The Short Sale Is Selling Everyone Short

The U.S. has an excess supply of housing. What’s more, it shows no sign of decreasing. And in this case, the culprit isn’t just overextended homeowners, but the banks, too.

Case in point: I’ve spent the past two weeks shopping for a house that I can use for investment purposes. What I’ve found is that while there are many bargains available, few will actually materialize.

The problem is that true sellers – those unencumbered by losses and not just intent to ditch the property at almost any cost – cannot sell their homes because they face competition that they simply can’t beat.

That competition is coming from distressed sellers – those who are advertising “short sales.”

A short sale is a way of getting out of a mortgage without enduring the pain of going into foreclosure. So the seller basically agrees to sell the property at a lower price than the mortgage – i.e. at a loss. But the sale can’t proceed without consent from the lender. It’s then a matter of negotiating with the lender to figure out how much responsibility the seller has for the loss.

The trouble is, short-sellers are making an already bad situation even worse for the rest of us because they’re under the impression that they can simply walk away from a property as long as they’ve found a buyer. So they list their properties at often ridiculously low asking prices, thus depressing the market around them.

But, wait… that’s good for buyers, isn’t it? Not so fast…

The Short-Sale Saga

Once a short-seller set a price and gets offers, he takes them to the bank, which then decides if it wants to eat the difference between the loan amount and the amount offered by the buyer.

In most cases, the banks come back with a different, higher amount – and then the circus begins.

The seller naturally balks at the higher price because he wanted less burden – i.e., a free lunch).

The buyer balks because the price is much higher than the listing price – which was a joke to begin with.

By the time the process churns through, three to four months have passed because the bank is obviously in no hurry to take the hit on its books. Moreover, it’s in no rush because the government is subsiding its operations and providing cheap money to lend.

And who’s the fall guy from this fiasco? The real sellers.

A Three-Year, $225,000 Price Depreciation

As a result of short-sellers squashing their market, true sellers have to lower their asking prices to reflect what shows up on the Multiple Listing Service as the average price for the area.

And you guessed it… these average prices include grossly mispriced short sales. Sales that aren’t based on the true value of the market, but the whims and wishes of a seller who got in over his head.

For example, one place I looked at was listed at $300,000 just three years ago. Today’s price: $75,000.

Not only that, the carrying costs are high because it’s a condo that comes with high monthly homeowners fees and property taxes, which were based on higher assessments.

A similar property sold a few weeks earlier. It was a “short-sale,” listed at $75,000. The bank had returned with a counter-offer to the buyer of $150,000. The home eventually closed for $135,000. The seller was lucky. The buyer must really have wanted the place. But it still took three months for the process to close.

And don’t expect any help from the realtors listing the property either. Sure, they’re doing it in hopes of making sale, but they won’t spend much time on it – and sometimes won’t even respond to a short sale.

Why? Because the prices are low… they’re artificial prices that don’t reflect the home’s real value… and the short sale can take months to consummate. Not only that, it will often result in a lower commission because the bank will ask all parties for concessions.

And if the short-seller has moved out and is renting the place, tenants rights can interfere with the sale, with many paying below-market prices and not compelled to keep the place in showable condition, or be available for a showing.

Here’s the deal…

The Bargains Are Out There… But You’ve Got To Work For Them

A low selling price means absolutely nothing in this market if the home is in pre-foreclosure.

The better deals are available on “bank-approved prices,” which means the properties are already in foreclosure and the bank has already agreed on a price.

And of course, the best possible price will come from a non-short-seller who is forced to compete with short-sale prices – i.e. artificial competition.

And remember, while there are bargains available, there’s no such thing as a free lunch. Getting what you want requires more work than the media lets on.

And as for U.S. housing prices… they’re going to stay low until the real selling prices are determined. And that’s not happening yet.

Karim Rahemtulla

Source: The 800 Pound Gorilla on the Housing Market’s Back

After yesterday’s major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” answers former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating biz is… well… corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA… housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too.

But even Moody’s is starting to hedge their bets. They recently created three subdivisions within their AAA rating: resistant, resilient and vulnerable… a corporate way of saying the good, the bad and the ugly. While the U.S. isn’t in the worst of the bunch, it’s certainly not the best.

Not the best time to be Ireland or Spain, eh? S&P has already downgraded both nations, and just this morning Spain unveiled its worst recession in over 40 years. GDP shrank 1.8% there in the first quarter, after a 1% drop in the last three months of 2008. From a year earlier, GDP is down 2.9%, the worst annual contraction since at least 1970, when Spain’s National Statistics Institute started keeping track.

Since we started today’s issue with a tough question, how about another: How much further can Spain and Ireland fall (Greece too) before the euro enters crisis mode?
Stocks suffered Wednesday, as the Dow shed 2.2% and S&P 500 lost 2.7%. Traders looking for a reason to take profits found their excuse in the worse-than-expected retail sales number.
“I’m very encouraged by this pullback,” our resource trader Alan Knuckman told CNBC this morning. “We’re coming back to a breakout point in the S&P 500. 875 is a pretty important level. Once we got through that, we had a nice acceleration, so we’ll see if that can hold.

