyone else caused all this pain, the man who announced as Federal Reserve Chair that variable rate mortgages were a sensible option, now says that nothing should be done to help the victims. Not surprising, I guess, coming from one whose hero is the philosopher of psychopathic individualism, Ayn Rand. While Greenspan abhors any bailing out of average people facing eviction from their homes, he and other central bankers are always ready to bail out their fellow bankers. Only they don’t call it bailing out, they call it “providing liquidity.” The problem we face now is that, as Paul Krugman put it, this is not a liquidity crisis it is a solvency crisis.

After the money's gone

Paul Krugman

December 14, 2007

Princeton, New Jersey -- On Wednesday, the U.S. Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it.

In past financial crises - the stock market crash of 1987, the aftermath of Russia's default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working.

Why not? Because the problem with the markets isn't just a lack of liquidity - there's also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.
Suppose that there's a nasty rumor about the First Bank of Pottersville: People say that the bank made a huge loan to the president's brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices - and it may indeed go bust even though it didn't really make that bum loan.
And because loss of confidence can be a self-fulfilling prophecy, even depositors who don't believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity - the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: The bank really did make a big bad loan. Then the problem isn't how to restore confidence; it's how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia's default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system - both banks and, probably even more important, nonbank financial institutions - made a lot of loans that are likely to go very, very bad.

It's easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, the United States had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity - owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.
And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity.

If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What's going on in the markets isn't an irrational panic. It's a wholly rational panic, because there's a lot of bad debt out there, and you don't know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won't start functioning normally until investors are reasonably sure that they know where the bodies - I mean, the bad debts - are buried. And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.
Meanwhile, the housing crisis shows no signs of ending.
U.S. Housing Crash Deepens in 2008 After Record Drop

Daniel Taub

Dec. 14 (Bloomberg) -- For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

“We’re only halfway through the housing shock,” said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth- biggest U.S. securities firm by market value. “It’s just a matter of time before the weakness spreads to the rest of the economy.”

The housing market collapse has been anything but the “soft landing” that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

“I’m not going to sit here and tell you it’s going to turn real strong next year,” said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. “It’s not going to turn real strong next year.”

‘Let the House Go’

Analysts at New York-based CreditSights Inc. predict housing won’t rebound until “2009, at best.” Moody’s Inc., the economic forecasting unit of Moody’s Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson’s plan to slow foreclosures won’t help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can’t afford it.

“It looks like we’re going to have to let the house go,” said C.W. Hicks, 65, a long-haul truck driver who has kept working past retirement age to help pay medical bills for his wife Sandy, 59, who has heart problems. “I guess we’ll try to rent a house or something.”

The Hickses aren’t the only ones grappling with the consequences of this year’s housing market. The number of Americans behind on their mortgage payments rose to a 20-year high in the third quarter, the Washington-based Mortgage Bankers Association said earlier this month.

Lender, Homebuilder Woes

“The whole thing has deteriorated faster and further than we or anyone else had anticipated,” said Ron Muhlenkamp, president of Wexford, Pennsylvania-based Muhlenkamp & Co., which has about $2.5 billion under management and holds shares of mortgage lender Countrywide Financial Corp. and homebuilder Ryland Group Inc.

Not true, Mr. Muhlenkamp. Many of us saw this coming a mile away.

The five biggest U.S. homebuilders by revenue, led by Miami- based Lennar Corp., recorded writedowns and charges totaling about $7.5 billion this year for land that plunged in value.

Mortgage companies, including Irvine, California-based New Century Financial Corp., the second-largest subprime lender in 2006, have filed for bankruptcy protection after borrowers unable to repay their loans defaulted.

H&R Block Inc. of Kansas City, Missouri, shut Option One this month after plans to sell the subprime home-lending unit fell apart, and U.S. regulators ordered Santa Monica, California-based Fremont General Corp. to stop selling subprime mortgages, loans given to people with poor or limited credit histories or high debt levels.

O’Neal, Prince Fall

Bank and brokerage writedowns and losses related to subprime loans totaled more than $80 billion. Citigroup Inc., the biggest U.S. bank by assets, last month said it would write down the value of subprime mortgages and collateralized debt obligations -- securities backed by bonds and loans -- by $8 billion to $11 billion. At Merrill Lynch & Co., writedowns on mortgage-related investments and corporate loans have cost the world’s biggest brokerage $8.4 billion. Both companies are based in New York.

