Consumer confidence, of course.

We recently vowed to stop calling our national brethren “consumers” in favor of less degrading words — like Americans, citizens or just plain-old people. Thus, we report the Conference Board printed a surprisingly optimistic gauge of American consumption attitudes (doesn’t that sound better?) yesterday. After two months of decline, the index kicked back up to 54.1, just shy of a 2009 high.

Coupled with the latest printing of the home price index, that was enough to keep this mega-bounce alive and kicking. The news shot the S&P 500 to a 1% gain within moments of yesterday’s opening bell, which eventually faded into a 0.25% advance. The index is up almost 4% in the last five trading days. The Dow hasn’t fallen for six days in a row.

We accept that improving consumption attitudes could bump stocks higher, especially retail. But we wonder… do consumption attitudes lead markets, or the other way around?

Seems like Joe Six-pack is routinely late to the party, no? We blew the post Lehman crash, stayed gloomy during the best of the stock rebound, got bullish in June when stocks went nowhere and lost confidence last month when the market shot up again.

So what does a big improvement in consumption attitudes tell us now? If anything, that the stock rally is about to cool off.

“Retail is a terrible business to be in during a recession,” says Dan Denning, belaboring an obvious idea that seems lost on the world right now. “Don’t forget the primary economic and social trend right now: People are reducing their debts. They are cutting back, becoming more frugal and learning to live within their means.

“Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.”

Source: Can Consumers Lead the Market?

Jumbo mortgages — home loans exceeding $417,000 — now have the fastest rising default rates of any mortgage class. According to recent data from First American CoreLogic, 7.4% of these larger-than-life mortgages are currently in some form of default, nearly three times the rate at the start of 2008.

As you can see, when stocks tanked in late 2008, the market for super-sized mortgage loans followed suit:

(Heh, we love the “exclude option ARMs” note… no need to worry about them!)

Is there any reason for this trend to improve? The Obama administration has done plenty to help out their beloved middle-class homeowner… like the $8,000 first-time homebuyer credit, artificially low FHA mortgage rates and several mortgage modification programs. But those programs don’t apply to jumbo loans. Even Fannie and Freddie, masters of mortgage speculation, will no longer stand behind jumbo mortgages.

And the market is blowing jumbo loans a stiff head wind, too. Mortgage rates are roughly 100 points higher for jumbos and inventory — geesh — this is pretty remarkable:

So… an accelerating rate of default; a government cold shoulder; higher-than-typical lending rates; and a huge, growing glut of supply? Could get interesting.

Source: The New Credit Crunch Victims

Our faith is weakening. That is, our faith that the government will be able to cause inflation, sooner or later. Let’s review our own narrative: deflation now, inflation later.

Since then, it has been known as “The Friedman Effect.”

It’s important to understand the Friedman Effect because it can have dramatic impact on your investment decisions and your portfolio…

Milton Friedman & The Friedman Effect

Basically, Milton Friedman found that if the Fed switched from tight money to easy money, or vice versa, it would take about six months before you would see any change in the direction of the economy or Wall Street.

The Friedman Effect worked like clockwork during the financial crisis of 2008. In late 2007 and early 2008, the Fed decided to squeeze the money supply and impose a credit crunch on the financial markets to slow down the real estate boom. The Fed got more than it bargained for. Its tight-money policy had a dramatic impact – the real estate market crashed and took the financial markets with it.

The Fed panicked and in September, 2008, Ben Bernanke & Co. reversed course and injected billions of dollars into the marketplace. The Fed’s balance sheet (see chart below) doubled in a few months as the Fed acted aggressively. Among other bold efforts, the Fed bought Treasuries and mortgage-backed securities directly in an effort to stem the tide of a deflationary collapse.

As you can see from the above chart, the Fed’s bank account (Adjusted Monetary Base) doubled in short order in 2008-09.

The Friedman Effect – Pinpointing The First Signs of Recovery

According to the Friedman Effect, that means the first signs of a recovery and stock market rally would occur six months later. Sure enough, in March, 2009, Wall Street bottomed out and roared ahead in one of the strongest rallies in Wall Street history. The S&P 500 Index has climbed an incredible 34% from its lows of March 8.

