Friday, September 14, 2007

Unemployment and the Credit Crisis

Unemployment and the Credit Crisis [¹]
Click here for link to complete article:

By Henry C.K. Liu | 14 September 2007
    Strong employment had been a key benefit of the liquidity boom even though wages had not been rising enough to keep up with asset prices. News on slow growth of employment for July 2007 had been an ominous sign that the liquidity boom was ending. Economists know that employment data are a lagging indictor, showing only the effects of previous periods. Yet official unemployment for July was only 4.6%, or 7.1 million workers, still “uncomfortably” near the bottom of the structural range (4 to 6%) of what neo-classical economists call a non-accelerating inflation rate of unemployment (NAIRU). The low structural unemployment rate presented a lingering inflation threat. It will continue to do so until unemployment rises past the 6% NAIRU limit to stall the economy with deflation.
The Voodoo Theory of Structural Unemployment

Central banks operate on some voodoo theory that NAIRU is the cardinal rule to keep inflation in check, using current unemployment to fight future unemployment, keeping some people out of work now in hope of enabling more people working later. The rationale is that excessively low unemployment is undesirable because it pushes up wages to cause wage-pushed inflation which will require central banks to raise interest rate which will in turn slow the economy to increase unemployment down the road. This necessary unemployment is called structural or natural unemployment and up to 6% of it must be tolerated to maintain a non-accelerating inflation rate. In other word, there is no case for central bank intervention as long as unemployment stays below 6%.
    [ Normxxx Here:   Still, I believe that AG disavowed NAIRU quite a few years back when he first allowed the unemployment rate to fall well below 6% without raising rates. Of course, he may have been using the old calculations for unemployment. ]
The problem with the concept of NAIRU is that when wages have persistently failed to rise as fast as the astronomical rate of asset appreciation, any talk of wage-pushed inflation is perverse and does not need 6% unemployment to contain it. This is particularly true when outsourcing of jobs to low-wage countries has kept inflation abnormally low. In fact, full employment with rising wages is an effective way to close the wide gap between stagnant wage income and run-away asset prices buoyant by debt.

Not only is NAIRU a dubious theory, particularly in a debt bubble, it is also decidedly a pervert moral posture of neo-liberalism. NAIRU condones a policy of making a helpless minority pay heavily now for maximizing future marginal job opportunity that may benefit the majority, instead of foregoing future maximization to ensure that all can have jobs now to share the benefits of full employment equitably. The equity issue is exacerbated when structural unemployment consistently falls on the same segment of the labor force that is least able to fend for itself.

Credit Crisis Aggravated by Stagnant Wages

The credit crisis since August 2007 is obviously caused by years of systemic credit abuse, but it is aggravated by stagnant wages that have been out of step with run-away debt-pushed asset inflation for almost a decade. Throughout the nation, workers have been forced to live in homes priced at levels their wages cannot support because wages have persistently fallen behind home prices.

The resilience of US equity markets, buoyed by robust employment and strong corporate earnings fueled by cheap debt, has been frequently cited by irrational yet unyielding optimists as proof that the credit crisis in the money markets is merely a passing shower in otherwise fair economic weather. The reality is that the robust employment and strong corporate earnings have been the unsustainable result of systemic credit abuse. This illusion, formed by mistaking debt-pushed exuberance in the stock market as a sign of health in the economy, was shattered on Friday, September 7, by news of the first job contraction in four years which many market participants regard as the first signs of a financial perfect storm.

Having bought into the myth of a benign decoupling of the credit squeeze from the real economy, analysts had expected a gain of 110,000 new jobs for August. The unwarranted expectation caused market shock sparking sharply lower stock prices when the ugly reality showed a loss of 4,000 jobs. Normally, central banks, driven by an institutional bias bordering on phobia toward inflation threats, would consider unemployment rising up toward 6% positive news since it removes inflationary pressure. But the news of a reverse in employment in August spooked the jittery market, even though the overall unemployment rate stayed at a benign 4.6%. The market surmises that when the credit market collapses even with low structural unemployment, the economy is heading for serious trouble.

Talks of recession immediately proliferated in the media as it finally dawned on even the most doggedly wishful-thinking analysts that August was the month that economic reality set in to dispel doctrinaire myths which assert that economic fundamentals can remain strong in finance capitalism even when financial markets seize up. Waves of layoffs had been anticipated in all housing and financial services related sectors in recent months, but unemployment was still expected to stay below the 6% NAIRU level, posing no serious threat to the economy except inflation. This is the reason the Fed has been reluctant to lower the Fed Funds rate target.

Now, suddenly in August, like the subprime mortgage crisis spreading to the entire financial system, contagion is spreading unemployment to all sectors. The market fears that unemployment might shoot above 6% within a few short months because layoffs have been made easy and swift for corporate management by government policy in the last decade. Whether the Fed will lower the Fed Funds rate target in the next FOMC meeting on September 18 depends on whether the Fed sees 6% unemployment is on the horizon.

Poor Employment Data tilted Market Sentiment

Despite reports of massive bank exposure approaching $1 trillion to the system-wide credit squeeze from a 13.4% contraction of the commercial paper market in the past four weeks, the mood among equity investors had still been one of cautious optimism sustained by silly pep talks from giddy analysts. That unwarranted optimism evaporated with the jobs report for August.

Share prices fell and both corporate bonds and Treasuries rallied to push yields down sharply on the very day of the bad news on jobs, as traders fled to safety on the realization that many more homeowners will have difficulty meeting higher adjusted interest payments in their floating-rate mortgages later this year and the next when unemployment rises further. Recession risks are overshadowing rate cut hopes as market participants begin to understand that rates cuts can be neutralized by a liquidity trap in which banks cannot find enough credit-worthy borrowers at any rate.

The interest rate futures market was already pricing in a Fed Funds rate of 4.57% by the end of October, a 68 basis points drop from current Fed Funds target of 5.25%. Fear remains that rate cuts not only may not help alleviate the present credit squeeze in the non-bank financial system, it could also be a psychological trigger that would destroy the Fed’s already dwindling credibility. A market that catches on to the impotence of central bank intervention can go into a free fall.

Interest Rate Cut Stimulates More Risk Appetite

In fact, a program of sharp rate cuts will render risk-averse investment unattractive and revive insatiable risk appetite for abnormally high returns that has landed the economy in its current sorry state in the first place. A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The government should make use of the money that the banks cannot find worthy borrowers to lend to, and the money cautious investors are seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation.