“Regardless, the pullback is healthy for the overall market. It’s something that markets often do. It’s important to see how we recover after a big sell-off, which we haven’t really had yet. I need to see a day where everyone has negative opinions again. I want to see how the market reacts to a BIG push to the downside….”

When that big sell-off comes (and believe us, it will), Alan says, “Watch the next day or two. Will that pessimism overwhelm people again, or will people look at that as a buying opportunity? That will be more of a (market) indicator than anything.”

To get Alan’s full take on today’s market, you can check out his CNBC interview here. But for his priceless trading advice, there’s only one place to look — Resource Trader Alert.
Buyers are drifting back into the market today after yesterday’s decline. The Dow and S&P opened up about 0.5%.
Two worse-than-expected data releases have tamed today’s equity buyback.

First, producer inflation inched up 0.3% in April, says the Dept. of Labor. Contrary to everything you might have heard from the Federal Reserve, inflation can exist in this market.

Second, unemployment claims rose by 32,000 last week, to 637,000, about 20k more than Wall Street was anticipating. Continuing claims, people filing for unemployment for more than one week, climbed 6.56 million. That’s the 15th consecutive week of record highs.
Financials beware: The Obama administration formally announced its intention to regulate the derivatives market today.

“The financial crisis was caused by — and exposed – significant gaps in oversight,” opined Treasury Secretary Geithner. “We are committed to working with Congress to create a more comprehensive system.”

No firm plans yet, but at the core of the government’s scheme is the creation of a centralized clearinghouse for derivatives. Credit default swaps and other derivatives are very much an over-the-counter matter currently, and the Obama team wants to, essentially, create an NYSE for these complicated contracts. We’ll let you know if it comes to fruition.
“Sell Chinese banks, buy Chinese commodities,” declares Chris Mayer, armed with your pair trade of the day.

“China’s banks are hiding more bad loans than the Appalachian Mountains hide moonshiners. Yet the stock prices seem to say Chinese banks are perfect. China’s banks make up 18% of the market of global banking stocks, but hold only 5% of the assets. Further, as a percentage of deposits, the market caps of Chinese banks are four times higher than Japan’s and 60% above the global average.

“As economic woes continue to linger, these outliers won’t likely hold up. Chinese bank stocks are for selling at today’s prices. ‘When these banks crack and come clean,’ says Chris Burn of Goshen Investments, ‘it will be one of the last phases of the [current] cycle.’

“On the other hand, there’s China’s massive urban migration. I can’t emphasize this enough. There is a migration of hundreds of millions of people from China’s rural areas to its budding cities. Just within the next 15 years, China will add some 60 new cities with between 1.5-5 million people. The U.S. doesn’t even have 10 cities today with a million people in them.

“The financial crisis will not undo this migration. It is bigger than that. It is a history-making event and the world will probably never see anything like it on this scale again. As China builds out these cities, it will consume great amounts of commodities — for roads, power systems, houses and more.

“Don’t let the nasty crater that was 2008 take you off the scent of commodities. China is still as big and voracious as ever in the commodity world. There is certainly a pause here, just as that old Chinese saying points out that every meal must end. But every ending also has a new beginning. China will be back for lunch, so to speak.”
Commodities are starting to feel the pinch of the recent stock decline. Oil had been holding steady, but over the last 24 hours, it has succumbed to renewed pessimism on Wall Street. The front-month contract fell from a 2009 high of $60 a barrel to $57 today.

Copper has it even worse. It fell through the $2 mark early this morning, and now at $1.96 a pound, it’s down almost 10% from last week’s high.
Gold is the exception (heh, isn’t it always?). The spot price hit $925 Tuesday and has flat-lined since. That’s a six-week high.
After a nearly full-point rise yesterday, the dollar index is holding steady at 82.8, waiting for the market’s next move. The euro dropped a penny Wednesday, and rests at $1.35 as we write. Ditto the pound, at $1.51.

The yen is the outlier of the bunch, growing stronger all week long as the world’s appetite for risk fades away. It’s at 95 today, nearly a two-month high.
“Do you remember when the Internet was viewed as interesting, but with little financial potential?” asks our technology adviser, Patrick Cox. “That’s where the robotics industry is now.

“Already, low-end robots like Roomba are exploding into new markets. Even as consumers cut back dramatically last quarter, Roomba sales were up 69% compared with the first quarter of 2008. This trend will continue. Within a few years, truly sophisticated consumer robots will be common in high-income households. Before you know it, incredibly capable general-purpose robots will be seen as essential appliances.

Don’t snicker… fortunes have been made with far less

“Moreover, military spending on robotics continues to expand and buoy the industry. The proposed Obama budget increases funding for the DoD programs that move robotics forward. The trend toward unmanned robotic weaponry is unstoppable. Military conflict will not go away, and robots offer many developed nations a way to reduce battlefield casualties.

