Saturday, July 3, 2010

The U.S. Economy is Falling. Towards another Credit Collapse?

by Bob Chapman

The Fed says US unemployment is likely to stay high for a long time, and that justifies zero interest rates indefinitely.

The June Chicago Purchasing Managers Index was 59.1 vs. 59.7 in May. The employment component rose to 54.2 from 49.2 in May. New orders fell to 59.1 from 62.7.

Homebuilder Lennar is cutting new home prices 15% as new orders fell 10%. KB Builders said new orders fell 23%, as new home sales fell 32%.

The MBA Purchasing Applications Index fell another 3.8% week-on-week and was 36% lower year-on-year.

The housing market is in serious freefall with builders scheduled to increase units by 535,000 this year. As sales fall so will big bank balance sheets. That means we are facing another credit collapse.

The US stock market seems to have a case on indigestion. The Dow continues to struggle just above 10,000 and is getting ready for another test of recent lows, which we believe could very well be broken. Markets worldwide share the downward pressure. We predicted a lower Chinese market in September and it has since fallen 23%, as China prepares for the bursting of their recent real estate bubble caused by the injection of $1.8 trillion into the economy. It could be that debt restructuring could be needed by the five PIIGS of the euro zone. The elitists are talking in terms of five years when that problem may have to be faced over the next six months to a year. There is the call for great fiscal centralization and the final death of sovereignty. Europe did not do well for ten years; they just hid their problems, much as other nations have. The euro has proven to be another unnatural creation engineered to bring about a world currency.

As sovereign debt problems rage across the world financial scene, the prices of stocks and commodities are fading and bonds could be topping out. Who would be willing to accept a yield of slightly under 3% for a US Treasury note? In addition, commodity currencies are under pressure. The dollar remains relatively firm after having fallen to 85.42 on the USDX from a recent high of 89. In that process the dollar cold be completing a head and shoulders, which could in time portend a much lower dollar. There are certainly lots of uncertainties out there, as volume increases each time the market falls, a sign that the natural direction is downward. AAA companies have done well in the recent past in part due to plenty of cheap money. In the second half of the year their earnings should begin to fade as GDP falls into the minus column. That fall can be stopped if more stimulus is added or if the Fed injects $2 trillion more into the economy.

The unemployed won’t get extended benefits, but the bankers and Wall Street got most of what they wanted in the financial reform package. That includes making the Fed, which is privately owned, into a tyrannical, financial monopoly. The unemployed don’t contribute to campaigns, Wall Street and banking does. The reality is special interest money controls our House and Senate, and that is why incumbents have to be kicked out of office in November.

The $8,000 real estate stimulus is gone and sales are falling in spite of 30-year fixed rate loans at 4.69%. Inventory and shadow inventory grows with each passing day. It should be noted that Fannie, Freddie, Ginnie and FHA are buying and guaranteeing 95% of mortgages, a good part of which are subprime. The $860 billion stimulus looked good and sounded good, but in part it was neutralized by cutbacks in state spending. It simply wasn’t strong enough to overcome underlying negative factors. That left the Fed with the job of keeping the recovery going. Even spending more than $2 trillion couldn’t ignite a permanent stage of growth. Worse yet, the refusal of the Senate to extend unemployment benefits will put 1.3 million Americans in a dire situation. It’s food stamps and nothing else. Americans for years have been just weeks from being broke. Now many of then are broke. Finding a place under a bridge is going to become more difficult.

GDP for the first quarter was 2.7%. That is half of the 5.6% posted in the 4th quarter and 1.7% of that 2.7% gain was due to stimulus. Final sales were 0.8% of that 1%. YOY real final sales grew only 1.2%, making this the weakest recovery in 100 years. The foundations of the economy are trembling. The 2nd quarter’s official GDP growth should be ½% to 1-1/2%, the 3rd quarter could be even and the 4th quarter zero to minus 2%. The Congress and Senate probably won’t approve more stimuli, so the Fed now has the entire job of keeping the economy in 2011 from collapsing. If the G-20 meeting told us anything it’s that it is now every man for himself. Europe is at least for now not cooperating with the US. In Europe it’s austerity and bailouts along with higher taxes. That will bring on depression and bankruptcy. In the US it’s the Fed injecting money and credit and higher taxes that will bring on higher inflation and then collapse and that won’t work either.

The US should cut taxes and have government cut costs 30%. Yes, we know unemployment will rise, but it is going to rise anyway. This would cause a much slower slide into depression, which would be far more manageable. That may be small consolation, but it beats plunging. Under classical economics the system has to be purged and so it will be. The trick is to make it as palatable and less damaging as possible. We have to laugh watching the “experts waving their magic wands and blaming the austere Europeans for the wavering in the US economy. Most of these pundits are legends only in their own minds. What is absent is dissenting opinion and that is the way it will always be until GE goes under and with it CNBC. Then we can return to the framework of FNN and get objective reporting instead of an elitist controlled cheering section. Some of the players are now doing ads for the Council on Foreign relations. The experts and CNBC are all well aware of what the message is and that is propaganda. All are nothing but word merchants. This attempt at recovery was vastly different than a normal manufacturing recovery. It is a financial recovery. Incidentally, if you didn’t notice we have hardly any manufacturing left. That became the victim of free trade, globalization, offshoring and outsourcing. That has caused us the loss of 8 million jobs and has allowed transnational conglomerates to hide $1.4 trillion in profits offshore depriving America of taxing those slave labor profits, which aggregate about $500 billion. Remember readers that this exercise is to enrich these companies and the financial sector and to keep Illuminist companies solvent. The economy is rolling over and even the public realizes it. Consumer confidence figures just fell from 62 to 52, so that should tell you something. The FOMC is running in circles not knowing what new trick to pull out of the hat. We have just experienced almost three years of de-leveraging and the problem is yet to be solved. All the Fed has done is give companies money to keep them solvent. The problem is still there and the economy is more fragile than before. CNBC parades their guru’s across the stage telling us how everything will be all right. Last Wednesday they had on Jon Corzine, former CEO of Goldman Sachs, who as governor of New Jersey left the state in a shambles, after being ejected from office due to his involvement with unions and disgusting personal affairs. These are the kind of people the elitists want us to listen to and follow. The stock market is finally figuring out what is going on and is heading down with giant justification. The corporate earnings will fall and economic activity will slow dramatically.

It wasn’t long ago we saw the US 10-year T-note at 4%. It was then apparent to professionals that the market was in trouble and that funds would be escaping into bonds and gold. That is what has happened. We do not find this a reason to buy dollar denominated bonds. We expect the dollar to fall in value against other currencies and gold. For those who follow technical patterns the dollar USDX chart is in a massive head and shoulders, which will prevail to the downside in the intermediate future.

May saw $1 trillion in the value of stocks wiped out in minutes. The market action has been so volatile over the last 1-1/2 years that once the market rallied back the public began to leave. Millions began an exodus that has since been filled by black box trading and government’s blatant intervention. As we write the S&P and Dow are in the process of breakdown, which should soon carry them lower. During May we saw the largest outflow in 18 months. Who can blame them shares have lost 55% of their value in 22 months despite the bear market rally of the past year. We are sure the game that was being played by Wall Street and banking, which on May 8th, plunged the market almost 1,000 Dow points in a half hour, had to have terrified investors. $1 trillion was lost in 30 minutes and regulators are still “investigating.” We spent 28 years on Wall Street; they knew within 5 minutes what was going on.


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