Signs of the Economic Apocalypse, 8-18-08

From SOTT.net:

Gold closed at 791.70 dollars an ounce Friday, down 9.2% from $864.80 for the week. The dollar closed at 0.6813 euros Friday, up 1.8% from 0.6691 at the close of the previous week. That put the euro at 1.4677 dollars compared to 1.4944 the week before. Gold in euros would be 539.42 euros an ounce, down 7.3% from 578.69 at the close of the previous week. Oil closed at 113.71 dollars a barrel Friday, down 1.3% from $115.20 at the close of the Friday before. Oil in euros would be 77.47 euros a barrel, up 0.5% from 77.09 for the week. The gold/oil ratio closed at 6.96 Friday, down 7.9% from 7.51 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,659.90 Friday, down 0.6% from 11,734.32 at the close of the previous Friday. The NASDAQ closed at 2,452.52, up 1.6% from 2,414.10 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, down nine basis points from 3.93 for the week.

The fall of gold accelerated last week with gold falling 9% against the dollar last week and 16% over the past two week. Commodities in general have been falling. We seem to be seeing the bursting of the commodities bubble due to the view that the world economy has not yet “decoupled” from the United States.

Gold, Oil Slump, Leading Commodities Plunge to Four-Month Low

Feiwen Rong and Chanyaporn Chanjaroen

Aug. 15 (Bloomberg) -- Gold plunged below $800 an ounce, heading for the biggest weekly slide in more than 25 years, and oil, wheat and sugar slumped as the dollar's rebound reduced the appeal of commodities after a six-year boom.

The Reuters/Jefferies CRB Index of 19 commodities tumbled as much as 2.7 percent to 379.07, the lowest since March 20, as silver, soybeans and corn lead the drop. A rally this month in the U.S. currency has curbed the appeal of dollar-priced raw materials as a hedge against inflation, and demand for commodities may be hurt as an economic slowdown spreads.

Commodities, measured by the CRB, are down 20 percent from a record July 3, descending into a bear market. Declining raw- materials prices may help ease global inflationary pressures after consumer prices in the U.S. accelerated 5.6 percent during the year to July, the biggest jump in 17 years.

“There will be a precipitous slowdown in global growth and that means a lot less demand for things like energy and base metals,” said Michael Pento, a senior market strategist at Delta Global Advisors in Huntington Beach, California. “It would be insane to step in and buy oil or metals now. These markets will be vulnerable for the next four of five months.”

Sixteen of 19 commodities in the CRB declined this month, after the index plunged 10 percent in July, the biggest such drop in 28 years. Only wheat, cattle and nickel are up in August.

Commodity Peak

“Prices have made a peak,” said Marc Faber, who forecast in June that commodities would start to fall. “Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower,” he said by telephone today from Chiang Mai, Thailand.

Gold futures fell as much as 4.5 percent to $777.70 an ounce, the lowest since Nov. 20 on the Comex division of the New York Mercantile Exchange. Gold fetched $788.60 at 12:56 p.m. A close at that price would leave the precious metal down 8.8 percent, the biggest weekly decline since February 1983.

Silver lost as much as 14 percent, dropping to the lowest price since Sept. 5.
“There's a perception that demand for commodities might be weakening,” David Jollie, editor of Johnson Matthey Plc's publication on platinum-group metals, said today by telephone from Royston, England. “North America and Western Europe are struggling, but the emerging economies remain strong.”

Gasoline Demand

Crude oil for September delivery dropped as much as $3.67, or 3.2 percent, to $111.34 a barrel on the Nymex, and traded at $111.86 at 12:59 p.m. Gasoline demand was down 2.1 percent in the first seven months of the year as record prices and slower economic growth cut consumer spending, the American Petroleum Institute said Aug. 13.

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, a report showed yesterday. According to a UBS AG report published Aug. 6, the world is “precariously close” to a recession in 2009.

“It's not just a U.S. problem, it's a global problem, and it's taking its toll on commodities,” said Peter Luxton, an energy analyst at Informa Global Markets. “What's happening elsewhere is starting to take its toll.”

