Good day… And a Happy Friday to one and all! It’s still raining here in St. Louis this morning, but I won’t that get me down, as it is a Friday! G-20 has gotten a bit ugly, folks… Seems everyone just can’t seem to get along! Imagine that! 20 different countries, and now they want to be able to watch another country’s finances and comment on them! Oh, I can see that working out real well! NOT!

So… Yesterday, we had the dollar gaining back the ground that it had lost the previous day, but at the end of the day, we’re looking very much like the currencies hadn’t moved from morning to morning… And overnight, didn’t bring about much movement… So… When you get to the currency round-up below, you’ll see the dollar’s gains were small, and short-lived.

The U.K. and France are a bit upset with the U.S. and the President’s plan to reduce the number of board members to the IMF, and guess who is on the chopping block? That’s right… The U.K. and France! I really don’t care about all this stuff, except to watch the saber rattling, and jockeying for “supreme leader”… I won’t say any more about that here…

I did notice thought that, just as I said months ago, regarding the BRIC countries, that they would have to be reckoned with, due to their HUGE Treasury Chests of reserves, and the fact that they have a good portion of the World’s population… Ok, where was I? Oh!, I noticed that it was going to be announced today that G-20 was going to take over as the main forum for global economic coordination. They will take that over from the G-8…

Well, guess who’s a part of G-20 that wasn’t a part of G-8? The BRIC countries! They will have more say in what goes on economically! Just like I said they would! This is a big deal, in that this shifts the power from the rich countries to the emerging markets… Yes, the rich countries are still in the Group of 20… But, the emerging markets outweigh them now!

And already, we can hear China taking shots at the U.S…. And, now that everyone can comment on other countries’ economies, the U.S. took a shot at Germany, saying that they haven’t done enough to spur Domestic Demand… Germany’s chancellor, Angela Merkel, who is up for election on Sunday, shot back at the U.S., and said… “We should also look at imbalances between currency regions and not pick on specific countries within the Eurozone.”

OK… Let’s talk about something else… I was reading the Financial Times last night, and came across a story that really said something… Here it is… The FT…

“Losses on loans at U.S. banks and other lenders rose to $53 Billion in the first quarter, almost triple the previous high, reached in 2002, said a group of regulators, including the Federal Reserve and the Federal Deposit Insurance Corp. Nonbank lenders, particularly hedge funds, hold $1 of every $3 in troubled loans and 47% of all distressed loans. Loans made to media and telecommunications companies were in the worst state. Lending to the financial-services sector was the next worst, followed by loans to property companies.”

But Hey! According to people in power that should know better, it’s time to sound the all-clear horn!

And that brings me to something I wrote about the other day, regarding the delayed foreclosures… A reader was kind enough to send me this that maybe explains the delays…

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

And… As another reader pointed out to me… It sure doesn’t make the holder of the loan any richer to foreclose on it, given the state of the housing market today…

Ok… Enough of that! Yesterday, I talked about how Japanese yen was living right these days, rallying when the dollar is weak, and rallying alongside the dollar when it’s not! Well… One of the reasons this could be happening with regularity, is that it is believed that Japanese exporters are repatriating their profits, as their fiscal first half ends this month…

So, does that mean the rug gets pulled out from beneath yen next week? Hmmm… I don’t think so… I think that the one thing that’s really underpinning yen right now is this new found appreciation by the Bank of Japan for yen strength! Just last night, Japan’s Finance Minister Hirohisa Fujii reiterated his opposition to intervention in foreign- exchange markets.

Now, I don’t know how long the exporters in Japan are going to go along with this new found appreciation for yen strength… But for now… Yen is on the verge of gaining even more ground…

In New Zealand overnight… The string of good data prints ended with a thud! New Zealand’s Trade Deficit widened almost double what was expected! UGH! Remember, New Zealand has to import lots of things, and when the exports of wool, dairy, and lumber aren’t strong, their deficit gets whacked! So, New Zealand would always have a Trade Deficit… But, at times it gets completely out of hand, and this is one of those times… Kiwi, got taken to the woodshed after the report printed, as well it should!

The Swiss National Bank (SNB) had a board member giving an interview last night, and when asked about the SNB’s repeated jawboning to get the franc weaker, he had this to say… “with regards to the Swiss franc this means that we counter an appreciation of the franc against the euro decisively.”

Now, that’s a horse of a different color! All this time we were led to believe that the SNB would intervene to get the franc weaker VS the dollar! No wonder the franc has kicked some dollar tail lately, without a peep from the SNB… The franc was allowed to get stronger VS the dollar, as long as the euro was moving in the same direction, same general percentage move VS the dollar!

Our mortgage production guru, Stacy Blair, was talking the other day in a meeting, and mentioned that mortgage rates had edged down again, and production was picking up once more… Well, that plays well with a story I read last night… The average interest rate for U.S. home mortgages fell to less than 5%, and loan applications surged 13%, the Mortgage Bankers Association said. The nationwide average rate on a 30-year fixed-rate mortgage declined to 4.97%. The application surge amounted to a 50% increase compared with the end of June.

OK… So… I would guess that most of that stuff is re-financing loans, but hey! Like I told everyone on our desk 6 months ago, when the rates were in the 4% region… Go refinance your home loan! And then put the money you save each month in savings!

