US Consumer Demand Off a Cliff as the Crisis Deepens

As we said, we would be taking a closer look behind the headline GDP numbers recently released. The advantage of procrastination is that eventually a capable person will chart up the data which you have been studying. So thank you to ContraryInvestor for his excellent charts. His site is among the best, and we read it regularly.

The big story is the collapse of the US consumer, unprecedented since WW II, and possibly the Great Depression. This is apparent in the numbers despite the epic restatement of GDP having just been done by the BLS in their benchmark revisions.

If the Fed and Treasury were not actively monetizing everything in sight, we would certainly be seeing a more pronounced deflation as prices fall WITH demand. And if they continue, we may very well feel a touch of the lash of that hyperinflation that John Williams is predicting. We still think a stiff stagflation is more likely, but are allowing that the Fed and Treasury may indeed be 'just that dumb enough' to trigger something less probable.

Until the consumer returns to some semblance of health, there will be no sustained recovery. It really is that simple.



The Fed will have to stop artificially draining credit supply by paying such a high rate of interest on reserves. They know this. It will stimulate lending, even to less worthy borrowers. But this is not a cure. It is one of the paths to more inflation, fresh asset bubbles, and the devaluation of the dollar. And 'stimulus' handouts are no better. Healthcare reform is a step in the right direction. The US consumer pays far too much for the same (or less) level of care in most of the developed nations. But that is not enough.



The cure will be to increase the median wage, and to stop the transfer of the national income to fewer and fewer hands. For that is how the system is set up today. It is not the result of 'free markets' but a sustained transfer of wealth through regulatory and tax policies, and a pernicious corruption of the nation most significantly starting in 1980, although a case has been made for 1913.

It is an ironic echo that our inexperienced, badly advised President seeks to place more and broader powers into the hands of the Federal Reserve and its owners, the banks, in the spirit of Woodrow Wilson.

Obama needs to bring in fresh thinking. Volcker and Stiglitz would be a step in the right direction, but it is ironic that they are much older than the Bobsey twins, Geithner and Summers. Bobsey being, of course, Bob Rubin. They should be sacked.

The problem as we see it is that Obama is hopelessly over his head, and failing badly. His stump speeches to admiring crowds, as the most recent in Elkhart, Indiana, ring increasingly hollow. Granted his situation is difficult to say the least. He reminds us increasingly of Jack Kennedy in his first year in office, and his manipulation by 'handpicked advisors.' Remember the Bay of Pigs? He did manage to find his own voice, and was beginning to make his own way. There is still some hope that Obama can find his, but the trend is not hopeful.

Look for several third party candidates to rise in the next election, as both the Democrats and the Republicans fail to deliver an honest performance for the country. The problem is that at least one of them will be a toxic choice, probably the one that is most narrowly financed.

It does not look hopeful at this moment in history. But tomorrow is another day.

US Housing in a Deep Dive Says Buba

Do banks ever stop swimming?

Ben will need to print quite a bit more manure to throw on those green shoots, tout suite.

Its almost feeding time again, chum.

Bloomberg
‘Underwater’ Mortgages to Hit 48%, Deutsche Bank Says
By Jody Shenn
August 5, 2009 15:32 EDT

Aug. 5 (Bloomberg) -- Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said.

“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.

Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report.

The share of borrowers owing more than 125 percent of their property’s value will increase to 28 percent from 13 percent, according to Weaver and Shen.

Home prices will decline another 14 percent on average, the analysts wrote.

Infamia e Disgrazie: Is Sheila Bair an Unsophisticated Hick?

"Flagrant evils cure themselves by being flagrant; and we are sanguine that the time is come when so great an evil...cannot stand its ground against good feeling and common sense..." John Henry Newman

The reporter on Bloomberg television just mentioned as a snide, smirking editorial aside, that Sheila Bair feels that a million dollars is a lot of pay for one year, and that ten million is excessive for a deposit taking institution. He noted that she is obviously a Washingtonian, and not a New Yorker.

That's right. A million dollars annual pay is 'nothing.' Even ten million is not much pay for an average Wall Street banker that is taking billions in public funds and gaming the financial system.

