- Crisis denialists are still around but are slowly and
grudgingly giving way to the reality that global capitalism is in serious
crisis as recession lurches toward depression in a continuing downward
spiral.
-
- Nearly every new data release confirm it. On November
19, housing starts and permits hit record lows, according to the Commerce
Department. At an annual 791,000 rate last month, they were the lowest
they've been since number tracking began in 1959 and are down 4.5% from
a revised 828,000 September reading.
-
- Building permits were also worrisome at an annual 708,000
rate (down from 805,000 in September), breaking the previous 709,000
March 1975 low figure.
-
- With supply way exceeding demand and prices in near free
fall, no end of this is in sight for an industry perhaps facing its most
challenging environment ever. The National Association of Home Builders
(NAHB)/Wells Fargo November housing market index shows why. It fell to
a seasonally adjusted 9 reading - its lowest recorded level since the
index first began in 1985 and below its October reading of 14. Any number
below 50 indicates contraction.
-
- In addition, the Mortgage Bankers Association's (MBA)
weekly purchase loan index fell 12.6% in the week ending November 14.
At 248.50, it's at its lowest loan applications level since December
2000. This signals weak future home demand at a time when it's woefully
weak and declining.
-
- There was more bad news on November 20 as well as weekly
initial jobless claims keep rising. This time by a higher than expected
27,000 to 542,000 in the week ending November 15 - the highest level
since July 1992. The four-week average is its highest since January 1983
as employment keeps deteriorating at an increasing pace.
-
- It's no surprise that the October 28 and 29 Fed Open
Market Committee minutes showed the sharpest meeting-to-meeting sentiment
drop in memory, according to one of its former governors, Lyle Gramley.
It now predicts that the economy will contract for a year or longer and
"agreed that the downside risks to growth had increased." Back
in August, the Fed left interest rates unchanged at 2%, foresaw continued
but lower growth, and said: "Although downside risks to growth remain,
the upside risks to inflation are also of significant concern to the Committee."
-
- Currently, the Philadelphia Fed's survey predicts that
GDP will shrink by 2.9% in Q 4, a sharp downgrade from its last 0.7% growth
prediction. It added that the economy entered recession in April. It
will last at least 14 months and will be one of the longest ones since
the 1930s. Its latest survey of manufacturing conditions decreased from
-37.5 in October to -39.3 currently. It's now at its lowest point since
October 1990 and falling. Its employment index also fell to -25.2.
-
- Another distressing sign is the growing number of unsold
goods in Long Beach, one of the nation's most active commercial ports.
On November 18, The New York Times called them "A Sea of Unwanted
Imports" and a reflection of growing inventory levels - up 5.5% in
September from a year earlier and rising.
-
- Long Beach accounts for about 20% of the country's container
imports. It's second only to Los Angeles, and its volume is down 10%
from last year. It's "where imported products arrive and filter through
the tributary of trucks, trains and retailers into the hands of consumers.
But now, products are just sitting" and turning the port into a parking
lot. Nearly all other major ports are in similar decline as the current
crisis worsens.
-
- Veteran Long Beach port workers say the slowdown is like
nothing they've ever seen. It's affecting other businesses and workers,
and it's got them all worried. US consumers, too, and in the words of
one reflecting the many: "I'm saving money, paying bills (and) hunkering
down." It shows in declining retail sales.
-
- The Architecture Billings Index (ABI) indicates future
construction activity. In October, it hit an all-time low since the survey
began in 1995. It's at 36.2, down significantly from 41.4 in September.
Any number below 50 indicates contraction. In addition, new project inquiries
were at 39.9, another record low.
-
- Many other indicators are as bleak and show the economy
in free fall, taking most others down with it. Clearly the verdict is
in. At the least, it's the worst economic crisis since the 1930s. At
worst, it may be far greater that only the fullness of time will reveal.
-
- Bellweather Canaries in the Coal Mine
-
- Once a bellweather corporate icon and virtual proxy for
the S & P 500, General Electric has fallen on hard times. In September
2000, its stock price traded at around $60 a share. On November 20, it
fell to $12.84 for a net eight year loss of nearly 79%. Back in April,
when the company badly missed its earnings target, the stock lost $47
billion in market value that day, and The Economist remarked that "This
is not what investors expect from one of the few remaining triple-A rated
companies, famed for hitting its targets." Analyst Bob Chapman believes
only gold deserves that rating at a time when no asset class is safe.
