Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

Good day… And a Marvelous Monday to you! My weekend turned out to be quite grand, as all the things I said that would make it special came to pass! My Cardinals clinched their division. My beloved Missouri Tigers won on Friday night, and my little buddy’s 8th grade Flyers won their game against their arch rival… WOW!

Well… Here we go with the last 3 days of September… A month that saw Gold return to $1,000, and the non-dollar currencies all return to levels they held a year ago, having withstood the onslaught of flight to safety trades that benefitted the dollar after the Lehman Bros collapse.

We’ve seen the Fed Chairman sound the “all clear horn” and me question, why anyone would still be listening to this guy! And our country is becoming quite divided over the health care issue… So… There we have it… September all rolled up in a nice package, to take out the trash!

Ok, we’re all caught up now… On Friday, the currencies gravitated toward weaker levels, as the dollar buying continued, with stocks leading the risk assets lower… But it hasn’t been a “taken to the woodshed event” for the currencies yet… So, the question remains if this is the correction we’ve been waiting for or not…

Last week I gave you some quotes by Nassim Taleb, but forgot to tell you that he was the author of the book, “The Black Swan”… Nassim Taleb was talking to a group of business people in Hong Kong this weekend, and asked the same question I’ve been asking, as he wanted to know why Big Ben Bernanke, and Treasury Sec. Tim Geithner kept their posts after failing to foresee the collapse in global credit markets. Taleb said, “Bernanke, Geithner, and Summers didn’t see the crisis coming so why are they still there? Bernanke is like a pilot who didn’t see a hurricane.”

Good stuff, eh? Especially, when you read the Washington Post and see that the Fed was ignoring pleas from Consumer Groups, as far back as 1999, that subprime lending was expanding… Turning a deaf ear on the Consumer Groups, the Fed left rates low, and accommodating… What the heck do we have these guys for any way! The Fed has been the root cause of every financial problem we’ve had in this country since they were created in 1913…

OK… Last week, the Financial Times ran a story regarding the dollar laying claims to being the top Carry Trade Currency… Let’s read a bit from the FT… “For years, the yen was the currency of choice to fund international Carry Trades. Analysts say negligible U.S. interest rates, its quantitative easing measures and little sing that the country is set to withdraw from its ultra-lose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.”

Well… I had already told you all that, but when you see it in the FT, it obviously gives it more credence, eh?

But, let’s talk about that for a minute… If the dollar begins to become the new funding currency of the Carry Trade, that means that people will be selling the dollar short, and using the proceeds to buy a higher yielding asset… Well, in today’s markets, there aren’t what we would traditionally consider to be “high yielding assets”… For the Carry Trade is quite risky, therefore you need to have some cushion from the “buy side” asset… The only “real interest differential” in the world resides with Brazil… But the real is traded on a non-deliverable forward, which means it’s just as liquid as say Aussie or kiwi, which were the main beneficiaries when the yen was the funding currency.

So… This new Carry Trade, might have to wait a bit before getting into 4th gear. When the Reserve Bank of Australia (RBA) begins their rate hike cycle, probably by year-end, then it might begin to make sense… Which is just another thing in the gauntlet the dollar has to run through every day!

Speaking of the Japanese yen… The yen reached a 8-month high of 89.30 overnight. I told you last week that yen is getting a lot of love from Japanese exporters that are repatriating their profits in yen, ahead of the end of the month / quarter.

I had to laugh out loud when I read a story about the Japanese Finance Minister, Fujii, who apparently hadn’t gotten the memo about how Finance Ministers are supposed to jawbone the yen lower… Recall, I had told you that he said over and over again that he supported a strong yen… Well… That all changed once he got the “memo”… Fujii said last night that, “people were mistakenly saying he supported a strong yen.”

Hey Fujii, got the memo now? Is it clear?… Crystal… OK, now go out there and jawbone the yen weaker, or you’ll be falling on a sword!

This week is chock-full-o-data all over the globe… In the U.S. we’ll end the week with the Jobs Jamboree, while Japan will print their latest Tankan report (which checks the pulse of the economy), Canada will print their latest GDP, China will print their latest Manufacturing Index, and Australia will report on Retail Sales…

In the Eurozone, Germany re-elected Angela Merkel as chancellor… Now, she just needs to figure out how to deliver those tax-cuts she promised during the campaign!

The euro had climbed back to 1.4720, but the election results were not taken as “euro friendly”… Remember, I told you that there could be tax-cuts coming in Germany, which is the Eurozone’s largest economy. Tax-cuts are great, if you are in a fiscal position to do so… Germany has a nascent recovery at best going on right now, so the timing is not what traders are happy with… Therefore the euro dropped like a stone to 1.4570, but then bounced off that is back to 1.4635 as I write…

And the Reserve Bank of Australia, (RBA) which I mentioned earlier was in the news overnight, as the RBA Gov. Stevens gave a speech, that was hawkish… Stevens mentioned that the interest rates needed to move off their “unusually low levels”. He also pointed out something that should be quite recognizable by all Central Bankers now, but apparently not here in the U.S…. And that is that “imbalances build up when rates are left too low for too long.”

Well… The highly touted G-20 meeting last week ended not with a bang, but with some newfound strength as a group… Recall on Friday I told you that they would replace G-8 as the watchdog for the economies of the world. That news was announced later on Friday… G-20 ended with leaders from the G-20 nations saying that they plan to cooperate on an overhaul of financial regulations to prevent arbitrage in the global system. By the end of next year, banks will be required to hold more capital, and compensation policies will need to be linked to longer-term performance.

