Ultimate Conditions for Recovery

By Jim Willie CB Nov 9 2009 www.GoldenJackass.com

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

With the steady stream of claims toward an economic recovery, one must do a reality check from time to time. The Gross Domestic Product for 3Q2009 reflected a solid temporary push from the absurdly inefficient and costly Clunker Car Program, and an inventory draw down that finally arrived. Both factors contributed to a lift in GDP that in no way testify to a recovery. The Productivity at 9.5% for Q3 is the latest story of a supposed recovery. Well, if the truth be told, the combination of business liquidation and significant worker cuts adds to output with the advantage of the negative incremental workers. So if extremely large swaths of the USEconomy were to be liquidated in an organized fashion, and businesses pared down staff just to management and perhaps some temporary workers, the economists that swarm the financial helm would rejoice for the burst to GDP with amplified Productivity. What a clown show! Then came the promising rise in the ISM manufacturing index. However, almost every single of the 15 regional manufacturing indexes turned lower. Hmm! Seems like a fraudulent national statistic was released. Is any USGovt economic statistic valid anymore?

NON-EXISTENT EXIT STRATEGY

This week some reality sprinkled Wall Street like so much holy water, as the US Federal Reserve conducted its perfunctory meeting. They shocked nobody when they announced a repeated statement of near 0% official interest rate again for an extended period. Regard their admission as a powerful contradiction of anything remotely resembling an economic recovery. Yesterday the Euro Central Bank confirmed its own ultra-low 1.0% rate as ongoing and even justified. The same day the Bank of England confirmed its own ultra-low 0.5% rate, and even announced an extra 20 billion pound sterling for more monetized bank relief. Did they not announce just two weeks ago the exact opposite, an end to bank rescues and a flood to monetized aid? These are hardly stories steeped in recovery. More like stories replete with desperation, brokenness, insolvency, and failure. We are witnessing a global failure of the entire central bank franchise model system, and breakdown in the currency system itself.

Last August, a Hat Trick Letter special report was penned, with title “Non-Existent Exit Strategy” to describe the conditions that hamstring the USFed. Their inability is coming to full light. They cannot stop the 0% easy money policy any more than a deathly sick child can be sent to work in the field after bedridden for weeks of urgent care. In the special report, the desperation is depicted. Firehose holder USFed Chairman Bernanke regularly congratulates himself despite blindness to see any problems in advance. So how could he foresee any recovery, if he failed to see a single change of course since his inauguration? His failures read like a tragic laundry list. Diverse USTreasury monetization follows colossal bond fraud by US banks. Would an exit strategy involve little or no monetization of USTBond auctions? Curtailed credit or a USDollar devaluation or both soon come. Foreigners are in the process of isolating the Untied States, with US residents the last to know. Meanwhile, US bank leaders are curiously confident in their heavy reliance upon the Printing Pre$$, as monetized debt is the intravenous line as wide as a river. These remain anything but normal times. The 0% official rate remains the badge of dishonor.

Recent mid-level profile bank failures now total well over 100. To the astute eyes, evidence is clear that the FDIC fund as broken. Chairman Sheila Bair cannot appeal to the USCongress for more funds, since the $12.9 trillion debt limit is within immediate reach. The banking sector girds for a powerful second wave of crisis, with several hundred dead US banks soon to be shut down . A deflation cocktail backfire is in the works. Recall three years ago that the incredibly wrong-footed bankers who remain fixed in the policy making halls showed almost daily concern over price inflation, with sweaty brows from all the worry. We saw the opposite during a bust they did not foresee. In recent months, the same cast of clueless economists that continue to dominate the policy wonks express open concern over price deflation. Heck, these guys cannot even define inflation. Prepare for a price inflation spillover from the colossal monetary inflation and USTreasury debt. As soon as the USFed discourages banks from storing their reserves in the central banker icebox, out of harm’s way, price inflation will arrive like a winter storm without warning. Apparent stability precedes hyper-inflation, as floodgates are opening. The path to hyper-inflation comes from falling demand for money, from gradual shutdown of supply capacity, from cutbacks in the supply chain itself, and from the falling USDollar. The misled economists focus so much on demand driven price effects, that they overlook the painful lift to prices that comes from reduced supply. They actually miss how price is a result of Supply versus Demand !!!

ULTIMATE CONDITIONS, DIFFICULT TO DISPUTE

Four immediate conditions can be stated unequivocally as urgent requirements for any economic recovery. All other talk is pure distraction. We are nowhere near any of them in actual occurrence. These are critical characteristics of the Intensive Care Ward. Unless and until each has vanished from the landscape, no USEconomic recovery is remotely possible. People, investors, officials, and leaders are far too pre-occupied by economic growth statistics. They focus correctly upon the wretched labor market. They cannot even conceive of the business capital expenditure concept, which is flat as a pancake. And leading economic indicators are far too dominated by the stock market indexes and consumer sentiment to be useful anymore. What follows is just common sense.

