25 posts tagged “u.s. collapse”
Take the time to read this when you get a chance. Chris Martenson reviews in this article many of the things I've talked about over the past year. It seems that most people who are really paying attention to this crisis - are all waiting on the next shoe to drop - a rapid decline in the dollar coupled with a spike in interest rates.
If you were paying attention last week - then you noticed that there was significant turmoil in the mortgage loan business as 30 year fixed rates increased roughly 1% in one day (roughly 4.5% to 5.5%). Things got so bad at one point on Thursday that many loan originators refused to 'lock-in' rates for mortgages due to mortgage interest rate fluctuations. The turmoil was caused by a spike in U.S. Treasury yields (caused by runaway deficit spending). From an article on Friday:
"Yesterday (Thurs - May 28), the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST."
Imagine being approved for a home loan or refinance at 4.6% - but you didn't 'lock' the rate either because you thought interest rates might go a little lower or because your lender could not fund the loan in time. Many mortgage brokers had a very rough day on Friday explaining to people why their rates increased significantly or why they no longer qualified for a loan at all based on the higher interest rate.
"A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lenders without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-30 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s time line. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund."
There is nothing in the underlying economic data that tells me anything is 'stabilizing'.
John
The Five Horsemen
Sunday, May 31, 2009, 5:12 pm, by cmartenson
Executive Summary:
· What can we expect next, and how will we recognize it?
· A series of sharp, interrupted shocks is more likely than a major sudden collapse.
· Five game-changing events, what I call The Five Horsemen, will indicate that the rules have changed and a new reality is about to take over:
o The First Horseman: New credit growth falls below interest payments
o The Second Horseman: The Fed monetizes debt
o The Third Horseman: Government deficit spending exceeds 10% of GDP
o The Fourth Horseman: The dollar goes down, while interest rates go up
o The Fifth (and final) Horseman: US debt becomes denominated in foreign currencies
Severe structural damage has already been inflicted on our economy. As I wrote two weeks ago in It Has Hit the Fan:
If you have been waiting for further confirmation about the direction of the economy, or waiting for a sign that it's now time to get serious about preparing for a future filled with less, this report is written for you.
You are living in the midst of the collapse of western economies, which are moving from a more complicated state to a less complicated one. This is it. Keep a journal, because it's happening right now.
After the Great Depression, many people remarked that it was only obvious in retrospect. While it was unfolding, things steadily eroded. But 75% of the workforce remained employed, while hopeful signs of progress were constantly trotted out by various politicians, private economists, and official-sounding government agencies. It is often quite difficult to appreciate the true magnitude of sweeping change while it is occurring.
The most pressing question now is this: What can we expect next, and when?
In this report, I will give you the precise combination of macro-events that will cause me to issue an alert and kick my thinking and actions into new orbits.
The Path
I do not expect a major sudden collapse to be the most likely path, although it is a possibility. Instead, I anticipate a series of sharp shocks, followed by periods of relative tranquility.
Here's how I described the various paths in May of 2008, in a report entitled Charting a Course Through the Recession:
While it is possible, I do not anticipate a one-way slide to the bottom, wherever and whenever that may be. I lean towards the ‘stair-step’ model, where a series of sequential shocks and relatively placid periods mark the path to the future. The three scenarios around which I tend to form my thinking (and actions) are:
· No change. The future looks just like today, only bigger, and no major upheavals, shocks, or recessions happen. The Fed and Congress are successful in fighting off the deleterious effects of the bursting of the housing bubble, and everybody carries on without any major changes or adjustments. This is not a very likely outcome. Probability: 1%.
· A series of short, sharp shocks. Moments of relative calm and seeming recovery are punctuated by rapid and unsettling market plunges and marked changes in social perspective. Think of the food scarcity and riots, and you know what this looks like. One day there was low awareness about food scarcity and the next day shortages and prices spikes were making the news. Soon enough, relative calm returns, prices fall, and order is restored, but prices somehow do not recover to their previous levels, leaving people primed and alert for the next leg of the process. I see this as the most likely path forward. Probability: 80%.
· A sudden major collapse. Under this scenario, some sort of a tipping point causes a light-speed reaction in the global economic system that requires shutting down cross-border capital flows. Banks would no longer be able to clear transfers and accounts, which would wreak all sorts of havoc upon our just-in-time society. Food and fuel distribution would be the most immediate concerns. There's enough of a chance of this scenario occurring, and the impacts are potentially so severe, that you should take actions to minimize the impacts to yourselves and your loved ones. Probability: ~20%.
Based on the odds, the most likely outcome that I see is a series of short, sharp shocks (#2, above) as being the most likely to define the path forward. So far this has been our exact pattern with the first shock occurring in 2007, the second between October 2008 to March 2009 and now a period of stability between March and June of 2009. I invite you to re-read the piece linked above as a means of assessing my information,gathering abilities, and my ability to connect the dots, and shine a light on the future.
In the grand sweep of the trajectory that will deliver the United States, and many other western countries, to a lower standard of living (although not necessarily a lower quality of life, but that's another story), there are several discrete elements that I think of as The Five Horsemen.
The Five Horsemen
I believe that a diminished standard of living is in the future for each of the major economies across the world especially those where the inhabitants have been living beyond their means.
Another belief I hold is that any period of living beyond one's means must certainly be followed by an equivalent trough of living below one's means. For example, if you produce 100 but consume 110, then at some point you will need to produce 100 but only consume 90.
There are two ways that we might expect this period of adjustment to unfold economically. I laid out the basic elements in Crash Course: Chapter 12 - Debt. When too many claims (debts) are laid upon the future the only question is whether those debts will be defaulted upon or paid back (with "inflated away" being a form of default). If all those claims are destroyed by default, then the reduction in future living standard falls to the holder of the debt(s). If the debts are paid back, then the debtor must accept that they will have less money to spend on consumption. Either way, somebody has less coming to them in the future than they either expect or currently enjoy.
Stretched across an entire nation, too much debt becomes an unsolvable problem, a predicament, due to the fact that no benefit accrues from shifting the burden of bearing the impact of default from one sector to another. Shifting a promisory note from one pocket to the other does not change the net worth of the individual and this tactic is equally ineffective for an entire country.
Thus the fact that the US government is assuming massive piles of bad debt from stricken financial corporations does nothing to solve the underlying problem, which sprouts from a nation that has overconsumed for decades. But this is exactly what the government is doing, and the goal seems to be to preserve the status quo at all costs.
Assuming this view is correct, there are signs we can read along the way to confirm if our fiscal and monetary authoritites have selected the right path or the wrong path. This report details the signposts that will tell us when certain thresholds have been crossed that will mark that the current strategy is failing and that a new leg of the journey has begun.
The problem and the mindset of the economic elites are neatly revealed in this quote:
May 30 (Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.
