The End of The Great Bailouts is Approaching

Broke central banks, UK must monetize or collapse, 20 major countries on the edge of insolvency, No way but down for the Stock markets, defaulting on bailout payments, Fed audit going through Senate, shrinkage of high-end properties, VAT coming.

June 23 2010

The devastating results of Keynesianism didn’t take hold of the western world until after WWII. Cycles were created for the accumulation of wealth. A boom occurs and you get wealthy from investments on the way up and even wealthier on the way down, because the elitists are controlling the supply of money and credit and interest rates. That is the real underlying mission of the Fed, which is owned by banking and Wall Street. All the power to control markets and create inflation and deflation lies with the Federal Reserve. Politicians do not create monetary policy, the Fed does. The politicians do as they are told. They know from time to time there will be economic pain, but the payoffs are so good they learn to live with it.

This time the damage is so bad that the Fed has been forced to monetize trillions of dollars of debt. The disease this time has spread to Europe with the ECB, using, quantitative easing by simply creating money out of thin air. That is something they said they would never do. The only real liquidity in Europe is emanating from the ECB and the Fed. We believe that eventually countries will fail, as Iceland has. You know all the possible victims. There are presently 20 of them including the US and UK. Three-card Monte games do not last forever. If liquidity is that scarce then where is the money coming from? The only place it could be coming from is the Fed. Not only is a $2 trillion bailout in process, but also as banks and thrift institutions fail stress tests some will be bailed out by being absorbed by other supposedly solvent institutions. When that option is gone then governments must bail them out. When the monetization hits the entire system collapses. After 50 or more years in this business we believe the system is definitely going to fold.

All the central banks involved are broke or virtually broke. If they are not broke why is their condition a big secret? The Bundesbank told Spain last week that we do not want stress test results made public. The reason obviously was because of the sad condition German banks are in and their penchant again to keep everything secret. These are the same people who want a one-world currency in the form of an SDR, which is worthless, because it has no backing. It is just another fiat currency. They all are in such bad shape they cannot even sterilize their interventions. The new trillions we see in the system in Europe and the US cannot be sterilized.

In England we see the Bank of England financing and monetizing the UK budget deficit. The alternative is financial collapse. The UK is in such terrible shape that they refused to partake in the almost $1 trillion bailout of the euro zone PIIGS. Recently the Fed bought $1.25 trillion in toxic waste and $800 billion in Treasury paper for over $2 trillion dollars. Adding to the incompetence and desperation, the ECB is buying the toxic debt of euro zone that are on the verge of bankruptcy. All entities are extending their debt buying programs with money they do not have and for people that can never pay the debt back. The central banks do not care as they save the financial institutions. The citizens are an afterthought. Not one of them wants to give up their power base. They don’t want to declare insolvency – they want the public to pay their debts. Weimar wasn’t much different, except it wasn’t caused by German greed, but by the vengeance of its enemies to bring about a war worse than the war to end all wars. This time it is propelled by greed and a quest for world government.

The result of all this is that some 20 major countries are on the edge of insolvency, not to mention scores of other countries. We see one funding crisis after another. Even major countries can’t sell their bonds even with higher than normal yields. Interest rates are close to zero. We suppose they could go into minus territory, where they would pay you to borrow money. Don’t laugh, it has happened more than once. It was also not uncommon to see negative lease rates, as countries engaged in the suppression of gold prices. Governments do anything they want. This same state of mind exists in increases in money and credit. Presently almost all governments are in trouble. If they haven’t made a dog’s breakfast out of their own economies they have bought bonds from those who have and stand to take stiff losses. Look at the euro zone’s almost $1 trillion bailout of the PIIGS. Do you really think those bonds will ever be paid off – we don’t. It is this concept of interconnectivity that as the players are finding out it is a disaster. How can solvent European countries even contemplate a $2 trillion bailout for nations that really do not care if the debt is ever paid off? That is how today’s world turns.

We fall back on a very important underlying concept and that is if you do not understand what is really going on behind the scenes you can never get the right answers and conclusions. People talk about cycles and super cycles as if they occurred out of nowhere. They all happen by design. As an example, the economy has improved, but that is because of $800 billion in stimulus and Fed spending. The growth that evolved was tepid at best. Now that the economy is trailing off, the stimulus having expended itself, and the question is what comes next? The only way to stave off recession/depression is to have another stimulus plan. That, of course, doesn’t affect the root causes - it just gains time.

