Signs of the Economic Apocalypse, 3-3-08

From SOTT.net:

Gold closed at 975.00 dollars an ounce Friday, up 2.9% from $947.80 for the week. The dollar closed at 0.6584 euros Friday, down 2.4% from 0.6744 at the close of the previous Friday. That put the euro at 1.5189 dollars compared to 1.4828 the Friday before. Gold in euros would be 641.91 euros an ounce, up 0.4% from 639.20 at the close of the previous week. Oil closed at 101.73 dollars a barrel Friday, up 3.0% from 98.81 for the week. Oil in euros would be 66.98, up 0.5% from 66.64 at the close of the Friday before. The gold/oil ratio closed at 9.58, down 0.1% from 9.59 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,266.39 Friday, down 0.9% from 12,381.02 at the close of the previous week. The NASDAQ closed at 2,271.48 Friday, down 1.4% from 2,303.35 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.51%, down 28 basis points from 3.79 for the week.

Gold and oil shot up again last week, with both rising about 3 percent against the dollar. Against the euro, gold and oil only rose about a half percent. Fed Chair Ben Bernanke is keeping the banks afloat by sinking the dollar. We’re only two months into 2008 and what a year it’s shaping up to be! The Dow is down about 1100 points for the year, close to ten percent and gold is up about 16 percent or more than 130 dollars an ounce. The bad trends seem to be accelerating and at some point we will reach the point of no return. The negative effects of the housing crash have only started to be felt and no one knows how long central bankers can keep the banks from failing.

The housing crisis in the United States is accelerating. In one startling sign, there are states where foreclosures outnumber housing sales:

In Parts of U.S., Foreclosures Top Sales

Floyd Norris

March 1, 2008

Mortgage foreclosure notices are going out so fast that in some states the number of new foreclosure proceedings each month is greater than the number of homes sold that month.

The foreclosure problem appears to be greatest in the West, particularly in Nevada, where home prices soared in the housing boom and are now falling rapidly.

Worries about foreclosures have led to a variety of legislative proposals in Washington and in state capitals, as well as to a voluntary plan organized by the Treasury secretary, Henry M. Paulson Jr., that seeks to delay foreclosures while homeowners and lenders try to work out agreements. But so far, no consensus has emerged on legislation, and the volume of foreclosure notices continues to rise.

During January, it was reported this week by RealtyTrac, there were 153,745 initial foreclosure notices sent out in the United States. That dwarfed the 43,000 total sales of newly built single-family homes and amounted to nearly half the total sales figure, which includes sales of existing homes and condominiums.

In the West, however, the picture was much worse. There the number of sales was barely higher than the number of foreclosure notices. It appears that in the most heavily affected states the sales totals lagged behind the number of foreclosure notices.

Moreover, the volume of foreclosures is especially high in some states. In California, RealtyTrac reports, nearly a quarter-million properties were subject to some legal action related to foreclosure in 2007. Not all those foreclosures were completed, of course, either because the process dragged into this year or because the homeowner managed to sell the house or come up with money to make the missed payments. But those foreclosure moves affected 1.9 percent of the living units in the state — or 1 in 52 homes.

California led the country in number of properties affected by foreclosure moves, but was only fourth in terms of the percentage of homes affected. Nevada led in that dubious category, with 3.4 percent — or 1 in 30 — of the housing units affected. It was followed by Michigan, which missed out on the housing boom but is playing a large role in the bust, and by Florida, which like Nevada experienced a wave of speculative building amid rapidly rising prices.

Those foreclosures, of course, represent dislocation for the homeowners being forced out of their homes and losses for the lenders. But they also represent an alternative supply of homes for buyers, providing competition for other sellers.

That can be particularly true because sales of homes that have been foreclosed, or are about to be foreclosed if they cannot be sold quickly, are made by sellers who are in no position to wait for better prices. Those sales can help to push prices lower for everyone.

