Signs of the Economic Apocalypse, 2-11-08

From SOTT.net:





Gold closed at 922.30 dollars an ounce Friday, up 1.0% from $913.50 for the week. The dollar closed at 0.6893 euros Friday, up 2.0% from 0.6756 at the close of the previous Friday. That put the euro at 1.4507 dollars compared to 1.4802 the Friday before. Gold in euros would be 635.76 euros an ounce, up 3.0% from 617.15 at the close of the previous Friday. Oil closed at 91.77 dollars a barrel Friday, up 3.2% from $88.96 for the week. Oil in euros would be 63.26 euros a barrel, up 5.3% from 60.10 at the close of the Friday before. The gold/oil ratio closed at 10.06, down 2.1% from 10.27 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,182.13 Friday, down 4.6% from 12,743.19 at the close of the previous week. The NASDAQ closed at 2,304.85 Friday, down 4.7% from 2,413.36 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.65% Friday, up six basis points from 3.59 for the week.

Stocks fell sharply last week, not just on recession concerns but on something more threatening: worries of corporate defaults. Worries, in other words, that corporate bonds will be worth much less than thought, which would add another layer to the existing credit problems stemming from the subprime mess.

U.S. Stocks Drop on Credit Concern; Banks, Weyerhaeuser Fall

Elizabeth Stanton

Feb. 8 (Bloomberg) -- U.S. stocks retreated, sending the market to its first weekly decline since mid-January, as concern that corporate defaults will increase outweighed gains in technology companies and commodities producers.

Bank of America Corp. and JPMorgan Chase & Co. led banks and brokerages to their steepest weekly drop in six years as indexes of corporate credit risk climbed to records. Weyerhaeuser Co., the largest U.S. lumber producer, fell to a 16-month low in New York after posting a loss. Declines were limited as Amazon.com Inc., Microsoft Corp. and Apple Inc. rose and higher oil and metals prices boosted energy and mining companies.

The Standard & Poor's 500 Index lost 5.62 points, or 0.4 percent, to 1,331.29. The Dow Jones Industrial Average fell 64.87, or 0.5 percent, to 12,182.13. The Nasdaq Composite Index increased 11.82, or 0.5 percent, to 2,304.85. Almost two stocks dropped for every one that rose on the New York Stock Exchange.

“There's going to be more writedowns, more problems,” said Quincy Krosby, who helps manage $330 billion as chief investment strategist at the Hartford in Hartford, Connecticut, during an interview with Bloomberg Television. “It's hard to navigate a market like this.”

The S&P 500 snapped two straight weeks of gains after a report on Feb. 5 showed service industries contracted at the fastest pace since 2001. The index has lost 15 percent since its Oct. 9 record, while the Dow has fallen 14 percent from its all- time high the same day. The Nasdaq has slumped 19 percent since an almost-seven year peak on Oct. 31.

Credit Concern

JPMorgan lost $1.29, or 2.9 percent, to $43.82. Bank of America retreated $1.21, or 2.8 percent, to $42.16. An index of banks and brokerages in the S&P 500 fell 8.6 percent this week, its biggest weekly loss since September 2001.

The costs of insuring various forms of corporate debt against default using derivatives rose to records. Contracts on the benchmark Markit CDX North America Investment Grade Index jumped 5 basis points to 129.59, the highest since the index started in 2004, according to CMA Datavision in New York.

The Markit LCDX Series 9 index of leveraged buyout loan derivatives traded at 91.8, according to broker Phoenix Partners Group, matching the lowest since the latest series began trading in October. Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.

‘Crunch Is Intensifying’

“It tells you the credit crunch is intensifying,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “A lot of this paper is sitting on bank balance sheets. There’s further potential for more writedowns, and that constricts the supply of credit in other areas.”

The world’s largest banks and brokerage firms have written down the value of debt and related products on their books by $146 billion since the beginning of 2007, according to data compiled by Bloomberg. The charges stem from the collapse of the U.S. subprime mortgage market.

A U.S. recession is now an even bet as job losses and the housing contraction jeopardize the longest-ever expansion in consumer spending, according to a Bloomberg News survey. The world’s largest economy will expand at a 0.5 percent annual rate during the first quarter, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30 to Feb. 7.

Weyerhaeuser, a supplier to homebuilders, fell $2.37, or 3.7 percent, to $62.34 after reporting a fourth-quarter loss of $63 million amid the worst housing slump in a quarter century...

The economist Nouriel Roubini, who has been predicting the current crisis for a long time, posted a helpful summary of the dangers we face:

The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster

Nouriel Roubini

Feb 05, 2008

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

It’s a sure sign of a crisis when we learn about institutions that few even knew existed. A case in point is the bond insurers that we have been hearing about quite a bit in recent weeks.