In this debt parade we find it interesting that but for one source, we see no mention in the media of America’s contribution, via the IMF, of some $60 billion. The frauds and criminality continue unabated. Nowhere do they tell you that among the biggest speculators were the banks that you are being forced to bailout.

Over this past year we have seen a stampede into corporate and Treasury bonds, at miniscule yields, due to the perception that bonds are safer. These investors are in for a big surprise as banks and other professionals start to factor in the risks involved, which throw off such poor returns. As the world economy runs out of stimulus and liquidity that has been chocked off by central banks, the realization will be that the prospects of countries and corporations have been severely diminished. GDP is falling and could in many countries, led by the US, should be negative for the last two quarters of the year and beyond. There is no safety in bonds, particularly municipals. Bonds are in a bubble, as many will soon discover. If income falls the ability to service bonds gets more difficult, both by government and corporations. While these myriad problems exist our Congress grovels before the political masters of Wall Street, banking, insurance, big Parma and transnational conglomerates. Pricing of risk is now impossible, which means risk rises exponentially. Eventually this reality will make credit harder to access as we move into the future.

What is important more than anything else are jobs and those who create them cannot easily borrow money. At the same time free trade, globalization, offshoring and outsourcing kill our jobs and fill the coffers of transnational conglomerates that keep their profits tax-free offshore. You cannot do that. While this transpires yourCongress stuffs their pockets with cash from elitists who own them.

The troubles we see in Europe are but a reflection of what is going on worldwide. This leads us to the conclusion that Americans and others are being systematically betrayed by their legislators. – A problem that can be remedied in November by removing almost all of them.

The European rescue attempt will not work nor will phony, temporary stimulus, or increased issuance of money and credit. Do not forget as well that a great deal of that European debt is being held by US institutions. Expending volatility is on the way, as the debt implosion continues. Is it any wonder, as we predicted, gold and the shares are hitting new highs.

Stock and bond markets have no way to go but down. If you are not out of both, with the exception of gold and silver shares, you had better be. The big money, the professionals, are in a state of panic and that money has to go somewhere. Yes, you guessed it, and that is very bullish for gold and silver related assets. As an added incentive the dollar is in the process of completing a head and shoulders, which means the rally is over and the dollar is headed down. Even though the dollar decoupled from gold over a year ago, as we predicted, and probably only affects gold by some 20%, it is still gold bullish and not neutral or negative. Adding further fuel to the fire we predicted four years ago not only real estate would collapse and that foreclosures would wipe out trillions in real estate values, but that millions would walk away from their underwater homes. Homes where mortgages were greater than the home value. The first wave began two years ago, but we now see affected those with good to excellent credit who are defaulting because one or even two breadwinners have lost their jobs. Now we have those underwater that won’t sit with a wasting asset. Besides they realize this could now go on for years, perhaps two more years to the bottom of the market and many more before any semblance of normality is seen. They have now become about 13% of all defaults, up from 4% three years ago. Mortgage holders also see this as payback for the banks that caused the debacle and screwed the homeowner in the first place. Banks aided and abetted all kinds of fraud and no one has ever been charged, never mind sent to jail. The Fed and government also bailed out the banks and not the public and that has further incensed homeowners and others. It pays to be a crook. The banks are losing about $100 billion a year and that is funneled into the economy via other channels – another stimulus plan, that is because many no longer pay a mortgage or rent. In the next two years homes in negative equinity will rise from 25% to 50% to 60%. Lots of lenders are going under and that is the way it should be. It, of course, will be devastating for the economy.

Last week saw the Dow gain 2.3%, S&P 2.4%, the Nasdaq 100 3.6% and the Russell 2000 2.7%. Cyclicals gained 2.4%; transports 2.6%; consumers 1.7%; utilities 4%; banks 2.3% as broker/dealers fell 0.4%. High tech rose 3.1%; semis 6.2%; Internet 2.4% and biotechs 2.9%. Gold bullion rose $29.50 to a new record high, the HUI rose 6.8% and the USDX, dollar index, fell 2.2% to 85.58, which could be ominous.

