It’s worse than they’re telling us (Headlines from the Meltdown)
General comment from Cardin: It’s worse than they’re telling us
Henry Paulson Jr., secretary of Treasury, left, with Ben Bernanke, chairman of the Federal Reserve, during a Senate hearing Thursday. (Doug Mills/The New York Times)
As the intentionally redundant saying goes, it’s deja vu all over again. Be sure to read the first two items below very carefully, and as you read them, remind yourself of what various rah-rah optimistic economists, politicians, and members of the real estate industry were saying all during the initial stages of the housing crash during 2006 and early 2007: “The bottom is in sight. This is just a brief market correction. We think it’s almost over. Get ready to start making money again. Don’t panic! Everything’s wonderful! No, I mean it!!!”
Okay, yes, I’m exaggerating ever so slightly with the sarcastic tone — but only very, very slightly. It was deliriously shocking, hilarious, and sickening to watch and listen to the chorus of naysayers denying the obvious, undeniable, slap-you-in-the-face fact that the most bloated housing bubble in history had sprung a leak and was inevitably deflating into a sucking economic void reminiscent of a black hole. And yet they kept chanting this litany of denial for months. Currently they’re all eating crow, and some of them have publicly admitted, “Yes, we completely fornicated with the canine on that one.”
Now, several months into the undeniability stage of the crisis, enter Ben Bernanke and Henry Paulson, respectively the chairman of the U.S. Federal Reserve and Secretary of the Treasury. They spoke at a Senate hearing in Washington on Valentine’s Day. That’s what the first two news items below are about. Please remember that army of housing crash naysayers and the black birds they’re all eating now when you read things like this in the reports below: “The nation’s two top economic policy makers acknowledged Thursday that the outlook for the economy had worsened, as both came under criticism for being overtaken by events and failing to act boldly enough.” “Bernanke said that in his own economic forecast he did not predict a recession but a period of sluggish growth.” “[Bernanke] pointed out that problems in housing and mortgage-related markets had spread more widely and proved more intractable than he predicted three months ago. . . . Both [Bernanke and Paulson] continued to avoid predicting a recession but said they were scaling back the more optimistic forecasts they had issued in November.”
Yes indeed, it’s deja vu all over again. Please forgive my pessimism, but the comments from Messrs. Bernanke and Paulson smell just like the same early-stage denials and soft-peddlings given to us by the real estate crowd. And I’m predicting that as in that more limited case, the wider problem of the U.S. economy in general will go south vastly farther and faster than Bernanke and Paulson are admitting.
Two things to bear in mind about these kinds of forecasts coming from a guy like me: First, I am not an economist, nor do I play one on TV (and please forgive me for using that hackneyed formulation). I’m just a generally educated person who has taken a great interest in current economic matters. I scan, read, digest, analyze, and react to all of these news stories not as a trained economist or policy analyst but simply on the level of plain logic, informed by a good dose of gut and intuition. The thing is, my reasoning, gut, and intuition have been proved uncomfortably accurate by events over the past several months.
Second, I don’t make the shallow-minded mistake of indiscriminately lumping the likes of Bernanke and Paulson in with the now-discredited cheerleaders of the real estate bubble. Those cheerleaders were blatant shills who deserve the humiliation they’ve received, whereas Bernanke and Paulson are smart and capable men, highly qualified to perform their respective duties, probably possessed of decent motives, who I suspect are doing the best job they can (although I’m inclined for some reason to impute better motives and greater overall effectiveness to Bernanke than to Paulson, who at times comes off as inept). The thing is, a part of their jobs is necessarily vested in politics and appearances. They know their words and even their facial expressions and tones of voice send ripple effects across the economic and social worlds. Witness the 175-point drop in the Dow on the day they gave the remarks reported on below. Prudence demands that they speak in a measured and conservative manner, avoiding hyperbole and putting a positive or at least neutral spin (if the latter isn’t an oxymoron) on facts whenever possible. I don’t blame them for that.
