International Forecaster Weekly

Fed And Treasury Exposed To Economic Upheavals

Declines the story of recent months, Treasury runs short of covering its deficit, government says one thing and does another, Shrinkage in the economy met with excess supply in retail, credit standards now tightening, monetization not providing expected results

Bob Chapman | July 11, 2009

The latest Treasury auction of $19 billion of 10-year notes was at a yield of 3.365%. The bid to cover was 3.28 to 1, the highest ever. This was the third of four sales this week totaling $73 billion.

Consumer credit fell $3.23 billion in May, as credit fell 1.5% to $2.5196 trillion from $2.522 trillion in April. Four monthly declines matches June-December of 1991. Big loans fell $400 million, or 0.3%. Revolving credit fell $2.9 billion, or at a 3.7% rate.

We are now al most six months into the depression approaching a 1932 scenario. America is now the world’s biggest debtor. The US has had a fiat currency for 38 years and major trade deficits for more than 30 years. Is it any wonder we are in depression? Is it any wonder the dollar is under pressure even though our government supports it at every turn in the market?

The world is looking aghast at the dollar as the Treasury runs short of money to fund its deficit beyond revenues of $1 to $3 trillion and as the Fed monetizes trillions of dollars. What would you think if you had 64.5% of your foreign exchange in US dollars? That is almost $1.8 trillion. Some of these buyers have ceased buying and if that continues interest rates will head higher and the cost of carrying such debt will increase. As a result the dollar, of course, would move lower.

Higher yields on 10-year T-bills translate into higher mortgage rates as real estate inventory continues to grow, a terrible formula for the economy.

We estimate fiscal 2009 to have a deficit of more than $2 trillion and incoming revenues will only make up less than half of that. In spite of the protestations of our Treasury Secretary Tim Geithner that the deficit will be reduced, our president guarantees $1 trillion annual deficits as far as the eye can see. Cuts will never come and the dollar will fall because that is the way the elitists want it to be. Only from the ashes of economic and financial collapse can the new world order rise.

Our government says one thing and does another. They want to maintain confidence and trust, but at the same time proceed with the destruction of the monetary and financial system.

We are told that next month the monetization will end, when in fact the Fed will not have completed its $3 trillion monetization of Treasuries and Agencies and bank toxic garbage.

Europeans, the Japanese and the British all want their currencies lower in value versus the dollar, believing that a cheaper currency is somehow a magic elixir for trade and, of course, that isn’t always the case. In fact, the latest efforts to subdue the euro haven’t been very successful. The dollar has been incapable of breaking up and out of 81 on the USDX. At the same time, for now the euro has retreated from $1.42 to just above $1.38, but it won’t last. Simply, the US is in worse trouble than the eurozone.

The latest madness to come out of CNBC/Wall Street and Washington is Rebuild America Retirement bonds. This idea is being foisted on us by none other than the resident CNBC shill Jim Cramer.

These bonds do not as yet exist, and Cramer’s proposal regarding them is a trial run to gauge investor reaction. The idea was proposed on “Mad Money,” which we found appropriate. These bonds supposedly would strike a medium between risk, safety and income. They certainly wouldn’t offer growth with the dollar falling in value. Cramer said investment options are somewhat limited today, and that he didn’t want to see people falling prey to investment scams. He probably had his friend Bernie Madoff in mind.

This “Mad Man Cramer” has called upon the Treasury Department to issue 30-year, 5% bonds. As you know our Treasury has so much paper to sell that it has had to ask the Fed to monetize, create money out of thin air, to fund $3 trillion in treasuries, Agencies (Fannie –Freddie-FHA, etc.), and toxic garbage securities from America’s biggest elitist banks. Inadvertently, the secret Fed refuses to divulge what they are paying for such garbage. These 30-year, 5% Treasuries would be offered as a way to help families, who are desperate after having lost some 50% of their investments in the market to recover their savings. You might call them modern day Continentals.

This newest monstrosity is designed specifically for 401(k)’s, IRA’s and 529 college savings plans. They’d be commission free and the 5% would compound. Cramer tells us they’d double in 14.5 years.

Supposedly these funds would go toward economic recovery. How can that be when the Treasury is struggling to cover a $1 trillion plus budget shortfall? What Cramer and the elitists are trying to do is entice the average American into funding the administrations out of control spending. Don’t forget our president has told us we’ll have annual budget shortfalls of $1 trillion or more as far as the eye can see.

Fools and their money are soon parted. This is another scam to keep the American economy afloat. Anyone who invests in US government paper is stupid and they deserve to lose their money.

This shows you how the elitists totally control CNBC to do their bidding.

July 3 MBA Mortgage Applications rise 10.9%.

About $29 billion from President Barack Obama’s $787 billion economic stimulus package has been provided to state and local governments, a pace slightly ahead of schedule, according to congressional auditors.

Most of the money is allocated for health care and education and makes up about 60 percent of the stimulus funding states and local governments will get for fiscal 2009, the Government Accountability Office said in a report obtained by Bloomberg News.

More than 90 percent of those funds are being used to maintain benefits under Medicaid, the government health-care plan for low-income Americans, and to shore up education programs, the report said.

Many states are using money allocated for highway improvements on repaving projects because they put people to work quickly, it said. State officials said bids are coming in below estimates because so many contractors are looking for work.

The analysis was based on information from 16 states and the District of Columbia, which represent about 65 percent of the U.S. population.