Bonds Unbound

James Surowiecki

February 11, 2008

If the ongoing turmoil in the world’s financial markets has made anything clear, it’s that the list of things that can go wrong in those markets is a very long one. Month after month, it seems, another potentially disastrous problem rises to the surface. The latest looming crisis is the possible implosion of a group of companies called monoline insurers. If you haven’t heard of monoline insurers, don’t worry: until recently, few people, even on Wall Street, were all that interested in them. Yet their problems have become a serious threat to global markets. Rumors that monoline insurers, like M.B.I.A. and Ambac, were in serious trouble helped spark the vast market sell-off that prompted the Federal Reserve’s interest-rate cut two weeks ago, and, only a few days later, rumors of a government-orchestrated bailout of these companies set off a six-hundred-point rally in the Dow.

Monoline insurers do a straightforward job: they insure securities—guaranteeing, for instance, that if a bond defaults they’ll cover the interest and the principal. Historically, this was a fairly sleepy business; these companies got their start by insuring municipal bonds, which rarely default, and initially they confined themselves to bonds with relatively predictable risks, which were easy to put a price on. Unfortunately, a sleepy, straightforward business wasn’t good enough for the insurers. Like everyone else in recent years, they wanted to cash in on the housing and lending boom. In order to expand, they started insuring the complex securities that Wall Street created by packaging mortgages, including subprime ones, for investors. This was a lucrative business—M.B.I.A.’s revenues rose nearly a hundred and forty per cent between 2001 and 2006—but it rested on a false assumption: that the insurers knew how risky these securities really were. They didn’t. Instead, they gravely underestimated how likely the loans were to go bad, which meant that they didn’t charge enough for the insurance they were offering, and didn’t put away enough to cover the claims. They’re now on the hook for tens of billions of dollars in potential losses, and some estimates suggest that they’ll need more than a hundred billion to restore themselves to health.

Obviously, this is bad news for the insurers—at one point, M.B.I.A.’s and Ambac’s stock prices were down more than ninety per cent from their all-time highs—but it’s also very dangerous for credit markets as a whole. This is because of a peculiar feature of bond insurance: insurers’ credit ratings get automatically applied to any bond they insure. M.B.I.A. and Ambac have enjoyed the highest rating possible, AAA. As a result, any bond they insured, no matter how junky, became an AAA security, which meant access to more investors and a generally lower interest rate. The problem is that this process works in reverse, too. If the insurers lose their AAA ratings—credit agencies have made clear that both companies are at risk of this, and one agency has already downgraded Ambac to AA—then the bonds they’ve insured will lose their ratings as well, which will leave investors holding billions upon billions in assets worth a lot less than they thought. That’s why so many people on Wall Street are pushing for a bailout for the insurers. It may be an abandonment of free-market principles, but no one has ever accused the Street of putting principle above profit.

Normally when companies make bad decisions and fail to deliver value, it’s just their workers and investors who suffer. But monoline insurers’ desire to grab as much new business as they could, risks be damned, quickly radiated across global markets and will have huge consequences for millions of people who have never heard of M.B.I.A. or Ambac. The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies—not even very big companies, at that—can make the entire edifice totter…

The food crisis has also been accelerating recently. Food prices have been rising rapidly and reserve stocks have been falling. A perfect storm of climate disruption, energy cost increases, and demand for biofuels adds yet another threat to the economic and physical well being of people.

Wheat continues to surge above $10 a bushel

Sue Kirchhoff,

USA Today

U.S. wheat prices continued to soar Wednesday as export demand remained robust despite record high prices, with values in the United States rising by the maximum allowed in a trading day and helping to rally corn and soybeans.

Overall, wheat prices have doubled since last June at the Chicago Mercantile Exchange, which owns the Chicago Board of Trade. Prices have been pushed higher by surging world demand and bad weather in some major producing nations.

"For the near-term price, it's still heading higher," says Joe Victor, vice president of marketing at Allendale, a commodity research firm. He says prices will stay elevated until the markets get a better handle on potential production in coming months. "If we have good weather, plenty of plantings, then there's likely a price correction," Victor says. "If it's bad weather … (prices will) continue their upward trends."

There were fresh signs that record high prices for wheat had yet to dent demand from importing nations.

Egypt, one of the world's largest importers of wheat, bought 150,000 tons of the grain, including 25,000 tons from the United States, the world's top exporter of wheat.

"That is such an important factor in the wheat market," says grains analyst Bill Nelson of A.G. Edwards, referring to the purchase by Egypt.