U.S. Output

There are signs of a pickup in the U.S., the world's largest economy. Industrial production unexpectedly rose in July, helped by gains in automobiles, metals and machinery, the Federal Reserve reported today.

Demand for autos increased for a third month, reflecting a continued rebound from a strike at an auto-parts supplier. Gains elsewhere signal demand from overseas continued to boost orders even as U.S. consumer and business spending weaken.

Crude oil will probably fall below $100 within weeks, nearing the $90 threshold that would trigger a production cut by the Organization of Petroleum Exporting Countries, according to Alfa Bank. OPEC, the supplier of more than 40 percent of the world's oil, is scheduled to meet in Vienna on Sept. 9 to review production targets.

“OPEC will likely defend $90 a barrel or higher,” Alfa analysts led by Ronald Smith in Moscow wrote in an e-mailed report today. “OPEC will remain firmly in control of the oil market for at least the next decade.”

Investment Flows

Assets linked to commodity indexes have almost quadrupled to $297 billion as of June, from about $76.7 billion in January 2006, according to an estimate by Lehman Brothers Holdings Inc. Some investors buy commodities as a hedge against inflation and against declines in the dollar. The CRB index jumped to a record last month as the U.S. currency slumped to an all-time low against the euro.

A “buying orgy” in commodities was inflating prices and increasing the risk of a collapse, Paul Touradji, founder of Touradji Capital Management LLC, said in March.

Gold may rebound from the latest slump and rally through 2010 as fabrication demand rises and on expectations that the dollar will resume its slide against the euro, Citigroup Inc. said. It forecasts an average price of $950 next year and $1,000 in 2010.

“Longer term, we would not be surprised to see gold double,” the bank's analysts John Hill and Graham Wark wrote in a report. “We would be aggressive buyers at current levels expecting gold to work higher through 2009/10.”

It is interesting that Citigroup sees a stong rise in the price of gold in the future despite the sharp drop in recent weeks. George Ure agrees and explains the paradox by referencing hedge funds:

The Great De-Levering, Redux

As I explained on Tuesday, my friend who has written a book has explained in great detail how something called "The Great De-Levering" is taking hold in the world, so as you look at the price of gold which has crashed well under $800 an ounce this morning, it's neither a time for fear, or a time for panic. What's missed by the conspiracy minded is that there has been a tremendous build-up of excess financial leverage in the global economic system and it's in the process of all coming unraveled.

In the detailed explanation this week, the plot line simplifies to this:

· There are 9,000 hedge funds. Virtually all of them are over-leveraged to one extent, or another. They control something on the order of $500-trillion in synthetics, but some of that is double and quadruple-counted, so let's say only $250-trillion.
· So all it takes is one hugely run up asset class to suffer a short-term decline and two things happen:

o Those with over levered positions are forced out immediately.
o Those who try and hang onto positions find their balance sheets have been devalued. What might have been a $50 million position with gold at $1,000 an ounce today is down to a shade over $39-million.

· When the decline is asset values hits the top line of a hedge fund, their can quickly go from hugely profitable to horrible losses.
· These loses then trigger additional selling of assets in an attempt to stem the bleeding on the P&L
· Which then drives down other asset classes....and so forth.

As a result, with The Great De-Levering underway, if my serious money-managing friend is right, we should see the propagation of losses across almost all asset classes. Let's check the headlines and see how things are going as the week winds up, shall we?

· Gold falls more than 3 percent overnight. No surprise there.
· Silver, part of the same asset class dropped even more, down to $12.95 an ounce (update quotes at top of page).
· Oil is another asset class that could be expected to drop. Sure enough, we now read that "Oil seen dropping under $90 by Year End" in a headline. The headline in this morning's WSJ online report "Oil Falls on Economic Worries" while accurate, doesn't mention that the real driver is the Texas Hold-em Poker game being played as the 9,000 hedge funds play masters of the universe and try to hang on to be one of what my friend thinks will be only 3,000, or so, left by the end of the game.
· Headlineslike "Oil falls below $114 on slowing economies" only gets to part of the answer. Yes, a global recession/depression is bad, but remember energy is an asset class that's de-leveraging, too.
· Homes? Because of the mess in home financing, the sales of homes has fallen to a 10-year low. Well, oh duh. What were you expecting? This is a global (as in circularly referenced) economy. A sneeze here is a sinus headache there, and first thing you know, heart attacks are propagating. So much so that Mr., Bulbblator, former Fed Deity Alan Greenspan is saying now maybe the housing market won't bottom until next year. Now who woulda thought?

