PANIC Part II: One Year Later

July 28, 2008

Elaine Meinel Supkis

Once again, the stock market slipped on a 239 point banana peel. We revisit this blog exactly a year ago and my, oh my, it was the exact same thing! Looks like the Japanese carry trade has been pulled out of the ditch and restarted. I don't think it will creak along much longer due to increasingly painful inflation in Japan. Japan's workers are being hammered even harder, incidentally. All the major US media is now intent on proving that it is China, not the warmongering US, that is causing high oil prices. HAHAHA. I don't see China menacing Iran Kitty! And Venezuela pulls our chain, sells oil for only $100 a barrel to Spain. I don't think the US public can figure out what is going on, thanks to all this wonderful propaganda churned out by our lovely media owners.

My blog, exactly one year ago: Pause In Panic, Counting Many Losses

I decided to make a chart of the data they had at Big Picture. What interests me most is that the world's #1 and #2 economy both have the poorest stock markets. Both have the weakest currencies. Both had beggared their own workforces to cut inflation. But also outsourced jobs like crazy to cut inflation. But within this little scheme are several exact opposites. Japan has the world's biggest profit margin from trade, for example. Japan also has the world's biggest US bond fund, double that of China who is #2. And Japan has the biggest automobile trade surplus with the US compared to all other nations.

The real puzzle is not that Japan's Nikkei is so bad but why they keep it deliberately bad for this can't be accidental. If Japan was doing really badly in global trade, etc, then it would be understandable! But this is not the case here. The US struggles with inflation while Japan enjoys the ravages of depression and the Bank of Japan does nothing to fix this even as the US and indeed, the entire world struggles with oil-induced inflation.

I made up that graph, myself. My, oh my! Look at that: the worst stock markets when it comes to percentage growth were the US and Japan! And it is obvious to me that both are using the cheap currency, cheap loans, crush the workers schemes that seem pretty anaemic. Far from being astounding economies, the #1 and #2 economies were both pretty pathetic. One very significant difference: Japan is the creditor nation for the US. The US is in debt to virtually every man, woman, child, dolphin, polar bear, koalas on this planet earth! Not to mention, the panda in China.

Japan has one of the planet's biggest trade surpluses. The US definitely, by far and away, has the world's mightiest trade deficits! This yin/yang duality is down the line. Everything Japan is, we ain't except for the 'suppress worker's wages, lie about inflation and lend far below even the fake official inflation rates' parts. Let's look at today's news in light of what I wrote a year ago:

Yen Cross Basics by Joseph Trevisani:

Three terms have resurfaced in the currency markets recently: carry trade, risk aversion and risk appetite. The euro/yen cross is once again popular. Have world economic and financial conditions so improved that this risk barometer is again an active trade?

A little more than a year ago, in June 2007, the American dollar was worth 124.00 yen. That month it began falling against the Japanese currency and by late March of this year it had landed at 96.00 yen --an astonishing 23% slide in ten months. Over a slightly later period, August 2007 to July this year, the dollar fell a comparable amount against the euro, dropping 20% in value from 1.3350 to 1.6037. But since then the yen and the euro have parted ways against the dollar.

On Friday, the dollar closed at 107.90 against the yen, a 43% recovery of the 124.00 – 96.00 decline. But against the united currency the dollar finished the week at 1.5700, a bare 13% recovery of its 1.3350 – 1.6037 decline. The difference is the euro/yen. This cross has erased the entire credit crisis inspired collapse when it sank from just over 169.10 to 149.26 in two months. On the 17th of this month it reached a new all time high at 169.96. The dollar has hardly improved versus the euro but it has surged against the yen. Is the euro/yen the biggest factor in the dollar’s return against the yen? The euro/dollar rate gets most of the media focus but for currency traders the cross has been where the action is.

The yen got weaker because, as I reported last year, Japan surrendered to China and after a flurry of top secret Bank of Japan and Bank of China presidents, a series of diplomatic initiatives were signed and suddenly, Japan went from barking along with the US at China over China's currency values and Japan and China began to work in tandem on many, many issues, large and small.

Indeed, the globe trotting duo, Hu and Wen had a huge visit to Tokyo and then Japan visited the Dragon Throne. And since those visits, a curious silence has fallen over Asia. Both China and Japan suddenly, and in tandem, resumed stockpiling dollars in the FOREX reserves after these visits and both are weakening their currencies against the dollar and boosting the euro. This is why the yen is collapsing against the dollar while the dollar is still bad off vis a vis the euro. There is no logical reason for this. It is purely Asian strategic moves in the Floating Currency Casino. They are playing with marked cards while the US is playing poker with a mirror behind our backs, reflecting our cards so the Asians can read them.

From Seeking Alpha:

The primary Japanese factor in the movement of the dollar yen, as the pair is called in the interbank market, has been the static nature of the Japanese economy and Japanese interest rates. For almost six years prior to mid-2006 the Bank of Japan had a zero rate policy. When the Bank of Japan finally raised rates to 0.25% in July 2006, the bank governors envisioned a slow return to a normal rate environment. But the persistence of deflation until last August, and the fear of the prior deflationary decade inhibited the BOJ’s ability to increase rates.
*snip*
The yen crosses can and do affect the trading rates of their components, the euro and the dollar, in ways which do not relate to the economic currents between the Eurozone and the United States.