Moreover, we’ve seen sure signs of stabilization in the financial markets and the economy. The Libor rate – the interest rate banks charge each other to borrow short term – has fallen sharply, an indicator that the financial crisis is ending.

Many economic indicators have also turned positive. On Thursday, the Labor Department announced that the total number of people filing for unemployment insurance fell by 148,000 to nearly 6.7 million in the week ending June 6. That was the largest drop in more than seven years, and snapped a streak of 19 straight record-highs.

The best overall indicator of a possible recovery is the U.S. Index of Leading Indicators published monthly by the Conference Board, a private research group based in New York. The Ten Leading Indicators are designed to forecast the economy in the next three to six months. Most of the indicators are business related, such as new orders for capital goods, building permits and unemployment claims – and, I might add, the stock market and real money supply growth. The Conference Board also surveys the leading economic indicators for 10 other countries around the world.

The Board reported that the U.S. Leading Indicators fell sharply over the past year, and finally bottomed out – in March of this year! The leading indicators have now risen two months in a row. And on Thursday, the index rose 1.2%, the biggest gain since March 2004.

• In short, the good news is that the U.S. economy is slowly but surely on the road to recovery.
• The bad news is that the Fed has apparently decided to step on the brakes again, reversing course in its monetary policy. The days of quantitative easing are apparently over. As the graph above indicates, the Fed has stopped adding to its balance sheet – the adjusted monetary base has stopped growing.

The broader-based money supply (M2) was growing at double-digit rates until a few months ago. Now’s it’s growing at only 2% or less.

This tight money policy could spell trouble down the road if it continues. The stock market will probably continue to push higher for now, due to the lag time in the Friedman Effect. The Dow might even reach 10,000 by the end of this year. But if the Fed maintains this new tight money policy, we could be in for another rough period and a return of the bear market.

Source: The Friedman Effect: Is Another Bear Market Around the Corner?

Then begins the horror.

But just look around. There are plenty of frightening and unnatural scenes going on.

Broadly speaking, it’s a merciless war between inflation and deflation. But there are many different attacks, ambushes, counterattacks, feints, and massacres going on.

The Dow retreated 173 points yesterday. Typically, following a major fall in the stock market, there is a ‘reflex rally’ that lasts several months. Our rough guess was that it would carry on until summer. Most analysts think it will exhaust itself sooner. Who knows? But yesterday, it looked as though the rally may be nearing an end.

The rally itself is a part of a larger battle between two contradictory body parts – the heart and the mind. The heart wants to believe that the worst is over. It reacts sentimentally, remembering the glory days of the great bubble era and wishing they were back. Higher consumer confidence readings sent the stock market higher on Tuesday – the heart ruled.

But on Wednesday, it was the head’s turn. The head looks at the facts: housing and employment are still going down. People will spend less money. Businesses will make less money. Ergo, no reason to expect stocks to go up. Instead, they’re more likely to go down. The Dow scurried back to the lines it occupied at the beginning of the week.

The head noticed, too, that the Treasury market is getting slammed by higher yields. The long bond yielded 4.56% yesterday – up from well below 3% at the end of last year.

“Treasury yields give cause for concern,” says this morning’s Financial Times.

“Rising Treasury yields threaten to stifle economic recovery,” continues another article in the same paper.

But has the top of the bond market really passed? Is the credit cycle now in full retreat? Will homeowners and businessmen be tortured with higher interest rates?

Those are the questions the head was asking yesterday. And it didn’t like the answers. If there were any green shoots, it reasoned, higher interest rates could crush them.

And then at least a few heads began thinking about what this meant to the big strategic issues… and how this flick will turn out.

At the end of last year, America’s great buddy, China, changed its policy. Instead of buying long-dated US debt, China began buying the short stuff. China’s top man openly wondered whether the US would be able to protect the value of the dollar and keep its promises to foreign lenders.

“We have a huge amount of money in the United States,” we quoted China’s premier just yesterday. He reminded the US that China had entrusted a lot of its wealth to US paper and went on to request that America respect its obligations to bond buyers. Obviously, the Chinese must wonder if the US is capable of protecting its currency while still funding its war against deflation.