“While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday
I like this quote because it distinguishes between the "real economy" and the economy resulting from excessive government borrowing and spending. Stimulus money is almost by definition wasted money because the probability of it resulting in proper investment is so low. The gains from stimulus money run out the very second the juice is turned off.
But it is the second part of the quote that is revealing - "...unless you eventually get the credit system working..." - apparently those in charge find it unthinkable that an economy could be built on anything other than credit.
An alternative quote expressing a more fundamental view would read, "While the stimulus has given an impulse, it’s like a sugar high, unless it is followed by growth in wage-based income".
The difference between the real quote and the one I provided is like night and day. The Zoellick quote assumes that our past period of living beyond our means is recoverable and extendible, and mine does not. Mine assumes a long-term relationship exists between what people earn and what they can spend. In order for us to service our past debts, we need to grow our incomes, not our access to easy credit.
There is a mathematical limit to this "game," at which point it cannot be carried on any longer. I think we have reached the outer limits of our debt-fueled fantasy, although I recognize that the extreme efforts to carry it on a bit longer may well produce short-term results.
The most obvious and mathematically-defendable end of a credit economy comes when interest payments exceed all income. However, things rarely progress that far, as the trouble becomes painfully obvious far earlier and creditors withdraw their continued support.
How will I know that the participants in this game have finally caught on to the fact that it's over? Here are the five game-changing events that will indicate that the rules have changed and a new reality is about to take over. As I mentioned, I have been tracking these for years and, unfortunately, been watching them unfold one by one.
The First Horseman: New credit growth falls below interest payments
Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.
~Kenneth Boulding, economist
In our debt-based monetary and economic system, it is imperative that new credit growth at least equal the interest payments on past debt. If this does not happen, then the entire financial edifice, levered up as it is, immediately begins to wobble and crumble. Of course this imposes an exponential growth "requirement" on our entire debt/money system rendering it a long-term impossibility.
Total credit market debt (chart below) stood at over $52 trillion at the end of 2008 and has fit an exponential curve nearly perfectly over the past 5 decades.
The "getting the credit system working again" quote by Mr. Zoellick refers to keeping the curve of this chart sweeping upwards in an uninterrupted fashion, as nothing less will get us back to "how things were."
Where this chart required ~$1 trillion of new yearly credit growth in 1995, the remorseless math of the exponential function turned that into $2 trillion per year by 2000, $3 trillion by 2005, and more than $4 trillion by 2008.
While the government's $1.8 trillion of deficit spending for 2009 is certainly heroic, it needs to be complemented by more than twice that amount from the private sectors in order to keep this chart on a smooth path. That, I am confident to say, will not be happening this year.
Status of the first horseman: Arrived.
The Second Horseman: The Fed monetizes debt
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
~Ludwig Von Mises
My second sign occurs when the Federal Reserve directly "monetizes debt," which is a fancy way of saying "prints money out of thin air and exchanges it for private and/or government debt." This started in 2007 with the first set of rescues, although at the time the Fed took great pains to stress that it wasn't really monetization because they planned to reverse their actions soon. Of course, that has not happened yet. Some of their activity was cleverly concealed with complexity, such as when the Federal Home Loan Board (FHLB) bought up $160 billion in mortgages from failing originators such as Countrywide and then quietly passed them to the Federal Reserve for cash. Minus the FHLB complexity, this represented nothing less than the Fed printing up some fresh electronic cash and handing it over to Countrywide for some failing mortgage products.
The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.
Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered this in a recent "In Session" posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis.
This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.
As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.
This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world's reserve currency, so this has enormous, far-reaching implications.
Status of the second horseman: Arrived.
The Third Horseman: Government deficit spending exceeds 10% of GDP
I did not expect to see this one arrive for the US this early in the game and I am quite stumped by the apparent acquiescence by the rest of the world's financial authorities to the US running a fiscal deficit of over more than 13% of GDP. I would have expected some resistance on their part, such as a refusal to continue buying US Treasury debt, more than a third of which (this year) has been bought by foreign central banks.
I am convinced that this stimulus money, as historical and enormous as it is, will fail to provide any lasting benefit, in part because so little of it is being spent on investments in the future. Promising to cover the losses for bad debts only protects those who financed past malinvestments. At most, a few measly percent of the total cost of this bailout and stimulus is going towards investments such as beefing up our energy independence or modernizing our transportation infrastructure. If, instead, 95% was going towards investments, and Wall Street had to fight over the remaining scraps, I would be singing a different tune.
The inertia of government spending programs assures that these record deficits will recede slowly only under the best of circumstances and will actually grow larger under normal or worsening conditions. I also want you to recall here that government deficit spending has the strongest correllation with future inflation handily beating out the impact of bank monetary reserves, a common red herring argument trotted out most recently by Paul Krugman who wrote in the NYT:
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
Again, inflation correlates most highly with government deficit spending and I remain at a loss as to why this clean, clear fact eludes so many who should, truth be told, know better.
Status of the third horseman: Arrived.
The Fourth Horseman: The dollar goes down, while interest rates go up
As long-time readers know, it is this fourth horseman that I watch on a daily basis. The combination of a failing dollar and a rapidly rising interest rate on US Treasury obligations will signal to me that the "limitless borrowing spree" of the US government is over.
Currently, more than $7 trillion in US Treasury debt is "held by the public." (The other $4 trillion is owed by the government to the government, so it is not on the open market.) Treasury debt is bought and sold in vast quantities on a daily basis. More than half of it is held by foreigners. If foreigners sold this debt, rates would rise. If they then took the dollar proceeds from these sales and exchanged them in preference for some other currency, the dollar would fall.
The combination of rising interest rates and a falling dollar will signal (to me) that a final loss of confidence in the US dollar as an international store of value has occurred. When (not if) this happens, all manner of financial ills will stalk the globe. Everything priced in dollars will go up in price - in dollars. That includes basically all commodities. All holders of US dollars and US debts will be desperate to get out of their holdings, and you can expect wild plunges and gyrations in most markets. Interest-rate derivatives, which are mainly denominated in dollars and linked to US interest rates, will become toxic destroyers.
So much hinges on the US dollar retaining its role as the reserve currency of the world that thinking through this scenario would require a report all its own. Suffice it to say, that you cannot overestimate the impact of a rapid decline in the value of the dollar coupled to rising US Treasury interest rates.
Because of this, I am quite perplexed that the other central banks continue to play along and buy US debt, while the Fed monetizes like crazy and the US government sports a 13% of GDP fiscal deficit.
Here's the latest data. We certainly are seeing a bit of a decline in the dollar and a bit of a rise in interest rates espoecially since mid-March when the Fed announced its intention to buy massive quantities of US Treasury debt.