We get back to some data in the U.S. today, and I think that it could have a lot to do on whether the currencies rally or not VS the dollar. Durable Goods Orders for August prints first, and is expected to really fall back from July’s strong 4.9% print… August is expected to print just a .4% gain for Durable Goods… That won’t get the “strong recovery flag wavers” out, and that won’t be good for the non-dollar currencies…

Then later we get the U. of Michigan Consumer Confidence report, which could turns things around for the non-dollar currencies… As the Consumer Confidence report is expected to be strong… ????? Why? I have no idea… (besides the obvious, stock strength)

We’ll also see New Home Sales data for August…

Have you noticed the collapse of the Oil price? Pretty steep drop in just a couple of days! I told you the other day that the G-20 might put pressure on commodities… Oil is off, and Gold has fallen back below $1,000 wink, wink…

So… To recap, the dollar’s rally was stopped short. The G-20 is the new global economic monitor, and the U.S. is ticking the U.K. and France off, regarding seats on the IMF board. G-20 is getting hot and heavy… Japanese exporters are repatriating their profits thus propping up Yen… And, New Zealand’s Trade Deficit widens again…

Currencies today 9/25/09: A$ .8650, kiwi .7185, C$ .9175, euro 1.4685, sterling 1.6010, Swiss .9720, rand 7.4280, krone 5.7850, SEK 6.9170, forint 184.25, zloty 2.8550, koruna 17.15, RUB 30.09, yen 90.20, sing 1.4160, HKD 7.75, INR 47.98, China 6.8286, pesos 13.48, BRL 1.7995, dollar index 76.73, Oil $66.28, 10-year 3.36%, Silver 16.31, and Gold $997.32

That’s it for today… I hope you have a Fantastico Friday, and Wild and Wacky Weekend!

Chuck Butler

Source: G-20 Heats Up…

“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”

Right on, David!

And here’s the CEO of Pepsico:

“The age of thrift is here.”

Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.

What’s a consumer economy need in order to keep growing?

Uh…it’s needs consumer spending.

What do consumers need in order to boost spending?

Uh…they need more money!

Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:

“$30 billion home loan time bomb set for 2010.”

Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’

Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.

And there’s always some dumb economist trying to smother it with a pillow!

A report from the world’s biggest bank, HSBC (NYSE:HBC), tells us the dollar’s days are numbered.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

The Telegraph reports:

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”

That said, we repeat a headline from Seeking Alpha:

“Dollar shorts should look out.”

We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.

But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.

But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.

For a while.

Until tomorrow,

Bill Bonner

Source: There’s No Flu Shot for the Thrift Bug

• Two people told Reuters that General Motors Co. (OTC:MTLQQ) is prepared to sell Opel, its European carmaker, to Canada’s Magna International Inc. (NYSE: MGA). The board of trustees that controls a majority stake in Opel has the last word on which Opel’s buyer will be. GM was thought to be selling Opel to either Magna of RHJ International SA.

• Nearly 360,000 U.S. housing units – or an average of one in every 357 units – filed for foreclosure in August, down 1% than in July. Nevada remained the state with the highest foreclosure rate, one in 62 units, for the month, followed by Florida’s rate of one in 140,MarketWatch reported.

• The Bank of England kept its benchmark interest rate at 0.5% and kept plans to buy as much as $290 billion (175 billion pounds) in assets to prevent the U.K. economy from slumping further into recession. The U.K.’s FTSE-100 Index responded to the move by rising above 5,000 for the first time in nearly a year, Bloomberg News reported.

• Emerging market stocks, as measured by the MSCI Emerging Markets Index, are at their most expensive level in nearly nine years, according to data compiled by Bloomberg. Valuations are 19.9 times earnings, and emerging market shares have risen 53% this year as a result of global government stimulus packages, interest-rate cuts, and optimism that the financial crisis is over.

• House prices in England rose 0.8% in August, their second consecutive monthly gain, according to a survey by HBOS, which is owned by Lloyds Banking Group plc (NYSE ADR: LYG). Prices are at nearly the same level as the beginning of 2009, but 10.1% lower than they were in August 2008, MarketWatch reported.

• Turkey’s economy shrank 7.0% in the second quarter, Turkish Statistics Institute said, a sharp pace but a much better performance than the 8.0% decline many analysts expected,MarketWatch reported. The second-quarter figures are much better than Turkey’s 14.3% gross domestic product (GDP) tumble in the first quarter. Thursday’s data “showed that Turkey has become the latest economy to emerge from recession, rebounding strongly in the second quarter of this year,” Neil Shearing, emerging Europe economist at Capital Economics, wrote in a note to clients.

• Japan’s third-largest brewer Suntory Holdings Ltd. is in talks to buy drinkmaker Orangina – maker of Schweppes, Oasis and other brands – from Blackstone Group LP (NYSE: BX) The brewer seeks to expand outside its domestic market, which entrenched deeply in recession during the global financial crisis. “Purchasing Orangina would be a stepping stone to further development in global markets, including Europe,” Shigeo Kikuchi, an equity manager at Takagi Securities Co., told Bloomberg. “Japan’s beverage industry is saturated and companies need to look for overseas markets to grow so the move is inevitable.”

Source: Investment News Briefs Friday, September 11, 2009

Good day… And a Thrillin’ Thursday to you! Ahhh! A change! Just thought that with the thrilling victories my beloved Cardinals have been accumulating, that Thrillin’ would be a nice change to our Thursday lineup!

Front and Center this morning… The currencies added to their gains this week yesterday, albeit small gains, but gains nonetheless. The Fed’s Beige Book was “cautiously positive”… And… Overnight, the Reserve Bank of New Zealand met, and left rates unchanged as suspected… This and more as we begin our Thrillin’ Thursday!