The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

The response by banks to this “growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. “The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”

There were 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, more than twice the number at the end of last year, with hotels and retail among the most “problematic,’ Real Capital Analytics Inc. said in a report yesterday. Losses on commercial mortgage-backed securities, or CMBS, will total 9 percent to 12 percent of the market, or as much as $90 billion, said Richard Parkus, a research analyst for Deutsche Bank Securities in New York.

Government insured home loans jumped to 36 percent of all U.S. mortgage applications in June, the highest since 1990, the Mortgage Bankers Association said.

Federal Housing Administration and Veterans Administration loan applications increased in market share from 25.7 percent in May and from 27 percent a year earlier, the Washington-based trade group said today in a statement.

Borrowers are turning to government backing to offset stricter lending by banks. About 50 percent of banks tightened requirements for prime borrowers in the first quarter, asking for bigger down payments and more savings, the Federal Reserve said in June.

“Credit standards are tightened so much, home-buyers have turned to the government,” said Michelle Meyer, economist for Barclays Capital. “I think that as the financial markets normalize and credit markets heal, you’ll start to see the share of conventional mortgages increase again.”

The Mortgage Banker’s index of applications to purchase a home or refinance a loan rose 11 percent to 493.1 in the week ended July 3. Purchase applications rose 6.7 percent while requests to refinance gained 15 percent.

The number of Americans filing claims for unemployment benefits fell last week to the lowest since January, as early automotive plant closures altered the timing of layoffs that typically happen at this time of year.

Initial jobless claims fell by 52,000 to 565,000, a lower level than forecast, in the week ended July 4, from a revised 617,000 the prior week, the Labor Department said today in Washington. Meanwhile, the number of people collecting unemployment insurance jumped to a record in the prior week.

Manhattan apartment rents fell as much as 18 percent in the second quarter from a year earlier as rising unemployment curbed demand.

The median price dropped 3.1 percent to $3,100 a month, appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. Studio prices fell 18 percent to $2,000; one-bedrooms declined 13 percent to $2,795; two-bedrooms were down 5.1 percent to $4,550 and three-bedrooms dropped 4 percent to $7,673. A separate report from broker Citi-Habitats Inc. showed average rents fell 8 percent for studio and one- bedrooms and 11 percent for two- and three-bedrooms.

U.S. wholesale inventories fell again in May as distributors kept working to clear their shelves of excess supply built up by the reduced demand of the recession.

Wholesalers lowered inventories 0.8% to a seasonally adjusted $402.2 billion, the Commerce Department said Thursday. April inventories fell 1.3%, revised from an originally reported 1.4% drop.

A gauge of excess supply, the inventory-to-sales ratio, fell a second straight month, indicating wholesalers were slowly getting inventories under control.

The sales of these middlemen of the economy crept up 0.2% in May to a seasonally adjusted $311.3 billion, after staying flat in April. April sales were originally seen down 0.4%. For the year, sales in May were 19.9% lower.

Year over year, inventories were down 7.6%.

The nation’s retailers were already reeling from the new consumer frugality but in June, incessant rain and rising unemployment further dampened sales. Stores that had made strides in recent months reverted to double-digit declines.

Overall, the industry posted a 6.7 percent decline in sales for the month, in contrast to a 3.9 percent increase a year ago, according to the Goldman Sachs Retail Composite Index. Wal-Mart, which had been a bright spot in the retailing world and helped lift the overall industry number, is no longer reporting monthly sales. Retailers are also facing challenging year-over-year sales comparisons because this June there were no tax rebate checks to help bolster shopping.

The US Treasury on Wednesday pushed ahead with scaled back plans for public- private partnerships to buy toxic assets, naming nine fund managers and allocating $30bn of public funds, but without securing any further backing from the Federal Reserve.

Officially, the US central bank is still considering providing additional financing for investors buying bubble-era residential mortgage-backed securities, but its decision not to announce anything on Wednesday strongly suggests that it does not intend to take this step.

Government insured home loans jumped to 36 percent of all U.S. mortgage applications in June, the highest since 1990, the Mortgage Bankers Association said.

Federal Housing Administration and Veterans Administration loan applications increased in market share from 25.7 percent in May and from 27 percent a year earlier, the Washington-based trade group said today in a statement.

Borrowers are turning to government backing to offset stricter lending by banks. About 50 percent of banks tightened requirements for prime borrowers in the first quarter, asking for bigger down payments and more savings, the Federal Reserve said in June.

“Credit standards are tightened so much, home-buyers have turned to the government,” said Michelle Meyer, economist for Barclays Capital. “I think that as the financial markets normalize and credit markets heal, you’ll start to see the share of conventional mortgages increase again.”

The Mortgage Banker’s index of applications to purchase a home or refinance a loan rose 11 percent to 493.1 in the week ended July 3. Purchase applications rose 6.7 percent while requests to refinance gained 15 percent.

In June, the government-insured share of purchase applications climbed to 38.6 percent from 27.8 percent a year earlier, the MBA said. The federally backed share of refinance applications increased to 33.6 percent. It touched a record high 38.4 percent in October, according to the MBA.

Home loan rates climbing from a record low 4.78 percent in April are one reason buyers are looking for other ways to reduce costs. The 30-year fixed U.S. mortgage rate was 5.2 percent this week, according to McLean, Virginia-based Freddie Mac.

“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, associate vice president of economic forecasting for MBA. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!

God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.