Bob Chapman - Housing Market in Serious Free-fall - Credit Collapse Imminent

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. Socialists in the House will unsuccessfully try to extend unemployment benefits, and in lieu of that, the administration will extend the $8,000 housing credit into the fall for those who didn’t make the cutoff, so the real estate sector and the economy won’t fall off a cliff. Fascist nostrums don’t work, but rich socialists do not get it, they never get it. Look at Wall Street and banking as an example. Politically they love to give money away, but not their own money, only the general public’s money.

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.

Another factor pulling the market lower is not only lower GDP and earnings, but also the specter of higher taxes in 2011, particularly an increase of 5% in long term capital gains taxes from 15% to 20%. It is insanity the Democrats want to go ahead with the increases.

Weakness is becoming more apparent in the US economy. Retail sales fell 1.2% in May. Business conditions in NYC from ISM fell to 69.3 from 89.9 in May, the largest one-month decline on record. The six-month outlook fell to 69.6 from 84.2. NYC debt and deficit are very high as are those of many cities and states.

As the market falls the opportunities for capital gains disappear and with them the chance for business investment. Business is in fear and are not hiring. Why should they as productivity increases 3% to 6%. Besides getting money from banks is very difficult if not impossible. The lenders and financial institutions have been bailed out, but the citizen hasn’t been. If Main Street doesn’t prosper neither can Wall Street.

On the exterior we see the BP false flag operation and all the negativity it engenders. Hundreds of thousands have lost their jobs and businesses. State, County and cities are broke. After doing little or nothing about the BP episode the President pushes hard for carbon taxes and Cap & Trade. We have the pending passage of financial reform, which makes the Federal Reserve a financial dictatorship. A planned unnecessary war that will engulf the whole world is about to begin in the Middle East. Unless the Fed soon re-liquefies the economy it will collapse into deflationary depression.

We need not tell you about US residential and commercial real estate, which is still falling.

Unemployment increases relentlessly. These warning signs cannot be missed, they are all around you. Do not be fooled by smoke and mirrors, stick with reality.

The federal debt will represent 62% of the nation’s economy by the end of this year, the highest percentage since just after World War II, according to a long-term budget outlook released today by the non-partisan Congressional Budget Office.

Republicans, who have been talking a lot about the debt in recent months, pounced on the report. “The driver of this debt is spending,” said New Hampshire Sen. Judd Gregg, the top Republican on the Senate Budget Committee. “Our existing debt will be worsened by the president’s new health care entitlement programs…as well as an explosion in existing health care and retirement entitlement spending as the Baby Boomers retire.”

At the end of 2008, the debt equaled about 40% of the nation’s annual economic output, according to the CBO.

The report comes as the National Commission on Fiscal Responsibility and Reform meets today. The group, created by President Obama, is expected to issue recommendations in December to curb the debt – a point Democrats raised today.

The CBO report “reinforces the importance of the work being done right now by the president’s fiscal commission,” said Sen. Kent Conrad, D-N.D., who chairs the Senate Budget Committee. “We simply cannot allow the federal debt to explode as envisioned under CBO’s projections. The economic security of the country and the quality of life for our children and grandchildren are at stake.”

  Thirty minutes after the NYSE open the Confidence Board reported that US consumer confidence plunged to 52.9 in June from May’s 62.7; 62.5 was expected.  But that’s not the entire story.  May consumer confidence was revised lower, to 62.7 from 63.3.  So the June decline is dramatic. 

  The magnitude of the confidence decline shocked investors and traders on Tuesday.  Hopefully the Confidence Board didn’t miscalculate previous US consumer confidence like they did with China. 

  Consumers’ short-term outlook, which had improved significantly last month, turned more pessimistic in June.  Those anticipating an improvement in business conditions over the next six months decreased to 17.2 percent from 22.8 percent, while those expecting conditions will worsen rose to 14.9 percent from 11.9 percent. 

  Today’s ADP Report does not include the effects of federal hiring for the 2010 Census. Hiring for the census may have peaked in May. For this reason, 

Friday’s figure for the change in nonfarm total employment reported by the BLS might be weaker than today’s estimate for nonfarm private employment in the ADP Report. 

If final demand is lacking, the inventory buildup that accounted for 69% of Q1 GDP will drag the economy lower in Q2 and perhaps Q3. 