Tim Geithner promptly responded. “Yes we can!” But the Chinese cogitated on the matter… ‘No they can’t,’ they began to think. Then, they switched to buying short-term US debt, leaving the longer-term bonds to other buyers. Since the Chinese were the biggest buyers at US Treasury debt auctions, this switch in policy had a quick and noticeable effect. Bills rose. Bonds fell. The yield on bills fell to below zero, while the yield on the 30-year bond has gone steadily up.

If America’s supply lines to cheap credit have been cut, she is at a great strategic disadvantage. Or rather, her pre-existing strategic disadvantage is becoming more apparent: she depends on foreigners just to be able to continue living in the style to which she has become accustomed. As the president of the United States of America acknowledged this week:

“We’re out of money now.”

But how does this affect the war between inflation and deflation?

The US is on the side of inflation, of course. It put its whole economy on a war footing and has earmarked more resources, in real terms no less, to the fight than it spent on WWII.

In a larger sense, the US is at war with capitalism… and with nature herself. Markets have natural rhythms. They go from boom to bust… from inflation to deflation… from expansion to contraction naturally. Trying to stop the bust is futile. It is a fight against Fate… a losing proposition. And it is diabolically unnatural. You have to take the bad with the good in life. There’s no going to Heaven without dying. And you can’t rebuild a house without tearing down the old one. Mistakes must be corrected. Old, worn-out businesses have to go out of business so that new ones can take their places. Bad investments need to be deflated… liquidated. Failed managers and failed business models must be eliminated. Bubble delenda est.

The feds can’t beat nature. The bubble can’t be reflated. They can’t make the situation better than it would be if they left it alone. But they can make it a lot worse.

They still have the nuclear option. Then we’ll all be blown to Hell…

More…after some thoughts from Manraaj Singh, over at Profit Hunter, on the recent rally… and on the next big commodity opportunity…

“There is no accounting for the irrationality of the markets, but the economic data simply doesn’t support the current rise in share prices. Consider what actually triggered this economic crisis – the bursting of the US property bubble. The latest data on US housing makes it very clear that the bubble still hasn’t completely burst.

“The results of the benchmark S&P/Case-Shiller US house price survey came out yesterday. The index tracks house prices in 20 major US cities. And its results show that house prices fell by 19.1% in the first three months of this year. That’s the biggest drop in the index’s 21-year history. And it was a bigger drop than analyst were expecting. Figures like that make me extremely sceptical about claims that the market has already priced-in most of the bad news. It hasn’t.

“That doesn’t mean you ought to pull-out of markets entirely right now. The investments that look set to keep rising despite a broad sell-off are those for which there is a clear catalyst… like sugar.

“We’ve been following this story very closely in Profit Hunter. The epicentre of the looming global sugar shortage is in India. The country was the world’s second-biggest sugar exporter until recently. But a combination of bad weather, crop substitution and tighter credit markets has led to a sharp drop in production there.

“The market for sugar is about to get a lot tighter than mainstream analysts were predicting just a few months ago.

“Consider that in November, the US government was predicting that global sugar production this year would be just 4.6% lower this year than in 2008. Last week they revised that dramatically to an 11% drop in global production. But they are still behind the curve. The US government is basing its estimate on the assumption that India will produce 16.8 million tonnes of sugar this year. That’s far higher than anything the Indians themselves believe will happen. You can bet that the price of the sweet stuff is going up.

“Speculators are now waking-up to opportunity here in a big way. Hedge funds are now making their biggest bet in nine months that commodity prices will rise. And their biggest bets right now are on sugar and corn. The faster they pile-in, the better for the sugar price.”

Yes Manraaj, but how do we play it?

“Your readers will get my new, updated in-depth report on the best way to play the coming sugar price boom in the next couple of weeks. Tell them to look out for details… or to join up for a trial of my Profit Hunter service today, and the name of the company I’m recommending will be revealed.”

Click here if you’d like to take a no-obligation trial to Manraaj’s service and get access to all his current recommendations.

And more thoughts…

*** What’s the nuclear option? It’s the Zimbabwe Solution… pioneered by Gideon Gono, head of Zimbabwe’s central bank… and recently proposed for the US by Harvard professors Rogoff and Mankiw. And they’re not the only ones.

Of course, there is no need to exaggerate. The facts are outrageous enough. So, let’s calmly look at what has happened so far… and where it is likely to lead.

