From the National Federation of Independent Business: Small Business Optimism Declines in March
The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history.
“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”
…
After a devastating period of employment reductions, employment change per firm hit the “zero line” in March. …. While actual job reductions may have halted, plans to create new jobs remain weak. … Only nine percent (seasonally adjusted) reported unfilled job openings, down two points and historically low, showing little hope for a lower unemployment rate.
Several weeks ago I speculated that we were “On the brink of an asset explosion” . So far events are unfolding about as expected. I might even say they are moving more aggressively than I thought. Well actually, there’s no doubt this cyclical bull is unfolding much more aggressively than anyone expected.
Compare the angle of assent of this cyclical bull to the last one.
Once the market corrects I think we can back up the truck in virtually any asset class for the final parabolic move as the Fed completely loses control of money supply. We just need to keep in mind this will be an end game not the beginning of a new secular bull.
Greece was bailed out today, so says Bloomberg:
April 12 (Bloomberg) — European governments offered debt- plagued Greece a rescue package worth as much as 45 billion euros ($61 billion) at below-market interest rates in a bid to stem its fiscal crisis and restore confidence in the euro.
Forced into action by a surge in Greek borrowing costs to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros in three-year loans in 2010 at around 5 percent. That’s less than the current three- year Greek bond yield of 6.98 percent. Another 15 billion euros would come from the International Monetary Fund.
EU leaders haven’t yet agreed unanimously to offer Greece a bailout, according to a Wall Street Journal report that offered details about the potential plan. But ministers have made the terms of a potential deal public in an effort to reassure world financial markets, which have been unnerved by Greece’s debt woes for months.
Oh.
So we “made details public” of something we don’t have approval to do, and haven’t actually done.
In other words, we’re lying.
Again.
And then there’s this, which is rather more explicit:
“This decision today was no decision on aid for Greece,” Finance Minstry spokesman Michael Offer told Dow Jones Newswires. “But it was only about technical preconditions for aid by further specifying the decision of the heads of state and governments. We expect, we hope that Greece is now in a situation where it can continue to refinance itself on the capital markets, as previously.”
That’s rather explicit – we’ve not agreed to actually do anything!
Oh, and then there was this:
Offer said that if the aid plan were to be activated, this had to be preceded by a Greek request, followed by a separate decision process in which the heads of state and governments would “personally” and “unanimously” approve help, a recommendation by the European Commission and the European Central Bank for such aid as well as an assessment by the IMF, which would send a mission to Greece ahead of any aid package decision.
So we have two “wee problems” here:
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Each government involved will have to authorize the act, and all must agree. Many of them undoubtedly will have to actually pass bills authorizing this – that’s no mean feat in and of itself.
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The IMF has to sign off, and it will impose additional austerity conditions, which Greece will have to agree to. Best-a-luck on that one.
But once again we see that the magic market pumpers come in with a headline, trumpeted loudly through the planet, that all is saved, when in point of fact nothing at all has actually been done, all designed to goose the markets once again (as if there’s a “stability” problem with a market that has risen 80% from its lows. Oh wait – maybe it is a bit unstable with that sort of advance, eh? Hmmmm.)
Courtesy of Mish
In a candid attack on his former colleagues, Poole Says Fed Has ‘Tilted Playing Field’
“The Fed did not provide assistance to all on an equal basis but tilted the playing field,” Poole said in remarks prepared for a lecture at the University of Delaware, where he is a scholar in residence. “Why should the Fed have had a program to buy commercial paper from large corporations and no program to help small businesses starved for funds?”
The Fed’s program to purchase $1.25 trillion in mortgage- backed securities issued by government-sponsored enterprises probably contributed to the demise of the market for non- government mortgage-backed securities and will “complicate monetary policy in the years ahead,” Poole said.
“Much more research is necessary to determine whether the Fed made the right choices; clearly, I have my doubts,” said Poole, 72. He was president of the St. Louis Fed from 1998 until retiring from the post in March 2008, the month that Bear Stearns collapsed.