Bullocks! This article by an 'expert' goes off the cliff like so many others! Japan has had the EXACT SAME INFLATION AS THE REST OF THE PLANET. I have crunched Bank of Japan's numbers and looked at their graphs and they show quite vividly, the thing that has been eating inflation is the Japanese workers! They have seen huge wage reductions coupled with the government allowing Toyota to not pay for overtime...AT ALL! But to force workers to do 'inspections' above and beyond working hours. Free overtime for Toyota!

Indeed, literally working people to death. Not only have wages utterly collapsed there, working conditions are dire, it is more like China than say, Germany or France. The number of full-employed has fallen like a rock. Part timers are used, instead. This keeps wages very low, too. More people are now part time workers than full time in modern Japan. A significant loss of working class powers.

Toyota to raise prices in Japan

Toyota Motor Corp. plans to raise domestic prices for some models by 1 to 3 percent to cope with the sharp rise in prices of materials, including steel, sources said.

The models subject to the price increases will likely be midsized passenger cars or larger vehicles that are currently selling well, they said.
*snip*
If Toyota raises prices, other automakers will likely follow suit.

Toyota could keep prices low in Japan thanks to ....super-cheap 0.5% lending by the Bank of Japan! And even with this and working people without pay, Toyota's bottom line is suffering because of the downturn in auto sales in the US. So here is yet more obvious inflation in Japan! But does this stop the Bank of Japan?

No. Not any more than the budget and trade deficits coupled with rising, even hyperinflation bothers Bernanke. 2% or lower! Full speed ahead, damn the icebergs.

Ministry urges labor policy shift

Corporate efforts to cut labor costs by reducing the number of regular employees and hiring more part-time and dispatch workers are actually stifling productivity and hampering economic growth, a government report said Tuesday.

In its annual white paper on labor and the economy, the Ministry of Health, Labor and Welfare suggested that companies return to Japanese-style, long-term employment with an emphasis on nurturing their work forces and raising the added value per employee.

The ministry called on companies to devise well-planned strategies to hire new graduates and train personnel from a long-term vision.

This tid bit is from today's Asahi Shimubun in Japan:

Japan Jobless Rate Rises to 4.1%, Highest Since 2006

(Bloomberg) -- Japan's unemployment rate rose to the highest in almost two years in June and household spending fell, adding to signs that the economy's longest postwar expansion may be coming to an end.

The jobless rate climbed to 4.1 percent, the statistics bureau said today in Tokyo. Economists estimated the rate to stay at 4 percent. Household spending declined 1.8 percent from a year earlier, the fourth monthly drop, the bureau said.

Corporate sentiment is at a four-year low as higher energy prices and the U.S. slowdown prompt companies to pare hiring plans and forego wage increases. Inflation at a 10-year high is discouraging consumers from spending and weighing on an economy that probably shrank last quarter.

The misery in Japan is astonishing. And totally ignored by the government. Note the 'inflation is at a 10 year high' part! No wage increases plus rising inflation=death. And suicides, murders and abortions are all rising rapidly. This is very cruel. Note also the 'longest post-WWII expansion' is ending. Hey, we were told in the US media, Japan has been in this depression, not a massive, fast-growing economy!

Their stock markets didn't soar. Nor did their housing markets. But their MANUFACTURING took off like a rocket! And this is significant because as Japan's manufacturing took off, ours died. Now, ours is totally dying, fast.

Asian Nixonomics May Spell Subsidy-Driven Stagflation

(Bloomberg) -- Asian governments from India to Malaysia, clinging to budget-busting fuel subsidies, may end up paying an even higher price: saddling their economies with an extended period of stagflation.

``Subsidies will come increasingly in the way of future growth,'' says Kalpana Kochhar, a senior adviser for the International Monetary Fund's Asia-Pacific Department in Washington. ``Not passing prices through and keeping artificial price and wage controls never works.''

Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash. Inflation has already reached decade highs throughout the continent and played a role in destabilizing politics.

Yes, there is inflation. There is inflation in America. Despite the subsidies in Asia, the biggest gas guzzlers on earth are still...AMERICANS! We dearly wish to blame everyone else for this situation. On top of this, China and Indonesia [which is mostly Muslim] and Japan are not menacing Iran. The US is doing this. Menacing Iran means high oil prices. Period. If Asia is trying to minimize the pain of all this rabble rousing oil conquering messes created by Americans seeking to tear apart the Middle East and steal the oil---well, what on earth? HAHAHA. Right! We are not doing things, Asia is doing things to us! We are innocents.

This is the sort of rubbish propaganda the US needs to feel better. Well, oil prices fell for two reasons: the US for the first time, directly talked to Iran. And the US has asked Israel to cool the hot head talk about war. Also, Asia might have 'stagflation' but what are we brewing? Hyperstagflation? We just have to stop throwing rocks at others and look in the mirror! Can we achieve a hideous depression alongside hyperinflation? I had to buy a large box of screws today. It cost me over $28. Three years ago, it cost only $16. OUCH. Plywood: 12 years ago, 1/2" sheets were going for about $3.50. Now, they are over $12. This is crazy. Then there is the oil....1999, it was selling at $0.89 a gallon, today, with it dropping by $0.5 it is still above $4 a gallon!