For new-home builders, one result has been growing inventories of completed homes without buyers. The number of such houses across the country hit a record 197,000 in December, and slipped only to 195,000 in January, the Census Bureau reported this week. Moreover, the median age of such houses is up to 6.7 months, nearly twice the age of such houses when the housing market was peaking in the fall of 2006.

The states with the lowest rates of foreclosures tend to be states that missed the boom in housing prices and now have reasonably good economies. In South Dakota, there were only 50 homes involved in foreclosures last year, a minuscule 0.007 percent of homes in the state. Vermont, Maine, West Virginia and North Dakota also turned in rates below 0.1 percent.

Houses are being abandoned and vacant houses dot formerly prosperous neighborhoods.

Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns

Brian Louis and Dan Levy

Feb. 29 (Bloomberg) -- When Quinn Cuthbertson looks around his new neighborhood in El Dorado Hills, California, he sees rows of empty homes and barren hillsides. A promised new school and a clubhouse haven't materialized.
Cuthbertson paid $460,000 for a four-bedroom house in this northern California town named for the mythical golden city. He now suspects his neighbor spent $45,000 less. Nearby, 87 of 98 Toll Brothers Inc. home sites are undeveloped.

Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973. Partially completed developments reduce revenue for cities and towns and hurt businesses, said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. Rising foreclosures and falling property values may cut tax revenue by more than $6.6 billion for 10 states, including New York, California and Florida, the U.S. Conference of Mayors said in a November report.

“Half-filled developments are an advertisement for a failing housing market,” said Retsinas, a former assistant secretary for housing at the U.S. Department of Housing and Urban Development. “It also has a spillover effect on the surrounding community.”

Falling Prices

About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data.

In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million.

Home prices may fall at least 8 percent nationwide and by as much as 26 percent from the third quarter of 2007 before hitting bottom, according to a Feb. 13 report from New York- based Deutsche Bank AG analyst Karen Weaver, the firm's global head of securitization research.

El Dorado Hills and the nearby towns of Bass Lake and Cameron Park started growing in the mid-1990s as Californians sought out new suburbs within commuting distance of Sacramento, the state capital. El Dorado Hills is about 30 miles east of Sacramento and used to be known as just a bus stop between the San Francisco Bay Area and Lake Tahoe resorts.

El Dorado's Growth

“Thirty years ago, El Dorado Hills was a Raley's and a 76 gas station, and some homes off in the hills,” said Mike Applegarth, a senior administrative analyst in the El Dorado County chief administrative office. Raley's is a grocery store chain based in West Sacramento, California.

Today the town has a Target Corp. store, a Mercedes-Benz dealership and a Regal Cinemas with 14 screens, Applegarth said.

Most of the community's growth came in the late 1990s when the El Dorado County Board of Supervisors gave approval for construction of 11,598 homes as part of five development agreements, said Laura Gill, the county's chief administrative officer.

Lennar Corp., Centex Corp., Cambridge Homes and Parkland Homes plan to build 1,500 houses on 990 acres in El Dorado Hills in the Blackstone El Dorado development south of Highway 50, according to the project's Web site. So far, Centex has built 30 of the 105 houses it plans to construct there, said salesman Bob DeWitt.

Building permits in El Dorado County are estimated to drop to $3.5 million in the fiscal year ending June 30, from a peak of $5.7 million in fiscal 2004, Gill said.

Cutting Prices

In Yorkville, Illinois, a town 55 miles southwest of Chicago, residential building permits fell 47 percent in 2007 from the year earlier.

In El Dorado Hills, Cuthbertson, a California Highway Patrol officer who has two sons ages 4 and 6, plans to stay in the area, and says he can afford to wait for prices to recover.

“We'll wait to see what the neighborhood will be like,” Cuthbertson said. “We know prices might be going down, but in five years we'll be OK.”

Homebuilders can't wait. They're cutting prices even further than last year and some are courting real estate brokers and using auctions to get rid of homes. They usually rely on their own staff to sell properties.

Builders Retrench

“It's a desire for the companies to do whatever is necessary to retrench and put themselves in a position to succeed when the residential markets turn more favorable,” said Keven Lindemann, director of the real estate group at SNL Financial in Charlottesville, Virginia.