Credit Market Seizure Causes More Unemployment

The scurry by banks to shore up their deteriorating balance sheets as the commercial paper market dries up as a source of funding for many of their highly-leveraged borrowers could slow down bank funding for consumer credit further to cause a downward spiral of more layoffs in the already anemic economy. Also, as recently completed private equity deals structured with cheap money turn distressed with a credit squeeze, massive layoffs in the target companies will follow, adding to further sharp rise in unemployment.

Rate Cuts Hurt Exchange Rate of the Dollar to Cause Inflation

More ominous, the wide anticipation for a rate cut by the Fed on its September 18 FOMC meeting has already pressured the exchange rate of the dollar, pushing up gold prices. By September 12, the GLD exchange-traded fund (ETF) for gold set a 52-week high of $70 with the gold prices rising above $700 per ounce from $610 in January. Oil has risen to over $79 per barrel. Food prices are rising. A further weakening of the dollar combined with faster growing economies in emerging markets means foreign investors would invest in non-dollar zones or in US companies that have non-dollar revenue, further weakening the US domestic market.

All 10 major sectors in the S&P fell lower on Friday, September 7, and for the week, the consumer discretionary sector fell 3.2% amid fears over lower consumer spending. Homebuilders lost 6.8% for the week, taking its fall for the year to 50%. Financials declined 2.6% for the week, while the S&P investment bank index fell 0.8% on the day of the discouraging jobs report, taking its loss for the year to 16.5%. Investors are still waiting nervously to see whether the market can clear a backlog of $300 billion in unsold debt paper and bonds associated with this year’s record private equity buy-out deals.

In the midst of all the negative news, it is sometime forgotten that the DJIA is still above 13,000, a level substantially higher than economic fundamentals would justify. Left alone, a truly free market would adjust downward by as much as 40% before all the liquidity fluff is removed. The pleasure of excess in the market is never restrained by the excess of pleasure which unfortunately must be paid at some point for by pain in the economy.

Structural Disparity in Job Opportunity

Still, structural disparity in job opportunity persists in the faltering economy. In August, white unemployment was at 4.2%, below the overall rate of 4.6%; African American at 8.0%; Hispanic at 5.9% and Asian at 3%. The last two categories did not include illegal immigrants which could alter data on underemployment substantially. Teenage unemployment (16-19) was at 15.2% while black teen unemployment was 26.5%. The pain of NAIRU has not been equitably shared even in the liquidity boom. The rising tide failed to lift all boats.

Hidden unemployment was 16.2 million or 10.3% of the labor force. They included 4.3 million who had part-time jobs because they could not find full time employment and 4.8 million who wanted jobs but were not counted in official statistics because they were 'not looking', of which about 1.4 million searched for work during the prior 12 months and were available for work during the reference week.

In addition, millions more were working full-time, year-round, yet earned less than the official poverty level for a family of four. In 2005, the latest year data were available, that number was 17.0 million, 16.2% of full-time workers. In June, 2007, the latest month available, the number of job openings was only 4.3 million, nearly 4 job-seekers for each job opening, while corporate earnings continued to rise from job outsourcing and financial manipulation such as share buy-backs made possible by a liquidity boom.

Phantom Strong Economic Fundamentals

With the liquidity boom abruptly halted, residual robust employment and corporate earnings had been misidentified as the alleged remaining "strong" economic fundamentals to which high government officials and Wall Street cheer leaders misleadingly referred, in defiance of facts even weeks after the subprime mortgage crisis broke out. Even honest fools would know that a collapse of credit markets would lead quickly to rising unemployment and falling corporate profits, and high government officials and high-paid analysts are surely not fools. The issue then must be one of honesty.

Non-farm payroll employment dropped by 4,000 in August to 138 million, and the unemployment rate remained at 4.6% or 7.1 million workers, more than the total population of any one US city except New York. Still, 4.6% is uncomfortably on the low end of NAIRU (4 to 6%) and that means an interest rate cut now would [[might?: normxxx]] risk inflation down the road in a faltering economy, i.e., stagflation, as in the Carter/Volcker years of 1977-81. This is the dilemma faced by the Fed, a cut in short-term rates may do more harm than good by not helping to sustain a liquidity boom yet fueling accelerated inflation, not to mention leading to a loss of confidence of the market in the Fed’s ability to manage a monetary and financial crisis.

Socialize Risk to Deliver Privatized Profit

Like their flawed attitude toward risk, the authorities in charge of regulating financial markets and the economy apparently think that inflation-fighting structural unemployment spread over the whole economic system is not damaging to the economy as long as the resultant profit is privatized and concentrated on a preferred selection of financial institutions, even if the privatized profit is achieved by externalizing the cost of risk to the entire financial system through structured finance. Free-market capitalists obviously think that socializing risk or unemployment is not the dreaded evil of socialism— only socializing profit is.

Drop in Labor Force Participation

Over third quarter of 2007, total payroll employment changes have averaged 44,000 new jobs per month, well below the monthly average of 147,000 new jobs between January and May. In August, employment in manufacturing, construction, and local government education declined, while job growth continued in health care and food services. The civilian labor force edged down to 152.9 million, and the labor force participation rate decreased to 65.8%. The declines were largely due to a drop in labor force participation among teenagers; their participation rate fell to 39.7%. Total employment in August was 145.8 million.

Part-time and Temporary Workers

The number of persons working part time for economic reasons, at 4.5 million in August, 2007, was 359,000 higher than a year earlier. This category includes persons who indicated that they would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Nearly 1.4 million persons (not seasonally adjusted) were only marginally attached to the labor force in August, down by 227,000 from a year earlier. These individuals wanted and were available to work and had looked for a job sometime during the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 392,000 discouraged workers in August, little different from a year earlier. Discouraged workers are those not currently looking for work specifically because they believe no jobs are available for them even if they try. The nearly one million remaining persons marginally attached to the labor force in August had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance and family responsibilities.

Drop in Employment in August

The overall drop in employment in August was preceded by negligible job growth in June (+69,000) and July (+68,000), as revised [[downwards, by almost 50%!: normxxx]] In August, employment continued to fall in manufacturing and construction; local government education also lost jobs. Job gains continued in health care and in food and beverage services.

Employment in retail trade was little changed in August because of back-to-school shopping. A job gain in building material and garden supply stores was partially offset by a decline in general merchandise stores. Wholesale trade employment changed little in August— unemployment in these sectors tends to have longer lag time.