-
- CreditGuru.com defines a AAA credit rating as follows:
-
- "Bonds rated AAA are of the highest credit quality,
with exceptionally strong protection for the timely repayment of principal
and interest. Earnings are considered stable, the structure of (its) industry
is strong, and the outlook for future profitability is favorable. There
are few qualifying factors present which would detract from the performance
of the entity, the strength of liquidity and coverage ratios (are) unquestioned
and the entity has established a creditable track record of superior
performance. Few entities (warrant) a AAA rating."
-
- Why? Because of practices like these:
-
- -- living excessively off credit;
- -- an uncertainty of future earnings;
- -- playing fast and loose with accounting policies;
-
- -- lying to investors;
-
- -- diluting the market with recapitalizations; and
- -- having a history of these practices.
- Government fiscal irresponsibility is no different than
for businesses. As a result, America's credit worthiness is at risk.
-
- In the late 1970s, 58 companies were rated AAA. In the
1990s, it was 22, and in 2001 nine.
-
- Today, according to 247wallst.com, GE is one of only
six corporations rated AAA by S & P (along with ExxonMobil, J &
J, Toyota, Berkshire Hathaway, and ADP) but it's status is clearly jeopardized
in the view of some analysts. One puts it this way:
-
- "The legendary American institution is in deep trouble.
Its PR machine has been in constant spin mode as the company sinks deeper
into despair." Its "AAA rating is not worth the paper it is
written on. One look at GE's balance sheet will convince you....AAA companies
do not need to take the desperate actions that GE has taken in the last
few months."
-
- The first signs of real trouble appeared in April when
the company missed its target. "It is widely known that they are
masters of 'legal' earnings manipulation," so it came as a shock.
"Accounting rules allow for wide discretion in reserves and estimates.
GE Capital has always been a black box within the larger company,"
and the management used this division "as its backstop for meeting
earnings estimates." It failed, and it's slide has been precipitous
enough for the company to need Warren Buffett to invest $3 billion as
a psychological boost and have to pay him a 10% dividend and other incentives
to get it.
-
- "Credit default swaps (CDSs) protecting against
GE Capital default now trade as if GE is a junk bond credit." And
issuing $12 billion in new common stock (at $22.25 a share) was "an
act of extreme desperation and brings into question whether GE has a lucid
strategy."
-
- Its divisions face problems across the board but especially
GE Capital, its largest with three subdivisions - GE Commercial Finance,
GE Money, and GE Consumer Finance. The company "is a bank disguised
as an industrial conglomerate." In boom times, it did wonders for
its profits. Today it's "a rocky path to destruction," and as
GE goes, so goes the S & P 500 perhaps and the economy along with
it.
-
- Market analyst Robert Prechter calls GE a "bellweather
for a global bear market," and when the August 1982 - January 2000
longest ever bull market ended, he said "GE is going to go way down
(and it) probably heralds stormy weather ahead for the market as a whole;
or should we say 'hole?' " Prechter maintains that view today as
GE's valuation keeps falling at a time when it just secured government
insurance for $139 billion of GE Capital debt. If the company was strong,
it wouldn't need it. Getting it is a sign of real weakness.
-
- A condition also affecting Citigroup that's teetering
on the brink of failing. No longer the nation's largest bank, it, too,
has fallen on hard times and its stock price reflects it. At $3.77 a
share on November 20, it's down around 94% from its closing high and now
trades at 15-year lows. Clearly the company is in very big trouble. So
are other major banks. They're all effectively insolvent and are only
kept operating with billions in government aid and plenty more if needed
under Paulson's no banker left behind scheme. At least none anointed too
big to fail.
-
- Perhaps in Citi's case, it's too big to save. It has
$2 trillion in assets, a $37 trillion (notional value) derivatives portfolio
(including $3.6 trillion in credit default swaps), $202 billion in troubled
residential mortgages, huge numbers of shaky auto loans, and unknown amounts
of other dead weight that may in the end sink the company. One analyst
calls Citi insolvent and says its problems are double those of AIG. It
plans 52,000 job cuts (14% of its workforce) on top of 25,000 previously
announced and more to come as the company furiously restructures to survive.
