Where is Your Money Safe?

Last January we predicted that there would be another stimulus program this year. Congress has already passed legislation to continue unemployment benefits, which the Senate will approve as well. Those out of work cannot survive without such assistance, as our transnational conglomerates continue to send our jobs to foreign lands. The question is will the unemployed, as a result, receive benefits indefinitely, as these elitist corporations park their profits in tax havens tax-free?

There is nothing to stop these events because the public doesn’t understand what is going on and Congress answers only to campaign contributions and the call of re-election. The biggest insult is to expect Americans to believe unemployment is 10% under U3, never bothering to mention U6, which is 17.3% and climbing. Of course there will be more stimulus and Fed monetization of Treasury debt. They know if it is not forthcoming the economic and financial system will collapse. Can you imagine what would happen to the mortgage securities market if the Fed stops buying that toxic waste, or if Fannie Mae, Freddie Mac, Ginny Mae and th FHA stop buying subprime and ALT-A type mortgages? The stock market has slowly moved higher as the insiders in the market, who know what is going on, perceive what is in store for 2010. As far as the Fed is concerned they have to continue doing what they have been doing. The purchase of Treasuries, Agencies and toxic waste has to continue as we long ago pointed out. There isn’t enough dollars floating around the world to absorb this debt. That is why the Fed has to continue to create money out of thin air. They may have cut back on M3, but the money spigot hasn’t been turned off and won’t be eliminated. All this money freed up by Fed purchases of Agencies and toxic waste allows banks, Wall Street, insurance companies and corporate America to buy Treasuries to keep the scam going, as Mr. Ponzi said. Incidentally, when my mother grew up she lived across the street from Mr. Ponzi.

We forecast this two years ago while most economists were sleeping. This past year the Fed bought 80% of new government debt or $1.2 trillion worth as foreigners bought only $300 billion worth. To think this program will end is pure folly. There will be no one to buy the debt, which grows larger with each minute. Deficits will run more than $1.5 trillion a year as far as the eye can see. Revenues continue to fall and spending to rise. Foreigners are dumping dollars not accumulating them. Worse yet many other nations have similar problems. They have to raise money as well. Who will accommodate them? We are talking $10 trillion alone for the G20 countries, some of which are on the edge of bankruptcy. Then again where will the money come from to bail out the likes of California, New York, New Jersey, Florida, Nevada, Arizona, etc.? There just isn’t enough money to go around. The Fed has to increase printing money and issuing credit; there is no other choice short of economic collapse. The price to be paid for this Keynesian profligacy is hyperinflation and you can be sure it is already in the money pipeline.

Some, if not most of the experts, see downdrafts and discipline ahead, which is wishful thinking. The choice in today’s bond market is which purchase will do you the least harm? Will money shift out of corporates into Munis and Treasuries? We do not think so. Would you buy bonds from a bankrupt in a depression in a growing inflationary atmosphere? Of course not. Leverage is in vogue again. Banks are fulfilling the needs of hedge-funds and they are engaged on their own as well. This while they have reduced lending by almost 20% to business and individuals. The banks, hedgies, Wall Street, insurance companies are back doing the same speculative things that they did to cause the current crisis, which is far from over. Why do you think the market, junk bonds and commodities have been as strong as they have been? Why do you think there is a dollar carry trade and why the dollar cannot get out of its own way? Anyone who believes this will end up in a voluntary deflationary spiral, a suicide pact, is mistaken. Central banks and money centers will be dragged kicking and screaming to the moment of justice. Just wait until the public finally understands what they have been up too.

If the dollar is doomed to depreciate what is the alternative? It can’t be the euro with the problems in Greece, Spain, Ireland, Portugal and Italy. You could gravitate to the rising Canadian dollar, the Swiss franc, the Australian dollar or the Norwegian korona. You could gain 30% or more versus the US dollar over the next few years. As we pointed out in the gold section in a recent issue all major currencies have lost big over the past ten years versus gold. As you saw in the last issue central banks are buying gold and are no longer selling gold. Doesn’t that somehow ring a bell? They have gone from selling 500 tons a year in Europe to being buyers. Is this not a major change? We say it is. All the gold is no longer coming to market. Even India bought 200 tons from the IMF, or at least they say they did. Anyone in gold and silver related assets over the past ten years, as our subscribers have been, know what it is like not to lose ground against currencies and to retain their purchasing power. Where else would you go if you have any knowledge of economics and history? Markets and bonds may have risen, but they are losers to the depreciation of currencies. Gold is up over 200% versus those currencies.