The Big Dog euro has been off the porch chasing the dollar down the street for a week now, one would think that a return to the porch for food and water might be in the cards… But, as I was telling someone yesterday… Even though all signs point to a major stock sell-off, it hasn’t happened, so why stand in front of the stock and risk assets rally bus?

The euro climbed to very near 1.46 yesterday, before falling back to 1.4550 as the day ended… Overnight, the euro has traded within a narrow range. The Aussie dollar (A$) got slapped on the wrist by traders after it was reported that Australia lost 27,100 jobs in August (consensus was to lose 15,000)… The unemployment rate in Australia remained at 5.8%, but the weaker than expected data caused the A$ to slide from the 86-cent handle to .8550…

If the heat remains on the dollar the rest of this week, then I would expect the A$ to rebound from that sell-off last night. Much like the Brazilian real sell-off last week… You may recall me saying that it was overdone, and I expected the real to bounce back, which it did, and the bounce was like a Super Ball Bounce!

The Reserve Bank of New Zealand (RBNZ) met last night, and kept rates unchanged as expected… But I really thought the RBNZ would opt to change the wording of their last statement following a rate announcement, in which they talked about leaving rates unchanged for some time to come… Well… They didn’t change… And instead repeated the comment from the previous meeting… “We continue to expect to keep the OCR (official Cash Rate) at or below the current level through until the latter part of 2010″.

Here we go again with a Central Bank making statements about rate policy months ahead to time! I don’t see where they have the data to do something like that… But, they do it! I’ll bet a dollar to a Krispy Kreme that the RBNZ has to move rates higher before “the latter part of 2010″, and when they do, they’ll be pushing rates up in 50 BPS clips!

Kiwi also took a slap across the wrist by traders after the RBNZ rate announcement and statement. I’m not so sure about this currency’s ability to rebound, but if the A$ does rebound, kiwi normally hangs on the coat tails of the A$…

So… As I look across the screens this morning… I see that the euro and yen are the only currencies that are really stronger today than yesterday… So, my statement at the beginning that the currencies had added to their gains this week, needs to be tweaked, to say just euro and yen have added to their gains this week!

The Norwegian krone, was really on a run yesterday, trading below 5.90… But, couldn’t hold those gains. I was reading a story last night about Norway’s inflation rate falling, and how that might push back the Norges Bank (Central Bank) timetable for a rate hike from late this year to the 1st QTR of 2010… That thought process is responsible for the pull back in the krone yesterday, and overnight.

Do you see the mental giant (NOT!) thought process that goes through some of these traders? Sometimes it’s all about yield differentials, and sometimes it’s all about economic growth possibilities. Just like a baseball player wishes for consistency from the Umpire, I wish for consistency from the markets… UGH!

The Fed’s Beige Book was “Cautiously Positive” yesterday… And of course, you know me, I want to know why the Fed is Positive at all! Let’s see… The Beige Book said, that… Most districts characterized consumer spending as “soft” with a majority of reporting retail activity as “flat.” And that the Cash for Clunkers was a positive… HEY! FED HEADS! Cash for Clunkers is over!

On the real estate component… Both residential and commercial real estate markets were described as “weak”… So… Do you see anything in here that spells “positive” for the Fed Heads? I sure don’t!

I’ll stop there… These guys at the Fed drive me up a wall, and cause me to go over to the walls and scream at them!

One thing the Beige Book didn’t contain was the report yesterday that foreclosures in the U.S. jumped above 300,000 for the sixth consecutive month! RealtyTrac Inc. reported that a total of 358,471 properties received a default or auction notice or were seized last month, which is 18% higher than it was a year ago!

And then add in those details I gave you yesterday about the Option ARMs that will reset in the next three years, and this is getting ugly folks…

Doesn’t it seem as though the “people in power” have turned their backs on this problem? I mean, don’t get me wrong, I don’t want the Government sticking their hands in everything, but they already started down this road, and then turned around and headed down a different road… That’s the Gov’t’s way isn’t it? As my football coach used to describe someone not giving everything to a play as doing it half-a_ _ … That’s what the Gov’t does… I don’t want you sticking your hands in the private sector! But! If you’re going to do it, do it right and until it’s fixed!

The Bank of England (BOE) and the Bank of Canada (BOC) both meet today… The BOE’s meeting is going on as I write, while the BOC meeting will take place later today. I look for both Central Banks to remain steady at the wheel. The BOC will really tick me off later today when they repeat their earlier statement that interest rates will remain at near zero until June of 2010… The BOC also talked about the strong Canadian dollar / loonie in their last statement, as “significantly moderating growth”… As if a strong currency is a “bad thing”, which it certainly is not! But here’s an opportunity… If the BOC doesn’t talk about the strong currency this time out, we could see a “relief rally” in the loonie…

Today, the U.S. data cupboard has July’s Trade Balance, and since it’s Thursday we’ll see the latest Weekly Initial Jobless Claims. The Trade Balance is a misnomer as far as I’m concerned… It should read… The Trade Deficit! And while this Trade Deficit isn’t as bad as it once was, due to the depression, it remains a bugaboo…

And talk about sticky! Those darn Weekly Jobless Claims! Last week they printed 570,000 new claims, and this week is expected to be 560,000 more! I wonder when these people will be counted as “unemployed” by the Bureau of Labor Statistics (BLS)! OK… You know me… The BLS is one letter too long, as the “L” should be removed!