-
- On November 21, the Wall Street Journal highlighted the
company's plight in a feature article titled: "Citi Weighs Its Options,
Including Firm's Sale." It cites company executives considering the
possibility of auctioning off pieces of the bank or selling it entirely
after its worst ever percentage one-day drop in valuation. The board of
directors will meet to decide what's next and may do what was "unthinkable
only weeks ago." They must also deal with growing rumors that Citi
is on the verge of bankruptcy and that Washington plans a takeover, AIG-style.
-
- For now at least, a stopgap plan was announced on Sunday
(November 23) for Washington to provide Citi with another $20 billion
infusion and will guarantee as much as $306 billion of its troubled assets.
The bank must absorb its first $29 billion in losses and 10% of others
beyond that. The Treasury will assume the next $5 billion, the FDIC the
next $10 billion, and the Fed will take the rest up to the agreed on amount.
This may provide some temporary relief, but given the extent of Citi's
problems, it may in the end be short-lived.
-
- Growing numbers of other companies face similar problems
or may in the months ahead. The auto giants are already insolvent and
a hair's breath from bankruptcy or even oblivion. Other companies fear
a similar fate. It's reflected in their sinking stock prices and bond
yields, especially the junk variety. As reported in the Financial Times:
-
- "Average yields on US junk bonds have topped 20
per cent for the first time (over 50% for GM debt) amid rising concerns
about a protracted recession and a wave of corporate defaults." It
could have a "dramatic impact on economic activity" by making
debt prohibitively expensive. These issuers comprise nearly half the
corporate bond market, according to S & P. "The yield on the
benchmark Merrill Lynch US High-Yield index hit 20.81" topping its
previous 18.66 January 1991 reading.
-
- Even worse, the risk premium spread over Treasuries is
nearly double what it was then when the benchmark 10-year bond yielded
over 8%. Today, it's ranging between around 3.0 - 4.0%. Moody's sees
14% of corporate bonds defaulting - an all-time high figure since it began
keeping records, and it's likely the number will rise as the global crisis
deepens and companies start falling like tenpins.
-
- Maybe US Treasuries also according to analyst Martin
Hennecke of Bridgewater Ltd, Hong Kong. He told clients that "The
US might really have to look at a default on the bankruptcy reorganization
of the present financial system," and a corresponding government
one is very possible.
-
- "In the United States, there is already a funding
crisis, and they will have to sell a lot more bonds next year to fund
the bailout packages that have already been signed off." He added
that to solve or stem the current crisis, America will have to radically
reduce spending across the board and recall all its troops from around
the world. As for a stimulus package, "there is not much of an industry
left to stimulate back to life," he believes. Others agree and see
depression ahead - not whether but when it will arrive.
-
- Then there's Asia with Bloomberg reporting (on November
19) that: "Asian stocks fell, extending a global rout, as Japan's
exports declined the most in almost seven years (7.7% from a year earlier)
and US consumer prices sank by a record" raising the specter of
deflation. One analyst described it as "the end of the world as we
know it" in the worst ever global slump he's seen and "no region
(able) to help (others)."
-
- AFP in Tokyo said "Japan (officially in recession)
reported a rare trade deficit in October." Exclusive of the slow
holiday-affected January period, "it was the first red figure in
26 years" and a sign of more trouble ahead. In America also with
JP Morgan Chase predicting that the Fed will cut interest rates to zero
by January, hold them there throughout 2009, and other central banks will
cut as well. But hold the cheers.
-
- So far, monetary policy has been ineffective and little
more than pushing on a string in a liquidity trap climate. Further, perception
is everything at a time confidence is at record lows and shows no signs
of stabilizing.
-
- Once nominal rates hit zero, "the Fed has run out
of ammo" except for what innovative tools it may use - such as buying
toxic debt more aggressively and transferring it to its balance sheet
in unheard of and reckless new ways.
-
- One analyst weighs in on this possibility as follows:
It's a desperation-driven "course of action that is not working (and)
not a sign of intelligence....If Fed funds at 1% (and huge liquidity
injections aren't) inducing banks to extend credit, a further reduction....won't
have any impact" either, so why do it and maybe makes things worse.