But prudence also demands that we ordinary folks recognize these things for what they are, and the actual situation for what it is. If Bernanke and Paulson are saying blatantly grim things and struggling to find positive angles, as the following stories report, then the reality of the overall situation is very likely akin to the early stages of the housing collapse. That is, the relevant public figures are putting as happy a face as possible on the whole mess while the brute reality is more akin to a grimace, or maybe the mottled visage of a plague victim. My gut and intuition are telling me that the American economy is staggering toward an imminent collapse. Moreover, as the authors of the ever trusty Daily Reckoning speculate about in the third piece linked below, the transition to a vastly slower-paced and lower-strung standard of living may be permanent.
I could well be mistaken. I half hope I am. The other half recognizes that the past few years and decades of the United States’ social, political, economic, and cultural history represent such a stupendous Faustian/Huxleyan ascent (or descent) into heretofore unexplored realms of excess, internal rot, and imperial hubris that an equally stupendous crash, while it will certainly result in much real suffering, may be necessary to save our collective soul.
Oh — and while we’re talking about the issue of appearances and perceptions among prominent government employees, is it just me or is last Friday’s sudden, shocking announcement by David Walker, the U.S. comptroller general, that he’s resigning his job as the head of the GAO (see link and excerpts below) more than a little concerning? For over than a year he’s been touring the country and speaking on television, outside of official government channels, to warn that the U.S. is bankrupt and currently perched on a “burning platform of unsustainable policies.” Now he quits his government post for the stated reason that he can effect more positive change and get his message out more clearly in the private sector. Uh-ohs all around, says I, for various reasons.
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The Associated Press, Feb. 14
WASHINGTON — Using words like “sluggish” and “deteriorated,” Federal Reserv Chairman Ben Bernanke gave a starkly pessimistic assessment of the nation’s economy on Thursday and signaled that the Fed will cut interest rate cuts further if needed to combat the adverse effects of a prolonged housing slump and a severe credit crisis.
….Bernanke told the Senate Banking Committee the serious housing slump and a credit crisis triggered by rising defaults in subprime mortgages had greatly strained the economy. “The outlook for the economy has worsened in recent months and the downside risks to growth have increased,” Bernanke told the committee. “To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so.”
….Bernanke said that in his own economic forecast he did not predict a recession [!!!] but a period of sluggish growth “followed by a somewhat stronger pace of growth starting later this year” as the impacts of the Fed’s rate cuts and the $168 billion economic stimulus package of tax rebates begin to be felt.
However, he also said there were significant downside risks ranging from the threat that the housing slide could become even more severe, the job market could deteriorate more than currently expected or that the credit squeeze will intensify.
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The New York Times, Feb. 15
With the credit markets once again deteriorating, the nation’s two top economic policy makers acknowledged Thursday that the outlook for the economy had worsened, as both came under criticism for being overtaken by events and failing to act boldly enough.
In testimony to Congress, Ben S. Bernanke, the chairman of the Federal Reserve, signaled that the Fed was ready to reduce interest rates yet again, pointing out that problems in housing and mortgage-related markets had spread more widely and proved more intractable than he predicted three months ago.
His sobering assessment was echoed by Treasury Secretary Henry M. Paulson Jr., who appeared with him. Both continued to avoid predicting a recession but said they were scaling back the more optimistic forecasts they had issued in November.
….Stock prices, which normally rally when the Fed hints it will lower borrowing costs, tumbled instead. The Dow Jones industrial average dropped 175 points, or 1.4 percent; broader stock indexes dropped by similar amounts.
Anxiety is escalating among institutional lenders and major borrowers, as the panic over soaring default rates on subprime mortgages that began last summer continues to spread, freezing up credit for municipalities, hospitals, student loans and even investment funds holding the most conservative bonds.
….Senator Christopher J. Dodd of Connecticut, chairman of the Banking Committee, told reporters after the hearing that “it just seems as if they aren’t as concerned about the magnitude of the problem.”
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Yahoo! News, (AFP story), Feb. 16
The head of the audit and investigative arm of the US Congress announced his resignation Friday, citing “real limitations” on what he could do. David Walker, 51, a respected voice on fiscal matters, said he was making an early departure from the(GAO) to head a new public interest foundation.
“As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress,” Walker said in a statement.
He did not elaborate but Walker last year issued an unusually downbeat assessment of his country’s future in a report that drew parallels with the end of the Roman empire.
