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HAT TRICK LETTER - Macro Analysis Report
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MACRO ANALYSIS REPORT
ECONOMICS, CENTRAL BANK POLICY
BANKS, BONDS, GEOPOLITICS
* Miscellaneous Morsels
* Bloat Undermines USGovt Debt
* Dysfunction in USEconomy
* Bloat Undermines Real Estate Market
* USFed Trapped in Monetary Policy
HAT TRICK LETTER
Issue #70
Jim Willie CB,
“the Golden Jackass”
17 January 2010
"Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of the
retained mortgage portfolios." -- USDept Treasury (in recent statement after granting the doomed black
hole duo an unlimited credit line to liquidate millions of bad loans and book an additional couple trillion$
in additional losses)
"The Powerz have firm control of the helm, but it is disconnected from the rudder, while the engine room
water level is rising, but the Gold forces have full control of all the lifeboats." -- Anonymous HTL
subscriber
Editor Note: This came from a diligent subscriber, a correction. "I subscribe to your Hat Trick Report,
excellent. However, you made a mistake in last issue. You quoted the Czech Republic in list of countries
where people took mortgages in Swiss Francs. It is true for Hungary, partly true for Poland, but
completely false for the Czech Republic. Almost all mortgages (if not 100%, then 98-99% for sure) are in
local currency (CZK). Best Regards, JanD from the Czech Republic" Message heard, my error and
gratitude.
MISCELLANEOUS MORSELS
◄$$$ THE MOVIE "AVATAR" WILL SOON BECOME THE BIGGEST BOX OFFICE HIT IN
HISTORY. THE JACKASS HAS SEEN IT IN ENGLISH AND SPANISH. IN MY VIEW IT IS THE BEST
MOVIE IN ITS CLASS IN 10 TO 20 YEARS, SURE TO CREATE A CULT AND MUCH ANCILLARY
BUSINESS. IT COMBINES ELEMENTS AND THEMES FOR FOUR MAJOR MOVIES. SO FAR THE
MOVIE HAS GROSSED OVER $1.3 BILLION, A RECORD IN UNDER A MONTH SINCE RELEASE.
WHAT A FUN INSPIRATIONAL MOVIE!! $$$
Be sure to know my attraction to science fiction and futuristic films. Pandora (ominous name from onset) is
a moon of a great gas planet, reached by humans after years in cryogenic stasis. Pandora has an atmosphere
of oxygen, nitrogen, and xenon, but also ammonia and hydrogen cyanide, thus poisonous to humans. This
special moon contains the rare metal unobtainium, worth $20 million per kilogram, an industrial target,
since it defies gravity. The majestic floating islands laden with it are something to behold, and well
integrated in the movie, as the dragon flies nest there. The rite of passage into the clan involves finding one,
taming one, after climbing the heights bravely. Harken back to Rocky & Bullwinkle in the 1960 cartoon
series, whose travels encountered upsidaisium. Four movies come to mind, all melded wonderfully into
"Avatar" and its plot. Nothing comes to mind for genetic splicing of humanoids and control of mental and
bodily processes as remote operator of an Avatar creature though. Key factors in the movie center on soldier
Jake Sully having a scientist twin brother, whose Avatar body becomes fortuitously ready for Jake to take
over after his untimely death. Jake lost the use of his legs from battle wounds. His new world has legs and
flying capability in a unique way. His old world holds the promise of new legs if he enlists in the corporate
rape of the forest, its exploitation of its metal, and migration of the natives from their sacred zone. Clearly
the clan in the movie has strong similarities to native American tribes, who hunted and lived in harmony
with nature, respecting the great spirit. Their language could have been patterned after Sioux or Iroquois. In
addition, parallels to Amazon forest dwellers is clear, like with usage of Avatar poison tipped arrows.
The movie integrates "The Last of the Mohicans" with forest tribes who hunt and consider the animals their
brothers upon taking their lives. The tough Iroquois warrior who was played by Wes Studi in the 1992 film
appears as the clan chief. The movie integrates "Dancing With Wolves" with a soldier turning native, joining
the clan, learning their ways, and taking a wife. The movie integrates "The Matrix" with the entire natural
system on the moon displaying an extremely developed electro-chemical biological network of life and a
one-ness called Eywa, their perceived deity. See Yahweh, a near anagram from the Bible. This new matrix is
tested for the transfer of the entire mental set from human body to the Avatar body, fully ten feet high (3
meters), with cat-like yellow eyes, slender frame, and carbon fiber bone structure. Are all Avatar hunters left
handed? The highlight of the Pandora natural ecosystem was its flora and creatures, some of which could be
tamed, if not linked, by nervous fiber connection, along with the communication with spirit souls, as Eywa
displayed its spirit. The horses, dogs, dinosaurs, and especially dragon flies were phenomenal. The movie
integrates "Terminator" with its mechanized soldier workers, those 15-foot (5-meter) body suits turned
robot with massive power. The final battle is breath-taking, action-packed, and amazing where Eywa
responds to the external threat. A sequel is assured, as Jake Sully of the Jarhead Clan indeed opens his eyes at
the closing scene. He will be back! My guess is at least two to three sequels will come. This is clearly not a
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Romeo & Juliet romance, but at the end of the battle scene, the touching hint is indeed noticed. Spoken like
a Marine, he called the new world 'just another hellhole' but it might become his new home.
The studio 20th Century Fox has a truly gigantic epic smash hit on its hands, easily to surpass the record
"Titanic" movie in box office sales. It should be noted that box office volume is distorted by the higher
ticket prices for 3-D and IMAX. The budget for "Avatar" was $250 million, aided by a $150 million
additional marketing budget. This movie is "Star Wars" in full technological development, eclipsing it in
plot, animation, acting, nature, and battle scene realism. My plan is to take some little kids to see the movie
and watch it next in 3-D. See the Yahoo Finance story (CLICK HERE). In a surprising display of insecurity
came Vatican dissent. They offered derision for what they saw as worship of nature as a deity. If truth be
known, the Vatican might worship gold, where they have amassed the largest collection on the planet, and
use it in power broker moves. They called the movie no masterpiece, ignoring the computer animation
breakthroughs. See the RR News article (CLICK HERE).
◄$$$ GOVERNMENT JOBS HAVE OVERTAKEN THE TOTAL JOBS IN THE TANGIBLE
USECONOMY, A SHOCKING REVELATION. MOST EVERY NATIONAL TREND AND INITIATIVE
POINTS TOWARD EVEN GREATER DIVERGENCE, AS THE WAR ECONOMY DOMINATES. $$$
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The inverted fundamental condition is consistent with police states and Third World nations, beset by gross
structural imbalances growing worse without remedy. Ever since the 911 events, the nation has gone into a
tailspin. Dedication to war and development of a war economy tends to destroy capital, undermine the
economy, and kill private sector jobs. The reliance upon a housing and mortgage bubble as foundation for
the USEconomy backfired badly during the same period since 2001. The flow of credit is brisk to the
connected big banks, and minimal to the tangible economy on Main Street. The direction toward socialism,
even communism, will promote even more government jobs and pour acid over capital formation and
legitimate economic growth. Too much money is supporting dead entities, while promising businesses are
starved for funds.
◄$$$ USGOVT HEALTH CARE BILL CREATES 111 NEW AGENCIES, SOON TO BECOME THE
LARGEST FEDERAL BUREAUCRACY IN EXISTENCE. $$$
A gigantic stride toward establishment of the USSA Politburo soon comes. The federal health care monster
is on track to form a sprawling addition of new federal bureaucracies, undoubtedly loaded with inefficiency,
overlap, corruption, ineptitude, red tape, and red ink. The Healthcare Bill HR 3962 would create 111 new
USGovt agencies:
1. Retiree Reserve Trust Fund (Section 111d, p61)
2. Grant program for wellness programs to small employers (Section 112, p62)
3. Grant program for State health access programs (Section 114, p72)
4. Program of administrative simplification (Section 115, p76)
5. Health Benefits Advisory Committee (Section 223, p111)
6. Health Choices Administration (Section 241, p131)
7. Qualified Health Benefits Plan Ombudsman (Section 244, p138)
8. Health Insurance Exchange (Section 201, p155)
9. Program for technical assistance to employees of small businesses buying exchange coverage (Section
305(h), p191)
10. Mechanism for insurance risk pooling to be established by Health Choices Commissioner (Section
306b, p194)
.....
101. Indian Health facilities needs assessment workgroup (Section 3101, p1775)
102. Indian Health Service tribal facilities joint venture demonstration projects (Section 3101, p1809)
103. Urban youth treatment center demonstration project (Section 3101, p1873)
104. Grants to Urban Indian Organizations for diabetes prevention (Section 3101, p1874)
105. Grants to Urban Indian Organizations for health IT adoption (Section 3101, p1877)
106. Mental health technician training program (Section 3101, p1898)
107. Indian youth telemental health demonstration project (Section 3101, p1909)
108. Program for treatment of child sexual abuse victims and perpetrators (Section 3101, p1925)
109. Program for treatment of domestic violence and sexual abuse (Section 3101, p1927)
110. Native American Health and Wellness Foundation (Section 3103, p1966)
111. Committee for the Establishment of the Native American Health and Wellness Foundation (Section
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3103, p1968)
The Health Care Bill contains 1990 pages of legislation. The list of new agencies and offices underscores
the complaints by opposition that the health care reform bill over-burdens taxpayers and bloats the USGovt
further. One supporter offered a lame comment. A source dismissed the list of bureaucracies as an
exaggeration, calling them 'Demonstration Projects' instead. See the FoxNews article (CLICK HERE).
BLOAT UNDERMINES USGOVT DEBT
◄$$$ THE USTREASURY HAS SCHEDULED TO ISSUE A WHOPPING $133 BILLION IN NEW
DEBT SECURITIES IN RECENT MONTHS, AT A TIME WHEN FOREIGN BUYERS HAVE STEPPED
BACK. PRESSURE MOUNT FOR CONTINUED MONETIZATION FROM PRINTING PRESS
PURCHASE. $$$
Between November 15th and February 28th, the USGovt has had to roll over and refinance $133 billion in
debt. Compounding the strain is the new USGovt debt issuance, totaling $150 to $300 billion in order to
finance a $1.5 trillion federal deficit. In all, the USGovt issued nearly $2 trillion in debt in 2009. The
challenge will be to find buyers, or else monetization must be used, perhaps more heavily. Buyers are
picking up under 20% of auctioned USTreasurys, a gross departure from the USGovt results offered
after each auction. Historically foreign investors and foreign governments have been the biggest buyers of
US debt, but times have changed during the Paradigm Shift. The annual aggregate data does not tell the
proper story.
A look at the monthly data shows a severe pullback. The annual increase in foreign government purchase of
US debt came in first half of 2009. According to the official Treasury Intl Capital Report for October,
foreign governments have actually become sellers of long-term US debt that month. The report notes: "Net
foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been
$8.3 billion. Foreign holdings of dollar denominated short-term US securities, including Treasury
Bills, and other custody liabilities, decreased $43.9 billion. Foreign holdings of Treasury Bills decreased
$38.3 billion." The breakdowns usually occur on short-term debt rollover. Foreign creditors are not likely
to pick up the slack in the Treasury market. Notice China and Japan are the biggest creditors, with Brazil
approaching the OPEC nations. The Caribbean is where the USFed has its off-shore slush fund accounts for
maneuvering its illicit transactions with British help.