Poole expressed concern about “an appalling lack of economic literacy in Congress” and said that neither the House nor Senate versions of legislation to overhaul financial regulation address the most important shortcomings.
Poole is correct about the Fed’s favoritism and the Fed buying mortgages. It is very doubtful the Fed helped housing much, but at some point the Fed has to get rid of that $1.25 trillion in mortgages. That will pressure mortgage rates.
Why did the Fed even purchase the last half-trillion? By then, the Fed was already discussing an exit strategy. It made no sense.
Certainly Congress does consist of economic illiterates, but the same thing can be said about the Fed. Pray tell what did Bernanke or Greenspan get right?
New York Faces $1 Billion Cash Shortage in June
In a scene playing out in nearly all states in varying degrees New York Faces $1 Billion Cash Shortage in June.
New York state faces a $1 billion cash shortage in June, budget director Robert Megna told reporters today.
The state is considering all options to deal with the shortage, including borrowing, Megna said. “We are significantly underfunded in the first week of June,” Megna said.
Soros Bought More Gold, Says Pound Devaluation Is Option For UK
Inquiring minds are reading Soros Says Pound Devaluation Is Option for Next U.K. Government
Billionaire investor George Soros said the next U.K. government after the May 6 election should decide whether to allow a further devaluation of the pound to rebalance the economy and assist the recovery.
Britain “has more room to use exchange rate adjustments as a way of adjusting the economy” than do nations that use the euro, he said in an interview yesterday in Cambridge, England. “It’s a question for the next government to decide. It has a number of options, of which a currency depreciation is one.”
The pound has dropped about 25 percent on a trade-weighted basis since the start of 2007, making exporters’ goods less expensive overseas. Bank of England policy makers are counting on sterling’s weakness to aid the recovery and rebalance the economy away from domestic spending at a time when the nation faces a record budget deficit.
“It’s a question now of, if you now cut the budget deficit and borrow less, you could probably keep the currency, raise the interest rate, you could keep the currency from going down,” he said. “Britain, by having kept out of the euro, has that option of allowing the exchange rate to adjust.”
Soros said that history shows Britain still has room to borrow more to bolster its public finances. Its debt levels have been higher, and Japan’s 10-year borrowing costs are about 1.5 percent even after its debt load swelled, he said.“Probably Britain is not at the limit of its borrowing capacity,” he said. Still, “Britain is in a very difficult situation.”
At about 12 percent of gross domestic product, the U.K. deficit rivals that of Greece. Net debt climbed to 60.3 percent of GDP in February.
Soros Fund Management LLC manages about $25 billion. The firm increased its investment in SPDR Gold Trust, the world’s largest exchange-traded fund for the metal, by 152 percent in the fourth quarter. Soros told Reuters in an interview in January that he didn’t trade himself.
Is Devaluation That Simple?
Soros makes devaluation sound so simple. Is it? Please consider a definition of devaluation.
A deliberate downward adjustment to a country’s official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country’s government (i.e central bank) can alter the official value of the currency.
There are two implications for a currency devaluation. First, devaluation makes a country’s exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country’s trade deficit.
In a genuine devaluation, the central bank would have to peg the rate to some other currency and defend that peg (buying or selling currency to enforce the target rate). Given that the British Pound floats, devaluation per se, is not exactly the right word.
Nor is the word “allow” the right word as in “The Bank of England should decide whether to allow a further devaluation of the pound”.
I seem to recall Soros collecting a $1 billion bet that the pound would crash whether Thatcher would “allow” the pound to drop or not. To be fair, there are some things Thatcher could have done to support the Pound, but she did not want to.
Likewise, there are some things the U.K. can do now to pressure the pound (such as spending ridiculous amounts of money) or dropping interest rates.
However, the Bank of England is right near zero-bound at .5% and wasting more money on fiscal stimulus is not exactly the most prudent thing to do.
For now, UK interest rates are on hold at 0.5% and the Bank of England also decided not to pump any more money into the UK economy under its policy of quantitative easing (QE).