-
- It's why analyst Tim Duy calls Fed policy "adrift"
in a November 20 commentary. He cites "a distinct lack of leadership
and believes Bernanke "has used up his bag of tricks" and doesn't
know what to do next. He calls recent Fedspeak "littered with confusing
statements that leave the true policy of the Federal Reserve in question."
For example, on interest rates, whether to lower them further or stand
pat, and more debate on the target rate is "nothing more than academic
masturbation."
-
- That rate is a non-issue, and "policy needs to take
a different direction....One can only conclude that Fed officials do not
understand their own policies. Policy is adrift. Be afraid; be very afraid....Bernanke
cannot elucidate a coherent policy strategy to his organization because
no such strategy exists. What does exist is a potpourri of policy responses
that amounts to providing liquidity at all costs....Beyond this, the Fed
is stuck in a netherworld of dual policy targets - not ready to admit
the loss of the interest rate target, not ready to adopt a formal policy
of quantitative easing."
-
- "I think it is high time some real critical attention
was placed on Bernanke. How complicit was (he) with designing and implementing
a clearly failed policy?" And while "Fed officials publicly
debate the intent of their own policies, investor confidence is collapsing.
Bernanke needs to step forward and define policy. We need to pressure
him into providing that leadership - or (have him) step aside for someone
else to do it."
-
- It's a sign of the times that another analyst describes
this way: America's problems "are trickling down from the top and
devastating (people) at every level. A vicious cancer has materialized
and every segment of the economy is suffering. Americans increasingly
have nowhere to turn as funds dry up and unemployment skyrockets."
-
- According to The New York Times (on November 20), even
New York's shoeshine business is suffering. In Grand Central Terminal
alone, one operator of five stands now gets 100 customers a day compared
to 700 in good times. It's a "s(h)ign" of the times.
-
- The World According to Paul Volcker
-
- At a November Lombard Street Research conference in London
he said: "What this crisis reveals is a broken financial system like
no other in my life. (He's 81.) Normal monetary policy is not able to
get money flowing. The trouble is that, even with all this (intervention
and) protection, the market is not moving again....I don't think anybody
thinks we're going to get through this recession in a hurry." Leading
up to this has been "leveraging in the economy beyond imagination,
and nobody was saying we need to do something....Alan (Greenspan) was
not a big regulator."
-
- It's now payback time, and according to economist Paul
Ashworth, business spending is in "meltdown." And the same is
true for maxed out consumers.
-
- Market Watch columnist Paul Farrell sees depression ahead
in 2011 and lists 30 reasons why. Here's a sampling:
-
- -- America may lose its AAA credit rating; it already
exists in name only;
-
- -- growing numbers of companies need bailouts;
-
- -- "Treasury sneaks corporate tax credits into bailout
giveaway, shifts costs to states;"
-
- -- sinking state revenues and rising debts signal trouble;
-
- -- "state, municipal, corporate pensions lost hundreds
of billions on derivative swaps;"
-
- -- "consumer debt way up, now at $2.5 trillion;
next area for credit meltdowns;"
-
- -- Fannie Mae, Freddie Mac, AIG, the big banks and other
companies are bleeding cash and want more taxpayer dollars;
-
- -- bailout costs will be in the many trillions;
-
- -- all asset classes are sinking and signal a global
meltdown;
-
- -- retailers are failing; "mall sales (are) in free
fall;"
-
- -- unemployment (is) skyrocketing; and
-
- -- "government policy is dictated by 42,000 myopic,
highly paid, greedy lobbyists" - exceeded only by Wall Street's level
of greed and corruption.
-
- Two Additional Shoes to Drop
-
- The auto industry for one. They're so close to the edge
that no amount of bailout may help, but consider the consequences of
bankruptcy. The big three employ around 250,000 US workers and affect
nearly three million others at suppliers, dealerships and other companies.
Without this industry, unemployment will skyrocket to unimagined levels,
and the economic fallout will be catastrophic - both at home and globally
because these companies have foreign operations and America's problems
resonate everywhere.