Employment in financial activities was flat in August, following a large increase in July. Within the industry, employment in credit intermediation edged down over the month and was 19,000 below its most recent peak in February 2007. The trend is expected to rise sharply in coming months to reflect turmoil in the credit market. One company, Countrywide, alone announce a job cut program of 12,000 in the next three months. The mortgage brokerage industry is expected to lose 100,000 jobs this year. A sharp shift in employment from deal making to distress restructuring is expected.

In professional and business services, management and technical consulting services added 7,000 jobs in August, and temporary help employment continued to trend down. Temporary help has lost 72,000 jobs thus far in 2007 as companies downsize by first shedding temporary workers with no severance cost and pension liabilities.

The Honest Services Issue of Public Officials

On Friday, September 7, the disappointingly bad news on August employment was released to the public at 8:30 a.m. EST by the Bureau of Labor Statistics. Although the data had been embargoed until official release time, surely both the Fed and the Treasury had advanced knowledge of BLS data as they were collected. It is inexplicable why those in charge of maintaining the sustainability of a healthy economy and open and transparent markets would knowingly provide misleading prognoses on economic trends that they know to be false and that would be refuted by pending public release of official data in a matter of days. Do these officials not realize that by not coming clean before the sun rises on what they know to be false, they damage rather than promote market confidence in their ability to manage the economy?

On Thursday evening, September 6, 2007, some 12 hours before the public release of the dismal BLS August employment data, Treasury Secretary Henry Paulson said in an interview on Nightly Business Report on PBS that turmoil in credit markets will only exact a price on the US economy but would not stall its growth. "There will be a penalty to our economic growth and I'm quite comfortable that we're going to continue to grow, create jobs," said Paulson. "We have a very strong economy against the backdrop of these stresses and strains in the capital markets," the US Treasury chief added confidently.

Meanwhile, mortgage defaults continue to soar, further adding to the seizing up of credit markets as lenders grow increasingly reluctant to lend, and investors to invest in commercial paper, amid uncertainty about the true conditions of portfolios which may or may not include 'slices' with risky mortgages, but still sporting 'investment-grade' ratings by rating agencies. Such have been sold in credit markets to nameless and faceless investors around the world, leaving the market scrambling to determine which institutions are left holding the unsold 'toxic waste' commercial paper.

When recently asked how long he thought it would take to sort out the stress in capital/debt markets and determine how serious the contagion problems actually are in subprime mortgage loans, Paulson, having repeatedly declared that problem had been contained in previous weeks, now says: "It's certainly going to be into the weeks, maybe a matter of months. I have a difficult time making projections, but it will be a while."

It is not clear if Paulson, the nation’s highest finance official, was making a political statement or providing a deliberately false market analysis by someone in the position to know about the true state of finance in the economy. The US Treasury for over a decade under both Democrat and Republican administrations has been the branch of the government most responsible for pushing financial globalization to produce a strong US-dominated global economy at the expense of a weak US domestic economy held up by debt. The situation makes it very difficult for the Fed to use monetary ease, i.e., lowering dollar interest rates, to stimulate the US economy without pushing the exchange rate of dollar down, which will further weaken the US domestic economy. A collapse of the dollar will make a recession seem like tea dance by comparison.

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Tuesday, September 11, 2007

Camelot's End

Are the Banks in Trouble? [¹]

By Mike Whitney | Monday, 10 September 2007 | 11 September 2007
"The new capitalist gods must love the poor— they are making so many more of them."
— Bill Bonner, "The Daily Reckoning"

"The hope of every central bank is that the real problem can be kept from public view. The truth is that the public— even professionals on Wall Street— have no clue what the real problem is. They know it has something to do with derivatives, but none of them realize that it’s more than a $20 trillion mountain of unfunded, unregulated paper that has just been discovered not to have a market and, therefore, no real value… When the dollar realizes the seriousness of the situation— be that now or sometime soon— the bottom will drop out."
— Jim Sinclair, Investment analyst

About a month ago, I wrote an article "Stock Market Brushfire: Will there be a run on the banks?" which showed how the collapse in the housing market and the deterioration in mortgage-backed bonds (CDOs) in the secondary market was creating difficulties for the banking system. Now these problems are becoming more apparent.

From the Wall Street Journal:
"The rising interbank lending rates are a proxy of sorts for the increased risk that some banks, somewhere, may go belly up." (Editorial; WSJ, 9-6-07)
Ironically, the WSJ editorial staff— which normally defends deregulation and laissez faire economics "tooth-n-nail"— is now calling for regulators to make sure they are "on top of the banks they are supposed to be regulating, so we don’t get any surprise bank failures that spook the markets and confirm the worst fears being whispered about."

"Surprise bank failures?"

Henry Liu sums it up like this in his article, "The Rise of the non-bank system"— required reading for anyone who wants to understand why a stock market crash is imminent:
"Banks worldwide now reportedly face risk exposure of US$891 billion in asset-backed commercial paper facilities (ABCP) due to callable bank credit agreements with borrowers designed to ensure ABCP investors are paid back when the short-term debt matures, even if banks cannot sell new ABCP on behalf of the issuing companies to roll over the matured debt because the market views the assets behind the paper as of [increasingly] uncertain market value.

This signifies that the crisis is no longer one of liquidity, but of deteriorating creditworthiness systemwide that restoring liquidity alone cannot cure. The liquidity crunch is a symptom, not the disease. The disease is a decade of permissive tolerance for credit abuse in which the banks, regulators and rating agencies were willing accomplices." (Henry Liu,"
The Rise of the Non-bank System”, Asia Times)
[ Normxxx Here:   The crisis is one of CREDIBILITY! ]

That's right; nearly $1 trillion in worthless asset-backed paper is clogging the system— putting the kybosh on the big private equity deals and spreading panic through the money markets. It's a slow-motion train wreck and there's not a thing the Fed can do about it.

This isn't a liquidity problem that can be fixed by lowering the Fed's fund rate and creating more easy credit. This is a solvency crisis: the underlying assets upon which this world of "structured finance" is built has been found to have no established market value, therefore— as Jim Sinclair suggests— they're worthless. That means that the trillions of dollars which have been leveraged against these shaky assets— in the form of credit default swaps (CDSs) and numerous other bizarre-sounding derivatives— will begin to cascade down, wiping out trillions in market value.