You know… When the media reports “Bankers compensation” they’re not talking about real Bankers, per se… They’re referring to the Merrills and Goldmans of the world that pay out Billions in bonuses, or did at least… Just thought I would clarify that point…

And then there was the British Pound sterling, which I kept saying over and over again, that this dance is gonna be a drag, no wait! I kept saying over and over again, that the pound sterling strength was a house of cards… Well, that house of cards is collapsing under the pound sterling… Even the speculators that were buying it because it was a part of the mix of currencies that made up the IMF’s SDR’s (Special Drawing Rights), are backing out now…

Data in the U.S. besides the Jobs Jamboree at the end of the week, include the S&P/ CaseShiller Home Price Index for July which will print tomorrow, along with Consumer Confidence, which is expected to be stronger… I guess the people they surveyed haven’t seen the Bernanke video collection of his statements that couldn’t be more wrong, and still believe him when he says it’s all OK! Wednesday brings us the final print of 2nd QTR GDP. Thursday has two of my faves, Personal Income and Spending, and then Friday’s Jobs Jamboree…

So, if the data continues to show some strength, but nothing to speak about… I would think that the risk takers will remain confused, and it could lead to further selling in stocks, and other risk assets… Don’t really know… Just an opinion on what might happen…

OK, to recap… The dollar has rebounded, but nothing too strong to speak of as of this morning. G-20 is the new world economic watchdog, there’s a ton o’ data to print this week, all over the globe, and Japanese yen continues to outperform the other currencies VS the dollar.

Currencies today 9/28/09: A$ .8665, kiwi .7135, C$ .9135, euro 1.4650, sterling 1.5870, Swiss .9695, rand 7.44, krone 5.82, SEK 6.9750, forint 184.20, zloty 2.88, koruna 17.22, RUB 30.11, yen 89.30, sing 1.4190, HKD 7.75, INR 47.98, China 6.8274, pesos 13.57, BRL 1.7890, dollar index 76.90, Oil $65.77, 10-year 3.32%, Silver $15.99, and Gold… $992.10

That’s it for today…I hope your Monday is Marvelous!

Chuck Butler

Source: A New Carry Trade Currency?

The downturn took $12 trillion off Americans’ net worth. The feds have pledged about $12 trillion to fix the problem.

But wait, where does government get any money?

Hey, they borrow it, just like consumers did. And besides, it’s ultimately the same money – taxpayers’ money. So what’s the big diff?

The big diff is the subject of today’s Daily Reckoning.

The first big diff is that the feds don’t spend your money the way you would. Private citizens spend money they don’t have on things they want but don’t need. The feds spend money that doesn’t belong to them on things that the rightful owners don’t even want.

Wait a minute. US markets were closed yesterday for Labor Day. With no figures to report, we should talk about something important. What’s important about macro-economics? Nothing. It’s 95% claptrap. The other 5% is pure fraud.

At least as practiced by the leading macro-economists of our time – such as Ben Bernanke, Tim Geithner and Larry Summers. It’s just a show-off sport… the idea is to impress the world with some fancy data-heavy formula… win the Nobel Prize and save the world. That way, you get what all men crave… money and power. Why do men (and women) want money and power? Aw c’mon… we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success, or what?

The great Khans of today are no longer the steppe warriors on horseback. They’re basketball players, rock ‘n’ roll stars, actors, and hedge fund managers. And, oh yes, occasionally, economists.

The link between economic theory and procreation is probably very weak; but that doesn’t stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President’s Council of Economic Advisors… or to the central bank… or get a professorial post at Princeton… etc. etc. This you do by producing tomes, formulae and hypotheses. And, don’t forget to write a piece for the Wall Street Journal from time to time.

Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.

If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macro-economist who tells people to leave well enough alone… and to let the forces of natural economics sort out their own problems? No one… at least no one who is running for public office. Instead, they want someone who will promise to “Save the World.”

Save the world from what? Why… from the damage done by other economists!

Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists… and Daily Reckoning commentators… laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.

But they had their charts and graphs… their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favoured home ownership, for example… even by people who were bad credit risks. They set up Fannie (NYSE:FNM) and Freddie (NYSE:FRE) to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.

And now… wouldn’t you know it… Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion… about $124,000 per household. Total debt/GDP tripled since 1980.

And now it’s pay-back time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…

And so what do the simpletons do? Private citizens are unwilling to consume… so they push the government to consume their money for them!

“Frugality is the new normal,” says an Associated Press report. One study suggests that consumer will spend 14% less – even AFTER the recession is over.

Boomers are out of time. Out of money. And they’ll be out of luck unless they trim expenses and begin saving.

They’ve figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn’t done that since 1947 – when they first began tracking it.

Consumers’ net worth has taken a big hit – down $15 trillion, from $65 trillion to $50 trillion.

And so, the simpletons think the government has to rush in where fools foundered… that is, rush in with more money.

But where do the feds get any money? They have to borrow it… or print it. There’s a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won’t be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they’re right. Sometimes – such as when economists mislead them with a lot of gibberish numbers – they’re wrong. And when they’re wrong, borrowers default… and lenders lose money.

The feds, on the other hand, can’t default. At least, not when their debts are calibrated in money they control. But there’s the risk right there. And it is a different kind of risk. It’s the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.

Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so… perhaps his sense of honour would prevent him. Or maybe he would fear that he wouldn’t be allowed to borrow again. But if his back were to the wall, there is little doubt that he’d soon be in the print shop.

The feds are in the print shop already. They’re printing up more dollars intentionally – to try to get inflation rates up… and to finance federal borrowing. It will be a miraculous thing if their new dollars don’t eventually cause inflation. But the macro-economists who run the print shop tell us not to worry. They’ve got it all under control. They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.

The simpletons – who had no idea that the crisis would come… and then thought it could be easily contained… and then mistook it for a monetary, banking crisis… and then judged it over before it had really started…

…these same simpletons still do not understand that the problem is not a lack of money, it’s a surplus of debt…

…they now reassure us that they know just how much money to put into the system… and just when to take it out.

If you believe them… you might want to stay in stocks and US bonds. If not, you should head for cover.

The country is being run “by a gang of clueless bozos,” says Lee Iacocco, in his new book.

Source: Head for Cover

For starters, Guaranty Financial of Texas went belly up late Friday and secured a spot in the history books. With $13 billion in “assets,” the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history.

Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. We’re surprised on two fronts here: 1) That a bank from Spain — strapped with double-digit unemployment and a wretched housing bust — wants to bring their euros to I.O.U.S.A. 2) That BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Lone Star State. That could be an interesting trend to watch.

Three other banks failed along side Guaranty: CapitalSouth, First Coweta and ebank. That brings the yearly total to 81.

This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up:

The DIF does have a source of income — it taxes member banks a significant “insurance fee.” But we have to think that the DIF is still in bad shape, perhaps even empty… and that the FDIC will soon be hitting up someone (Tim Geithner, Joe Taxpayer and/or U.S. banks) to refill their coffer.

The FDIC will provide their second-quarter report tomorrow, which among other things will include a look into the DIF and their infamous bank “problem list”… could get ugly. We’ll keep you up to speed.

“Recent bank failures remind us of the problem loans festering on small and regional bank balance sheets,” writes Dan Amoss, “and that many of them are marking loans at fantasy levels. The secondary market value for some of the worst loans, like construction loans, is 20 or 30 cents on the dollar.

“There’s a backlog of at least a few hundred insolvent banks that need to be shut down and sold into stronger hands. Bank stock bulls are ignoring the credit losses yet to be recognized, so there are lots of shorting opportunities in the sector. Many banks will not be able to “earn their way out” of their credit losses.

“The problem is, there aren’t many strong buyers with lots of capital out there. Those that are, like private equity groups, are buying only after the FDIC agrees to eat most of the credit losses, and the buyer is gifted with the remaining shell — the profit-making engine of spread lending.

“It’s understandable that the FDIC doesn’t want much publicity about the Deposit Insurance Fund; it wants to maintain the public’s confidence that it can ‘insure’ all deposits with just a few basis points of capital reserves and skimpy premium income. The fund is clearly not adequate to cover the bank failures still in the pipeline, so we’ll see another ‘special assessment’ imposed on all other banks, which will ultimately be passed on to depositors via lower interest rates.”

Critical banking analysis has been one of the hallmarks of Dan’s Strategic Short Report. His brand of scrutiny gave readers 162% gains betting against Allied Capital (NYSE:ALD), 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. Today is the last day we are offering his latest financial short play for just $1. Capture this truly rare opportunity by clicking here… midnight tonight, the deal’s off.

Source: The Banking Crisis Cometh

“It is critically important that Congress act before the [debt] limit is reached,” Tim Geithner wrote over the weekend in a letter to lawmakers, “so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations.”

Sounds like our Treasury Secretary is finally putting his foot down, insisting that Congress pull back its lavish spending programs and start addressing our incredible $11.6 trillion national debt.

Wait… what’s that? Oh, Geithner’s actually asking for Congress to raise the debt ceiling. If Congress authorizes our government to dig deeper than $12.1 trillion in debt (our current glass ceiling) our partners here and abroad will somehow “remain confident.” How perverse is that?
The U.S. budget deficit rose $181 billion in July, to a record $1.3 trillion, the Congressional Budget Office reported over the weekend. You know the drill by now… tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%.

That’s a $530 billion increase in spending from fiscal 2008.

The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008’s record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers.
Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of their way to publicly embarrass Big Three execs for jet setting from Detroit to D.C.

Prepared for a public backlash, Congress has a several lame talking points at the ready… that the current fleet of private jets is outdated… that having new high-tech planes will be better for the environment and ultimately lower cost… and that these planes will be used mostly by the Pentagon and only about 15% of the time for lawmakers.

But here’s our favorite: Legislators are eager complete the transaction so that they can have a new fleet in time for the busiest congressional travel period of the year… August, when they are all on holiday!

Here’s the crucial difference between 2009 and 2007: While the government is still spending with reckless abandon, the consumer is rapidly deleveraging. Consumer credit fell for the fifth consecutive month in June, the Fed announced Friday. Credit outstanding fell by $10.3 billion in the month, to a total of $2.5 trillion. That’s more than double what the Street expected. Revolving credit, namely credit cards, fell by $5.2 billion — a record 10th month in a row of decline.

Now in a state of contraction since February, the average American is embarking on the longest credit pullback since 1991.
“We are clearly in an economy-wide deleveraging process that will last for years,” writes Strategic Short Report’s Dan Amoss. “We are not in a typical inventory-led recession. Sure, the next few years will not mirror the 1930s, because the government and central bank are debasing the currency to prevent a dreaded debt deflation spiral. We probably won’t have 1930s-style bank runs (although the FDIC is running dangerously close to needing to tap its line of credit with the Treasury to replenish its Deposit Insurance Fund).

“But make no mistake: We will pay for the inflationary bailouts at some point down the road with a currency crisis. Central banks cannot keep abusing savers and the bond market to this extent without eventually provoking a collapse in demand for paper money.

“A collapse in demand for paper money, not a decline in the ‘output gap,’ will eventually bring about inflation. We’ll see signs of it as real Treasury bond investors keep balking at these low rates at Treasury auctions, leaving the Fed to step in and monetize the debt. Eventually, there’s a risk that the Fed will lose the tiny bit of independence it has left and the printing press could come under the control of Congress, which would accelerate the endgame for the U.S. dollar. The market for gold-related assets will look ahead to this possibility.”

Dan’s Strategic Short Report readers own calls on GDX, and recently took on a short position in a very well-known bank. We’ll be telling you much more about this fishy financial soon… keep an eye out tomorrow.
The benchmark 10-year Treasury bond just suffered its worst week since 2003. Investors forced yields up 38 basis points last week, to as high as 3.88%.
But the stock market continues to climb. Friday’s better-than-expected jobs report (more on that in a minute) bumped the major indexes up about 1.3%, to their highest levels since October. The Dow and S&P 500 finished up over 2% for the week.