“As Moore’s Law continues to improve computer technologies, the decision to risk robots, rather than humans, will be easier and easier to make. Regardless of consumer spending trends, we will see far more advanced robots in the battlefield and on crime scenes. Those advances will, in turn, accelerate the domestic and industrial robotic industries.

“Believe me. You want to own robots.”

Of course, Patrick’s readers have a robotics play, which you can get here. That’s just one of the transformational opportunities he’s expecting soon… for more, be sure to check out today’s P.S.
“Let’s see,” a reader begins, “we can put billions toward shoring up banks, stock brokers, auto companies and their suppliers, but there’s no money for Social Security or Medicare??

“What does that say about our government’s concern for the ‘common man’? I thought Obama was a man of the people.”
“Isn’t government, especially Social Security” a reader asks, “the biggest Ponzi scheme of all time?”

The 5: No. In a scheme, the victim has to choose to hand it over. SS is more like a Ponzi stickup.
“All the focus on Social Security and Medicare shortfalls,” writes the last, “has allowed another ‘balance of payments’ issue to slip under our radar. What will happen to the stock markets as the same baby boomer generation draws down their collective 401(k)s and the like without a countering infusion from new investors? I’m definitely out of that trust-the-market-to-make-you-a-million-for-retirement fraud!

“Thanks for the great insights!”

Source: The Mighty AAA, A Pair Trade, More Gov. Intervention, Buy This Future Tech and More!

According to the latest S&P/Case-Shiller Home Price Index, U.S. home prices fell an annualized 18.6% in February, compared with February 2008 – and a 0.4% improvement on the 19% drop in January.

Some have speculated that this news means we’ve hit the bottom and the market will now begin to trend upwards again.

Not so fast. Those folks must either be eternal optimists or very shortsighted. A 0.4% improvement is one of those “you have to start somewhere” pieces of good news, not a reason to celebrate.

The truth is, average home prices are still down 30.7% from the mid-2006 peak and are running at levels last seen in Q3 2003. We’re still a very long way from a solid housing market. And given that the S&P/Case-Shiller index reports figures from the 20 largest U.S. cities, there’s no doubt that we need to see more than just one month’s worth of evidence before forming many conclusions here.

Here’s what we can say, though…

Three Housing Market Headwinds

If you’re wondering whether this housing news is the first sign of some long-awaited stability for the housing market, or just an anomaly, consider this…

While nine of 20 cities in the index showed a price improvement in February and at least provided a glimmer of hope, remember that a prolonged decline often means the market requires a longer period of consolidation before it breaks higher over the long-term. Moreover, the market is fighting a fierce, triple-pronged headwind…

• Unemployment: With U.S. companies continuing to lay off workers in a desperate cost-cutting bid, this is hardly the kind of fertile environment that will kickstart enough home sales to cut into the bloated excess supply, drive prices higher, and improve the market. Unemployed Americans won’t even be thinking about buying new houses, never mind the struggle they’d face to get a decent loan or mortgage rate. As the job market goes, so goes the housing market.
• Confidence: The current economic and real estate climate has eroded confidence among would-be homebuyers. According to the Conference Board, the number of people who said they plan to buy a home in the next six months sank to a 26-year low in March.
• Excess Supply Of Housing: With America in the grips of a recession, jumping into a beleaguered housing market is low on Americans’ priority list. Existing home sales dropped by 3% from February to March and the U.S. Census Bureau said this week that the number of vacant homes hit a record 19.1 million in the first quarter. Plus, mortgage defaults and foreclosure rates are rising.

So expect to see home prices drift along rather aimlessly for now, while the punch-drunk market drags itself back together.

The Housing Market’s Silver Lining

Now for the housing market’s silver lining…

• First, although the U.S. still has way more houses for sale than demand calls for, the inventory of new homes for sale is currently 311,000 (10.7 months of supply) – the lowest number since 2001.
• Second, with the average 30-year fixed mortgage rate still holding steady at around 4.8%, it represents an attractive entry point for buyers. However, with the Fed having spent many of its bullets to drive the rate down already, it might not dip much lower. If Ben Bernanke and his fellow bankers make this point, it could tempt would-be homebuyers into the market, for fear of missing out on lower rates if they don’t.
• And finally, there are some pockets of strength across the U.S. – in some of the hardest-hit areas, too. For example, Business Week reports that home sales on Florida’s Gulf Coast, Inland Empire in Los Angeles, and the Las Vegas area jumped around 80% in February, compared with February 2008.

Moreover, the number of available homes in California tumbled from 15.3 months worth a year ago to 6.5 months in February is a good sign in terms of clearing the market and driving up prices. However, this may be the result of speculators or first-time buyers, who don’t put a home on the market in return. The sell-then-buy equation remains very tricky and a lengthy process in many areas.

One measure that California has passed in order to boost its market is a $10,000 tax credit to anyone who buys a newly built home.