The five largest U.S. builders had almost 8,900 completed homes for sale at the end of their most recent quarters, according to data compiled by Bloomberg.

D.R. Horton Inc., the second-biggest U.S. builder, held an “UnAuction” on Feb. 16 and Feb. 23 with prices cut as much as 50 percent at 23 developments in Southern California.

Pacific West Cos., a Reno, Nevada-based builder, said this month that it's offering a “risk free” price guarantee to buyers in its California communities, including El Dorado Hills. If a similar property in the same development sells for less than a homeowner paid, the company will refund the difference.

‘Element of Fear’

“We’re taking the element of fear away,” said Taylor Cohee, Pacific West’s vice president of sales.

Builders such as Los Angeles-based KB Home and D.R. Horton of Fort Worth, Texas, are seeking out real estate agents to bring buyers to developments, said Joellen Chappell, sales manager at Century 21 M&M and Associates in Stockton, California. Century 21 realtors are now getting commissions of as much as 4 percent for a sale.

“They’re bribing us with bonuses,” Chappell said.

Stockton’s metropolitan area had the second highest foreclosure rate in the U.S. last year and again in January. Almost 5 percent of households in that community were in some stage of foreclosure in 2007, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data.
At least 14 new-home auctions are scheduled through April in California, Florida, Illinois, Arizona and Nevada, said Brigitte Boudress, a Beverly Hills, California-based spokeswoman for Kennedy Wilson Inc.

Moving Inventory

“The builders are looking for ways to accelerate sales and get inventory moving,” said Marty Clouser, senior vice president at Kennedy Wilson. The company auctioned 450 properties last year for $170 million at prices 85 percent to 90 percent less than the homes’ listings, Clouser said.

The decline in housing values is reducing the amount of revenue that counties make from property taxes, said Jacqueline Byers, director of research and outreach with the National Association of Counties in Washington. In states like California that require builders to use sales proceeds to pay for streets, fire stations and schools, that means slower development.

Brent Sease, who bought a five-bedroom home built by Miami- based Lennar in El Dorado Hills, said a park and school that were supposed to be constructed are at least two years from being completed. Across the street, red tags that say “Available” are pasted on two houses.

“That’s the thing I’m concerned about,” said Sease, a software manager with three daughters. “It’s going to be a while before they put all that in, because they’re not selling homes.”

It’s getting to the point where once pristine suburbs are turning into slums:

The Next Slum?

Christopher B. Leinberger

The Atlantic Monthly, March 2008

The subprime crisis is just the tip of the iceberg. Fundamental changes in American life may turn today’s McMansions into tomorrow’s tenements.

Strange days are upon the residents of many a suburban cul-de-sac. Once-tidy yards have become overgrown, as the houses they front have gone vacant. Signs of physical and social disorder are spreading.

At Windy Ridge, a recently built starter-home development seven miles northwest of Charlotte, North Carolina, 81 of the community’s 132 small, vinyl-sided houses were in foreclosure as of late last year. Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in. In December, after a stray bullet blasted through her son’s bedroom and into her own, Laurie Talbot, who’d moved to Windy Ridge from New York in 2005, told The Charlotte Observer, “I thought I’d bought a home in Pleasantville. I never imagined in my wildest dreams that stuff like this would happen.”

In the Franklin Reserve neighborhood of Elk Grove, California, south of Sacramento, the houses are nicer than those at Windy Ridge—many once sold for well over $500,000—but the phenomenon is the same. At the height of the boom, 10,000 new homes were built there in just four years. Now many are empty; renters of dubious character occupy others. Graffiti, broken windows, and other markers of decay have multiplied. Susan McDonald, president of the local residents’ association and an executive at a local bank, told the Associated Press, “There’s been gang activity. Things have really been changing, the last few years.”

