As usual, most of the news comes from the U.S. because that’s where the economic melt-down continues in earnest. News from Europe shows that their peripheral countries’ economies are still collapsing especially Ireland and Greece. And, Canada’s economy, largely dependent on the U.S. for exports is slowly sliding into recession.

            None of the root causes of the West’s economic and financial problems have been addressed, let alone solved. Toxic derivatives are still being created faster than they’re being written-off, governments are sinking deeper into debt, money is being printed like there’s no tomorrow and that is causing commodity prices and inflation to rise. The necessary economic structural changes are not being made. In fact, there has been a lot of activity and news but it’s nothing more than re-arranging the deck chairs on the Titanic.

None of the major problems mentioned above and examined in greater detail in previous commentaries have been solved and the globe continues its downward economic spiral. So, if you’re pressed for time, you can stop reading now because all the old problems are still with us. Nothing has been fixed. It’s getting worse. If you want more details, read on.

There was a lot of hope riding on the November U.S. election results. Instead, the Republicans took the House but not the senate. The resulting gridlock couldn’t have happened at a worse time. Not only has Obama become a “lame duck” president but the entire U.S. government is now a “lame duck” government where nothing will get done. Fiscal policy (government spending) is now dead in the water. The Federal Reserve cannot lower interest rates any further because they already are effectively at zero. The last desperate option is to continue running the printing presses on steroids thus debasing the U.S. currency like a Third World country. The U.S. has well and truly become a banana republic.

America’s problems are structural. This means they are permanent and only a great deal of pain will solve their problems and THERE IS NO LEADERSHIP because America has a lame duck government. According to David Rosenberg, the U.S. problems are “due to a bad housing mortgage policy, a bad industrial policy, a bad financial policy, a bad fiscal policy, a bad foreign investment policy, too much entitlement debt, severe demographic problems related to the aging baby-boomers, and to very costly wars abroad … deep-rooted structural problems — stretched personal balance sheets, excessive housing supply, over-regulation, uncertain health care and taxation costs in the future, and chronic unemployment.” (1)

Professor Rodrigue Tremblay writes, “In fact, it is likely that in the long run, this extreme monetary policy risks exacerbating rather than correcting the problems. Economic structural problems cannot be corrected with monetary means. They rather require real economic solutions. That means correcting the housing mortgage mess and devising an industrial strategy, a fiscal strategy, and an investment strategy that can put the economy back on its tracks of economic growth.

But, for better or worse, the Federal Reserve Board (Fed) seems to be the only branch of the U.S. government left that can still function properly, i.e. that is not caught in a permanent political gridlock. As a consequence, for the time being at least, bankers are in charge of the U.S. economy. Since they are the ones who created many of the current problems, this is not very reassuring. (2)

G-20

The October G-20 finance ministers meeting was all talk and no action. They agreed that the brewing currency war was dangerous (more on this later.) In fact, they agreed on a lot of meaningless things but what’s really important are the things left unsaid. They didn’t spank Japan for weakening its currency. They didn’t spank Thailand, South Korea, Brazil, Indonesia, Russia and others for recent currency market interventions and new capital controls all of which points to currency wars. In other words, they contradicted their own pronouncements. The G-20 as I’ve mentioned previously is now a toothless tiger – Brazil didn’t even bother to attend – and future G-20 meetings will be equally worthless, a waste of time but great for photo opportunities and media propaganda.

The latest G-20 summit in Korea was also a failure that accomplished nothing except to show how much influence America has lost. “G-20 Rebuffs Obama on Currency Spat,”… “Failure to adopt U.S. stand on currency underlines reduced U.S. influence on international stage.” (3)  

Both the U.S. and President Obama were snubbed and insulted by both China and Korea. Obama failed to conclude a free-trade agreement with Korea. The Chinese refused to allow Obama to visit the Great Wall with his own helicopter and made him use a Chinese helicopter instead. China is flexing its muscles like never before.

Currency Wars

            As mentioned in previous commentaries, all fiat currencies (none are backed by gold anymore) are in a race to the bottom. It benefits a country to devalue its currency because by making its exports cheaper it increases its volume of exports. During normal times (remember those?) a country could, over time, export its way out of massive debt. However, nowadays most countries are faced with massive debt and it is impossible for all countries to devalue their currencies. Devaluation takes place in relation to other currencies so when all countries are trying to devalue their currencies; it’s simply a race to see who can turn their currency into toilet paper first. This is similar to over-grazing of pasture land and is often called “the tragedy of the commons.”

            Currency wars thus demonstrate that the global problems are systemic and structural i.e. permanent and not just a combination of events (conjunctural.) This makes it more difficult for world leaders to paper over global economic problems because it shows that a genuine recovery is unlikely.