To be sure, there are a few asset classes which have done better than others. Wheat's outlook is mixed, so it has been in a rally for a few days, but it's not so much that wheat demand is up (it is) or that the world is running out of food (it is)( or that topsoil is disappearing (it is) and that Prince Charles is right about genetically modified foods posing a planetary health risk (they are).

Nope, the reason that grain has been in a short counter-trend rally here is what? The ultra-lemming behavior of the fund managers who play the game of financial pile-on even more tightly regimented that mindless 401(k) retail "investors".

…A colleague of mine called from Chicago yesterday to ask a simple enough question:

"George, we see the worst inflation numbers in 17-years, food is running on empty, there's a threat of global war which could go global, and all these other pressures -- so why isn't the price of gold going through the roof and making us rich?"

I then patiently explained that we live in a country which has been hijacked by a bad craps game involving hedge funds. Just for example, the big money boyz want Hillary so badly that she's now weaseled a her way into a nomination slot. Big money is throwing all kinds of dough her way because she'll socialize more losses and privatize more gains. What part of the picture is not clear? America has been hijacked by high rollers. How many times did Americans have to say "No Hillary!" and still we're being over-ruled by the hand-outs from the Fat Cats. What isn't clear?

The Fat Cats are also angling to get another War going as soon as they can because that will help their version of "the economy" by boosting defense spending. Which is why Condi Rice and a large naval armada are talking peace but really angling for regional conquest along Russia's southern border. Meantime, the Polish "defense shield" deal has been signed.

This puts a US/Western missile program about 300-miles from the Russian border and right next door to Belarus. How would you feel if the Russians angled to put a missile project in Edmonton, Alberta? That's how close we're talking. So no wonder Russia is pissed.
--
In this morning's email I received this:

"I’m a journalist for a Belgian business magazine. I read your comments on your discussion with your friend in the hedge fund business who is about to write a book

At one moment you say ‘Before Thanksgiving I might take a position long gold/commodities in the light of the discussion… because some serious money could enter this trade’ or something like that.

Before that the whole discussion was about the deleveraging of the hedge fund business acting in lock step (black boxes).

My question is, why wouldn’t the opposite happen ? May be they have too much leveraged positions in gold/commodities.

Can I quote you on the answer ?"

'K, point by point: My friends book is done - ready for print - he's just looking for an agent because he's too busy managing a fund with more zeros than I can count to mess with publishing it himself.

I guess my 'quotable answer" would be this: "Markets always go to extremes. At some point, the price of gold and silver will likely be oversold. The world is also a very dangerous place and we have the potential in Ossetia, Kashmir, and Bushir for direct conflict involving nuclear weapons. I expect one of these two thresholds will be passed before year's end, perhaps before November 1st. A flight to safety from war, or just the mechanics of being oversold might be playable, so I may try.

Once there, because hedge funds are so lemming-like, I a major short-term move up in the metals and that's when I might be in one last leveraged move which would precede a move to government bonds held directly because the middlemen (banks) have become shaky and untrustworthy as I read it. Having a 'split portfolio' of part gold/silver balanced against cash/government bonds held directly, seems to me a reasonable way for a small investor to cover both the possibility of hyperinflation on the one hand and massive deflation on the other.

The game is not about making a killing. It's about not getting killed.

We might add that it is not a game.

No doubt the easing of commodity inflation and the increase in industrial production in the U.S. is good news. The problem is that the root cause of the recent distress, the collapse of the housing market, shows no sign of letting up.

Bank seizures of US homes reach record high

Andre Damon

16 August 2008

Banks repossessed almost three times as many American homes last month as in July of 2007, while foreclosures jumped 55 percent over the same period, according to a report issued Thursday by RealtyTrac, a California-based seller of foreclosure data.