The losses led to the ouster of Merrill Chief Executive Officer Stan O’Neal and the resignation of Citigroup CEO Charles O. “Chuck” Prince III. O’Neal’s exit came after he said as late as July that “not even a sharp downturn in one market today necessarily portends financial disaster in another, and we’re seeing this play out today in the subprime market…”

“I know we weren’t predicting things would get this bad,” said Frank Liantonio, executive vice president for global capital markets at New York-based Cushman & Wakefield Inc., the largest closely held real estate services provider. “There were some signs there, but I don’t think anyone anticipated the level of dislocation that was actually created.”

They need to stop saying that no one anticipated this! Maybe no one living in whatever bubble these people live in saw it coming, but this crisis was the easiest thing to predict.

Now, however, the mainstream media is jumping on the bearish bandwagon with pieces like the following from the Los Angeles Times on the attractiveness of gold as an investment:

Buy yourself gold for portfolio protection?

Tom Petruno, Los Angeles Times

December 16, 2007

Financial advisors often try to discourage clients from such investments, but some individuals consider the metal to be insurance against the U.S. dollar. Learn four common ways to invest, and the pros and cons of each.

Gold is one holiday gift that has kept on giving for the last seven years.

The metal's market price, which last month surged above $800 an ounce for the first time in nearly three decades, has risen every year since 2000.

It has trounced the U.S. stock market in that period, rocketing 190%, compared with a 26% total return for the Standard & Poor's 500 index. After mostly being out of favor in the 1980s and 1990s, gold has found a new, and global, investor audience -- including the emerging rich in booming Asian economies.

Fresh interest in gold also has spawned an array of gold-related securities, providing more options for people who want to own the metal without having to take physical possession of it. Yet professional financial advisors often try to discourage their clients from gold investing in any form. Many say they don't believe it has a place in a modern portfolio. In part, gold and other precious metals -- platinum and silver -- suffer from their long-standing image as havens for survivalists, conspiracy theorists and flakes."

That's for the guys we don't want as clients," said Michael Glowacki, head of financial planning firm Glowacki Group in West Los Angeles.

Some fans of gold, however, say the bad rap is outdated and ignores the metal's powerful performance in this decade.

Martine Pham, a 45-year-old Bay Area investor, says she likes gold as a way to protect her purchasing power if the U.S. dollar continues to lose value, deepening its slide of the last six years.

But she also says she was drawn to the commodity in recent years by basic investment analysis."

If you just look at it based on supply and demand, I could make a good fundamental case for the price to go up," Pham said.

Some individual investors say they simply consider gold to be a modest bit of insurance for their portfolios of stocks and bonds."

In a worst-case scenario, you might be glad you had it," said Orvis Adams, an 82-year-old Los Alamitos investor who said his gold holdings amounted to less than 2% of his total investment mix.

If you're thinking about adding gold to your portfolio, how best to do it?

Here's a primer on the pros and cons of four common ways to invest in gold:

Gold bullion

Coins and bars from government or private mints are the classic way to own the metal itself -- and also the most cumbersome.

Coin dealers like to say that nothing compares to the weighty feel of real gold, one of the heaviest of the elements.

There's a "warm, fuzzy feeling" people get when they hold a gold coin in their hand, said Ken Edwards, a partner at California Numismatic Investments in Inglewood.

That's part of the marketing, of course. And government mints have tried to outdo one another in the last two decades in designing coins to catch the public's eye -- and bring in revenue from mint sales.

Thirty years ago the South African Krugerrand had the global gold coin market largely to itself. Now, the Krugerrand competes with the American Eagle, the Chinese Panda, the Canadian Maple Leaf and other government-minted coins.

One current favorite of some coin dealers is the Austrian Philharmonic, which on one side is adorned with the images of musical instruments including the harp and the violin.

Ultimately, gold is gold: The value of a minted coin depends mostly on its weight and the market price of the metal, plus the dealer commission (the markup or markdown, depending on whether you're buying or selling).

Dealer commissions typically range from 2% to 4.5%, depending on the coin. So it's worth shopping around.

The benchmark price of gold in New York futures markets Friday was $793.30 an ounce.

For 1-ounce coins, California Numismatics on Friday quoted a selling price of $826 for the American Eagle, $821 for the Canadian Maple Leaf and $816 for the Krugerrand.

All of the coins contain 1 ounce of gold. But some, including the Krugerrand, contain small amounts of alloys, such as copper, to add strength (because gold is relatively soft). Others, including the Maple Leaf and the relatively new American Buffalo, are virtually pure gold.

It's a matter of personal preference, Edwards says. "Some people just prefer solid gold."

Some investors also prefer gold bars to coins. The bars, in sizes as small as 1 gram, also are produced by government and private mints.

Michael Carabini, who manages gold dealer Monex Precious Metals in Newport Beach, sells bars and coins. But he recommends coins for most investors because they are easier to sell, he says."

The liquidity is better with coins," he said, in part because they're easily recognizable around the world.