            As mentioned above, the currency war is spreading to a number of countries with no sign of abatement. “Within a single week 25 nations have deliberately slashed the values of their currencies.   Nothing quite comparable with this has ever happened before in the history of the world,” said Ben Davis, the CEO of Hinde Capital.  (4)         The biggest problem with currency wars is that it inevitably leads to trade wars and tariffs. Other countries are unwilling to subsidize the bankrupt U.S. dollar reserve system. Trade wars and tariffs are largely responsible for the collapse of world trade that plunged the world into the Great Depression of the 1930s.

U.S. Foreclosure Scandal

More cracks are appearing as the U.S. economy collapses. The latest is being called “Mortgagegate” or “Fraudclosure.” American financial institutions have been churning out millions of home mortgage foreclosure documents without verifying the underlying documents and in many cases there are no underlying documents (“Who’s got the mortgage document?”).

Banks, mortgage companies and other financial institutions have hired Wal-Mart clerks, hairdressers and truck drivers – “Robo-signers” – without experience or training to rubber stamp foreclosure documents. In some cases, these “foreclosure mills” have faked or falsified documents to expedite foreclosures. In other cases, people have been foreclosed and evicted when they were not behind in their payments or even if they had no mortgages because they had paid them off.

About 9 million homes in the U.S. are in foreclosure and there are wider ramifications, “Even sales of houses not in foreclosure could be affected if the property has been in foreclosure before. Home insurance companies have also become more cautious as the investigations widen.” (5)

This is paralyzing a real estate market, reduce demand and undermine prices in a market that is already in dire straits at a time when the government, in its usual incompetent ways, is trying to revive it. About one third of real estate sales are foreclosed homes and in some hard hit areas like Phoenix as much as 40% of real estate sales are foreclosed homes.

Hard-hit banks are now facing a double whammy. Litigation and legal fees will amount to the tens of billions of dollars at a time when most banks would be insolvent were it not for the relaxation of the Financial Accounting Standards Board (FASB) rules that allows banks to pretend their worthless assets are worth book value VS market value. Also, much of this “paper” has been resold countless times. The institution that issued the original mortgage, sold it to another institution who, in turn, re-sold it to another who, in turn bundled it into tranches and sold it as bonds so now, no-one knows where the actual mortgage document is. Homeowners are beginning to realize they can stop making payments to cash strapped banks because they can no longer be evicted. This breakdown of contract law has serious ramifications on a nation’s legal system. What happens to civil society when citizens realize they don’t need to pay their debts?

It’s difficult to know where this will end but Argentina is instructive. Their government defaulted on their debt and the ensuing economic collapse destroyed their middle class leaving only the poor and the ultra-rich. Without a middle class tax base, their government has difficulty meeting basic needs and the country has degenerated into crime and corruption.

U.S. Housing

Indeed, home values accelerated their decline in September, according to a report from Zillow wrapping up the third quarter.A record 23.2% of all mortgaged homes are now underwater.  (6) 

Among major metro areas, Miami, Atlanta and Phoenix have seen home values drop over 12% during the last year. “The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn,” says Zillow chief economist Stan Humphries, “and, with encouraging signs fading, will easily eclipse it in the coming months.”

Oh, and the Zillow report indicates foreclosures have reached an all-time high as of the end of September.

Nicholas Cage listed one of his houses in 2007 at $37 million and sold it for $10.5 million this year.

Still, if you ask us, $10.5 million seems a bit pricey for a six-bedroom house… even if it was previously owned by Tom Jones and Dean Martin. Near as we can tell, this is the fourth home Cage has lost to foreclosure — proof it wasn’t just the working class who made bad decisions during the housing bubble. (7) 

Canadian Housing 

            Asset deflation is an innocuous sounding economic term. It means the stuff you own is getting cheaper. Asset deflation is often a precursor to depression. We need to watch for an American style real estate price slide. In August, we saw the number of Canadian home sales fall. In August, we saw the sixth month of sales declines. Sales plummeted in Toronto and Vancouver as the HST kicked in. However, even outside Ontario and BC sales declined. They were down 41% and 39% in Calgary and Edmonton, down 26% in Halifax and 13% in Winnipeg.  (8) 

            That’s the first step. The next step, serious price reductions, will probably begin after Christmas. In October, the Economist magazine reported that Canadian real estate prices were over-valued by 23.9%. “TD said it expects home sales will feel a sharp pinch, hitting a trough of 320,000 units by mid-2011 – a far cry from 2009’s near-record high of 465,000 units.” (9) 

            October home sales (numbers not prices yet) in Toronto were down 21% from a year ago while listings are up 21%.  (10)  October Canadian housing starts dropped 9.2% Month over Month, the lowest since July 2009 while multi-units dropped 15%. Single family starts have dropped four months in a row now. (11) 

Canadian Economic Situation

            Economists talk about a “savings rate.” This does not necessarily mean money in the bank. Savings is income that is NOT spent and results in deferred consumption. For instance, paying off credit card debt is included in this savings rate. The U.S. went into their economic downturn three years before Canada and Americans have increased their savings rate from 2% in 2007 to 6.5% largely as a result of deleveraging their debt. Meanwhile, Canadian saving rate has collapsed to 2.5% while Canadians continue to add to their debt seemingly oblivious to the global economic condition.