However, these moves are not not yet strong enough to cause me to issue an alert or take personal actions. They definitely have a big portion of my attention, but are not yet at the top of my list of immediate concerns.
What would make me sit up and take notice? Right now that would involve the dollar slipping into the low 70's, while the $TNX (ten year bond yield) vaulted up by some massive amount which, for me, would be 50 basis points in a day (which is one half of a percent).
At that point, I would be putting out an alert that it's time for any fence-sitters to hurry up and grab some dollar-decline protection.
Status of the fourth horseman: Maybe it's here. Maybe. But not yet in full swing.
The Fifth (and Final) Horseman: US debt becomes denominated in foreign currencies
For whatever reason, some people still trust the debt-rating agencies, and one of the more farcical practices is that these agencies routinely "rate" the US for credit-worthiness. The good news is that Moody's recently reaffirmed that the US still has a "AAA" rating, which is the highest possible rating. Or is this good news?
The reason this is a farce is captured in a post that I wrote in an "In Session" forum thread on this matter:
This is a bit of a non-issue. For a country that has 100% of its debt denominated in its own currency there can be no other rating besides AAA.
The idea behind the rating is to answer the question, "What is the probability that this entity can pay off this debt?"Well, that probability is 100%, when the entity has a printing press.
The only thing that would change this would be if/when that entity has debt denominated in something other than its own currency.
So while we can all be relieved that Moody's has such a high opinion of the US, this is useless information for the purpose of deciding if one wants to hold the debt of that country. An alternative measure would be, "What's the chance that this country will resort to printing to relieve itself of its debt burden, thereby eroding the claims of the current bondholders?"
Let's call this new rating the "M system." One M means, "Sort of likely," two Ms means, "Probably will do it," and three Ms means, "No doubt, they will print." By this system, I rate US government debt as quadruple M, or MMMM.
Off the charts, in other words.
However, the absolute game-changer would be if the US had to pay off borrowed money in a currency other than its own. Yen, for example. In order to pay off that loan, we'd have to get Yen from somewhere, with the usual source being a positive trade balance.
If the US could not get the Yen through legitimate trade, then it could always print up dollars and buy Yen off the open market. But this would serve to drive up the value of Yen and drive down the value of the dollar, so this scheme would rapidly unravel in a currency crisis. If this sounds familiar, it should. This is how most developing nations get in trouble and experience severe currency and debt crises.
Having your debt denominated in your own currency is an enormous privilege. Should that luxury go away, it would become immediately apparent how much the US depends on the kindness of strangers to continue living beyond its means.
So far, only Japan has made some low-level noises about denominating their loans to the US in Yen instead of dollars, but you can be sure other countries are quietly considering it as well.
Status of the fifth horseman: Not here yet.
Conclusion
Three out of the five "horsemen," which indicate where we are in the trajectory of our downfall, have already arrived. A fourth is possibly here; perhaps not quite yet. And the final one will mark an inevitable date with a vastly lower standard of living for US citizens and all countries that are the accidental holders of too many US dollars and debts.
I urge you to begin keeping a close eye on these five horsemen:
- New credit growth falls below interest payments
- The Fed monetizes debt
- Government deficit spending exceeds 10% of GDP
- The dollar goes down while interest rates go up
- US debt becomes denominated in foreign currencies
The current presence of three, or possibly four, of these signs has me thinking very carefully about my assets, my family's needs, and how we will manage the changes ahead. When the fifth horseman arrives, it will bring a new reality for all of us, and I intend to be as ready as possible.
Interesting article. When you have time – go to the link and read the 22 page study of money by Christopher Weber.
jg - July 5, 2009
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Tuesday, June 30, 2009
Debasing the Currency is Leading to Financial Collapse . . . Just As It Has for Thousands of Years
http://thecomingdepression.blogspot.com/2009/06/debasing-currency-is-leading-to.html
In a fascinating 22-page study of money and currency, Christopher Weber shows that every government - from Athens, to pre-collapse Rome, to the Islamic countries in the Middle Ages - which stuck to the Greek standard of coins has been stable and prosperous.
Specifically, the Athenian Drachma contained 65.6 grains of silver. Even after Greece declined as a superpower, its currency remained stable.
The Roman Denarius, Byzantine Bezant, and Islamic Dinar all copied the Drachma, using around 65.6 grains of gold or silver in their coins.
For the many centuries the Romans, Byzantines, and Islamic rulers left this precious metal content alone, they had stable and prosperous money supplies and nations.
But after the Romans and Byzantines started to whittle down the precious metal content of their coins - and after the Muslims started issuing paper money - their currency went down the drain, their prosperity plummeted and their empires collapsed.
This may all sound like ancient history, except that Weber points out that:
The US dollar has been depreciating for generations. Seventy years ago it was first devalued from $20.67 a gold ounce to $35. Then 35 years ago the devaluation started gaining strength. The dollar has lost over 90% of its gold value since August 15, 1971.
History is repeating . . . Sound money is again being trashed, which is causing the collapse of the American empire.
Over the past few months – I’ve been reading that commercial real estate is poised for a significant ‘correction’ – similar to housing. Looks like we’ve arrived (see chart at end of post) – more write-downs and bank failures ahead. If you’ve paid attention over the past couple of months, you’ll notice that everything seems to be dropping in value 15-30% - corporate revenue (2nd qtr earnings reports), local/state/federal government tax revenue (charts below), real estate, etc. You have to wonder what will happen to stock markets once people stop focusing on Wall St. earnings 'estimates' (which have been extremely low) and start focusing on year over year revenue declines.
If you’re the President and have made promises regarding your ‘stimulus’ plan – what do you do if economic data does not support your overly optimistic budget/economic projections? You delay the report. It appears the White House will delay the midsummer budget update until September. Regardless of when they report - you can bet that Federal revenues will be down, spending up - and the deficit growing much faster than anticipated.
WASHINGTON (AP) - The White House is being forced to acknowledge the wide gap between its once-upbeat predictions about the economy and today's bleak landscape.
The administration's annual midsummer budget update is sure to show higher deficits and unemployment and slower growth than projected in President Barack Obama's budget in February and update in May, and that could complicate his efforts to get his signature health care and global-warming proposals through Congress.
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Monday, July 20, 2009
CRE: I Think the Shoe Just Dropped
www.econompicdata.blogspot.com
The worry that commercial real estate was the "next shoe to drop" goes back a long time, but after this additional data point, I think we're here. How banks and other financial institutions are hiding this level of damage has me scratching my head. Calculated Risk with the details:
From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May
Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.
According to Moody's, CRE prices fell in 8.6% in April (about 16% in two months).
Talk about cliff diving!
This could be a very interesting week…….
jg – July 26, 2009
Treasury Auction Schedule
By: Karl Denninger
June 23rd, 2009
Let's see if I can count this up....