And… Before I recap, is it just me? Or does anyone else see stock market bubbles all over the world? I’ve already talked till I’m blue in the face, which is normally red!, about the U.S. stock market being overbought… But there was news yesterday that Asian stock index hit a 1-year high… And that the FTSE, London’s stock exchange, returned to the 5,000 level for the first time in a year! Bubbles Greenspan, should be in hog-heaven with all these bubbles floating around!

OK… Almost ready to go the Big Finish… Let’s recap first though… Euro and yen have added to this week’s gains, while other currencies have seen profit taking. Central Banks in the U.K. and Canada meet today, while New Zealand’s Central Bank was a disappointment. U.S. Beige Book is “cautiously positive”, and Foreclosures are greater than 300,000 for the 6th straight month!

Currencies today 9/10/09: A$ .8560, kiwi .6940, C$ .92, euro 1.4530, sterling 1.6560, Swiss .9585, rand 7.6150, krone 5.9650, SEK 7.0520, forint 188.10, zloty 2.8710, koruna 17.5725, RUB 30.93, yen 92.10, sing 1.4270, HKD 7.75, INR 48.65, China 6.8292, pesos 13.54, BRL 1.8330, dollar index 77.12, Oil $71.69, 10- year 3.46%, Silver $16.07, and Gold… $984.55

That’s it for today… I sure hope your Thursday is Thrillin’!

Chuck Butler

Source: Cautiously Positive?

It’s back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

We return to our lonely métier – chronicling the decline and fall of the US economy…and the Anglo-American empire too….

Two bits of news signal the scale of this trend. But first, here’s one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

But let’s turn back to our ‘decline and fall’ chronicles…

From Florida, comes news of the first drop in population in 60 years. “Unemployment is soaring,” reports USA Today. “Florida is second to California on foreclosures.”

Yes, dear reader, there is trouble in the sand states…

Florida lost a net 58,000 people this year…for the first time since the 1940s.

Why would that be? We’ll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing…building houses for consumers!

But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They’re also staying put, rather than moving to Florida. So Florida needs fewer new houses…and fewer people to build them.

Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they’re paying the price. And it will take years – maybe 10 years, maybe longer – before they’ve paid down their debts to more comfortable levels. In the meantime, they are poorer than they’ve been since the Eisenhower years.

Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now…not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it’s doomed to is a long period of adjustment…with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

But there’s no going back. It was as if the economy was playing a game of Russian roulette…and then the pistol went off – the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn’t going to bounce back; it’s dead.

Still, just because a thing is hopeless doesn’t make it unpopular. The feds are fighting the correction every step of the way. They’re propping up brain-dead companies…and keeping zombie banks going by feeding them the blood of taxpayers. It’s ghoulish…it’s a very scary movie!

Unfortunately, the ghouls vote! And everywhere the feds look there’s a campaign contributor or a lobbyist or a voter…and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they’ve become accustomed…

Just what you’d expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap – the very thing Ben Bernanke has pledged to avoid. So they’ll continue going down that road – towards inflation – until they finally get there. And they’ll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you’d expect.

So, where’s the surprise? We’re on the road to destruction; that’s clear. But it may be a much longer road than most people expect.

Ambrose Evans-Pritchard in London’s Telegraph:

“‘The current financial crisis is unlike any others,’ says the Bank for International Settlements. Lasting damage has been done. The ‘cumulative output loss’ is likely to reach 20pc of GDP in the major economies.

“The message is the same at the International Monetary Fund. ‘The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,’ said Olivier Blanchard, the Fund’s chief economist.

“It has certainly alarmed US retail tycoon Howard Davidowitz. ‘As a country we are out of control, we’re in a death spiral,’ he said.

“Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. ‘Generational destruction of a society’s balance sheet will not rectify itself in a matter of months.’

“‘How about a quarter century?’”

Until tomorrow,

Bill Bonner

Source: Trouble in the Sand States

Consider this likely scenario: The heavy retail investor inflows into corporate bond funds last spring (far in advance of the peak in defaults, by the way) undoubtedly helped push corporate bond spreads down. The quant funds’ models detected this movement, concluded that the recession might be over, and proceeded to buy stocks that are highly sensitive to future U.S. consumer spending — including banks and REITs. This scenario likely explains some of the rally in bank and REIT shares, which occurred far in advance of the peak in credit losses.

This type of scenario could easily reverse this fall as experienced stock and bond fund managers start to question why they own barely solvent financial companies at valuations that imply 4-5% real GDP growth over the next two years. Huge swathes of the financial sector are insolvent (the mark-to-market value of assets is less than liabilities), and the debate over mark-to-market accounting boils down to whether losses should be recognized up front or over long periods of time. The losses are not going away, and were baked in the cake as soon as the bubble-era loans were made.

Last fall’s panic was not really a “black swan” event; it was the realization that much of the banking system was insolvent and at the mercy of electronic bank runs. Last fall, I thought that at the very least, the authorities had a plan to wind down Lehman in a controlled manner. Instead, Lehman went into forced liquidation and took the “shadow” banking system down with it. Our Lehman puts were huge winners, but even I was surprised at how quickly Lehman stock went to zero.

The issue facing REITs parallels that of the banks: an industry-wide solvency crisis. Only REITs lack access to enormous subsidies from the Federal Reserve, which include the manipulation of borrowing rates down to the range of 1%, resulting in a profitable spread on new lending.