Besides 1-ounce gold coins, some mints produce smaller sizes, down to one-tenth of an ounce.

But you may pay a bigger percentage premium to buy smaller coins, and dealers may charge a bigger markdown when you sell, compared with 1-ounce coins. The reason: Smaller coins trade less frequently.

"On a typical day, I'll trade 100 times more 1-ounce coins than smaller coins," Edwards said.

Even so, smaller coins may make sense for some investors, Carabini said. For example, if your plan is to eventually split the coins among heirs, smaller sizes could make that easier.

Thinking about your exit strategy is important for another reason: The tax man isn't friendly to bullion. Hard assets like gold coins are subject to a higher long-term federal capital gains tax rate when you sell -- 28% versus a top rate of 15% for securities such as stocks.

For some investors, the biggest potential drawback to owning coins or bars is the need to store them somewhere secure. Under the mattress isn't recommended -- not at about $800 an ounce for something so easily fenced.

Storage will cost you money, whether you use a bank safe deposit box, a home safe or a safekeeping program offered by some gold dealers.

Monex, for example, charges $5.50 a month to store 20 ounces of gold, Carabini said.

Gold certificates

These programs allow an investor to hold gold in certificate form. The certificate represents ownership either in gold held specifically for you or a stake in a pool of gold with other investors.

The firm that issues the certificate handles the safekeeping and typically is obligated to produce the gold upon demand or redeem it for cash.

When investor Martine Pham decided she wanted to own physical gold two years ago, she said, she considered buying coins but didn't want to deal with storing them herself.

She bought into the certificate program of GoldMoney, a Britain-based gold certificate company. The company stores its gold in vaults in London and Zurich, Switzerland.

She chose the program over others, Pham said, because of the ease of transferring funds. GoldMoney promises 24-hour access to its program.

Other companies offering certificate programs include EverBank in Jacksonville, Fla., and the Perth Mint in Australia.

It's worth shopping around to compare minimums and fees for the programs. GoldMoney says that it has no minimum investment and that its storage and insurance fee is a flat one-tenth of a gram of gold per month (about $2.60), regardless of the amount of gold owned.

EverBank has a $5,000 minimum for pooled accounts but doesn't charge a storage fee on them.Also compare purchase and sales fees. The Perth Mint charges a commission of 1.75% on purchases. EverBank charges 0.75%.

Exchange-traded funds

These funds provide a simple way for investors to ride a rally in gold's price -- or bet on a price decline.

Shares of the funds, the streetTracks Gold Trust (ticker symbol: GLD) and its rival, the Ishares Comex Gold Trust (IAU), trade on the New York and American stock exchanges, respectively.

A central idea behind the funds is that their daily price changes closely track changes in the price of bullion. That's because the funds' shares are backed by the metal itself, held in storage.

StreetTracks Gold Trust, created in 2004, has a market capitalization of nearly $16 billion. Ishares Comex Gold Trust, created in 2005, has a market cap of $1.4 billion.

Both stocks trade for about one-tenth the market price of bullion. On Friday, for example, the streetTracks Gold Trust closed at $78.50 a share. It's up 24% this year, compared with a 25% rise in the New York futures price for bullion.

The funds also can be used to bet on a falling gold price, because they can be "shorted" -- meaning, the shares can be borrowed from a brokerage and sold, with the expectation that the price will drop and the borrowed stock can be repaid later with shares bought at a lower price.

One potential drawback of the funds: You'll have to pay a trading commission each time you buy or sell.

And the stocks pay no cash dividends because gold itself doesn't generate any income.

Also, the Internal Revenue Service considers these a direct investment in gold, which means they're subject to the 28% hard-asset long-term capital gains tax instead of the 15% maximum on most stocks.

Some investors who prefer owning physical gold point to another potential negative with gold securities: When the stock market was closed for four days in 2001 after the terrorist attacks, owners of gold securities had no way to sell what they owned, or buy more.

Larry Heim, who operates a business in Portland, Ore., that buys gold bullion for clients, said he didn't recommend gold securities for that reason. "I don't want to take that risk," he said.

Mining stocks and fundsShares of gold mining companies and mutual funds that invest in them offer a way to buy into the business of gold as opposed to just the metal itself.

The performance of a gold mining stock may be tied in part to the metal's price performance, but in the long run the stock's rise or fall may well depend more on how well the business is managed.

Consider: The price of gold is up 25% this year. Shares of Barrick Gold Corp., one of the industry's titans, are up 24%. Shares of the much smaller Yamana Gold Inc. are down 5%.

In general, gold mining stocks are "notoriously volatile," warns Katherine Yang, an analyst at investment research firm Morningstar Inc. in Chicago.