70 day CMBs, $30 billion (tomorrow)
13 week Bills, $32 billion (July 27th)
26 week Bills, $31 billion (July 27th)
52 week Bills, $27 billion (July 28th)
2 year Notes, $42 billion (July 28th)
5 year Notes, $39 billion (July 29th)
7 year Notes, $28 billion (July 30th)
19 year, 6 month TIPS (reopened), $6 billion (July 27th)
That's two hundred thirty-five billion dollars over the next week!
Almost one quarter of a trillion.......
I guess you should get while the getting is good, but this is going totally parabolic. That money has to come out of somewhere, by the way, in order for the sale to succeed, which is going to get rather interesting at some point - but exactly where it matters is impossible to know.
I expected that when we crossed the $100 billion threshold in a week the market would throw up all over it, but it didn't. Now we've got the government trying to sell a quarter of a trillion dollars in debt over the next week, the announcement is out there, and while the bond market is selling off to a material degree equities could care less!
This is flat-out insane. At this run rate we would be trying to sell twelve trillion dollars over one year's time, an obviously ridiculous and impossible-to-peddle amount of debt at any price.
When does the rest of the world wake up (not to mention the primary dealers) and say "NO!"? Never? Is there a truly insatiable demand for our government's debt, despite the fact that President Obama got up on the national stage last night and promised to spend another trillion dollars we don't have?
How do equities power higher into this sort of debt issuance? Is it simply that the market has deduced that the government will hand all of this zero-interest money out - indefinitely?
Guess what - that which is impossible won't happen, and the stock market is now telling you that the impossible will become reality. There has been and will not be any amount of fiscal sanity on the part of our government until the market imposes it, and when it does it is going to happen in exactly the same way it happened to Bear Stearns, Lehman, Fannie and Freddie. May I remind readers that it was said that Fannie and Freddie "couldn't" get in trouble due to their implicit government guarantee? Well guess what - they both effectively failed, but when the US Government finds itself in the same situation it has nobody who can take it into conservatorship and as such we're just going to have to deal with the consequences of failed debt auctions - that is, dramatically increased funding costs across the board in the economy, including the government, which will choke off any hope of economic anything.
Folks, this is how you get detonation of a nation's monetary and political system. Timing the "event" it is not easy, but the certainty of outcome given this sort of outrageously irresponsible activity is not in doubt.
I'm increasing my stock of things that "will never go to zero" and keeping my ear to the ground. The "short the phone book but make sure you get out fast before you get trampled" moment approaches - mark my words.
There is alot of data analysis going on behind the scenes right now with the recent run-up of the stock market. Will the stock market go higher? Are we at the peak? If we only rely on mainstream media - it would seem that economic 'good news' is everywhere. If we look at the data ourselves - we get a different picture. New home sales/new home construction data was recently released for June - and most media outlets touted the 11% 'spike' in new single family home sales. Chris Martenson briefly analyzed the data (article below) - take a look at his chart and you tell me if this looks like good news.
The other piece of the housing puzzle relates to something that the media seems to ignore. We never seem to get anyone to look at new home sales and new home construction together. Each is usually analyzed separately. It's easy to see why - if we look at the data. If homebuilders started construction on new homes at an annualized rate of 582,000 in June and new homes are being sold at an annualized rate of 384,000 in June - what does this tell you? It tells you that homebuilders are building approximately 50% more homes than they are selling - and this is now happening month after month after month.
This leads to some obvious observations - home inventories/vacancies must be increasing - and this is exactly what we're seeing. I'm also starting to see articles about banks who are now bulldozing new home construction - since they can't sell the properties. (http://www.cnbc.com/id/30580830)
As this trend continues, ask yourself what affect this will have on future home prices and sales as supply outstrips demand by huge margins. How long can homebuilders survive in this environment?
As Chris mentions below - because the new home sales number is a 'sampling' - the 11% 'spike' is + or - 13.2%. This means that the number could be -2.2% or +24.2% - or any number in between. Makes you wonder if the data is even worth reporting. Media outlets could care less - and trumpet this 'good news'. The bottom line is that if we compare sales to a year ago - we're looking at a 20%+ decrease.
The media spin machine continues........
jg – July 28, 2009
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In Session - New home sales: 'Really good news'
By: Chris Martenson
New home sales: 'Really good news'
By Les Christie, CNNMoney.com, July 27, 2009
NEW YORK (CNNMoney.com) -- Sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes, according to a report released Monday.
The gain over May was much greater than expected.
A consensus of housing industry analysts had forecast seasonally adjusted sales of 352,000, according to Breifing.com.
However, sales are still 21% below the levels of a year ago, when new homes sold in June at an annualized rate of 488,000, according to the report released by the U.S. Department of Housing and Urban Development. Four years ago, during the height of the housing boom, the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month.
Comments:
"Spiked" and "much greater than expected" sure make things sound great. While I think it is plausible to begin to look for a bottom somewhere in housing (personally I think it is still a year or more away) I do object to the use of hyperbole to paint an inaccurate picture of the situation.
The data is horribly noisy and, worse, it is sampled data that is seasonally adjusted and has serious methodology issues (e.g. cancelled orders are not removed from the reported figure) making the Census Bureau New Home Sales figure among the least reliable of them all.
At least they have the good graces to tell us as much right on the release itself:
Sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.0 percent (±13.2%)* above the revised May rate of 346,000, but is 21.3 percent (±11.4%) below the June 2008 estimate of 488,000.
The reported figure of 11% above last month is, uh, plus or minus 13.2%. In other words the release tells us flat out that their methodology is inaccurate enough that the correct answer could just as easily be +24.2% as is could be -2.2%. Or maybe it's +11%. Hard to say for sure. All we know is that each of those figures is equally likely under the loose methodology employed by the Census Department.
At any rate, below is the chart that, for some reason, never accompanies a mainstream news financial article but which the Wall Street pros get to check out before they make their decisions. I personally do not (yet) see anything here to suggest a bottom or turnaround.
Does that look like a "spike" to you? How would you characterize that wiggle at the end there? Is it any more dramatic than any other wiggle on the chart?
Anyone care to go long a double fistful of homebuilder stocks based on what you see here?
I have been watching the U.S. Treasury Bond/Note sales closely this week due to the sheer size of the offerings - $235 Billion. With all of the recent stimulus packages and bailouts - the question everyone is asking is – how much of our debt is the world willing to buy? Yesterday’s bond auction is the first indication that we’re in serious trouble.