Finding The Light At The End Of America’s Long Real Estate Tunnel

As Robert Shiller, economics professor and co-creator of the Case-Shiller index, states, “The market is still doing badly. But there’s always light at the end of the tunnel.”

In other words, while depressed prices, record low mortgage rates, and government incentives worth $8,000 in tax credits for first-time buyers may spark some buying, the current recession, high unemployment, and tight lending conditions mean we’re probably still a long way from the end of that tunnel.

However, when recovery does eventually take hold, it may be perennially popular areas that have suffered the most during the bust – like California, Florida, and Nevada – that will lead the way higher.

Source: The U.S. Housing Market: Is it Time to Start Buying Real Estate?

The assumption up until now was something about the reassuring value of continuity — if we could just prop up an ailing set of banks for a little while, the US public could resume a revolving credit way-of-life within an economy dedicated to building more suburban houses and selling all the needed accessories from supersized “family” cars to cappuccino machines. This would keep everyone employed at the jobs they were qualified for — finish carpenters, realtors, pool installers, mortgage brokers, advertising account executives, Williams-Sonoma product demonstrators, showroom sales agents, doctors of liposuction, and so on.

This was a dumb strategy for such a supposedly bright group of people surrounding Mr. Obama. That old economy was dead on arrival January 20th. Even the kindest physicians don’t put corpses on life support. This particular corpse has been placed in the world’s cushiest intensive care unit, with transfusions running about a trillion dollars a month — not to mention hefty bonuses for the attending nurses. Instead, a fast and furious wake might have been held, with the corpse of the old economy laid out on a granite countertop for all to toast and bid farewell. President Obama might have led this exercise with some aplomb — even while directing his new justice department warriors to round up a host of suspects in the old economy’s suspicious death.

What it comes down to, apparently, is a leadership elite across all sectors — politics, business, academia, media — that is incapable of processing the truth, and then conveying it to the broad American public. Alas, this also appears to be a common theme in history, with a commonly tragic outcome, which is that elites get ruthlessly dumped and replaced by new elites, often composed of zealots, maniacs, nincompoops, and others generally ill-disposed to the able management of complex affairs. It’s called the “circulation of elites,” and in times of crisis it tends to take on a kind of downward spiraling flavor, with each gang of discredited leaders tossed out for a progressively worse one until a kind of exhaustion is reached — whereupon the archetypal man-on-a-white-horse arrives on the scene.

Mr. Obama looked to be the man-on-a-white-horse — on the exhaustion of Reagan-Bush Jesus-Republicanism — but he’s coming off more like Philippe Égalité (Louis Philippe Joseph d’Orléans, duc d’Orléans) in 1793, with perhaps Newt Gingrich waiting offstage to become Robespierre in 2012 — and some obscure US Army captain now toiling in Kirkuk slated to become the American Napoleon of 2015. As you’ve surely heard a thousand times now, history doesn’t repeat itself but it rhymes. The enormities of Wall Street today are a little like those of the French Ancien Régime at Versailles. If America encounters the sort of disruptions of food and energy supplies that are brewing on the horizon, and unemployment keeps arcing up its current trajectory, civil uproars could easily follow. Readers think I joke about the Hamptons going up in flames. But the antics of the bankers, hedge funders, the CEOs, the Madoffs, and even the P. Diddy’s of our time, are liable to attract murderous attention as the public mood moves from sour to wrathful.

So, what people of good intention and progressive predilection want to know is how come Mr. Obama doesn’t just lay out the truth, undertake the hard job of cutting the nation’s losses, and get on with setting this society on a new course. The truth is that we’re comprehensively bankrupt, and no amount of shuffling certificates around will avail to alter that. The bad debt has to be “worked out” — i.e. written off, subjected to liquidation of remaining assets and collateral, reorganized under the bankruptcy statutes, and put behind us. We have to work very hard to reconfigure the physical arrangement of life in the USA, moving away from the losses of our suburbs, reactivating our towns, downscaling our biggest cities, re-scaling our farms and food production, switching out our Happy Motoring system for public transit and walkable neighborhoods, rebuilding local networks of commerce, and figuring out a way to make a few things of value again.

What’s happened instead is what I most feared: that our politicians would mount a massive campaign to sustain the unsustainable. That’s what all the TARP and TARF and PPIT and bailouts are about. It will all amount to an exercise in futility and could easily end up wrecking the USA in every sense of the term. If Mr. Obama doesn’t get with a better program, then we are going to face a Long Emergency as grueling as the French Revolution. One very plain and straightforward example at hand is the announcement last week of a plan to build a high-speed rail network. To be blunt about it, this is perfectly ******* stupid. It will require a whole new track network, because high speed trains can’t run on the old rights of way with their less forgiving curve ratios and grades. We would be so much better off simply fixing up and reactivating the normal-speed track system that is sitting out there rusting in the rain — and save our more grandiose visions for a later time.

I don’t like to be misunderstood. With the airlines in a business death spiral, and mass motoring doomed, we need a national passenger rail system desperately. But we already have one that used to be the envy of the world before we abandoned it. And we don’t have either the time or the resources to build a new parallel network.

