International Forecaster Weekly

We Are In A Depression, Not A Recovery

Accept that we are now in a depression, Stock Markets still grossly overvalued, poverty rates increase across midwest, a lots opportunity to regulate the banks,Goldman Sachs reports record profits and still bonusing employees richly, mainstream America goes on a financial diet, suburbs now home to American poor.

Bob Chapman | January 23, 2010

Few professionals are yet willing to admit we have been in a depression for the last year. You have to understand the position that economists and analysts are in. They work for corporations, insurance, Wall Street, banking and government and if they thought we were in a depression and they publicly announced that all chances for advancement would be lost or they would be squeezed out of the firm or simply fired. Under such circumstances can you ever expect that you get the truth? We don’t think so. Furthermore the depression we are enveloped in is far from over. The recession encompassed a drop in real GDP in the midst of a credit crisis. The crisis was the result of over-extended credit, prohibitively low interest rates, massive speculation by banks, brokerage houses, insurance companies, and corporations worldwide. It just didn’t happen it was planned that way. We saw that recently in testimony before Congress when CEOs of these financial firms admitted they made a mistake in the process of enriching themselves. The worst sin was the criminal securitization of mortgages and the deliberately criminal mislabeling of their ratings. Then making matters worse those who sold this toxic garbage to their clients such as Goldman Sachs, JP Morgan Chase and Citigroup were shorting the product that they had just sold to their best clients. What kind of monsters are these people? Unethical doesn’t go far enough. It was criminal. These are the same characters, along with the Fed, and others, who gave us the dotcom boom and collapse and then foisted the real estate boom on our economy. The result has been deflating assets and contracting credit offset by massive lending, money and credit creation by the Fed and monetization, all temporary expedient measures, which in the context of history has led to failure. This has been in process for seven years. This second major abuse of our system in 14 years has presented a terrible dilemma and that is where we are today. Our monetary policy hasn’t worked and won’t work and there has been and presently is little fiscal control in Washington. This is no normal recession; it is a depression.

We have zero funds rates and up until six months ago M3 expansion of more than 17%. The Fed has monetized trillions of dollars of Treasuries, Agencies and toxic waste and now we are told we are in recovery – the worst is over. We wish we could agree, but we can’t. We are reenacting the same mistakes of the past all over again. Unemployment is close to the depression levels of the “Great Depression” and is still expanding albeit more slowly. Money velocity has fallen even after the massive infusion of aggregates. Liquidity is not flowing into the economy it is pouring into Wall Street to aid and abet more speculation, which has sent the Dow from 6600 to 10,700. This game cannot be played indefinitely. Wall Street cannot continue to prosper as the economy remains stagnant, and unemployment climbs higher.

The market is grossly overpriced and the effect of favorable news will begin to wane. It should be noted that insiders are selling into the never-ending rally, and mutual funds have very little money flow coming into the funds. That, of course, is our government at work manipulating the market. Just last week insiders bought $18 million worth of shares and sold $419 million.

This to us is more proof that the stock market is the most overvalued since September 1987, which brought about the market collapse of 10/19/87 and resulted in August 1988 in the Executive Order, “The President’s Working Group on Financial Markets,” which has led to market manipulation and the end of free markets.

That and the bailout of banks, brokerage firms and insurance companies too big to fail, those same entities carrying two sets of books as authorized by the BIS, FASD and the SEC, government purchase of stock in selective Illuminist controlled companies, and government control of the mortgage and real estate markets. This give you corporate fascism at its finest. We see intervention everywhere and that is not free markets.

How can there be a recovery with 22.5% unemployment, and with the additional threat of further unemployment? Who will buy the new housing and the tremendous inventory overhand? What will happen to the commercial inventory building up? Who has money in America to buy cars and trucks? Credits to buy housing for subprime and ALT-A buyers will end up with a 50% failure rate. Cash for clunkers was a colossal failure. Such exercises in futility only buy time, just as stimulus packages, and monetization do the same thing. The elitists behind the scenes know this just as we know this. That means the colossal deficit increase of $1.4 trillion a year will add 10% yearly to the federal debt to GDP ratio that will be over 100% by 2011. The tax liability to service this debt will be overwhelming. Government debt is rising exponentially and if further stimulus is not added the credit crisis will be renewed. This is why the Fed cannot remove further liquidity from the financial system, especially after having taken M3 from 17 to 18% to 6%. Incidentally, England and the ECB have done the same thing, and they still see rising inflation. If further stimulation is not forthcoming, or war, or default comes, we will see inflation reverse and deflation take over and that could last for ten years or more. This deflation, if allowed to take its course, will cause losses of $12 to $15 trillion from the economy and cause unemployment to rise to 40% to 50%. That would also entail cutting extended benefits. That would give us the scenes we saw in the 1930s. The debt we are facing knows no precedent in modern times, and there is no possible way it can be paid.