As you know, the battle between inflation and deflation is going badly for the feds. Deflation is winning. And yesterday, the Eastern Front collapsed.

Germany announced that consumer prices are now 0.1% lower than they were a year ago. Germany is in outright deflation. The rest of Europe is probably not far behind.

In America, the trend is probably in the same direction. The money supply – M-1 – grew at an 18% rate over the last 6 months. But taking just the last 3 months, the rate of growth has fallen to only 1.8%.

Meanwhile, the US Treasury is borrowing 100s of billions of dollars in order to close the gap between what the US spends and what it receives in taxes. Even if the Chinese are willing to fund that borrowing in the very short term, it just pushes forward the inevitable day when the list of willing lenders is shorter than the list of US Treasury bonds to be sold.

When that happens, the Chinese can bend over and kiss their reserves goodbye. Because there is no way the US government is going to forego spending money just to protect foreign bondholders. Instead, to raise money, it is going to turn to its very own bond buyer of last resort – the Fed.

The Fed will “monetize the debt” – by buying Treasury debt and converting it to dollars in circulation. At least, that’s the plan. The risk is that it will cause consumer price inflation. Everyone is aware of the risk. Few doubt that it would happen.

But that’s where Gono, Rogoff, Mankiw and many others, come in.

Caroline Baum reports:

“Harvard University’s Ken Rogoff and Greg Mankiw think more is better when it comes to inflation.

“Rogoff said he advocates 6 percent inflation “for at least a couple of years.”

That would alleviate the strain deflation imposes on debtors, including the U.S. government, who have to pay back their loans in appreciated dollars.

“In the Middle Ages, they threw people who failed to repay their debts into debtors’ prisons. Today debtors are rewarded with all kinds of government perks. Look how far we’ve come!

“Borrowers took out mortgages they couldn’t qualify for to buy homes they couldn’t afford. When the housing market collapsed, they were rewarded with government-subsidized mortgage modifications and, in some cases, partial forgiveness on their loan balances. And now, under Rogoff’s 6 percent solution, debtors would see more of their burden lifted.

“And we, the savers, get screwed again.

“And who says the Fed can orchestrate 6 percent inflation and not let it get out of hand? You know what would happen to those well-anchored inflation expectations: Ahoy, matey, it’s out to sea with you.

“Trying to manage a slight increase in the rate of inflation in a discretionary way is not practical,” says Marvin Goodfriend, professor of economics at Carnegie Mellon’s Tepper School of Business in Pittsburgh.

“Mankiw didn’t specify his preferred inflation rate in the Bloomberg story. He was too busy to give me an interview, directing me instead to his New York Times column from last month where he proposed the idea of negative interest rates: not negative real rates, adjusted for inflation; negative nominal rates. The idea is “to make holding money less attractive” so people will spend it.”

Needless to say, we can’t wait to see what happens. The Chinese already seem to think that holding dollars is less attractive than it used to be. But Geithner and Bernanke assured Wen Jiabao that his money was safe. We wonder what he’ll do when he realizes they played him for a fool.

Source: Financial Horror Movie

American home prices just suffered their worst quarter in recorded history.

That’s the word from the National Association of Realtors today… the median home price fell 14% from the first quarter of 2008 to the first three months of 2009, to just $169,000. Of the 152 metropolitan areas surveyed by the NAR, just 18 registered annual price gains. Nearly half of all sales during the first quarter were foreclosed properties or short sales. A whopping 3.7 million previously owned homes are still on the market.

Is this rock bottom for U.S. housing? Ehh… probably not.

After staying flat for most of the ’90s, the Case/Shiller home price index more than tripled during a 10-year boom. If this “credit crisis” is what people say it is — a generational calamity, Bill Bonner’s “Depression with a capital ‘D’” — then a mere 26% retrenchment from the peak seems kind of… lame. Even the Dow managed a bigger fall than that.
If you’re a real estate opportunist (or just looking for a damn cheap house), you might want to check out Saginaw, Mich. The median existing home price there during the first quarter was a stunning $30,300, the lowest in the U.S. We won’t pretend to know what’s going on over there, but geez… they’re practically giving ’em away.