If you carefully consider the combined statistics on commercial mortgage debt, equity, and future rental cash flows, you come to the conclusion that the value of many REITs is permanently impaired. Even if a core group of higher-quality REITs escapes bankruptcy, their equity will still be impaired because lenders will only refinance properties on very tight terms: strict covenants, high interest rates, and requirements of hefty equity infusions into upside-down properties. This is a transfer of wealth from REIT shareholders to creditors. This wealth transfer is occurring through many channels, but the most important one relates to claims on future rental cash flow, which will be bleak regardless of who owns it:

1. Creditors will take a higher share of those rental cash flows via higher interest rates
2. Of the cash flows that trickle down to shareholders, they will be divided up among more and more REIT shares as we see more and more dilutive secondary offerings

This unprecedented collapse in commercial real estate fundamentals means that for the next few years, you can throw out the analyses that rely on “cap rates” to value REITs. Distressed sellers and vulture buyers will make up the bulk of commercial real estate transactions for at least the next few years. Equity looking to invest will be scarce, so it will demand very low prices and high potential returns to invest.

Between now and 2013, $1.6 trillion in commercial real estate debt will mature. Bankers know this, so they’re going to keep conditions very tight for any refinancing that they grant. Plus, a hefty chunk of this debt is held by commercial mortgage-backed securities (CMBS), in which the lenders cannot sit across the table and renegotiate with stressed borrowers; owners of senior CMBS tranches will want to liquidate the collateral to get paid back, while owners of the junior tranches will want to refinance and pray for a recovery in value. I expect the motives of the senior lenders to win out, resulting in lots of property liquidations.

REITs Selling Must Compete to Dump Properties

Lots of REITs have plans to sell properties to pay down debts but… Sell to whom? And at what sort of price? Yet REIT investors seem unaware the hundreds of billions in new equity that creditors will require to refinance mortgages that were made during the 2006-2007 peak in values — and what that catalyst will do to the value of their equity.

On Wednesday, The Wall Street Journal ran a story that relates to this theme: “Tishman Faces Office Downturn.” Link in Web Version Only. The article describes the tough choices facing privately owned real estate investment partnership Tishman Speyer, which owns Manhattan landmarks like the Chrysler Building and Rockefeller Center.

Tishman also owns a levered portfolio of Washington, D.C., properties named CarrAmerica. You’d think that with all the crony capitalists flocking to Washington the lobbying business is booming. But apparently, even lobbying is not a strong enough business to justify CarrAmerica charging the pricey rents it needs to pay its mortgages. The WSJ describes the financing problem:

The Tishman partnership that bought the CarrAmerica portfolio has been in talks with its lenders, led by Lehman Brothers Holdings Inc., since late 2008 about modifying the credit agreement, according to S&P. But so far, nothing has happened and, until now, the talks have been kept quiet. “We have confidence in the long-term value of the properties,” Rob Speyer said.

S&P warned even if Tishman wins new covenants, its ability to refinance the loans in 2011 “will likely require additional capital investment or a recapitalization.” [emphasis added]

The Tishman mortgages were one of many credits that Lehman was marking at fantasy levels. As it turns out, the bears on Lehman were right: The loans that Lehman provided to Tishman to finance its acquisition of Archstone-Smith were impaired soon after they were underwritten.

What will the Tishman family do about its privately held portfolio? How much debt is carried against Tishman Speyer’s properties? I get the impression that it’s a lot, considering Tishman’s aggressive behavior at the market peak (as opposed to, say, Sam Zell, who unloaded a ton of properties onto Blackstone (NYSE:BX) and Maguire (NYSE:MPG), which will both wind up losing most or all of their equity). Tishman Speyer will probably hit a lot of low bids on its second-rate properties to raise the cash that banks will require as new injections in order to refinance — and keep to deeds to — its trophy properties.

The smart money in commercial real estate — including Sam Zell — certainly sees the mountain of debt maturities coming down the pike. Investors will certainly be looking for bargains in commercial real estate, and they will find the best deals in either foreclosure auctions or purchasing commercial mortgages from stressed banks at a discount.

Regards,
Dan Amoss

Source: REITs Racing to Bankruptcy

Here at the Daily Reckoning, we always take the part of the humble… the despised… the oppressed… and the misbegotten.

Today, that means the rich…

Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

Their governments all have in it for them… taxes on ‘the rich’ are rising. In the US, the Democrats are talking about financing the entire nation’s health care system on the backs of the super-rich.

And their salaries are being targeted by prosecutors and politicians. No more million-dollar paydays… not with the feds looking over their shoulders. Oh… and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% — try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9 th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

But everyone is pointing a finger at the rich – as if they were to blame for the financial debacle of the last few years. Some economists even blame the “growing inequality of incomes” as a cause of the crisis.

This is completely unfair. The rich didn’t cause the problem – they merely took advantage of it as best they could. It was a time when ‘financialization’ was on the rise… when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you’re going to lend or speculate. Some of ‘the rich’ – those in the financial industry – cleaned up.

But come the revolution of ’07-’08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn’t the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega-mc-mansions got re-priced as cracker shacks?

On this last point, we have new information. The housing crisis may have begun in the sub-prime trailer part of town. But now it’s in the older suburbs – it’s the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2 nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank – nearly three times as many as at the beginning of 2009.

And now nearly half of all jumbo mortgages are underwater. Yikes, the rich… and bourgeois classes… are up to their necks.

And now this sad report from the New York Times:

“Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

“Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.”

And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

*** At a certain level, all of this concern about who earns what… and who has what… is just so much envious claptrap. For most of us – who have enough to eat and a roof over our heads – money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

We don’t know. So we turn back to the game. How can we get more wealth than our neighbours?