More than 272,000 properties, or one for every 464 US households, were in “some stage of foreclosure” last month, according to the report. The number of foreclosures in July jumped 8 percent to 272,171 from June, slightly lower than the record 273,001 foreclosures in May.

Even these staggering figures represent an “artificial depression” in foreclosures, Rick Sharga, a RealtyTrac vice president, told Bloomberg News, due to the fact that a number of states—including New York and California—implemented foreclosure moratoriums last month. Most of the affected properties will go into foreclosure in later months, Sharga said.

Bank repossessions grew significantly as a percentage of all foreclosure activity, “posting a 184 percent year-over-year increase, compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices,” according to James J. Saccacio, CEO of RealtyTrac.

When foreclosed properties fail to sell at county auctions, they are repossessed by banks pending their sale. Bank repossessions constituted only 16 percent of foreclosure activity a year ago, but they now make up some 28 percent, according to the report. While banks owned 224,000 foreclosed properties in 2006 and 445,000 in 2007, they owned 775,244 through July of this year.

The sheer mass of foreclosed homes is depressing real estate markets and steeply driving down prices, leading to more foreclosures. Foreclosed properties now represent approximately 17 percent of the inventory of existing homes for sale, according to the RealtyTrac report.

US Treasury Secretary Henry Paulson said two months ago that 1.5 million foreclosures started in 2007, and that as many as 2.5 million could begin in 2008. But, by all indications, even these figures constitute only a fraction of the homes yet to be foreclosed.

Some 6.5 million US properties are set to fall into foreclosure by the end of 2012, according to a report circulated last April by Credit Suisse. Some 12.7 percent of mortgage borrowers, or 8.4 percent of all US homeowners, stand to lose their properties in the next five years, according to the report.

Credit Suisse expects that housing prices will fall by ten percent in 2008 and five percent in 2009, precipitating what it refers to as “a wave of foreclosures.” It further predicts that some 63 percent of subprime borrowers will have negative equity by 2009, compared to only about 30 percent last year.

Nearly one third of Americans who bought homes since 2003 have negative equity—that is, they owe more on their homes than their current value—according to Zillow.com, a property valuation company. Zillow also found that 45 percent of those who bought at the peak of the housing market in 2006 are under water.

Home values have fallen 15.8 percent in the year to May, according to the S&P Case-Schiller index, which tracks home values in 20 major cities. Moreover, nearly one quarter of home sales in the past year were at a loss to the sellers. Such circumstances raise the incentives to foreclose, driving property values lower and precipitating a downward economic spiral.

Zillow also found staggering negative equity rates in cities most affected by the housing downturn. Four cities in California—Stockton, Modesto, Merced, and Vallejo-Fairfield—had more than 90 percent of homeowners underwater. Five more cities had negative equity percentages of more than 80 percent. Half of the sales in Stockton and Modesto were foreclosed properties, compared to 15 percent nationwide.

Figures released this week by the National Association of Realtors are similarly bleak. The association found that existing home sales fell to their lowest levels since 1998, falling six percent in the past year alone. The report also notes that the median price among single-family homes fell by almost eight percent in the past year, from $223,500 to $206,500.

California cities were among the worst hit. Home values in Sacramento, the state’s capital, fell by 36 percent in the past year, while those in Riverside/San Bernadino fell by 32.7 percent and in Los Angeles fell 30 percent.

These cities, consequently, had among the highest foreclosure rates, with more than one in every 90 homes in some stage of foreclosure during the month. All in all, one in every 182 California homeowners received a foreclosure notice in July.

Cape Coral-Fort Meyers, Florida had the highest metro foreclosure rate in the country, with one in every 64 households receiving a foreclosure filing in last month.

In addition to fueling a massive social crisis, the vicious cycle of falling home values and foreclosures will drag down economic growth and fuel unemployment, as the US ruling class seeks to purge the excesses out of its financial system by writing down billions of dollars in bad debt.