And if you’re also a newshound, like us, Saginaw might bring back the memory of this little love shack:

Back in October 2008, a Chicago woman famously bought this Saginaw home on eBay for $1.75. Ouch.
Foreclosures set a new record in April, says a separate report from RealtyTrac today. 342,000 homes were in some form of foreclosure last month. That’s one for every 374 homes in the U.S. — just in April. Over 1.3 million homes have now been lost to foreclosure since the housing correction began in August 2007.
A study out today shows that minorities are suffering the worst of the housing crisis. The homeownership rate among all Americans has fallen 1.7% from its 2004 peak. But for black households, the rate of ownership has plunged 3.8%, more than double the national average. Native-born Latinos have it even worse — down 4.6% from their high.

According to Pew Research, this rise and fall among minority homeowners was directly correlated with the popularization of subprime lending. “Blacks and Hispanics were more than twice as likely to have subprime mortgages as white homeowners, even among borrowers with comparable incomes,” reports The New York Times. (Queue the predatory lending lawsuits.)

And the only ethnicity to not see homeownership rates decline? Latino immigrants, with the lowest rate of all groups studied, have managed to maintain a homeownership rate of 44.7% since peaking in 2007. (Ugh… and queue the flood of hate mail into our humble inbox.)
The credit crunch has hastened the predicted demise of Social Security and Medicare. The Obama administration admitted yesterday that they now expect Medicare to run out of money in 2017, two years sooner than the Bush administration predicted in 2008. Social Security’s imminent insolvency was bumped up four years, to 2037. That’s all under the assumption, naturally, that the economy will recover by the end of 2009.

Even those already sucking the government teat got a dose of bad news. Social Security trustees now predict, for the first time in over 30 years, that recipients will not receive any cost of living increase next year, or in 2011.

In just seven years (2016), the Social Security trust will enter deficit. Eight years at the current pace and Medicare will be totally wiped out. When do you think we’ll start worrying about it… 2015? What a mess.
Last month’s budget deficit was the first April loss since 1983. We hit most of the details of the latest deficit yesterday, but felt obligated to raise this one point today: How can Uncle Sam possibly lose money during tax month? Only the U.S. government can “earn” $266 billion in one month (mostly our confiscated income) and still end up $20 billion in the hole.
All the above is weighing heavily on the market today, but the latest retail sales numbers are pushing traders over the edge. Retail sales fell 0.4% in April and were revised down to a 1.3% decline in March, the Commerce Dept. said today. The Street was expecting flat sales this month and no March revision.

Declines for both months proved to be the last straw for an already nervous market. After registering small gains yesterday, the Dow and S&P 500 raced down almost 2% at the opening bell this morning.
“Who’s surprised?” asks our currency man Bill Jenkins in response today’s retail “shock.” “Economists predicted a rise in sales from last month, but based on what? Here’s the bottom line: 3 million more people have been added to the lines of the unemployed since the beginning of 2009. I’m not sure where a person learns the following lesson, but apparently not in Keynesian Economics 101. So our readers can learn it here: Unemployed people spend no money. (Or at least they spend a lot less, if they have any sense.) Less spending equals fewer sales.

“As of the first quarter, we have already had record budget deficits, and Moody’s has announced that with the planned and continued spending, America puts at risk her AAA bond rating. What will happen to the dollar then? Dollar weakness is going to shock the world even more than today’s shocking sales numbers. Get ready to short the dollar aggressively.”

Need a hand trading currencies? Then definitely check out Bill’s Master FX Options Trader. His strategy is one of the only ways to profitably trade worldly monies without taking on loads of leverage. Details here.
But don’t short the ol’ greenback just yet. Today’s equity decline is doing wonders for the dollar. After cratering at a four-month low of 81.9 yesterday, the dollar index is back up to 82.5 this morning.
“One of the most exciting growth industries,” writes Jim Nelson, finding opportunity amid today’s sell-off, “is Far East Internet service providers. According to internetworldstats.com, 73.8% of Japanese and 76.1% of South Koreans are on the Internet. Even about one in every four Chinese citizens has Internet access. But too many forget that these superpowers aren’t the only places where you can make big money.

“Indonesia has the world’s fourth largest population, over 200 million people, but it ranks No. 16 in GDP purchasing power. Internet access is trailing in the region, with just 10.5% of its population online.

