Friday, August 27, 2010

The Bronze Bear is Smiling

The government revised its estimate of the GDP down sharply today from an already weak number. The revision was based on worsening data on the trade deficit particularly with China. These numbers reflect the draining away of the stimulus money from the US economy and into China. China’s promise to revalue the Yuan has turned out to be nothing more than a token gesture.

The Commerce Department has said they will dramatically increase the enforcement of trade rules on the dumping of cheap products into the US that harm domestic manufacturing. In fact they have been bringing dozens of cases, okay last year it was 19 cases and this year it’s 35 but in eight years of Bush the number of cases brought was zero despite thousands of complaints and accompanying over 40,000 factory closings.

The number of factories currently at risk of closing is estimated to be about 90,000. If Obama slaps a 99% tariff on dumping violators as he did on Chinese steel pipe it would be a finger in the dike but the flood is already coming over the top. Even a 35% tax on Yuan to USD currency conversions as some economists propose would not really fix the problem of US companies outsourcing production. Outright tariffs and a crack down on transnational companies dodging US taxes is what is required.

The stock market rose 1.5% today and the excuse was that the GDP numbers weren’t as bad as the economists had predicted. That big bronze bull in front of the NYSE leaves copper cow patties. The real reason the market is up is the Fed Chairman came out with four “new” solutions to stave off economic collapse. First they are going to buy long term Treasury debt and lots of it, he didn‘t say how much but we‘re talking trillions.

Second Bernanke said they will announce that the funds rate will be effectively kept at zero for a “long” period with the hopes that will bring down interest rates charged by banks. Third the Fed will cut the interest rate they are paying banks on the trillion dollars in excess reserves the banks have on deposit with the Fed with the hope banks will start lending it out instead. Even Bernanke didn’t seem to think this would have much effect and said it ran the risk of freezing up the credit market.

Fourth the Chairman discussed a controversial proposal, advanced by some economists, for the Fed to set a medium-term inflation target “above levels consistent with price stability.” But he dismissed that strategy as “inappropriate for the United States in current circumstances.” Of course this completely contradicts the first three parts of his plan because this is exactly what they are doing.

The Federal Reserve is printing money big time to try to keep deflation from taking hold and Bernake acknowledged we are already having some deflation, (do you suppose his house is under water) . Without any restraint on Wall Street they will use these new trillions to inflate commodity markets which will trickle down (alright more like a torrent) into consumer price increases on inconsequential things like food and fuel. Corporations will probably manage to keep “wage inflation” in check however.

Mr. Bernanke painted a rosy picture of  “Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year”. You can translate that into a still bigger trade deficit as people spend more money on things from China. He did say one thing that is almost true, “Central bankers alone cannot solve the world’s economic problems.” Some pundits are painting this a Bernanke saying it’s up to the consumer to borrow and spend more.

 The fact is the Fed had a big hand in causing the problems but they didn’t do it alone. Reaganomics or the de-criminalization of predatory capitalism is what really put the world in this mess and the then Fed Chairman Alan Greenspan was the “expert“ everybody used to justify modernizing the economy or rather undoing that old fashioned New Deal regulation.  But Mr. Bernanke’s comments today did make Wall Street happy, even the bronze bear out front is smiling or is he just licking his chops?

Thursday, August 26, 2010

Bad Omens and gas bags

The DOW sank below 10,000 today and that could be the threshold of perception that finally catches peoples attention but then again maybe not, since Americans barely notice that they own the only occupied house on the block. Nationwide, one in ten of your neighbors are at risk of foreclosure but if you live in a factory town that number is really closer to ten in ten as corporations continue to fire workers by the thousands.

New unemployment claims were down, so things are better, right? Well of course not, we still have far too many claims each week to think we aren’t really losing hundreds of thousands of jobs each month no matter that the government statistics say we are gaining a few jobs.

A total of 302,000 people were added to extended unemployment just last week and that’s about the same number as the previous week.  This was net increase, people falling off at 99 weeks are no longer counted but act as a plus for the unemployment statistics. Starving, homeless people are a plus, welcome to the Libertarian Paradise of America. Democrats should be screaming about this but if they do, they get no face time on corporate media and they want to get re-elected.