While throwing open the Federal Reserve Board and the US Treasury to Wall Street speculators, the government has done next to nothing to assist the millions of people having their lives uprooted. The housing bill recently passed by Congress assists at most 400,000 homeowners, representing only six percent of the 6.5 million people estimated to fall into foreclosure by 2012.

The time for payment of debts due and the restoration of stolen property has come.

The Fire This Time. The Republicans and the Economy

David Michael Green

August 9 / 10, 2008

Any American who’s been on the planet for more than a few years has lived through a series of economic ups and downs – what economists call the business cycle. These booms and busts seem to follow one another as inevitably as sunset does sunrise.

Phil Gramm hasn’t apparently noticed, but we’re now pretty deep into an economic downturn – whether or not it officially qualifies as a recession yet or is simply on the way to becoming one.

But two things are especially striking about this particular iteration of our economic malaise. One is that we never quite seem to have had the boom we were supposed to get in between this bust and the last one. Gross domestic product, the key single indicator of economic health used to measure the state of the economy, has done reasonably well since the downturn that began in 2000. So has the stock market, and so, especially, have the one percent or so of the richest Americans, who have lately transitioned from being ridiculously rich to obscenely rich.

Most of the rest of us, on the other hand, may be excused for wondering when the good times hit, ‘cause we somehow missed it. It’s funny (hah-hah, right?), but in the go-go late 1990s, some economists were wondering whether Alan “The Second Coming” Greenspan and Robert “Token Wall Street Pseudo-Democrat” Rubin hadn’t actually killed the business cycle forever, with only good times to come for generations on end. Ironically, the subsequent decade may be considered to have posed the same question, only with a very different meaning. Given the absence of any serious recovery content in the latest alleged recovery, maybe the business cycle is dead – only not with permanent boom, but permanent bust, instead.

In truth, though, we may come to look upon years like 2004 or 2005 as the good ol’ days. That’s because the second unique thing about the present downturn is the depth of down to which we may now be turning. I’m sure somebody was relieved when George Bush recently informed the country that the economic fundamentals are solid, but it sure wasn’t me. Hard as it is to imagine that this president could get something wrong or speak, uh, somewhat less than candidly, my fear is that conditions are quite the opposite of those the cheerleader-in-chief portrayed. I remember well the recessions of the 1970s, 1980s and 1990s. This one doesn’t feel anything like those. It seems a lot bigger. My fear is that the bottom may be falling out. My fear is that it’s the fire this time.

I’m not an economist (not that economists so very often know what the hell they’re talking about either), so I will readily admit that I don’t have a lot of expertise on this question. But I will say one thing with confidence, however, even as a economics dilettante (in political science we call those people ‘angry voters’). And that is that there are incredible signs of economic thin ice almost anywhere you turn today. The national debt has never been higher. Consumer debt has never been higher. Savings have never been lower. The trade deficit has never been higher. The dollar is spectacularly weak. Foreclosures are mushrooming. Quality jobs are disappearing in droves. People are working longer to maintain the same standard of living, or often less. Employers are economizing, among other ways, by cutting healthcare benefits. Real estate values are plummeting. Sure, it’s a great time to be a bankruptcy lawyer or a repo man, but probably most of us would agree that keeping people in those two fields well employed isn’t worth the trade-off of having an economy in the toilet.

…There’s no question that America has historically been an industrious, innovative and hard-working country. We still are today, though the hard-working part has gotten simultaneously more hard, less rewarding, and less driven by desire for advancement than need for survival. Perhaps the paradigmatic moment of our time was Clueless George on the campaign trail in 2004, gushing over a woman he met who said she worked three jobs to keep afloat. For Bush, it was an ‘only in America’ moment – completely oblivious, as he seemed to be, that this represents almost nobody’s vision of the good life. Well, almost nobody. One imagines that Dick Cheney was smiling in the wings of that event, thinking to himself: “Once we get all of them doing that, our work here will be done!”. Nowadays, no industrialized country in the world has workers who put in more hours per year than the US. None has such a glaring absence of economic support programs as America does, either.