The point being, if you're going to buy a gold stock, you ought to be prepared to do some homework -- and cross your fingers.

Overall, a Philadelphia Stock Exchange index of 16 major gold mining stocks is up nearly 17% this year after rising 11% last year and 29% in 2005.

Some mining-stock experts worry that a broad slide on Wall Street could drag mining stocks down as well for a while, even if the price of gold holds up.

"We could be coming up on a time when mining stocks could decouple from the price of the metal," said Frank Barbera, who writes the Gold Stock Technician newsletter in Los Angeles.

Decoupling could occur, he said, if a stock market plunge drives investors to sell their winners as well as their losers. In sharp market declines, "you sell what you can," Barbera said.

But longer term, he said, he favors smaller mining companies that could be takeover targets if the industry continues to consolidate and the metal's price continues to rise.

Investors who want to own a basket of mining stocks can pick from more than a dozen mutual funds that focus on gold stocks."

For people who aren't that interested but want some exposure, that's probably the way to go," Barbera said.

But as with any mutual funds, shop around. Some gold funds charge high management fees that will dent your returns.Morningstar's two favorite fund picks are American Century Global Gold and the Vanguard Precious Metals and Mining fund.

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Monday, December 10, 2007

Signs of the Economic Apocalypse, 12-10-07

From Signs of the Times:

Gold closed at 800.20 dollars an ounce Friday, up 1.4% from $789.10 at the close of the previous week. The dollar closed at 0.6822 euros Friday, down 0.2% from 0.6834 at the close of the previous Friday. That put the euro at 1.4658 dollars compared to 1.4633 the Friday before. Gold in euros would be 545.91 euros an ounce, up 1.2% from 539.26 for the week. Oil closed at 88.28 dollars a barrel Friday, down 0.5% from $88.71 at the close of the week before. Oil in euros would be 60.23 euros a barrel, down 0.6% from 60.62 for the week. The gold/oil ratio closed at 9.06 Friday, up 1.8% from 8.90 at the end of the week before. In U.S. stocks, the Dow closed at 13,625.58 Friday, up 1.9% from 13,371.72 for the week. The NASDAQ closed at 2,706.16 Friday, up 1.7% from 2,660.96 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.11%, up 17 basis points from 3.94 for the week.

No big movements in the markets last week. The unveiling of Bush’s plan to prevent housing foreclosures in the United States helped to counteract downward pressures on stocks. The surprise leak early last Monday of the National Intelligence Estimate (NIE) which stated that Iran’s nuclear weapons programs were disbanded in 2003 gave hope that the United States will resist pressure from Israel to attack Iran. That helped keep oil prices below their recent highs

U.S. Stocks Rise for 2nd Week on Bush Plan to Avert Recession

Elizabeth Stanton

Dec. 8 (Bloomberg) -- U.S. stocks posted their steepest two- week advance since September after President George W. Bush announced a plan to freeze some mortgage rates to prevent foreclosures from causing a recession.

Centex Corp. and D.R. Horton Inc. led homebuilders as they climbed the most in seven years. Intel Corp., Micron Technology Inc. and other semiconductor companies in the Standard & Poor's 500 Index rose the most since June following analyst predictions that demand for computers will increase. All 10 industries in the S&P 500 gained.

Stocks have rebounded after losing their 2007 gain at the end of last month, spurred by speculation the Federal Reserve will reduce interest rates to prop up the world's largest economy. The S&P 500 declined yesterday after a Labor Department report showed U.S. employers added more jobs than estimated in November, diminishing the odds that central bankers will cut their rate benchmark by half a point on Dec. 11.

“The economy is slowing, but it’s not falling off a cliff,” Jeremy Siegel, an economics professor at the University of Pennsylvania’s Wharton School of Business, said during an interview in New York. “That’s important for investors.”

The S&P 500 added 1.6 percent to 1,504.66, bringing its two- week gain to 4.4 percent and its advance this year to 6.1 percent. The Dow Jones Industrial Average rose 1.9 percent to 13,625.58. The Nasdaq Composite Index climbed 1.7 percent to 2,706.16.

Quarter-Point Cut

Ten-year Treasury yields had the first weekly gain since October, rising to 4.11 percent, as traders pared bets that the Fed will reduce its rate benchmark by more than a quarter point. Two-year yields rose to 3.10 percent.

Homebuilders in the S&P 500, which fell as much as 78 percent from their July 2005 peak through Nov. 27, added 17 percent for the steepest weekly advance since August 2000. Centex gained the most, climbing 24 percent to $25.81. D.R. Horton rose 16 percent to $13.86.