But grandiosity is just another way that we lie to ourselves about where we’re at and what is really possible. Surely Mr. Obama knows that hope fades where the light of truth doesn’t shine. He is a charming fellow. I don’t especially want to see Newt Gingrich chop his head off.

The Joker in the Deck

Things come out of the woodwork. All of a sudden it’s a mutant H1N1 swine flu, with bird and human DNA accessories. We don’t know where this is taking us. It could be a media blowover, like SARS, or it could be a big deal, shutting down travel and assemblies of humans. It would be a very big deal if it killed, proportionately, as much of the population as the 1918 flu event — the worldwide toll then was roughly 30 -100-million out of a global population around 1.7 billion. Now the world population is over 6.5 billion. The only thing anyone can predict at the moment is that there will be a lot of very worried health officials and politicians out there in the days ahead.

This flu epidemic comes just as global economy itself lies comatose in the economic intensive care unit, with IV lines of dollars, euros, yen, and renminbis transfusing its hollowed-out carcass. It’s an odd time for attention to be diverted from that awful spectacle. The cash transfusions have sent the Cable TV gang into raptures of “optimism” — meaning they expect debt securitization to resume as before, along with Yuletide-level credit card shopping sprees in the malls, a mass splurging on new cars, and a renewed frenzy of house-building in the Florida buzzard flats. Those “green shoots” and sprouting “mustard seeds” they report seeing may themselves be a flu-like symptom. I don’t know what the so-called Mexican swine flu will lead to, but the global economy as we’ve known it is a goner.

Even if the Mexican swine flu turns out to be something of a false alarm, it will require billions of dollars in unexpected new outlays for prevention operations here in the USA — reinforcing the false idea that the nation has bottomless resources (the same idea that has been driving the bail-out fiesta). My guess is that the fear emanating from the story will be a potent generator of paranoia in the meantime, leading to widespread closures of things, canceling of events, restrictions on travel (official or otherwise), and a sell off in the financial markets. And that’s if the flu turns out not to amount to anything.

If the flu is the real deal, it will surely drive a stake through the faintly-beating heart of that invalid global economy, and possibly even continental-scaled economies like the US, the Euro-zone, and China — any place where things and people have to move long distances to keep life going. The US, obviously, suffers in this instance from its proximity to Mexico, and the fact that so much of our food comes from places that employ casual Mexican labor. A serious flu outbreak would be a short path to food shortages in the US, with our three-day supermarket inventories and just-in-time shipping methods. It would not be such a bad idea now to lay in supplies of beans, brown rice, cooking oil, onions, and toilet paper.

In any case, the banking-and-investments sector has been on autopilot for a few weeks. Lesser banks are crashing around the country (Idaho, Florida, California last week), but the remaining Big Boyz are still lurching through the landscape like so many Frankenbanks, jazzed up on electric surges of digital cash. There are ever more hints of a peasant uprising against the castle of privilege, but no sign just yet of the flaming brands and shaking fists from the village below. This flu thing will put the schnitz on their distempers for a while.

Regards,
James Howard Kunstler

Source: Hope Equals Truth About Our National Bankruptcy

Multiply this by millions of permanent layoffs, bankruptcies, shut downs, going out of businesses, chains closing for good, autos down the tubes, housing starts virtually zero, and sales almost the same, and what do you get?  The Toyota effect, multiplied many times over. 2.5 Million jobs were lost in 2008.

You get millions out of a job, millions behind in their mortgage and credit card payments, millions with homes worth less than is owed on them, and the chain reaction follows.  The more layoffs there are, the more store closings and bankruptcies there will be, and resultant layoffs and increasing of all of the above.  In other words, thanks to the welfare state, which wasn’t in existence in the 1930’s depression, credit cards which weren’t in existence in the 1930’s depression, and un-backed dollars, which were backed in the 1930’s depression, and no money down home purchases and ARM mortgages, which weren’t possible in the 1930’s depression, the conditions currently extant can and probably will make this depression far more severe than the 1930’s depression.  The facts say it will be far worse.

Unfortunately, you haven’t seen anything yet.

Carburetors

For over 75 years, cars, trucks, planes, and everything powered with gasoline engines, used carburetors to mix air and gas to feed into the engine’s intake manifold.  They worked well, but on occasion, they became ‘flooded,’ and the engine wouldn’t run.  (Modern, fuel injected engines can’t be ‘flooded.’)  Carburetors had two things on them which caused ‘flooding.’  (1) The accelerator pump, and (2) The choke.  On cold mornings, often the choke, which restricts the flow of air, might make the mixture too rich, and cause the ‘flooding,’ or often in hot weather, too much gas pedal pumping would inject too much raw gas into the engine, ‘flooding’ it, and causing it not to run.  Both things, which caused the ‘flooding,’ and engines not running, were TOO MUCH GAS.