  The NY Time’s Gretchen Morgenson and Louise Story: Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents… 

          The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts.

  On Nov. 6, 2008 after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

           For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout.

           Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. 

            In the end, the Fed successfully kept most of the details about its negotiations with banks confidential for more than a year, despite opposition from the media and Congress.

           But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that  federal regulators forced the insurer to accept it. 

          Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. It was not until a Congressional committee issued a subpoena in January that the New York Fed finally turned over more comprehensive records. The bulk remained private until May, when some committee staff members put them online, saying they lacked the resources to review them all. 

www.nytimes.com/2010/06/30/business/30aig.html?th&emc=th

U.S. private-sector firms created 13,000 more jobs in June, according to the ADP employment report released Wednesday. Job growth was “disappointingly weak,” said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. Private-sector job growth was revised higher in May to 57,000 from 55,000 earlier. Economists are expecting nonfarm payrolls to fall by 130,000 when the government reports its estimates on Friday, including the loss of some 250,000 temporary workers at the Census Bureau. Private-sector employment has increased five months in a row.

Homebuyers would get an extra three months to complete their purchases and qualify for a generous tax credit under a bill overwhelmingly passed by the House yesterday.

Under current law, buyers who signed purchase agreements by April 30 have until today to close on the sale to qualify for tax credits of up to $8,000. The bill would give buyers until Sept. 30 to complete their purchases.

The extended deadline only applies to people who signed purchase agreements by April 30. The National Association of Realtors estimates that about 180,000 home buyers who already signed purchase agreements are likely to miss today’s deadline.

“We owe this to the people who have essentially followed the rules who are caught by a closing date,’’ said Representative Sander Levin, Democrat of Michigan and chairman of the House Ways and Means Committee.

The bill passed 409 to 5. It now goes to the Senate, where majority leader Harry Reid, Democrat of Nevada, has sponsored a similar measure.

The popular tax credit has helped to stabilize the nation’s slumping housing market.

We are now at the point where one can only sit back and cackle as the insanity unravels. The president earlier agreed with his supervisor that the Economy is doing swell on a day when the market posted the 5th highest TRIN rating in history, the ECB is saying all is well even as Europe is about to implode, and now, S&P has just announced it has put Moody’s on credit watch negative, the reason: “We believe there may be added risk to U.S.-based credit rating agency Moody’s business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies.” Just so you understand what is going on here – S&P: a credit rating agency, is downgrading Moody’s, a credit rating agency, on concerns financial regulations will impair credit rating agencies. Well, if “suiciding” your chief competitor is the best way to approach this situation, whatever works… Next week, Moody’s downgrades S&P, followed by another downgrade of Moody’s by S&P, until both companies bankrupt each other with a mutual D rating. 

The latest IMF Currency Composition of Official Foreign Exchange Reserves report was just released. In the quarter ending March 31, the biggest relative drop occurred in central bank holdings of Dollars, declining as a percentage of total reserves from 62.2% in Q4 2009 to 61.5% in Q1 2010. This is the lowest ever relative holding of US Dollars by foreign banks. Oddly enough, the euro was not the biggest beneficiary of this loss of confidence in the dollar (it also declined on a relative basis by 0.1% as a % of total holdings to 72.2% in Q1), but the “Other” currency category. We assume that the Chinese Yuan is the dominant currency in this particular basket. Other reserves increased from 3.1% of total to 3.7% in just one quarter. Central banks are starting to rotate holdings out of Dollars (and after this quarter, certainly out of euros) and into non-traditional, non-developed currencies. Are China and Russia slowly becoming reserves?

Crunchtime for mutual funds has arrived. On one hand they are getting slammed with the S&P now almost -8% YTD causing a collapse in the funds’ own equity values. On the other hand, investors have now withdrawn $30 billion in cash, forcing a feedback loop where selling begets selling, and even more redemptions. Ah, the beauty of a Keynesian system falling apart. And let’s not forget that fund cash levels are at all near record lows to begin with. If the market slide can not be contained, and if consumers who already have zero faith in the market retrench even more, it could be the beginning of the end for the fund industry. More relevantly, ICI has just reported $1,248 million in outflows from domestic equity mutual funds: this is the eighth sequential week of outflows since the Flash Crash, and a period during which $32 billion has been redeemed.