And here… a bit of perspective…

When the Great Khans road across the heartland of Eurasia in the 13 th and 14 th centuries, nothing could stop them… or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight… and little else. Europe’s population, meanwhile, was more settled… and more soft.

But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West – to conquer Europe. South – to conquer India. Or East – to conquer China.

They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

It’s hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Indus trial Revolution and the East was left behind. People in the West learned to save… and to invest their savings in capital improvements – machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse-mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow… providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

But what goes around comes around. Who’s saving now? The Chinese save 25% of their earnings. In America, the rate is rising… from zero to five percent!

Who’s building factories? Who’s harnessing the indus trial revolution? Who’s getting rich? Who’s innovating? Who’s building cities?

Who’s the world’s biggest creditor? Who’s got the biggest pile of money?

Oh, dear reader… you already know the answer…

“West will languish; Asia will lead…” says a headline in Barron’s this week.

And what’s this…

“ China commercial property sales higher than US,” says a headline at Bloomberg.

Yes, dear reader… it is the way of the world… Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on… always as it always was… but never the same.

And we leave you with that philosophical reflection… and go back to the financial world…

*** The nights have turned cooler. And the hot social season is giving off heat… like a pond in the autumn. Last night we went to a dinner under the stars. Without mentioning names, the crowd with mixed… and interesting: the widow of one of the greatest admen of all time… a descendant of Jacques de Liniers, who sank the English fleet at the battle of La Plata, thus protecting the Spanish possessions in Argentina, and a few members of the world’s most celebrated banking family. What were they doing in the middle of nowhere in France?

“There’s no explanation for it… I was surprised as you,” explained one of our companions. “You don’t expect it. The whole area is as dead as a doornail 10 months of the year. Then, in the summer it really comes alive. I’ve been to several cocktails… and several dinners… and concerts. Last night, there was an English choir – a big choir of more than 30 people – performing at the church in Montmorillon. There’s something going on almost all the time…

“Maybe it’s because the countryside is so quiet. And there aren’t many restaurants. Not much to do. So when you come here for the summer you just have to organize something yourself.

“The nice thing about it is that we all have friends here that we see nowhere else… and only once a year. So, we catch up.

“And I hear your children are making friends,” she said with a wink.

Word gets around.

Yes, it has been a summer of awakening, I think. Our sons have discovered that the little girls across the street have grown up. And the little girls across the street have discovered that they can charm young men. They hardly knew each other until this summer – though we’ve all been practically next to each other for nearly 15 years. But we were only here in the summer. And they were only there in the summer. And until this summer they never took much interest in one another.

This summer, they’re going back and forth from one house to another. They swim in our neighbour’s pool. They ride horses at our house. They play tennis. And it goes on all day and late into the night.

We left the party at about 1AM. When we got home, we spotted a campfire beside the pond.

“Let’s go see who’s still up,” said Elizabeth.

“Do we dare? I don’t think they want us intruding…”

“Let’s do it anyway…”

Next to the gypsy wagon, there was a group of about 10 teenagers. There were some we didn’t recognize. There were our three sons… and a couple of their friends. And there were the girls from across the road, with their friends. And one of their brothers, too. One of our sons was sitting very close to one of the girls from across the road – a charming 17 year old. In the light of the campfire, he looked very pleased with himself.

“Don’t you girls have to go home,” we asked.

“At 1:30AM…” they replied.

It was 1:25. Why waste a minute… when you are 17… and the summer is coming to an end?

Source: Pointing a Finger at the Rich

In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

Good day… And happy Friday! The data released yesterday morning was a mixed bag, as the leading indicators climbed for a fourth straight month and the Philadelphia fed reported a big jump in their gauge of activity, but the initial jobless claims unexpectedly rose. Unemployment in the US will continue to be a drag on the economy, slowing any recovery and possibly pushing the US back into recession (or as some predict a depression). Today we will get some news on the housing market, and while the media will pump up the fact that month on month sales continue to rise, another report released yesterday showed mortgage delinquencies hit a record high in July. The proportion of homeowners delinquent on their mortgage or in foreclosure rose to its highest levels in four decades. An ominous sign for the US economy is that the problem loans have shifted away from the subprime borrowers to those driven into delinquency by unemployment. More than half the mortgages in the foreclosure process during the second quarter were prime loans. So while this morning’s data may show a bump up in monthly home sales, the US is still far from being out of the housing problems.

The European markets took the Euro higher against the dollar after reports showed German services and French manufacturing unexpectedly expanded in August. Another report showed an index of German services industry grew for the first time in more than a year. This data confirms that the largest nation in the EU is pulling itself out of recession. The German services index rose to 54.1 from 48.1 and the French manufacturing index increased to 50.2 from July’s figure of 48.1. So both indices moved over the 50 mark which is an indication of expansion. And the composite index of both services and manufacturing for the 16 nations sharing the euro moved to 50 from 47, another strong indication that Europe is starting to grow again.

I have read a number of articles and research report which throw darts at the European Central bank for not being more aggressive with ‘quantitative easing’ and stimulus efforts. These latest reports indicate to me that the ECB may have played it ‘just right’. I know it won’t be clear sailing from here, and that the European recovery will still have some bumps, but the ECB left some powder dry and will be able to step in again if needed. And if the recovery sticks in Europe, the ECB won’t have near as much manufactured liquidity to pull in from the markets.