Moreover, at zero-bound, quantitative easing does not accomplish much other than create an exit strategy problem down the road. Money just sits as excess reserves unless consumers want to borrow and banks want to lend, neither of which is happening.
Courtesy of The Pragmatic Capitalist 
I wrote a pretty critical piece on Paul Volcker the other day for calling for higher taxes on the back of high budget deficits. Unfortunately, Ben Bernanke, speaking this evening, has done exactly the same thing. He said:
“To avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
Unlike Volcker, I have never been a big fan of Bernanke’s, but I will spare everyone the rant on his mistakes and how we don’t fund our deficits with taxes. This is more absurdity from our leadership. Tax increases would crush any sliver of a recovery we might be seeing. What we really need is more efficient spending (this is not the time for healthcare or paying banker salaries), lower taxes, and more regulation. Of course, none of this surprises me. I would be utterly shocked if we look back at Ben Bernanke in 10 years and describe him as anything other the second most destructive central banker in the history of the U.S. economy. We are repeating all the same mistakes of Japan and Greenspan only on a much larger scale.
The DOL reports on weekly unemployment insurance claims:
In the week ending April 3, the advance figure for seasonally adjusted initial claims was 460,000, an increase of 18,000 from the previous week’s revised figure of 442,000. The 4-week moving average was 450,250, an increase of 2,250 from the previous week’s revised average of 448,000.
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The advance number for seasonally adjusted insured unemployment during the week ending March 27 was 4,550,000, a decrease of 131,000 from the preceding week’s revised level of 4,681,000.
Click on graph for larger image in new window.
This graph shows the 4-week moving average of weekly claims since 1971.
The four-week average of weekly unemployment claims increased this week by 2,250 to 450,250.
The dashed line on the graph is the current 4-week average. The current level of 460,000 (and 4-week average of 450,250) is still high, and suggests continuing weakness in the jobs market. Note: There is no way to compare directly between weekly claims, and net payrolls jobs.
Here it is, folks, the chart to break a million retailers’ hearts.
It’s the Fed’s latest consumer credit reading, and after starting to come back, total outstanding consumer credit has fallen right back down, with a monster month-over-month decline.
When Western governments face debt disaster, they don’t technically default. They collapse the currency instead. Here’s how to protect yourself.
In response to our question, “Did the Housing Bust Fuel the Consumer Spending Binge?” Taipan Daily reader Mike writes:
Just a quick additional thought on the [consumer spending binge piece]. California actually encourages strategic default. Homeowners in California are not personally liable… So, if the house is worth only 50 or 60 percent of the amount of the mortgage, which is not uncommon, the owner just walks away. I know a couple of people who’ve done this. What is surprising is that more people haven’t done this. Of course, it eventually kills your credit rating.
Mike
Marina Del Rey
Yep. Trashing the credit rating thing is the thing. Maintaining a good credit rating used to take precedence. Now it doesn’t matter for a hill of beans.
Ironic, too, in that the U.S. government is working from the same playbook…
One of the dominant themes of the past few years has been a massive private-to-public debt transfer. When the government decided to bail out the banks, it essentially committed trillions in taxpayer dollars (via purchases, backstops and guarantees) to soaking up toxic assets. The same logic applied to propping up the housing market.
The thing is, even Uncle Sam has a credit rating to maintain. In order to keep the party going, the United States relies on hefty foreign purchases of dollar-denominated debt. The more debt that America piles on, the less attractive that debt becomes.
This is why your editor finds it sobering, and frightening, how cavalier investors seem to be when it comes to rising debt costs. It is not just strategically defaulting homeowners who have elected to “kill their credit rating” for the sake of short-term relief. The most powerful government in the world is doing it too.
Deadly Debt Service Costs
The U.S. relies on low interest rates to keep its debt service cost down to a reasonable level. (To understand what this means, imagine a household with $5,000 a month in income and $1,000 a month in interest rate charges on all their credit cards. That balance would represent a “debt service cost” of 20%.)