In the first half of last year, residential burglaries rose by 35 percent and robberies by 58 percent in suburban Lee County, Florida, where one in four houses stands empty. Charlotte’s crime rates have stayed flat overall in recent years—but from 2003 to 2006, in the 10 suburbs of the city that have experienced the highest foreclosure rates, crime rose 33 percent. Civic organizations in some suburbs have begun to mow the lawns around empty houses to keep up the appearance of stability. Police departments are mapping foreclosures in an effort to identify emerging criminal hot spots.

The decline of places like Windy Ridge and Franklin Reserve is usually attributed to the subprime-mortgage crisis, with its wave of foreclosures. And the crisis has indeed catalyzed or intensified social problems in many communities. But the story of vacant suburban homes and declining suburban neighborhoods did not begin with the crisis, and will not end with it. A structural change is under way in the housing market—a major shift in the way many Americans want to live and work. It has shaped the current downturn, steering some of the worst problems away from the cities and toward the suburban fringes. And its effects will be felt more strongly, and more broadly, as the years pass. Its ultimate impact on the suburbs, and the cities, will be profound.

Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025—that’s roughly 40 percent of the large-lot homes in existence today.

For 60 years, Americans have pushed steadily into the suburbs, transforming the landscape and (until recently) leaving cities behind. But today the pendulum is swinging back toward urban living, and there are many reasons to believe this swing will continue. As it does, many low-density suburbs and McMansion subdivisions, including some that are lovely and affluent today, may become what inner cities became in the 1960s and ’70s—slums characterized by poverty, crime, and decay…

Not surprisingly, consumer confidence continues to plummet.

U.S. Michigan Consumer Index Falls to 16-Year Low

Courtney Schlisserman

Feb. 29 (Bloomberg) -- U.S. consumers lost confidence in February as the labor market cooled and inflation picked up.

The Reuters/University of Michigan final index of consumer sentiment decreased to 70.8, from 78.4 in January. The measure is the lowest final reading since February 1992 and compares with a preliminary measure for February of 69.6 reported two weeks ago.

The first drop in employment in more than four years last month and higher gasoline prices are causing Americans to take a dimmer view of the economy and their own financial situations. Federal Reserve Chairman Ben S. Bernanke earlier this week signaled the central bank is prepared to lower interest rates further to keep the economy out of a recession.

The decline in confidence “points to slowing spending going forward,” said Dana Saporta, an economist at Dresdner Kleinwort in New York, who forecast a final reading of 70.5. “The combination of tighter credit conditions, falling home prices and an uncertain labor market argue for little or no spending growth until the tax-rebate checks come in, around mid- May.”

Economists had forecast the measure would fall to 70, according to the median of 55 projections in a Bloomberg News survey. Estimates ranged from 67.8 to 73.
The final Reuters/University of Michigan consumer confidence report for the month reflects about 500 responses, compared with the 300 households for the preliminary survey, which was released on Feb. 15.

The monthly gauge averaged 86.1 last year and has weakened in six of the past seven years since peaking at 112 in January 2000…

Jobs Report

The U.S. lost jobs for the first time in four years last month. The Labor Department is scheduled to release February’s employment report on March 7.
This month, weekly initial jobless claims have remained elevated and the number of Americans continuing to stay on benefit rolls reached the highest level in more than two years, signaling that weakness in the labor market continues.

Outside of the labor reports, other releases are showing weakness in the housing market is spreading to other parts of the economy. Orders for U.S. durable goods fell 5.3 percent in January, the Commerce Department said Feb. 27, signaling businesses are cutting spending.

Higher energy and food bills also are hurting consumers’ outlooks and contributing to them having increasingly less to spend on discretionary items. The price of regular-grade gasoline rose to an eight-month high of $3.152 on Feb. 26.
Consumers already are scaling back spending. Spending adjusted for inflation was unchanged in January for a second consecutive month, the Commerce Department reported today.

Target Corp., the second-largest U.S. discount chain, said earlier this week that revenue rose 0.8 percent in the quarter ended Feb. 2. Executives on a conference call said sales in the first half of this year would trail the latter part of 2007.