"Egypt is being seen as a proxy for world grain buyers who are, in general, willing to buy grain even at record prices. This is evidence that day after day of record prices are not limiting demand," he says.

The May futures contract for Chicago soft red winter wheat, used in cakes and crackers, jumped by the daily limit of 30 cents to an all-time high of $10.50 a bushel. The nearby March contract rose its 30-cent daily limit to a high of $10.33. Wheat prices briefly jumped to more than $10 a bushel in December.

Minneapolis Grain Exchange March spring wheat also rose by the daily limit to $14.93 a bushel, the highest price for any U.S. wheat futures contract. High-protein spring wheat, prized by millers and bakers for its quality, is forecast to have the smallest surplus in at least 30 years, and harvest doesn't start till August. The Minneapolis Exchange will raise the daily trading limit to 40 cents, beginning Feb 12.

Trading on Tuesday was influenced by a Canadian government report showing the wheat supply in that nation plummeting 30% from December 2006 to December 2007. The sharp drop was mainly caused by a more than 20% dip in wheat production last year.

The U.S. Department of Agriculture expects the U.S. wheat surplus this year to be the smallest in 60 years. Despite higher prices, U.S. plantings of winter wheat rose only about 4% from last year. Farmers had been expected to increase plantings by far more.

Prices for corn, soybeans and other grains have also surged in recent months. That helped push U.S. food inflation up to 4.9% in 2007 from 2.1% in 2006. The impact has been far greater in less-affluent nations, where people spend more of their income on food.

Merrill Lynch analysts in a recent report said the rate of what they call "agflation" could slow if economic growth cools. But costs will remain elevated. "Longer term, however, we remain convinced that agflation will be an important issue for consumers and policymakers alike," the Merrill Lynch report said.

The following chart from Doug Nolan’s Credit Bubble Bulletin shows wheat prices over the past five years:


I Guess soon we won’t have to worry about the obesity crisis anymore.

Signs of the Economic Apocalypse, 1-21-08

From SOTT.net:

Gold closed at 885.20 dollars an ounce Friday, down 1.4% from $897.40 for the week. The dollar closed at 0.6843 euros Friday, up 1.1% from 0.6768 at the close of the previous week. That put the euro at 1.4613 dollars compared to 1.4776 the Friday before. Gold in euros would be 605.76 euros an ounce, down 0.3% from 607.34 at the close of the previous Friday. Oil closed at 90.62 dollars a barrel Friday, down 2.3% from $92.73 for the week. Oil in euros would be 62.01 euros a barrel, down 1.2% from 62.75 at the close of the Friday before. The gold/oil ratio closed at 9.77 Friday, up 0.9% from 9.68 at the close of the previous week. In U.S. stocks the Dow closed at 12,099.30 Friday, down 4.2% from 12,606.30 at the end of the week before. The NASDAQ closed at 2,340.02 Friday, down 4.3% from 2,439.94 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.63%, down 15 basis points from 3.78 for the week.

The continued fall in the stock market has frightened the general public and the insiders, it seems. Hardly anyone now says there won’t be a recession. Predicting recession seems to be a bullish position now, with the bears predicting a depression or even a collapse.

US bank losses intensify recession fears

Patrick Martin

15 January 2008

Two more major banks reported heavy mortgage and consumer-loan losses Monday for the fourth quarter of 2007, reinforcing fears that that US financial crisis will likely trigger a recession, not only in America, but worldwide.

M&T Bank, based in Buffalo, New York, reported a 70 percent decline in earnings for the fourth quarter, largely due to losses on Collateralized Debt Obligations, the financial instrument widely used to transform home mortgages into tradeable securities.

Sovereign Bancorp of Philadelphia said it would take a $1.6 billion write-off for the fourth quarter, much of it related to mortgage lending. However, $600 million of the loss was due to defaults on consumer loans, an indication that the financial crisis is spreading. Sovereign said it had stopped issuing auto loans in seven of the 15 states in which it does business—Nevada, Utah, Arizona, Florida, Georgia and North and South Carolina.

Also on Monday, CNBC reported that the biggest US bank, Citigroup, will announce a colossal write-off of as much as $24 billion and the elimination of as many as 24,000 jobs. The bank is to report its fourth-quarter earnings Tuesday, and is also expected to announce a cut in its dividend.

Citigroup has been scouring the Middle East and Asia for investors in a position to take multi-billion-dollar stakes. Among those said to be involved is Prince Alwaleed bin Talal of Saudi Arabia. The bank is seeking to raise as much as $15 billion in new capital. On Monday, the state-owned China Development bank decided not to go ahead with a proposed investment of $2 billion in the company, forcing Citigroup to seek other benefactors.