How serious is it? Economist Liu puts it like this:
    "Even if the Fed bails out the banks by easing bank reserve [[What bank reserves? We've already emptied that well!: normxxx]] and capital requirements to absorb that massive amount, the raging forest fire in the non-bank financial system will still present finance capitalism with its greatest test in eight decades."


Credit standards are tightening and banks are increasingly reluctant to loan money to each other not knowing who may be sitting on billions of dollars in toxic mortgage-backed debt. (Collateralized debt obligations) It makes no difference that the "underlying economy is sound" as Bernanke likes to say. When banks hesitate to loan money to each other; it shows that there is real uncertainty about the solvency of the other banks. It slows down commerce and the gears on the economic machine begin to [lock up and] rust in place.

The banks woes have been exacerbated by the flight of investors from money market funds, many of which are backed by Mortgage-backed Securities (MBS). Wary investors are running for the safety of US Treasuries even though yields there have declined at a record pace. This is causing problems in the Commercial Paper market as well as for the lesser-know SIVs and "conduits". These abstruse-sounding investment vehicles are the essential plumbing that maintains normalcy in the markets. Commercial paper is a $2.2 trillion market. When it shrinks by more than $200 billion— as it has in the last 3 weeks— the effects can be felt through the entire system.

The credit crunch has spread across the whole gamut of commercial paper and low-grade debt. Banks are hoarding cash and refusing loans to even credit-worthy applicants. The collapse in subprime loans is just part of the story. More than 50% of all mortgages in the last two years have been unconventional loans— no down payment, no verification of income "no doc", interest-only, negative amortization, piggyback, 2-28s, teaser rates, adjustable rate mortgages "ARMs". All of these reflect the shoddy lending standards of the past few years and all are contributing to the unprecedented rate of defaults. Now the banks are holding [[are stuck with: normxxx]] $300 billion of these "unmarketable" mortgage-backed CDOs and another $200 billion in equally-suspect CLOs. (Collateralized loan obligations; the CDOs corporate-twin).

Even more worrisome, the large investment banks have myriad "off-book" operations which are in distress. This has forced the banks to circle the wagons and reduce their issuance of any loans, however credit-worthy— which is accelerating the downturn in housing. Typically, housing bubbles unwind very slowly over a 5 to 10 year period. That won’t be the case this time. The surge in inventory, the financial distress of many homeowners and the complete breakdown in loan-origination (due to the growing credit crunch) ensures that the housing market will crash-land sometime in late 2008 or early 2009. The banks are expected to write-off a considerable portion of their CDO-debt at the end of the 3rd Quarter rather than keep the losses on their books. This will further hasten the decline in housing prices.

The banks are also suffering from the sudden sluggishness in leveraged buyouts (LBOs). Credit problems have slowed private equity deals to a dribble. In July there were $579 billion in LBOs. In August that number shrunk to a paltry $222 billion. By September those figures will deteriorate to double-digits. The big deals aren’t getting done and debt is not rolling over. More than $1 trillion in debt will have to be refinanced in the next 5 weeks. In the present climate, that doesn’t look likely. Something’s has got to give. The market has frozen and the Fed’s $60 billion repo-lifeline has done nothing to help.

In the first 7 months of 2007, LBOs accounted for "$37 of every $100 spent on deals in the US".

37%! How will the financial giants make up for the windfall profits that these deals generated?

Answer: They won’t. Just as they won’t make up for the enormous origination fees they made from "securitizing" mortgages and selling them off to credulous pension funds, insurance companies and foreign banks.
    [ Normxxx Here:   Using those incredible credit ratings provided by Moody's, S&P, Fitch, etc.— for a fat fee, of course. ]

As Steven Rattner of DLJ Merchant Banking said, "It’s become nearly impossible to finance a private equity transaction of over $1 billion." (WSJ) The Golden Era of Acquisitions and Mega-mergers is coming to an end. We can expect that the financial giants will probably follow the same trajectory as the Dot.coms following the 2001 NASDAQ-rout.

The investment banks are also facing potentially enormous losses from liabilities that "operate off their balance sheets" In David Reilly’s article "Conduit Risks are hovering over Citigroup" (WSJ 9-5-07) Reilly points out that "banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper"… Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is NO MENTION OF CENTAURI IN ITS 2006 ANNUAL FILING with the Securities and Exchange Commission.

Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.

So, many investors don’t know that Citigroup could be holding the bag for "$21 billion in outstanding debt"? Or, perhaps, the entire $100 billion is red ink; who knows? (Citigroup’s stock dropped by more than 2% after this report appeared in the WSJ.)

Another report which appeared in CNN Money further adds to the suspicion that the banks’ "brokerage affiliates" may be in trouble:
    "The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities…This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties." (CNN Money)

Does this mean that the other large banks are involved in the same type of "hide-n-seek" strategies?

Sounds a lot like Enron’s "off-the-books" shenanigans, doesn’t it?

Wall Street Journal:
    "Any off-balance-sheet issues are traditionally POORLY DISCLOSED, so to some extent, you're dependent on the insight that management is willing to provide you and that, frankly, is very limited," says Mark Fitzgibbon, director of research at Sandler O'Neill & Partners."…..Accounting rules DON’T REQUIRE BANKS TO SEPARATELY RECORD ANYTHING RELATED TO THE RISK that they will have to loan the entities money to keep them functioning during a markets crisis.”….” The vehicles (SIVs and conduits) ARE OFTEN ESTABLISHED IN A TAX HAVEN AND ARE RUN SOLEY FOR INVESTMENT PURPOSES AS OPPOSED TO TYPICAL CORPORATE ACTIVITIES.”

Still think the banks are on solid ground?
    "Citigroup, is the nation's largest bank as measured by market value and assets. Its latest financial results showed that it administers off-balance-sheet, conduit vehicles used to issue commercial paper that have assets of about $77 BILLION.

    Citigroup is also affiliated with structured investment vehicles, or SIVs that have "nearly $100 billion" in assets, according to a letter Citigroup wrote to some investors in these vehicles last month." (IBID)

Yes; and how many of these "assets" are in fact corporate debt, auto loans, credit card debt, and student loans that have been securitized and are now under extreme pressure in a slumping market?

In an "up market" such loans can provide a valuable income-stream that that transforms someone else’s debt into a valuable asset. In a down-market, however, ('toxic waste') defaults can wipe out trillions in market capitalization overnight.

How Did We Get Into This Mess?