Where is this leading? SOTT.net’s banking expert, Simon Davies, posted in these pages last week an excellent and chilling description of coming collapse of the world financial system. The bottom line, according to Davies, is this:

The collapse of the international banking system is imminent. For the elite it will be a bonanza while for the rest of us it spells a return to servitude in a feudal society.

The article is a must read not only for the larger context but also as an analysis of the Northern Rock crisis in the U.K. But what’s really chilling is the larger picture and its implications for those of us who work.

…The issue is one of confidence in the banking system which can reasonably be measured by the willingness and ability of banks to lend to each other. The fact is that in September 2007 the banks simply stopped lending to each other. In plain English the banking system stopped and very nearly collapsed. It was this fact and no other that led the UK government to step in and rescue Northern Rock.

No doubt they were persuaded that it was a fine idea by the coterie of bankers that stepped forward to advise them. Bankers who had everything to lose if the government did not step in where the UK and international banking system was unable and/or unwilling to lend to Northern Rock directly or at least without a direct government guarantee.

This begs the question of what was wrong with the UK and international banking system in September 2007 and has anything changed?

The Global situation

The Sub-prime crisis originated in the US, its contagion spreading through the global financial system. Despite what the mass media has to say on the topic the real issue isn’t whether poor Americans are defaulting on their mortgages; the issue is the pyramid of structured financing companies, repackaging companies and their plethora of bonds, notes and other financial instruments, not to mention the vast array of structured derivatives that make it nigh impossible for anybody to assess the real financial performance of those entities, securities and derivatives.

In a nutshell none of the banks know just how broke the others are.
The fact is that the Federal Reserve assisted by other central banks including the Bank of England and the European Central Bank deliberately engineered the greatest expansion of credit in history by pumping vast sums of money into the banking system.

…The game could continue, like musical chairs, until something caused the music to stop. Except, unlike musical chairs where one person doesn’t have a chair, in this game almost nobody has a chair and the players know it. The Sub-prime crisis caused the music to falter and the players ran for their chairs.

The banks got caught in the trap of their own and the regulator’s making. They have had to bring the value of many of these complex financial instruments back on to their books, prop up their offshore structure investment vehicles and make substantial provisions for the most obvious losses. The reason it became a crisis is that the banks stopped lending to each other and the system relies on them doing that.

Why did they stop lending to each other?

Because they each know how bankrupt the system is and how the game has been played and they are desperately trying to make sure they get one of the few chairs if the music stops completely. They panicked and the system shuddered.

At this point the regulators stepped in and basically wrote blank cheques to keep the banks afloat. It is the desperation of this central bank support that we are seeing in the Northern Rock case.

Davies then connects some dots, specifically “repos” and the Fed’s decision to stop publishing M3 numbers and concludes:

It would seem that the Federal Reserve has created for itself and its banking collaborators a means of secretly supporting banks that are in fact insolvent. This is immoral but absolutely necessary if the international banking system is to be kept alive.

Deliberate Policy?

I’d now like to examine more closely this massive, Central Bank engineered, expansion of credit.

Central Banks literally create money, fiat currency, at their whim. When they do this the supply of money goes up. If this supply mirrors the real activity in an economy such as the production of gold, other metals and commodities, the construction of real property etc., then the expansion in "money supply" equals the expansion in "assets". On this basis the price of those assets would remain level as a new dollar would only be created to match the creation of a new dollar’s worth of something.

As we can all vouch this has not been the case, the price of almost everything has risen dramatically. Nowhere has this been more apparent than the stupendous inflation in house and commodity (metals, oil, grain, rice etc.) prices. In day to day terms this means that the price of the things we must have (homes, transport, communication, energy, food, medicine) have risen substantially. This has been due to this fact that far more money has been created than the value of real things produced. More money chasing relatively few goods and assets results in inflation.

…All this is a deliberate policy. If you stand back it’s all rather obvious:

- bankers create new money out of thin air

- it’s essentially valueless but we all use it and have no choice

- we provide our REAL labour in exchange for this valueless "money"

- we enter into binding legal contracts to pay for "life" by borrowing large amounts of this "money". In effect we agree to provide our future labour in exchange for more of their "money". We have to do this to buy our homes, our cars, our foods, everything

- By making the "money" worth less and less the bankers force us to provide even more of our real labour to get the same things that cost us less labour in the past. In effect they push down the value of our labour without our consent

- The quality of what we buy goes down so that nothing lasts and we have to keep replacing it; hence demanding even more of our labour.