The Financial Times reported Monday that Merrill Lynch, the largest US stockbroker, is seeking to raise an additional $4 billion in new capital, with the Kuwait Investment Authority as the leading candidate. Merrill Lynch is expected to write off as much as $14 billion in losses and lay off up to 1,000 workers.

The spectacle of giant US financial institutions going hat in hand to the oil sheiks and the government investment agencies of China, Taiwan and Singapore is one indicator of the deteriorating world position of American capitalism.

Another is the continued fall in the dollar, both against the currencies of rival capitalist powers, and against gold and other precious metals. Gold topped the $900 an ounce mark Monday in London trading, at one point hitting $914, an all time record. Platinum set a new record of $1,587 an ounce, while silver hit $16.58 an ounce, the highest figure in 27 years.

The dollar dropped to a record low of 1.0912 Swiss francs, while also hitting seven-week lows against the euro and the yen. At $1.4890 to the euro, the dollar is near to breaking the 1.50 barrier. That is widely regarded as a psychological milestone which could produce a much wider sell-off of dollars as countries currently accumulating dollars—especially the oil states and Asian exporters—seek to shift their surpluses to euros, yen or a basket of currencies more likely to retain their value.

The latest dollar plunge was said to be in response to comments last week by Federal Reserve Board chairman Ben Bernanke, in which he pledged “substantive additional action” to prop up the US economy, a statement widely viewed as a pledge to continue cutting US interest rates by at least a half percentage point this month.

Further cuts in US interest rates, carried out at the behest of Wall Street to stave off a collapse of confidence in the financial system, ultimately make the crisis even worse, since reducing the rate of return impels foreign investors to dump their dollar-denominated assets and shift their holdings into other, more lucrative, investments.

Exerting continuous pressure on the value of the dollar is the gargantuan US trade deficit, which hit its highest monthly total in 14 months last November, according to figures released by the US Commerce Department January 11. The trade deficit shot up 9.3 percent to $63.1 billion, much more than expected, driven by a 16.3 percent rise in the cost of imported oil. Oil imports hit $34.4 billion, accounting for more than half the net deficit.

Retail sales figures from December, to be announced publicly on Tuesday, are expected to show the combined impact on consumer spending of higher gasoline and home heating costs and plunging home values. An actual decline in retail sales in December, compared to the same month the year before, would be the first such negative reading since June.
Sales reports from individual retailers already suggest the dimensions of the downturn in consumer spending, with Macy’s reporting a 7.9 percent decline in same-store sales in December 2007, compared to December 2006. Kohl’s reported an 11 percent drop and Nordstrom a 4 percent drop. The broad decline is an indication that upscale as well as middle-income consumers are cutting back.

Other figures detailed the expanding dimensions of the home mortgage crisis, which is becoming a more generalized crisis of consumer credit:

* A Mortgage Bankers Association survey found that a record 18.81 percent of the nearly 3 million sub-prime adjustable-rate loans issued by its members were already past due.

* Freddie Mac, the big mortgage finance company, found that homeowners refinancing their mortgages were able to extract $20 billion less in the third quarter than the second. The $60 billion in home equity extracted was the lowest since the first quarter of 2005, and indicates that far less such cash will be available for consumer spending.

* The American Bankers Association found that delinquency rates for home equity lines of credit had climbed to their highest level in 10 years at the end of September.

* The Federal Reserve Board reported last week that total outstanding credit card debt rose at an 11.3 percent annual rate in November 2007. For the year, credit card debt is up 7.4 percent to $937.5 trillion, compared to increases of from 2 to 4 percent between 2003 and 2005.

The growing indebtedness of consumers, combined with the falloff of spending, demonstrates that millions of households, working class and middle class, are going further into debt just to finance their day-to-day expenses. Any new expenses can lead to major financial difficulties.

In the face of these figures, the sudden flurry of proposals by the political representatives of big business—the Bush administration, Congress, and the Democratic and Republican candidates—resemble nothing so much as the reorganization of the deck chairs on the Titanic.

White House officials told the press last week that Bush would propose a stimulus package for the US economy in his State of the Union speech scheduled for January 28, although no details had been worked out yet. Treasury Secretary Henry Paulson said January 11 that the US economy had slowed “rather materially” and that “time is of the essence” in initiating any stimulus package.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, the two leading congressional Democrats, sent a joint letter to Bush Friday saying, “We want to work with you.” The letter received a favorable White House response, and Pelosi met with Fed chief Bernanke Monday to discuss what concrete actions could be taken.