The next biggest purchaser of US debt behind foreign Govts in 2009 was the US Federal Reserve
itself through its Quantitative Easing Program. Read printing press. The year 2010 is in my view going to
reveal the full glory of USFed monetization of USGovt debt issuance, enough to raise gigantic red flags.
The typical strong bid from domestic sources can no longer be counted on. The state & local governments,
pension funds, and insurance companies have historically been strong buyers of US debt. According to
USDept Treasury data, these groups have either been net sellers or small buyers of USGovt debt in 2009.
The TIC Report contains a group called Other Investors, which ranked third largest group of US debt buyers
in 2009. It was responsible for buying nearly $700 billion in US debt. It is comprised of Individuals,
Government Sponsored Enterprises (GSE), Brokers & Dealers, Bank Personal Trusts & Estates, Corporate
& Non-Corporate Businesses, Individuals, and Other Investors. Graham Summers in his article entitled
"Could the Fed Be Manufacturing Another Crash?" (CLICK HERE) puts forth an alternative proposition.
He wonders aloud about the prospect that another stock market crash could be orchestrated, in order to
create demand for USTreasury Bonds generally. The conflict of interest between the USGovt and the private
sector is staggering and worsening.
If truth be known, the USFed has purchased between 80% and 90% of all USTreasury debt auctioned last
year. THIS IS GROTESQUE HIDDEN MONETIZATION. When maturing securities that must be rolled and
new debt issuance are factored, the gross amount of USTreasury issuance in year 2009 exceeds $2.5
trillion. This much is not in dispute. Check the official Treasury Investment Capital reports (CLICK HERE)
to see that the foreign holders of USTreasurys have increased their holdings by $422 billion over the first
nine months of 2009. Even by TIC data, foreign entities have purchased a mere 16.9% of newly issued
USTreasury debt securities. The USDept Treasury has made a complete mockery of the data regarding
foreign indirect bidders published, which reflect foreign central bank purchases at debt auctions.
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Monetization is occurring with steroids!
◄$$$ FANNIE MAE & FREDDIE MAC OFFICIALLY FALL IN GRAND BLACK HOLE WITHOUT
LIMIT. THEY WILL RECEIVE UNLIMITED USGOVT FUNDS TO STAY AFLOAT, AS THE
PREVIOUS $400 BILLION HAS BEEN REMOVED. $$$
On Christmas Eve, the USGovt officially announced an unlimited credit line to the beleaguered mortgage
giants Fannie Mae and Freddie Mac. The USDept Treasury formally removed the $400 billion financial
cap on funds necessary to keep the companies afloat. To date, the cost has been $111 billion for the fat
duo sewage process fees. A moronic deceptive estimate was stated by a senior Treasury official, who
actually said losses are not expected to exceed $170 billion over 10 years. It will reach at least $2 trillion
more, when credit derivatives like Interest Rate Swap contracts are factored. A flexible formula will be used
to ensure the F&F mortgage backed securities remain stable. The yearend statement of altered policy
side-stepped the need for a formal approval from a weary USCongress. Removal of official caps was
motivated to eliminate any uncertainty among bond investors about USGovt commitments. Some analysts
believe horrendous numbers for the fourth quarter were anticipated, but my view is staggering credit
derivative losses are hitting. They might be hidden from view for now, but the unlimited credit card can be
used to prevent an ugly eruption.
Fannie Mae & Freddie Mac provide crucial liquidity to the mortgage industry by purchasing home loans
from lenders and creating securitized bonds to store in the USGovt sewage repository. F&F own or
guarantee half of all mortgages, equal to 31 million home loans worth $5.5 trillion. Under the threat of a
foreign run selling their bonds, Fannie & Freddie were turned into a conservatorship (nationalized) in
September 2008 under Congressional authority. In return the USGovt received preferred stock paying a 10%
dividend. Every several months, the commitment has grown until now, an unlimited commitment. See the
Huffington Post article (CLICK HERE).Vast fraud, theft, and counterfeit lies inside F&F books. The
criminal aspect must be hidden, while the mortgagor of last resort role has been approved and instilled. An
impression has been made of creating a professional executive staff, when coverup is the prime objective.
The executive roll resembles a turnstyle or revolving door. The previous Freddie Mac Chief Financial
Officer was suicided in his Virginia home less than one year ago, a fact omitted consistently in the press.
Strong assistance was given to see David Kellermann hanged by the neck in his own home. He knew too
much, wished to resign, and wanted to come forward with information. "Kellermann was a behind the
scenes guy who never showed up on anyone's radar until he was appointed (acting) CFO last September.
He had a reputation of being a straight shooter with high ethical standards," said Guy Cecala, publisher
of Inside Mortgage Finance, a mortgage trade publication that covers Freddie Mac. Ethics are a liability in a
syndicate.
◄$$$ MOTIVES FOR THE UNLIMITED CREDIT LINE TO FANNIE & FREDDIE HAVE BECOME
THE TARGET FOR SPECULATION. THE BEST REASONS SEEM TO BE TO STEM THEIR CLIMAX
FAILURE, TO HALT ANOTHER RUINOUS RUN ON THEIR BONDS, TO PREVENT RISING
MORTGAGE RATES, AND TO MAKE ROOM FOR HUGE NEW BANK LOSSES IN COMMERCIAL
LOANS FOR THE BANKING SECTOR. BIG BANKS WILL SOON SHOVE MUCH MORE HOME
LOANS TO FANNIE & FREDDIE. $$$
The Business Insider provides some excellent analysis on valid justification for lifting the bailout cap for
Fannie & Freddie. See their article (CLICK HERE). The USDept Treasury might be taking steps in
anticipation of serious problems on the verge of eruption. Here are some realistic secret reasons the USGovt
eliminated the bailout caps on Fannie & Freddie:
1)
Revisions to the flagging Homeowner Affordable Housing Program (HAMP)
2) Fannie & Freddie taking on a greater role in the near term to support their own mortgage backed
securities (MBS)
3) Fannie & Freddie growing their portfolios on a long-term basis to provide continued support to the
MBS market
4) A follow-up on the future role of Fannie & Freddie announced last February 2009, which incorporates
executive pay packages that do not include a common stock component, also announced on Christmas Eve
5) Increasing the demand for Fannie & Freddie MBS by reducing the multiplier for bank risk based capital
requirements from 20% to 10%.
Not stated anywhere is the incoming flood of commercial losses to the banking sector. Mostly regional
banks are holding a growing mountain of impaired and toxic loans, whether held or in bonds. The new
Fannie & Freddie structure can accommodate a huge transfer of the residential loans and associated
mortgage bonds held by banks large and small, thus making ample room for fresh losses tied to the
wrecked commercial loan arena. The banks must take huge writedowns on the commercial side, an
inescapable fact. The residential portfolios are going to be shifted to Freddie & Fannie in a manner that will
protect the banks. F&F clearly have been designated the cemetery, where residential mortgages go to
die. Logistically it is too much for any other USGovt sponsored agency to handle, such as the Federal
Housing Admin or the Govt National Mortgage Assn (Ginnie Mae). If the truth were revealed, Fannie &
Freddie are burning through money 5 times faster than the topline figures show. The USGovt is funding the
Great Black Hole. The mere management of the F&F mortgage bonds requires vast sums of money to cover
important losses for Interest Rate Swap contracts. The Christmas Eve announcement makes it possible to
manage the vast acid pit more easily, to fund credit derivative losses more easily. Be sure to know that the
entire practice sponsored and endorsed is not even price inflationary, since it goes right into the toilet. This
is Weimar Defecation on a modern scale.
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◄$$$ BEHIND THE CURTAINS AND IN THE BASEMENT,THE BLANK CHECK GIVEN TO
FANNIE & FREDDIE TAKES SOME PRESSURE OFF THE USFED. ITS GROSS INSOLVENCY HAS
REACHED CRITICAL LEVELS. F&F WILL TAKE SOME PRESSURE OFF THE USFED, FROM ITS
GARGANTUAN AND STILL GROWING TOXIC BALANCE SHEET. $$$
The US Federal Reserve is busted. Details were provided in the December report. Half of the USFed balance
sheet is toxic mortgage bonds of F&F vintage. The USFed boasts the Mother of all Balance Sheets, and it is
loaded with impaired acidic mortgage bonds held at exaggerated values. Given its huge leverage, the USFed
is broke! The great dump of USFed balance sheet can next proceed, with passage of toxic deeply damaged
F&F mortgage backed securities directly to the USGovt for burial, or at least permanent seal. The USFed's
balance sheet has quietly ballooned beyond record levels. They recently announced a balance sheet expansion
to $2.22 trillion. Few analysts or financial anchors bother to mention that the expansion of the USFed
balance sheet to include vast tracts of mortgage bonds is in direct violation of their Congressional
contract. Yet Chairman Bernanke has deceptively assured the recession is very likely over. They have begun
to reverse the Quantitative Easing, and the beginning of the drain process for their balance sheet has begun.
All are lies. The USFed balance sheet is in crisis mode, and gross monetization will continue.
The USFed transformed itself into a toxic bond repository. It went from an essentially non-existent player in
the mortgage backed security market a year ago to owning $904 billion of the bad paper today. This private
financial institution has clearly shifted priority from the financial sector to the housing industry, loading up
on MBS bonds, as vast rivers of debt spilled from Fannie Mae & Freddie Mac into the system. The USFed
accepted the vast flows as a last resort in 2009 as an attempt to bring stability to the housing market by
putting a cap on mortgage rates. It is only a prop. Its owners want to dump them onto the USGovt before the
USTreasury default in my view.
The nationalization process is nearly complete. The credit market will next adopt the psychological view
that Fannie Mae & Freddie Mac have been fully nationalized, with ramifications to the debt risk for
USTreasurys as a negative rub however. While the federal government will stick to its fallacious if not
fraudulent accounting, and not officially consolidate Fannie & Freddie assets & liabilities onto the USGovt
balance sheet, the smarter foreign creditors will alter their perceptions of USTreasurys. These creditors will
start viewing Fannie & Freddie liabilities as equivalent to USTreasurys, which will substantially
increase the long-term default risk of Treasurys. The impact could soon be foreign demand for higher
rates to compensate for that risk. What was announced is a final defacto nationalization.
Look for a gradual transformation of these financial sewage treatment plants into new branches of the
USGovt. A new official USGovt agenda can be implemented for housing, without much regard for prudent
lending. Just as important, Fannie Mae rental homes can become a prime strategic for raising money from
rent, a new revenue stream. The USDept Treasury announcement on Christmas Eve adds substantially to the
case for higher pressure on USTreasury yields in 2010. Thus, the pressures for more amplified
monetization (printing press money) of USTreasurys will become acute and more broadly recognized.
Expect huge consequences for the USTreasury market, but primarily in global perception of USGovt debt,
whose insurance will rise in lockstep with higher default risk. See the Daily Reckoning article (CLICK
HERE).
Peter Wallison is a former general counsel at the Treasury, now a fellow at the American Enterprise
Institute. He believes the USGovt is losing far more than the old $400 billion limit, and the risk had become
acute for exhausted mortgage support to turn into an accident. He believes nobody knows how much will be
needed to keep the companies running. Wallison said, "It turns out it was impossible to regulate [Fannie &
Freddie]. They were too powerful. It was always safe to buy these notes. The USGovt was always going
to stand behind them. They are as good as Treasury notes." See the Bloomberg article (CLICK HERE).