The solution was to stop the flooding by depressing the accelerator all the way to the floor, and crank the engine till the excess gas was used up, or open the choke and wait for it to evaporate.  Gasoline engine technology is not the point here.  The point is this:  What got us into this economic mess?  TOO MUCH MONEY INSERTED INTO AN ECONOMY by the Federal Reserve.  Just like the engine being flooded with too much gas, the solution is to cut off the gas.

The Federal Reserve under Alan Greenspan flooded America with easy money, easy mortgages, and easy credit.  The result was bad credit, bad mortgages, and everything being over-priced.  Pouring more gas into a flooded carburetor guaranteed the problem would be made much worse.  Cutting off the gas would be the solution.  Pouring $2 trillion, and god only knows how much more into the economy, is like pouring gas into a flooded carburetor.  It will only make matters worse.  Obama says he has consulted 20 of America’s best, most respected economists, and they say pour more gas (printing press dollars) into the flooded carburetor (economy), and the engine of America will start.  NUTS!  I wish Obama had called me.

The same exact thing was tried in the 1930’s, with huge government spending, and it took WW II to get us out of the depression.  We’re already in two wars, and I certainly wouldn’t want us in a third one.  How about this as a cure for the current depression?

(1) Get us OUT of both wars we’re now in, and bring home all the troops.  Let ‘em solve their own problems over there.  We’ve got huge ones here, and can no longer concern ourselves with theirs.  This will save hundreds of billions a year, if not well over a trillion.

(2) Disband most federal bureaucracies, especially the Federal Reserve, and do it Quickly.  The DOT, DOE, HUD–and the list is long–serve no useful purpose.  The Department of Education educates no one, the Department of Transportation transports no one, etc.  This will save hundreds of billions a year.

(3) Revert to the Constitution, which gives government no authorization to subsidize anything.  This will put an end to all federal welfare, and save hundreds of billions a year.

(4)  Get out of the UN, NATO, and any and all foreign entanglements, at a savings of more hundreds of billions, and get the UN out of America.  Declare unconditional neutrality, and send no money or advice overseas at any time, or for any reason.

(5)  Close our borders with Mexico, and see to it that they stay closed 100%.  More savings.

(6) As illegals come up for police stops, free medical care, welfare, school enrollment etc., which are in the hundreds of thousands each year, instantly send them home.

(7) Renounce NAFTA, and all laws which encourage, tax wise, the building of plants off-shore, and resulting layoffs here.  With the budget balanced, and no more Federal Reserve, recovery would be pretty quick.

Today, every single state is in terrible economic condition because of layoffs, bankruptcies, and low tax collections.  They have to balance their budgets.  The D.C. Gang doesn’t, and can print and print and print, which they are doing, and will continue to do with nary a smidgen of responsibility.  We all pay for their lack of responsibility with every single dollar we own being reduced in purchasing power.

I can go on and on, but the point is this:  The ones who harm us the most–other than the Congress who has gotten us into this with a hundred years of bad legislation–are bureaucrats, welfare recipients, and illegals, who would be out of work, and that’s great!  Let D.C. turn itself into a ghost town, full of worthless, out of work ex-bureaucrats.  Maybe they’d burn the place down and we could start over.  Let the illegals go home by themselves, or by force when they are picked up.  If states want to subsidize the poor, or illegal, they can, but not the federal government.  All of these ideas would actually balance the budget, and make America strong again.  None of these ideas have a Chinaman’s chance in hell of coming to pass.  Not a single one.  Obama will print up another trillion dollars in un-backed scrip, and we’ll have hyper-inflation, except in housing, because that has yet to reach bottom.

To fix a flooded engine, you cut off the gas.  To fix an economy flooded with paper money, you cut off the paper money, not print trillions more!  The economy is in such a sorry state, flooded with fake money, that the fed interest is close to zero.  They’ll pay you NOTHING to store your scrip for you.  Wise people have taken their scrip, and turned it into precious metals, which will always have value in any currency, or all by itself.  An economy such as ours, which has been flooded with unbacked scrip, and ceased to run, as in a flooded engine, has to get itself out of the mess by ceasing the printing of scrip.

It will be very painful to millions of people who have not been acting wisely, or who have been depending on Uncle Sam for their sustenance.  The pain of this depression is unimaginable today.  We’re only at the very beginning of it.  The only sensible way to get out of it, is to let it run its course, and at rock bottom, the economy will begin to rise like the Phoenix Bird.

If my ideas ever came into being, there would be wholesale riots by those cut off, and many millions would die.  Wonderful!  We are flooded with not only too much scrip, backed by nothing, but too much human trash, who have been flooded with handouts from the public treasury. Millions actually believe that government owes them a living, which is gross error, and extremely costly. They, like the scrip, are basically worthless, and they must be gotten rid of to make our economy healthy again.  How to do it?  I give up, or at least won’t write about it.

Source: Basic Economics

Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was “broken” by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn’t appreciate the humor of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too – down $24.