Bush announced on Dec. 6 an agreement between the government and the lending industry that would freeze rates for five years on some variable rate mortgages and provide assistance to as many as 1.2 million homeowners.

The government’s plan may help end the recession in the U.S. housing market, which is entering its third year. The number of Americans behind on their mortgage payments in the third quarter was the highest in 20 years, the Mortgage Bankers Association said Dec. 6.

‘Muddle Through’

“The economy will muddle through without tipping into recession,” said Joshua Feinman, chief economist in New York at Deutsche Asset Management, which oversees $798 billion. Growth will accelerate during the second half of next year, he said.

Intel gained the most in the Dow average, climbing 6.3 percent to $27.73. Thomas Weisel Partners LLC analyst Kevin Cassidy raised his rating on the world’s largest chipmaker to “overweight” and increased his 2008 profit estimate in part because of growing demand for computers from Brazil, Russia, India and China…

Payrolls rose by 94,000 in November, the Labor Department said yesterday. The jobless rate remained at 4.7 percent for the third month in a row. Economists predicted a gain of 80,000 jobs and an unemployment rate of 4.8 percent, according to the median estimates in a Bloomberg survey.

Sales at U.S. retailers probably rose in November as discounts and wage gains helped Americans cope with near-record fuel costs, economists said before reports this week.

“The economy from a numbers standpoint is stronger than what people’s perceptions are,” said Scott Fullman, director of investment strategy at Israel A. Englander & Co. in New York, a derivatives brokerage firm for institutional clients with combined assets under management of more than $100 billion…

Is the economy really stronger than people’s perceptions? Will the United States economy really avoid recession in 2008? Probably not. A recession is probably the best that can be expected. No doubt statistics, such as the recently released “better than forecast” employment numbers in the United States, have been massaged to make us feel better. But perception management can only go so far in masking reality.

The economy's last hurrah before that big sucking sound

Richard Benson

December 7, 2007

As 2007 wounds down, it’s time to reflect on how bogus government statistics along with Wall Street media hype have impacted the psychology and perception in the financial markets. Sheer disappointment is one way to describe what the financial markets will experience as the existing belief in a Goldilocks economy is challenged by sobering facts and a hard landing, yet to come.

Christmas is meant to be a festive and happy time of year spent with family and friends, but there is a dark side to this year’s holiday. The picture of the father, mother, son, or daughter pulling out the only credit card left that’s not maxed out in order to buy that special gift for a loved one, is not the face you’ll see portrayed in the media. The TV and newspapers show only affluent-looking preppy-faced Americans wearing pricey Italian shoes and sunglasses, shopping the malls and luxury stores for 50-inch flat screen TV’s, cashmere sweaters, Tiffany diamond rings and fancy chocolates. The media will avoid at all costs the large percentage of Americans on the brink of bankruptcy and foreclosure, living paycheck to paycheck, because there’s nothing Christmassy about that picture.

I have to wonder, though, if Americans are really shopping (i.e., spending money), or just looking for bargains at the major department stores that began running fire sales as early as October. Foreigners will undoubtedly be the luckiest group this season as they take full advantage of the declining dollar. Contrary to what you may have read in the American financial press about the declining dollar being good for America, you’ll read a different viewpoint in the foreign press, as many people overseas think America is getting what it deserves: a real comeuppance, as the dollar and our empire literally go down the tubes.

The US Economy is in terrible shape! Our government has been psychologically manipulating the American people every time they publish blatantly false data on employment and income that makes our economy look stronger than it really is. If the average American realized how bad things were, they might try to save more. But spending would collapse if they did, so the goal of the Bush Administration seems to be to hide any signs of a recession as long as possible.

If you don’t see it, it must not be there

For those familiar with the government releases, the Bureau of Labor Statistics ("BLS") just posted a benchmark data revision that showed the total number of workers employed on the payroll survey was 300,000 less than originally estimated for March 2007 (900,000 versus the 1,200,000 that was reported). By the time the dust settles, and later benchmark revisions come in for the whole year, it is likely that all of the jobs added by the BLS Birth/Death Model in 2007 will be fictitious. This could mean there hasn’t been any job growth at all! Without the fiction of job growth, you can imagine how much worse it will be for consumer income, spending, and sentiment not to mention business investment plans.

The reason employment is weak is because at least 40 percent of all job growth was tied directly or indirectly to housing. With housing in free fall, the solid job growth reported by the BLS Payroll Survey simply does not make sense.

The Department of Commerce keeps statistical estimates such as Personal Income, which is based on the estimated number of workers in the BLS Payroll Survey. So now, based on the revisions to the BLS Payroll Survey for March (and other data), revised Personal Income (wages, salaries, interest income, etc.) grew at an annual rate of only 1.6 percent in the second quarter of 2007, not the 4.5 percent originally reported. That’s three percent less in Personal Income. These imaginary workers with no Personal Income will not be shopping this December or anytime soon, so we can expect to see lower retail sales and corporate profits. Income never made, can't be spent.

