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.

Hurricane Season Gets Underway in the Atlantic

The Atlantic hurricane season is officially from 1 June to 30 November.

But according to the Atlantic Oceanographic and Meteorological Laboratory AOML, with regard to Atlantic hurricanes there is a "very peaked season from August to October", with:

• 78% of the tropical storm days



• 87% of the "minor" hurricane days



• 96% of the "major" hurricane days

And within the hurricane season, early to mid-September is the peak.



In addition to the obvious humanitarian concerns, this is of interest to the financial community because of the large concentration of drilling platforms, refineries, and tanker delivery facilities serving the United States located in the Gulf of Mexico.

Hurricanes offer a tempting opportunity for energy "investment. "

SP Futures Hourly Chart

Wait for it...

More Big Banks On the Verge of Failure

The next wave of the financial crisis is fast approaching.

Fortune
Big Texas bank on verge of failure
By Colin Barr, senior writer
Last Updated: July 31, 2009: 1:53 PM ET

Guaranty Bank, which counts Carl Icahn as one if its backers, is teetering on the edge of insolvency. But it may not be easy for regulators to find a buyer.

NEW YORK (Fortune) -- Guaranty Bank is hardly a household name. But the Austin, Texas-based thrift's looming failure is shaping up as a big headache for bank supervisors -- not to mention a black eye for Carl Icahn and others in the smart money set.

Guaranty (GFG) could be soon seized by the government in what would be the biggest bank failure in a year that has already had 64 of them. Last week, the bank warned investors to expect a federal takeover after regulators forced a writedown of its risky mortgage investments and a bid to raise new capital failed.

Guaranty has $13.4 billion in assets and operates 160 branches in Texas and California -- two of the three best banking markets in the nation, thanks to their size and population growth.

But the bank's capital problems and its smallish, scattered network of branches could detract from Guaranty's appeal, making it tough for regulators to find a buyer quickly -- or without substantial federal subsidies.

"This may not be closed as quickly as you think, since it will require bids and rebids," said Miami banking consultant Ken Thomas.

That means resolving Guaranty's failure is likely to be costly to the FDIC's deposit insurance fund, whose balance is at its lowest point in almost two decades.

The Federal Deposit Insurance Corp. isn't the only one taking its lumps. So have some big investors.

Shares of the bank's parent, Guaranty Financial, have dropped 97% since a group led by billionaire Texas hotel mogul Robert Rowling and Icahn, the renowned New York corporate raider, poured $600 million into the company in June 2008.

Other big Guaranty holders whose stakes stand to be wiped out include hedge fund managers David Einhorn, who was among the most persistent skeptics of Lehman Brothers before its collapse, and Dan Loeb.

"Relatively low franchise value and the fact that two big money investors already got burned on this bank may suggest less interest than with BankUnited," said Thomas, referring to the Florida thrift that failed in May and was bought by a group of private equity investors.

BankUnited had half as many branches and operated in only one state, but had a strong competitive position in the most lucrative counties -- something Guaranty lacks.

Despite BankUnited's relative attractiveness, its sale to investors led by vulture investor Wilbur Ross was hardly a walkover for the FDIC. The deal cost the FDIC insurance fund $4.9 billion.

A big tab on Guaranty would be costly to the deposit fund, whose balance was $13 billion at the end of the first quarter. The FDIC has estimated failure costs on cases since then at $11.2 billion.

A spokesman for the FDIC stresses that it has already set aside an additional $22 billion for failure-related costs in 2009, and adds that congressional action this spring gave the agency access to $500 billion in Treasury credit.

Though Guaranty has been around since 1988, it came public less than two years ago. Guaranty was part of the Temple-Inland (TIN) cardboard-box conglomerate until Icahn pressured the company to split up at the end of 2007. Guaranty shares were then distributed to Temple-Inland holders.

Guaranty's chief executive at the time, Ken Dubuque, assured investors that despite the gale force winds sweeping the financial world, the bank would be safe.

"We're keenly aware of the importance of good credit, disciplines and effective risk management, in good times and in difficult times," he said on the bank's first earnings conference call in February 2008.

But Guaranty's risk management soon was found wanting. The bank aimed to expand beyond lending to the builders of office buildings, shopping centers and houses to new areas such as small business and corporate energy lending.

Because its thrift charter obliges Guaranty to keep 70% of its assets in housing-related investments, the bank matched growth in other areas with expanded investments in housing. That, Dubuque said, is how the bank ended up taking on a giant portfolio of mortgage-backed securities, backed largely by option adjustable-rate mortgages in California and Texas.

"We needed to increase the size of the balance sheet, so that was a relatively risk-free way of doing it," Dubuque told investors in 2008. "We also have liked the returns in that business as well."

But securities backed by option ARMs are anything but risk-free, as investors have learned. Among institutions that dealt most heavily in those were Washington Mutual, the Seattle thrift that collapsed in September with $307 billion in assets, and Wachovia, which was sold to Wells Fargo (WFC, Fortune 500) later in 2008. Other big option ARM users included failed California savings banks Downey Financial and PFF.