The market looks a bit timid today. After opening down, the Dow and S&P are near break-even as we write
“It’s been a rough year for dividends,” says our income analyst Jim Nelson, “but if you know where to look, your income will be just fine. Below is a breakdown of S&P 500 yields by sectors:

“As you can see, the biggest loser on the list is financials, which shouldn’t be a surprise. The segment’s dividend yield fell 300 basis points (right-hand column) from last year to now.

“The sector that pays the most is doing so under the radar: telecommunication services. This is a favorite of ours. That 14 basis point increase is primarily due to AT&T and Verizon — both paying out around 6%.

“These dividends aren’t nearly as safe as we’d like, though. Instead of gunning for the U.S. telecom industry, we like to play that game in emerging markets. We already have a Pacific Rim telecom in the Lifetime Income Report portfolio, and we’ll be adding another this week. Even after that, we’ll continue to keep our eyes peeled and noses to the ground in case something else pops up in that industry.

“Going back to that table, you can see the next two best-paying sectors are utilities and consumer staples. Our portfolio is already loaded with these, and we’ll continue looking in these directions as well.”

If you seek stable, dividend yielding stocks with serious upside potential, Jim’s Lifetime Income Report is where it’s at… details here.
It’s Monday… time to check in on the annual bank failure tally: Two in Florida and one in Oregon bit the dust over the weekend. That brings the 2009 running total to 72. The three took a $185 million chunk from the FDIC’s war chest. So far this year, the agency has lost over $15 billion from its bank insurance fund.
The dollar is holding onto its surprise Friday rally today.As we mentioned then, we were taken aback when the dollar index jumped from 78 to 79 after the better-than-expected jobs report.

“For months now,” explains Bill Jenkins, “every time there was good news for the economy (like Friday’s jobs report), it was bad news for the U.S. dollar. But not on Friday. The initial reaction to the good U.S. news was to sell the dollar. Then suddenly, the market reversed its course and began selling the other currencies with both hands, and buying the U.S. dollar, instead. In other words, the tide shifted, and good news for the U.S. economy also became good news for the U.S. dollar.

“So has the U.S. dollar put in a bottom here? Are we about to see a knee-jerk reaction favoring the greenback to other currencies? Only time will tell. But FX traders better be on alert. My readers saw a 42% profit in the Swiss franc on Friday’s move.”

42% in one day? Nice. There’s plenty more where that came from… just check out Bill’s Master FX Options Trader.
Since the dollar remains strong, gold is still under pressure. The spot price is down about $20 from Friday’s high, to $945 an ounce.
“Why is every analyst, yourselves included,” a reader asks, “so quick to believe the government’s unemployment and GDP figures, when the political interests of the White House are at stake in the numbers and the White House controls the executive departments that generate these figures? We know from past unhappy experiences (e.g., weapons of mass destruction in Iraq) that the White House is capable of lying when it suits political purposes. Not to mention that GE, Murdoch and the other oligopolists who control the news we get are politically and financially motivated to play along and hype the figures.”

The 5: We’ve talked about the dubious nature of the jobs report so many times (like here, here or here) that we thought we had gotten our point across. Guess not.

Uncle Sam — though the power of statistical ploys like the birth/death model, seasonal adjustments and margin of error — can put the jobs numbers just about wherever he wants. We follow ’em because they can greatly affect the prices of your investments, they influence policy and public opinion and there are very few viable alternatives. We quote folks like John Williams often so you get a worthy alternative point of view. We could only be more contrarian by ignoring government stats altogether, which would be a disservice to you, whom we promise to inform, enrich and entertain.

And speaking of Mr. Williams:

“Heavily distorted seasonal adjustments have artificially reduced the levels of new claims for unemployment insurance,” writes John in his latest Shadowstats alert. “They appear to have flowed through not only to July unemployment and payroll reporting, but also to the July purchasing managers manufacturing survey.

“July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed the pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries, as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported seasonally adjusted monthly gain in July, up by 28,000 jobs…

“The severity of the ongoing economic contraction has started to generate other distortions in data reporting:

• Year-to-year comparisons will begin to see a flattening in annual declines, as year-ago numbers used in comparisons were in severe contraction.
• Extreme economic disruptions have distorted patterns of regular activity and related seasonal-adjustment processes.
• The birth-death model overstates payroll levels during recessions.
• Short-term discouraged workers begin to disappear from the broader BLS unemployment measures as their “discouragement” extends beyond one year…

“While Wall Street likely will hype the July employment results as confirmation that the economy has turned the corner, such hype and resulting overly optimistic expectations should be slammed in the months ahead, when the positive reporting distortions reverse out in a normal catch-up process.”

Source:  The Debt Ceiling, Dividend Plays, A Currency Sea Change and More!

Sounds like our Treasury Secretary is finally putting his foot down, insisting that Congress pull back its lavish spending programs and start addressing our incredible $11.6 trillion national debt.

Wait… what’s that? Oh, Geithner’s actually asking for Congress to raise the debt ceiling. If Congress authorizes our government to dig deeper than $12.1 trillion in debt (our current glass ceiling) our partners here and abroad will somehow “remain confident.” How perverse is that?

The U.S. budget deficit rose $181 billion in July, to a record $1.3 trillion, the Congressional Budget Office reported over the weekend. You know the drill by now… tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%.

That’s a $530 billion increase in spending from fiscal 2008.

The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008’s record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers.

Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of their way to publicly embarrass Big Three execs for jet setting from Detroit to D.C.

Prepared for a public backlash, Congress has several lame talking points at the ready… that the current fleet of private jets is outdated… that having new high-tech planes will be better for the environment and ultimately lower cost… and that these planes will be used mostly by the Pentagon and only about 15% of the time for lawmakers.

But here’s our favorite: Legislators are eager to complete the transaction so that they can have a new fleet in time for the busiest congressional travel period of the year… August, when they are all on holiday!

Source: The Debt Ceiling Riseth

The Dow slipped a bit yesterday – only 39 points. Everyone is watching. They want to see how far this rally carries on. Many think it is more than a bear market bounce; they think it is for real.