Some combination of tax cuts for business, tax rebates for the working poor and a limited extension of unemployment benefits or home heating assistance is the likely outcome of such discussions, with a total amount estimated at $50 to $100 billion. Even these proposals are problematic, however, since congressional Republicans could block such measures, particularly those targeted to lower-income families.

The presidential candidates have chimed in, with the Republican candidates proposing more tax cuts for business and the wealthy—which would do nothing to alleviate the spreading economic distress among working people—and the Democrats offering stimulus packages that would amount to little more than band-aids.

Hillary Clinton’s plan, released Friday, calls for $70 billion in stimulus, including relief for homeowners facing foreclosure and an extension of unemployment benefits. Barack Obama slightly outbid her, offering a $75 billion plan, but with more targeted to business interests in the form of tax incentives.

None of these plans amount to more than a drop in the bucket compared to the vast dimensions of the social and economic crisis in the United States. By one estimate, the $30-a-barrel increase in oil prices over the past five months has by itself cost US consumers $150 billion—double the amount of “stimulus” proposed by the Clinton and Obama plans. It goes without saying that no big business politician is proposing that the oil companies disgorge any of their massive profits. On the contrary, the energy bill adopted by the Democratic Congress last month retains $12 billion in federal subsidies to the oil giants.

More fundamentally, a minor boost to consumer spending will do nothing to offset the spreading financial contagion or restabilize debt markets. The bursting of the housing bubble is only the initial stage of a financial crisis of unprecedented dimensions, one that will call into question the viability of the capitalist system worldwide.

It is probably past time to be worried much about the markets and high time to be worried about essentials like food. Talk of serious global food shortages has been increasing recently. High energy costs and conversion of food production to biofuel production are making food shortages a real possibility, even in developed countries which have had an abundance of food in recent generations.

An Oil Quandary: Costly Fuel Means Costly Calories

Keith Bradsher

January 19, 2008

KUANTAN, Malaysia — Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material.

This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.

The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.

In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.

According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.

“The urban poor, the rural landless and small and marginal farmers stand to lose,” said He Changchui, the agency’s chief representative for Asia and the Pacific.

A startling change is unfolding in the world’s food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food.

A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate change may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia.

In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.

There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West.

Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties.

These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore’s.

No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured.

Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it…

Growth in Biofuels

Biofuels accounted for almost half the increase in worldwide demand for vegetable oils last year, and represented 7 percent of total consumption of the oils, according to Oil World, a forecasting service in Hamburg, Germany.

The growth of biodiesel, which can be mixed with regular diesel, has been controversial, not only because it competes with food uses of oil but also because of environmental concerns. European conservation groups have been warning that tropical forests are being leveled to make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while also releasing greenhouse gases…

Demand Outstrips Supply

As the multiple conflicts and economic pressures associated with palm oil play out in the global economy, the bottom line seems to be that the world wants more of the oil than it can get.

Even in Malaysia, the center of the global palm oil industry for half a century, spot shortages have cropped up. Recently, as wholesale prices soared, cooking oil refiners complained of inadequate subsidies and cut back production of household oil, sold at low, regulated prices.

Street vendors in the capital, Kuala Lumpur, complain that they cannot find enough cooking oil to prepare roti canai, the flatbread that is the national snack. “It’s very difficult; it’s hard to find,” said one vendor who gave only his first name, Palani, after admitting that he was secretly buying cooking oil intended for households instead of paying the much higher price for commercial use.

Many of the hardest-hit victims of rising food prices are in the vast slums that surround cities in poorer Asian nations. The Kawle family in Mumbai’s sprawling Dharavi slum, a household of nine with just one member working as a laborer for $60 a month, is coping with recent price increases for palm oil.

The family has responded by eating fish once a week instead of twice, seldom cooking vegetables and cutting its monthly rice consumption. Next to go will be the weekly smidgen of lamb.

“If the prices go up again,” said Janaron Kawle, the family patriarch, “we’ll cut the mutton to twice a month and use less oil.”

We often focus too much on the problems of the various free trade agreements for the developed countries involved in them. In the United States, that takes the form of complaining about jobs going to Mexico, or about Mexicans coming to the U.S. for jobs. But agreements like NAFTA also damage the poorer partners. The following piece about Mexico, where the government has for generations subsidized the price to consumers of staple food items like beans and corn, while putting tariffs on imported food, shows what happens when trade is “liberalized” with a wealthy partner.