Once debt service cost hits a certain threshold relative to income, the heavy debtor passes the point of no return – making de facto bankruptcy all but guaranteed. This dynamic holds true for countries as much as individuals.
That’s why breakouts like the one above are no laughing matter. When government bonds fall in value, interest rates rise – and so do debt service costs.
Were foreign investors to start selling large quantities of U.S. government bonds (or simply to go on an extended buying strike), long-term interest rates would skyrocket. That would throw the economy into turmoil.
Were a fiscal catastrophe like the above to unfold, though, the United States would still avoid technical default. There is no need for that, ever, because the Federal Reserve can always technically meet U.S. obligations by printing more currency.
This is why, for countries that borrow heavily in their own currency, the real threat is not the more traditional understanding of debt default. It is outright currency collapse.
In a time of debt crisis, in other words, the logic goes like this: “So there’s a debt crisis because no one is buying our bonds? Fine, we’ll buy ‘em back ourselves with freshly printed dollars (or sterling, or euros, etc). So now there’s new panic because of all the forex paper we’ve flooded onto the market? Too bad… that’s someone else’s problem, not ours. Nobody forced them to honor ‘Federal Reserve Notes’ after all.”
Protecting Against Currency Collapse
If you live in a heavily indebted Western country, currency collapse is a genuine concern. If the private-public debt load gets to be too heavy for an economy to bear, rampant currency debasement will inevitably be the politicians’ chosen way out.
And so, whether your primary savings account is denominated in dollars, pounds, euros or something else, you have to think about the “weapons of mass financial destruction” – i.e. rows on rows of printing presses – owned by your respective central bankers, and the government’s willingness to use them.
Now, we could spill a lot of ink talking about “collapse mitigation strategies.” In fact, we could have an entire multi-day investment conference built around the theme, with multiple experts outlining the various escape routes in great detail.
Today, though, it makes sense to just cover a few basics, to help get your mind wrapped around the subject.
Collapse Avoidance Strategy #1: Foreign Bank Account
This is a very simple idea, but one that takes a little bit of doing to execute on. If your main concern is a bad currency, one direct step you can take is holding your cash in a stronger, sounder currency.
You can do this by opening up a foreign bank account and transferring a meaningful chunk of savings into it. Or, alternatively, you can make use of a bank (such as EverBank) or brokerage option that lets you manually adjust the currency mix.
Personally speaking, I bank with EverBank (among others) and trade with Interactive Brokers. I have the option of ‘$USD alternatives’ for my cash in both places. For some, though, a literal foreign bank account will be even more desirable.
Given the risk of eventual capital controls – something that any government will consider in a time of serious enough crisis – having a chunk of capital domiciled in a foreign location could be a wise thing. Our new service, Wealth Legacy Advisory, features expert advice on topics just such as these (opening foreign bank accounts and such).
Collapse Avoidance Strategy #2: ADRs (American Depositary Receipts)
Another useful collapse avoidance strategy involves the use of ADRs, or American Depositary Receipts. An ADR is basically a foreign stock traded on a U.S. exchange. For example, consider Companhia Siderurgica Nacional (SID:NYSE).
SID, which trades on the New York Stock Exchange, is the U.S.-based ticker for a Brazilian steel company.
Were, say, the USD to collapse, an investment like SID might still do very well. Being based in Brazil, with a global roster of clients, SID could see its dollar-denominated value rise stratospherically were the buck to turn to confetti.
There are a number of ADRs representing global companies, headquartered in fiscally sound jurisdictions, that would function as powerful “stores of value” were the currencies of one or more Western nations to plummet. These ADRs could function as useful proxies for cash under the right circumstances.
Collapse Avoidance Strategy #3: Hard Assets
Then, of course, there is the hard asset option. When it comes to paper currency concerns, there is a reason why gold has held its reputation as a store of value for thousands of years.
In short, politicians and fractional reserve lenders have been ripping off the citizenry since Roman times. Gold has been a worthy counterbalance for just as long. And given the right environment, many other forms of hard assets could step up as “stores of value” in the event of major currency collapse. Better to own oil in the ground, for example, than little slips of paper with Tim Geithner’s signature on them.