China's Cars, Accelerating A Global Demand for Fuel

"In China, size matters," says Zhang, the 44-year-old founder of a media and graphic design company. "People want to have a car that shows off their status in society. No one wants to buy small."

Zhang grasps the wheels of his Hummer, called "hanma" or "fierce horse" in Chinese, and hits the accelerator.

Car ownership in China is exploding, and it's not only cars but also sport-utility vehicles, pickup trucks and other gas-guzzling rides. Elsewhere in the world, the popularity of these vehicles has tumbled as the cost of oil has soared. But in China, the number of SUVs sold rose 43 percent in May compared with the previous year, and full-size sedans were up 15 percent. Indeed, China's demand for gas is much of the reason for the dramatic run-up in global oil prices.

ARF! The Washington Post warmongers are barking again at the Chinese! THEY are much of the reason we are paying through the nose for gasoline! HAHAHA. Right. I am glad Bloomberg News admitted this month, the war talk aimed directly at Iran is mostly responsible for all this price hike stuff. The US government has threatened to rip the noses off of all the hell hounds if they corner the top tiers of the global oil market futures so they have backed off, whimpering and snarling. For the moment. They will be back if there is no other way to make a fortune.

The US produces Hummers. We should be delighted, the Chinese want to buy these gas guzzling machines from us! Balance our trade deficit! Eventually, the Chinese will be running around in pick up trucks, drinking booze, driving into ditches and getting tasered by Chinese cops. Then singing about it on the radio, with a nasal twang. Yup!

Fuel Subsidies Overseas Take a Toll on U.S.

From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.

HAHAHA. The NYT joins the propaganda dog pack. Why should China conserve fuel when the US is responsible for the high price of fuel? Eh? It isn't their responsibility. The US can shut up about Iran, make peace there, open markets to Iranian oil and voila. Oil will be cheap again. To the complete horror of the Texas oil men! They do NOT want this any more than Israel wants this! End of story.

Venezuela agrees to sell Spain oil at $100 a barrel

(Thomson Financial) - OPEC member Venezuela agreed Friday to sell Spain 10,000 barrels of oil per day at $100 a barrel in exchange for medicine and other goods, a Spanish government source told AFP.

The agreement was reached during a meeting between Venezuelan President Hugo Chavez and Spanish Prime Minister Jose Luis Rodriguez Zapatero in Madrid, the source said.

Oil prices hovered around $125 a barrel on Friday after reaching a record high of over $147 on July 11.

Spain would make up the difference between the market price for oil and the price charged by Venezuela, a former Spanish colony, by providing the country with building material, new technologies and medicine, the source said.

YIKES! The price of oil is only $100 a barrel...for select customers. What will the US doing about this? How about attack the Spanish for not conserving oil? Tell Europeans to stop driving cars? The coordinated media efforts this week to convince Americans, we have NOTHING to do with high oil prices, it is the fault of people babbling in Spanish, Chinese drivers who want to act like Americans and Indonesian fishermen who want to use their boats. Not us. And since NONE of these people are egging on a massive boycott of Iranian oil or talking about bomb, bomb, bombing Iran, they, not the nutty warmongers running for President or the monkey in the White House, are causing high oil prices. Eh? Two weeks ago, the major media and the major money men including that innocent, silly, little baby boy, Paulson, were in DC for an emergency Bilderberger meeting.

I suspect this massive propaganda push is the result of that meeting. 'Ja, Let's blame der slanty-eyed, funny talking foreigners from former third world nations for der high oil prices!' said Kissinger in a thick, funny German accent. By the way, I am not joking. This is exactly what they decided.

IMF Says End of U.S. Housing Slump `Not Visible'

(Bloomberg) -- The International Monetary Fund said there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.

``At the moment, a bottom for the housing market is not visible,'' the IMF said in its Global Financial Stability Report, released today in Washington. ``Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover.''

This news is being blamed for causing total panic in the stock market today. HAHAHA. Let's blame this on the Chinese, South Americans, Indonesians and Spaniards.

Bust Up These Beasts

Steve Forbes

The Bush Administration should vigorously push to have Fannie and Freddie recapitalized and broken up into 10 to 12 new companies, with their ties to the government completely severed. Yes, this would mean Uncle Sam's pumping in some $300 billion in equity capital and, perhaps, taking on some $100 billion in those questionable mortgages. But such an investment would enable these companies to have a sound debt-to-equity ratio in the vicinity of 4-to-1. Shares in Fannie and Freddie would then be exchanged for shares of common and preferred stock in the new, solvent firms. Current shareholders could ultimately recover their losses, and taxpayers could eventually get most, if not all, of their money back. In fact, Uncle Sam might even make a profit.

One part of the restructuring should mandate that the federal government sell off its equity within, say, a five-year period.

Having 10 to 12 sound private companies competing in the mortgage market will help revive and reinvigorate that sector. If the Federal Reserve ever learned central banking--i.e., making the dollar strong and stable--the housing market would quickly snap back.

