Hat Trick Letter – únor 2010

Goldman Sachs

THE GREEK DRAMA WITH DEBT IS DEEPLY INTERTWINED WITH EXIT STRATEGY IN THE EUROPEAN UNION. THE EURO CENTRAL BANK RELAXED ITS COLLATERAL BANKING RULES, THUS PERMITTING IMPAIRED SOVEREIGN DEBT (NOT JUST GREEK) TO PERMEATE MONEY MARKETS. SO AS THE E.U. BANKS PURSUE AN EXIT STRATEGY, THE GREEK BONDS WILL SOON DOWNGRADE OR DEFAULT FROM MISSED INTEREST PAYMENTS. EUROPEAN BANKS ARE VULNERABLE TO A SEVERE SECOND CREDIT CRISIS SHOCK WAVE. EUROPE IS CONSOLIDATING AT ITS MIDDLE CORE.

Credit crisis contagion is here in loud form. Nevermind the bond vigilantes. The sovereign default vigilantes have called Almunia’s bluff at the Euro Central Bank. An incredibly crucial game is being played, calling the bluff of the German high banker command. The main question is whether Germany and the EuroCB will be able to resist the pressures for bailout of these deeply distressed nations. My sources claim Germany will permit them to default and suffer the consequences. Germany wants its independence back, and to shed its creditor role for the crippled Southern European nations.

In my view Greece is to Europe what Thailand was to the Asia in 1998 before the great Asian Meltdown that shook the world to its core.

So sovereign debt across Europe has been supported by relaxed rules, hiding impaired value. The Greek banks with huge tranches of  outstanding Greek bonds are at grave risk of sudden death, with or without continued EU membership. The money market mechanism in Europe serves as a near perfect parallel to the relaxed policy for trade of toxic mortgage bonds to the USFed within the United States. In Europe the banks have frequently suspended accounting rules and asset markdowns. Spain still holds gigantic tranches of mortgages, pretending they are linked to property assets with 25% to 40% higher value.

The likelihood is very high of broad sovereign debt downgrade this year. The process has already begun. Greek Govt bonds will certainly be excluded from any newly tightened ECB regime, no longer exchangeable. Banks will be caught in the cold. This January, senior ECB officials indicated that they intended to normalize the policy at the end of 2010, as part of their Exit Strategy extended in time. The reiterated intention has yanked the bid, and removed one key source of support for Greek debt. They are trash. Investors such as German insurance companies have scattered. They hold large blocks of weakened European sovereign bonds. The ECB debate over bank collateral has important consequences from ripple effects. The movement of funds has begun to take on distinct similarities to ‚Hot Money‘ pulling out of emerging markets like Iceland or Latvia. The macro-economic effect is in focus from sheer volume of money flow in exit. Consensus is growing for an eventual Greek Govt debt default. What Wall Street appears not to factor into the equation is politics. The story is not only about economics, but politics, and the fading determination to maintain European unity. That mindset is slipping away, and the risky outcomes are unclear. Lessons will be learned from Greece, applied to Italy and Spain immediately, as in rapid expulsion. The German bankers wish to quickly exit from their costly national welfare guarantor role!!

THE U.S. STATES COMPARE WORSE TO SOME EUROPEAN NATIONS, BUT WITH 35% OF THE POPULATION. GIVEN THE P.I.G.S. NATIONS ARE SMALL, THE UNITED STATES IS HAMPERED BY A MUCH LARGER LOOMING STATE PROBLEM THAN WHAT UNFOLDS IN EUROPE. THE STATE OF ILLINOIS EDGES TOWARD BANKRUPTCY, JOINED BY CALIFORNIA AND WITH SEVERAL OTHER BIG STATES.

Focus on some of the PIGS nation in reference. They have small populations and small economies by comparison to American States. While Spain has a larger population over 45 million, Portugal at 10 million and Greece at 11 million each have smaller populations nearly equal to the US state of Ohio. And Ireland at 4 million has a population similar to the state of Kentucky. The PIGS nations are clearly a problem for Europe. The problems they present for Brussels at the European Union are matched stride for stride by what the USGovt faces, but laden within several larger US states. Seeking Alpha produced a list of seven states in crisis, a list that removes Texas since its unemployment is not quite high enough, and its energy independence offers it some distinction in strength. However, note that Texas has a broad U-6 jobless rate of 13.7% and a state unemployment insurance situation best described as a train wreck in the making. Texas was compelled to borrow more than $1 billion to pay unemployment claims, a step that bankrupted its trust fund. State oil & gas production generates strong income.