Bad debt is piling up again in residential and commercial real estate as well as in personal and business debt. This in part is why lenders are not talking about it if they can help it, but they are not lending. Without further lending increases the economy cannot function efficiently because it is so dependent on credit. That means higher unemployment, fewer buyers and a slower economy. If you think foreclosed inventory is bad now wait until the second wave hits and it is going to hit. If you are under water on your mortgage you do not care anymore. You stop paying your mortgage and you live rent-free for a year or more. There is no longer any stigma to walking away or going bankrupt. All the Mickey Mouse games being played by government to keep people in their homes are not going to work. Subprime and ALT-A loans are not the answer. They start going into default in a big way next year as the taxpayer again foots the bill.


Where does the accumulation of debt end? For the two fiscal years ended 9/30/99, the public increased Treasury debt $5 trillion to $7.5 trillion or by 50%. The Fed has purchased 80% of Treasury debt yoy, increasing the monetary base from $850 billion to $2 trillion, which includes Agencies and MBS. Seeking cover on their announcement, they said on Christmas they would supply unlimited funds for three years to Fannie Mae and Freddie Mac. Government liabilities made in behalf of the American taxpayer since the third quarter of 2007 have jumped 61% to $3.62 trillion. It is our opinion that the inflation caused by funding and monetization over the next decade will be very disruptive and expensive to US dollar users as purchasing power falls. That translates into an additional loss in buying power of some 50%.

If liquidity stays at current levels the stock market will fall as it flourishes on increasing liquidity. In addition, higher inflation rates tend to push stocks lower. If we are correct and there is a second credit crisis ahead of us, M3 will rise again and monetization will be pushed into high gear again.

The banks make their money trading for their own accounts. They won’t have much in the way of earnings if legislation passes, the largest manipulations in history would come to an end.

The President has called for limiting the size and trading activities of financial institutions to prevent risk taking and another financial crisis. He also said there should be no proprietary trading. We are told Goldman Sachs will benefit from the President’s proposal to limit Wall Street risk by forcing deposit-taking banks to unwind trading operations.

Again the commercial paper market fell by $10 billion to $1.092 trillion. Asset-backed commercial paper rose by $3.5 billion to $430.0 billion.

Unsecured issuance fell by $9.9 billion versus rising $12.7 billion in the prior week.

Democrats have completely lost their moorings. They want to allow government to borrow an additional $1.9 trillion to put the national debt at $14.3 trillion. It would need 60 votes to pass.oqHo

Food prices are roaring upward again as the PPI rose 0.2%. That is a 4.4% gain month-on-month.

Housing starts were 575,000 and building permits rose 653,000. Starts fell 4%. How can any sane builder be building when official and bank hidden inventories are well over a year. Groundbreaking fell a record 38.8% to an all-time low of 553,000 units. Single-family starts fell 6.9% in January. New building permits rose 10.9% for all of 2009 permits fell 36.9%. A Florida builder who was going to build 5,000 units declared bankruptcy yesterday.

Americans haven't been fooled by the Dow's rise. What they see ahead are more taxes. Economists may see the recession as being over, but the man on the street does not. Roughly 60% of the public believes the recession still has a way to go, a NBC/Wall Street Journal poll reported last October.

There are sound reasons for this gloom. Consumers have learned a bitter lesson. They understand that increased consumption—private and public—will have to come from income and not borrowing, and income will have to come from employment. Today, mainstream Americans are going on a financial diet amid deteriorating family finances. By 2008, suburbs were home to the largest and fastest-growing poor population in the country.

Between 2000 and 2008, suburbs in the country’s largest metro areas saw their poor population grow by 25 percent—almost five times faster than primary cities and well ahead of the growth seen in smaller metro areas and non-metropolitan communities. As a result, by 2008 large suburbs were home to 1.5 million more poor than their primary cities and housed almost one-third of the nation’s poor overall.

Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. In 2008, 91.6 million people—more than 30 percent of the nation’s population—fell below 200 percent of the federal poverty level.

The timing was political: the president spoke on the day that Goldman Sachs announced fourth-quarter earnings of $4.95bn. Those of a more populist nature than Mr. Obama – both on the left and on the right – will say that he comes late to the game

Indeed, the White House and the US Treasury resisted the backlash against bankers earlier in 2009 – they opposed the punitive tax proposed in the House of Representatives. Instead of using the control they enjoyed over the banks through the troubled asset relief program in 2009, the authorities rushed to free banks from the restrictions associated with Tarp.

Mr. Obama may now be ruing this lost opportunity. The public mood has swung against Wall Street – to which Mr. Obama appears too close for comfort. Trillion-dollar bailouts for people on million-dollar salaries have infuriated Americans living in fear of losing their jobs and their homes.

Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment.

In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1. As of January 13, the Fed held $5.9 billion in dollar "swap" agreements with foreign central banks, down from $63 billion in early September and $583 billion in late December 2008 as the financial crisis was worsening. [This is very important. Without the swaps supporting the dollar in the Forex and buying Treasuries by foreign central banks will recede. The dollar will fall and there will be more monetization.]

The Fed balance sheet for the week ended yesterday declined $39.849B (Expiry has passed!) due to a TAF decline of $37.387B. Only $38.351B remains in TAF.

The Treasury on Thursday announced auctions to sell a total of $166 billion in securities in a range of offerings next week.