More than 40,000 factories have closed in just the last ten years from outsourcing and another 90,000 factories on the verge of closing. As part of Obama’s new leaner government they propose to cut the budget by closing the tiny unit at the Bureau Labor Statistics that keeps track of outsourcing. It’s the new normal so why keep track off it? It’s as silly as counting homeless people, just step over them or run them out of town as more and more cities are doing.

The stimulus was supposed to keep things going through the election but that’s looking iffy. Republicans are hoping for things to go really bad before then and they may just get their wish. The latest scare story that maybe responsible for the today’s market sag is the Hindenburg Omen, a complicated formula for timing market crashes. The problem is that even in hindsight it’s only been right 25% of the time, but like lightning jumping from the zeppelin to the landing tower there might be something to it. Wear your asbestos underwear just in case.

Of course we are riding on a bubble economy that might as well be a highly flammable cloth bag filled with hydrogen. You don’t really need any omens to predict it will be a fiery end. You see the Zepplin Hindenburg was built from highly flammable material, the hydrogen gas wasn’t really the issue. The same way the economy is fundamentally flawed, the stock market bubble isn’t really an issue, it just makes for a bigger fireball. Oh the humanity!

Wednesday, August 25, 2010

Don't tell me that's warm rain

Yesterday’s report on existing home sales showed the worst numbers in forty years that they have been tracking them, today’s Commerce Department figures for new home sales were the worst in the fifty years that they have been tracked. For July new home sales fell nearly 33% from last year and 2009 was not a stellar year. The drop from the previous month was 12% and again this compared to the previous bad month. This is even worse than yesterday’s news because new home sales are linked to far more jobs in construction, building materials and durable goods like appliances.

A disturbing point on this is that the poll Reuters did of economists had predicted there would be no change. These are the guys that are influencing the policy makers in government and business and it seems that every news piece mentions how wrong they were.

Durable goods showed 0.3% growth but those whacky economists had predicted a 2.8% gain. Remember these economists’ predictions that are quoted are poll number averages, some predictions were even further off. If you exclude aircraft and automobiles the numbers were all very bad, off almost 4% on average with machine orders off 8%. Machine orders, as in manufacturing jobs.

Whirlpool that became the world’s largest appliance maker after absorbing Maytag and then closing its union plants is exporting 400 more jobs to Mexico in October. Whirlpool shares are trading higher today with futures contracts particularly active creating the rumor that the price will spike still higher. Don’t mind that the stock market could head south anytime.

Some pundits are predicting a DOW at 5000 and wild fluctuations for many years to come. The likely bottom based on past market swings during even minor recessions since the last Depression has been 25% of the asset replacement value. This theory is also known as Tobin’s Q ratio (Tobin won a Nobel prize). The real value of the DOW is around 6000 points based on a Q ratio of 1 to 1. So the real bottom, if the theory holds is 1500 but that’s based on past numbers and we don’t live in that world anymore.
In the last century, the American Century, American factories made things, Americans built houses and sent their kids to college. Eggs came from farms and not from factories. Americans shopped at the stores on main street where they sold things that Americans made. That was the century Professor Tobin lived in.

The neo-cons say we are living in the New American Century and if we just cut taxes for the rich some more they’ll show us what that is really like. After all the rich will spend that money, it will then trickle down to the rest of us and we’ll all be rich. The first thing the rich will buy is some new Whirlpool appliances from Mexico. Do you feel a warm trickle running down your back too?

Tuesday, August 24, 2010

Work will set you Free

Sales figures for existing homes plunged by 27% in July, the biggest drop since 1968 when records were first kept. There is a 12 and a half months supply of houses for sale, this is more than twice the normal amount on the market. This does not count millions of homes in default that banks are holding back from foreclosure sale to keep the market from falling even faster.

This new tidbit of economic woe has driven down equity markets worldwide. Not that anybody that plays the stock market much cares about the middle class dream of owning a home or being able to pay for it but it puts into motion something they can’t ignore, derivatives. Derivatives don’t represent anything of value, they are just huge casino bets that are triggered by a particular number coming up. A big downward swing in the housing market can start triggering Credit Default Swaps even without actual defaults occurring, this is the magic of derivatives where anything can be written into the contracts to trigger a payoff. This in turn can trigger other derivatives purchased as a hedge and those still more and so on.