The States in the Crisis List are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each basket case state has a population above 8 million people. Each state has been forced to borrow more than $1 billion dollars, to pay for unemployment benefits. Each state currently registers broad unemployment over 15%. Each state is a large net importer of energy sources. These seven states in debt distress represent a full 35% of the total US population. They face policy clashes between protected state and city workers versus growing ranks of jobless from the private sector. The USGovt could print up money to fund these states, but loyalty is clearly directed to Wall Street banks and much greater funding requirements for the syndicate. The 70 million people in Portugal, Italy, Greece, and Spain are certain to face even higher levels of unemployment, when austerity measures finally slam their systems. Similarly, the 108 million people in these seven large US states face austerity measures, job cuts, project cuts, chronic budget shortfalls, higher selective taxes, and reduced ability to borrow. It is the rollover of debt refinance in short-term debt management that will kill their systems, like with corporations.

SEVERAL KEY STEPS AND DECISIONS MARK THE TRAIL, LIKE CANCEROUS BLOODY SORES, BEST SEEN IN THE U.S. SENATE.

The United States with these seven important decisions, has chosen to maintain the path of ruin, marred by corruption, even after fraud has been exposed, never having been prosecuted, failed policy recognized, and participants identified. At the end of the road lies a USMilitary dictatorship and USTreasury default, my ongoing unswerving forecasts.

My book to follow the systemic failure trail started with Step #1, the approval in October 2008 of the TARP funds totaling $700 billion to be distributed like a vast slush fund to Wall Street banks. Goldman Sachs was in charge of dispensation and first in line for reception. They covered their criminal fraud, relieved pressures from extortion, and provided themselves critical funds to continue bank minimal operations with heavy executive bonuses. Step #2 was the selection and confirmed appointment of Tim Geithner as Treasury Secy in January 2009. Indeed, any change would start with a break in the long line of Goldman Sachs alumni. Geithner is a mere lieutenant, whereas Paulson was a general. In his service as head of the New York Fed, Geithner was involved in bank regulatory oversight within reach of Wall Street, fully culpable. Step #3 was the decision made at several points in time to continue the wars in the Middle East and West Axis. The USCongress approved the sacred status of warmongering, the amplified deficits from war costs, and the refusal to rebuild the US economic structures. The many fraud cases do not deter the war machine, not Halliburton thefts, not the missing $50 billion from the Iraq Reconstruction Fund. The Obama campaign regularly featured promises to wind down the war. Step #4 was the empty Economic Stimulus Bill signed into law in February 2009, when it was known to contain almost no direct stimulus, no meaningful encouragement for small business, no urgent infrastructure construction. It did contain important plugs to the massive state budget shortfalls. In this sense, the bill was merely a grand band-aid patch applied to a hemorrhage wound.

Step #5 was the blessing given to the relaxed accounting rules offered by the Financial Accounting Standards Board, approved by the USCongress effective April 2009. The rule change enabled big banks to declare any value for assets they wished, according to any model they chose, without scrutiny, without any connection to reality of markets. The market essentially vanished for many such assets, ergo zero value. Step #6 was the confirmed reapointment of Bernanke as Chairman of US Federal Reserve two weeks ago. Bernanke was confirmed for a second term on January 28th, but by the weakest vote (70 – 30) in the history of the USFed. He is thus condemned by weak support. Threats of calamity accompany calls for full disclosure of the USFed itself. A NO vote would have signaled an unseating of the USFed as center for the financial syndicate, whose twin operator locations are Goldman Sachs and JPMorgan. Lastly, Step #7 was the Senate approval for a $1.9 trillion increase in the USGovt debt limit recently. The binding resolution cobbled from small but huge debt limit increases has been overtaken. Any serious ‚Deficit Task Force‘ was averted by the expedient alternative. President Obama, who had publicly supported the force, shifted his support to a gutless toothless equivalent task force. No change.

USECONOMY SLIDES FURTHER INTO A MASKED DEPRESSION, STILL NOT RECOGNIZED. THE JANUARY OFFICIAL JOBS REPORT HID SOME DEEP WOUNDS. MEANWHILE, HOME FORECLOSURES CONTINUE UNABATED AND BANK CREDIT REMAINS ON A STRONG DECLINE. NO RECOVERY IN SIGHT. WORSE, MONEY SUPPLY SHRINKAGE INDICATES A RETURN TO RECESSION DEAD AHEAD.