He had warned that the US government was on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action was not taken soon.
There were “striking similarities” between America’s current situation and the factors that brought down, he had said.
These included “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”
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The International Herald Tribune, Feb. 15
A fresh batch of data on Friday presented a bleak picture of the U.S. economy, with rising prices of imported goods, struggling manufacturing and an erosion in consumer confidence.
With the price of oil near record levels, import costs grew in January at the highest annual rate in a quarter century, the Labor Department said. In New York, manufacturing activity fell to its lowest level in five years. And consumers, responding to a national survey, said they felt worse about the economy than any time since the recession era of the early 1990s.
“This is just horrible,” wrote Ian Shepherdson, the chief United States economist for High Frequency Economics, a research firm. “The sustained volatility in the markets, the rise in energy and food prices and, of course, the catastrophe in the housing market, is making consumers extraordinarily miserable.”
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Doug Noland, Credit Bubble Bulletin, Feb. 7
[Cardin comments: If you’re not reading Doug Noland’s regular weekly report, then you should be. Note that the top portion always consists of a categorized and dated roundup of the week’s major economic news stories. To find Noland’s unfailingly perceptive and provocative comments and analysis, scroll to the bottom of the page.]
The leveraged speculating community has suffered the occasional tough month — last August providing a recent case in point. Each time, however, performance quickly bounced back. In true Bubble fashion, each quick recovery from a setback emboldened all involved; industry fund inflows not only never missed a beat — they accelerated. Yet a strong case can be made today that this (historic) Bubble has now burst — that last year was the “last gasp” before succumbing to New Post-Credit Bubble Realities. I don’t expect performance to bounce back, while I do foresee a flight away from the leveraged speculating now beginning in earnest. With “crowded trades” unraveling virtually across the board, marketplace risk is now escalating significantly for leveraged strategies in general. Systemic liquidity issues and dislocated market conditions have created an environment where there is seemingly no place to hide.
Importantly, a leveraged speculating community “unraveling” would prove a death blow for myriad sophisticated trading strategies and risk models, with enormous ramifications for systemic stability. There are unmistakable “Ponzi Dynamics” involved here worthy of a few Bulletins.
Going forward, I expect a foundering leveraged speculating community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate debt and derivatives is in the process of creating a massive overhang of securities to sell, in the process profoundly curtailing Credit Availability and Marketplace Liquidity throughout. The ramifications for our finance-based Bubble Economy are momentous. As an economic and financial analyst (as opposed to “fear-monger”), I feel it is imperative to highlight that it is more “technically” accurate to categorize the unfolding scenario in the historical context of an economic “depression” rather than “recession.” This is certainly not shaping up as a short-term inventory-led economic adjustment or “mid-cycle” slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our Credit and economic systems.
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The Daily Reckoning, Feb. 15
One thing that bothers us about our dim outlook for the U.S. economy is that so many others seem to see things the same way.
….It is always worrisome when people in positions of responsibility agree with us. It troubles us, for example, that so many people think they see a recession coming. Maybe we won’t have one after all.
Or . . . maybe we won’t have the recession they all expect.
….[W]hen Bernanke delivered the bad news to Congress yesterday, the news he gave out was not as bad as you might expect. He said the economy would be softer than expected, but that it would recover before the end of the year. That is the message that practically all the experts are peddling: look for a slump in the first part of the year, recovery later on.Yesterday, we noted that homeowners typically believe that the downturn in housing prices may last one or two years. They still believe that “house prices always go up in the long run.” Stock buyers seem to think the same thing. Many are talking about a bottom already. Some think the bottom has already come and gone — in January. They believe we’re now in a new phase of what is, for them, an eternal bull market.
Mr. Market always has a trick up his sleeve. What if his big surprise is that this downturn doesn’t go away after six months? What if house prices grind downward for five years. . . or more? What if we have begun a major bear market on Wall Street, with the Dow falling, in real terms, for the next 15 years? And what if Warren Buffett is wrong? What if America has topped out? What if, after 232 years of coming up in the world…it will go down for the next 232? What if it is now smart to short the United States — its currency, its stocks, its labor and even its military?