And I’m sure some readers will question how I can trumpet the recovery in Europe while at the same time believing the recovery here in the US won’t have legs. The main difference is what is fueling these recoveries. While many, including your current Pfennig writer, are in the opinion that the nascent recovery here in the US has mainly been driven by government stimulus; you can’t say the recovery in Germany and France is being driven by government intervention. Digging into the recent positive data here in the US shows the government is responsible for most of the spending; the private sector has largely stayed on the sidelines. The recovery in Europe, on the other hand, is being fueled by increased consumer confidence and internal private sector demand. In fact, many of the dollar bulls have continually chastised the European governments for not taking a more aggressive role in providing stimulus to their economies.

England and the US have yet to feel the inflationary impact of their budget busting ‘quantitative easing’ programs; but believe me, inflation is lurking just around the corner. While the US’s Bernanke and UK’s Darling have chosen to ignore the future consequences of these programs, Trichet and the ECB always kept a hawkish eye looking toward the future.

Currency traders got excited about these European data releases and took the Euro back above 1.43. As Chuck would say, the big dog started to move and the rest of the pack followed suit. The leaders vs. the US$ were the Nordic currencies of Sweden, Norway, and Denmark which were 1,2, and 3 overnight vs. the US$. Even the Swiss Franc showed some strength, matching the move up by the Euro.

The Norwegian currency probably benefitted a bit from an article which ran in the Economist magazine. The article was entitled “Which central bank will raise interest rates first?” and pointed out the most likely candidates were Australia and Norway. I believe the Pfenning pointed this out a few weeks ago, but for now the Economist magazine has a bit more readers than the Pfennig, so the article probably had a bit more of an impact on the markets. The article points to the brightening economic picture for both of these countries and the fact that “Because both countries primarily export staples like raw materials and food, their sales abroad have held up relatively well. Australia in particular benefits from Asian customers whose economies have remained pretty robust.” The magazine predicts that Norway will likely be the first to raise rates.

Long time readers of the Pfennig will recall that the direction of interest rates was at one time the largest determinant of currency movements. Those countries with central banks which were looking to raise rates were the favorite of investors. Nations with central banks who were ‘in front’ of the inflation curve and raising rates to combat future inflation were the best places to invest during this time period. Lately the currency markets have been trading on risk aversion, with bad economic news pushing investors toward the dollar, and positive news moving them back into higher yielding assets. As the global recession eases, I would look for the currency markets to return to past trends, and reward those currencies who have rising interest rates. Australia seems poised to benefit under either scenario, as they are already in the ‘higher yields” camp and are also predicted to move these rates even higher.

No big news out of the boondoggle in Jackson Hole, not that I expect any! There was one story which caught my eye yesterday regarding the meeting. Mohamed El-Erian, who is the CEO of bond giant PIMCO was on the news wires with suggestions for the central bankers meeting in Jackson Hole. He apparently is worried about the disjointed approach these central bankers have taken in their intervention with the markets and believes the approach will lead to volatile markets and slower global growth. He also believes we are in for a drop in the value of the US$. “The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian. “The real risk is that you will get a disorderly decline.” According to El-Erian, the euro will rise to $1.60 by the end of 2010 and the Canadian dollar will appreciated to 1.01.

And finally, the Mexican central bank will probably keep their interest rates unchanged at their meeting today. Inflation which has been running above their target level will prevent policy makers from cutting the benchmark rates to stimulate their economy. The Mexican pesos has turned in a good month, even outperforming the popular Brazilian real and Australian dollar. But don’t get too excited, Mexico is still very dependent on a strong US market, and at least some of this appreciation has been due to rising oil prices.

Speaking of oil, crude ran through another milestone yesterday hitting the high for the year. Oil exporters such as Norway, Brazil, Mexico, and Australia should continue to benefit from these higher prices. But the other commodities we track, gold and silver, seem to be stuck in a range. Silver seems especially cheap compared to gold right now, and both are good hedges against future inflation. I have to believe both are set for a breakout on the upside at some time down the road.

Currencies today 8/21/09: A$ .8331, kiwi .6789, C$ .9229, euro 1.4329, sterling 1.6574, Swiss .9448, rand 7.8576, krone 5.9725, SEK 7.0928, forint 187.70, zloty 2.8667, koruna 17.7965, yen 93.88, sing 1.4378, HKD 7.7511, INR 48.595, China 6.8313, pesos 12.846, BRL 1.8442, dollar index 78.06, Oil $73.59, 10-year 3.46%, Silver $14.01, and Gold… $944.40

That’s it for today…Hope everyone has a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney

Source: Mortgage Delinquencies Move Higher…

Achilles was said to be dipped in the river Styx and made invulnerable. But his mother held him by his heel, leaving that part untouched by the magic waters. Naturally, that is where a poison arrow got him.

The moral of this story is that you have to go all the way. If you want your baby to be invulnerable, put him all the way under the water… even the heels. Or, maybe there’s another point: that there’s always some place where you’re vulnerable.

For the purpose of today’s tale, we’ll take the second possibility. Try as you may, you can never escape all risks.

All over the world, consumer prices are falling. The world has too much capacity… too many factories… and too many workers. Too many, that is, for current demand. The ‘world’s mouth’ – the USA – has gone on a diet. And if the US reduces its intake, that means the rest of the world – especially China – must reduce its output. Otherwise, the whole thing will become unbalanced.