The housing collapse has nothing to do with the weak dollar. AU CONTRAIRE! The dollar going weak is not what killed the housing bubble! The Japanese carry trade ended rather abruptly. The housing market going weak in the knees saved our trade deficit by weakening the dollar which was too strong against the yuan and yen. They, in turn, fixed this by holding increasing numbers of dollars instead of plowing them back into the US lending stream. This, in turn, is now causing higher interest rates and is strengthening the dollar which is wrecking our trade with both nations! The easy lending regime that enabled the housing bubble ran alongside a very strong dollar vis a vis the yen and yuan. But not the euro. We cannot make the dollar stronger unless we brutally end the trade deficits with Asia and incidentally, Europe. Both nations know this. So they are trying to trick us into thinking the dollar is stronger this summer due to something nice happening.

But all that is happening is simply, China and Japan are holding a total of nearly three trillion dollars in cash and another trillion plus in US Treasuries. And the US plans to overspend our own budget by over half a trillion this year alone, a record. And to do this, Congress raised the debt ceiling to well over $11 trillion. Can Japan and China sop up another trillion from us in the next year and a half? One wonders. Oh, do we wonder.

Steve Forbes thinks all we have to do is 'privatize' mortgage lending. And this is just stone stupid. Fannie Mae and Freddie Mac were waste paper baskets for the private lenders. Who would write loans to all and sundry and then rush to Fannie Mae and Freddie Mac to dump them there and then rush off to write more bad loans! This is why the system is collapsing, got that, Steve?

By the way, this posting came in after midnight due to going off to pick up son at train station. Train was very late due to storm damage to tracks.

Elaine

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Comments

[GK]

I think we need to write a children's book on how to value businesses as it seems to have been lost on the public.

If the interest rate is 0% (no discounting of future earnings), then the value of a lemonade stand earning $100 a year for 10 years is ... duh ... $1000

The price earnings (P/E) ratio is $1000/$100 = 10.

As input prices go up and people stop buying, earnings of DJ stocks are going to go down and stock prices should go down.

But I am not sure where Mogambo gets his P/E ratio numbers. The DJIA P/E seems to be around 15 which does not seem unreasonable.

http://www.djindexes.com/mdsidx/ index.cfm?event=showAvgStats

by The Mogambo Guru

There are signs of stupidity and panicky desperation everywhere, such as the Dow Jones Industrial Average index going up last week when earnings fell to $132.14 from $146.15! Earnings went down, but the shares went up because there were more buyers than sellers! Hahaha!

If you think that the fall in earnings to $132.14 from $146.15 is a lot, then congratulations! You are right! It is a huge loss of 9.6%!

So, earnings fell almost ten-freaking-percent, yet the underlying stocks went up? Hahaha!

=========

In case you are not impressed with a 10% fall in earnings, maybe you will be impressed that as a result of earnings falling and prices going up, the price-to-earnings ratio is now a stunning 87, when the long-term average P/E for stocks is about 12, and where stocks usually top out at a P/E of about 21! Hahahaha! Who are these idiots buying these stocks?

[Elaine Meinel Supkis]

This does make no sense except for one item: the trade deficit! They have to get rid of the dollars because not everyone is holding dollars to make their currencies artificially cheaper, only Asia is doing this!

No, Europe and OPEC as well as all our other trade partners like Canada and Mexico have to park their loot somewhere! Stocks are where.

[anthony]

They are not going to stabilize the economy as long as average folks don't have money.

gas price - unemployment - lead to declining house - lead to busted construction sector - banking - retail ... etc.

They really have to start where it begins. stop agitating oil price. stabilize the banking, then start carefully pouring money where it needs.

instead they are just throwing money every which way drowning everybody with inflation.

and they are doing it harder each year. (look at the budget. more war spending, more bail out, etc)

[Ed-M]

Plus workers are being herded into mutual funds to save for their retirement in IRAs, Roths, 401Ks and the like.

[JT]

I wonder,

70% of US economy is based on internal consumption. And most profits are still kept by US Brands/importers/resellers.
Perhaps not the case with Japan (Toyota) but concerning China at least.

So isn´t blaming Japan and China for trade deficits a bit like blaming McDonald´s for being fat or U.S. Sugar Corp for having diabetes. Or blaming your first class teacher for being stupid :).
Blame your own management (Washington and master chimp).

I apologize for being mean (I´m in a bad mood, trying to install a new server for one of my customers at the moment).
But hey, I sent 2000 € your way today. 1500€ to HP (500€ to China for production?) and 500€ to Seattle for the OS.
So trying to help :), to balance things. And I bought a Weber charcoal grill last week that´s still made in US I think.

One request though could you guys pls elect Obama. Maybe all of us are screwed in the western world and it won´t change anything.
But it would feel nicer to drive off the cliff in the same car. A bit like Thelma and Louise in an old convertible, you know.
But without the GWB and JM cow horns on the hood of the car :).