Two-year T-bills fell 2 bps to 0.68%; 10-year T-notes fell 1 bps to 3.23% and the 10-year German bund rose 16 bps to 2.73%.

Freddie Mac 30-year fixed rate mortgages rose 3 bps to 4.75%; one-year ARMs fell 9 bps to 3.82%; 15’s rose 3 bps to 4.20% and 30-year jumbos rose 1 bps to 5.58%.

Fed credit expanded $8.3 billion to $2.322 trillion, up 9.9% YTD and 13% YOY. Fed foreign holdings of Treasury and Agency debt increased $4 billion to a record $3.080 trillion. Custody holdings for foreign central banks rose $125 billion YTD, or 9.1% annualized, or 11.9%.

M2 narrow money supply rose $7.3 billion to $8.602 trillion. It is up $90 billion YTD and 2% YOY.

Money market fund assets fell $34.5 billion to $2.806 trillion. Year-to-date it has fallen $488 billion and YOY 23.6%.

Total commercial paper out rose $18.8 billion to $1.083 trillion. CP has declined $87 billion, or 16.1% YTD and YOY 9.9%.

BP on Monday faced new allegations that it had ignored safety warnings before the Deepwater Horizon rig exploded – sending its shares down another 2pc in London.

While a congressman, Emanuel asked for trades with embattled gov.

Emanuel agreed to sign a letter to the Chicago Tribune supporting Blagojevich in the face of a scathing editorial by the newspaper that ridiculed the governor for self-promotion. Within hours, Emanuel's own staff asked for a favor of its own: The release of a delayed $2 million grant to a school in his district.

More than 90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.

The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial's analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

Under the TARP program, the U.S. Treasury invested in preferred shares issued banks looking for funds. The banks were to make regular dividend payments to the Treasury, and have the right to repurchase the shares at some point in the future.

While many of the largest U.S. banks easily repaid billions in TARP aid, more than 600 smaller banks still hold $130 billion from the program, created at the height of the financial crisis.

In some cases, small banks are renegotiating the repayment terms. Midwest Banc Holdings [MBHI 0.019  0.002  (+11.76%)], for example, agreed to swap $84.8 million in preferred shares issued under the TARP program in 2008 for $15.5 million in common shares. That would have meant an 80 percent loss for the government—and the U.S. taxpayer—on the initial investment. But the swap was contingent on the bank raising more private capital, which it failed to do. Regulators seized the bank in May.

The next quarterly TARP payments to the U.S. Treasury are due by August 16.


The Senate will accept an expanded Federal Reserve audit proposal from the House as part of Wall Street conference committee deliberations, Sen. Chris Dodd (D-Conn.) told the panel Wednesday evening.

The House proposal allows repeated future audits of discount window and open market transactions, whereas the Senate proposal had only allowed a one-time audit.

The Senate's provision had already been stronger than what the Federal Reserve and Treasury Department had previously been willing to accept.

The details of the final proposal are still being worked out, but momentum is with advocates of Federal Reserve transparency. Depending on the specific language, however, Fed critics are worried the House proposal will still allow the Fed to keep information secret by keeping certain operations ongoing.

Look at unit sales over $1 million in Sarasota County Florida and all appears well. Twelve-month sales equaled 128 units at March 1 versus 151 units the previous year. The 15 percent fall in sales is real, but it isn’t scary. If you want to sell your home there, you may not like the rest of the math as much.

Talk to Hannerle Moore, an agent at Michael Saunders & Co. She suggests a sobering strategy. Reduce prices at least 40 percent from 2005 highs.

“I tell them, ‘You could be the lady who has had her home on the market for 936 days, or you could sell,’” Moore told the Sarasota Herald Tribune (Are High-End Properties Going Down? 4/26/10).

In putting together this story, I was unable to get all the data I was after on high-end inventory. I am firing shotgun to lead to something worth knowing. My review runs near and far in six posts starting today and includes most importantly data on the mortgage performance of jumbo mortgages. My hypothesis is that mortgage performance serves as a leading indicator of both future inventory and price trends. The worse the payment performance, the more prices will fall. Signs of serious distress on many other measures have been in open evidence for expensive properties and we will see it most clearly in jumbo mortgage performance.