As these pretend workers turn out to be a myth, they will eventually show up in the government statistics. When that happens, corporate sales will suffer and the financial markets will take notice. This is also a reminder that for statistics, the government's game is to report the false glowing numbers to the financial markets in the full light of day, and then report the corrections and horrible truth in the dead of night, and hope no one notices.

The big reason the economy is going over the cliff is not the direct result of the sub-prime mortgage debacle and the hundreds of billions in investor dollars that have been lost, although this is a major contributing factor. The reason, we focus on, is that the economy is already in recession as a direct result of homeowners having had that ATM ripped out of their house. Stories like the homeowner who purchased a home for $100,000 years ago but got carried away in the frenzy of the last decade by doing 4 cash out REFI’s, running their mortgage balance up to $625,000 while living large, are last year’s stories. That $800 billion a year in Mortgage Equity Withdrawal ("MEW") has come to a sudden end and with the average homeowner no longer living large off the house, the economy is left with that "big sucking sound".

With home prices falling, there frequently is no equity to take out! Potential borrowers don't have verifiable income to actually pay back a loan unless home prices are rising rapidly, so they can no longer buy or refinance. Meanwhile, with lenders asking for down payments, housing prices will just keep heading down for another year.

The US economy is continuing to weaken in many areas: The US Treasury has received lower income tax receipts forcing state and local governments to cut back because they’re coming up short; capital gains on home sales are falling as home prices fall; property tax receipts are also declining as assessed values go down; weak retail sales mean lower sales tax receipts; corporate profits are down, along with corporate taxes paid; and, many self-employed workers may be employed, but they’re not making anything or only half of what they used to.

Moreover, America is not the only country with an economic problem. The housing bubble is turning out to be worldwide, with a major impact on England and much of Europe. The biggest economic losers include the emerging markets, especially China. Don't believe for one second those Wall Street touts selling the notion that the emerging markets have "decoupled" from the US economy and their growth will lead the world forward without the American consumer. That’s hogwash. Where do you think their trade surpluses and big sales gains (driving investment in plants and equipment) came from anyway? From the American consumer and MEW! Take $800 billion of easy spending away from the American consumer and you're going to see a lot of blow back in lost sales by the emerging market countries, including China.

As the recession takes hold, I see this holiday shopping hype as the Economy’s Last Hurrah, but it’s not just the American economy that’s going to hear that "big sucking sound" in the New Year!

As Benson wrote above, it’s hard to imagine that a sharp downturn in the U.S. economy wouldn’t send the rest of the world into a recession as well. That has been made clear in the past few months when the world got a glimpse of how many non-U.S. banks were infected with U.S. subprime loans. But that effect will pale before what happens when the U.S. consumer runs out of money (credit).

‘Decoupling’ Debunked as U.S. Collapse Infects World

Simon Kennedy

Dec. 7 (Bloomberg) -- It turns out the U.S. economy matters after all.

The credit collapse and dollar decline that followed a surge in U.S. home foreclosures jeopardize expansions in the U.K., Canada and Germany, economists said. They also debunk “decoupling,” an argument advanced by analysts at Goldman Sachs Group Inc. and Morgan Stanley that the world wouldn’t suffer as it did during U.S. slowdowns in previous decades.

The Bank of England and Bank of Canada this week followed the Federal Reserve in cutting interest rates, and the European Central Bank lowered its growth forecast for next year. British policy makers reduced their benchmark rate yesterday, even after Governor Mervyn King expressed concern about inflation just two weeks earlier.

“Two thousand and eight will be the year of ‘recoupling’,” said Peter Berezin, an economist at Goldman in New York, explaining his firm’s about-face. “What began as a U.S.-specific shock is morphing into a global shock.”

Of the 38 countries they monitor, Goldman economists expect growth to slacken in 26 and strengthen in a dozen. That will cause global growth to slow to 4 percent next year from 4.7 percent this year, with Europe and Japan fading faster than the U.S., they say.

“There are a lot of risks out there,” Goldman Chief Economist Jim O’Neill said in an interview today.

Market lending rates have risen worldwide in the last three weeks as $70 billion of writedowns linked to defaults on U.S. subprime mortgages fanned international concern about the strength of financial institutions.

Roach Skeptical

Decoupling is “a good story, but it’s not going to work going forward,” Stephen Roach, chairman of Morgan Stanley in Asia, said in an interview in New Delhi on Dec. 2. His colleague, Stephen Jen, said in a report the previous week that because the possibility of a U.S. recession has increased, so has the chance that the rest of the world will falter.