-
- Alt.A loans are another issue, called by some "liar
loans." Moody's recently warned about this less publicized part of
the mortgage market, and they should. They've grown faster than subprime
ones to borrowers with less than top credit.
-
- Alt.A refers to people with A-rated credit who borrow
with little or no verification of income, or so-called alternative documentation.
They cut across all socio-economic lines, exist everywhere in the country,
are in danger of imploding, and if it happens, they'll dwarf the subprime
meltdown. Why so? Because they're higher-priced, higher-leveraged, and
there are more of them.
-
- In combination with so-called Jumbo Prime mortgages,
over $1 trillion in residential mortgages are at risk - much of it on
balance sheets of the nation's largest banks (including Citigroup, JP
Morgan Chase and Bank of America) and another reason why their stock prices
are plunging.
-
- As of October, Alt.A delinquencies of at least 90 days
averaged 20.3% for those originated in 2006. For 2007 ones, it's 17.5%.
According to Moody's, prepayment rates are at historical lows (in the
mid to high single digits) and are expected to remain depressed in light
of credit tightness and declining home equity. Moody's stated:
-
- "Given the lack of pool seasoning, cumulative losses
have not yet risen as steeply as delinquencies. However, many pools are
starting to show a sharp increase in the rate of loss realization. As
the pace of liquidations has picked up, the performance data suggests
worsening loss severities."
-
- Moody's added that when Alt.A loans include an option
adjustable- rate mortgage, delinquencies outpace pools without option-ARMS.
The reason is because negative amortization results in weaker loan-to-
values, and downgrades are certain to follow.
-
- Corporate Director Resignations Increasing
-
- It's another sign of the times and highlighted in the
Wall Street Journal (November 21). The Journal states: "Departing
board members cite too-frequent meetings and conference calls. (Thus)
a small but growing number....are quitting or planning to quit corporate
boards just when companies need them most."
-
- They give the usual reasons, but not the more likely
ones. Corporate directorships pay well for a limited amount of work -
six- figure compensation, stock options, and various other benefits as
well as gaining valuable interlocking relationships with other corporate
officials.
-
- So why give them up? Along with benefits comes liability
at a time many companies are floundering. Growing numbers face potential
insolvency, shareholder law suits, and other increasing downside uncertainties.
Citing too little time is a smoke screen. Busy people are rarely too busy
for things they feel are important. Avoiding unnecessary risk is one of
them.
-
- Gold - The Traditional Safe Haven in Troubled Times
-
- On November 19, Market Watch.com reported that "Retail
investors sharply increased their demand for gold bars and coins in the
past few months as they struggled to find a safe place for their money
amid the financial crisis...."
-
- On the same date, a World Gold Council press release
stated:
-
- "Dollar demand for gold reached an all-time quarterly
record of US $32 billion in the third quarter of 2008 as investors around
the world sought refuge from the global financial meltdown, and jewelry
buyers returned to the market in droves on a lower gold price. This figure
was 45% higher than the previous record in Q 2 2008. Tonnage demand was
also 18% higher than a year earlier."
-
- Record demand is showing up at retail and in exchange
traded fund (ETF) inflows. They were also offset by "inferred investment"
outflows by hedge fund liquidations to raise cash for redemptions.
-
- James Burton, World Gold Council's chief executive officer
stated:
-
- "Gold's universal role as a store of value has shone
through during this quarter helping (to) attract investors and consumers
to all forms of gold ownership. Looking forward, given the uncertainty
that surrounds the global economy, gold's safe haven appeal should continue,"
but so will the speculative side of the gold market.
-
- Earlier in the year, spot gold reached $1000 an ounce.
The price then briefly fell below $700, remained in the low to mid-$700
range (until on November 21 it spiked to $800), and reasons cited are
that institutional investors are selling desired assets to meet margin
calls on weaker ones. Perhaps so, but much more is going on as well.
-
- Markets are heavily manipulated, and gold among others
are targeted. For the precious metal, it's to hold down its price to
make dollars more attractive at a time it should be soaring and likely
will looking ahead with some forecasts of it reaching extremely high valuations.