‘Primary Dealers’ (Goldman Sachs, JPMorgan, etc.) of Treasury bonds/notes are required by the government to buy whatever is not sold. This hasn’t caused any heartburn for them in recent years because we’ve had ample demand for our bonds/notes – this is now changing. Primary dealers of yesterday’s auction were forced to buy a significant amount – which is why the auction effectively failed. Without primary dealer purchases, we would not have sold all of the bonds offered. It’s not hard to see why – our economy is unstable and our budget deficit of $1.8 trillion is flooding the market with our debt. Supply is outstripping demand. The U.S. government has been balance sheet insolvent for some time (liabilities exceeding assets) – our inability to sell bonds is the first step towards cash flow insolvency – bankruptcy and debt default. If you think things have been crazy over the past year – just wait until this gets out in the mainstream media. It doesn't help that the Treasury is selling another 28 billion in 7 year notes today and then quarterly refunding begins. Remember, just a few short months ago - our government was auctioning around $10-15 billion a week.
Many people who have kept an eye on Treasury auctions over the past year believe that it is entirely possible the Federal Reserve has been supporting Treasury Auctions directly (monetizing our debt). This is one reason they believe the Fed is opposed to an audit. I have attached a brief blog post below relating to this. It was posted yesterday. No one seems to know who is buying the bulk of recent auctions. In a truly free market - this wouldn't be a mystery.
Ladies and gentlemen, this is a very big shoe that just dropped. This is not theory or speculation - this is very real - and we are staring into a very real abyss. If the U.S. cannot fund its growing deficit - the party is over. No more low interest rates, no more stable currency, no more stock markets, no more ridiculous consumption rates, no more ridiculous budget deficits - and this will have a worldwide economic impact. Of course - most people have no real knowledge of what is happening below the surface due to all of the media spin - so our stock market continues to rise. At some point, it will be impossible to hide what is happening - and people will panic - and markets will fall. It seems that we have learned nothing from history. The parallels between now and 1929 are ominous.
Our economic system is collapsing - there's no other way to say it. The pace of collapse has recently slowed - but I believe we're now very close to being pushed off the ledge.
jg – July 30, 2009
US 5yr Bond Auction Effectively FAILS
http://market-ticker.denninger.net
Wed. July 29, 2009
That's right, FAILS.
No, you didn't hear it reported this way and won't, but that's the math.
Here you have the results (table attached):
And here's the math:
1.923 BTC X 61.59% Primary Dealer bid = 1.18 BTC (PD), greater than 1.0. Or to put it a different way, but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.
Thats a fail; but for the primary dealers the issue would not have subscribed.
Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers." For this reason short of thermonuclear war you will never see an actual (BTC < 1.0) "fail" on a US Treasury Auction - Treasury has rigged the process so as to insure that cannot be reported.
Therefore, the question is this: Less the primary dealer "bid" (forced by agreement) was there sufficient interest to subscribe the issue, and the answer is NO.
Those who think this is "no big deal" need to have their head examined. In general any BTC under 2.0 indicates a serious problem, and the perverse nature of the primary dealer system is the reason.
The United States' Credit Card (issued by China and Japan) is being slowly cut off. That the stock market "recovered" after this ridiculously bad auction (bow-wow is the best way to describe it) speaks to the vacuum between the ears of both the cheerleaders in the mainstream media and those in the equity markets.
There is only one other time in recent memory that we've had a bond market auction fail like this. You might want to go have a look at your charts - with dates - for what followed shortly thereafter.
They're going to try to sell 7yrs tomorrow, and then the real fun begins with the quarterly refunding.
That ought to be a real riot.
President Obama, you might want to have a chat with Bill Clinton about the Bond Market and Hillarycare, lest you wind up learning this lesson the hard way.
Nathan's Economic Edge
http://economicedge.blogspot.com
Bond and dollar futures are both higher. Higher during a week that they are issuing $235 billion??? Now here’s my question… how do we finance $235 billion of bond auctions in one week – WHERE DOES THE MONEY COME FROM? Well, if we look at the bid results, we find that the Primary Dealers (PDs) are doing more and more buying each week. And when we look at the TIC data, we find that international buyers are doing more selling than buying. So, if the money to buy such massive issuances is coming from the PDs, then they have to be using their own cash or equivalents to buy them – correct?
So, let’s go and look at the balance sheets of the biggest Primary Dealers and see how much cash they possess… Let’s start with JPM. Here’s their balance sheet from their 2008 Annual Report, page 131:
It shows roughly $27 billion in immediate cash.
Now let’s look at the balance sheet of Goldman Sachs:
Here we find $35.4 billion of cash and cash equivalents. Hmmm… Okay, let’s say that the 5 biggest each have that amount – 5 times 35.4 = $177 billion. Of course they can’t place 100% of their cash and equivalents in long term bonds, so I would assume that only a fraction of that money would actually be available to buy at auctions. Of course there are their "trading assets" which we have no idea how they are used. But my premise is that week after week of $100 billion or now $200+ billion auctions cannot be supported by the money that the Primary Dealers possess.
So again, WHERE’S THE MONEY COMING FROM? Since I can’t see where the money is coming from, I’m going to throw a wild guess out there and say that the government and PDs are simply printing it as they go! How much? WAY, WAY more than the announced use of Bernanke’s $300 billion. Sound like a conspiracy theory? It is, and I invite the Fed, the Treasury, and the Primary Dealers to open their books and prove me wrong. I want to see a paper trail leading to the purchase of those bonds and treasuries!
This is a vitally important question to have answered for the future of our country – CRITICAL.
I would love to find some good data/news somewhere that actually made sense – but there simply isn’t any. Most recent mainstream media articles touting economic ‘good news’ are either using flawed assumptions, bad/manipulated data or completely disregard data that would contradict their positive spin.
I wrote a couple of months ago that we were in a relatively calm period before things really started to head south. I think we’re nearing the end of anything resembling calm.
Declining Federal tax revenues will translate into bigger deficits – which will require additional Treasury debt – which will flood the debt market with even more Treasury bills/notes. At some point, the world will say ‘enough’ – and all sorts of unpleasant things will start happening.
John
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Nathan's Economic Edge
http://economicedge.blogspot.com/
Tuesday, August 4, 2009
Federal Tax Revenues – Cliff Diving and Data Hiding…
Remember what Chris Martensen called good economic data? You know, data that “is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.”
Good Data
• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers' volume
• Corporate Revenues (just added to list)
Well, here’s the data from the top of the list, the only data the government releases that meets Chris’s “good” criteria.
And how’s it looking? Is it down the .7 or even 5% that comes out of the massaged and adjusted data? NO! It’s down, wait for it, 22% year over year for Federal individual tax receipts and it’s down a horrific 57% for Corporate Income Taxes!
Now that’s a crash of revenue, just when our government is RAMPING spending all while simultaneously spending trillions of your dollars to bail out the central banks and pay bonuses on Wall Street!
What will that mean for our deficits? GAME OVER! The math is simply so far from working that there is NO WAY to keep the game going very much longer. You can ignore it, call it looney Tunes, whatever, the math simply tells the truth and cannot lie.