More than 20 years of dogged lobbying from the financial industry finally paid off with the repeal of the Glass-Steagall Act which was passed by Congress following the 1929 stock market crash. The bill that was specifically written to isolate and limit the conflicts of interest that are bound to occur when commercial banks are permitted to underwrite stocks and bonds.

The financial industry whittled away at Glass-Steagall for years before finally breaking down its regulatory restrictions completely.
    In August 1987, Alan Greenspan— formerly a director of J.P. Morgan and a proponent of banking deregulation— became chairman of the Federal Reserve Board. In 1990, J.P. Morgan became the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business [did] not exceed the 10 percent limit. In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board [issued] a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with [as much as] 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively rendered Glass-Steagall obsolete. ("The Long Demise of Glass Steagall", Frontline, PBS)

In 1999, after 25 years and $300 million of lobbying efforts, Congress aided by President Bill Clinton, finally repealed what remained of Glass-Steagall. This paved the way for the problems we are now facing.

Another contributing factor to the current banking-muddle is the Basel rules. According to the BIS (Bank of International Settlements) website:
    “The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision."

The Basel Committee on Banking (Basel 2) requires "banks to boost the capital they hold in reserve against the loans on their books."

Sounds like a good thing, doesn’t it? This protects the overall financial system as well as the individual depositor. Unfortunately, the banks found a way to circumvent the rules for minimum reserves by "securitizing" pools of mortgages (MBS) rather than holding individual mortgages. (which called for more reserves) This provided lavish origination and distribution fees for banks, but shifted much of the risk of default to Wall Street investors. Now, the banks are saddled with roughly $300 billion in mortgage-backed debt (CDOs) that no one wants and it is uncertain whether they have sufficient remaining reserves to cover their losses.

By October, we should know how this will all play out. As David Wessel points out in "New Bank Capital requirements helped to Spread Credit Woes":
    "Banks now behave more like securities firms, more likely to mark down the value of assets when market prices fall— even to distressed levels— rather than sitting on bad loans for a decade and pretending they’ll be paid back."

The downside of this is that once that banks write off these toxic MBSs and CDOs; the hedge funds, insurance companies and pension funds will be forced to do the same— dumping boatloads of this bond-sludge on the market driving down prices and triggering a panic-sell-off. This is what the Fed is trying to prevent through its $60 billion repo-bailout.

Regrettably, even the Fed cannot hope to remove a half-trillion of bad debt from the balance sheets of the banks or forestall the collapse of related financial institutions and funds which are loaded with these "unmarketable" time-bombs. Besides, most of the mortgage derivatives (CDOs) have been massively enhanced with low interest leverage from the "carry trade". When the value of these CDOs is finally determined— which we expect will happen sometime before the end of the 3rd Quarter— we can expect the stock market to fall sharply and the housing recession to turn into a full-blown economic crisis.
    [ Normxxx Here:   Don't underestimate the ability of the Fed and others to patch things and drag this out for another year or so. ]

Alan Greenspan: The Fifth Horseman?

So, who’s to blame? The finger-pointing [[and lawsuits: normxxx]] has already begun and more and more people are beginning to see how this massive economy-busting equity bubble originated at the Federal Reserve— it is the logical corollary of former Fed-chief Alan Greenspan's "easy money" policies.

Henry C K Liu sums up Greenspan’s tenure at the Fed in his article "Why the Subprime Bust will Spread":
    "Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street-firm balance sheets approaching $2 trillion, a $3.3 trillion repo (repurchase agreement) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion.

    On Greenspan's 18-year watch, assets of US government-sponsored enterprises (GSEs) ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle— and low-income homeowners, farmers and students. Agency mortgage-backed securities (MBSs) surged 670% to $3.55 trillion. Outstanding asset-backed securities (ABSs) exploded from $75 billion to more than $2.7 trillion."
    (Henry Liu, "Why the Subprime Bust will Spread", Asia Times)

"The greatest expansion of speculative finance in history".

That says it all.

But no one makes the case against Greenspan better than Greenspan himself. Here are some of his comments at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005. They show that Greenspan "rubber stamped" every one of the policies which have since metastasized throughout the entire US economy.

Greenspan: Champion of Subprime loans:
    "Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers."

Greenspan: Main Proponent of Toxic CDOs
    "The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business. The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans."

Greenspan: Supporter of Loans to People with Bad Credit
    "Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.

    These improvements have led to the rapid growth in SUBPRIME mortgage lending…fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

    "Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits.

    Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low— and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households"

Greenspan: Big Fan of "Structural Changes" which increase Consumer Debt
    "As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have.

    This fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.” (Federal Reserve Chairman, Alan Greenspan; Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005)

Greenspan’s own words are the most powerful indictment against him. They show that he played a deliberate and central role in our impending disaster. The effort on the part of media pundits, talking heads, and so-called experts to foist the blame on the rating agencies, predatory lenders or gullible mortgage applicants misses the point entirely. The problems began at the Federal Reserve and that’s where the responsibility lies.