The prevailing opinion is that quick action by the feds avoided a more serious meltdown. Ben Bernanke says he was working to prevent a “second great depression.”

And now that the crisis is past, the economy is slowly climbing out of its hole. The second quarter showed GDP falling at 1% per year in the US… rather than the 6.4% rate recorded earlier in the year. Housing sales have perked up. Oil is trading above $71 – a sign of renewed economic activity. And gold seems to be getting ready for another assault on the $1,000 mark – a sign of growing inflation pressures.

At least… that’s the way the world sees it.

Here at the Daily Reckoning, we look… we squint… we wipe the fog off our glasses and try to tear the scales off our eyes. What do we see? We see a financial world gone mad.

Or, perhaps we should say… a financial world that has still not recovered from the Bubble Madness of 2002-2007.

One bubble begat another. We have previously reported that the bubble era was over. Because the machinery that made it possible – the bubblelized financial industry – was broken. Well, we were only half right. The finance sector has exploded. Bear Stearns was sold for peanuts. Lehman Bros. went broke. Merrill was forced into a shotgun wedding with the Bank of America (NYSE:BAC); with Hank Paulson holding the firearm. JPMorgan (NYSE:JPM) is still in business. So is Goldman (NYSE:GS).

But now we know that even Goldman might have gone under if Paulson – ex-Goldman man – had not engineered a stealth bailout. He brought the feds in to save AIG, and in the process he saved his old alma mater too… AIG’s biggest trading partner, Goldman Sachs.

And now Goldman is in the news almost every day. It reported spectacular trading results for the quarter, lifting the entire world stock market. What’s good for Goldman must be good for the whole world economy, investors reasoned.

Then it was reported that Goldman made its money in a variety of ways – none of which had anything to do with providing genuine service to the economy. Goldman made a fortune on the feds’ own money-raising, it came out. And then it came out … Goldman was making billions by trading at lightning speed — clipping investors for fractions of pennies each time a transaction passed through the markets.

The Italians think Goldman runs their country. They’ve got the top three posts in Rome… Premier Romano Prodi is an ex-Goldman guy. So is the headman at the Treasury. And the chief of the central bank too.

They think Goldman is like a cult… a semi-secret society of insiders with the power to rule the country – surreptitiously. Like the free masons… the Jesuits… or the Illuminati.

Goldman has its boys in important posts in the US too – but not at the same level as in Italy. Tim Geithner is not a Goldman graduate. Neither is Ben Bernanke. But both have plenty of in-put from ex-Goldman associates, colleagues and handlers.

We confess an interest – we have relatives working at Goldman. But we doubt that Goldman rules the world. Just look what they said and did over the last couple of years; they had no more idea of what was going on than anyone else. No, they don’t rule the world… but they do manage to persuade it in their direction from time to time…

During the bubble years, they urged consumers, bankers, and investors to borrow… to speculate… and to ruin themselves. Naturally, Goldman made out like… well… like a bandit.

And now Goldman guys urge the government to ruin itself too. Yes, dear reader, the bubble age is not quite over. Now, there’s a bubble in government debt… Here too Goldman makes money like a bandit. The more the feds borrow… the more debt there is to buy and sell. And the more the feds stimulate… the more acts of reckless speculation there are to finance.

And the more money Goldman makes… the more politicians the firm is able to buy. Of course, they welcome campaign contributions.

And of course, Wall Street is spending record amounts in lobbying. But the real appeal is the lure of being able to join Goldman itself… of being able to spend some time in Washington… pushing business Goldman’s way… and then cash in big by joining the firm and getting a piece of the action…

*** There are two big bubbles now. There is the familiar one in federal government debt. The other is the Peoples’ Republic of China.

Andy Xie says China is a ‘giant ponzi scheme’ fed by new investors hoping to get rich. Of course, the China story is an attractive one. China’s growth rate is spectacular. Even in a worldwide financial meltdown… and the biggest depression since the ‘30s… China is still growing at greater than 8% per year – or so the figures tell us. New cities are still being built… at a breathtaking pace.

Stocks on the Shanghai exchange are up 80% so far this year. China has the biggest pile of cash on the planet — $2 trillion worth. And it has more bright, well educated engineers, accountants and economists than anywhere else… In fact, it has so many economists trained at Western universities, it is almost sure to blow itself up…

Maybe this is the Chinese Century. Maybe it is not. Either way, it seems inevitable to us that the Chinese bubble economy is going to pop. Banks are lending 3 times as much as they lent last year. You can’t increase lending at that rate and still maintain credit quality – if there was any in the first place. A lot of buildings are going up that won’t find tenants. A lot of factories are expanding that won’t find customers. A lot of speculations are going on that investors will later regret. That’s just how a bubble works!

Mr. Xie says, for example, that the cost of property in China is about the same as in the US. But wait, the average income in China is only 1/7th what it is in the USA. How can the Chinese afford American prices? Well, they can’t. They’re all betting on the greater fool theory – that they can pay any price, because some greater fool will come along and pay more. Trouble with that is that the Greatest Fool of All finally shows up… and then the whole structure collapses.

*** Barron’s says that “The Greenback is Broken.” True, the dollar has been losing ground as the stock market gains it. Yesterday, it took $1.44 to buy a euro.

“I was amazed at how expensive everything is in Paris,” said son Will. “You go into a shop to buy a few groceries… You expect to pay about $12. Instead, the bill comes to $40. Or, you stop to have a cup of coffee and a croissant. It costs you $10. I don’t know how you can afford to live in Paris…

Will lives in Buenos Aires… with frequent visits to in-laws in Florida…

“You know, it used to be so much cheaper to live in Buenos Aires than just about anywhere. But now, I think the prices are about the same as in Florida. Everything seems so cheap in Florida. And you can make some very good deals on property…

“Remember that house that I bought in 2006. You warned me not to do it. But right after I bought it people were coming to my door asking if they could buy it. One guy offered to write a check for $600,000. Then another guy offered $675,000. I began to think I really had something hot.