[ralph]

Dear Elaine,
I found this online. Do you think this has any merit. Or is it lame. Please read the following........ Mr. Williams was told that over the next twelve months, from mid-2008 to mid-2009, (1) news of super giant oil fields, ready to produce, would be announced for two locations, in the Northern Slopes of Russia and in Indonesia, which oil fields would together contain more oil reserves than the entire Middle East; (2) that this news would drive oil prices down to $50/barrel; (3) that OPEC countries, especially in the Middle East, would be bankrupted by this price decrease; (4) that this would cause the financing of our foreign trade and current account deficits through purchases of treasury paper by foreign nations with their surplus oil profits to collapse, leading to the collapse of the dollar; (5) that the collapse of the dollar would cause unprecedented financial strife and turmoil in the US, and that it would take many years for the US to recover from this financial debacle; (6) that they (big oil) support John McCain for President; and (7) that US domestic oil reserves would never be tapped, and that any legislation which might allow domestic reserves to be tapped would not be allowed to pass, leaving the US dependent on foreign oil forever.

[DrKrbyLuv]

I wonder how much Japan and China are using their T-Bill leverage to deter the US from further exploiting Iraq and Iran. They seem to be in the drivers seat in that either or both could be privately advising Washington that further transgressions would trigger heavy T-Bill trading, which would be the death knell for the dollar.

An interesting theory, put forth by Jerome Corsi in his book "The Late Great USA", is that a failing dollar may be deliberate to push the people to accept the "Amero" (or some other new currency that will be common to the US, Mexico and Canada). Thus, forming the North American Union.

If China could be blamed for the collapse of the dollar - via T-Bill dumps, all the better.

[G.]

Oh Pooowah Libwulz of America !

Hold on tightly to the coat-tails of the
Audacious One. You will surely get a
Magic Carpet Ride to the Kindom of Hope.
Where the bluebirds sing next to the lemonade
springs. And the Big Rock Candy Mountain
will have an inexhaustible vein of choir
music and good TV campaign commercials.News
anchors will once again have good reason for
their expensive facials and hair styling.

Oh Lord when are Americans going to learn
that there can be no positivity without
some negativity (ie,hell raising--Elaine's
observations on "balance" here)

When are we going to go for some frumpy
negative person with occasional 5 o'clock
shadow that says real things rather than
some blow-dried piece of make up velvet art.

Throw your two party system in the river.
It died years ago when the DLC took over.
Cant you smell the corpse ? Your clothes
stink from being too close.

I'd recommend going to the Arboretum this
wknd and see the fabulous "corpse flower".
Its blooms are the largest in the world and
only blooms once in its life. The smell is far more worthwhile putting up with than
hanging around with most Democrats.

[Jojo]

All conspiracy theories lead to concentration of wealth and power in the ambitious hands of the aggressive to the loss of those that share the qualities of being timid and trusting.
The hope is the belief that there is intercession from an invisible hand, a ninja-like hand not bound by logistics and time or self-serving justifications - This avenging dexterous appendage of justice will somehow serve it's people and lift them up.
There are those that argue that the hope of there being a higher force of cosmic justice is a drug that inhibits human rage and agitated action at the injustices that are inflicted upon them.
So, it seems to me that if the undefined, miracle induced hope of justice prevents the meek from taking hold of injustice and choking the power out of it - then hope is a conspiracy.

[Jojo]

All conspiracy theories lead to concentration of wealth and power in the ambitious hands of the aggressive to the loss of those that share the qualities of being timid and trusting.
The hope is the belief that there is intercession from an invisible hand, a ninja-like hand not bound by logistics and time or self-serving justifications - This avenging dexterous appendage of justice will somehow serve it's people and lift them up.
There are those that argue that the hope of there being a higher force of cosmic justice is a drug that inhibits human rage and agitated action at the injustices that are inflicted upon them.
So, it seems to me that if the undefined, miracle induced hope of justice prevents the meek from taking hold of injustice and choking the power out of it - then hope is a conspiracy.

[WTO_WHO]

WTO talks collapsed... heavy dollar buying(by whom, ahem ahem)...

[Gary]

How can I be against hope? I'm only against
the new version of "hope" (regTm)

You can be hopeful if you're part of a movement that is attempting genuine change
rather than a coreographed "movement" that is centered around "hope" and other pious
sounding noises.

Out of negativity comes positivity. When negativity is driven out of the system
positivity becomes sinister--like the movies with the "clowns-gone-wild" killers.

I always have a little hope when I go into
the booth and crank on the handle that says
Nader or Ron Paul (maybe)

[JZ]

America's house price time bomb

By Michael Robinson
BBC World Service

With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide.

The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.

By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less.

So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.

"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense."

Take the hit

As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded.

Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment.

Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."

Over to the bank

In California and much of the rest of America, there is a powerful incentive for homeowners such as Ms Trainer to walk away from their mortgage obligations.

Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.

Consequently, by walking away from her apartment, Ms Trainer has also walked away from the $200,000 loss on her property.

Her bank gets stuck with that.

Unthinkable option

Traditionally in America there is a social stigma attached to those who default on their debts, which should be a deterrent to walking away from your home.

But according to Susan Wachter, professor of real estate and finance at Wharton School of Business, in the depth of this crisis the social attitudes to such actions are changing.

"This is the kind of conversation that's going on at cocktail parties, at swimming pools," Professor Wachter says. "And suddenly this option which was truly unthinkable in the past becomes thinkable."