            U.S. house prices are down 30% while Canadian house prices still rose 1% this year although the tide seems to be turning. And, as mentioned above Canadian house prices are expected to start falling next year.

            Canada’s Federal government debt is in good shape but provincial government debts are soaring. Ontario’s per capita debt is 10 times that of California whose bonds are rated on par with Croatia.  (12) 

            The Canadian economy will slow for a number of reasons:
1) the weak U.S. economy will continue to impact our exports to the U.S.

2) Canadian housing slowdown

3) Canadian consumers are tapped out and credit cards are maxed out

4) The effect of the previous stimulus package is fading and no new stimulus is in the works.

Canadian consumers are among some of the highest leveraged households in the world, and that doesn’t bode well for the housing market, TD’s report said. (13) 

Stock Market

            Call me a chicken but I took mostly profits and one loss and bailed half my equities out of the stock market today, Monday, Nov 15. I’ll stick with a core holding for a while until I see where the markets are going. It looks too frothy, overbought, lacking in volume and too manipulated for my liking.            

Deleveraging

            This is another innocuous sounding economic term. Beware innocuous sounding economic terms because they bite. Deleveraging is like deflation except deflation refers to a fall in prices while deleveraging is the painful payment of debt. It can best be explained by its opposite: leveraging.

            When you take out a loan, the money is immediately available to be spent. People don’t usually take out a loan unless they already have a need and a reason to spend it. And, spending it has a positive economic impact because it creates jobs, profits and investments. This is known as leveraging and can result in inflation such as a booming housing market. A small amount of money spent can have major effect on the economy.

            On the other hand, deleveraging is paying back that debt. It can take years or decades to pay back and the result is deflation because people who have debts to pay have less money to spend. Spending it can be done quickly but paying it back takes a long time because you have to earn new money to make your payments.

            What can you do in this deflating world? Several things. Think twice before buying stuff you don’t need like a new car or cottage or a new snowmobile because stuff will be cheaper in the future. On the other hand, stuff you need and consume like food and gas will go up in price. Pay down debt. Hang on to your job. Consider cashing in investments to pay down debt which is not tax deductible  and then borrow to buy back those investments so the interest on the loan is now tax deductible (check with your financial adviser first.) Don’t buy stocks or index funds right now because they’re overbought. Instead buy sector ETFs. Play the volatility. Buy when everyone is worried about doom and gloom and sell when everyone is euphoric.   (14) 

QE-2

            Another outcome of the latest G-20 summit is the failure of the U.S. to convince anyone else to do Quantitative Easing (QE) to supposedly stimulate economies. Germany pointedly has been refusing to stimulate. Why should it? Its economy is strong and doesn’t need more stimulus.

            The U.S. has announced another QE stimulus package or $600 billion dubbed QE-2 in honor of the first stimulus package for $1.8 trillion. The government and the ass media would have us believe the U.S. is on the road to recovery. If that’s so, then why do they need another stimulus package? Furthermore, if the first stimulus package failed to solve America’s economic problems why would a second, smaller one be any more successful?

            Crusty, old Jim Sinclair said it best; it’ll be QE forever.

Europe

            Once again Europe is in the news. Ireland and Greece look set to default. Greece again admitted its deficit is worse than previously reported at 15.6% and not 13 something. Like I believe them this time. Germany vows not to bail them out again. Like I believe them too. It’ll be bailout nation forever.

News Tidbits

“Economist Christina Romer serves up dismal news at her farewell luncheon”

By Dana Milbank

Washington Post Staff Writer
Wednesday, September 1, 2010

“Lunch at the National Press Club…  caused some serious indigestion.

“It wasn’t the food; it was the entertainment. Christina Romer, chairman of President Obama‘s Council of Economic Advisers, was giving what was billed as her “valedictory” before she returns to teach at Berkeley, and she used the swan song to establish four points, each more unnerving than the last:

“She had no idea how bad the economic collapse would be. She still doesn’t understand exactly why it was so bad. The response to the collapse was inadequate. And she doesn’t have much of an idea about how to fix things.

“What she did have was a binder full of scary descriptions and warnings: “Terrible recession. . . . Incredibly searing. . . . Dramatically below trend. . . . Suffering terribly. . . . Risk of making high unemployment permanent. . . . Economic nightmare.”

David Rosenberg of Gluskin Sheff offers up this definion:

“WHAT IS A DEPRESSION, ANYWAY?