◄$$$ FORMER FANNIE MAE OFFICIAL DESCRIBES THE FOUNDATIONAL FRAUD OF FALSE
RISK ASSESSED ON ITS PORTFOLIO. THE CONFIRMATION COMES FROM THE VAST DUMPING
OF F&F BONDS BY LARGE FINANCIAL ENTITIES, LED BY CHINA AND PIMCO. THEIR ACTIONS
CONTRADICT THE RETURN TO NORMALCY OR A RESTORATION OF CONFIDENCE. $$$
New research by Edward Pinto, a former chief credit officer for Fannie Mae and housing expert, sheds light
on fundamental accounting fraud to support the growing mortgage firm into a ruined giant. Pinto has found
that Fannie & Freddie periodically bought risky loans as early as 1993, but they routinely
misrepresented the mortgages they were acquiring. They reported them in the prime loan category,
when they had characteristics that made them clearly subprime or Alt-A. But because of this endorsed
mislabeling, millions more high-risk loans were underwritten, enough to support a vast housing bubble in
recent years. Acidic urine in the pipes was called potable water, and it flowed through the F&F plumbing.
This strategic fraud assured that default rates and realized financial losses in the aftermath of bust, bank
failure, and home foreclosure would be much larger than all previous experience. When failure rates began
to show up early in 2007, it was apparent that assumptions upon which AAA ratings had been based were
not only wrong, but the bust would be one for the history books. See the Zero Hedge article (CLICK
HERE).
Mortgage Lender Bust website manager Aaron Krowne said, "I am sure we are now simply seeing a
surfacing of the real reasons that China, PIMCO, and others are taking the Fed's monetization
operations as an opportunity to dump Fannie & Freddie securities, rather than buying more, as the
confidence restoring measures might be expected to do. I have always said the GSEs were just another
locus of toxic waste, based information from other sources. Now we see confirmation and more detail
from a former Fannie official." The mask is being ripped off the F&F front, just a sprawling diverse
USGovt sponsored toxic waste processing center. Wall Street firms are another toxic waste repository.
Eventually, the entire national financial core has become filled with toxic waste.
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PIMCO CEO and co-Chief Info Officer Mohammed El-Erian summarized the strained broken condition in a
recent CNBC interview. He expects USGovt deficits to go higher, calling the national ills much worse than
a flesh wound, but rather deeply engrained problems. He urged focus not on economic growth quantity, but
its quality which he called very poor in the recently completed decade. The economic growth in the 2000
decade was founded upon credit growth atop a housing bubble. El-Erian points out four gross insolvencies,
a Hat Trick Letter premise often made, in housing, banks, households, and now governments. He identifies
three troublesome areas for 2010. 1) New taxes on banks when they are expected to lend. 2) Sluggish
employment, unlikely to be assisted by a deficit-ridden federal budget. 3) New focus on sovereign
government debt on the verge of defaults, warned by downgrades. It all adds up to bad investment in
USTreasury Bonds, confirmed by Paul McCulley of PIMCO.
DYSFUNCTION IN USECONOMY
◄$$$ THE USECONOMY SUFFERS FROM A MAJOR KEYNESIAN HANGOVER. THE POINT OF
NO RETURN ON THE FINANCIAL FATE OF THE NATION WAS PASSED TWO DECADES AGO,
MAYBE MORE. A COMMITMENT IS MADE WITH USAGE OF MOUNTAINS MORE OF USGOVT
FUNDS, IN USDOLLAR TERMS, TO PAPER OVER AND RESOLVE PAST CYCLE AFTER CYCLE.
THE HANGOVER LINGERS FOREVER, SINCE RESOLUTION IS FEVERISHLY OBSTRUCTED
WITH ALL POLICY. $$$
Prepare for a bad Keynesian hangover, warns Benn Steil. He is director of international economics at the
Council on Foreign Relations. The current USGovt spending orgy is a vain attempt to remedy
problems from past spending orgies, several of them. In 2008, in the wake of an incredibly reckless credit
expansion to feed the housing and mortgage bubbles, the Bush II Admin decided against proposals to
liquidate ruined assets held by the big financial firms and against proposals to reform the regulatory
structure. No Resolution Trust Corp was formed like in a past crisis in 1990. The price to pay multiplies
rapidly with each cycle. The beginning of the hangover effect comes in 2010. The Obama Admin has run
full blast with nationalization of credit creation process while the USFed has made crude enormous
commitments to serve as the national banking underwriter. Over 30 years ago, President Nixon once said,
"We are all Keynesians now" and never have such words been more fitting. The USGovt budget deficit
stands at $1.4 trillion, sure to remain at least $1 trillion annually for as far as the eye can see. Berkeley
economist Brad DeLong summarized the fiscal irresponsibility well when he wrote, "Anything that boosts
the government deficit over the next two years passes the benefit-cost test, anything at all." No logic,
rationale, or reason is left.
On the monetary side, the US Federal Reserve has gone way past the point of no return. The credit market
might appear to have stabilized, even to exhibit signs of normalcy. It hides the reality of lost control. Some
like Princeton economist and New York Times columnist Paul Krugman believe the USFed is not
looking for an exit from the 0% policy. This has been my claim in No Exit Strategy for close to a full year.
USFed Chairman Ben Bernanke wants it both ways. He buids its balance sheet to insane levels beyond
recognition. He talks of reversing the process and removing the vast oceans of liquidity, but with mere
buckets and pails. He plays a political game with vacant words and empty promises. The reality of collapsing
the USFed bloated balance sheet would require dumping hundreds of billion$ of stockpiled mortgages.
Doing so would kill the housing market and probably send the USEconomy reeling much deeper into
recession.
Bernanke continues to berate the banks for not lending to qualified borrowers. Yet the USFed has gone far
beyond the point of no return in extending loans to big banks that are grotesquely insolvent. In doing so, the
US banks collectively resemble developing nations in an ugly pathogenesis. The USFed with USDept
Treasury blessing and cooperation has extending loans to the extreme to their worst borrowers to keep them
alive, lest the banks themselves collapse from defaults. The biggest US banks have become zombies, pulling
along their affiliated financial entities set up to control massive activities off their balance sheets. If the
banking sector was imbalanced and insolvent in 2008, it is twice as imbalanced and insolvent in 2010.
It is going in the wrong direction. The credit misallocation that led to the general economic collapse in
2008 has worsened. The bonafide solution requires the permanent removal of bad assets from the bank
balance sheets. The accounting gimmicks provide window dressing, helpful for stock investor charades.
The bank executives are painfully aware of the reality of the crippling insolvency trap, which results in
refusal to lend. They instead starve far too many sound commercial ventures, letting legitimate promising
business opportunities to die on the vine like neglected branches.
The alternative to the current lunatic policy of the USFed and USGovt together buying endless impaired
worthless assets is big bank bankruptcy, a string of them. What scares US officials white with fear is the
knowledge that the string of failures might at most kill the entire system, but surely at least render the main
players total paupers on the poor farm. The hangover has a cost in extreme economic sluggishness.
Worse, the American financial power grid is using electricity drawn from the world. It is using the
world's money. Foreign creditors are lined up for a powerful backlash. Those who use the USDollar in
commerce for transaction settlement are lined up for installing alternatives, more backlash. As Steil claims,
"America possesses the exorbitant privilege of minting not only its own but the world's money. As we
move into 2010, no doubt the horns will be blowing for the long-awaited U-shaped recovery. I suspect it
will not be long before we realize we have drunk too much, and that the second dip of a W-shaped
recession awaits us." See the Wall Street Journal article (CLICK HERE).
◄$$$ STIGLITZ CONTINUES CRITICISM OF AMERICAN ECONOMISTS, AND CLAIMS THE
CREDIT CRISIS EXPOSES THEIR FLAWED IDEAS. HE POINTED TO IRRATIONAL BEHAVIOR
TOWARD HOUSING & MORTGAGES, AND TO THE LACK OF MARKET EFFICIENCY. $$$
Joseph Stiglitz has been a thorn in the side of US bankers and economists. The Nobel Prize winning
economist accused economists of being among those at fault for the financial crisis, which exposed major
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flaws in prevailing accepted concepts in his words. Stiglitz pointed to flawed premises such as the
concepts that economic participants behave rationally and that financial markets are competitive and
efficient. Rather, the housing bubble was fueled by the expectation that prices would go up forever, in his
view. Homeowners, bond investors, and probably financial executives exhibited 'marked irrationalities.' He
said, "[They might have] bought into their own false arguments. Economists should be included in the
list of those to blame for the crisis." Stiglitz believes a 'window of opportunity' to build new theories 'based
on more plausible accounts of individual and firm behavior' exists right here, right now. He addressed a
certain key area of his recognized expertise. In 2001, Stiglitz shared the Nobel Prize for research on market
challenges when parties fail to share equal access to information.
Stiglitz repeated criticism of former USFed Chairman Alan Greenspan for urging homeowners to
undertake adjustable rate home loans. Stiglitz was deeply critical of the mortgage market and the
financial engineering. In the market for mortgage securities, the complexity of products was far too
complex. He believes the excessive complexity of underlying assets induced large incentives for asset quality
deterioration. He actually said, "Globalization had opened up a global marketplace for fools." Actually,
the global process created provinces for grand fraud, made simple by exploited trust given to Wall Street
bond purveyors. Stiglitz did not address the grotesque insider trading from privileged information that
renders the markets unspeakably inefficient. See the Business Week article (CLICK HERE).
◄$$$ ONE WEEK LATER, STIGLITZ CRITICIZED OBAMA FOR LACK OF SUBSTANTIVE
CHANGE, DESPITE CAMPAIGN CALLS FOR CHANGE. HIS NEW BOOK DETAILS GRAND
FAILURE OF PAST AND PRESENT ECONOMIC POLICIES BY THE ECONOMIC BRAINDEAD
TRUST OF THE UNITED STATES. $$$
Stiglitz scolded what he called 'No Drama' Obama for failing to install any meaningful reform in the
rebuilding of the USEconomy. In the new book entitled "Freefall" by Joseph Stiglitz, he delivers a
powerful set of criticisms that read like an obituary for a failed economic state. He used the hackneyed
phrase of Obama rearranging the deck chairs of the Titanic, after promising change. The book brings to bear
how flawed theories and misguided policies brought us the worst meltdown since the Great Depression. His
message: A once in a generation chance is presented to design a more efficient and a more stable economy by
recalibrating the balance between markets and government. The Obama Admin has so far squandered the
opportunity in his opinion. In a strident criticism, Stiglitz said, "In a more fundamental sense, 'No Drama'
Obama was conservative. He did not offer an alternative vision of capitalism. [Obama chose instead to]
muddle through to take a big gamble by largely staying the course that President Bush had laid out." He
does not mention the criminal syndicate control on Wall Street and its control of the USDept Treasury, a
dangerous topic.
Stiglitz pointed out the Titanic deck chairs by name. Obama retained two leading members of Bush II
economic team, Ben Bernanke and Timothy Geithner, key players in the credit maket breakdown.
Obama enlisted Lawrence Summers, who assured that derivatives would stay unregulated. Stiglitz lays out
the arguments that the market has wondrous, self-regulating machinery versus those who claim that
deregulation often wrecks the machinery. Stiglitz knows all the arguments against regulation. He shoots
them down, one by one, and keeps up the barrage steady. The main problem is that de-regulation unleashed
criminal fraud, collusion, and coverup, which he does not address. Lack of regulation is great in an ideal
world with honest policymakers and honest capital investment brokers on Wall Street. We have neither.
In surveying the American landscape wreckage, moral outrage pours over the pages written by Stiglitz.