“Of course, then the market crashed. Now, I’m thinking of selling it for $300,000 – if I could find a buyer.

“But that’s in South Florida… only about an hour up the coast from Miami. There are places in the US where things are really, really cheap. In Iowa, maybe… Arkansas… Michigan. You can get a nice house for less than you’d pay for a garage in Paris. From that standpoint… the US seems like the place to be. You can live so cheaply. And fairly well… but quality of life is another thing… ”

The dollar is low… America is cheap. Barron’s is probably wrong about the buck. It’s not broken – not yet. Our guess is that it will rise when stocks crash this fall.

*** We’ve thought a lot about quality of life. It is not a constant, fixed thing we conclude…

There are only three main decisions you make in life – what you do; who you do it with; and where you do it. Typically, these decisions are made without much real thinking – which is probably the best way. They are not things that lend themselves to thought… but to feeling. Pity the more man who marries a woman after a prolonged and logical thought process. The poor sap is doomed. His head may be in the game, but his heart will drop the ball. The next thing you know, he will be in divorce court or therapy.

Likewise, the decision about where you live is not one that is readily subject to logical analysis. You like a place because you like it… And you may like it for a variety of reasons that defy analysis. There’s no accounting for tastes, as they say.

Living in rural Iowa probably wouldn’t suit us. We don’t have the stomach for it. We couldn’t draw enough nourishment out of such lean meat. We need more stimulation.

We like Paris for the street scenes. Everywhere we look, we see something we like to look at – people, buildings, shop windows, streets, bridges, river boats… Same thing out here at our summer place. We work in an octagonal office that sits in the park. No matter what window we look out of we see something that pleases us. A stone barn with a red barrel tile roof. Those big limousine cattle grazing in the field. And there’s the house itself… a conglomeration of a fortified farm house from the middle ages with a Renaissance-style faux-chateau cobbled onto it in the 19th century. And there is our grandson… 16 months old… playing in the gravel…

… wait… what’s he doing? Uh oh… he’s eating the gravel…

Gotta run…

Source: Goldman…Goldman…Goldman…

The Dow rose again yesterday – up 33 points, to close at 9,320. We set 10,000+ as our objective for this bounce. We’ll stick with it for a while longer.

Make no mistake though. No one knows how long this rally will last – certainly no one here at the Daily Reckoning vacation headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.

It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom – a genuine recovery. We don’t see that happening…

But people must think it is happening…

“There are signs of a recovery in the US… ” was a popular line at last night’s cocktail party. Several friends mentioned it. Each time, we had the same reply – we wouldn’t bet on it.

Yesterday, the price of oil rose; it ended the day at $71. And the dollar stayed where it was – at $1.44 per euro. Investors are betting on recovery – despite our advice.

And when the recovery turns out to be a clunker, they’ll probably put these trades into reverse. Oil will go down; the dollar will go up.

You want to speculate, dear reader? Sell oil… buy the dollar. Wait for another crash this autumn.

Why will there be another crash?

Because people believe something that isn’t true. People believe that there is a recovery… and that it is the result of stimulus efforts by the feds. The results from the second quarter show the economy still contracting… but at a slower pace, just –1% annually, rather than the -6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.

“It if weren’t for stimulus spending, the contraction [in the 2nd quarter] would have been closer to 4%,” says the editorial in the International Herald Tribune. “The stimulus is helping… and more stimulus would help even more.”

Oh? Would it? Let’s look at stimulus-in-action:

Cash for clunkers is a hare-brained scheme… but that doesn’t make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to get the money, people have to buy one.

According to the press reports, the program has been a great success wherever it has been put in place – in France and Germany as well as the US.

If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

What’s so special about autos, in other words? And why is it a good thing for people to buy cars?

Oh c’mon, dear reader, don’t pretend you don’t know. The auto industry is huge… with many lobbyists and many organized groups interested in its well-being. It is an old and well-established industry with plenty of political clout.

Tomorrow’s industries, by contrast, have no lobbyists… no organized labor… no pet congressmen… no political action committees. So who gets the money?

Here’s the problem: the meddlers are not only up against tomorrow’s industries… they’re up against tomorrow itself. It’s not as if Americans needed cars. Not at all. They’ve got plenty of wheels already. Three car households are typical. And they’re fairly new cars. Americans were on a buying spree during the bubble era, 2001-2007; they bought new cars along with everything else. So, the goal of the cash for clunker scheme is not to increase the size of the US auto fleet, it’s to make it newer.

People don’t need more cars. They only need to replace cars that get worn out. If they bought a car 5 years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash… and the buyer decides to replace his car this year rather than next.

This is heralded as a success. The feds have stimulated demand. But what about next year?

We’ll have more to say about this on Friday… but the auto example helps us see what a scam these stimulus schemes really are. They claim to boost demand. But they can’t really increase demand. All they can do is roll next year’s buying into the present year.

Sound familiar? That’s the very thing that has been happening for the last two generations. Consumers didn’t want to wait until they’d made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn’t earned yet… thus bringing forward purchases that should have been made in the future. That’s why we have a depression; now, we’re in the future!

It had to come sooner or later. After drawing consumption forward for decades, Americans had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.

But consumers spent more than they could reasonably be expected to pay back. They out-spent the future! They bought a ticket to somewhere beyond the future… to a place where they would never actually arrive. In many cases – especially in the housing market – lenders discovered they couldn’t get their money back, which is what led to the credit crunch and the collapse of Wall Street.

Of the big five – Bear, Lehman, Goldman (NYSE:GS), JPMorgan (NYSE:JPM) and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.

From one scam to another… that’s the way the feds do it. From bailing out Wall Street they now turn to bailing out the entire world economy – in a similarly fraudulent way. Tim Geithner told the Chinese last week that the US would revive thanks to increased private demand. But the feds cannot really increase demand in the private sector. Increasing real demand would mean increasing real wages. And there’s no sign of that. To the contrary, incomes are going down.

