Massachusetts Revolution Fueled by Depression Will Slow Government Intervention in Economy

        Few professionals are yet willing to admit we have been in a depression for the last year. You have to understand the position that economists and analysts are in. They work for corporations, insurance, Wall Street, banking and government and if they thought we were in a depression and they publicly announced that all chances for advancement would be lost or they would be squeezed out of the firm or simply fired. Under such circumstances can you ever expect that you get the truth? We don’t think so. Furthermore the depression we are enveloped in is far from over. The recession encompassed a drop in real GDP in the midst of a credit crisis. The crisis was the result of over-extended credit, prohibitively low interest rates, massive speculation by banks, brokerage houses, insurance companies, and corporations worldwide. It just didn’t happen it was planned that way. We saw that recently in testimony before Congress when CEOs of these financial firms admitted they made a mistake in the process of enriching themselves. The worst sin was the criminal securitization of mortgages and the deliberately criminal mislabeling of their ratings. Then making matters worse those who sold this toxic garbage to their clients such as Goldman Sachs, JP Morgan Chase and Citigroup were shorting the product that they had just sold to their best clients. What kind of monsters are these people? Unethical doesn’t go far enough. It was criminal. These are the same characters, along with the Fed, and others, who gave us the dotcom boom and collapse and then foisted the real estate boom on our economy. The result has been deflating assets and contracting credit offset by massive lending, money and credit creation by the Fed and monetization, all temporary expedient measures, which in the context of history has led to failure. This has been in process for seven years. This second major abuse of our system in 14 years has presented a terrible dilemma and that is where we are today. Our monetary policy hasn’t worked and won’t work and there has been and presently is little fiscal control in Washington. This is no normal recession; it is a depression.

        We have zero funds rates and up until six months ago M3 expansion of more than 17%. The Fed has monetized trillions of dollars of Treasuries, Agencies and toxic waste and now we are told we are in recovery – the worst is over. We wish we could agree, but we can’t. We are reenacting the same mistakes of the past all over again. Unemployment is close to the depression levels of the “Great Depression” and is still expanding albeit more slowly. Money velocity has fallen even after the massive infusion of aggregates. Liquidity is not flowing into the economy it is pouring into Wall Street to aid and abet more speculation, which has sent the Dow from 6600 to 10,700. This game cannot be played indefinitely. Wall Street cannot continue to prosper as the economy remains stagnant, and unemployment climbs higher. 

       The market is grossly overpriced and the effect of favorable news will begin to wane. It should be noted that insiders are selling into the never-ending rally, and mutual funds have very little money flow coming into the funds. That, of course, is our government at work manipulating the market. Just last week insiders bought $18 million worth of shares and sold $419 million.

       This to us is more proof that the stock market is the most overvalued since September 1987, which brought about the market collapse of 10/19/87 and resulted in August 1988 in the Executive Order, “The President’s Working Group on Financial Markets,” which has led to market manipulation and the end of free markets.

       That and the bailout of banks, brokerage firms and insurance companies too big to fail, those same entities carrying two sets of books as authorized by the BIS, FASD and the SEC, government purchase of stock in selective Illuminist controlled companies, and government control of the mortgage and real estate markets. This give you corporate fascism at its finest. We see intervention everywhere and that is not free markets.

       How can there be a recovery with 22.5% unemployment, and with the additional threat of further unemployment? Who will buy the new housing and the tremendous inventory overhand? What will happen to the commercial inventory building up? Who has money in America to buy cars and trucks? Credits to buy housing for subprime and ALT-A buyers will end up with a 50% failure rate. Cash for clunkers was a colossal failure. Such exercises in futility only buy time, just as stimulus packages, and monetization do the same thing. The elitists behind the scenes know this just as we know this. That means the colossal deficit increase of $1.4 trillion a year will add 10% yearly to the federal debt to GDP ratio that will be over 100% by 2011. The tax liability to service this debt will be overwhelming. Government debt is rising exponentially and if further stimulus is not added the credit crisis will be renewed. This is why the Fed cannot remove further liquidity from the financial system, especially after having taken M3 from 17 to 18% to 6%. Incidentally, England and the ECB have done the same thing, and they still see rising inflation. If further stimulation is not forthcoming, or war, or default comes, we will see inflation reverse and deflation take over and that could last for ten years or more. This deflation, if allowed to take its course, will cause losses of $12 to $15 trillion from the economy and cause unemployment to rise to 40% to 50%. That would also entail cutting extended benefits. That would give us the scenes we saw in the 1930s. The debt we are facing knows no precedent in modern times, and there is no possible way it can be paid.