Millions of people have lost their homes and their jobs. The financial sector used its political influence to
secure a trillion$ bailout against the public will. The USGovt debt ratio to the gross domestic product
surged to almost 60% in 2009, certain to reach 70% quickly in this new decade. Stiglitz is an American
economist, and thus bears warts. The solutions suggested for by Stiglitz are deeply disappointing, and
reveal the US flawed roots so common among US economists. He calls for a second dose of stimulus
spending, and perhaps more in year 2011. He calls for overwhelming force to invest in a brighter, more
sustainable future. He calls for heavier taxes on upper income Americans. These are absurd flawed
approaches that have failed miserably in the recent past. He fails to recognize that the USCongress and
USDept Treasury represent engrained centers of compromised staff, owned by Wall Street, engaged
in coverup of bond fraud and counterfeit as much as selling disguised banker welfare programs without
much connection to Main Street and the needs of people. Sadly, Stiglitz accepts the latest grandiose
congame. He wants people to pay a high price for greenhouse gas emissions, which would provide
incentives to waste less and innovate more. On a more promising note, Stiglitz seeks a new vision of the
financial system that would return banks to the core functions of providing an efficient payments function,
making loans and managing risk. He also calls for the creation of a new global reserve currency, to enable
countries to diversify out of USDollars and thus safeguard again financial upheavals. He offers no pathway
to either idealistic ground. See the Bloomberg article (CLICK HERE).
◄$$$ TWO OTHER NOTABLE ECONOMISTS PITCH IN WITH REBUTTALS THAT CARRY
SUBSTANCE, VOLCKER AND SPENCE. BUT VOLCKER WANTS TO PRESERVE THE USFED
INDEPENDENT POWERS. $$$
Confirmation of criticism comes from yet another Nobel Economist. Michael Spence, sitting Stanford
University professor, believes strongly that the Obama Admin and USCongress on way off course in
righting the economic ship of state. He believes the US banking system must separate its lending
operations from its securities trading function. When a crisis does hit, the banking system can lean on its
lending core that remains. He finds deep error in the notion that bankers can be expected to regulate
themselves. Their tendency toward high risk innovation and liberal risk assessment must be held in check,
but the regulators tend to come from the banking industry. Incestuous relations result in hindered regulatory
action. The expectation that regulators must keep pace with innovation is fallacious. Spence believes the
economic stimulus is nowhere near on target, and that infrastructure is totally unaddressed. Lastly, he was
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critical of the entire bank compensation focus of attention. Fees levied on compensation cannot pay for
insurance against systemic risk. The USGovt pursues a path for bank fees to pay for Wall Street bailouts, a
veritable insane and myopic concept. Real losses are multiples of total bank assets. In my view, neither the
regulators nor the lawmakers can keep pace with financial innovation and the follies of financial
engineering. The overseers move at a slow snail's pace while the banker crowd rambles in fast sporty
jalopies.
Volcker calls for support in fighting the bank lobby on reforms. The former USFed Chairman accuses the
bank lobbyists of watering down reform and blocking regulatory changes that would prevent future
crises. He said, "If you agree, make your voices heard somehow or another. There is heavy lobbying on
the other side, and that has to be overcome. I have a whole bunch of people who support the position I
am taking. A lot of them are rather more elderly than the average. Some market participants, possibly
some in this room, seem to be suggesting that the events of the past couple of years were like a bad
dream, a truly unsettling bad dream. But nonetheless something that in the cold light of day need not
require a really substantive change in the structure of markets or corporate lifestyle." A year ago, his
report from Group of Thirty called for separation between commercial banks and businesses that engage in
speculation. His recommendations have not been embraced by most regulators and lawmakers. Volcker said
many in the financial industry believe that better risk management, higher capital and liquidity standards,
accounting changes, and improved regulation will be adequate to fix the financial system. He implied their
viewpoint is folly. He dismissed that as Reform Light in derogatory fashion. He rejected the Congressional
initiatives to strip the central bank of its supervisory and regulatory powers, siding with USFed Chairman
Bernanke. Volcker defended the banking oversight function, stressing its clear need for a stronger
administrative focus. See the Bloomberg article (CLICK HERE).
◄$$$ THE DECEMBER JOBS REPORT SURPRISED THE MAINSTREAM WITH A BIGGER THAN
EXPECTED NEGATIVE NUMBER. EMERGENCY UNEMPLOYMENT COMPENSATION ROSE BY
43% IN JUST ONE MONTH, WHICH OFFSETS THE SMALL DECLINE IN JOBLESS CLAIMS. THE
LABOR MARKET RECOVERY REMAINS A PURE FICTION, DESPERATELY NEEDED,
URGENTLY CLAIMED. THE CHARADE CONTINUES, FOR PADDING FICTIONAL JOBS, ONLY TO
REVISE THE TOTALS LATER WITH ELIMINATION. $$$
One must come to appreciate the propaganda usage of the word 'unexpected' in recent news releases. The
Hat Trick Letter never is shocked by negative economic news, since some must leak through the controlling
sieves handled by the USGovt statistical lab rats. The official Non-Farm Jobs Report estimated the
USEconomy lost 85,000 jobs in December. The jobless rate held at 10.0%, while the broader U-6 jobless
rate inched up to 17.3% from 17.2%, which counts those without jobs who want jobs. Revisions subtracted
only 1000 from payroll figures previously reported for November and October combined. The report
claimed that manufacturing shed the fewest jobs last month since the recession began in December 2007.
The number of temporary workers increased 46,500 in December, the fifth straight gain. In early 2009, the
Obama Admin economic advisers forecast the $797 million Stimulus Plan would keep the official jobless
rate below 8%. It did not since they are clueless compromised fools. The greatest prospect for hiring comes
from a USGovt boost. The Census Bureau will hire 1.15 million temporary workers in the first half of 2010
in an official census to count the population, a practice conducted every 10 years. See the Bloomberg article
(CLICK HERE).
Contrast provides perspective on statistical fraud. Check the MASSIVE jump in the Emergency
Unemployment Compensation (EUC) benefits in December. They jumped from 3,594,253 (November
7th) to 5,143,410 (December 19th), up 43% in just six weeks! The increase in EUC overwhelms the gains
from reduced jobless claims. The emergency EUC claims have set a modern day record. Economists have
pointed out that continuing claims and initial claims were falling as a bullish sign. No such thing! Jobless
claims are indeed down to the 430k per week range, an improvement from the near 500k per week just two
months ago. People are falling out of the system, rescued temporarily by emergency claims, while new
claims are reduced. However, instead the state jobless insurance benefits were being rapidly exhausted for
throngs of people. The final statistic dropped for the Jobs Report, because it measures state insurance
beneficiaries only. Those who exhausted their state jobless benefits ended up taking emergency claims. A
record was set, with a 52.24% exhaustion rate. If anything, the new lie and deep deception is with the
broader U-6 jobless rate that measures discouraged workers. It could not possibly have risen only 0.1%
when the EUC claims shot up 43%. See the Global Economic Analysis article (CLICK HERE).
The Non-Farm Jobs Report is an exercise in fiction. Each month a significant number of mythical jobs is
added from a small business model of job birth and death. The official number from the Bureau of Labor
Statistics is worthless for assessing the job market. The official Jobs Report is worse than worthless,
since it provides a false snapshot to policymakers on monetary policy, federal programs toward
stimulus, and much more. The stock market reacts to the false reports. Last March the BLS made a 820k
downward correction, which essentially removed a raft of non-existent jobs that it improperly included.
Every March the BLS makes a correction, with almost no publicity or press coverage. The Birth-Death
Model since this past April has added a robust 900k jobs, surely to be removed later in the shadows in
formal quiet deletions. The USDept Labor maintains that, despite the huge corrections, it still believes
its Birth-Death Model is working well because it is tracking closely the Census Bureau's quarterly
surveys of employment and wages. It fails miserably in tracking income tax receipts though! So this
hack agency does not believe it needs to alter its methods, which claim small companies are being created on
a widespread basis, complete with scads of new jobs. This B-D Model is a primary propaganda tool, along
with constantly altered seasonality estimation. It added a mythical 59k jobs in December from thin air. See
the New York Post article (CLICK HERE). See also a remarkable 3-year interactive progression tool of
unemployment across the United States, county by county (CLICK HERE).
◄$$$ THE RECESSION IN THE USECONOMY IS FURTHER CONFIRMED BY STATE TAX
REVENUE. IT IS IN A POWERFUL DECLINE, AT LEAST FOR DATA THROUGH SEPTEMBER 2009.
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STATE DATA COINCIDES WITH FEDERAL DATA, CONCERNING TAX REVENUE DECLINE. $$$
Previous Hat Trick Letter reports have mentioned federal tax revenue sharp declines as evidence that the
labor market and hence the USEconomy remains mired in recession. The state data matches federal data in
confirmation. US state tax revenues in the first three quarters of 2009 declined the most in 46 years, led by
shrinking personal income and sales tax sources, according to the Nelson Rockefeller Institute of Govt, a
public policy research arm of the State University of New York in Albany. Total state revenue fell by $80
billion to $523 billion, making a 13.3% decline, compared to the same nine months of 2008. Collections in
3Q2009 alone plummeted by 10.9% to about $162 billion, evidence of accelerated decline. It was the
fourth straight quarterly decline. State income tax revenue fell 11.8% in 3Q2009; sales tax collections fell
8.9%; corporate income tax fell 22.6%. Business leads the path downward, with fallout effects to personal
income and lastly sales tax receipts. The USEconomic recession continued through September, even
accelerating into that month. "The great recession hit virtually every single source of tax revenue and
pushed a number of states to revise revenue forecasts numerous times throughout fiscal 2009 and 2010,
with significant impacts on services," Dadayan and Boyd wrote from the institute. One major purpose of
the Obama Admin stimulus program was to aid state and plug shortfalls. The $787 billion stimulus
package made up as much as 40% of the revenue losses states suffered. Shortfalls linger powerfully.
See the Bloomberg article (CLICK HERE).
◄$$$ ARROW TRUCKING IS STAVING OFF BANKRUPTCY. ARROW HAS STRANDED DRIVERS
NATIONWIDE, CALLING A HALT TO TRUCKING OPERATIONS. THE SUPPLY CHAIN
CONTINUES TO BE HARMED. $$$
The shutdown of Arrow Trucking has stranded drivers across the nation, leaving them with bus rides home.
Based in Tulsa Oklahoma HQ, Arrow Trucking suspended operations in mid-December, stranding hundreds
of drivers around the country on Christmas Eve. The firm is trying feverishly to obtain new credit terms in
order to resume business. Company truck drivers learned of the shutdown when its fuel credit cards were
canceled, hardly the honorable course of action. Its headquarters was closed and website shut down. Rival
carrier Schneider National issued a statement offering rides home within proximity to an estimated 1400
drivers stranded by Arrow's abrupt action. Arrow CEO Doug Pielsticker issued a statement that they are in
negotiations with its main lender, which wishes to secure collateral. See the Journal of Commerce article
(CLICK HERE).
We could be witnessing the beginning of the Death March of the big rigs. Some irony exists. A big truck
typically is worth $130k to $180k. Yet Arrow and its Daimler Trucking partner demand the return of the
fleet of trucks to the pen, promise to issue a $200 bus ticket, but cut off fuel credit cards. That is not a wise
approach to winning back the costly truck assets, especially since truckers would be angry as hell, even
loaded with personal belongings in their sleeper cabins. Truckers often have strained family relations, child
support payments to make, and rugged personalities. Truckers live more from paycheck to paycheck, with
meager savings, like many working class people. Do not be suprised to see some trucks sabotaged.