We don’t know what these trigger numbers are since Derivatives are not regulated and these “dark” markets are really just back room deals. But this is the free market so what could possibly go wrong? Hundreds of billions in TARP money were required the last time, plus trillions of newly created money from the Federal Reserve. The Inspector General for the TARP program estimated that the FED and Treasury Department purchased or guaranteed 24 trillion in toxic “assets” to keep the Ponzi scheme from collapsing.

So were these abominations done away with? Attempts to include a ban on even some derivatives in the financial reform legislation met with the typical response from Republicans, “Hell NO you can’t”.  There are still some 600 trillion or perhaps twice that much worth of these contracts piled up like snow above the ski lodge waiting for a trigger to start the avalanche. It only takes one more snow flake.

So what to do with all the unsold houses on the market? Obama’s pledge to help people stay in their homes has fallen flat and foreclosures continue to rise. Interest rates are at record lows but good luck getting a loan. A new twist at the bank is that they need to believe you will be able to keep your job, who qualifies for that? The copper market is down with the slump in housing but that doesn’t keep the scavengers from stripping anything of value from entire neighborhoods laid waste by foreclosures, copper thieves are the only people with steady employment, maybe they could get a mortgage. Whole subdivisions are now seen as potential farm land, it seems almost post apocalyptic. Was there a rapture and I missed it?

So what to do with all the former home owners who didn‘t rise up naked to heaven? The Republican candidate for New York governor, Carl Paladino said he would transform some state prisons into dormitories for welfare recipients, where they could work in state-sponsored jobs, get employment training and take lessons in "personal hygiene."

Paladino is a wealthy Buffalo real estate developer popular with the tea baggers and says he didn’t mean the state should jail poor people: The program would be voluntary. How long will it remain voluntary?  Seven million people have no other income but food stamps. That was last year’s figure and the number of people who are falling off unemployment is going to be millions in the next few months if nothing is done.

Even if tier five unemployment benefits are created it is really a just a band-aid if no real economic reform is implemented. Republicans and far too many Democrats can only think of “austerity” as the solution and that means putting millions of people on the street. The economic drag reduced spending will cause will put still more out of work and the safety net will be gone for them as well.

So what do you do with all those millions of people in the street? “Volunteer” them for the work camps.   "Arbeit macht frei"

Monday, August 23, 2010

The Roulette Wheel Doesn't Have Your Number

Small investors have pulled 33 billion from the stock market so far this year when you would normally expect at this point in the “recovery” to have 10 to 20 billion flowing in. Where is the money going? Some of it simply doesn’t exist anymore as many in the middle class have stopped being middle class but much of it has been shifted into Treasury bonds driving the prices up and yields down.

Stock market salesman (oh I meant financial advisors) are pointing out that some blue chip stocks are paying bigger dividends than the return on bonds. They don’t mention that dividends can dry up overnight at the whim of corporate CEO’s who put their own paycheck at the top of the “to do” list and paying your dividends at the very bottom.  Your investment can also evaporate with the next flash crash and take decades to “recover” not counting inflation and if you are in managed fund, it can disappear completely.

Bonds are not without their own risks. The bond market appears headed for its own bubble and while your investment is relatively safe in that the literal default of the US government is generally believed to be unlikely.  The problem is that they pay in USD and the dollar’s value is subject to hyper inflation that could make bonds in reality not worth much at all. China has been taking advantage of the bullish bond market to unload US debt, selling more than 3% of its US Treasury holdings May and a similar amount in June.

I do often refer to deflation which in theory would make bonds a great bet but the problem is that there is such a huge amount of Treasury debt, that there is no way that the casino could pay off. You can have hyper inflation of prices and deflation of assets at the same time, in the seventies they called this sort of thing stagflation.

Basically it’s all a rigged game to separate the middle class from its wealth and redistribute it to the top one tenth of one percent. There is no way to out-smart the system, the wheel will never stop on your number. Even putting all your money into gold won’t protect you, although I’m not opposed to owning some if you don’t have room for anymore canned goods.

Oh, and eight more banks failed on Friday, the FDIC said early in the year that they expected the peak in failures would come in the third quarter. There are about 2000 banks that are on shaky ground so the peak isn’t anywhere in sight. It’s commercial loans dragging these banks under and not mortgages. Small business is still in full decline, none of the policies of the last thirty years have been changed and if the neo-austerity that is being contemplated in Washington comes to pass, the work of Ronald Reagan will be complete. That pesky middle class who thinks they should live the American Dream will become extinct once and for all.