So, here is a good place to take up our guesswork about what is going on in the world’s markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world’s markets have begun a major correction. The world’s governments – led by the United States – are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

“Pink slips pile higher,” reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves – savings – the pressure on Misters Obama and Bernanke to ‘do something’ will increase. What can they do? Spend money.

“US deficit set for post-war record,” reports the Financial Times. Reports today tell us that Obama says deficits will go “over $1 trillion.” One estimate put it at $1.2 trillion for ‘09. We’ve seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet’s chump of last resort. He didn’t have any money. Still, when an economy slumped, he nevertheless kept spending – buying on credit. Gradually, the whole world economy came to rely on him. But now he’s stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux – all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can’t afford a bailout of this magnitude. Trillion-dollar deficits won’t be enough. Martin Wolf, in the FT, quotes a report from Levy Economics – “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.”

With rising unemployment the pressure to ‘do something’ grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can’t cure the patient. All they can do is to deliver larger and larger doses of their quack medicine – until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn’t reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron’s survey told us that Wall Street’s strategists all believe stocks will go up in ‘09. The only question is how much. The bulls think they’ll go up and keep going up. The bears think they’ll go up…and then go back down again.

And currently, there’s more money on the sidelines – waiting – than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in ‘08…it wants to get even in ‘09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it’s what you find at the beginning of one. People still think that they will make money in stocks – it’s just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don’t know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in – just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle – such as we were in 1920 – we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future’s gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we’re out of time for today.

*** This year marks the 50th anniversary of Cuba’s revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

Source: Global Financial Illness

Gold edged lower on Friday as the dollar strengthened against the euro in the wake of U.S. December non-farm payrolls numbers, but reaction to the data was muted as it came in broadly in line with expectations.

Spot gold slipped to $850.65/852.65 an ounce at 1415 GMT from $856.10 late in New York on Thursday.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $2.80 to $851.70.

A government report showed U.S. employers slashed payrolls by 524,000 in December, driving the unemployment rate to its highest level in nearly 16 years.

Analysts polled by Reuters had expected a reduction of 550,000 jobs in December.

“The non-farm payrolls were only a few thousand off consensus, so that took some of the surprise away from the market,” said BNP Paribas metals analyst Michael Widmer.

Gold is taking its cues predominantly from the currency markets. The dollar turned higher against the euro in choppy trading after the data, with the single currency hitting a session low of $1.3588.

A stronger dollar tends to pressure gold, which is often bought as an alternative asset to the U.S. currency and tends to move in the opposite direction to it.

While the data was very poor, Widmer said, recent economic reports from the euro zone economies have also been weak, leaving both the dollar and the euro lacking support.

Oil prices, which also tend to influence gold, slipped more than $1 a barrel after the data to below $41 a barrel, as the rise in unemployment deepened gloom over the demand outlook in the world’s largest oil consumer.

In the longer run, concern over the prospects for the global economy continue to support gold as a haven from risk.

However, jewelery buying is relatively lackluster and strong demand for investment coins and bars is said by traders to have slackened since its autumn peak.

In India, the world’s leading market for gold jewelery, buying remains muted with prices at relatively high levels.

“There is hardly any demand at these prices,” said Mayank Khemka, managing director of bullion importer Khemka International in Delhi.

FORECAST CUT

Platinum has posted modest gains since the beginning of the year after a sharp sell-off in the last nine months of 2008, which knocked prices down 65 percent from their March highs.

However, it is still likely to suffer in 2009 from falling demand from carmakers, the major consumers of the white metal.

Investec cut its 2009 platinum forecast by 28 percent to $970 an ounce, although it said it remains positive on the longer-term outlook.

“We see downside risk to the platinum price in the near-term,” it said. “The outlook for vehicle sales, which accounts for 50 percent of platinum and palladium demand and 80 percent of rhodium demand, remains very poor.”

Spot platinum was quoted at $978/988 an ounce, down slightly from $991.50 late in New York on Thursday, while palladium was at $191.50/196.50 an ounce from $194.50.

Spot silver was at $11.09/11.17 an ounce against $11.08.

The world’s largest silver-backed exchange-traded fund, the iShares Silver Trust (SLV) , said its bullion holdings rose 1 percent or just over 55 tonnes on January 8.

LONDON, Jan 9 (Reuters)

The cuts are on top of the 23,000 jobs eliminated so far this year. Chief Executive Officer Vikram Pandit plans to whittle the company’s workforce down to 300,000. By the time Pandit puts down the machete, he’ll have lopped off about 20% of the company’s headcount since Citigroup’s peak.

Just last week, Citigroup announced the release of 10,000 employees in addition to hiking interest rates an average of 3% for about one-in-five of its credit card holders.

Since the subprime market caved in last year, bank and brokerage firms around the world have shed nearly 160,000 jobs, Bloomberg reported. Citigroup’s plan to let go 50,000 is the largest workforce reduction in the U.S. financial industry since it first started to unravel.

Since the crisis started in June 2007, Citigroup’s shares have dropped like an anchor, falling more than 83%.