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

True American Patriotism, II


Colin Powell: Terrorists are NOT greatest threat to nation

By Mark Memmott and Jill Lawrence | 11 September 2007

In an interview with GQ magazine that's scheduled to be put online here at 11 a.m. ET, former secretary of State and one-time potential presidential candidate Colin Powell has this to say about terrorism and the threat it poses to the USA:
      "What is the greatest threat facing us now? People will say it's terrorism. But are there any terrorists in the world who can change the American way of life or our political system? No. Can they knock down a building? Yes. Can they kill somebody? Yes. But can they change us? No. Only we can change ourselves. So what is the great threat we are facing?"
Powell adds, in an interview with Walter Isaacson, that to improve its image in the world, the USA should focus on welcoming newcomers. He takes on the immigration debate that has become a hot-button issue in the presidential race:
      "America could not survive without immigration," he says. "Even the undocumented immigrants are contributing to our economy. That's the country my parents came to. That's the image we have to portray to the rest of the world: kind, generous, a nation of nations, touched by every nation, and we touch every nation in return. That's what people still want to believe about us. They still want to come here. We've lost a bit of the image, but we haven't lost the reality yet. And we can fix the image by reflecting a welcoming attitude— and by not taking counsel of our fears and scaring ourselves to death that everybody coming in is going to blow up something. It ain't the case."
As for the Iraq War, Powell— a retired general and former chairman of the Joint Chiefs of Staff— tells Isaacson that as he and others in the Bush administration debated strategy in the lead-up to the war, he did not think the Pentagon and then-secretary of Defense Donald Rumsfeld had planned for what would happen after Baghdad fell.
      "That was the big mistake. Don had written a list of the worst things that could happen, but we didn't do the contingency planning on what we would do about it. So we watched those buildings get burned down, and nobody told the divisions, 'Hey, go in there and declare martial law and whack a few people and it will stop.' Then the insurgency started, and we didn't acknowledge it. They said it wasn't an insurgency. They looked up the definition. They said it was a few dead-enders! And so we didn't respond in a way that might have stopped it. And then the civil war started at the beginning of last year. I call it a civil war, but some say no, it's not a civil war, it's a war against civilians. In fact, we have total civil disorder."
Also today, GQ has already posted a lengthy interview with Rumsfeld. Author Lisa DePaulo sums up her conclusions this way:
      "If you're expecting Don Rumsfeld— out of government now, on his farm, in a moment of repose— to play the bitter, angry, reflective, tragic fallen hero ... ain't gonna happen. If he feels any of those things, he's not showing it. (And if he did, he probably wouldn't be Donald H. Rumsfeld.) The man does not do regret. Over the course of the next few hours, he will answer every question asked of him, and even when the answer is 'I'm not gonna talk about that,' there's never a flash of anger. Impatience, yes, but never anger."


True American Patriotism...

Dodd: Dad's Nuremberg notes apply today [¹]

By RON FOURNIER, AP | Mon Sep 10, 2007 | 11 September 2007

WASHINGTON— As a prosecutor at Nuremberg, Thomas Dodd charged the Nazis with "the apprehension of victims and their confinement without trial, often without charges, generally with no indication of their detention."

His son, Sen. Chris Dodd, wonders today whether he and his fellow Democrats did enough to stop the United States from violating that same rule of law in the war on terror.

"For six decades, we learned the lessons of the Nuremberg men and women well," the presidential candidate writes in his book, "Letters from Nuremberg" published this week. "We didn't start wars— we ended them. We didn't commit torture— we condemned it. We didn't turn away from the world— we embraced it."

"But that has changed in the past few years," Dodd writes.

The book is a compilation of the letters future Sen. Thomas Dodd wrote home to his wife, Grace, from the trial of Nazi war criminals. On a deeper level, "Letters from Nuremberg," is a story of the symmetry between a father and son, and their times.

Thomas Dodd was a young lawyer in the summer of 1945 when he traveled to Nuremberg, Germany, to interrogate such notorious figures as Hermann Goring, Albert Speer and Rudolf Hess, rising to the No. 2 prosecutor on the U.S. team.

The elder Dodd saw the trial as a triumph of the rule of law, with civilized countries conducting a fair trial for mass murderers who didn't seem to deserve one.

Flash forward six decades and the U.S. leaders, including the younger Dodd, are faced with the same moral dilemma on the issue of how to treat prisoners in the war on terror.

President Bush has argued that the commander in chief is authorized to hold enemy combatants indefinitely without trial or formal charges.

The Bush administration established military tribunals at Guantanamo Bay, drawing a rebuke from the Supreme Court in a June 2006 ruling that said the president overstepped his authority. Bush responded by seeking the necessary authority from Congress, which Dodd saw as a political maneuver aimed at casting Democrats as soft on terror.

In the book's opening pages, the Connecticut senator recalls how the patriotism of former Georgia Sen. Max Cleland was questioned by the White House because of his opposition to a provision in the bill creating the Homeland Security Department in 2002.

Cleland lost his Senate seat that year.

"I had no doubt that if we, as a group, had the audacity to take a firm stance against the commander in chief on the interrogation issue we'd get the same treatment," Dodd writes.

Chastened Democrats backed a GOP compromise, but the deal didn't withstand Bush's review. The final legislation allowed the president to define U.S. commitments under the Geneva conventions.

" ... We had been played," Dodd writes. "In agreeing to all this, Congress has shirked its oversight responsibilities."

A filibuster might have blocked the bill, Dodd writes, but he ducked the fight. Dodd called that "my last compromise on the issue."

Before voting against the bill, Dodd reminded the Senate what Justice Robert Jackson said about the need for a fair trial at Nuremberg: "To pass these defendants a poisoned chalice is to put it to our lips as well."

Dodd now seems to wonder whether he dampened his lips on the chalice by not fighting harder against the Bush administration.

He also regrets voting in 2002 to give Bush authority to wage war.

Dodd sees many parallels to this era and post-World War II, including a new and shadowy enemy (Soviets then, Islamic terrorists today) and the uneasy balance between security and civil rights.
        [ Normxxx Here:   Fortunately for us, all of the U.S. presidents of the time, from Truman to Reagan were true American patriots. ]
His book "is an epistle to this generation as much as it was letters to my mother," Dodd told The AP.

Its lessons for today?

"The rule of law," he said. "When evil happens, build those international relations and stand up for the principles that are universal."

No matter what the pressure.

Web Trend Map 2007, Version 2.0 [¹]

By TheBigPicture | 11 September 2007

Way cool: The 200 most successful websites on the web, ordered by category, proximity, success, popularity and perspective:

Click Here, or on the image, to see a larger, undistorted image.

Monday, September 10, 2007

Agora Financial…Unplugged

Agora Financial…Unplugged, Part II [¹]
Click here for link to complete article:

Edited By Eric J. Fry | 10 September 2007

Adrian Ash, editor of Gold News:

Forget about commodities and T-bonds! The place to have been last month was in Yen [e.g., the FXY], not least for Aussie investors [see FXA]. The Yen has gained more than 11% against the Aussie dollar since July 24th…
        [ Normxxx Here:   You can play the spread widening by shorting FXA and buying FXY— or, if you didn't time it right, you could have gotten killed when the snap back occured and the spread narrowed drastically. ]
Equities may continue to slide from here. But the big dump’s already whacked 10% off the MSCI…The sharp move in the Yen also looks to have gone, for now at least. New corporate Yen-bond issuance fell to a two-year low in August, so the carry trade at least took a pause, even if it wasn’t unwound. Maturities on outstanding Uridashi bonds targeting the New Zealand Dollar also spiked.

Dan Denning, editor of the Australian Daily Reckoning:

Thanks everyone for the feedback. Lots of interesting and good ideas.

I had no idea there even WERE Uridashi bonds…or that the yields had spiked.