NAFTA and Mexico's Agrarian Apocalypse
Zero Hour

John Ross

January 15, 2008

At the stroke of midnight this past January 1st, a hundred or so farmers and day laborers from both sides of the border converged on the hump of the Cordoba Las Americas bridge that connects up El Paso and Ciudad Juarez, to mark the demise of Mexican agriculture. In accordance with the timetables set by the North American Free Trade Agreement signed by Mexico, the U.S. and Canada 14 years ago, as of January 1st 2008, all tariffs on corn, beans, powdered milk, sugar and 200 agricultural products were reduced to zero, setting in motion a doomsday scenario that farmers organizations here say will inevitably lead to crisis in the Mexican "campo" or countryside, mass abandonment of unsustainable plots, increased hunger, and even armed rebellion by the nation's beleaguered small farmers.

"If they build steel walls to keep our people from entering the United States, we will make walls of people to keep their products out of Mexico," a grizzled leader of the militant farmers' front El Barzon Popular growled into his bullhorn as the protestors spread out in the frigid dark to block the lanes of the bridge over the river the U.S. calls the Rio Grande and Mexico the Rio Bravo. But traffic was slow and few trailers were lined up to ferry the thousands of tons of U.S. agricultural products that pass over the Cordoba Las Americas into Mexico every day.

Strung across the roadway, each protestor carried a letter of the alphabet in his or her hand but despite the palpable fear and loathing afoot out in the Mexican countryside as the tariffs plummet to nothing, the farmers could barely muster enough troops to spell out "Sin Maiz No Hay Pais - Y Tampoco Sin Frijol", including the appropriate spacing between words ("Without Corn, There Is No Country - And Also Without Beans.")

Despite the midnight deadline, the immediate impacts of this premeditated apocalypse may be postponed for a while - at least until the spring planting when farmers have to calculate how many hectares they can afford to put under crops. Unlike the U.S., farm subsidies are a thing of the past here, stripped away years ago in the rush to NAFTA.

Reduction to zero tariffs is not in fact a steep drop. 14 years of incremental decreases had wiped out 90% of all protectionist barriers by 2007 and U.S. corn growers were only shelling out 18% of the value of their exports to get their grain into Mexico. Moreover, NAFTA-driven dumping by lavishly subsidized U.S corn growers that allowed them to drop their loads in Mexico below cost and still make a boodle is being blunted by skyrocketing ethanol subsidies as maize climbs to record quotes on U.S. commodity markets - the grain hit an all-time record $177 USD a metric ton last spring but has begun to slide as storage capacity for ethanol corn is saturated and distribution lags far behind production.

Meanwhile, the uptick in world corn prices ripples out in the global marketplace with tortillas topping out at nine pesos the kilo on New Year's Day here - tortilla prices in Mexico have risen 126% under NAFTA from 1994 to 2007 despite - or because of - massive corn imports from the U.S. (44 million tons in the same period.) The tortilla remains the household measure for basic food prices in Mexico.

According to the World Food & Agricultural Organization or FAO, the world has only 11 weeks of consumable corn reserves left, the lowest inventory since record keeping began. Corn prices will remain unstable until producers can sort out the relationship between food cropping and biofuels, the FAO cautioned in a recent report. Low reserves and high prices are a sure formula for social upheaval, underscores the U.N. organization, pointing out that grain riots broke out in Morocco, Uzbekistan, Yemen, Guinea, Mauritania, and Senegal last year.

Despite the farmers' New Years protest on the Cordoba Bridge, the truth of the matter is that formal notice of the death of Mexican agriculture is long overdue. The damage was done long before NAFTA (or the Treaty of Free Trade With North America - TLCAN - here in Mexico) was a gleam in Ronald Reagan's eyeball. As Mexico decapitalized the "campo" following the 1982 default crisis, which allowed the World Bank and the International Monetary Fund to annex the Mexican economy and initiate "structural readjustment" of the agricultural sector, the nation ceded its nutritional sovereignty to U.S. imports.

The migration of impoverished subsistence farmers from southern Mexico that swelled the Mexico City misery belt in sprawling slums like Nezahualcoytl was the first concrete evidence of the evisceration of the "campo", ventures Harvard professor John Womack in a recent e-mail. Womack is the author of the definitive biography of Emiliano Zapata, the incorruptible farmer-general who remains emblematic of the campesinos' struggle for land.

NAFTA-TLCAN, which, after all, is an integral part of the same scheme of "structural adjustments" to globalize Mexico's agricultural sector and force dependence on export cropping, has only accelerated the stampede from the countryside and into the migration stream. By the trade treaty's 10th anniversary in 2004, NAFTA-TLCAN had driven 1.2 million farmers off the land, according to a Carnegie Endowment evaluation of the pact's impacts issued that year. Since each farm family averages out to six people, the total number of expulsees from the campo hovers around 6 million.