The U.S. enjoyed an extraordinary run of good luck. It had rich farmland. . . with huge oil deposits under it. It had energetic labor and low taxes. It had innovators, risk takers. . . and a government that left them alone. It had thrifty, hard-working people who asked for nothing but the chance to work. This combination of hard work and good luck put America on top of the world. But that’s the trouble with being on top of the world; there’s no where to go but down. Now, the U.S. is a net importer of food. . . and fuel. Its government seeks to control not only the lives of its citizens, but the fates of other peoples half way around the globe. Its citizens work harder than ever. . . but they are now competing with people who work even harder than they do. . . people who are willing to work for one tenth the compensation and then save half of what they earn. These same U.S. citizens are bending under the heaviest burden of private and public debt the world has ever seen, while their government encourages them to spend more.
Here’s a surprise for you, dear reader. What if this great economy didn’t “emerge even stronger”…but instead was crippled, and never recovered?
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Yahoo! News (AFP story), Feb. 14
New York state governor Eliot Spitzer warned Thursday that bond and credit woes afflicting Wall Street and global markets could turn into a more damaging “financial tsunami.”
In testimony to the US Congress, Spitzer urged lawmakers and regulators to urgently address the bond and credit problems roiling the financial industry which have forced some big firms to writeoff billions of dollars in troubled securities.
“If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy,” Spitzer said, according to a transcript.
He said the financial difficulties of bond insurance companies could have a widespread effect because they insure a broad range of bonds and securities such as municipal bonds, college loans and even relate to museum budgets.
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Bloomberg, Feb. 7
The estimated 1 million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime borrowers face an average increase of 8 percent or less when their adjustable- rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in.
“We call them neutron loans because they’re like a neutron bomb,” said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. “Three years later the house is still there and the people are gone.”
….”These could be called long-fuse, exploding ARMs,” said Kathleen Keest, former assistant Iowa attorney general and now senior policy counsel at the Center for Responsible Lending in Durham, North Carolina. “I’ve heard people say they are the most complicated product ever offered to consumers. They are the real liar loans.”
The loans accounted for 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, up from 8.3 percent in 2005, according to an estimate by industry newsletter Inside Mortgage Finance.
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The New York Times, Feb. 12
The credit crisis is no longer just a subprime mortgage problem. As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
….Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit. “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.
….The bursting of [the generalized credit/debt] bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.
….And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s Economy.com and Equifax, the credit bureau.
About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.
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After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly.
“This will be the year with the highest number of hedge fund failures given the huge number of new and untested hedge funds,” said Bradley H. Alford, founder of the Atlanta-based Alpha Capital Management, an investment advisory business.
….“People who have been in business for 20 years are saying January was one of the most difficult and challenging times they have ever seen,” said a manager who oversees a fund of hedge funds, who asked not to be identified because he does business with many managers.
It is a remarkable turnabout for an industry that upended the old order on Wall Street and, in the process, redefined Americans’ notions of wealth. In recent years hedge fund money has driven up prices of everything from New York apartments to Andy Warhol paintings and reshaped the worlds of philanthropy and politics.
Managing a hedge fund has become the running dream on Wall Street. Since 2000, the number of funds has more than doubled, to 10,000. These private pools of capital now sit atop almost $1.9 trillion in assets.
….Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money. “That’s a scary number,” Mr. Waksman said.
Many managers fear things will only get worse.
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Yahoo! News (AFP story), Feb. 10
[Cardin comments: Methinks this is not currently, nor will it be in the future, a problem for Asia alone. Just as Africa is currently serving a canary-in-a-coal-mine function for the issue of electrical blackouts, with events on that continent demonstrating the devastating effects of chronic and severe energy shortages on electrically powered societies, so Asia is probably serving a similar warning function for the problem of food shortages and price spikes based on the tangled interplay of things like global warming, fossil fuels, peak oil and energy, growth-based economic systems, rising lifestyle expectations, crop failures, and so on. We already saw a flurry of events and accompanying news stories early last year about turmoil in Mexico over the spike in corn prices caused by the ethanol boom. As The Economist reported two months ago, the era of cheap and steadily falling food prices is over. Also check out the Financial Times article below.]
Rising food prices have hit Asia’s poor so hard that many have taken to the streets in protest, but experts see few signs of respite from the growing problem.