        Bad debt is piling up again in residential and commercial real estate as well as in personal and business debt. This in part is why lenders are not talking about it if they can help it, but they are not lending. Without further lending increases the economy cannot function efficiently because it is so dependent on credit. That means higher unemployment, fewer buyers and a slower economy. If you think foreclosed inventory is bad now wait until the second wave hits and it is going to hit. If you are under water on your mortgage you do not care anymore. You stop paying your mortgage and you live rent-free for a year or more. There is no longer any stigma to walking away or going bankrupt. All the Mickey Mouse games being played by government to keep people in their homes are not going to work. Subprime and ALT-A loans are not the answer. They start going into default in a big way next year as the taxpayer again foots the bill.

       The public is catching on. You saw this in Virginia, New Jersey and this week in Massachusetts. The public, a liberal public at that is trying to tell government we have had enough and we want the truth, not more lies. How bad is it? The Tea Party has spoken,, driven by talk radio and the Internet.  The moment of truth is upon us. Each passing day brings us closer to facing the music. 

       Where does the accumulation of debt end? For the two fiscal years ended 9/30/99, the public increased Treasury debt $5 trillion to $7.5 trillion or by 50%. The Fed has purchased 80% of Treasury debt yoy, increasing the monetary base from $850 billion to $2 trillion, which includes Agencies and MBS. Seeking cover on their announcement, they said on Christmas they would supply unlimited funds for three years to Fannie Mae and Freddie Mac. Government liabilities made in behalf of the American taxpayer since the third quarter of 2007 have jumped 61% to $3.62 trillion. It is our opinion that the inflation caused by funding and monetization over the next decade will be very disruptive and expensive to US dollar users as purchasing power falls. That translates into an additional loss in buying power of some 50%.

       If liquidity stays at current levels the stock market will fall as it flourishes on increasing liquidity. In addition, higher inflation rates tend to push stocks lower. If we are correct and there is a second credit crisis ahead of us, M3 will rise again and monetization will be pushed into high gear again.

       Meredith Whitney, the banking analyst who forecast bank shares would fall in June of 2008, said plans to limit risk-taking at financial companies will probably be approved and may dramatically reduce trading profits.

       JP Morgan Chase and Goldman Sachs as a result may have to sell some private-equity business and stop investing in buyouts under a proposal by the President. He wants to prohibit banks from owning or making investments in private-equity and hedge funds.

     The banks make their money trading for their own accounts. They won’t have much in the way of earnings if legislation passes, the largest manipulations in history would come to an end. 

      The President has called for limiting the size and trading activities of financial institutions to prevent risk taking and another financial crisis. He also said there should be no proprietary trading. We are told Goldman Sachs will benefit from the President’s proposal to limit Wall Street risk by forcing deposit-taking banks to unwind trading operations.

      Again the commercial paper market fell by $10 billion to $1.092 trillion. Asset-backed commercial paper rose by $3.5 billion to $430.0 billion.

      Unsecured issuance fell by $9.9 billion versus rising $12.7 billion in the prior week.

      Democrats have completely lost their moorings. They want to allow government to borrow an additional $1.9 trillion to put the national debt at $14.3 trillion. It would need 60 votes to pass.oqHo

      Food prices are roaring upward again as the PPI rose 0.2%. That is a 4.4% gain month-on-month.

      Housing starts were 575,000 and building permits rose 653,000. Starts fell 4%. How can any sane builder be building when official and bank hidden inventories are well over a year. Groundbreaking fell a record 38.8% to an all-time low of 553,000 units. Single-family starts fell 6.9% in January. New building permits rose 10.9% for all of 2009 permits fell 36.9%. A Florida builder who was going to build 5,000 units declared bankruptcy yesterday.

       Americans haven’t been fooled by the Dow’s rise. What they see ahead are more taxes.  Economists may see the recession as being over, but the man on the street does not. Roughly 60% of the public believes the recession still has a way to go, a NBC/Wall Street Journal poll reported last October.