Federal tax revenues plummeting
AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans
By Stephen Ohlemacher, Associated Press Writer
On Monday August 3, 2009, 8:51 pm EDT
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.
"This just adds to the problem."
While much of Washington is focused on how to pay for new programs such as overhauling health care -- at a cost of $1 trillion over the next decade -- existing programs are feeling the pinch, too.
Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.
The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.
For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.
Is there a way out of the financial mess?
A key factor is the economy's health. The future of current programs -- not to mention the new ones Obama is proposing -- will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.
"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.
"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."
A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.
Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.
Some experts think the sour economy has made those numbers outdated.
"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.
The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.
The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.
"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."
The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.
"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.
President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.
Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.
Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.
Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.
Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.
Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."
BUT WAIT! That’s actually an improvement in Corporate tax receipts… then a funny thing happened on the way to look at the St. Louis Fed’s charts. It seems that this chart series, (FCTAX), the only one that presents federal tax data on the Fed’s site, has stopped reporting data! Below is the same series chart that I posted on April 10th of this year:
That’s right, you can see that corporate tax receipts were down well over 70% at that time!
Now, when that same data series is pulled up, you will find that the data begins in 1996 and ENDS in 2008!
In fact, do a search at the Fed’s site and you will find that all aggregate tax receipt information is suddenly only reported to the beginning of 2008!
Fred Search, Gov't Receipts, Expenditures & Investment
Why would they do that? Oh, go ahead and ask. I can already guess their response… “That data is no longer relevant.” Or, “It was an error and will be corrected [when the recession is over].” LOL, seriously, when they were playing games with the “excess reserves” charts, they came up with all types of excuses and now it’s impossible to know exactly how it’s calculated.
One more time:
The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should haveaccess to the information before the public! access to the information before the public.
Nathan A. Martin 0 comments
If you’ve been paying attention to recent U.S. Treasury bond/note auctions, you’ve probably noticed that the amount of debt offered at these auctions is growing significantly. This is a direct result of our Federal Government’s spending on the numerous stimulus and bailout packages. To put the amount of debt in perspective – a year ago the U.S. would auction anywhere from $5 to $15 billion a week (on average). Last week the U.S. auctioned over $230 billion in Treasury bonds/notes.
Although our leaders in Washington act as though they have a blank check – it’s easy to see the repercussions of what they’re doing. The growing deficits are requiring the Treasury to auction more and more debt. The question becomes – at what point do we hold an auction where no one shows up to buy? As you’ve seen me say before – I (and others) believe this is already happening to some degree.
Personally, I believe the Federal Reserve has been supporting Treasury auctions for some time – but I could not figure out how they were doing it. Chris Martenson explains how they’re doing it in the article below.
You have to ask yourself – why all the secrecy? Why do they need to support our Treasury auctions? What happens if they stop supporting Treasury auctions?
The answers will lead you to one unpleasant conclusion – U.S. debt creation is unsustainable.
John – August 5, 2009
The Shell Game - How the Federal Reserve is Monetizing Debt
Sunday, August 2, 2009, 10:02 pm, by cmartenson
by: Chris Martenson
Executive Summary
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· The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
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· Non-US demand for the dollar must remain high, or the dollar will fall.
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· Demand for US assets is in negative territory for 2009
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· The TIC report and Federal Reserve Custody Account are reviewed and compared
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· The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
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· The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.
One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money. If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one. If you have any interest at all in where interest rates are headed, you'll want to understand this story.
There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered. One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept. A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts. And the third concerns the dollar itself.
In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.
Replacing private credit with public credit
Our entire monetary system, and by extension our economy, is a Ponzi economy in the sense that it really only operates well when in expansion mode. Even a slight regression triggers massive panics and disruptions that seem wholly inconsistent with the relative change, unless one understands that expansion is more or less a requirement of our type of monetary and economic system. Without expansion, the system first labors and then destroys wealth far our of proportion to the decline itself.
What fuels expansion in a debt-based money system? Why, new debt (or credit), of course! So one of the things we keep a very close eye on over here at Martenson Central, as they do at the Federal Reserve, is the rate of debt creation.
One of the big themes in the current credit bubble collapse is the extent to which private credit has been collapsing and the corresponding degree to which the Federal Reserve has been purchasing debt and the federal government has stepped up its borrowing. In essence, public debt purchases and new borrowing has attempted to plug the gap left by a shortfall in private debt purchases and borrowing.
That's the scheme right now - the Federal Reserve is creating new money out of thin air to buy debt, while the US government is creating new debt at the most fantastic pace ever seen. The attempt here is to keep aggregate debt growing fast enough to prevent the system from completely seizing up.
How are they doing?
The debt gap
One of the great perks of living in a relatively open society is that we generally get access to pretty good information. The Federal Reserve routinely publishes a document called "Monetary Trends," where they collapse all their points of interest into a nice, tidy collection, and then make it available for all to see.
Here's what caught my eye in the most recent one
What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts).
This raises a most interesting question: "Who is lending the money to accommodate all that federal borrowing?"
Here's where the story gets interesting.
Treasury International Capital (TIC) flows
Lately, a number of observers have made note of a troubling decline in foreign demand for US paper assets, notably bonds. Worse, it's even turned into outright selling which will ultimately translate into dollar weakness.
The relative demand for the dollar "out there" in the international Foreign Exchange (or "Forex") market directly impacts the dollar's strength. If there are more sellers then its value will fall; if there are more buyers, then its value will rise. One way to assess this delicate balance is to ask, "In total, are foreigners buying or selling US assets and what are they doing with those proceeds?"
Luckily for us, the exact answer to this very question is released in a monthly report put out by the Treasury Department, called the Treasury International Capital Flows report, or TIC report for short.
The recent TIC reports have been quite alarming, because they not only reveal the most sudden deceleration in flows in history, but also that they have been negative for some time now. This chart is from the Federal Reserve:
What we see here is that from the early 1990's onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there. It is only over the past seven months, out of decades, where that process has reversed and become negative. This is a significant event, to say the least.
On the surface, the above chart hints at a potential disaster for a country that is embarking on the largest-ever federal debt binge in history.
After all, if US assets are being shunned by foreigners, how will we find enough buyers? And what will happen to the dollar?
The answers are: "We won't" and "Nothing good."
Digging in
If we dig into deeper into the detail of the report, we find something even more interesting. While the overall flows have been negative, there is an enormous difference between the behaviors of foreign central banks and private investors. Fortunately the TIC report distinguishes between these two broad classes of buyers.
Since the start of 2009 and continuing through the month of May, private investors sold $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury). Added up, some $314 billion dollars of foreign money has left the country since the start of the year.
What this demonstrates is the utter reliance of the entire house of cards upon the continued purchase of US financial assets by foreign central banks. Without the continued cooperation of the foreign central banks in accumulating US assets, suffice it to say that the dollar will fall a lot lower than it already has.