Worrying development

Ms Trainer says she feels no moral obligation to go on paying a loan on a property that is going to go on losing her money. She says her friends support her decision.

"I think people are taking a more cold-hearted look at it," she says.
"Is the bank going to pay for my retirement because I was a good girl and paid my mortgage, even though legally I didn't have to?"

Professor Wachter believes that, to date, most people have had their homes repossessed because they could not manage the repayments.

The trend of people now positively choosing to walk away because it makes financial sense to do so is a worrying new development.

"The dangers are extraordinary," Professor Wachter says.

"If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation".

No renegotiation

In the city of Stockton - the foreclosure, or repossession, capital of the US for 2007 - estate agent Kevin Morgan sells repossessed houses on behalf of the banks that now own them.

According to him, walking away has become commonplace.
"I would say it's probably 70% of the volume of our foreclosures right now," he says.

"It's a business decision for their family that the smartest thing they can do is walk away from their home."

As a sign of the changing times, some 60% of borrowers do not even bother to contact their banks to attempt a renegotiation of their loan, Mr Moran explains.

"They stop paying and they stop talking," he says. "They just plain walk away."

Total disaster

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."

Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.

Because if it fails, the economic fallout could be felt far beyond America's shores.

Michael Robinson's two-part series "The Trouble with Money" is broadcast on 30 July and 6 August on BBC World Service. You can hear the programmes online by going to:

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7529277.stm

Published: 2008/07/29 08:29:55 GMT

© BBC MMVIII

[Elaine Meinel Supkis]

Well, guess what? The Japanese carry trade took off again today. And the yuan and euro are weaker against the dollar. EVERYONE who has a trade surplus with the US, Asian, European, African and the other Americas, all are working in union to increase the value of the dollar and continue the US giant trade deficit.

They will be sorry for this. Even if they sell us things as cheap as humanly possible, with out the Home ATM machines cranking out endless fake money, the US consumer will be hitting the highest possible debt limits at the credit card usury level.

As I keep saying, the last 35 years status quo and especially the 2002-2006 status quo is the global ideal. And we are being killed by it.

[DrKrbyLuv]

Interesting post JZ

[Gary]

Instead of INCOMES our economic hucksters concentrated on
cheap credit. Concentrating on incomes would've become a
threat to their power and priviledge and also would've required
some real work on their part. It would require a nation of engineers rather than a nation of PR hacks and lawyers.

Our economy now resembles one of those con-job booths at a travelling Carney. Years ago I got suckered by one of these for
a decent sum of cash and never went near one again. Now we have a whole nation of these fatty palmed douchebags that never flipped an honest dime in their lives.

Moral Hazard ? Hell, we left that quaint idea long ago when
we booted out the decent intelligent Jimmy Carter and coronated
a 3rd rate Chimp actor and world class snitch Saint "GE Theater" Reagan. From then on it was let the blood and money flow.

Family Values, Myass ! The Patriarca family had more values than
Govt Banksters..They only wacked their own kind and on top of
it, they gave us the best restaurants in Providence.

[cigar]

Elaine,

What tells you the carry trade starts or stops?I know we should see the yen move lower and stocks move higher when the carry trade is on and vise versa when it unwinds, but what else do you look for?

[Roberto]

Naomi Klein just divulged, during a Free Speech TV interview by Democracy Nows Amy G, that she'd just been to China, and a 2 (medium) city experiment was in progress to outfit those burgs with ungodly amounts of video cams (beyond the creaming fantasies of the most nationalistic brit control freaker) to see how they might control the currently out of control migrant labor population they fear most there. And today Global BC, a station we get on the airwaves here in very NW Washington state, fronts a story of how western kinda folks are freakin about a Chinese ogvt directive to monitor all e-mail messages coming out of the chinese olympic village.... YA THINK????
As EMS has often said.... they're a communist dictatorship folks. No "trade partners". So get over it.

[Michael]

JZ - Some observations about mortgages from someone who has been both a housing borrower and lender:

There's a reason for that Depression-era legal change letting people walk away from mortgages (rather than still owing the money).

Prior to that legislation, the typical loan (for mortgages and everything else) was relatively short-term (5 years or less - no 30 year mortgages), and it was "callable," meaning at ANY MOMENT OF ITS CHOOSING the lender could demand full repayment of the entire principle. Typically, failing to make one payment on time automatically led to the loan to being called (unless you were a rich borrower with a personal or business relationship with the lender).

There were countless personal tragedies that happened when the economomy tanked and people couldn't make their payments on time, and a massive housing price deflation (even worse than the current one) resulted when the banks repossessed all the farms and homes where a payment had been missed and the banks had to resell the property.

And, prior to the new legislation, in some cases the dispossed property owner STILL OWED MONEY on the property that had been taken (collecting this money was impractical in most situations). This was one of the disasters that started on the farms in the 1920's and led to the severity of the Great Depression.

Think about it logically: Under a mortgage, the house is put up as collateral, and if the mortgage is defaulted the lender takes possession of the house; in other words, the lender has regained the value of their loaned principle (plus the invested down-payment) when they respossess, and shouldn't need further payment.