          There are sound reasons for this gloom. Consumers have learned a bitter lesson. They understand that increased consumption—private and public—will have to come from income and not borrowing, and income will have to come from employment. Today, mainstream Americans are going on a financial diet amid deteriorating family finances. By 2008, suburbs were home to the largest and fastest-growing poor population in the country. 

         Between 2000 and 2008, suburbs in the country’s largest metro areas saw their poor population grow by 25 percent—almost five times faster than primary cities and well ahead of the growth seen in smaller metro areas and non-metropolitan communities. As a result, by 2008 large suburbs were home to 1.5 million more poor than their primary cities and housed almost one-third of the nation’s poor overall.  

        Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. In 2008, 91.6 million people—more than 30 percent of the nation’s population—fell below 200 percent of the federal poverty level.

      The timing was political: the president spoke on the day that Goldman Sachs announced fourth-quarter earnings of $4.95bn. Those of a more populist nature than Mr. Obama – both on the left and on the right – will say that he comes late to the game 

          Indeed, the White House and the US Treasury resisted the backlash against bankers earlier in 2009 – they opposed the punitive tax proposed in the House of Representatives. Instead of using the control they enjoyed over the banks through the troubled asset relief program in 2009, the authorities rushed to free banks from the restrictions associated with Tarp. 

        Mr. Obama may now be ruing this lost opportunity. The public mood has swung against Wall Street – to which Mr. Obama appears too close for comfort. Trillion-dollar bailouts for people  on million-dollar salaries have infuriated Americans living in fear of losing their jobs and their homes. 

      Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment. 

         In the weeks between the closings on her two mortgage loans, Bair met with Bank of America’s chief negotiator in the bailout talks.  To avoid conflicts of interest, the Federal Deposit Insurance Corp., which Bair heads, prohibits employees from participating in “any particular matter” involving a bank from which they are seeking a loan.  [Is it stupidity or arrogance that induces solons to flaunt law & ethics?]  

      In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1. As of January 13, the Fed held $5.9 billion in dollar “swap” agreements with foreign central banks, down from $63 billion in early September and $583 billion in late December 2008 as the financial crisis was worsening. [This is very important. Without the swaps supporting the dollar in the Forex and buying Treasuries by foreign central banks will recede. The dollar will fall and there will be more monetization.]

       The Fed balance sheet for the week ended yesterday declined $39.849B (Expiry has passed!) due to a TAF decline of $37.387B.  Only $38.351B remains in TAF. 

      The Treasury on Thursday announced auctions to sell a total of $166 billion in securities in a range of offerings next week.

      Brown’s victory in Massachusetts not only torpedoes Obamacare, it kills ‘cap & trade’, global warming and a host of other socialistic proposals.  (You might want to reconsider your holdings of GE, GS and other cap & trade plays.).  It also kills further Wall Street bailouts and impairs CEOs that have pandered to President Obama – Yes, this means you Jamie Dimon, Jeff Immeltdown, Buffett and the Google geeks. The ginormous upset in the People’s Republic of Massachusetts – Tiananmen II – implies that the GOP could capture the House and possibly the Senate in 2010.  Now that all but the safest Democratic House seats are in play, reputable GOP candidates will surface and money will pour into GOP coffers. 

     The same dynamic is likely to occur if the GOP takes one or both houses of government in November. First stocks will rally but then the medicine will be administered and the results will be extremely bitter. 

      Please keep this in mind as various blowhards spew ‘start of another massive bull market’ rhetoric.  The dynamic behind any GOP revolution is limited government and no more bailouts. A new Congress will institute some degree of limited government, which might include handcuffing the Fed. 

      The Massachusetts unemployment rate surged by nearly a point in December, driving joblessness to its highest level since the 1970s and dealing another setback to a labor market that appeared to be on the mend.

      The state unemployment rate leaped to 9.4 percent from 8.7 percent in November, more than reversing two previous months of significant declines, the Executive Office of Labor and Workforce Development reported. It is the highest rate since August 1976, when the state was recovering from the energy crisis recession that began in 1973 after the Arab oil embargo.

      Massachusetts’s employers, meanwhile, slashed another 8,400 jobs, the most since September. Since the recession began in March 2008, the state has shed more than 136,000 jobs, including 66,000 in 2009.