Higher market rates pushed up the cost of lending everywhere, making it costlier for companies and consumers to fund new spending or investment. The cost of borrowing euros for three months, for example, this week rose to a seven-year high.

“Initially the impact of the subprime crisis was on the U.S. directly, but what we’re seeing now is a more insidious paralysis of credit conditions moving across different markets and economies,” said Brian Hilliard, director of economic research at Societe Generale SA in London.

Threat to Airbus

The dollar’s decline in sympathy with its economy is also exacting a price overseas. Airbus SAS may cut its 2 billion-euro ($3 billion) research budget to trim costs as the dollar’s dive becomes “life threatening” for the world’s largest planemaker, Chief Executive Officer Tom Enders said Nov. 23.

At the same time, U.S. consumers are starting to retrench in the face of declining home values and rising energy bills as oil prices near $100 a barrel. The Conference Board’s index of consumer confidence decreased last month to the lowest since the aftermath of Hurricane Katrina in 2005.

Wolseley Plc of the U.K., the world’s biggest distributor of plumbing and heating equipment, said Nov. 28 that first- quarter pretax profit through October fell almost 15 percent after U.S. revenue declined 10 percent.

“The American consumer is the big gorilla on the demand side of the global economy,” Roach said. “As the slowdown goes from housing to consumption, we’ll find the world is not as decoupled as it thinks.”

U.K. Cut

U.K. monetary policy makers yesterday cut their key rate for the first time in two years to 5.5 percent, pointing to deteriorating financial markets. In August, King said he was optimistic the turmoil wouldn’t hobble his economy.
The Bank of Canada identified “global financial market difficulties” as it lowered its main rate by a quarter point to 4.25 percent on Dec. 5.

While the European Central Bank is signaling no intention of cutting interest rates soon, Bank of France Governor Christian Noyer said Dec. 4 that there is now a “question mark” over his view of September that Europe would remain unscathed from the market rout.

Tai Hui, head of Southeast Asian economic research at Standard Chartered Bank Plc in Singapore, also doubts Asia’s economies can weather a collapse in U.S. consumer demand, with Hong Kong, Taiwan, Malaysia and Singapore at particular risk from reduced exports.

‘Need to See’

Bank of Japan Governor Toshihiko Fukui said this week that “we need to see how the U.S. consumer is affected” as he holds his key rate at 0.5 percent, the lowest among industrialized nations. Waning U.S. demand meant the Japanese economy grew an annualized 1.5 percent in the third quarter, almost half the preliminary estimate, the Cabinet Office said in Tokyo today.

On the other hand, Alex Patelis, head of international economics at Merrill Lynch & Co., is confident “the time has not yet come to call the end of this global upturn,” citing demand in emerging markets such as China and Russia.

Patelis predicts the world economy will grow 4.7 percent next year and 5.6 percent if the U.S. is excluded.

John Llewellyn, a senior economic policy adviser at Lehman Brothers Holdings Inc. in London, is unconvinced, arguing that if U.S. consumers buckle, so will growth elsewhere.

“Decoupling is a lovely idea, but I’ll only believe it when I see it,” he said.

China has the most at stake in whether or not the world economy can “decouple” from the U.S. But China itself is itself hiding huge amounts of bad debt.

The coming China crash

Martin Hutchinson

December 3, 2007

While the Chinese stock market, as measured by the China Securities Index 300, is down 18% since October 16, that follows a period of almost two years during which the CSI 300 had soared 535% since January 1, 2006. Chinese economic growth is currently running at over 11% and the big money is convinced that it will continue, while the country’s foreign exchange reserves are $1.4 trillion, the largest in the world.

A crash would appear to be imminent!

Bears on China have been common for the last decade, and their track record has not been good. To take just one unfair example, Henry Blodget, the former Internet genius, wrote in Slate in April 2005 “You’ve probably been daydreaming about the fortune to be made in Chinese stocks. Well, keep dreaming….you’ll eventually conclude that you could have done better selling insurance in Toledo.” That was about six months before the Chinese market took off, and if anybody has made 500% on their investment by selling insurance in Toledo during that period, I haven’t met him.

To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the $200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today’s prices, ExxonMobil, General Electric, Microsoft – there are 4-5 others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment’s moves into the market were awaited with bated breath.

Well, so much for that. A third of China Investment’s portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. $3 billion of the fund was invested in the private equity manager Blackstone in May – that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities – which are also losing money steadily in yuan terms.

The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses, and have been propped up by the banking system. Since 2004, loss-making state owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses have resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, the Chinese banks have an enormous volume of bad loans -- $911 billion at May 2006, according to a later-withdrawn estimate by Ernst and Young, which must surely have ballooned to $1.2-1.3 trillion now.