The dollar
Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.
Of course, I've said all this before, and every time we seem to get close, there's been an upside surprise in store. The forces aligned to prevent a dollar collapse are numerous.
But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002. In fact, it's grown worse. Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative. The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit. However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.
Treasury auctions
During this past business week (July 27th - 31st, 2009), the US Treasury auctioned off more than $243 billion worth of various Treasury bills and bonds. "Indirect bidders," assumed to be mainly central banks, took an astonishing 39% of the total, or nearly $95 billion worth.
With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.
Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May - and now they are said to be buying $95 billion during a single week in July alone?
Something is not adding up here.
To understand what, and to get to the essence of the shell game, we need to visit one more source of information - something called the Federal Reserve Custody Account.
The Federal Reserve Custody Account
It turns out that when China's central bank (or any other foreign central bank) decides to buy either US agency or Treasury bonds, they do not walk up to some window somewhere, hand over a pile of cash, and then take some nice looking bonds home with them in a suitcase.
Instead, what happens is that the Federal Reserve actually holds the bonds (or rather an electronic entry representing the bonds) in a special account for these various central banks. This is called the "Custody Account" and it holds US debt 'in custody' for various central banks. Think of it as a magnificently vast brokerage/checking account, run by the Federal Reserve for central banks, and you'll have the right image.
Although the TIC report shows flows of capital into and out of the country, it does not show you what is going on with those funds that are already in the country. If you look again at the first chart in this report, and behold the vast flows of money that came into the US between 1995 and 2008, you can get a sense of how much money got sent to the US and mostly remains parked there.
The custody account currently stands at $2.787 trillion (with a "t") dollars. It has increased by over $430 billion the past 12 months and by more than $275 billion in 2009 alone (through July 29). These are truly shocking numbers, and they tell us that foreign central banks have been accumulating US debt instruments throughout the crisis.
As we can see in the chart below, there has been absolutely no deflection in the growth of the custody account as a consequence of the financial crisis, bottoming trade, or the local needs of the countries involved. It's almost as if the custody account is completely disconnected from the world around it. If you can spot the credit bubble crisis on this chart, you have sharper eyes than me.
What does such a chart imply? We might wonder what sorts of distortions are created by having such a massive monetary spigot aimed from several central banks towards a single country. We also might question just how sustainable such an arrangement really is. It is a complete mystery how such a chart can display nary a wiggle, despite all that has recently transpired.
This next table showing the yearly changes in the custody account actually surprises me quite a bit.
Despite everything that's been going on, the custody account is on track to grow by the largest dollar amount on record this year, nearly $500 billion dollars (if the current pace continues). Where is all this money coming from and for how much longer?
Understanding the gap between the TIC and the Custody numbers
One thing you might have noticed is that the TIC report only shows $50 billion in foreign bank inflows for 2009, while the custody account grew by $277 billion.
How is it possible for the TIC report to show smaller inflows than growth in the custody account? We can see that clearly in this table, which compares the two. (Note: These are 12 monthly yr/yr changes, so the numbers will be different than the YTD numbers I just cited):
One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not "sent home" and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.
International check kiting
Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.
An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a "check kiter" might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.
In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser. Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.
If this strikes you as a scam, congratulations; you get it.
If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.
Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.
What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?
It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?
Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.
The shell game
Have you ever seen a sidewalk magician run the shell game, where a pebble under a shell is magically shuffled around - now you see it under this shell, now you see it under that shell, now it disappears completely - or does it? The more it moves around, the more confused you get. If you can only figure out which shell the pebble is hidden under, you win! But where is the pebble? The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.
These are the three critical points to remember as you read further:
1. The US government has record amounts of Treasuries to sell.
2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
3. The Federal Reserve does not want to be seen directly buying US government debt at auctions, because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pebble is still there somewhere - the pebble being the fact that the Fed is creating money to fund the purchase of US debt.
At the time, the Federal Reserve program to purchase agency bonds was described like this:
Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.
While "stimulating borrowing," "stabilizing the economy," and "lowering interest rates" are laudable goals, the primary goal of the program seems to have been something else entirely - to assure plentiful funds for the massive US Treasury auctions coming due. I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air. But that's clearly one of the outcomes.
The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.
However, this openness only extends to the amounts themselves, not the source(s) of those Agency bonds. This is, in my mind, yet another reason the Fed desperately wishes to avoid an audit. The results would expose the game for what it is.
As we can see in the above chart, the Fed has purchased more than $640 billion of Agency bonds, and has promised to buy more in the near future.
As we now know, at least some of that money has been recycled into US government debt, where "indirect bidders" have been snapping up an unusually high proportion of the recent offerings. (Note: The way Indirect bidders are calculated has recently changed, and I am not entirely clear on how much this influences the numbers we now see….I'm working on it).
A fair question to ask here is, "If there are green shoots everywhere and the stock market is racing off to new yearly highs, why is the Fed continuing to pump money into the system at these mind-boggling rates?" One answer could be, "Because things might not be as rosy as they seem."
Conclusion
The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets. To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items. For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, "inflation vs. deflation" is not the right frame of reference for understanding the potential impacts. For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar. Is this inflation or deflation? Both, or neither? Instead, we might properly view it as a currency crisis, with prices along for the ride.
Further, all efforts to supplant private debt creation with public debts should be met with skepticism, because gigantic programs are no substitute for the collective decisions of tens of millions of individuals and cannot realistically meet millions of individual needs in a timely or appropriate manner.
The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.
My advice is to keep these potential issues and insights in sharp focus, make what moves you can to diversify out of dollars, and be ready to move rapidly with the rest. This game is far from over.
Great investigative work here by Chris Martenson. Chris shows us how the Federal Reserve is deceptively purchasing Treasury securities from the U.S. Government. This is a very big deal. It means that the world’s investors (domestic and foreign investors, etc.) are no longer willing to purchase all of our debt – which means that we cannot get the financing we need to sustain our enormous budget deficits. As I’ve mentioned before – if we can’t sell our debt – we will start down a path that will end with the bankruptcy of the United States (cash flow insolvency).
The Fed is stepping in (secretly) to purchase a significant amount of our debt to delay Treasury auction failures. They can’t purchase our debt forever, at some point the world is going to figure out what is going on. I suppose they are doing this so that when this is known – it will appear as though they were trying their best to help us.
It took about an hour for this information from Chris Martenson to spread to many of the popular economic blogs on the internet. It won’t take long before this becomes the #1 discussion topic on the internet – and then someone will break this news to the world.