Yesterday’s news tells us that despite press reports of a recovery, the key indicators of real economic growth are still falling. Almost one out of 10 mortgages are now delinquent. And the rate of foreclosures is increasing faster than any time in the last 30 years. Housing prices, meanwhile, fell 16% in the 2 nd quarter, from a year earlier, according to the National Association of Realtors.

Unemployment claims went up last week. The sharp eyes of the Financial Times see the link: “Mounting joblessness fuels US housing crisis,” says its headline.

In the real economy, people are cutting back… with the inevitable results we discuss every day here in the Daily Reckoning. One major consequence of reduced demand is too much supply. The factories built in China to supply products to America during the bubble years now find they have no market.

Currently, overcapacity and oversupply are causing prices to fall. Falling prices mean rising currency values. Each unit of ‘money’ buys more stuff. But there are many competing currencies, and they don’t all rise and fall together. Even in a world of deflation, some currencies will deflate more than others.

The dollar is, of course, the world’s main money. In a sense, the whole world economy is under its heel. But it is a heel that has never been dipped in the river Styx. It is now a heel that waits for an arrow.

PIMCO is the biggest manager of bond funds in the world. It says the greenback is going to lose its status and lose its value.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” says its Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” doom the currency.

Both China and Russia are calling for a new global currency to replace the dollar.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” continues the PIMCO report.

Meanwhile, our old friend Jim Rogers says he is moving all his assets out of dollars and buying Chinese yuan. And Warren Buffett warned this week – writing in the New York Times – that “greenback emissions” threaten the whole world econo-system.

But what does it mean? What are the threats to you? What are the opportunities? If you pay your bills and keep score in dollars, what does it matter if the dollar loses value against the yuan? If prices are generally falling, the dollar is actually getting stronger, isn’t it? So what if some other currencies are getting even stronger still?

The trouble with the Achilles heel is that it is connected to the Achilles tendon… which is connected to the leg muscles… which is what keeps the whole thing moving forward. Cut the tendons and the feet go flippety, floppety and you get nowhere.

Yesterday came word that the US deficit for 2009 might come in lower than expected. Instead of borrowing $1.8 trillion as anticipated, the feds might only borrow $1.58 trillion. Well, that still leaves them about $680 billion short – even if every dollar of trade deficit and every dollar of domestic savings is applied to it. But definitely a step in the right direction! This gap must be closed by quantitative easing, that is to say, by printing press money. So, holders of old dollars are bound to wonder how much their savings will be weakened by the addition of so many new ones.

They’re likely to wonder, too, how much those US Treasury notes will be worth after this monetary inflation catches up to them. At some point, they are likely to think twice about buying more of them… and possibly even want to sell the ones they have already. Either way, it could create a nasty financial whirlpool which sucks down the entire world economy. As private investors reject US dollar credits, the Fed would be forced to print up more money to buy them itself. As the Fed buys more, private investors become more fearful that this monetary inflation will lead to consumer price inflation; they may panic and dump all dollar-denominated assets.

But if investors drop the dollar, what do they take up in its place? Oil… maybe. Oil is selling for $72 a barrel, even while the world is in a major downturn. What makes it so expensive, if not the fear that the currency in which it is quoted is more slippery than the black goo itself? And gold? Yesterday, gold lost $3. But is still trading in the mid-$900s – not far from its all-time high. And this at a time when consumer price inflation is going down! In the US non-oil export prices are falling at a 5% rate. If people are buying gold as a hedge against inflation, they must know something we don’t. Consumer prices are falling…actual CPI rates are negative in many countries already. Take out the effect of speculation on oil and commodities, and deflation is probably a fact of life almost everywhere. Gold buyers are not hedging against an increase in the price of bread, in other words; they’re hedging against a poison arrow directed at the dollar itself.

*** It is a real Ouzilly summer.

We feared we would be alone this summer. Our children almost all grown, we imagined ourselves sitting on the veranda and talking just to each other, like a pair of old shoes left in the closet. No family was coming from the US to visit. Our daughters were pursuing their careers. Our sons had plans of their own.

But then a Swiss friend came. And then his mother came. And then the boys showed up. And then an Irish journalist. And then and Italian egg producer. And then an Argentine singer. And then, a girl from across the street. And then a girl from the village. And then… the house was full…

In the kitchen yesterday, three women busied themselves… making jam… polishing the old stove… sharing gossip and jokes. It was like a scene from an earlier era… when people had regular kitchen staff. Our ‘staff’ are all volunteers and part-timers. Still, the ambiance was rich and convivial.

“Do you want a cup of coffee?” one asked.

“Yes… but I’ll make it….”

“No… I’ll make it… you shouldn’t make it. You’re the head of the house. You’re the one who keeps the place going…”

“Oh… yes… well… that’s a nice way to look at it…”

“Yes, without you, we’d have to go to the beach for the summer… and we wouldn’t have the pleasure of working in this hot kitchen. I’m just joking. It’s fun working in the kitchen. This is where the action is. Did you know that? It was always the kitchen that was the place to be… in these big old houses. That was where the maids and gardeners and all the staff hung out… in front of the fire. It was often the only warm room in the house. Everyone wanted to be in the kitchen. And it was where the food was.

“And people in the kitchen know what is going on… The maids come down and report on the state of the bedrooms… and who is sleeping with whom. Yes… that’s the way it was… at least in France. And they hear who is arguing with whom… and about what. And the staff keep their eyes and ears open… and then they come into the kitchen and talk. There were never any secrets in a place like this… the people in the kitchen knew everything…”

Source: The Achilles Heel of the World Economy