In 1993, just before NAFTA-TLCAN became fact, Mexico's Secretary of Agriculture contracted UCLA professor Raul Hinojosa to calculate the fallout amongst poor farmers. The researcher's worst-case scenario was the diaspora of 10 million campesinos. Now, with the reduction of NAFTA-TLCAN tariffs to zero, that "goal" is just around the corner.

Where do they go? During ex-president Vicente Fox's six year term in office, 2.4 million Mexicans, 70% of them reportedly displaced farmers, migrated to the U.S. despite the formidable barriers erected by Washington to keep them out. U.S. anti-immigration pundits like Lou Dobbs and Republican and Democratic presidential hopefuls that beat up on undocumented Mexican workers might do better to pin the tail on the correct donkey - the North American Free Trade Agreement.

According to CONAPI, Mexico's Council on Population, 29 million Mexicans and Mexican descendants now live in the United States, two million more than live out in the Mexican campo from which so many of them have fled. Ironically, those 27 million who remain on the land back home are sustained by the $22,000,000,000 USD in "remisas" that those who have gone north send back, Mexico's second source of Yanqui dollars behind $100 barrel petroleum. Which is to say the Mexican agricultural sector is supported by those who have abandoned it.

Since NAFTA-TLCAN kicked in January 1st 1994, the same night the Zapatistas rose in Chiapas to remind Washington just how desperately poor and unstable its new trading partner really was, four Mexican presidents - Carlos Salinas, Ernesto Zedillo, Vicente Fox, and now Felipe Calderon, apparently rendered dumb by Washington's dominance, have turned a deaf ear to demands by farmers' organizations to re-open the treaty-agreement's agricultural chapters for renegotiation. Indeed, leftist Andres Manuel Lopez Obrador's insistence on renegotiating NAFTA-TLCAN was a nuts and bolts factor in the campaign to deny him the presidency.

For Calderon, who was awarded high office amidst widespread fraud, NAFTA-TLCAN has been a net gain for Mexico's farmers. The president and his cohorts like Agriculture Secretary (SAGARPA) Alberto Cardenas never tire of chanting the mantra that the trade pact has nearly tripled Mexican agricultural exports to the U.S. But what these neo-liberal mouthpieces forget to point out is that Mexico has run a $2,000,000,000 USD deficit in Ag exports to the U.S. every year since the late '90s as U.S. imports overwhelm the Mexican market.

Moreover, the Calderon-Cardenas happy stats disingenuously inflate the numbers - for example, Mexican beer on its way to transnational distributors who now invest heavily in breweries south of the border, accounts for 18% of $8.5 billion USD in Ag exports to the north through October 2007.
Under NAFTA, beer is considered an agricultural export.

Nor does the President and his cronies identify who it is that is actually benefiting from the NAFTA-TLCOM boom. According to the National Farmers Confederation or CNC, a creature of the once-ruling (71 years) PRI party and once gung-ho for the trade treaty, only 2% of all Mexican producers are sharing the largesse. The other 98%, including 3.5 million corn farmers, 85% of whom grow on five hectares or less (average U.S. corn spreads are 270 acres), have no access to the NAFTA-TLCAN market whatsoever. The big winners? About 20,000 corporate tomato growers, avocado and tropical fruit moguls, and specialty crop niche market sharpies (organic coffee -but organic anything) - plus, of course, the beer barons.

Meanwhile, on the other side of the ledger, two out of the three top chicken suppliers to Mexico are U.S. headquartered - Pilgrim's Pride and Tyson. Mexico now imports 22% of its corn, 55% of its wheat (which went to zero tariff in 2003), and 72% of its rice from U.S. growers. Wal-Mart, with over 700 megastores and now the largest employer and retail food seller in the country, provides a ready-made distribution system for getting U.S. Ag products into Mexican homes. Wal-Mart, now Mexico's leading tortilla seller, is the poster boy for the NAFTA-TLCAN credo of "convergence" - selling the same product in the same stores at the same price on all sides of the border.

But if Mexico's agricultural apocalypse has already come to pass, new ones are lighting up the radar screens. The zero tariff deadline will particularly play out on southern Mexico's mid-level sugar growers, mostly "pequenos proprietarios" or "small land owners" and their huge workforces of underclass campesinos. In respect to the beloved "frijol", although Cardenas's SAGARPA insists that Mexicanos no longer eat beans and the inundation of U.S.-grown legumes will have little impact on diet, beans are an emblematic commodity which combined with maiz form a protein that has sustained the Mexican "raza" (race) since its birth.