But we’ve worked hard here, historically, like the good Protestants we are, and we’ve been technologically innovative and admirably determined in achieving our far-reaching aspirations. That’s all good stuff, but just the same, though, there’s been an undeniable dark side to the phenomenal success of the American economy. We’ve worked hard to produce a lot, true, but we’ve also – in a word – stolen a lot as well.

We stole from indentured servants from the beginning. We stole from Native Americans within minutes of landing here, and never stopped until we’d grabbed all the land and resources we wanted, leaving them casinos and poverty in return. We harnessed yokes around Africans and imported them as if they were agricultural beasts of burden, and continued to do so for centuries. We built our economic accomplishments on the backs of near-slave immigrant laborers, from Chinese coolies to Mexican wetbacks, along with Irish, Italian, German, Jewish and a whole lot of other nationalities in-between. We stole fully half of Mexico following a trumped-up war no less bogus than the current one in Iraq, then we did the same for Hawaii, Cuba, the Philippines and more. We broke the backs of labor movements in order to enrich a few owners while grinding ‘human resources’ into impoverishment and early death. We exploited the entire continent-and-a-half of Latin America, installing local dictators in country after country who got personally wealthy by doing the oppressive and murderous dirty work for American resource extraction corporations. We assigned to women endless domestic chores without the slightest compensation, nor political power, nor even ownership of family wealth.

These are the obvious thefts – and there is no more accurate word for it – by which we’ve massively enhanced our wealth over a period of centuries. But there are less obvious ones as well. We have raped the environment for precisely the same purposes. You can get a lot wealthier a lot faster by not concerning yourself (or even paying compensation for) the environmental destruction caused by manufacturing, mining, drilling and more, than you would by having to be responsible for those very real costs of your enterprise. Economists like to gently refer to such factors as ‘externalities’. That’s a polite way to describe a process by which the rich get even richer through offloading the costs of their business to you and me, and keeping the profits for themselves.

Not content with any of that, however, we’ve also lately been engaged in other, new and improved, more subtle forms of national wealth theft. Rampant consumerism based on little plastic cards is quite effective, leaving costs to others, like our children. So is – as exhausted consumerism now heads for the ditch – turning our houses into piggy banks to keep an economy artificially afloat, until that can no longer be sustained either. Or running incredible trade deficits, or radically deflating the value of our currency to keep sales of American goods abroad halfway viable. Another nice trick you can do is run up the national debt and leave that to your kids as well. You can also ignore your infrastructural repair and development needs so people can party on now, instead of paying the taxes necessary to keep the economy strong for the next generation. Talk about eating your young. One of the best of all these games over last decades has been the uninhibited agenda of economic globalization which has now managed to successfully export American white collar jobs to India, right behind the blue collar ones that previously went to China. That was supposed to make us all richer, remember? Some people indeed are. Those without jobs, or working for half what they used to make, aren’t in that small group however.

What all of these ploys have in common is that they are all methods allowing one to live larger than we’re rightfully entitled to. Slavery is the most obvious example. You wanna live the good life? The most basic formula ain’t that hard to figure out. Kidnap some dude from a less technologically developed part of the world, terrorize him with overwhelming force and psychological violence to go along with the real kind, then watch as he plows your field while you sit on the porch sipping Mint Juleps. Then, repeat. This is the most obvious example, yes, but really no different in principle from ripping off your own kids with tax ‘cuts’ unaccompanied by spending cuts, which drive up the national debt and hand the next generation the bill. Plus interest. Or stealing in the form of externalizing costs for remediating environmental destruction while the eco-evildoers go off scot-free with grossly inflated profits (indeed, in some cases, these would be non-existent profits, were the real costs to have been factored in). And so on, and so on.

…But the bigger point is simply this. Americans historically did well by working hard, educating themselves and bringing clever innovation to the table. But for just as long they got really rich by stealing the extra wealth, whether from someone else’s labor, from their neighbors, from the environment in which we live, or from the future.

What if there are no more piggy banks from which to steal? What happens if the US economy has finally hit the wall of remorseless reality, and can only produce what it can honestly produce? What happens to the American economy and American standards of living if all the gimmicks have been exhausted?

The fire this time?