“But it’s the growth that impresses us. In 2000, only 2 million Indonesians had the Internet. That number is going to reach 25 million this year. That’s a massive growth rate… and serious investing opportunity.”

Jim just gave his readers a solid dividend-yielding play in this sector. If you’d like to get the details, be sure to check out his Lifetime Income Report.
Oil is holding up today, even though stocks are in the dumps. As we write, the front-month contract is actually up about a quarter from yesterday’s close, to $59 a barrel.
“Take your coal profits and run,” Bryon King told his Outstanding Investments readers late yesterday. “Coal is besieged. The coal industry wrestles daily with weak demand due to the U.S. economic slowdown. At the same time, the build rate for coal-fired power plants is at a historic low. Sure, in ‘ordinary’ times, coal might stage a comeback. But these are not ordinary times.

“The ‘rock that burns’ is under attack from many quarters of the environmental movement. Primarily, coal is guilty of the environmental sin of emitting carbon dioxide when burned — much more, pound for pound, than natural gas or oil. But it’s not just coal. Coal ash is also under attack, as are the many other byproducts of coal combustion (mercury, arsenic and much else).

“Is the anti-coal movement over the top? Yep. Is the anti-coal ‘science’ valid? Some of it is good; some is dramatically bad. Will the U.S. economy benefit from a precipitous rush away from burning coal? Nope. Will many Americans eventually look back and regret it if the current anti-coal frenzy prevails? Probably.

“But for now, I’m not going to get into the whole scientific and economic debate over the merits of the anti-coal claims. I’m just going to say that if you have a chance to make money in your coal positions, you should take it and move onto other ideas.”
It’s a great day to own some gold. The spot price has perked up $20 from yesterday’s low, now at just over $925 an ounce.
“You asked a question yesterday,” a reader writes: “‘Would you expect more credit card losses during this recession (aka the credit crisis) or the tech bust?’

“For what it’s worth (not much, as it is only my gut-feeling guess), here’s an extreme answer. I expect that the chart you’ve provided will hit 20-30% by the time it is all over, many years from now. Unlike any previous recession/depression, the use of credit cards today is at an all-time high globally, particularly in the U.S. As such, The Daily Reckoning Dicta No. 2 as provided by Mr. Bonner comes into play: ‘The force of a correction is equal and opposite to the deception that preceded it.’

“And with the marginal utility of debt approaching zero with each passing day, one may even be enticed to provide a higher number than merely 20-30%, but I do not wish to go that far into the gloom.”

The 5: Thanks for the forecast.

Source: The Housing Bottom, Doomed Entitlements, Retail Sales Suffer, Sell Coal and More!

Platinum soared as high as $1165 in early New York trading but then it too fell off, eventually getting stuck between $1140 and $1150, and ending at $1145, up $10. Overnight, platinum is little changed.

Silver prolonged its string of positive days and, although it too peaked around 9 a.m., after pushing past $14 to $14.13, it rebounded from a fall to $13.70 to take back a chunk of the lost ground and close at $13.79/oz., up 6 cents. Overnight, silver is trending higher. (Click here for charts)

While yesterday was pretty much about consolidation until the market can digest the bank stress test reports, silver and platinum still managed to post positive numbers even as gold got a serious case of the blahs.

Precious metals fanciers had cause to be a little disappointed, as equities fell off, oil gushed higher and the dollar weakened. But that was apparently insufficient to overcome investor indifference.

With gold a bit in the doldrums, this is a good time to consider some larger issues. Yesterday, longtime gold watcher Julian Phillips, writing for Goldforecaster.com, pondered the implications of the recent revelation that China has been quietly bulking up on gold.

Wrote Phillips: “The fact that China is a buyer for reserves is far more important than how much it currently holds. There is no other conclusion we can reach other than China recognizes its worth as a reserve asset! .

“On the bigger global screen, this revelation stops the concept of gold as a ‘barbarous relic’ as bankers had hoped it would become in the last 50 years and brings it back into a monetary role, even if it is minor at this point … If China buys a larger percentage of local production going forward, then it is probable that central bank buying will overtake central bank selling in the years to come. This alone takes gold away from the perception of its being an archaic relic. More than that it brings gold back to a particularly valued asset ‘in extremis’, the times we are now living in.