An array of factors, from rising food demand and high oil prices to global warming, could make high costs for essentials such as rice, wheat and milk a permanent fixture, they say.
“The indications are in general pointing to high prices,” Abdolreza Abbassian, a senior grains analyst at the UN Food and Agriculture Organisation in Rome, told AFP.
The agency’s figures show food prices globally soared nearly 40 percent in 2007, helping stoke protests in Myanmar, Pakistan, Indonesia and Malaysia.
“High growth in per capita income, especially in Asia, is driving demand for food,” said von Braun, the Washington-based group’s director general.
At the same time, Asia‘s growth has left many of its poor behind, he added. They spend between 50 and 70 percent of their meagre incomes on food, making price rises especially debilitating.
….Drought and bad weather, high oil prices stoking transport costs, spiking biofuel demand and low reserves have also played their part, experts say.
….Experts are still wary of pinning the blame for these events explicitly on the impact of global warming.But a Stanford University study found that climate change could cut South Asian millet, maize and rice production by 10 percent or more by 2030. Climate change, in particular the drive to cut greenhouse gas emissions from conventional fuels to curb global warming, has also driven demand for biofuels.
The high cost of crude oil, which hit record levels in January, has made biofuel production more commercially viable. Farmers are switching to growing crops such as corn or jatropha, a weed, to feed the biofuel industry rather than crops destined for the dinner table.
“Ambitious government biofuel targets are leading to pressure on prices and probably to some sort of structural increase overall in trend food prices,” said Dean.
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The Financial Times, Feb. 14
And what struck me most forcefully from this analysis — aside from the usual, horrific litany of bank woes — was just how much trouble is quietly brewing in corners of the commodities world.
….Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”
Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.
However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.
….[L]eaving aside this very real human tragedy, what should also be crystal clear for investors is that this is not a picture that points to 21st-century capital markets progress; nor is it likely to breed stability in the medium term. Anyone who thinks this decade’s problems start and end with credit, in other words, may yet receive a rude shock; sadly, we live in a world where soyabeans may yet pack as painful a punch as subprime.
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ClusterFuck Nation, Feb. 11
Behind all the blather and bullshit about the Federal Reserve’s rescue gambits and the machinations of the ratings agencies, and the wiles of foreign sovereign wealth, and the incomprehensible mysteries of markets, and the various weather forecasts of a gathering “recession” is the simple fact that the USA is a way poorer nation than we imagined ourselves to be six months ago. The American economy has been running on the fumes of “creatively engineered” finance (i.e. new-and-improved swindling) for years, and now these swindles are unraveling. In their aftermath, they leave empty wallets, drained bank accounts, plundered retirements funds, boiled away capital reserves, worthless stocks, bankrupt companies, vandalized housing tracts, ruined families, and Wall Street executives who are still pulling down multimillion-dollar pay packages despite running their companies into the ground.
We’re burning down the house and kidding ourselves that there is a remedy for it. All the rate cuts and loans to big banks and bank-like corporate organisms, and “monoline” bond insurers, and mortgage mills amount to little more than a final desperate shell game to conceal the radioactive pea of aggregate loss. The losses are everywhere, and when you add up seven billion here and eleven billion there they probably amount to something like a trillion dollars in sheer capital evaporation — not counting the abstract “positions” that the capital was leveraged onto by the playerz and boyz who mistook algorithms for productive activity.
The shell game may run a few more weeks but personally I believe the timbers are burning. The losses are no longer “contained” or concealable.
….This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie “consumers” of other peoples’ productivity, paid for by “money” they haven’t earned.
….It’s not hard to understand why the Bernankes, Paulsons, Lawrence Kudlows and other public representatives of capital keep pretending that everything is under control. On the other side of their pretenses lies disorder and hardship. One wonders, of course, what they really see in their private minds’ eyes. Do they actually believe that the statistics issued by their serveling agencies amount to a plausible picture of reality? Are they so lost in their fantasies of “management” that they think they’re controlling events?
My guess is that their credibility is spent. In the weeks ahead, nobody will know who or what to believe. We may even run out of questions to ask as we just all collectively stand there in a thrall of wonder and nausea, watching the nation’s financial house burn down.