Also, I should apologize for not making something more clear: I am ALWAYS right about this stuff. Always. It’s just that sometimes I’m a year or two early on the call.

For example, I quit Penny Stock Fortunes with a circulation of 30,000 readers because I thought the tech market had topped out…in 1998. Right call, two years early.

In 2000, at "Strategic Investment" I recommended the preferred "B" shares of Freeport McMoran as a play on gold. The B shares would be redeemable at 1/10th the price of gold in 2002— right before gold’s big move. Early again.

In 2003, I recommended the Oil Service Holders (OIH) as part of the post-Iraq war strategy. I reckoned they would go from $40 to challenge their all-time high of $95. It did reach $95 by 2005…and then kept going (it’s at $180 now…Thank you Peak Oil!)

In 2004, I called the top in the mortgage-lending bubble. I recommended long-term puts on HGX, the homebuilders index. It doubled from there. I was two years and several trillion dollars in subprime mortgages early on that one.

And in November 2005 I moved to Australia to escape the decline and fall of the U.S. dollar.

What I’m trying to say is that in making my "go to cash" call now…it’s possible you have about 18 months to get out before it’s too late.

But if you use 2005 as the actual date of my call (judging by the deeds not the words), then you have about 62 days, four hours, and twenty three minutes….

You’ve been warned.

For the record, I AM presumptuous. And a coward. And a Nervous-Nelly. And many other things. But not complacent.

So I did tell the Aussie readers of our edition of Outstanding Investments to liquidate all their U.S.-dollar denominated stocks.

Many of these stocks were no longer useful because they’d appreciated so much…or because in Aussie dollar terms, they were not going up fast enough to compensate for the currency risk.

But I think it’s still worth considering whether it’s time to make a major strategic change in focus.

If not now, when?

Chris Mayer, editor of Capital & Crisis:

Jeez, man…what are you on over there? First e-mail is a doubt-filled plea for help and the second one is "I am ALWAYS right you jerks…"

The all-cash option is like the nuclear option… It’s drastic. Although, it sounds like you are not really doing that…given that you are keeping your Aussie equities.

Interesting stuff in any event…

Dan Denning:

My question about the market risk is still the same, after all the replies: if credit as an asset class is in a bear market, how will stocks go up from here?

It was the biggest bubble of all time and the signs that it’s been pricked are all around us. Yet you’re telling me the whole thing’s been factored into stock prices and earnings?


It’s not like we haven’t seen what happens at the top before. It’s just that we’re choosing not to believe the end of the credit bubble will result in falling stock prices. But why shouldn’t it?

As the Nasdaq declined to 4,900, 4,800, 4,500 there were plenty of dip-buyers. Dipwads!

Once the tech bubble burst, there was no going back. The Nasdaq fell 77% from its March 09, 2000 closing high of 5,041 to 1,114 on October 9th of 2002. And today, seven years later, the Nasdaq is still nearly 50% below its 2000 high.

Asset classes that lead one bull market up rarely lead the next one up. Instead, they go into a generational bear market, like real estate in Japan. It takes a long time to wash the taste of a crash out of your mouth.

How is today so different that a genuine bear market in credit does not mean much lower stock prices? Will the whole bubble in structured finance deflate without any impact in the real economy?

You could argue that there is real economic growth to this boom, and that this boom is global. That would give you some justification for buying stocks. But which stocks?

And more importantly, should you be buying any stocks at all right now, when the bear market in credit appears to be getting ready for something spectacular, vicious, and completely unplanned?

Of course it is probably a mistake to talk about "the stock market" and then make decisions about single stocks. So the questions I put to myself are these:
        1. What companies can grow earnings even if credit contracts?
        2. Which stocks or assets depended the most on credit growth for their rise?
        3. Is it possible the credit bubble will collapse without any long-term effect on stock prices or the real economy?
The market may have been a little over-sold by the end of August. But the "big dump" wasn’t that big and it wasn’t that much of dump. A "bigger dump" will mean much steeper falls in financial stocks and anything that depends on the U.S. consumer.
        [ Normxxx Here:   Wait until Fall, 2009! ]
Granted, you may get a few ultra-blue-chips that have lots of cash and very little debt that become "lifeboat stocks." But I think the de-leveraging of the market means much lower U.S. stock prices.

There probably ARE some quality U.S. businesses with strong balance sheets that are worth owning. I would make a list of the top ten of them and look to buy them at much lower prices. Lots of cash, little debt, and lots of tangible (visible) assets on the balance sheet.

And if I never got to buy them, I wouldn’t lose any sleep over it. That’s because I think this is exactly the inflection point we’ve been writing to our readers about for years. It’s finally here and we want to imagine that things will keep muddling through.
        [ Normxxx Here:   Still a bit early; it's why the prescient usually get killed also— just a bit earlier. ]
Maybe they will for a bit. But…

Rude Endnote: All weekend I’ve been receiving well thought replies to Dan’s question: To Cash or not to Cash? Responses range from the more predictable arguments for gold to the less anticipated advice to get into the olive tree business. There was no shortage of readers who advised that ammo and fallout shelters were the best bet, either.

Dollar in the Dumps, Heads Roll at CFC, Gold $1,000, and More!
[Filed Under Today's 5 Minutes ]

by Addison Wiggin & Ian Mathias

The Fed’s "trade-weighted" dollar index busted through the resistance point we’ve been watching.

At 77, the index is at the lowest point since the St. Louis Fed created it in 1973.

"There is more room on the downside," commented Chris Mayer after viewing this chart. "It’s hard to make a case for the dollar when so many dollars remain out there to trade— and when the central bank still seems so willing and ready to pump more dollars into the system at the merest whiff of troubles."
        [ Normxxx Here:   Be warned: our trading partners are not going to just stand idly by while the dollar falls down out of sight. ]
John Williams’ reports that thanks to recent Fed pumping, money growth is running close to 50% annualized over the past several weeks.

"It’s pretty obvious the Fed is [just] going to let the dollar collapse," writes Dan Denning from his perch down under this morning, "to prevent major recessionary pain from the housing market in the U.S."
        "Inflation has been the ‘predominant concern’ of the Fed all year long, and for good reason… the dollar has been in the pits for sometime. If the Fed’s hand is forced to lower rates, traders will surely rush in for the kill. And if there were ever a time for China to bail out of its ‘nuclear option’… this would be it.