Central banks are forced to make the same mistakes that they made several years ago. That is lending to those who would leverage their bets. They themselves have also been in the same process for the past six months and they are lending more than 40 times their asset and deposit base. You can be assured they will create another credit crisis bigger than the most recent debacle. That will result in many years of very painful de-leveraging and a major economic and financial collapse. During such corrections the availability of finance and credit retracts, and when available becomes more costly. As we have seen over the past two years personal use of credit declines, default increase and so does personal savings. The longer government and the central bank interfere in the economy the worse the situation will be and the longer the recovery will be. In the meantime our government deficit increases as it fights a two-front war with no end in sight. Even with stimulus 2010 is going to be a very difficult year.

The Federal Reserve’s blowout 2009 profit is no reason to cheer. Rather, it is a reminder of the dangers inherent in the extraordinary policies the central bank has pursued during the credit crunch.  Last year, the Fed earned $52.1 billion, with most of that income coming from interest payments on bonds that it bought during the year. Anyone with access to printing presses could have racked up similar gains.

California bondholders got an early glimpse of what the state’s budget-negotiation season may bring as a looming $20 billion deficit led Standard & Poor’s to cut its credit rating for the second time in less than year.  S&P lowered its assessment on $64 billion of the most-populous U.S. state’s general obligation bonds one level to A-.

Manhattan apartment rents dropped 9.4% in the fourth quarter of 2009 from a year earlier as Wall Street jobs vanished in the recession.  The median rent fell according to Prudential Douglas Elliman Real Estate and appraiser Miller Samuel Inc.

Hedge funds had their best annual performance in six years in 2009 as the global economy began recovering and investor confidence returned, according to Eurekahedge Pte.  The Eurekahedge Hedge Fund Index, tracking more than 2,000 funds, rose 0.9% in December, bringing its 12-month return to 19% and total assets to $1.48 trillion.

Hede-fund managers that use computers to predict trends in futures prices posted the biggest losses in more than two decades in 2009. Managed-futures funds fell an average of 4.7% last year, according to an index of 50 top funds compiled by Barclay Hedge Ltd. The decline, which compared with a gain of 13.5% in 2008, was the first in 15 years and the largest since Barclay Hedge began tracking returns in 1987.

The FDIC closed three more banks over the weekend in what we call, “The FDIC Friday Financial Follies.”

The latest rumor is the Four Seasons in Dallas is headed for foreclosure.

Bankruptcy is defined as an inability to pay debts out of current assets, and it’s no secret that Illinois can’t pay its bills. The latest count puts Illinois’ unpaid bills at around $5 billion – a contentious fact among the state’s gubernatorial hopefuls.

The Top 10 Illinois Stories of 2009

The question is: what can Illinois do about its near-bankrupt status?

Answer: not much.

Federal bankruptcy protection doesn’t apply to states, so there’s no way for Illinois to hide from its creditors. And none of Illinois politicians are willing to make the tough choices needed to close the budget gap, like raising taxes or cutting spending, Crain’s notes.

Many foresee a governmental collapse in which vendors will stop bidding on contracts, investors will stop buying bonds and employees will be paid with IOUs, similar to what California has done.

“I don’t see any light at the end of the tunnel,” Dan Strick, CEO of SouthStar Services, a Chicago Heights non-profit that helps people with developmental disabilities told Crain’s. “It seems to be getting worse and worse, and the delays longer and longer.”

Indeed, Illinois is not taking in cash, its liquid assets have dipped below $1 million at times, Comptroller Dan Hynes said, and the state is supposed to pay $5.4 billion into its pension fund next year and $10 billion the year after that. And that’s just the beginning. 

“The crisis will come when you see state institutions shutting down because they can’t pay their employees,” David Merriman, head of the economics department at the University of Illinois at Chicago told the publication.

No-one wants to see a budget crisis.