The January Jobs Report revealed the US labor force shrunk by 661 thousand workers. Americans are dropping out of the system. The broad U6 index of unemployment rose to 17.3%, a figure steady for at least three months. Often called the under-employment rate, the broad U-6 is more often mentioned in economic news stories, a very favorable change from past years. It is interesting to note that by this point in the recovery from most previous recessions, after a certain number of months, all of the lost jobs had already been recovered. This recession is stubborn and longlasting, due to systemic damage in several key structural parts documented on a consistent basis in the Hat Trick Letter. The recessions are progressively worsening to a great degree, as the systemic damage causes significant deterioration to the entire USEconomic foundation. The current recession is only 25 months along officially, but to date during its course, a whopping 8.4 million jobs have been lost. Its upward revision caused a minor stir, not enough in my view though. The previous recession that began in 2001 lasted 47 months officially. The decline as a percentage of the workforce is the worst since the Great Depression. Time will tell if the job losses will indeed stabilize. The key is housing prices and bank assets, both in dire need of staggering volume in liquidations (like a national enema).

THE LONG-TERM USTREASURY BOND IS THE MOST CONTROLLED PAPER SECURITY ON THE PLANET. REGARDLESS, IT SHOWS WARNING SIGNALS OF HIGHER YIELDS AND LOWER PRINCIPAL VALUE. THE USGOVT MIGHT HAVE A GRAND TASK TO KEEP IT CONTROLLED. $$$

Thanks to TheChartstore for a vivid bearish Head & Shoulders displayed pattern on the long-term USTreasury Bond yield. It indicates a 6% to 7% yield in the future. Translate to mean the USGovt will have to fight the powerful current with even greater monetization than just phony bids on USTreasury auctions from its central banker cohorts. The attempts by the free market to push bond yields higher must be met with evermore powerful monetization by JPMorgan, the usual suspect and assigned market manipulator by the USFed. My best description is the JPMorgan machinery will be forced to work much harder to achieve the same stable result in long-term bond yields. They are crucial for mortgage rates, and thus must continue to be managed by outright USTBond monetization and Interest Rate Swaps. In good eventual time, the USTreasury and USFed will be totally isolated with their monetization machinery, for all the world to see. Their devices are barely hidden anymore. Only then will the global shun of the USDollar be carried out. Until then the USDollar benefits from the Competing Currency War, where all other currencies are seen as rotten and are dealt with.

THE SWISS FINANCIAL CENTER IS SUFFERING A COLLAPSE ON THREE IMPORTANT FRONTS. THE PROCESS IS NOT REVERSIBLE.

The Swiss banking sector is suffering mightily from three large factors, each significant, together crippling and devastating. Their banks purchased far too much US-based toxic mortgage bonds, with huge losses. Their banks underwrote far too much Eastern European mortgages. The losses are huge, but further amplified since the collateral has fallen worse from local currency devaluations. Their banks are seeing record outflows of money from the once safe haven accounts. While the Swiss Govt and Courts attempt to stave off the assault from the USGovt, the banks continue to appear to cave in. The actual shared data is miniscule, compared to what exaggerated US press reports indicate. Here is a quote from a banker contact with close ties to several important German and Swiss banks. He said, „UBS and CS are in deep deep trouble. Swiss banks are losing 100 billion CHF per week in assets under management. Most money is flowing out to Asia, with some coming back to the Persian Gulf. It is still a huge outflow, reaching 170-175 billion CHF last week. The outflow peaked in January a month ago, when a sum over 100 billion CHF exited Swiss banks on given single days.“ Within several months the Swiss financial sector will experience major shakeups. By the way, CHF stands for Swiss Francs, UBS is Union Bank of Switzerland, and CS is Credit Suisse.

ROSENBERG EXPECTS A FURTHER DECLINE IN HOME PRICES, AND A SECOND STAGE OF ECONOMIC RECESSION. HE FORECASTS 50% OF U.S. HOUSEHOLDS WILL BE INSOLVENT ON HOME LOANS BY 2011.

David Rosenberg is chief economist and strategist at Gluskin Sheff & Assoc in Toronto. He is one of my very few respected economists. He said, „Watching the situation in Europe, it is not even clear that the root cause of problems here at home has been solved. We still have a very fragile situation. Household balance sheets, [home loan] delinquencies, defaults, and home prices are still vulnerable to another down leg. People think because you finish one chapter in this post-bubble credit collapse that the book is done… We are in a post-bubble credit collapse and there are going to be periods of calm and stormy weather. Investors will have to navigate through the volatility. Unfortunately, I think we are still in the early stages. The next recession will happen more quickly than people think.„ Rosenberg expects a further decline in housing prices of 10% to 15% over the next few years. He cites the nine million residential housing units in inventory for sale across the country, a very high home vacancy rate, and unresolved home loans despite futile attempts of USGovt modification. A estimated 21.4% of the US population holding home mortgages has negative equity, owing more than the home value. The figure peaked at 23.0% in 2Q2009, but foreclosures close the book, like a jobless man dying, no longer jobless. He expects that figure to continue to rise in tragic fashion. Rosenberg estimates that the insolvent household rate to reach 50% across the country by 2011, with respect to their mortgage loans.