BLOAT UNDERMINES REAL ESTATE MARKET
◄$$$ THE COMMERCIAL PROPERTY MARKET IS IN SHAMBLES. SHOPPING CENTER
VACANCIES HIT A RECORD. OFFICE VACANCIES SURPASS THE LEVEL OF THE LAST
RECESSION. APARTMENT VACANCIES HIT A 30-YEAR HIGH. ECONOMIC RECOVERY LIES
BETWEEN FABLE AND PROPAGANDA. $$$
Shopping malls are in distress. The Regional Economic Information System operates within the Bureau of
Economic Analysis. REIS economist Ryan Severino published a report two weeks ago. The strip mall
vacancy rate rose to 10.6% in 4Q2009, surpassing the high set in 1991. They are the smaller mall versions.
That rate was 10.3% in 3Q2009 and 8.9% in 4Q2008. The vacancy rate at large regional malls rose to 8.8%
in Q4 from 8.6% in the third quarter. The 8.8% large mall vacancy is the highest since REIS began tracking
regional malls in 2000. Severino said, "Our outlook for retail properties as a whole is bleak. We do not
foresee a recovery in the retail sector until late 2012 at the earliest." Aint no hint of economic recovery
here! He clearly is not a USGovt employee. See the Calculated Risk article (CLICK HERE). The
indefatigable and colorful retailer guru Howard Davidowitz expects at least 70% of retailers to suffer sales
slumps in a continuing decline, fast turning into a disaster. We are witnessing a backfire of the incredibly
stupid and absurd broken economic model based upon consumption (and not investment) within the United
States, built atop housing & mortgage bubbles. Davidowtiz gives an examination of the retail sector with no
holds barred. See the Clip Syndicate video (CLICK HERE).
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REIS reports the office vacancy rate rose to 17.0% in 4Q2009 from 16.6% in 3Q2009 and from 14.5% in
4Q2008 in the US market. The peak seen in the previous recession was 16.9% for office vacancy. At 17.0%,
the US office vacancy rate has reached the highest level since 1994. During the fourth quarter, the price of
rents asked declined 1.1%, while effective rent declined 1.9%. For the full year, effective rent fell 8.9%, the
largest one-year decline since REIS began tracking in 1980. Analyst Calanog said, "Never before have
landlords been under so much pressure to offer concessions to attract and retain tenants. Asking rents
have fallen at a lower rate, but this just implies further room to fall down the road if conditions do not
improve soon." Anecdotes are widespread of rollover leases offered with a few free months, and of retail
chains joining gasoline stations to share the lots. Aint no hint of economic recovery here! See the Calculated
Risk article (CLICK HERE).
An example in San Jose California effectively exposes a zero property value in the commercial
property market. The weblog called The Square Feet Commercial Real Estate Blog has a post on a new
lease signed in San Jose for 188 thousand square feet that is alarming. It exemplifies the distress in the
commercial property market. It cites a 10-year term, commencing on September 2010, with two years free
rent, $1.90/sqft per month net of all operating expenses starting in third year, with 10 cents in annual bumps
in monthly rent, a $100/sqft tenant improvement over shell, and a right to cancel after seven years. Now that
is a low effective rent! Not only is the tenant getting two years free rent, but the tenant improvements are
about four years worth of rent. The lease is triple net. Hence the tenant is also paying taxes, insurance and
maintenance. The landlord is mostly just covering expenses. A contact in Northern California commented,
"This is a big lease in Silicon Valley. While it allows the landlord to cover his operating expenses, the
intrinsic value of the real estate (land plus building) is effectively zero after you deduct for free rent,
$100 tenant improvements, brokerage commissions (not mentioned), debt service (not mentioned), and so
on." See the Calculated Risk article (CLICK HERE).
The apartment vacancy rate rose to nearly a 30-year high of 8.0% in 4Q2009, and rents declined the most
in a single year ever. This again is according to real estate research company REIS Inc. The US apartment
vacancy rate rose 1.3% for the full year, and now stands at the highest national vacancy rate on record in its
30 years of tracking the sector. During the fourth quarter, asking rents fell by an average of 0.7%, the largest
decline in a single quarter since 1999. For 2009 the asking rents fell 2.3%, the largest decline in 30 years.
Effective rent fell 0.7% in 4Q2009. The 3.0% drop for the year was more than three times the deterioration
in 2002. Analyst Calanog said, "Never before have we observed rental properties in so much distress, both
on the space and pricing side." The rising rental vacancy rates and falling rental income combine with
nearly impossible refinance opportunity to make a total nightmare for owners and investors alike.
Future losses for commercial mortgage backed security investors as well as local and regional banks are
being avoided by accounting fraud and delayed writedowns, basic gimmicks of hiding rotten salami. What
lies ahead are more bank failures, downward pressure on commercial rent, and the associated fallout to
housing prices. Aint no hint of economic recovery here! See the Calculated Risk article (CLICK HERE).
◄$$$ COMMERCIAL WRITEDOWNS LOOM FOR BANKS, DIFFICULT TO HIDE ANY LONGER.
EXAGGERATIONS COME IN THE PROCESS, AS IMPAIRED ASSETS REMAIN TUCKED AWAY
DEEP OFF THE BALANCE SHEETS. $$$
More huge bank losses loom. Moodys estimates that US banks will register another $336 billion in asset
writedowns through the end of 2010. The largest portion of losses will still come from residential real
estate, but 23% of the losses will come from commercial real estate. The commercial losses are very
concentrated with a small group of big banks. A recent research report by Citigroup equity analysts found
that banks with large consumer businesses and those with large recent acquisitions are near the end of their
credit cycles. For instance, Wells Fargo is roughly 68% through its writedowns. PNC is estimated to be
67% through. Bank of America has posted 52% of the write-downs it will see through 2010, and JPMorgan
Chase 55%. By contrast, banks that are heavily weighted in commercial & industrial lending or commercial
property are at the early part of their credit cycle. M&T Bank has posted only 38% of its estimated total
write-downs. Comerica has posted only 42%, BB&T and New York Community Bank only 44%, and
Regions Financial only 45%, according to Citi. See The Street article (CLICK HERE). Citigroup made no
mention in the report of hidden assets held off the balance sheet or the absurdly high values held on most
commercial credit assets, of course. Take the Citi research figures as gross under-estimates at best, and
fantasy support at worst.
◄$$$ COMMERCIAL PROPERTY PRICES FALL 1.5% IN OCTOBER. LOWER VALUATIONS
MAKE REFINANCE OF TYPICAL SHORT-TERM COMMERCIAL LOANS NEXT TO IMPOSSIBLE.
BANKS ARE EXTENDING TERMS, HOPING FOR PRICES TO RISE. THE PRICES CONTINUE TO
FALL. $$$
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The Moodys/REAL commercial property price index fell 1.5% in October from the month before.
Commercial prices have fallen 36% from a year ago and are 44% below the peak in October 2007.
Valuations cripple the entire refinance process, since banks are halted by loan ratios to equity, an immediate
obstacle. Whether or not prices accelerate down further does not address the massive price declines to date.
Demand is reduced for apartments, offices, and retail space by the chronic job cuts and lack of hiring. Office
vacancies may approach 20% next year, property brokers Jones Lang LaSalle and Grubb & Ellis stated last
month. Matthew Anderson is a partner at Foresight Analytics. He said, "The #1 issue facing commercial
real estate right now is the value declines that we have seen since prices peaked. I tend to think that the
size of the declines moving forward is going to be smaller." See the Bloomberg article (CLICK HERE). If
the Extend & Pretend policy used by banks is ended, and commercial properties are put up for sale upon
liquidation, Anderson and others might be surprised by further hefty price declines.
◄$$$ COMMERCIAL LOAN LOSS RISK REMAINS BIGGEST BANK RISK. THIS GRAND
PROBLEM DOES NOT GO AWAY. ITS LOSSES ARE MERELY PUSHED BACK DEEPER ONTO
BANK BALANCE SHEETS. CONTINUED DEFAULTS GUARANTEE LOSSES. JUST ONE MORE
HUGE LINGERING OVERHANG. $$$
US bank examiners once more declare that losses on commercial real estate loans pose the biggest risk to
US banks this year. Eugene Ludwig is former Comptroller of the Currency, now chairman of Promontory
Financial Group. He headed a review, and concluded the losses would not threaten the entire financial
system. He said "Losses from commercial real estate will be quite high by historic standards. Hundreds of
banks will fail or will be resolved over the course of the cycle." Numerous other bank leaders admit the
strain, exposure, trouble spots, and headwinds derived from the commercial arena. Falling collateral
property value is a major source of the problem, especially with debt refinance. The failure of loans backing
shopping malls, hotels, and apartments may impede the USEconomic recovery as small and medium sized
banks reduce lending and conserve capital to absorb losses. The default rate on commercial mortgages
held by US banks more than doubled to 3.4% in 3Q2009, according to Real Estate Econometrics.
Default rates in the first three quarters of 2009 have been the highest since 1993. Banks and investors held
about $3.5 trillion of commercial real estate debt as of June 2009, with about $1.7 trillion of that total on
the books of banks and thrifts, according to USFed data. About $500 billion of the loans will mature each
year over the next few years. Regional banks are almost four times more concentrated in commercial
property loans than the nation's biggest banks. Smaller banks are comparatively more vulnerable. The big
banks are not growing stronger at the expense of the smaller banks. The big banks are favored by the system
rules to a much greater degree. The entire banking system swirls down the toilet, with attention recently
directed at the regional and smaller banks. See the Bloomberg article (CLICK HERE).
◄$$$ COMMERCIAL MORTGAGE EXTEND & PRETEND HAS BECOME POLICY. EVIDENCE OF
SMOKING GUNS IS PROVIDED FROM INSIDE THE USGOVT BOWEL CHAMBERS. SOME CALL
IT CLEVER EXPEDIENT, WHILE OTHERS BASIC ACCOUNTING FRAUD. WHAT WORKS FOR
HOUSING NOW IS APPLIED TO COMMERCIAL PROPERTY. $$$
George Ure offers direct evidence of coordinated accounting fraud, actually relaxation of accounting rules
to accommodate fiction and fantasy. The banking community wishes desperately to avoid major asset
writedowns and losses. They lack reserves to do so. A friend of Ure attended a senior level Commercial Real
Estate (CRE) conference. So as to protect the banks from massive write-downs and bankruptcy, the USDept
Treasury will institute a policy of 'Extend & Pretend' on the grand widespread scale for CRE mortgages that
are coming due. Ure wrote, "Here is the real stunner. A senior person at Treasury said to a small group of
us that it is now official Treasury policy to extend and pretend on [commercial] real estate loans. In
other words, the policy statement from last week says, if you can make an analysis that says even if the
current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years,
and if the economy gets better, and if the loan can be amortized down to where the loan is no longer
more than the value, then the lender does not have to take an impairment writedown. Loans are to be
modified by rate reductions, deferral of reserves, deferral of amortization or whatever. Just NOT
principal reduction. This is just like they are doing in housing." All that is required is imagination and a
stated scenario.
The free market seeking an equilibrium price is no longer permitted policy on any property asset, whether
residential or now commercial. An official posture is maintained that current USGovt policy is working and
new jobs are being created, and housing prices would surely recover. Reportedly, at least 50 of the most
senior, smartest real estate professionals were in attendance, and they objected in opposition with open
insults. Accounts described the setting like a hostile town meeting. The professional CRE group called the
accounting rule guidance terrible public policy. They replied that for job creation, the system needs lower
rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept intact at old levels
without writedown and the commercial property values not reduced, then landlords would be in no position
to reduce rents to an economically viable level for tenants. Retailer costs remain high. Lower prices to
induce sales cannot come. When pressured by the crowd, the USGovt official from the USDept
Treasury actually said, "What do you want us to do, bankrupt all the banks?" This is clear evidence that
the US banking system is insolvent, busted, and operates like a pack of trained zombies. See the Urban
Survival article (CLICK HERE).