Yesterday’s news tells us that personal incomes went down 1.3% in June. . Incomes had gone up in May, by precisely the same amount – 1.3%, thanks to stimulus payments. Then, too, commentators saw it as a sign of recovery. But what the feds gave in May was taken away in June. The future caught up with the Obama administration’s stimulus efforts within 30 days. Net result = zero.

The June number reflected the biggest drop in income in 4 years. It is not surprising. We’re in a depression, remember? Salaries and wages fell 0.4% in June… the 9th drop in the last 10 months.

*** “It looks like there are finally some signs of recovery in the US,” said more than one person we talked to last night.

The occasion was a cocktail party… held on the grounds of a stately chateau. The summer social season is underway in Poitou. We are attending dinners, plays, cocktail receptions, barbecues and weddings.

Last night, waiters in tuxedos passed out champagne, foie gras canapés, and desserts while hundreds of guests milled about and talked.

“You might want to hedge your bets on this recovery,” we told one Daily Reckoning reader. “It’s probably not going to work out.”

“But I’m confused about something,” he continued. “You’ve been urging me to buy gold for years. And now you seem to be changing your mind.”

“No… no… not at all. I’m still a gold bug. It’s just that I expect this rebound to end… and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression… and that the feds can’t do anything about it. They’re going to rush to the safety of dollars… at least for a while. Probably long enough to shake out a lot of gold buyers.”

Source: Cash for Liquor Anyone?

They’re at it again.

This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.

And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes – 9% higher than estimates.

Collectively, new and existing home sales hit the highest level in eight months in June.

Sweet! Hand me some champagne – let’s celebrate. Or maybe we should hang on a sec… there’s a problem with these headlines. Here’s what you need to know about the real estate market, and what we really should be looking for.

The “Real” Story Behind The Real Estate Sales Numbers

While an 11% rise in new home sales within the real estate market certainly makes for good reading, it doesn’t mean much when it’s not put into perspective.

And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy incentives and tax credits when buying real estate.

But perhaps the most notable reason for the sales rises is the home defaults…

• Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.
• And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it’s still a hefty amount.

To understand how real people are being affected by the nascent housing recovery, look no further than the troubles Treasury Secretary Tim Geithner has had in trying to sell his house.

Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the “For Sale” sign. And that’s after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they’re now apparently renting the home at a loss.

Doesn’t Tim read the papers?

He didn’t seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It’s tough out there, mate. First, you have to persuade buyers that it’s worth shelling out $1 million-plus for a house.

Then you need to convince them that the plans you have for the recovery will help the U.S. economy. But I digress. Haven’t we just seen some positive data for the real estate market?

Putting Perspective On The Price Figures

Last week also saw the release of the latest S&P/Case-Shiller Home Price Index – a closely watched gauge that monitors home prices in 20 major U.S. metropolitan area housing markets.

• Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April – its first monthly increase since July 2006.
• In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.

Good news, for sure. But let’s put it in context. The market hasn’t magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May’s year-over-year figure rolled in with a 17.1% drop.

So while prices did rise month-to-month, the truth is that the real estate market isn’t exactly growing, nor are prices appreciating. It’s just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.

As S&P index chairman David Blitzer says: “On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”

And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.

You might say I sound more bearish than a Rocky Mountain grizzly, but it’s important to inject some perspective into the story, rather than just blindly absorbing the media reports.

What Will It Really Take For The Housing Market To Grow?

As I’ve said before, for the housing market to truly start growing again, it’s going to require a few key things.

• First, we need to see a reduction in the bloated number of available homes on the market. In that respect, it’s good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you’re talking about a meaningful upswing, that brings me to another crucial requirement…
• As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of “distressed” sales – i.e. short sales or foreclosures).

Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both.

For example, home prices declines were partially responsible for a $13.9 trillion drop in household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.

There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time.

Meantime, if you’re looking for a bargain in the New York area, give Tim Geithner a call.

Good investing,

Martin Denholm

Source: Don’t Celebrate Housing’s Recent Uptick Yet

Here it comes, slowly but surely: “We sincerely hope the U.S. fiscal deficit will be reduced, year after year,” China’s Assistant Finance Minister Zhu Guangyao said overnight after talks with Treasury Secretary Geithner. Could he lay it out any more clearly than this? “The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.”

The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.
“We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” We have no idea what he might mean by that… the CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.”
The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.
“Debt is the story of today’s economy,” says Chris Mayer, echoing a theme of this year’s Investment Symposium. “There is still too much of it. Yet the mainstream view seems to be that more of same is the elixir to see us out of this bust. In fact, debt issuances by governments are hitting new records.

“The U.S. government is spending money hand over fist. That’s not new. The U.S. is hoping more foolish foreign central banks will line up and absorb the deluge for pitiful interest rates. The 2-year note sells for a yield of 1.1%.

“Maybe Washington will pull it off. But one day, people are going to demand a better rate to take the government’s paper. At some point, the market’s appetite for puny yields will go away. When that happens, interest rates will rise significantly and debt prices will crash. It’s not a matter of if, only when. To continue at this pace is clearly unsustainable.

“The crazy thing is that the U.S. government is not alone. Emerging markets are also issuing record levels of bonds. The Financial Times reports this morning that ‘the surge in issuance this year [hit] its highest point since records began in 1962.’ The biggest issuers include China, Brazil, Russia, South Korea and some of the Gulf states.

“Incredibly, most seem to look at these debt issuances as positives for the global economy. The FT, for instance, opined (in the middle of its news story) that the debt sales were ‘an encouraging sign for the world economy.’