Losses built at Guaranty over the past year, and Dubuque quit without explanation in November. In April regulators told Guaranty to raise more capital. When that effort failed, they told Guaranty to write down the value of the mortgage-backed securities by more than $1 billion. That move, announced this month, left the bank with negative capital of $748 million, according to filings....

Job Prospects: Wall Street and the Government

Who says there are no new job opportunities in the financial bubble economy?

Wall Street is hiring, and there are entry level positions for internment/resettlement specialists with the government.

Progress! But towards what? That is the question for America.

The queue for your swine flu shots is on the left. Oink.

TheDeal.com
Hiring: Goldman Sachs, Fifth Third, Wells Fargo
July 31, 2009

It looks like the tide may be turning slightly. If you are looking for a job, there are some more opportunities at Goldman Sachs Group Inc. (NYSE:GS), Fifth Third Bancorp (NASDAQ:FITB), Bank of America Corp. (NYSE:BAC), Barclays plc and more banks around the world.

Here are more details.

•Fifth Third Bancorp plans to hire 50 employees for its sales force and small business teams. The bank is also looking for branch managers, according to The Charlotte Observer.

•Goldman Sachs is adding staff to its equity research team in Japan, according to Bloomberg.

•Bank of America is expanding its equity businesses in Japan and is hiring bankers in Canada, according to Bloomberg and Dealbook.

•Barclays is looking for 10 equity sales and trading staff in Tokyo, London and New York by Sept. 30, according to Bloomberg.

•Standard Chartered plc and Merrill Lynch & Co. are hiring business school graduates, especially those in accounting, according to AsiaOne.

•Wells Fargo & Co. (NYSE:WFC) will be hiring branch support as it integrates Wachovia Bank, according to The Philadelphia Business Journal....


iHispano.com
Corrections Officer: Internment/Resettlement Specialist

Company Name: Army National Guard
Job Category: Legal/Law Enforcement/Security
City: Pensacola/Panama City
State: Florida
Country: USA

As an Internment/Resettlement Specialist for the Army National Guard, you will ensure the smooth running of military confinement/correctional facility or detention/internment facility, similar to those duties conducted by civilian Corrections Officers.

This will require you to know proper procedures and military law; and have the ability to think quickly in high-stress situations.

Specific duties may include assisting with supervision and management operations; providing facility security; providing custody, control, supervision, and escort; and counseling individual prisoners in rehabilitative programs.

By joining this specialty, you will develop the skills that will prepare you for a rewarding career with law enforcement agencies or in the private security field...

Looming Financial Crisis Dampens German Banker's Earnings

We would have to agree that there is another significant wave incoming a from different set of bad loans in this financial crisis.

Contrast Deutsche Bank's actions with those of its Wall Street counterparts and remember this in the fourth quarter when they start queuing up at the trough for bailouts, warning of martial law, food shortages, and a breakdown of the financial system.

The Obama economic team's handling of the banks is disgraceful, serving a few politically connected Wall Street firms at the expense of the nation's interests.

The banks must be restrained, and the system brought back into balance, before there can be a sustained economic recovery.

Bloomberg
Ackermann Says Bad Loans Are ‘Next Wave’ of Crisis
By Elena Logutenkova

July 31 (Bloomberg) -- Rising delinquencies among consumer and corporate borrowers are the “next wave” of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann.

“This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.”

Deutsche Bank, Germany’s biggest lender, said this week it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below- forecast revenue from trading sent the Frankfurt-based bank’s shares to the biggest decline in four months on July 28. (Why don't they just ignore such risks like the American banking system and keep the bonus machine rolling? - Jesse)

“We were struck by the 44 percent increase in problem loans in the quarter,” Morgan Stanley analysts Huw van Steenis and Hubert Lam said in a note today, cutting their rating on Deutsche Bank shares to “equal-weight” from “overweight.”

Deutsche Bank fell 1.30 euros, or 2.8 percent, to 45.39 euros in Frankfurt trading, making it the worst performer on the 63-company Bloomberg Europe Banks and Financial Services Index over the past five days with an 11 percent drop.

‘Crisis Not Over’

“The crisis is not over,” Ackermann said. “When one looks at the developments of global economic growth, then it can be expected that starting in the second half of this year we slowly move into the positive territory. But we’re still moving on a low level.”

Banks that were forced to take government aid and are now encouraged to increase domestic lending may be more in danger from rising loan defaults than companies that can expand internationally and diversify risks, Ackermann said.

Deutsche Bank “intentionally” reduced its balance sheet and risk-taking this year, he said. (No soup for you, Deutsche Bank employees. - Jesse)

“We were disciplined in our considerations about what risks which should take,” Ackermann said. “If we had played it out to the full extent, we could have earned significantly more.” (And if you were front running the DAX with high frequency trades using government funds you would be rolling in profits - Jesse)