“A depression is a very long recession. Like the one that lasted from Q4 1929 to Q1 1933 that contained no fewer than six positive GDP quarters and even a 50% rally in the equity market in 1930!

“You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending. Or when home sales go down to record lows despite record-low mortgage rates.

“The economy is in a depression when the banks are sitting on $1.3 trillion of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.

“They usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories.

“When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession.

“Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away.

“More fundamentally, in a recession, the economy is revived by government stimulus. In a depression, the economy is sustained by government stimulus. There is a very big difference between these two states”.  (15) 

The August Forecast Market Updates

September 20, 2010

Surprise! 950,000 homeowners must pay back first-home buyer tax credits. M3 money supply continues to shrink at -4 percent rate. Baltic Dry Index has dropped below its moving average.

September 24, 2010

Durable goods orders drop sharply but the Administration spins it as good news. Residential inventory is up 50 percent since pre-summer.

September 29, 2010

Civil unrest and anger spreads through Europe over mismanagement of government spending. China’s imports are plunging sharply, as is world steel production. Both consumer and business sentiment fell in September.

October 1, 2010

The U.S. is dangerously entangled with foreign interests, especially China; China’s monopoly on rare earth minerals could cripple the U.S. arms industry. Are state bailouts next on the Federal agenda? Spain loses its AAA credit rating. Distressed properties continue to devastate the real estate market.

October 4, 2010

Is Las Vegas about to shrivel up and lose its international entertainment crown? Continued deflation is driving the infancy of currency wars, which may be behind the current weakness in the dollar. Every nation wants a weaker currency. Increased spending is the only antidote for deflation, and nobody is spending.

October 8, 2010

Recession continues with 95,000 more lost jobs in September. QE2 is a fraud that relies only on anticipation of the event, not the event itself; it is impotent in reversing deflation. U.S. cities are in dire straits as revenues and spending plunge.

October 6, 2010

Let the currency wars begin! Japan drops interest rate to zero; it’s a backdoor bailout to big banks. Private hiring falls. Spending cuts by middle class hurt discretionary items.

October 22, 2010

Foreclosure-gate is far from over, as the banks would have us believe. The commercial real estate market continues down unhindered by the weak economy.

October 25, 2010

Seven more banks shuttered bring 2010 just one bank shy of the record 140 closures in 2009. Ninety percent of total bank earnings are recorded by only 1.3 percent of all U.S. banks. Small banks continue at most risk of closure. Mortgage-gate is still just getting started.

October 27, 2010

The sovereign debt crisis will hit the EU first, followed by the Mideast and South America. The EU is still in jeopardy of breakup, along with the euro. Which country will topple the first domino? Greece.

October 29, 2010

Media spin machine plays up economic growth without explaining that business spending growth is half of Q2. There is a two-tier business/retail world where one gets bigger while the other diminishes. Roubini predicts that Obama is heading for a fiscal train wreck.

November 1, 2010

Mixed bag of economic results from the ISM Report on Business, but not surprising with Christmas shopping heating up.  Societe General forecasts that the ISM will plummet to 48 in December. Baltic Dry Index is currently pointing down, giving evidence to speculators driving up the price of commodities. QE2 is a magic trick to bail out large banks, not main street.

November 5, 2010

Economists cry: Send the banksters to jail? Bernanke is under fire from China, India, Brazil and Germany (to name a few) over QE2, which is seen as the beginning of global currency wars; capital controls coming in several countries. Ireland will soon reignite Europe’s sovereign debt crisis.

There’s lots more but little of it is good news. I’ll keep my ear to the ground and keep you informed.

Stay tuned.

–       Gerold

References

(1) Breakfast Dave 11-09-10

(2) Prof Rodrigue Tremblay “The Fed and the Debased “Imperial Dollar”: Inflation, Stagnation and Higher Interest Rates Ahead” – Global Research 11-07-10

(3) MSN 11-13-10

(4) King World News, “The World Monetary Earthquake – the Dash from Cash” Sept 28, 2010

(5) Paul Waldie, “Foreclosure crisis could paralyze housing market” Globe and Mail, Oct 15, 2010

(6) 5 Minute Forecast – Agora Financial 11-13-10

(7) Ibid.

(8) Breakfast Dave 8-17-10

(9) The Montreal Gazette “Growth is slowing: TD report” September 17, 2010

(10) Breakfast Dave 11-04-10

(11) Breakfast Dave 11-09-10

(12) Neil Reynolds, Ontario, Not Unlike California, is Going for Broke, (Toronto Globe & Mail, August 25, 2010

(13) The Montreal Gazette “Growth is slowing: TD report” September 17, 2010

(14) Garth Turner “Deflated” Aug 8, 2010

(15) David Rosenberg, Gluskin Scheff – Lunch with Dave 8-27-10