- However, we acquiesce as we believe we have no choice.

The end result is that we are effectively slaves; not bound by chains and shackles but by debt. Debts of money that the system has created out of nowhere but we have to pay back with our very real labour. The legal system, credit card system, banking system - the whole system - is set up to enforce this form of indenture, this form of servitude.

We are serfs in the New Feudal World Order.

Not many people recognize it for what it is yet. But they will do very soon, it is to this that we should now turn.

Banking system collapse

When banks collapse, as they did in 1929, the entire economy collapses with them. Savings are lost (money becomes worthless), jobs are lost and only those things that are essential to survival become important and even they can become impossible to obtain and people starve. However, pay attention here: two things do not change, 1) the debts that are owed remain and 2) the assets they financed, for the most part, remain. To the extent that debt was used not to buy real things but rather for financing a certain "lifestyle", then just the debt remains with no assets connected to that debt.

These debts are legally enforceable and are historically enforced by the full weight of the law; truncheon, taser, 9mm and all. That means that you lose everything - all your assets, everything - to repay loans for money created by bankers, worth nothing in reality, but used by you to finance a certain "lifestyle" (buying an overpriced house or vehicle, take vacations, send the kids to private schools, dance lessons, etc) or perhaps just to survive.

When banks collapse, at the extreme, there is no money available. This was deliberately engineered by the Federal Reserve in 1929 as they withdrew huge sums from the banking system and only partially reversed under the New Deal. In 1929, with less money and fewer jobs even those still in employment were paid less and less until the banks seized the assets that the debt was secured on. Homes, farms, businesses, all were seized by the banks. Even seemingly large companies were bankrupted and seized by the bankers and their friends.

Conclusion

It is my conjecture based on the data I have collected that we are being set up for a total financial system collapse. The UK government has been persuaded by bankers to keep the system alive for a while longer, an act of great folly but one so well engineered that no politician could fail to fall into the trap.

The Federal Reserve would seem to be illegally and secretly supporting the US banks in a similar way.

The rich are getting richer not through the rise in value of their assets but because they are pulling vast amounts of cash out of the system and using it to buy more and more real assets while the poor are getting poorer and everyday more people join their ranks as they desperately struggle to maintain a quality of life that is advertised via the media as the "right" of all.

Certainly, one would not consider owning a home, a car, or feeding one’s family a "quality of life" but the elite do. From the elite’s point of view, all the masses deserve is a hovel and rags, just as long as you can work.

When the system is finally allowed to collapse we will all find ourselves stripped of those things we thought we owned. We will lose our homes, our savings (if we even have any), our jobs (in the most part) and much else besides. The money system will collapse.

At this point we will be offered a deal:

- You can remain in your house but it will be owned by a central housing company.

- Your will work at a designated job and credits for that work will be used to pay the housing company for you accommodation.

- You will travel by company owned transport within your local area only.

- You may not travel nationally or internationally unless you have enough credits and are approved by the system.

- Your children will be educated in company controlled schools the way we want them to be educated.

- You will eat food that the company will provide you with using your credits regardless of whether or not this is the diet you prefer.

- You may not question the content of your food; we will add as many chemicals as we see fit to ensure the shelf life of the food.

- You will get what healthcare is available to you depending upon your credits and your behaviour. If you do not behave as we tell you to, you will get no healthcare.

- Nobody will survive outside this system.

What can we do? First, gather real knowledge. Then, work on creating a true will that can act upon that knowledge. Why? The elite must be preparing the lockdown as an antidote to chaos that they can see coming. (What type of chaos? This, for example.) Non-linear dynamics teach us that in chaotic periods of transition from one stable state to another, seemingly small actions can tip the balance and have profound effects on the new stable state.