The obvious implication is that Ms. Bair is some hick regulator who is not as sophisticated as, let's say, Larry Summers, Tim Geithner, or Ben Bernanake when it comes to rewarding their Wall Street cronies for allowing the economy to continue unimpaired.

Perhaps he was attempting to sneak a bit of irony into the propaganda that passes for news in the States these days, but it was not obvious.

But he might be right. When the monetary inflation from all this financial corruption hits, a million dollars per year might yet be a 'livable wage.'

And so goes the "downward spiral of dumbness." Keep these metrics in mind when you look at your next credit card bill, mortgage payment, and paycheck, rubes, and send your tribute to Caesar.


Bair Says U.S. Regulators Should Set Pay Standards for Banks
By Alison Vekshin and Erik Schatzker

Aug. 5 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators should set pay standards for U.S. banks to ensure incentives encourage long-term performance without setting specific dollar limits.

Banking agencies should “become more active” in using existing authority to set compensation standards that are “principles-based,” Bair said today in an interview with Bloomberg Television in Washington.

“We do need to revamp the system to make sure that the incentives are long-term,” Bair said. “I do wish some of these firms would exercise better restraint and common sense on what they’re paying their folks.”

Bair echoed concerns of House Financial Services Committee Chairman Barney Frank and other lawmakers who say government needs to write compensation rules that discourage excessive risk taking. Goldman Sachs Group Inc. set aside a record $11.4 billion for pay and benefits in the first half of 2009, up 33 percent from a year earlier and enough to pay each worker $386,429 for the period, the company reported last month.

NAV Spreads of Certain Precious Metal ETFs and Funds and How to Use Them

Let's take a minute to review this chart, which we have been posting for about five years or more, since we appear to have new readers who are not familiar with NAV spreads and their relationship to different types of funds. We have been receiving some remarkably eccentric interpretations of this data and these funds.

SLV and GLD are funds which are targeted to a specific index or price. If the market is efficient, they *should* track their targets which are the *spot* prices of Silver and Gold respectively.

In both cases there are management fees, which are relatively stable, so we would expect the fund to be selling at a slight discount to the actual spot price, and in fact they do.

They accomplish this by buying and selling the underlying metals which they hold, in addition to other assets such as cash. There has been much criticism of both funds in relation to the lack of transparent public audits of their holdings which we will not address here. We would also assume that they buy or sell their share in the open markets as well for short term management, or engage in some arbitrage with other product if they are prohibited from trading in their own shares.

We do watch the fluctuations their spreads, primarily as a way of spotting clumsy arbitrage or short selling attempts by those who do not trade the futures, or as a futures pair if the market becomes inefficient. But these are rare.

Yes, we have read the prospectuses of both funds, and are well aware of what they say, and were around when they were both established. There were some 'issues' about the product and some regulatory and product boundaries they addressed.

CEF and GTU are 'closed end funds' based in Canada. They purchase a set amount of the underlying commodity and rarely sell it. The most significant fluctuation in asset holdings arises from the sale of additional shares in the fund, which does happen on occasion.

Because of this, CEF and GTU are an interesting guage of gold and silver sentiment. In its initial year, GTU traded at a significant DISCOUNT to its NAV, which created an opportunity to patrons of this Cafe to invest in gold 'on the cheap.'

Why do they so often trade at a premium? Because as a proxy for physical bullion, they tend to be offset by the costs of buying and storing physical bullion.

There is a silver fund being created by this same group in Canada, which is not yet available to US investors. When it does become available we will add it to our chart.

By the way, in answering a question received, there is no proper 'spot' market other than the twice daily 'fixing' on the London Metals Exchange. The fluctuating spot price which you may see quoted is a calculation based on the time decay to the 'front month' in the futures market.

We make comparisons therefore not so much between the products on this chart, which can be interesting nonetheless as it was when GTU traded at a discount because of investor wariness. Rather, the most interesting comparisons are product to itself over time. To accomplish this you will have to search back on prior posts, if you do not have a 'feel' for the norms.

When trading a bull market, a seasoned trader will tell you 'to buy weakness and sell strength.' An exceptional trader will tell you to never lose your core position as well. We have not lost ours since 2001, although we have certainly traded around it.

"Spreads" such as these are one input into the determination of what is strength and what is weakness. There are also the familiar chart based indicators as well.

We hope this helps.