“This has to force a rethink of the role of gold by unwilling bankers and the recognition that selling it will not elevate the value of paper money any more. The confidence lost in the last two years cannot be shored up by such foolish practices. It is now time to recognize the dangers not only of today’s crises, but of the dangers that lie ahead, even if the world economy returns to the halcyon days of early 2007 [which appears to be the aim of central bankers and governments now]. The dangers that led to the ‘credit crunch’ will return, if successful. So prudence demands recognition of gold’s value when life gets painful.”

Obviously, we concur.

Source: Gold Gives Off Static

General Growth filed for Chapter 11 seeking protection from creditors after it amassed $27 billion in debt accumulating over 200 shopping mall properties. The filing covers 158 of its U.S. malls, but excludes its joint-venture properties and third-party management business.

The Chicago-based company – the country’s second largest shopping mall owner – owns such valuable properties as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston. It listed total assets of $29.56 billion and total debt of $27.29 billion.

“We intend to emerge as a leaner company,” General Growth President Thomas Nolan told Bloomberg News in an interview. “We want to come out as a less leveraged company. Our business model remains strong.”
In the eyes of many observers, the filing brings the U.S. real estate collapse full circle as commercial properties values are now plummeting in concert with the ailing residential housing market. Commercial real estate prices in the U.S. dropped 15% last year, according to Moody’s Investors Service (MCO).

Many commercial real estate companies have been squeezed out by the credit crunch as banks continue to curb lending.

Nolan said General Growth was a victim of “a broken capital market.” No one could have predicted the severity of “the credit markets shutting down,” he said.

Last November, General Growth warned it might have to seek protection from its creditors because it was unable to refinance maturing debt obligations. The company was trying to restructure bonds it floated to finance a $14.3 billion all-stock deal for Rouse Co., a high-end mall dealer it bought in 2004.
“It just tells you that this debt can’t get redone, especially for big properties,” RBC Capital analyst Rich Moore told Reuters.

“General Group has long been the poster child of too much debt,” said Moore.”General Growth has malls, and malls are some of the biggest assets out there.”

Analysts said the bankruptcy might allow competitors to cherry-pick some of General Growth’s more desirable properties, giving Simon Property Group Inc. (SPG) the opportunity to bolster its position as the No. 1 mall operator.

“I think Simon’s going to be able to pick up some of these assets on the cheap,” Dan Fasulo, managing director at real estate research firm Real Capital Analytics, told Bloomberg.

However, Fasulo also called General Growth’s filing “the beginning of the end,” which could lead other companies to fail.
“This bankruptcy will drive down the values of mall assets in the United States. It’s going to put, I believe, more supply on the market than can be absorbed by investors,” he said.

About $814 billion of commercial mortgage debt is expected to mature over the next two years, which will only serve to put more pressure on the market, according to real estate research firm Foresight Analysis.

Meanwhile, the residential market chimed in with its own bad news.  On the same day General Growth filed, the U.S. Department of Commerce said builders broke ground on 10.8% fewer homes in March and new permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.

“Buyers seem to be more interested in picking up bargain- basement prices in the existing-home market than in the new-home market,” Robert Dye, a senior economist at PNC Financial Services Group Inc. (PNC), in Pittsburgh, told Bloomberg News.

Source: General Growth Files Biggest Real Estate Bankruptcy in U.S. History

After all, the 44 year-old president of Euro Pacific Capital was mocked on networks like CNBC and Fox for predicting “wild” things like a real estate bust, a credit crunch, and a deep recession. Two years later, and Schiff’s original prophecies have come true.

That validation has been earning Schiff some much-deserved credibility in the financial world, where until now he’s been dismissed as overly pessimistic.

But does Schiff really deserve the acclaim he’s recently found?

While Schiff has proved himself as an economist, his ability to parlay those predictions into profits for his clients was questionable for 2008. For the last few years, he’s been betting big on overseas investments and precious metals – two areas that got hit as hard or harder than the S&P last year.

According to Morningstar, the average international equity fund performed 7% worse than the average U.S. stock fund in the last year.