That explains why China Investment is somewhat un-aggressive in its international investment strategy. China’s $1.4 trillion of reserves are in fact almost all required to prop up the banking system, when the inevitable liquidity crisis occurs. If the banks are to survive, China Investment will have to be followed by six more sovereign wealth funds of equal size, each of which will have to abandon its attempts to take over Exxon or Google and pour its money down domestic rat-holes.

A $1 trillion problem in subprime mortgages has caused even the US money market to seize up and has required frequent applications of sal volatile by the Fed. Since China’s economy is around one fifth the size of the United States’ the Chinese banking system’s bad debt problem is in real terms about five times that of the United States, about 40% of its Gross Domestic Product.

We have seen this movie before; the Japanese banking system’s bad debts after 1990 totaled around $1 trillion, about 30% of Japan’s GDP. The result was the bursting of the 1980s bubble and a period of little or no economic growth that lasted well over a decade. Admittedly the Japanese authorities made matters worse, by refusing to face up to their bad debt problem and issuing more government bonds to fund witless Keynesian public spending schemes.

Nevertheless, we can have very little confidence that the Chinese authorities, once the same problem stares them in the face, would do any better. After all, at least one of the alternative policy mixes, that tried by Herbert Hoover and the Federal Reserve in 1930-32, proved very much worse. Per Capita US Gross Domestic Product was no higher in 1940 than it had been in 1929, as in the Japanese case, but in the interval it had declined by a horrifying 28% and had recovered very slowly. If China faces the choice between a decade of stagnation, as in Japan from 1990-2003 and a decade of economic collapse, as in the United States from 1929-1940, it will rightly prefer the Japanese alternative.

It may not however have the choice. One of the factors that kept Japan out of real trouble in the 1990s was continued strong growth in the US and world economies; thus its magnificent export industries were able to continue growing, albeit at a slow rate, and provide a certain amount of traction for the economy as a whole. However, China will find it difficult to do the same, since the next decade does not seem likely to be a period of robust world growth, far from it. The United States seems fated to endure at least a few years of very sluggish growth due to its housing market crash, and Britain appears to be in a similar mess, so even relatively robust growth in the resurgent economies of Germany and Japan may not be sufficient to keep Chinese exports growing.

At that point, China will have two alternatives. It can allow the banks to work their way out of their bad loans, condemning the domestic economy to probably a decade of little growth and extremely tight credit (high Chinese savings would alleviate this problem, but they will be trapped in the Chinese banks because the authorities foolishly do not allow Chinese citizens to invest abroad.) Alternatively, it can inject more or less its entire foreign exchange reserves into the domestic banking system in order to recover its bad debts, which would allow the Chinese economy to continue expanding, but at a cost of devastatingly high inflation from the additional money pumped into the system (the $100 billion plus of Chinese bank initial public offerings carried out in 2006-07, pumped into the domestic economy, already appears to be worsening Chinese inflation and China Investment’s $130 billion will doubtless worsen the problem.)

We have seen societies with low economic growth, very high inequality (as China has now) and persistently high inflation; they are collectively known as Latin America. Since China also has much of the corruption that bedevils Latin America and its government lacks any genuine understanding of the free market and is increasingly dominated by special interests, it may indeed be fated to follow a Latin American growth path for the next few decades, with a tiny entrenched elite enriching itself at the expense of the disfranchised masses. That would be the worst possible outcome for the Chinese people, but it is not by any means impossible.

Many observers of the current US financial market downturn comfort themselves with the thought that the world now has more than one growth engine, and that China, with four times the US population, can because of its very high growth pull the world economy along sufficiently even when the US stalls. However, if China is about to incur the inevitable backlash from its recent debt and equity bubbles, during which practices have flourished that have no place in a well functioning free market, then we may be entering a world in which the two main growth engines of the last decade are both broken. Growth in such a world will be truly sluggish and inflation high, as the world struggles to cope with the effects of an excess of cheap money now grown toxic…

Those who say that the economy is better than perceptions of it are responding mostly to numbers showing how things are now. The pessimists are looking at what may be in the near future. The fundamentals haven’t changed much over the past several years, but general perceptions of the future, economic or otherwise, have gotten much more pessimistic. This is finding its way into the mainstream media. Articles like the following in the Washington Post would be hard to find a couple of years ago:

It's Not 1929, but It's the Biggest Mess Since

Steven Pearlstein

December 5, 2007

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from
President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond.

In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next.

With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.

It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

The fact that pessimistic talk is featured in the leading news outlets in the United States may be the best evidence that the plug is being pulled.

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