Senate Democrats on Wednesday proposed allowing the federal government to borrow an additional $1.9 trillion to pay its bills, a record increase that would permit the national debt to reach $14.3 trillion.

The unpopular legislation is needed to allow the federal government to issue bonds to fund programs and prevent a first-time default on obligations. It promises to be a challenging debate for Democrats, who, as the party in power, hold the responsibility for passing the legislation.

A 1.2% decline in light truck prices pulled core lower. Consumer prices, an actual cost to consumers unlike an accounting entry like light trucks, increased 0.3%. Food prices jumped 1.6%.

But inflation in the pipeline jumped. Intermediate goods prices (both headline & core) rose 0.5%. Crude prices jumped 1.0% headline and 5.0% core in surging commodity prices.

Columbia University professor Joseph Stiglitz, a Nobel Prize-winning economist, said the U.S. should inject a second round of stimulus spending into the economy to avert a “double-dip” recession.

It will be “2012 or 2013 at the earliest that we will be back to normality,” Stiglitz said in an interview today on Bloomberg Television. “This is a scenario that is putting us a little better but not much better than the Japanese malaise.”

Releasing its first global economic forecasts since June, the World Bank was more upbeat about this year's outlook, with the rate of recovery expected to reach 2.7% instead of 2%. The contraction in 2009 was also estimated to be more modest than expected, a drop of 2.2% instead of 2.9%.

The 2011 forecast was left unchanged at 3.2%. But the bank painted a more sobering picture for next year and beyond, as credit conditions remain tight and governments start to withdraw extraordinary support measures.

"If the private sector continues to save in order to restore balance sheets, a double-dip recession, characterized by a further slowing of growth in 2011, is entirely possible--especially as the growth impact of fiscal stimulus wanes," the bank said.

Goldman Sachs Group Inc. responded to intense criticism of big Wall Street paychecks by putting less money into its bonus pool, a move that helped it earn a record $4.79 billion fourth-quarter profit.

The big bank said yesterday that it rewarded employees with $16.2 billion in salaries and bonuses for 2009. That’s up 47 percent from the previous year but much lower than many expected. In all, compensation accounted for 36 percent of Goldman’s $45.17 billion in 2009 revenue, the lowest annual ratio since the company went public in 1999. In 2008, Goldman set aside 48 percent of its revenue to pay employees.

The company is also shifting more pay into deferred stock, allowing it to hold off recording compensation costs for years.

The pay restructuring helped the bank easily top analysts’ earnings estimates. Goldman earned $8.20 a share in the last three months of the year, well above the $5.20 a share expected by analysts surveyed by Thomson Reuters.

The $4.79 billion profit was the biggest quarterly gain ever for the New York-based bank. The previous record was $3.16 billion in the fourth quarter of 2007, as the bull market on Wall Street was peaking.

Trading of fixed income, commodities, and currencies buoyed Goldman’s profits for the third straight quarter. The bank also reported higher fees from underwriting stock and debt offerings.

Berkshire Hathaway reinsurer General Re agreed to pay almost $100 million to settle several charges and a lawsuit related to its involvement in accounting frauds by American International Group and Prudential Financial, the Securities and Exchange Commission said Wednesday.

Gen Re agreed to pay $12.2 million to settle SEC charges that it helped AIG (AIG 28.01, +0.05, +0.18%) and Prudential (PRU 53.70, +0.08, +0.15%) manipulate and falsify their financial statements, the regulator said.

Manufacturing conditions in the Philadelphia Fed area have continued improving in January, although at at a slower pace than in December, according to the latest Business Outlook Survey by the Federal Reserve of Philadelphia.

The Philly Fed current business conditions Index has eased to 15.2 in January from 22.5 in December, somewhat below the 18.2 index forecasted by market analysts.

New orders and business indexes have continued growing although also at a slower pace than in December. New orders Index dipped to 3.2 in January from 6.5 in December, while shipments Index dropped to 11.0 from 15.3 in December.

The Leading Economic Index for the US grew to 1.1% in January from 0.9% in December. This result marks the ninth consecutive month of gains in the index and is ahead of forecasts of a slight decline to 0.7%.

The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week - an increase a U.S. Labor Department economist said is partly due to an administrative backlog in processing claims.

Total claims lasting more than one week, meanwhile, declined.

Initial claims for jobless benefits rose by 36,000 to 482,000 in the week ended Jan. 16, according to the Labor Department's weekly report Thursday. The previous week's level was revised upward to 446,000 from 444,000.

Economists surveyed by Dow Jones Newswires expected a decrease of 4,000 initial claims.

The four-week moving average, which aims to smooth volatility in the data, also increased as well last week. The Labor Department said the four-week moving average increased by 7,000 to 448,250 from the previous week's revised average of 441,250.

The loan troubles of many U.S. consumers weighed down fourth-quarter results at Bank of America Corp., Wells Fargo & Co. and U.S. Bancorp, but bank executives predicted loan losses are near a peak.

The three banks hold a combined 24% of all U.S. deposits and operate more than 15,000 retail branches, making them important barometers of consumer sentiment and the health of the U.S. banking industry.