Just look at the iShares MSCI Belgium (EWK), the worst performing ETF last year according to SmartMoney.com, or the iShares FTSE/Xinhua China 25 ETF (FXI), which lost 49% in 2008.

Another of Schiff’s investment strategies has been to exit the U.S. dollar in favor of more fundamentally sound currencies. This too has proved untimely since anxious treasury investors have driven up the dollar in the last year.

Just because Schiff’s favored investments didn’t do well doesn’t mean that others’ investments didn’t. Just look at former hedge fund manager Andrew Lahde, whose real estate fund made 866% last year by betting that defaults would rise. Schiff was an early investor in the fund, but even that play couldn’t shake the losses on his other picks.

Some of the market’s other doomsayers, like Nicholas Nassim Taleb, banked gains for the year, so why couldn’t Schiff?

Likewise, a lot of individual investors did well in 2008 by betting against the market. But if you’re still trying to decide where to put your money in 2009, you’re not alone. While the market is a lot less volatile than it was six months ago, it’s still wild enough to give pause to even the most decisive investors right now.

Now, I don’t think Schiff should be written off – he took a risky stance against CNBC’s perpetual bulls, and it paid off. He’s also helped to bring attention to some of our country’s very real financial problems. That’s something he should be congratulated for.

We’ll see where his investments go in the future, but it doesn’t look like his opinions are wavering for the time being. “…My problem has always been that I see things too clearly and too far in advance,” he said in the Fortune article, “Other people don’t understand what I do, so the markets might not validate what I’m saying right away. But they will eventually.”

Source: How to Profit Better Than “Dr. Doom”

Testifying after former Fed Chairman Paul Volcker, Geithner told the committee the United States is facing “the mother of all financial crises.” Geithner also urged Congress to quickly pass a robust stimulus plan, Bloomberg News reported.

“If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system,” he told the committee at a hearing on his nomination.

The credit crunch and housing market collapse require a “comprehensive plan” that must be coordinated with international partners to effectively relieve global economic conditions, Geithner said.

Promising to reform the TARP program, Geithner said the Obama administration will require banks receiving government money to provide proof of increased lending. Some Senators sitting on the panel are upset at how the Treasury-administered financial rescue program has been run.

“We have to fundamentally reform this program to ensure that there is enough credit available to support recovery,” Geithner said.

He said the administration is considering expanding the system to help small businesses and families that are losing their homes and jobs. Former Treasury Secretary Henry Paulson, so far, has limited the program to injecting capital into banks.

The Obama team is also considering further steps to shore up the banking system, including the possibility of having the government take bad assets off banks’ books, according to people familiar with the thinking of the Obama team, Reuters reported.

Geithner, currently president of the New York Federal Reserve Bank, said it was possible the administration could establish a “bad bank” to soak up toxic assets held by banks that are discouraging them from lending.

Banking Regulations Should Change

Geithner also called for “comprehensive” regulatory changes to prevent a future economic crisis of this magnitude – the worst since the Great Depression – from happening again.

“We need to move quickly to build a stronger, more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” he said. “Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy.”

His statements echoed the sentiments of our own Shah Gilani, who provided guidelines on how to implement effective regulatory reform in Monday’s edition of Money Morning.

“The inability of the present system of regulation to deal with the complexities of expanding capitalism and protect us from inordinate concentrations of systemic risk has been tragically demonstrated. It is time that the crumbling walls of regulation are replaced with a new singular, transparent, effective and dynamic regulatory apparatus,”Gilani wrote.

Geithner, president of the Federal Reserve Bank of New York, was also grilled by lawmakers about his failure to pay $34,000 in taxes over several years in the first half of the decade. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – fueled the doubts of some Republicans, who were blocking efforts to fast track Geithner’s nomination.

Geithner said his tax errors were “careless” and unintentional, and he apologized to the committee for the toll they have taken on his confirmation process. As reported by Money Morning on Jan. 19, Geithner actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors.

Apparently it worked. Confirmation appears to be a fait accompli as several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Geithner made “disappointing mistakes” that shouldn’t derail the nomination.
“After discussing them with Mr. Geithner, I believe them to be innocent mistakes,” Baucus said.

Source: Geithner Promises TARP Overhaul, Regulatory Changes to Solve “Mother of All Financial Crises”