Once the world figures this out – the value of the dollar will plummet and interest rates will sky-rocket. It’s going to be painful to watch our leaders in Washington try to manage through the worst financial crisis in our history. If you think the past year has been tough – you haven’t seen anything yet. Think about the problems California has been dealing with over the past year (significant tax revenue declines coupled with out of control government spending) – and then think about the fact that our Federal budget is approximately 40 times larger. I can only think of one word to describe what we’re going to see – chaos.
As I’ve mentioned before, the Fed doesn’t use existing money – it creates money. Therefore, when the Fed purchases our debt – it is increasing our money supply – by a significant amount. Add this to all of the other Fed ‘actions’ that have ballooned its balance sheet – and it’s not hard to see what is propping up our money supply.
Who bails out our Federal Government? It would be easy to say – no one. The truth is that we will be offered a way out by the world – but it will come with a very steep price.
This is the beginning of the end of the financial dominance of the United States.
jg – August 6, 2009
The Fed Buys Last Week's Treasury Notes
Thursday, August 6, 2009, 12:21 pm, by cmartenson
In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.
This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs"), we can consider these additions of money as good as permanent themselves.
Looking at the maturity range, we can see that these are all long-dated bonds, with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand," and all the rest
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction, but this way, using "primary dealers" and "POMOs" and all these other extra steps, the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash.....
jg – August 6, 2009
You’ve probably wondered – if there is so much negative economic data out there – why does the stock market continue to rise? With the Dow Jones Industrial Average and S&P 500 index up by significant percentages this year – it would seem that stock investors know something we don’t. Is this true or is something else happening?
If you invest in stocks, then you are familiar with the stock price to earnings ratio. This is a good metric to determine if a stock price is considered expensive – and therefore, a good metric to determine whether or not to buy a particular stock (P/E trends). If we take this a step further and look at the P/E ratio for the entire S&P 500 index – we can get a good idea if it’s a good time to buy into the stock market.
So - there are two, very big questions we should answer when it comes to future stock prices:
1. Is the economy rebounding to the point that company earnings will increase significantly in coming quarters?
2. Are stock prices considered high compared to corporate earnings?
As I’ve said before – I see no indication (based on good, quantitative economic data) that the economy is rebounding. As we’ve seen – the economy continues to deteriorate – continuing job losses, growing residential and commercial loan defaults, home prices continue to decline, wages and income declining, etc. Therefore, I would not bet my financial future on a quick economic turnaround that will increase corporate earnings - based on the economic data that I trust.
Also remember, companies have been able to beat recent earnings estimates due to significant cost reductions – not due to sales/revenue increases. How much more can they cut if revenues continue to decline? Bottom line – I would not expect to see a significant turnaround in corporate earnings any time soon.
This is not exactly good news considering current S&P 500 earnings. Over the past 20 months we’ve watched the biggest earnings drop in the history of the S&P 500. Again, you’re probably wondering – with such a big drop in earnings – why is the S&P 500 up approximately 35% since March? Good question. We’ll answer it after we look at the current S&P 500 P/E ratio.
With earnings plunging, we would expect to see a high P/E ratio if prices haven’t also plummeted. As I mentioned above, since S&P 500 stock prices have increased significantly since March – the S&P 500 P/E ratio is through the roof.
From Nathan’s Economic Edge (http://economicedge.blogspot.com):
“The higher stocks go without real earnings and without clearing the debts from consumers, the higher price to earnings ratios will go. It is ultimately earnings that underpin the equity markets and the price of stocks has NEVER been so high compared to earnings.
It would take one heck of a lot of growth to pull P/E’s back into a normal historic range, and the only reason they look as “good” as they do is because the financial industry was allowed to go back and mark their assets to fantasy – otherwise the large banks are still insolvent and would not have earned a nickel.”
The answer to question #2 is – stock prices are at historic highs compared to earnings – and not by a small margin. We see the same situation with the DJIA.
Bottom line – we see no real economic turnaround and P/E ratios are at historic highs. What does this tell you? It tells you that it’s a very bad time to invest in the stock market. If you’re not in the market – stay out. If you’re in – get out. The whole house of cards could collapse at any time.
So – the final question to answer is – why are stocks increasing if the economy and earnings are plummeting? It’s not because the economy is rebounding (regardless of what the media tells us) and it’s not because stocks are cheap. As Chris Martenson shows us below – the culprit is – once again - the Federal Reserve.
If you’ve seen the movie ‘The Sting’ (1973), you have some knowledge of how a confidence (con) scheme works. In the movie, Robert Redford and Paul Newman’s characters ‘con’ a big time bad guy (the ‘mark’) out of some serious money. The ‘con’ was broken down into the following acts:
1. ‘The Set Up’ – devise a plan to deceive and then steal a significant amount of money from the ‘mark’
2. ‘The Hook’ – create a situation that ‘hooks’ your ‘mark’ – meaning that the ‘mark’ becomes very interested in what your scheme can do for him
3. ‘The Tale’ – tell a good story that the ‘mark’ believes will make him lots of money. A good tale preys upon the weaknesses of the ‘mark’.
4. ‘The Sting’ – just when the ‘mark’ thinks he’s going to make a killing – pull the rug out from under him and steal his money
What was the most important lesson from this movie? The ‘mark’ can never know that he’s been taken.
The people of the United States have been the victim of the biggest confidence scheme in the history of the world.
By creating bank panics in the late 19th/early 20th centuries, the bankers behind the Federal Reserve set the stage for the Federal Reserve Act of 1913.
We’ve been told a grand tale – that our current banking system is stable, reliable and benefits everyone.
We’re about to experience the ‘Sting’ – when the international bankers behind the Federal Reserve try to take everything from us. This will most likely begin in earnest with a significant stock market crash.
With high stock prices, low corporate earnings and a deteriorating economy – our stock markets have been setup for an historic fall.
It’s going to be epic.
jg – August 7, 2009
Fed POMO activity and the Stock Market
Friday, August 7, 2009, 11:38 am, by cmartenson
Today, again, we receive news that Fed is continuing to pour more and more POMO money into the banking system, this time with a 'mere' ~$2 billion addition.
August 7 - New York Fed purchases $1.937 billion in agency coupons
As long-time readers here know, I have been tracking the Permanent Open Market Operations (or "POMO") activity of the Fed for a long time.
As I wrote in The Five Horsemen ( May 31 2009, enrollment required $):
The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.
Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered on this in May (2009) in an "In Session" posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis.
This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.
As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.
This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world's reserve currency, so this has enormous, far-reaching implications.
Today I want to update that chart above and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity that is being expressed as "billions of dollars per day." No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.
What we might wonder here are three things:
1. 1. How would the stock markets have behaved without the massive daily additions of billions of dollars?
2. 2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?
3. 3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?
Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.
Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do. One of those things, it seems, is to goose the stock market, especially late in the day.
The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States'. If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.
The only question here is "what does this mean to me?" We'll be exploring that in some detail later on…