Consider the statement of National Association of Realtors’ chief economist Lawrence Yun. Almost exactly a year ago he said the supply of existing homes for sale over $750,000 had reached a forty-month supply (High-End Foreclosures Are Next, 5/27/09, CNBC). Translate that into something you understand: Inventory was SIX TIMES higher than it should be.


Inventory is the king of the castle. We need to analyze it in guessing the direction of future prices. The high-end market is always a small presence, but also of peculiar significance — to the owners of those properties.

Some stories of the log-jam in high-end property are dramatic. In Charlotte in 2009, less than 3% of all homes listed above $500,000 closed each month. In 2007, homes sales in that category closed at a 33% rate. My pigeon math says the old times were ten times better than the new times. How else to describe this but as a frightening fall off (High-End home lending market has Wells Fargo on line.  4/9/10. Charlotte Business Journal)?

The Wall Street Journal reported in a front page story that supply in June of last year of unsold homes priced above $750,000 equaled 17 months of sales from an already high 14.5-months the previous year (I don’t know yet why Dr. Yun’s report had the supply at 40 months from a story in the same time period.).

An agent from the wealthiest suburb of Chicago had an unmixed report on supply last August.

“We’re extremely oversupplied,” said Sherry Molitor, a real-estate agent in Kenilworth Illinois – the boyhood home of your HousingStory.net blogger (High-End Homes Frozen Out of Budding Housing Rebound. 8/3/09. WSJ).

She reports today (June 2010) that the Kenilworth market supply equals 18 months, down from 22 months a year earlier. The average selling-period is 349 days and 49 homes are listed for sale of a total of 800 households. Ms. Molitor believes values have fallen about 25 percent in Kenilworth and in the other wealthy suburbs of the North Shore of Chicago (Wilmette, Winnetka, Glencoe, Highland Park, Lake Forest).

High-end Dallas also looks long in tooth. At the end of this March, listings over $500,000 provided 20 months of supply and 4500 units. Overall that market had six months of supply. This obvious indicator of high-end distress may be true in all markets across the United States. Each one is different and needs to be studied on its own, but national trends are real and must also be considered.

The element of subterfuge is highest in expensive neighborhoods. You can expect ambitious concealment when a thing which requires massive sacrifice – blowing 5k or 10k out the door every month just to keep running in place — has a price falling in the wrong direction.

One Russell Shaw of John Hall & Associates (self-reporting as in the top 1% of all property agents nationally) says that real estate owned by banks following a foreclosure is big business in high-end homes and the only game in town for asset managers whose work is reselling homes lost after payment failure and bank seizure.

“Those high end agents are getting inventory, lots of it,” Mr. Shaw said (The Shadow Inventory Equals Shadow Gibberish.  5/8/10, AgentGenius.com).

The fall in price can be wicked. If you think your digs are north of $13 million in value, take note that a Walla Walla Washington residence boasting 15,000-square-feet listed for $13 million and closed last spring for $3.5 million. Truly a Hannibal haircut (You remember the scene where one’s scalp is now outer brain – as the scalp has been neatly removed by Hannibal. So much better for your brain to take in the sun and produce vitamin D.).

So what do we know so far about the direction of inventory of expensive properties? A pro says to knock down prices 40% to list in Sarasota County. The National Association of Realtors reported a high-end supply of 40 months — or more than SIX TIMES higher than it should be. Charlotte is selling out ten times slower than in better times. Kenilworth Illinois is “extremely oversupplied”. And in Lake Forest power houses are selling, but it takes 20 years to get rid of the thing. Does anybody see a trend? I have one question for you Mrs. Lincoln: Did you love your husband?


More than 90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.

The SNL Financial statistics show 91 banks missed their dividend payment under the Troubled Asset Relief Program.

The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial's analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

Under the TARP program, the U.S. Treasury invested in preferred shares issued banks looking for funds. The banks were to make regular dividend payments to the Treasury, and have the right to repurchase the shares at some point in the future.