◄$$$ A MORTGAGE MELTDOWN AWAITS AGAIN, AS WAVE II FROM OPTION ARMS HAS
BEGUN. THE MORTGAGE RATE RESETS WILL BECOME A BIG PROBLEM. IT WILL LIMIT THE
USFED ABILITY TO RAISE RATES. WORSE, THE RISING LONG-TERM BOND YIELDS WILL
DIRECTLY AFFECT MORTGAGES. THE USFED WILL FACE PRESSURE TO CONTINUE WITH
MONETIZATION. $$$
By all indications, the next wave of mortgage defaults will be as powerful, if not more powerful, than the
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first. In the first wave, the sub-prime meltdown exploded, as the low grade mortgages failed in droves for
borrowers with lower credit worthiness. This next will feature the prime borrowers, more sub-prime
borrowers, and Alt-A borrowers who had one thing in common. Banks approved them all for loans to
buy homes with little or no income verification and often nothing on down payments, not even assets (see
NINJA loans). Loan balances are widely expected to be greater on this wave, as the subprime loans tended
not to be big. The time has finally come for the much awaited blowup of Option ARMs as their mortgage
rates reset. Monthly payments will rise significantly upon reset, sometimes twice or triple. According to the
chart, detonations around the country should arrive in April 2010, reach a peak by September 2011, not to
clear up until the second half of 2012. Some analyst estimates have built in forecasts that residential home
value could decline another 10% to 15%. Given the mammoth hidden inventory held by banks of foreclosed
properties, some powerful pressure is not only mounting, but never really backs off. The unrelenting
pressures will continue to push home prices down. The second wave of mortgage defaults stemming from
Option ARMs is just one more powerful downward force. The lessons from Japan are usually ignored by
myopic arrogant US analysts. The Japanese suffered well over 50% property price declines in the 1990
decade.
If interest rates are ordered to rise, the impact to Option ARMortgages would be amplified. The mortgage
rate reset process responds to current prevailing mortgage rates and also the prevailing LIBOR short-term
rates. Pressure will be extreme for the USFed not to wreck the housing market even more than already. Any
official USFed rate hike in the first half of 2010 would probably exacerbate the adjustable rate process for
resetting. The results could be truly catastrophic. For a comprehensive and unique review of the residential
real estate market, see Reggie Middleton's analysis on Safe Haven (CLICK HERE).
Catherine Fitts, former auditor of Fannie Mae finances within the USDept Housing & Urban Devmt, pitched
in with a personal message via email. She said, "My preliminary research indicates that Option ARMs will
hit in 2010 and Commercial Real Estate will hit primarily in 2011. That would fit with how bubbles have
traditionally managed to burst. One question is who will buy Treasuries in 2010? Fannie & Freddie are
not only a great place to deal with ARMs and modifications, they can also serve as Treasury purchaser of
last resort and do it in a manner that generates the profits needed to shelter the ARM and other write
downs." Prepare for Wave II in the credit crisis. Worse interior distortions will surely come in shell games
of accounting.
◄$$$ THE HOUSING MARKET CANNOT REMOTELY STABILIZE WITH A MOUNTAIN OF
HIDDEN INVENTORY. LOS ANGELES TOTAL SHADOW INVENTORY IS 5X LARGER THAN THE
STATED MULTI-LIST INVENTORY, COUNTING ALL HOMES IN SOME STAGE OF THE
FORECLOSURE PROCESS. AT A NATIONAL LEVEL, THE HIDDEN HOUSING INVENTORY IS
MONSTROUS, A HUGE GROWING OVERHANG. $$$
Los Angeles County has 269 zipcodes and 19,400 homes on the Multi-List inventory shared by realtors to
catalog the inventory of available homes for sale. However, counting the foreclosures, the scheduled
auctions, the bank owned properties, and the 90-day delinquencies, the total including the so-called
shadow inventory comes to almost 100 thousand homes in LA County. That is 5x the officially stated
inventory and a staggering overhang. It is properly called the Shadow Housing Inventory. The only way the
housing market can be spared of downward price pressures from the horrendous hidden supply waiting to be
dumped on the market is for the extra inventory supply to be gobbled up by Fannie Mae. See the Dr Housing
Bubble article (CLICK HERE).
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Turn to the national level. The visible supply of unsold housing inventory was 3.8 million units in
September 2009, down from 4.7 million a year earlier. The visible inventory measures the unsold inventory
of new and existing homes that are currently on the market, apart from additional sources of homes. The
broader total unsold inventory was 5.5 million units in September 2009, down from 5.7 million a year ago.
It combines the visible and pending supply from additional sources. The visible supply has decreased while
the pending supply reveals huge inventory building rapidly. The pending supply must include homes stuck on
bank balance sheets, not really pending for sale at all. The pending plus hidden supply will have a great
impact on the housing market for the couple years at least. Notice that the REO bank inventory (in
green) has declined nicely, but the foreclosure and serious delinquency categories (in yellow and red)
have gone haywire out of control. The official USGovt loan modification programs are a total farce, as the
chronicly dead loans feed the foreclosure process in a grand revolving door. Lenders modified 31,382 of the
4 million mortgages targeted for loan relief under the Obama Admin foreclosure prevention plan through
last month, the Treasury Dept announced on December 10th. That is an embarrassment of under 1% aided.
They want only the appearance of aid to the people, but vast rivers of aid to banks.
◄$$$ THE HOUSING MARKET CANNOT REMOTELY STABILIZE WITH A MOUNTAIN OF
HOMES THAT ARE INSOLVENT ON THEIR LOANS. A STAGGERING NUMBER OF CALIFORNIA
MORTGAGES ARE UNDERWATER, WITH LOAN BALANCE IN EXCESS OF HOME VALUE. $$$
The housing market is deeply disrupted. Not only are many of the underwater home loans directed for sale in
the housing market, but a flood of new renters entered the market. The total of 1.8 million California
mortgages are listed as underwater and insolvent. In 2008 alone, over 100 thousand renters were added
to the market. When no meaningful loan modification takes place, homeowners remain insolvent. They
merely participate in a revolving door that benefits Wall Street firms guilty of bond fraud. Shuffling the
loans, altering the loans, and swapping bond owners accomplishes something important. It removes legal
liability and thus protects the bond fraud kings from lawsuits. A horrible side effect is rarely mentioned.
Those who dwell in underwater homes make lousy consumers, and lousy economic participants generally.
They spend less. They invest not at all. They form no businesses, nor expand businesses. They become
zombies within the system, hoping when hope fades.
Dr Housing Bubble summarized the situation well, as fraud coupled with bad judgment and non-existent
vested interest. He describes a mortgage welfare program, with loan subsidies installed nationally. He said,
"And things are going so good that Fannie Mae and Freddie Mac are having their caps (credit & aid
limit) pushed upwards. Turns out losses are just pouring in. Do you remember the gall of these people
telling us we were somehow going to turn a profit on this? This was the ultimate sucker play. If banks
had to make mortgages with their own money, you can rest assured the interest rate would be somewhere
between 8% and 10% and they would be limiting who they lend money too. I would assume a more
sizeable down payment as well. But instead, banks with their horrible underwriting standards are
actually dishing out USGovt backed loans with artificially low rates. These are the loans that are now
imploding. Banks do not give a crapp since they do not hold the note." The banks have degraded into loan
originators without vested interest, meaning no concern or loss if the home fails. Losses go to the USGovt
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in the form of huge deficits. See the Dr Housing Bubble article (CLICK HERE).
◄$$$ PRIME MORTGAGES ARE GOING DELINQUENT. RECALL IN SUMMER 2007 THE HACK
USFED CHAIRMAN BERNANKE CALLED THE CREDIT CRISIS A SUBPRIME PROBLEM, EVEN
CONTAINED. THE PRIME DQs WILL ROCK THE BANKS WITH MORE LOSSES. JUMBO
MORTGAGE DELINQUENCY RATES ARE GOING OFF THE CHART. FIGURES ON THE LOAN
MODIFICATION REVOLVING DOOR ARE UPDATED. $$$
The byline is troubled home loans go worse, typically strong home loans go more delinquent, modified
mortgages fall behind again, and homes in foreclosure rise. No recovery here! For the first time ever, the
number of homes in foreclosure with mortgages serviced by US-based lenders surpassed the one
million mark, according to both the Office of Thrift Supervision and Office of the Comptroller of the
Currency. The report covers 34 million loans, almost two thirds of all US mortgages. They made the
conclusion, "Mortgage performance continued to decline as a result of continuing adverse economic
conditions including rising unemployment and loss in home values." They should tell Wall Street and the
USFed, who are far too busy congratulating themselves.
Of the mortgages at national banks and thrift institutions, 12.8% were in some phase of delinquency. Their
DQ rate has grown for six straight quarters. Loans 60 days past due and loans to delinquent borrowers who
have filed for bankruptcy rose to 6.2% of bank portfolios, up from 5.3% in 2Q2009 and up from 3.6% one
year ago. The ugly data point comes from holders of prime mortgages. The prime DQ rate 60 days past
due jumped to 3.2%, up from 2.7% in 2Q2009 and up from 1.5% one year ago. Prime delinquencies
thus doubled from last year. The DQ rates for jumbo mortgages are going haywire, especially in the
sunshine state. On a national level, the jumbo DQ rate has risen to 9.2%. Worse, the DQ rate for
2006/2007 vintage jumbos is a staggering 12.7%, an astonishing level. These older vintage large home
loans have exploded in delinquency. The Florida vintage DQ rate is 16.0%, previously measured at 7.3%,
now an utter disaster. The California vintage DQ rate is 10.8%, before at 3.5% only. The New Jersey rate is
7.1%, previously at 2.4% only.
Furthermore, homeowners with modified loans defaulted in repeated manner at high rates. More than half of
them fell 60 days or more behind in their payments within six months of the modification taking place. The
repeat rate has improved, as 35% of loan modifications from 3Q2008 went delinquent within three months.
The DQ rate has fallen to 19% for loan modifications from 2Q2009. Reworked loans are pushed more
recently to actually aid homeowners. Pressure builds for programs that permit judges to lower mortgage
loan principal as part of bankruptcy. Amazingly, given the past failures, mortgage servicers started almost
twice as many modifications as new foreclosures. Another report recently cited 1.7 million homes headed
for the market because of foreclosures or delinquency. This backlog of 'Shadow Inventory' increased
55% in the year that ended September 30, according to First American CoreLogic. The overhang of supply
grows fast. No recovery here! See the LA Times article (CLICK HERE).
◄$$$ STRATEGIC DEFAULTS PLAGUE THE MORTGAGES FOR THE BANKING INDUSTRY.