It's not the mortgagee's fault if the lender didn't demand enough down payment and/or accepted (even encouraged) a grossly over-valued assessment so that the biggest loan possible could be made (and the biggest profits possible garnered from the loan process).

The generation in the 1930's that put in place such financial regulation for the protection of the American worker, investor, and consumer was much wiser than the generation of the 1980's and 1990's that did everything possible to remove all protective regulations.

[Elaine Meinel Supkis]

Actually, Michael, many a seller and real estate agent conspired to create loans on top of everything else so buyers with no savings and no down payment could LIE to the bankers and claim, they had a down payment! I said several years ago, 'This is fraud.' People who honestly had real down payments were forced to bid against people who were putting $0 down! This drove up the price of all houses.

There were lots of very bad things going on during the housing bubble.

And LA had a shake up moment today: there is, in the not very distant future, a huge earthquake event just itching to turn central California upside down. Half a trillion in damage, anyone?

[Greg]

Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu

It was just 5 days ago in Death Spiral Financing at WaMu, Merrill Lynch, Citigroup that I wrote about ratchet provisions and how they would bite companies that agreed to them. Here is the key snip:

The investors in the equity raise would have their investment protected by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free.

It doesnt take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.
As expected, Merrill Lynch needed to raise capital again. And this one hurts because Merrill previously agree to ratchet provisions. Inquiring minds may wish to consider Merrill to Sell $8.5 Billion of Stock, Unload Money-Losing CDOs.

Merrill Lynch & Co., the third biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill's biggest investor by acquiring shares in December, will buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment.
My Comment: That $2.5 billion is because of ratchet provisions. Mother Merrill is really only raising $6 billion.

Almost $19 billion of net losses in the past year forced Merrill Chief Executive Officer John Thain to backtrack from assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O'Neal.
My Comment: The market cap of Merrill Lynch is $23.97 billion. Mother Merrill has raised $30 billion since December. It is taking herculean capital raising efforts to keep the good ship Merrill afloat.

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.
My Comment: Desperate mothers do desperate things, such as provide 75% of the financing to sell CDOs at 22 cents on the dollar.

Thain's Track Record

In December and January after raising $6.6 billion each month Bloomberg quoted Thain "We're very comfortable with our position. We could have raised substantially more money. We turned people away.''

In April he sold $2.55 billion of preferred stock.

On July 17 in a conference call Thain said "We believe that we are in a very comfortable spot in terms of our capital."

Now Thain is back at it again, selling $8.5 billion in stock but only netting $6 billion in cash from it. It will be interesting to see how long it takes before Thain is back at it. One thing we can assume is that this will not be the last time Thain needs to raise cash, no matter what Thain says.

One good thing for Merrill is their Press Release shows Merrill is no longer exposed to those death spiral ratchets.

In satisfaction of Merrill Lynchs obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.
Washington Mutual Ratchets

A quick check shows WaMu's market cap is $6.71 Billion. It's share price is $3.95. TPG bought $7 billion of stock at $8.75 with a ratchet provision that if WaMu raises more than $500 million in equity, WaMu has to pay TPG the difference. The odds of WaMu not needing to raise capital are slim and none. Washington Mutual is in deep trouble over many things, and those ratchets make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu
Posted by Michael Shedlock at 1:02 AM Print

[RobG]

Bloomberg: "Freddie, Fannie: The situation is much worse"

Forget everything you've read about how woefully undercapitalized Fannie Mae and Freddie Mac are. The situation is much worse. ... snip ...

Using the methodology described in Fannie's footnotes, I was able to estimate that about $14.3 billion of that $15.2 billion differential came from adjustments to the company's deferred-tax assets. The way this works is the company calculates the tax effects on the difference between its shareholder equity at fair value and under GAAP; it then includes these in other assets.

Without that $14.3 billion of tax adjustments, the fair value of Fannie's net assets would have been negative $2.1 billion, by my math. Exclude deferred-tax assets entirely, and it would have been negative $19.9 billion as of March 31. (Fannie raised $7.4 billion of additional capital in May.)

As for Freddie, it showed $16.6 billion of net deferred-tax assets under GAAP as of March 31. Like Fannie, it put deferred taxes in "other assets" on its fair-value balance sheet. Freddie said its other assets had a GAAP carrying value of $31.6 billion and a $42.5 billion fair value.

By my calculations, using the methodology in Freddie's footnotes, it looks like Freddie wrote up the deferred-tax assets on its fair-value balance sheet by about $10.1 billion. So, take out the tax write-up, and Freddie's net assets had a fair value of negative $15.3 billion. Exclude deferred-tax assets entirely, and that falls to negative $31.9 billion.

[Elaine Meinel Supkis]

Sigh, yes, Rob, that is probably true. The only way keeping books works is if everyone is ruthlessly honest with themselves. If they lie to themselves like, say, Congress does all the time, the books go way, way off balance. Then a catastrophe strips them of all value and all sanity.

Of course.

[Anthony]

Anybody following this? The big states start bleeding profusely.