While many of the largest U.S. banks easily repaid billions in TARP aid, more than 600 smaller banks still hold $130 billion from the program, created at the height of the financial crisis.

In some cases, small banks are renegotiating the repayment terms. Midwest Banc Holdings [MBHI  0.02  ---  UNCH  (0)   ], for example, agreed to swap $84.8 million in preferred shares issued under the TARP program in 2008 for $15.5 million in common shares. That would have meant an 80 percent loss for the government—and the U.S. taxpayer—on the initial investment. But the swap was contingent on the bank raising more private capital, which it failed to do. Regulators seized the bank in May.

The next quarterly TARP payments to the U.S. Treasury are due by August 1.


Voters are forcing Democrats into an election-year equation they may be unable to solve: How to spend more money to create jobs and at the same time reduce the deficit.  Democrats have abandoned billions of dollars in proposed jobs initiatives to avoid adding to the deficit, risking that a pending bill may now seem ineffective to the 15 million unemployed. To further cut costs, they added more than $50 billion in taxes on buyout managers, oil companies and other businesses, seized upon by Republicans as job killers.  Yet there are few signs Democrats’ contortions to avoid adding to the deficit are winning over voters, especially when the savings are compared with this year’s $1.5 trillion shortfall.  ‘We’re in a vise,’ said Representative Gerald Connolly - It’s a real dilemma.

California, already facing a $19.1 billion budget deficit, will have to pay 18% more in retirement costs for government workers to the California Public Employees’ Retirement System. The fund’s 13-member board voted today to boost the state’s contribution by $600.7 million, to $3.9 billion. Fund managers said an increase is needed after a 24% drop in asset value in the past fiscal year and because of higher benefit costs as retirees live longer.


  New York Governor David Paterson set a June 28 deadline for an accord on the state’s overdue budget and said if lawmakers don’t cooperate he will submit an emergency bill that would have to be passed or else government would shut down. Lawmakers, under pressure from Paterson, have passed 11 consecutive weekly spending bills that trimmed the $9.2 billion deficit in the governor’s $135.2 billion budget to about $8.1 billion.


Investors are ignoring warning signs in the $2.8 trillion municipal-bond market, raising the risk of a reckoning, according to some market specialists.  Numerous municipalities are struggling financially. A Rhode Island city recently said it faces insolvency. Harrisburg, the capital of Pennsylvania, is considering a municipal-bankruptcy filing. And famed investor Warren Buffett recently warned of a ‘terrible problem’ ahead for municipal bonds. But municipal-bond prices aren’t reflecting much concern.


Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said.  Citi Capital Advisors, which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said.


Listen up – those of you who want to move out of IRA’s should consider this: With almost 60% of national spending devoted to Medicare, Social Security and other mandatory programs, shrinking the deficit with budget cuts would require the elimination of virtually all entitlement outlays. "You can't solve the deficit problem with spending cuts alone. It's inevitable that we're going to have to raise taxes to do so."… the tax cuts enacted by President Bush in 2001 and 2003 will expire at year's end, and tax rates could go up significantly for almost all taxpayers. The current 10% bracket will disappear. While income cutoffs haven't been specified, couples earning up to about $70,000 would probably pay a 15% rate. The 25%, 28%, 33% and 35% brackets would most likely pop up to 28%, 31%, 36% and 39.6%.

Letting the Bush cuts lapse also would push the long-term capital-gains rate from 15% to 20%. Dividends, now taxed at 15%, would become subject to rates on ordinary income.

Obama outlined in his 2011 budget proposal: Extend the tax cuts for most taxpayers, but let them expire for couples earning more than $250,000 and singles making more than $200,000. This means that the top two tax rates would rise to 36% and 39.6%...If you've been considering selling any highly appreciated investments—whether a stock or a second home—consider doing so in advance of the capital-gains increases… [This will impair stocks in Q3 &4.]

http://online.barrons.com/article/SB50001424052970203296004575308923080973564.html?mod=BOL_hps_highlight#articleTabs_panel_article%3D1


Barron’s also notes that coming tax hikes will not produce enough revenue to remedy the budget mess; so be prepared for a VAT in coming years, or the theft of your retirement.

 


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