UNLESS & UNTIL THE HOME FORECLOSURES HALT, NO ECONOMIC RECOVERY IS POSSIBLE. Housing prices supported USEconomic growth from 2003 to 2006. The nation actually built growth atop a housing asset bubble, and blessed it as good by the central banker shamans. How can people so quickly forget the outrageously destructive policy of Alan Greenspan, who was curiously revered? The hidden banker home inventory festers like a cancer. It is a huge overhang to supply that will prevent home price rebound altogether for another two years. Talk is prevalent of stability finally attained in the housing market. They look too much at home price patterns, and ignore inventory pileup. The banks are hiding their inventory, shuffling homes on their balance sheet, refusing to take heavy losses. Word comes from a banker contact in Florida, that 85% of foreclosed homes in the Sunshine State have yet to hit the property market for sale. The fellow mentioned the certain impact of upwardly adjusting mortgage rates, finally coming from the Prime Option Adjustable Rate Mortgages.

UNLESS & UNTIL THE USTREASURY AND USAGENCY MORTGAGE BOND MONETIZATION HALTS, NO ECONOMIC RECOVERY IS POSSIBLE. Observers should regard the bond monetization as an extreme act of desperation. Instead, they somehow regard it as a positive for sustained and vibrant liquidity, and a cap on borrowing costs. Unbelievable deception occurs on both the domestic bond bidding process and foreign bond bidding process. This is a topic often cited in my articles, one not to be overlooked, in need of regular emphasis. To foreign creditors, the monetization represents an extreme betrayal in pure monetary inflation directed precisely at the bond instrument they care the most about in their FOREX reserves, and a gigantic billboard sign of abnormal times. The ultra-low bond yield in the USTreasury Bills is a badge of dishonor, a central bank scarlet letter. The USTreasurys receive most attention in the news. But obvious games are played, shell games, that enable the USFed to monetize USAgency Mortgage Bonds in the back door, so as to permit indirect foreign bids of USTreasurys in the front door. Presto!! The USTreasury auction has a strong bid to cover ratio. George Orwell would be pleased.

UNLESS & UNTIL THE COMMERCIAL MORTGAGE LOSSES SHOW UP AS BANK LOSSES, NO ECONOMIC RECOVERY IS POSSIBLE. These horrific losses are a long time in coming. They are pre-saged like a plague or wave of locusts. They will start like a trickle and end like a torrent. Banks are working overtime to hide these commercial mortgage losses. Despite oftentimes high (like over 95%) commercial tenant performance rates on monthly payment on time and current, commercial mortgages are being liquidated. Heavy losses come. The problem is the 30% to 40% typical property value loss. Lenders require a substantial increase in borrower equity payment, otherwise known as a bump in the down payment. They cannot come, and liquidation is forced by the bankers unwillingly. Banks are on the hook for massive losses in what some analysts call the Second Wave of bank losses. Given the relaxed FASB accounting sham rules, the commercial losses are being easily hidden from the onset.

UNLESS & UNTIL THE WARS IN IRAQ & AFGHANISTAN COME TO AN END AND HALT THE DRAIN OF UNPRODUCTIVE COSTS, NO ECONOMIC RECOVERY IS POSSIBLE. Their budgets are sacred. Their burden to the USGovt deficits is unspeakably huge. Their benefits are minimal and falsely promoted. If truth be told, the cost of a barrel of oil coming from the Persian Gulf (including Iraq) must include an extra $50 per barrel increased cost from the military component. Almost no analyst includes such a tax. The gains in Afghanistan are altogether questionable, even to many within the USMilitary itself. It needs to be repeated regularly, that nobody is even looking for the missing $50 billion in Iraqi Reconstruction Funds. With each passing month, the missing tally grows higher.

GOLD LOVES EASY MONEY, LOTS OF IT

The gold & silver prices respond very favorably to continued easy money, like the near 0% that cannot be stopped. No Exit Strategy means Constant Gold Bull Market. The gold & silver prices respond very favorably to ample flow of false money, like what cannot be stopped. The USFed, along with their USDept Treasury control helm led by Goldman Sachs staff, long ago painted themselves into the corner. They cannot raise interest rates. If they do, they kill the housing market. If they do, they end the banker arbitrage of long-term versus short-term bond yields. If they do, they raise borrowing costs across the land. If they do, they kill the new goose that lays profitable eggs in the Dollar Carry Trade. So the USFed painted themselves into the corner, while foreign creditors are cutting out the floorboards. The US will thus fall into the Third World. Yet few even are aware. The foreigners are systematically removing the USDollar from its pre-eminent position, with hardly a hint of respect paid by US bankers, government officials, or investment leaders. They charge ahead, expecting a return to the Halycon Days of yore in a grand self-deception. The Paradigm Shift away from the USDollar is beyond their perception, or perhaps mentally blocked since so fearsome.