But the most lethal blow from zero tariffs will be a speeded-up abandonment of their plots by small corn farmers and their immersion in an already-swollen migration stream, a tale that does not presage a happy ending. Traditional migration routes to The Other Side are now shut down by U.S. militarization of the border, ICE raids in U.S. Mexican communities, and the anti-Mexican hysteria sweeping that northern neighbor as the presidential campaigns peak…

Violence has been pandemic in the Mexican campo ever since the European Conquest. Massacres and bloody land battles like Acteal in Chiapas (49 killed) and Rio Frio in Oaxaca (29) are contemporary expressions of the eternal war for the land here. Mexico's many guerrillas historically have incubated inside farmers' movements and still do. The Calderon-Cardenas strategy of deliberate denial of the crisis in the countryside is a little like whistling past the graveyard.

Secretary of Agriculture Alberto Cardenas, a former governor of Jalisco state, is an agro-tycoon from the central Mexican "Bajio", a fertile swatch of land from which big growers reap fortunes in export agriculture. A holdover from the Fox administration (Fox too made his fortune in Bajio export agriculture), he is a stocky, pugnacious and not very bright man who represents the right wing of the right wing PAN party, the "Yunque", a secretive Catholic cabal based in the Bajio from which Fox drew many of his cabinet members.

So when he had to sell Mexicans on the "benefits" of zero tariffs, Cardenas came up with the brilliant gimmick of getting Lorena Ochoa, the world's number one woman golfer and a Guadalajara native, to extol the health of the Mexican "campo" - an unfortunate play on words (a "campo de golf" is a golf course) - which has incited farmers' organizations to schedule a national march on Mexico City this January 31st.

For the Mexican underclass, "campos de golf" are the playgrounds of their "patrones" or bosses. 10 years ago, speculators secretly bought community land in Tepotzlan up in Zapata country in Morelos state to build a country club and golf course and began sucking up what little ground water the farmers still had left. Wild protests - the so-called "Golf War" - ensued. In the midst of flying rocks and burning construction machinery, a U.S. reporter asked the newly-elected mayor (the old one had sold out to the golfers) why the people were so agitated about a golf course. Lazaro Rodriguez paused, put his hand on the reporter's shoulder, and stared him in the eye like he was a nincompoop from Mars. "John," the exasperated mayor made it clear, "we don't play golf here."

Last week we looked at how capitalism works and how, by doing what it does, it ruins everything. What can we do about it? Marxism has been an indispensable tool for understanding capitalism, but historically has not been able to offer any solutions. Why is that so? If the diagnosis was so good why wasn’t the cure of revolutionary socialism effective?

According to Andrew Lobaczewski in Political Ponerology, most political movements are susceptible to what he calls “ponerization,” the infiltration of groups by pathological elements that end up twisting the original goals and motivations of the group to pathological purposes.

In order to have a chance to develop into a large ponerogenic association, however, it suffices that some human organization, characterized by social or political goals and an ideology with some creative value, be accepted by a larger number of normal people before it succumbs to a process of ponerogenic malignancy. The primary tradition and ideological values of such a society may then, for a long time, protect a union which has succumbed to the ponerization process from the awareness of society, especially its less critical components. When the ponerogenic process touches such a human organization, which originally emerged and acted in the name of political or social goals, and whose causes were conditioned in history and the social situation, the original group’s primary values will nourish and protect such a union, in spite of the fact that those primary values succumb to characteristic degeneration, the practical function becoming completely different from the primary one, because the names and symbols are retained. This is where the weaknesses of individual and social “common sense” are revealed. (p. 160)

To the extent that a social theory or movement has an incorrect view of human nature, to that extent is it susceptible to ponerization. For Marxism or revolutionary socialism, the erroneous view of human nature would be that human nature is a blank slate created by human practice. Its downfall was that it didn’t recognize the two types of humans: psychopaths and those with the potential to develop conscience. It shares that downfall with many other ideologies and religions.

Revolution, by overthrowing all traditional forms of order ended up creating the most fertile ground possible for the psychopath. We can see this historically in France, Russia, China and Cambodia. According to Lobaczewski, movements that start out with laudable goals are prime targets for pathological types because those movements can provide the perfect cover for the “other human race.”

Where does that leave us? In the position of learning from past mistakes and building movements that take the two human races into account. We would have to be able to limit the damage caused by the small percentage of psychopaths. That would involve being able to identify psychopathic behavior and being able to distinguish between genetic psychopaths for whom there is no hope (essential psychopaths in Lobaczewski’s terminology) and those who are not born pathological but made pathological. It would also avoid tactics used against the pathological borrowed from the pathological, for those tactics would only create fertile ground for ponerization.

The solution would be more evolutionary than revolutionary, because it would entail hard work on the part of those with the potential of conscience to develop that conscience while at the same time seeing both human nature and current events accurately.