Still, that’s not enough to shake Pandit’s confidence that his executions will produce results and redeem the company’s stock. Last week, Pandit and another top manager scooped up about 1 million shares between the two of them. Pandit bought 750,000 shares at prices between $8.92 and $9.45, Dow Jones reported.

In Citigroup’s presentation, the company pointed out that it has the lowest exposure to U.S. consumer mortgage market of the country’s top four banks. Citigroup has $218 billion in U.S. mortgages, Bank of America Corp. (BAC) has $461 billion, Wells Fargo & Co. (WFC) has $340 billion, and JPMorgan Chase & Co. (JPM) has $302 billion.

Other banks are expected continue cutting jobs. The London Times reported over the weekend that JPMorgan is planning to cut thousands. Goldman Sachs Group (GS) is planning to cut 10% of its workforce.

Fidelity Investments, the world’s largest mutual fund manager, plans to shed 1,700 jobs in the first quarter – in addition to the 1,300 it cut last week.

Source: Citigroup Whacks Another 50,000 Jobs; Cuts Expenses by 20%

This from The Daily Reckoning:

“Balloon bursts on festive parties in tough times,” is a headline at the Financial Times. Companies are cutting back sharply on their holiday celebrations. We know that from personal experience. A memo just received from corporate headquarters in Baltimore tells us that the annual Christmas party will be greatly scaled down. “Employees only,” is the word.

Well, the grinches in our own little company are generous compared to those in other firms. The big Wall Street firms “have scrapped extravagant parties,” comes the word from the street. “What’s there to celebrate,” asked one executive. “It’s the year from Hell.”

Certainly a “glass is half empty” way of looking at it. It’s a correction. And in corrections, spending goes down as people correct the errors of the past.

In Detroit, GM (NYSE:GM) and Chrysler have cancelled their big holiday bashes, too.. Oh, the poor caterers! It’s not as if there were a lot of upper-end work in Detroit these days. The caterers probably waited all year to put on a big do at Christmas for the carmakers. Then, wham, they cut off the juice…the party lights go out…and it’s a cold, cold winter in Detroit. As if it weren’t cold enough already!

The automakers are trying to cut costs as rapidly as they can. But revenues fall faster. Vehicle sales fell again in October – for the 12th straight month. This is the longest losing stretch in 17 years.

A writer for Britain’s “Spectator Business” took a drive to Detroit to check on the state of things. Spotting a live human being in a huge parking lot…apparently guarding an abandoned factory…he stopped to chat.

“Ten years ago, this place was booming,” said the guard. “Hard to believe isn’t it? Back in ’85 I used to work for General Motors fitting radios and cruise-control switches to the dashboards of cars. But they moved the factory somewhere else and that was that. Now I do security. Although what they’re guarding this for, I do not know. There’s nothing here.”

Behind him was the apocalyptic scene we associate with Detroit. Then, referring to the American Dream, the guard took up his reflection:

“I thought it was the auto industry…with jobs and pension and health insurance and what not, but that went pop. Now they say they are building condos everywhere down here, but I don’t know who they think is going to buy them. I guess that’s another type of dream.”

“It’s time to Wake Up, America..” continues the reporter, “this dream has become a nightmare.”

So, in addition to the $1 trillion taken out by the savers…there’s also the effect of less spending magnified all through the economy. The caterer doesn’t get to serve up a holiday party…the baker doesn’t get to bake…the liquor bottles begin to collect dust…from the guys who park cars to the babysitters to the hairdresser…the whole economy spins fewer dollars…people earn less…and they pay less tax.

Then, at the far back of the income bus, the most marginal workers fall off altogether. The jobs they could get anytime before can’t be gotten at all now. McDonald’s (NYSE:MCD)  begins to get choosey. It wants someone with a master’s degree in fluid mechanics doing its deep-frying. And over at the Bright Nails shop, heck, they’re looking for someone who used to be a chemist!

So the guys with few skills and spotty employment records can’t get jobs at all. They should do like those fellows in Latin America and South Africa. They stand out on the roadsides, waiting for anyone to pick them up and put them to work…a day at a time…one hour after the other. They get paid at the end of the day – in cash.

They should reduce the cost of their labor to the point where they’re worth hiring, in other words. But this is the United States of America we’re talking about. This is a democracy. And there are a lot of votes in the greater Detroit area…and a lot of Democrats who are going to be really cheesed off if their man in the White House doesn’t do something to protect the voters from reality.

So what’s Obama going to do? Simple, he’s going to do what his most persuasive advisors tell him to do…he’s going to borrow all those savings and put them to work. Everyone wants the safety of Treasury paper. Fortunately, the Obama administration is going to give them plenty of it… They’ll absorb the trillion or so in US savings…and then everything else they can get their hands on – including much of the rest of the world’s savings too. The US deficit will soar – along with the national debt. Rates will rise.

And then…maybe 18 months from now…maybe 10 years from now…it will get really interesting…

Source: Want The Good Times To Come Back? You Could Be Waiting 20 Years…