One week ago, gold offered a nice little discount that is no more. One must wonder if anyone inside the Untied States took advantage. My guess is more American sellers were ferreted out of the bushes, while Chinese buyers in legion showed up. One week ago, silver offered a sizeable discount that is no more. A story within the IMF India story can be told. Rumor was ripe that the Indian central bank paid for the 200 tonnes of gold offered supposedly by the IMF, not in cash, but in silver bullion. Rumor attached the question of whether India, with its huge silver reserve, had curried favor with the Boyz in New York and London. My best source of information reports that India paid not in silver at all. Little wonder that silver recovered a full 100 cents in just two days time. The opportunities to buy gold under 1100 are fast vanishing. The opportunities to buy silver under 18 are fast vanishing. The available prices paid will still look very cheap a year from now. Debate is really daft on whether gold is caught in a bubble. The big bubble is USTreasurys, but of little recognition. With money being created from nothing to support fiat currencies on a global scale, with central banks justifying their near 0% official interest rates, with governments continuing to authorize more bank rescues and bailouts under the table, debate should be centered upon the destruction of the monetary system and global currencies. Instead, they actually raise the question of a gold bubble. What will these same quacks say when gold hits $2000 and silver hits $50??

THE SCOURGE OF EXCESS CAPACITY

Compromised economists revel in mention of excess capacity and its supposed effect to put a damper on price inflation. They overlook the weak USDollar effect. They ignore the cutback in supply output. To be sure, softness exists. The utterly indescribable softness will prevent any USFed rate hike whatsoever. However, price inflation will come despite the surplus of capacity in the entire USEconomy. It will become the biggest paradox for the economic charlatans to explain in the next year or two years. They must explain how prices rise in the face of excess capacity.

Three stories are worth mention that highlight the plight. They are each incredible. The stories each scream of impossible prospects to hike the official interest rate. The Federal Housing Admin policies, the Shopping Mall lease innovation, and the California Inland Empire bust shed light on the excess capacity, or better yet the ruin that pervades the nation. Just an aside. Fannie Mae has asked for $15 billion in cash, to cover their ninth consecutive quarterly loss. They are the Poster Boy for Black Holes and the vanishing act for money. Fannie Mae has posted $102 billion in losses over the previous eight quarters, and has already taken $45 billion in federal aid since April. So much for the Bush II Ownership Society, which turned out to be a formula for Home Foreclosure Society. Talk of an interest rate hike is insane, pointless, and a grand distraction away from the extreme distress to the USEconomy. My description has been and will continue to be of economic deterioration, not recovery, and certainly not expansion.

The Federal Housing Admin has imposed rules that will essentially kill the condo market. FHA lending rules are too restrictive, and devoid of reason. Individuals are forbidden to own over 10% of units in any project. New FHA rules, which went into effect October 1st, prohibit any new FHA-backed loans on condo units in projects that include more than 25% commercial space. Condo developers and banks cannot escape the strict rules. “I am predicting that what we will see is whole condominium complexes sitting empty,” said Jill Hoogendyk of Wallick & Volk in Glendale Arizona. The new FHA rules for underwriting condo loans create very serious valuation problems in the condo marketplace, where values can suddenly switch from fair market values to almost nothing in weeks. The USGovt policy is consistently and predictably idiotic. Does an interest rate hike come amidst a flood of foreclosed property, led by condos? Never confuse Wall Street liquidity revival with economic revival.

They are called ‘Pop-Up Leases’ and they used to appeal to companies that wished to introduce a zippy new product or a sassy new service. At a shopping mall, the company would rent a store for 30 days, load it with catchy banners, maybe even shapely lasses. Malls are increasingly pocked with store fronts that feature 50% discounts, even more. But now, the pop-up leases are being used to liquidate inventory for businesses that have gone bust. The shock is to the other mall tenants, who must compete but cannot, and are at grave risk to go bust themselves. The pop-up lease is a virtual mall killer. Otherwise healthy retail and service outlets are feeling the heat from liquidator competition. Analysts expect the malls to accelerate into ghost town status, and this new lease feature to become a primary factor. Does an interest rate hike come amidst a flood of vacant shopping malls, harmed by destructive lease contracts? Never confuse Wall Street liquidity revival with economic revival.

Lastly, consider the plight of the commercial property arena in Southern California. Distress among the legion of white collar firms has resulted in a hemorrhage of office property thrust upon the market. The region is bleeding enormous office space. Almost 51 million square feet of office space in Los Angeles County, Orange County, and the Inland Empire is now empty. That is more than 17% of the total. The exodus from office buildings that began in late 2007 has actually accelerated during 3Q2009. No recovery there. The anemic business climate continues to take its toll on the commercial real estate rental industry. Vacancies stand as a direct reflection of unemployment. Companies cut back on workers, end leases, and struggle to survive. Some shut down and liquidate. The volume of idle office space in four counties is staggering. The vacant office space is a mind-bending 1200 to 1300 square miles of vacancy in just four counties of Southern California. The problems in commercial real estate are so huge, that they are hard even to grasp. Worse, bank losses have yet to hit the balance sheets on such commercial loans. Does an interest rate hike come amidst vast acreage of vacant office space, led by Southern California? Never confuse Wall Street liquidity revival with economic revival.

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Jim Willie CB
Editor of the "HAT TRICK LETTER"
Hat Trick Letter
November 05, 2009

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com