PEOPLE ARE JUST WALKING AWAY. THEIR UNDERWATER STATUS ON HOME LOANS IS THE
MAIN FACTOR, AS HOPE IS LOST. $$$
The Mortgage Bankers Assn recently told the Wall Street Journal that homeowners who default voluntarily
on their mortgages should think about the message given to family and friends. The implication is of a social
responsibility to honor debts. A number of prople are voluntarily choosing not to pay, a shocking
phenomenon that took root in early 2009. The housing collapse left 10.7 million families in a position
owing more than their home value. Enter the so-called 'Strategic Default' where they save their cash
and defy the banks. The banking industry needs to re-think their own words. They were responsible for well
over $1 trillion in mortgage bond fraud, selling toxic bonds knowingly to foreign institutions. They were
responsible for coerced TARP slush fund payouts, hidden from proper disclosure. The message given by
volunteers in default is revenge taken against a sprawling financial crime syndicate. Besides, financial firms
routinely default on loans with premeditations. Morgan Stanley recently decided to stop making
payments on five San Francisco office buildings. The buildings were bought at the height of the boom,
values having plunged. Nobody has criticized Morgan Stanley as immoral, or giving the wrong message to
the financial community. Even finance mafia don Hank Paulson, former Goldman Sachs CEO and former
Treasury Secretary, once said "Any homeowner who can afford his mortgage payment but chooses to walk
away from an underwater property is simply a speculator, and one who is not honoring his obligation."
Paulson engaged in gobs of speculation during his career and had a big hand in the TARP congame. My
sources indicate that threats of a dirty nuke attack upon WashingtonDC were part of the motive for the
USCongress to pass the controversial TARP Bill. The threats allegedly came from a tiny ally nation, not an
enemy state. That tiny ally holds hundreds of billion$ of stolen money in its banks from various schemes
including the one by Madoff.
Mortgage holders do sign a promissory note, a formal promise to pay with consequences. The usual penalty
for nonpayment is surrender of the property, a suffered consequence. In some states, lenders have legal
recourse to attach other assets like their cars and savings accounts. A study by the Federal Reserve
Bank of Richmond found that defaults are lower in such states with wider powers of confiscation. Lenders
can threaten the borrowers with legal judgments against their assets. Given that nearly 25% of mortgages
are underwater, and that 10% of mortgages are delinquent, it is a grand shock that more people do not
exercise the strategic default. The main fear by disstressed homeowners is ruined credit record and future
hardship to borrow, like even a basic car loan. Some argue that the USGovt should encourage borrowers to
default when in their economic interest. Morality is out of the equation these days, certainly for bankers. If
lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms and
reduce loan balances meaningfully. That might relieve the situation from stuck status. The onus for restraint
should not be put on ordinary homeowners. If the Mortgage Bankers Assn opposes defaults, its
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members, presumably the experts in such matters, might take better care not to lend people more
money than their homes are worth, or take better care not to lend without checking income, or take
better care not to structure silly low mortgage rates that double after two years. DUH!!!
Also, see the article by Richard Benson entitled "Jing Mail, Jingle Mail" on Financial Sense (CLICK HERE).
He makes many great points, among them that individual homeowners are not responsible for the housing
and mortgage bust or the aftermath, and need to survive during a time when the banks receive grandiose aid
but the people receive only foreclosure notices. Benson also reveals that the Average Joe might pay his
mortgage forever and never own his house since it fell in value by a few hundred thousand$.
USFED TRAPPED IN MONETARY POLICY
◄$$$ USTREASURY DEBT SUBJECT TO LESS THAN ONE YEAR IN MATURITY GROWS IN
VOLUME. SHORT-TERM OBLIGATION LEAVE THE USGOVT EXTREMELY EXPOSED TO ANY
OFFICIAL INTEREST RATE HIKE. THE VULNERABLE CONDITION IS ALARMING, AND MIGHT
DICTATE NO RATE HIKE FOR A LONG TIME. ADDING TO THE DANGER IS THE
PERFORMANCE OF USTREASURYS, WORST OF ALL SOVEREIGN DEBT IN 2009. $$$
An October 2009 edition of the Economist journal exposes the challenges facing the USGovt debt funding
needs. It put the monetary situation in a more illuminating light. They wrote, "The Treasurys ravenous
borrowing needs also leave lots of opportunities for something to go wrong. In the past two years, the
portion of its debt maturing in less than a year has jumped from 30% to over 40%, the most since the
early 1980s. In the fiscal year that ended on September 30th of 2009, the Treasury held an auction [of
USGovt debt] on average more than once a day to finance nearly $7 trillion of new and maturing debt."
That is an historically unprecedented volume of debt that the USGovt has financed in the very short term.
Pressures are monumental to continue the 0% monetary policy. The official interest rate is not going to
return to a normal higher level anytime soon. Clearly, the USGovt has taken advantage of low short-term
rates by funding short as they say, but without concern of long-term consequences. The one-year USTreasury
Bill yield has been 2.5% or less since June 2008, and 0.8% or less since March 2009. Most debt defaults in
the credit industry come from inability to roll over short-term debt obligations. The USTreasury debt
rollover should experience considerable challenges in the next two years. The urge to monetize debt will be
used heavily as a result, thus adding to the extreme risk of the confidence in the USDollar and its
USTreasury debt. The USFed cannot afford to interfere with the task of rolling over the debt with a decision
to hike the official interest rate. In FY2007, the USGovt spent $700 billion on interest to service the
federal debt and related costs. The category is one of the four major spending destinations, along with
War & Defense, Health & Human Services, and Social Security. No! The USFed will not hike rates and
cause a soaring jump in debt service!!
The USTreasury Bond posted the worst performance among sovereign debt securities across the globe in
year 2009. The USGovt sold $2.1 trillion of Notes and Bonds to fund its failed and broken policies that
resulted in profound trillion$ deficits. Investors in USTreasury securities lost 3.5% through December
30th, according to Bank of America Merrill Lynch indexes. It was its worst return on investment since at
least 1978, and right in the middle of a bond bubble. Risk abounds to sustain the big bubble! The
USTreasury market must contend with deficit spending, tremendous issuance, the pox of
monetization, diversification by creditors, the weakness in the USDollar, the added burden of Fannie
Mae debt transfer, and more. The yield on the benchmark 10-year note climbed to 3.84% at yearend 2009,
from 2.21% at the yearend 2008. The two-year USTNote yields rose to 1.14% from 0.76% over the course
of the year, another bad performance. See the Bloomberg article (CLICK HERE).
◄$$$ THE USFED CONTINUES TO LOAD UP ON TOXIC MORTGAGE BONDS, DESPITE ITS
PROTESTATIONS TO THE PUBLIC. TALK IS CHEAP, AND THE BERNANKE HAS PLENTY OF IT,
MOSTLY WRONG IN A DISMAL RECORD OF INCOMPETENCE AND DECEPTION. $$$
The USFed bought $12.0 billion of USAgency Mortgage Bonds in the first week of January, on a net basis.
The previous week shows a net purchases of $9.3 billion in these toxic bonds. The purchases brought the US
central bank total tally of mortgage bonds guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae to
$1.123 trillion since January of 2009. The USFed bought $14.5 billion gross of agency MBS from
December 31 through January 6, but sold $2.5 billion of mortgage securities in rebalance. The Fed aims to
buy $1.25 trillion of agency MBS in a bid to bring down mortgage rates and to stimulate the sluggish
housing sector. The more mortgage bonds they purchase, the more insolvent the central bank balance
becomes. It is that simple! USFed Chairman is sounding more and more desperate. See the Reuters article
(CLICK HERE).
◄$$$ DESPITE USGOVT CLAIMS ON PROFIT, THE T.A.R.P. FUND DETAILS ON DEADBEATS
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READS LIKE A LAUNDRY LIST. $$$
A growing number of the beneficiaries of the Troubled Asset Relief Program continue to struggle with
financial problems. The majority of financial firms have been unable to repay the USGovt. The deadbeat
tally is 15 banks in May who failed to make the required payments, according to federal data. The number
rose to 33 banks in August. The trend grew worse, as 55 banks failed to make the dividend payments
due November 17th, enough to make a 67% jump over the number of delinquent banks three months
earlier. Lies surround the official description, just like fraud surrounds the TARP Fund administration.
Countless criminal investigations are in progress. Both the Bush and Obama Admins described the
investments as available only to strong and healthy banks, an utter bad joke. Two of the largest companies
that have missed payments, CIT and UCBH (United Commercial Bank Holdings), have filed for bankruptcy,
killing the entire investment and removing any obligation to make payments. An additional 14 of the
delinquent banks signed contracts with the USGovt that permit them to avoid missed payments. The original
TARP plan was presented to invest in banks as a way to support increased lending. Instead, lending has
declined for five consecutive quarters. It turned into a secret gigantic slush fund. Fraud and deadbeat banks
are the real story. The lawsuits and Congressional queries are stalled that would force TARP Fund
disclosure. The syndicate resists and will likely prevail, since they control the USGovt, the regulators, and
the law enforcement. Meanwhile, Bernanke describes the program as a great success. See the Washington
Post article (CLICK HERE).
◄$$$ IN A BIZARRE MOVE, THE USFED PROPOSES RATHER QUIETLY TO ISSUE ITS OWN
DEBT IN OFFICIAL FED BILLS, AS THE DEBT PROPAGATION BLOSSOMS IN THE WEIMAR
WINTER. NO PRECEDENT EXISTS. THE USFED IS TRAPPED, WANTING TO CONDUCT LIMITED
BONDS SALES. RUMBLINGS ARE HEARD FOR ENDING THE EASE CYCLE AND STARTING THE
DRAIN CYCLE. ANALYST WARNINGS GROW LOUD. $$$
US Federal Reserve officials are considering limited sales of bonds from their bloated $2.2 trillion balance
sheet. They need new tools for withdrawing record monetary stimulus. A compromise route instead of
actual bond market drainage under study would allow small volume of bonds to be unloaded at announced
times. Ignore their words but watch their actions! That is my analytic motto! Despite all public statements
given as protestations against further monetization of USGovt debt, whether Treasury or Agency, the USFed
is preparing for a vast second round of Quantitative Easing. The QE is but a name for grotesque money
printing. The USFed has become the arch enemy of the USDollar. The USFed in fact might wait until the US
Dollar index rallies further, if possible, before it announces the next round of long-term USTreasury
purchases.
USFed Chairman opened the can of worms in a public speech. His language disguised the proposal of
USFed issued debt in term deposits, essentially USFed Bonds. Selling the USFed's accumulated USTreasury
and USAgency toxic hoard to drain reserves is completely out of the question, since it would bring to a
sudden end both the federal deficit financing and the housing refinance bubble, from much higher bond
yields. Enter the new Term Deposit Facility, but first, a bit of background. The spread between short-term
and long-term USTreasurys is of major concern. It serves as a much more reliable price inflation signal than
their stupid mangled TIPS (inflation security). Bernanke said, "However, if the spread does become large
and variable, then policymakers will need other tools for strengthening their control of short-term
interest rates. With that in mind, monetary policymakers have asked the Federal Reserve staff to develop
the ability to offer term deposits to depository institutions and to conduct reverse repos with other firms.
These tools are similar in nature, as they both absorb excess reserves by replacing them with a term
investment at the Fed."
Zero Hedge provides background. They wrote, "Common knowledge holds that the Fed does not have
authority to issue its own debt. The very thought of the Fed competing with Treasury at auction does not
seem kosher. Yet, little more than a year ago, with a balance sheet that had recently exploded several
orders of magnitude, the Fed was seriously contemplating the issue and exploring it publicly." The
USFed routinely explores new tools. But the Federal Reserve Act does not explicitly permit it from issuing
debt securities beyond currency notes. Since when does the law block the path of bankers?