        “Makes you wonder, could gold reach $1,000 in the next couple of weeks?"
Gold isn’t exactly in the four-digit range yet, but at $703, it looks like it’s ready to challenge its 2006 high of $720.

"Gold has headed higher as more and more people come to understand that gold does not have counterparty risk," says James Turk of "It also remains undervalued. Gold is not only a safe haven, but a good value, too."

On Friday, gold broke above the downtrend line it has followed since the May 2006 high.

Turk’s upside target for gold this year is $800.
"To be honest," he says, "I thought we would be there by now, but we’re not, thanks to the central bank. We have reached a state in the gold market where central banks cannot restrain gold at these relatively low price levels. So I still expect to see $800 this year."

U.S. stock markets took it on the chin Friday… major domestic indexes lost close to 2%.
The Labor Department’s first negative jobs report since 2003 sparked an early-morning sell-off that held steady right through the closing bell. Japan’s Nikkei lost 2%, akin to the U.S. sell-off, but otherwise, international markets were pretty flat. No contagion brewing just yet…

The fleet-footed John Williams calculates that "consistently adjusted" jobs fell 82,000, rather than the widely reported 4,000. "When the popular media and consensus economists start talking recession," Williams warns, "usually, an economic downturn already has been under way for a year or so."
        “The 2000 recession gained rapid recognition following Sept. 11, but the terrorist attacks did not trigger the downturn. The recession had been in place for over a year; the attacks only deepened an ongoing contraction. In like manner, the current recession has been under way for well over a year, but it was not triggered by the liquidity crisis that erupted in August, only intensified by it."
And the September jobs report is off to a bad start as well… U.S. mortgage giant Countrywide announced they will cut up to 12,000 jobs by the end of the year… that’s 20% of their entire work force.

"Countrywide’s retail and wholesale lending divisions plan to continue aggressively pursuing the increased opportunities presenting themselves in the current environment for profitable market share growth," said the company in a press statement on Friday. We guess that means putting thousands out of work.

In the same statement, Countrywide predicted a 25% cut in loan originations in 2008. The mortgage sector could shed as many as 100,000 jobs by the end of this year.

Stock prices for CFC fell down to $18 on the news… much to the delight of Survival Report subscribers. Their Countrywide put is currently returning 217%, and growing every time ol’ Angelo Mozilo opens his mouth.

Tropical Storm Gabrielle proved to be all bark and no bite over the weekend. She came rolling right into North Carolina, but ended up being more of a surfer’s delight and less of a destructive force.

Interestingly enough, despite Gabrielle’s tame performance, Gunner’s East Coast storm-reconstruction business saw a nice volume spike. You’ll recall from last Thursday’s 5 Min. Forecast, forecasters are still expecting a busy hurricane season. This image from NOAA seems to agree:

After having dodged Felix and Dean themselves, several pipelines owned by Petroleos Mexicanos near Veracruz were destroyed this morning by bombs. The last time guerillas attacked, in July, they stalled operations at Honda, Kellogg and Hershey.

"The price of natural gas continues to wallow around and not do much," Chris Mayer tells his Capital & Crisis readers, "but there are two long-term, seemingly relentless natural gas trends that bode well for those invested in the industry."
        “Price movement like this is making many natgas stocks “move around sluggishly like fat dogs in the noonday sun."

        “The first is the decline in productivity per well. In 1999, productivity per well was nearly 4 billion cubic feet of gas. Today, that productivity is about only 1 billion cubic feet per gas well— a 75% decline (according to the EIA and Baker Hughes).

        “Second, drilling intensity is rising. In 1999, total wells drilled every month couldn’t top 400. That figure was over 1,500 last year— yet domestic natural gas production did not increase. It seems clear the natgas industry is running on a treadmill that’s getting faster. New natural gas is getting more expensive and harder to find. This is good for drillers, as well as companies loaded with proven reserves and that have the ability to grow production. The demand for natural gas should also intensify the search for new wells."
Capital & Crisis readers have natgas drilling and production plays in their portfolio, both of which Chris says are still a "buy." Click here to check out the C&C portfolio.

Here’s an odd bit of international news. Before News Corp. offered to pay $60 per share for The Wall Street Journal, Gazprom— the massive Russian state-owned energy company— contacted Dow Jones with a rival $5 billion-plus offer.

On Friday, Dow Jones completed a regulatory filing with the SEC on Friday in which it revealed an "approach from an international oil and gas company." Gazprom, the Times of London later confirmed, was that company.

For entertainment purposes alone, we wish this deal would have gone down. If protectionists in Washington had a problem with Dubai owning ports, this would have completely flipped them out. Imagine the most influential business publication in the U.S. being run by a massive Russian energy company.

"In some ways," comments Christopher Hancock on the deal, "Gazprom is like a Sovereign Wealth Fund. It’s effectively controlled by the state, it has huge amounts of cash to spend, and it’s already diversified in a multitude of industries.

Gazprom’s reach is already astounding in Russia. Aside from controlling the biggest gas reserves in the world and an equally massive oil business, it owns Russia’s only nationwide independent television station, several newspapers and radio stations and Russia’s third largest bank.

"If anything," says Chris, "this offer symbolically illustrates Gazprom’s perch as the arm of the Kremlin. If you control energy, the media and banking… you’re holding a pretty heavy hand."

Back here in the States, apparently, a married duo of mortgage brokers fell on hard times "and so opened a brothel," reports Whisky & Gunpowder’s Greg Grillot. If there was ever a "beat" for Greg to cover, this is it:
        Police in New Rochelle, N.Y., arrested Richard Werner and Heather Mezzenga, both mortgage brokers, after the two decided to turn a home they couldn’t sell into an illegal prostitution house. According to neighbors, the couple lowered the price of the home from $750,000 to $600,000… and then, all of a sudden, the house went off the market, windows were covered in heavy shades and at least five cars started parking outside the house every night.
"Addison," Greg comments, "if our stock research service business turns south like the mortgage biz, I wouldn’t mind opening a brothel…or a drug smuggling ring…or at least a traveling carnival."

"I read an English translation of Unrestricted Warfare while living in China during 2003," writes a reader.
        "After a quite accurate assessment of U.S. military prowess, the authors concluded that the weak point of the fascist insect is the monetary system— something anybody dealing with the IRS will readily agree with. Thanks, I now have paid for property in the Highlands of Panama plus physical gold and silver."
You’re welcome. Maybe we’ll come by for a visit.


Addison Wiggin,
The 5 Min. Forecast

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.