“It’s a weird paradigm that thinks growing debt levels are a good thing for the global economy, but it is a mainstream view. Economists, lost in their models and abstract curves, preach the benefits of stimulus — printing money and spending and borrowing. And people seem to eat this up.”
Quick perspective: China’s Internet population grew 13.4% in the first half, to 338 million, says government-run China Internet Network Information Center. That’s more than the whole population of the U.S. Yet penetration rates there are just over 25%, compared with 75% in the U.S.
Here’s a headline we can’t resist: “Home Prices Rose in May,” trumpets The New York Times this morning. We understand… they’ve got papers to sell and a hell of a mortgage. But in reality, the U.S. housing market is only decaying at a slower pace. Today’s S&P/Case-Shiller home price index reading is par for the course for the last quarter… home prices and sales are still falling, just no longer accelerating into the abyss.

May registered a 16.8% annual decline in S&P’s 10-City Composite, with its 20-City just a bit worse. Even though that’s still a far cry from home price appreciation, May marks the fourth month in a row in annual return improvement. So raise your glass for a toast… here’s to four months of, ummm, home prices not registering record annual declines. (Better make it a double.)

“To put it in perspective,” says David Blitzer, steward of the index, “this is the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing.

“While many indicators are showing signs of life in the U.S. housing market, we should remember that on a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”
Stocks managed to eke out a small gain yesterday, even though blue chip earnings were a bust. Traders clung to the new home sales jump and shrugged off bad numbers from Honeywell, Aetna and Verizon. The S&P 500 inched up 0.3%.
“The stock market has abandoned rationality,” declares Dan Amoss. “Sure, it usually rallies ahead of evidence of measurable progress in the economy, but the rally from March to May had already priced in a strong ‘V-shaped’ recovery, which will, obviously, not happen. At best, we’re in for years of stagnation and lower living standards as society inflates away, pays down or writes off bad debts.

“The recent rally, starting on July 13, has raised the bar for corporate earnings over the next few quarters even higher, setting market participants up for another round of disappointment.

“In the financial, REIT and consumer discretionary sectors, the market completely detached from reality. Part of this can be explained by the growth of program trading based on backward-looking statistical inputs, part by the triumph of technical analysis over critical analysis, and part by the herd behavior of fund managers.

“Regarding the triumph of technical analysis over critical analysis, ridiculous notions like the following are clearly driving the market higher: ‘We just broke through ‘resistance’ at 950 on the S&P 500, so therefore, it’s a mathematical certainty that we’ll go to 1,050 or 1,100.’ This kind of ‘analysis’ is dangerous. When we all start watching and reacting to charts and stop thinking critically about what stocks are intrinsically worth based on reasonable assumptions about the future, the adjustment process back to reality can be violent and painful. The 1987 crash is a case in point.”

We’re putting the final touches on a new special report from Dan on the next big-name company to blow up. We’ve got to keep the details under our hat for a little while longer, but for now, let’s just say it’s a very significant and influential bank. More to come…
The SEC added more restrictions to short selling today.The process of naked shorting — selling stocks short without locating shares to borrow — is now officially illegal. It’s a reasonable rule, but we doubt it will make much of a difference… remember that the SEC has enforced a temporary ban on naked short selling since September 2008. Ironically, the worst of the credit crisis sell-offs came right after the ban.

But here’s one that gets us a little nervous: The SEC said it is “increasing transparency around short sales.” Essentially, the commission is going to require institutional-size shorters to provide daily trading reports, which it will make public one month in arrears (without the names of the investors or institutions). From a reporter’s perspective, it’ll certainly be interesting. But why are we keeping tabs on something that’s supposed to be legal? Will rabid buyers get the same treatment?
Speaking of short plays, the U.S. dollar is still in hot water.The dollar index briefly made a new 2009 low this morning of 78.3. Having found support there in the past, the index was quick to bounce back to a still-low 78.7.
The dollar’s spring back put the hurt on gold. After holding steady for the last week or so around $955 an ounce, the spot price is down to $944 as we write.
Crude oil is declining too. The light sweet variety is down a buck and change today, to $66 a barrel.
Sugar is the commodity du jour. At 18.45 cents a pound, sugar’s up 56% in 2009, to a three-year high. There’s a shortfall of the stuff in India, interestingly the world’s largest sugar consumer. And recent dollar weakness/energy price appreciation has added fuel to the fire.
Finally, the truth comes out: “I was not going to be the Federal Reserve chairman who presided over the second Great Depression,” Ben Bernanke told PBS at a recent town hall-style interview. We imagine the appearance was designed to boost his public image and cement his coming reappointment… looks like that might have backfired.

“Did he really think that comment through?” asks Byron King. “It’s so reminiscent of President Nixon, many years past… ‘I’m not going to be the first American president to lose a war,’ said Milhous of the police action in Vietnam. Goes to show you… just wait awhile and these public officials will give you grist for the mill.”

A few more quotes from the interview that we’ll be keeping on file:

“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again.

For the next couple of years, “inflation will be quite low.

And just for the mental image: “I had to hold my nose and stop those firms from failing.”
In the mailbox today, the sarcasm floweth:
“C’mon, admit it, you’re wrong,” writes a reader responding to yesterday’s 5. “Just ask Cramer: The bottom was in March. The housing bottom was hit a month ago… green shoots poppin’ up everywhere… Look at all them positive bottom lines. Soon we will be living in a carbon-free world with inexpensive health care for all, while maidens paid for by the government with our grandchildren’s bucks slowly drop grapes into our mouths.

“We can live in housing paid for by the government on land owned by the government. I wonder if we get a choice of color for our tents. Will they furnish chemical toilets or will we even have a pot to piss in? The recession is over… cause the depression starts and the Chinese take possession of Amerika in lieu of payment for what is owed.”
“You guys are so far off base!” claims another. “The ‘cash for clunkers’ program is another cash cow for Goldman Sachs: Securitize buying up thousands of ‘85 Chevys from Grandma, who has never heard about the program; sell them to Uncle Sam (aka GM/Chrysler); and give away the purchased upgrades for a charitable deduction. Everybody wins.”

Source:  China Warns (Again), The Housing Faux-Recovery, Three Sectors to Short and More!