Janet Yellin broached the subject of Fed Bills. In a May 2009 speech, she said "An alternative approach
that could accomplish the same goal, and perhaps do it better, would be something completely new for
the Federal Reserve. That is to issue interest bearing debt broadly to private investors. Let's call this debt
Fed Bills. Congress would have to authorize this, but it too is a tool available to many central banks. The
sale of Fed Bills would reduce the reserves of the banking system, as in a typical contractionary Open
Market Operation. As with interest on reserves, we could accomplish a tightening of policy while
maintaining our support of credit markets. But Fed bills would have an advantage over interest on
reserves. The loans to the Fed would come from investors throughout the economy, not just from banks."
See the Federal Reserve document (CLICK HERE). Just who the hell would buy these Fed Bills? More
siphons to drain the system? Or juggles to mask bond counterfeit? See the Zero Hedge article (CLICK
HERE). Without any doubt in my mind, we are witnessing the pathogenesis to a Modern Day Weimar
Finance system. Analysts raise no alarm whatsoever to the advent of Weimar America. Self-protection
comes easily with gold, silver, and other key commodities.
The risk is rising. The USFed is trapped. They know it. Much time has passed since the staggering increase to
the USFed balance sheet. It is loaded with toxic bonds worth far less than the book value stated. The
rumblings have begun in earnest for change. But risks of errors are enormous. Former USFed Governor
Lawrence Meyer said, "The attitude toward asset sales is changing in terms of more in favor and more
open-minded, and doing it very gradually. [Devising a plan for pulling back stimulus] is under way
intensively on the Federal Open Market Committee." Mark Spindel is chief investment officer of Potomac
River Capital. He said, "Here is the worry: What if they try to tighten and they lose control of the federal
funds rate? The challenge they have is to articulate how they are going to tighten and make sure all these
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tools work together." Dan Greenhaus is chief economic strategist at Miller Tabak & Co. He said, "If they
get this wrong, volatility is going to be through the roof. Investors are over- discounting the difficulty
that is coming our way when the Fed begins the process of raising interest rates." Brian Yelvington is
director of fixed income strategy at bond broker Knight Libertas. He said, "They are going to have to sell
assets [to maintain control over the benchmark lending rate.] The volatility of the effective federal funds
rate around the target is probably going to be a lot greater than it has been in the past." These private
non-government analysts have a good grip on reality and the huge risk facing the USFed to return to
normalcy. The 0% rate and heavy money creation will continue. See the Bloomberg article (CLICK HERE).
◄$$$ USGOVT DEBT LIMIT WAS RAISED IN THE NICK OF TIME TO AVOID TECHNICAL
DEFAULT. THE DISTRESS CONDITION WILL LINGER. THE IMAGE OF THE USGOVT DEBT WILL
REFLECT THE PANICKY ONGOING EDGE. $$$
Three days proved to be the actual buffer for the Obama Admin to avoid a technical bankruptcy. What a
reckless spending spree by the USGovt in reaction to the credit crisis, the economic recession, the
nationalizations, and endless wars. The new leeway is just $140 billion before the revised debt ceiling is
breached. Look for another $130 billion of new USTreasurys to be set for auction by January 15th. Pressure
mounts from expedience to devote some TARP funds to pay down USGovt debt. See the debt limit (in
orange) and the other series of outstanding debt fast approaching it. Thanks to Zero Hedge for the chart.
◄$$$ USGOVT DEBT LIES AT GREAT RISK, SO SAYS ROBERT RUBIN. THE ARCHITECT OF
FRAUD AND FAILURE IS A CREDIBLE SOURCE. $$$
Rubin is a former superstar Goldman Sachs currency trader. He is former Treasury Secretary from 1995 to
1999 in the Clinton Admin. He resigned six months early in 1999 so that he could short the stock market
and make billion$ in personal profit. His reign of financial fraud featured the pillage of the USGovt gold
treasure, from near 0% lease and sale with leveraged contracts by Wall Street firms, in particular Goldman
Sachs, his alma mater. He was the first powerful player from Wall Street who installed lasting appendages to
the USDept Treasury, thereby firming the grip of the financial syndicate that lasts to this day. In fact, the
Treasury Secy must be from Goldman Sachs. He now serves as co-chairman of the Council on Foreign
Relations and is a fellow of the Harvard Corporation. The CFR controls the USDept State with extremely
powerful Israeli connections. Some critics argue that no important Cabinet appointment can be made
without Israeli approval. Unsure here about that claim!
Rubin should know about risk of ruin, since he set up the USGovt and USEconomy for the ruin in progress.
It is considered a Rubin Doctrine to kick the can down the road and delay reckoning to a later date. That
permits pilferage and exploitation in the present. The removal of USGovt gold reserves rendered its debt
without sufficient reserve capital. Rubin now believes all hell could break loose because of huge
USGovt debt. He believes the United States faces projected 10-year federal budget deficits that seriously
threaten its bond market, exchange rate, economy, and the economic future of every American worker and
family. He said, "Our bond and currency markets could react with severe distress to fears about
imbalances in the supply and demand for capital in the years ahead or about the possibilities of
inflation. Those effects have been averted so far by a number of factors: large inflows of capital from
abroad into Treasury securities; concerns about other major currencies; the low level of private demand
for capital; and the psychological state of the market. But this cannot continue indefinitely. Change can
occur with great force and unpredictable timing." Thanks for pitching in, Bob. Nice to share your views on
failure. Now go back into hiding! Maybe you will be arrested for grand bond fraud in the next several
months!
◄$$$ THE BIG BANKS HAVE A TOTAL LACK OF EXCESS RESERVES. INSTEAD A MOUNTAIN
OF NON-PERFORMING LOANS & LEASES RESTS ON THE BANK BOOKS, FOR WHICH BANKS
HAVE RESERVES HELD AT THE USFED. THE USFED CANNOT DRAIN BANK RESERVES, SINCE
THEY ARE INDIRECTLY DEDICATED TO OFFSET LOAN LOSSES. $$$
Some clarity must come to bank reserves. Most analysts and the investment community believes the bank
industry holds tremendous reserves at the US Federal Reserve. No analysis has stated this many times also,
incorrectly so. The reality is that there are no Excess Reserves. The reserves they do have offset the
huge pile of non-performing loans held by the banking system, and stand in lieu of formal accounts for
bank loan loss reserves. The banks have almost no loan loss reserves, in their formal accounting. So the
USFed accounts that hold bank reserves are defacto loan loss reserves. Consider the total non-performing
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loans. The St Louis Fed provides reports of condition and income for all insured US commercial banks.
Note how 5% of total loans are non-performing loans, in a very fast rise from a 1% level in 2007. The
rise reflects their grotesque insolvency, and loan failures occur in their wake as a process. Non-performing
loans are those loans that bank managers classify as 90-days or more past due or in non-accrual in the call
report. On Friday, JPMorgan offered is Q4 earnings report. A rotten plum was prime mortgage writeoffs of
$568 million (=3.81% of book), up sharply from $195 million (=1.2% of book) a year ago. Another rotten
plum was $306 million in credit card losses. The biggest rotten plum of all was $4.2 billion set aside to
cover mortgage losses, up $653 million from 4Q2008, a giant 540% jump. No mention of vacant loan loss
reserves.
The non-performing loan rate has indeed soared. In order to quantify the actual amount involved, take
the 5% of nearly $7 trillion in total loan volume to estimate $340 billion in non-performing loans on
the books of banks. This is a staggering unprecedented amount of impaired loans. That covers only what
they admit. Non-performing loans do not include off balance sheet assets, various swaps with the USFed,
and other assets held on the books at valuations best described as wishful thinking or complete fantasy. So
the $340 billion estimate is very conservative, a baseline.
Banks are required to hold official Loan Loss Reserves, in accounts set aside, not to be touched, for usage in
resolving bad loans and making writedowns of impaired assets. The Bush Admin and USFed permitted such
reserves to run down to nothing, and the Obama Admin has been frozen in inaction on the matter. The big
banks have responded to their insolvent condition by refusing to approve much in new loan volume.
The decline in volume for loans and leases in 2009 is historically acute. They cut back because they are
insolvent and busted. Banks would normally have made provisions for those loan losses already, in legal
prepared fashion. Enter the 2000 decade, where banks could do anything they wanted, with no regulatory
oversight, even commit massive fraud, enter casinos with their funds under management, even put money
market funds at risk. Banks did not create Loan Loss Reserves, period! Assets held at banks whose ALLL
exceeds their non-performing loans are not zero, but at 15% ratio they are far below the 90% level seen as
the norm. Banks have their reserves parked at the USFed, not spare funds actually. They are a Proxy to
offset Non-Performing Loans, a practical Loan Loss Reserve. The ALLL stands for Allowance for Loan &
Lease Losses Methodologies and Documentation for Banks.
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HAT TRICK LETTER - Macro Analysis Report
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Bear in mind that accounting practices dictate that allowances for loan losses make a direct hit to earnings.
Next consider that allowances held in reserve are at recklessly low levels. The conclusion is that bank
earnings and capitalization ratios are ridiculously exaggerated. There are no excess bank reserves, not
much bank earnings, but decent stock valuations. See the Market Oracle article by Mike Shedlock (CLICK
HERE).
◄$$$ THE USFED REMAINS TRAPPED AT 0%. CALLS FOR RETURN TO NORMALCY ARE
COCKEYED, AND DEPART FROM REALITY. THE 0% RATE WILL CONTINUE, AS RISK
CONTINUES TO BE TRANSFERRED TO THE USDOLLAR. THE RISING LONG-TERM RATES WILL
PROBABLY BE STEMMED, OR ELSE JPMORGAN AND THEIR CONTROLS WILL STOP. FAST
RISING RATES WOULD SIGNAL A PROBABLY USTREASURY DEFAULT. $$$
Many analysts expect a return to normalcy in interest rates. My view 14 to 18 months ago was in agreement,
but my analysis was wrong, a bit naive. Rates are NEVER going up appreciably because the USFed will
monetize the debt as much as necessary to maintain the appearance of normalcy. They do not want to
see a bust in the USTreasury bubble, nor a rout by foreign creditors. They will monetize the USGovt debt at
the risk of the USDollar crumbling beneath their feet. RATES ARE NEVER GOING TO NORMALIZE,
EVER!! They have not been normal since early in the 1990 decade, when the bond vigilantes were
slaughtered. The tool and weapon used was JPMorgan's powerful Interest Rate Swap contract. Times could
change if the world decides to throw off the shackles of the USDollar as the world's reserve currency. The
cost of money has been fundamentally mispriced for more than a decade, and will continue. The
USEconomy and US financial sector are hopelessly dependent (nay, addicted) to artificially low interest
rates. JPMorgan can essentially PLANT long-term interest rates anywhere they choose. Some fine analysts
such as Ambrose Evans-Pritchard believe that the American machine is subject to the natural forces of
gravity. Pritchard and other competent analysts curiously remain delusional, a bit naive, but also possibly
timid to state the corrupt truth. They simply cannot see that the entire global financial foundation under the
USDollar is a freakish platform built of paper beams and falsely engineered sinew controlled by strong
distortive levers. The one TRUTH we can all rely upon heavily is that no return to normalcy is even remotely
possible. A complete explanation why in the mainstream would discredit the entire system.
Rates are not going to rise anytime soon, at least as long as the USFed, JPMorgan, and Goldman Sachs
dominate the landscape. In fact, if long-term rates do rise sharply, it will be notice of impending USTreasury
Default, and a series of credit derivative explosions. Thanks to Rob Kirby for discussions and exchanges.
Thanks to the following for charts StockCharts, Financial Times, Wall Street Journal, Northern Trust,
Business Week, CIBC Bank, Merrill Lynch, Shadow Govt Statistics.
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