NYgov. just called emergency meeting. (california is going down next)

http://www.nytimes.com/2008/07/30/nyregion/30paterson.html?em&ex=1217563200&en=11b535fdddd976e2&ei=5087%0A

ALBANY — Gov. David A. Paterson, in a brief and rare live televised address, said Tuesday evening that New York is facing a fiscal crisis in the wake of Wall Street’s meltdown, and he called on the Legislature to return next month to grapple with a budget deficit that will grow to $26.2 billion over the next three years.

Mr. Paterson gave few details about what actions he would take, but he told the public that his administration would examine an array of difficult potential steps, including reducing the state’s work force, cutting additional spending in state agencies and selling or leasing public assets.

“Our economic woes are so severe that I wanted to talk to you personally this evening about where we stand,” the governor said in a speech from the Capitol that lasted roughly five minutes. “The fact is, we confront harsh times. Let me be honest, this situation will get worse before it gets better.”

-------

http://www.latimes.com/news/local/la-me-budget21feb21,0,6427050.story

California's budget gap at $16 billion

SACRAMENTO -- California's budget shortfall has swollen to $16 billion from $14.5 billion, according to the state's chief budget analyst, who says the governor's proposal for closing the deficit is so flawed that her office took the rare step of drafting an alternative state spending plan for legislators to consider.

The plan offered by Legislative Analyst Elizabeth G. Hill, whom lawmakers of both parties look to for advice on fiscal matters, calls on lawmakers to raise taxes by at least $2.7 billion. It urges them to reject Gov. Arnold Schwarzenegger's plans for a 10% across-the-board reduction in state spending, suggesting that such an approach is short-sighted.

[Anthony]

This is nowhere near bottom.

Once state budget goes bust and crime rate soar...those mpty houses will worth NOTHING. it'll be drug and crime dent.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMrMPu3wiBy8&refer=home

Fed Extends Emergency Loan Programs Through January (Update2)

Bernanke flagged the likelihood of the extension in a July 8 speech, saying the Fed is ``strongly committed'' to financial stability. The programs represent a provision of Fed credit to nonbanks unprecedented since the Great Depression.

The Fed will start auctions of options of as much as $50 billion in the TSLF on top of the $200 billion program, which loans Treasuries to securities firms in exchange for asset-backed securities and other collateral.

New York Fed officials plan to consult with the primary dealers of U.S. government bonds on the TSLF options program, the district bank said in a separate statement. The options plan is aimed at providing liquidity for two weeks or less surrounding key financing periods to be identified. Further details are planned on or before Aug. 8, the New York Fed said.

[JZ]

From Wikipedia article on the GD, sounds a lot like nowadays, just before the crash

Inequality of wealth and income

Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)[22]:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

[PLovering]

Milton Friedman, famed Noble Economist, said that the 1929 Depression was caused by the US Federal Reserve Bank.

While the US Federal Reserve was funding Hitler with Treasuries worth $Billions to build spanking new autobahns, schools, factories, and armies in the 1930s, Americans were starving.

Americans will starve again in the US Federal Reserve Depression of 2009.

[Elaine Meinel Supkis]

Bush's granddaddy was the one funding Hitler via a PRIVATE bank.

Not the Fed Reserve. And the Jews were being looted by Hitler who seized their businesses and bank accounts. This is what funded all the goodies.

Anthony, I was going to write about the budget deficits last night but the earthquake intervened. I just posted about it a few minutes ago. Good grief, this is bad news. Barely gets headlines.

JZ, as international trade, commerce and banking collapsed as England and Germany collapsed internally, the loss of this income that was coming into the US to service what was then, epic sized lending for WWI, the entire banking system was decapitalized.

So there was no possibility of lending. The US government was SOLVENT. So Roosevelt struggled to provide emergency funding. He was correct to try doing this.

WWII took care of that by eliminating all trade partner's manufacturing bases as well as export markets [try exporting to South America while sinking each other's boats!].

[Bear of Little Brain]

PLovering:
"Noble economist". Nice slip. If only…

[Elaine Meinel Supkis]

The Fed Reserve caused the Great Depression because that bank lent most of the money used by France and England to fight Germany in WWI and the NONE of them paid us back.

[PLovering]

Paul Warburg, founder of the US Federal Reserve banking system, had the FED fund Hitler with $Billions in US Treasuries.

Warburg and his fellow Cabalists funded Hitler well into the 1930s, only stopping when Germany started printing its own money and financial instruments. Thereafter, the Cabalists funded Stalin exclusively.

[PLovering]

Bear:

Nice catch. I stand corrected.

[Michael]

TOO BIG TO BE EVALUATED HONESTLY

Yes, the states, counties, and cities of America are going bankrupt and (especially California) using MORE BORROWING to get through the current crisis. Oh yeah, and so is the U.S. government. Professor Minsky calls this "Ponzi Finance," where you have to use new debt in order to make the payments on your existing debt - until you crash.

And yet...they're all still rated AAA and people are buying their bonds at interest rates under 6% (for 30 year bonds!!). I guess clinging to the fantasy that it's still "business as usual" is more important than making the painful adjustments necessary to survive the coming economic disaster.

[Elaine Meinel Supkis]

Correct, Michael. The creditors in Asia and Europe pray that the old status quo returns. Except for the Chinese. They pray for us to go bankrupt, badly.