-
- Noted analyst Richard Russell of Dow Theory Letters has
his view on gold and its price action. He believes "one way or another,
gold is being manipulated by certain sources. What group would least want
to see (it) heading higher? My answer is the Fed. (It's) exploding the
money supply. This would ordinarily foment inflation. Surging gold is
a red flag that the public understands. The Fed is doing everything it
can to hide the fact that it is devaluing the dollar via its" explosion
of the money supply.
-
- Russell believes that gold is in a primary bull market.
The longer its price is artificially depressed, the "greater the
bull forces within gold will struggle to express themselves."
-
- Even now, the New York Post reported (on November 18)
that "Governments Can't Handle (the) Global Run on Gold Coins....as
people around the world are demanding so many of the valuable coins that
government mints are having difficulty filling orders."
-
- The US mint is allocating them to restrict supply. It
increased its dealer price for a 10-ounce coin by 10% and one-ounce coins
by 3%, and one dealer says that customers wanting 200 gold coins have
to wait up to two weeks to get them. Six months ago they were available
immediately. In addition, some dealers turn customers away, and those
selling them demand a 10 - 15% premium over the Comex quoted price.
-
- It hasn't curtailed demand and why not. Gold is a global
thermometer that reflects monetary, political and economic stability
as well as marketplace demand - for investment, jewelry, or as the ultimate
hedge against uncertainty. When prices rise, it usually warns of trouble
- geopolitical, inflation, deflation, the loss of confidence in fiat currency,
or a possible looming depression so far not reflected in the metal's price,
but watch out.
-
- Gold's price may be resting for a time and is being artificially
held down, but for how long. If conditions keep deteriorating and money
creation remains too expansive, sooner or later gold may explode on the
upside.
-
- Petrodollar states may think so and are making large
gold purchases. In November, Saudi investors bought $3.5 billion worth,
reportedly as a safe haven at a time of crisis and falling oil prices.
Reuters said that Iran is converting some of its $120 billion in foreign
currency reserves to gold. Dubai dealers are running low on the metal
as demand is high.
-
- In China it hit 38.4 metric tons through September compared
to 24 tons for all of 2007. Gold jewelry demand in China reached 241.6
tons through September compared to 302 tons in 2007 when jewelry demand
grew by 26%. China is the world's second largest gold consumer.
-
- On November 14, The Standard (based in Hong Kong) reported
that "The mainland is seriously considering a plan to diversify more
of its massive foreign-exchange reserves into gold (because of) fears
about the long-term viability of parking most of (them) in US government
bonds" at a time America's budget deficit and national debt are soaring.
-
- Demand in India (the largest gold consuming market) is
also growing (up 31% from Q 3 2007) at a time global gold mining production
was 1133 tons in the first half of 2008 or 6% below the same 2007 period.
Gold supply was down 9.7% over year-earlier levels due largely to significantly
lower central bank sales. Those made under the Central Bank Gold Agreement
(CBGA) totaled 357 tons in the year ending September 26 - the lowest annual
figure since the first 1999 Agreement. Prices are falling, but Saudis
and other Middle East investors are buying and for good reason.
-
- World economic viability is sinking, and it's affecting
oil prices. They've fallen around two-thirds from their all-time high,
and producer states are worried. The Energy Information Agency projects
that OPEC may earn $595 billion in 2009 - way down from its earlier $979
billion net 2008 revenues and lower that $671 in 2007.
-
- So today's gold weakness and dollar strength may turn
out to be a shorter-term phenomenon than many observers believe. The 10-year
credit default swap (CDS) spread on US Treasuries provides a clue. The
cost of insuring against a US government default is soaring, and it's
happening to Britain and Germany as well. It's now many fold higher than
in late summer, a cause for worry, and likely because markets are pricing
in massive bailouts that may far exceed the current levels. In the US,
it already hit $4.2 trillion, it's rising, and hinting at a possible future
default or huge devaluation that's the same thing.
-
- In this environment, gold may be the safest of all asset
classes at a time none are safe, and no one can predict how bad things
may get before they improve. What's likely, however, is that the road
ahead will be painful, protracted, and unlike anything experienced before
so all the old rules don't apply, and no one knows what, if anything,
may work. This saga has a long way to run, and the path ahead is down.
-
- Stephen Lendman is a Research Associate of the Centre
for Research on Globalization. He lives in Chicago and can be reached
at lendmanstephen@sbcglobal.net.
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