Collapse Avoidance Strategy #4: The Ultra-Resource Index CD
Last but not least, I would be remiss not to remind you about a special “hedge” product specifically designed to protect against currency collapse.
That hedge product is the EverBank Ultra Resource Index CD. Conceived by the Taipan Publishing Group and created by EverBank at our request, the Ultra Resource Index CD offers a basket of the following currencies:
- Australian dollar
- Hong Kong dollar
- Canadian dollar
- New Zealand dollar
- Norwegian krone
- Singapore dollar
Because all currrency trading is “relative,” the basket of currencies mentioned above will do very well in the event of a Western-debt-fueled forex meltdown. (And, in fact, this basket already has done very well by a number of measures.)
The logic is simple: Instead of owning currencies being printed en masse by countries deep in debt (like Britain and the U.K.), you want to own currencies being issued by fiscally responsible countries with a heavy backing of natural resources and surplus cash reserves.
(I am obligated to add that EverBank pays a small commission to Taipan on sales of the Ultra Resource Index CD. But given that the concept was our idea, specifically crafted to address the needs of readers like you, I think you can see how the arrangement makes sense. To find out more about the Ultra Resource Index CD, follow this link.)
I’ll keep this short as I know you’re busy, I just got word from my inside contact at MarketClub, that they’re opening up the premium service for a no cost 2 week trial!
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Borrowing costs are going up, and this chart says they’re going up a lot – like 200 basis points within the next year or so on mortgages and 10yr Treasuries.
Key to the thesis of Bernanke (and essentially everyone else) that this “V-shaped” recovery could take hold and be sustainable – instead of being a false dawn – is the premise that mortgage rates would behave.
Bernanke’s thesis, in fact was that he could cap 30 year money at 4% or less to prevent home price devaluation.
Well, now the 10 year bond is back where it was before the collapse. That’s good, right? Well, not really – because it means that 30 year money (mortgages) will start backing up shortly and prices on existing Fannie and Freddie (along with other long-duration) paper will start falling.
The target on this breakout of the inverted head-and-shoulders is 6% on the ten year treasury, and approximately 7% on 30 year mortgages. As of today’s pricing (about 5% on that same money) we can back into the home price impact quite simply; the hypothetical $200,000 house will be devalued to $161,644.55.
That is, the same payment that today pays down a $200,000 mortgage will only pay down a $161,644.55 one.
The time on the full expression of this target is one to two years hence, although it can occur sooner. The reliability of this sort of pattern is extremely high, and remains valid conditionally even with a drop back to 3%, and is not invalidated unless the ten year were to get down to 2.03%. Neither is likely.
The entire premise of the so-called “recovery” not only requires stabilization of the housing market but a resumption in home price appreciation. With the cost of mortgage money nearly-certain to rise toward the 7% range over the next year this is simply impossible.
The market will not ignore this for long, once it begins to express itself in actual rates and prices – and it will.
If you’re one of the trapped underwater homeowners who as of today has an opportunity to short-sale your house, take it – while it still is available.
Consider that The Fed is holding a literal trillion of this paper which is likely to come under extreme valuation pressures as rates back up.
Additionally, the sentiment in the market today is positively giddy – those who claim that retail is “not in” need to look at the ISE index, which hit an all time high today. That’s all retail call buyers – they sure are “in”, and now the shears can come out of the drawer.
Parabolic moves like this always go further than you’d expect or believe possible. But the math always wins, and the sort of rate environment we’re seeing now is quite similar to what happened in 1987.
No, this is not predicting a 1987-style crash – at least not today or tomorrow. But with both rates and oil headed up hard the effective tax this presents to the economy is going to hit home immediately and hard, with no evidence that this very same backup in oil is in commodities generally (look at wheat lately?)
That’s not inflation, it’s financial speculation in a blow-off top.
Real job creation and a healthier economy? We’ll see.
