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August 3, 2009
Issue 56  -  How to Catch a Wild Pig
 
 
This week saw a historic moment in the history of the United States.  A record sale of treasuries:
 

"Treasurys survive $200 billion onslaught

Prices rise after a record weekly debt offering goes down with only mild indigestion. Investors brace for next week's refunding announcement.

 
By Ben Rooney, CNNMoney.com staff writer
Last Updated: July 31, 2009: 4:54 PM ET

NEW YORK (CNNMoney.com) -- Treasury prices rose Friday after a record week of debt sales ended on a high note, easing some fears that foreign demand for U.S. debt is wearing thin.

The government sold more than $200 billion in notes, bills and Treasury Inflation Protected Securities this week. It was the latest in a string of record-setting debt offerings that the U.S. has held monthly as the government seeks to fund a $1.8 trillion budget deficit.

Concerns about buyer fatigue were highlighted after this week's auctions of 2- and 5-year notes brought in fewer bids compared with last month's auctions of the securities. Indirect bids, which include foreign central banks, were also mixed this week."
 
 
Let's think this through as the numbers can be mind numbing.  $200 billion in one week.  ONE WEEK!  If this were continued for a year that would be $10.4 trillion for a year.  This is nearly what the national debt is in TOTAL!  See here.  Of course, this doesn't count all the other liabilities of the country which totals nearly $90 trillion, but those things can always be reneged on, which means they will never be paid.  This includes social security, medicare, government pensions, etc...
 
Not to worry as there are green shoots aplenty with the GDP not decreasing as much as was originally thought!  Hooray!
 

"US Stocks Slightly Higher

By Peter A. McKay

Stocks moved slightly higher on Friday, helped by data showing a slower pace of contraction in the U.S. economy than expected. 

The Dow Jones Industrial Average was recently up about 19 points at 9173. Its component Chevron gained 1.2% despite reporting that its second-quarter earnings dropped 71% due to lower oil and gas prices compared to a year ago.

In the week's most anticipated economic release, the Commerce Department said prior to Friday's opening bell that gross domestic product shrank by 1% on a seasonally adjusted basis in the second quarter compared to the year-ago period. That was better than the 1.5% expected by economists.

However, the report also contained a bit of unpleasant news as the government revised its reading of first-quarter GDP to show a 6.4% slide, worse than the original 5.5% reading."   

  
 That's fantastic.  It's up, up, up from here.  Happy days are here again!  Not so fast.  First is the nasty little adjustment to first quarter from negative 5.5% to negative 6.4%.  Now this is just unacceptable.  There is no way that they could be that far off unless it was deliberate, which it was.  This is the game they play.  Manage expectations, low ball the current quarter and revise down later when noone is looking.  Just brazen and NOBODY calls them on it.  The second problem is less obvious. The total GDP is estimated to be about $13.8 trillion.  If you take 1% of this it is $138 billion.  1.5% of this is about $207 billion.  This is the loss in the GDP in the first quarter. So the expected loss was $69 billion better than expected.  That's pretty good, right?  Not so much.
 
If one takes into account what the government is going into debt versus this number its rather pathetic.  Considering that the debt increased over $200 billion last week than an "improvement" of $69 billion for a QUARTER doesn't seem so great.
 
Ok, so that wasn't so great news after all, but that "cash for clunkers" program is going nuts!  That's stupendous!  $1 billion gone in 1 week.  This is going to jump start the economy right?  Let's see what someone in the industry is saying in an email to www.urbansurvival.com:
 

"I am the manager for ****** ***** leasing in *******, Arizona. This provides a very unique insight into the current economic morass we are in. Facilities are shared with the parent company, the local Chrysler/**** dealership. This too gives me a front row seat for these fascinating times. My anger over this cash for clunkers program coupled with a frustration about how blindly people buy into these programs was the catalyst for (my) impetuous call this morning.

To date an overwhelming percentage of the people taking advantage of this program have traded vehicles that were free of encumbrances. Now they are in bondage, trapped into making payments during a time of great economic uncertainty. A number of the vehicles being traded in are in amazing condition. So, through this program we now eliminate a large segment of the used car market, vehicles that could be sold in the $3,000 to $6,000 range to those on tighter budgets.

The destruction of these vehicles will eliminate a huge resource pool of used parts to keep older vehicles on the road in a cost effective manner. The second reason this really lights my fuse is waste on this magnitude is truly immoral and irresponsible. I will forward photos tomorrow of some of the vehicles we will be destroying and I will also post them on my blog, www.route66chronicles.blogspot.com.  The blog generally leans toward the light hearted side of life but as an automotive historian with a lengthy resume of published work and as associate editor with Cars & Parts magazine I feel a responsibility to say something about this insanity.

Next is the simple fact we are merely sopping up some of the excess inventory of automobile manufacturers and doing little or nothing to stimulate responsible production.

Even worse we are placing dealerships in a position where there will be few potential customers in the months ahead. Then there is the environmental charade. Which cause more "pollution"? Driving a well maintained 1973 Olds responsibly (bicycling to work most days, renting a fuel efficient vehicle for long distance trips, and using the Olds for limited transportation) or destroying it to produce a new car?"
 
I wrote about this before and my opinion hasn't changed.  Paying people to buy new cars and then destroying perfectly good cars is pretty dam stupid.  This guy is right, most of these cars are owned outright.  So how, in a country that up so its eyeballs in debt, does going FURTHER into debt help us?  This is just taking future demand into the present artificially.  Dumb, dumb, dumb, and ineffective to boot.  Now they are talking about throwing another couple billion onto this bonfire.  What a nightmare.
 
At least the foreclosures are slowing down, right?  Oops, wrong: (from GATA) 

 

"Foreclosures Hit Record Levels in June...

adding more evidence to my post earlier this week that we will soon be entering a period of a massive bulging in bank-owned homes, the majority of which will be the larger, more expensive and harder to sell McMansions:

"prime jumbo mortgages continue to fare the worst, comparatively: foreclosures among good-credit borrowers with high loan balances are up a whopping 580% since Jan. 2008, LPS said."

The national foreclosure inventory rate was 2.86%, up from 2.5% last month, and up a whopping 86.1% from last June. It is becoming more clear that the trend in troubled prime mortgages is getting worse. Here is a link to the article:

ht
tp://www.housingwire.com/2009/07/29/report-foreclosure-inventory-hits-record-level-in-june/

Please note that, in an attempt to find a possible green shoot in the housing market, the authors of this article have borrowed a high-powered microscope with which to examine the cesspool and have decided that a one-month data sample showing that fewer borrowers appear to be going delinquent on their mortgages. Don't be fooled: that's not a green shoot - it's not even a speck of algae.

I know for a fact that banks are giving delinquent borrowers a lot more time to "cure" their delinquency because 1) the foreclosure processing pipeline is hugely backed up AND over the short-term, it makes bank balance sheets look healthier when they report lower delinquencies, so they tend to delay declaring mortgages delinquent.

I have a friend on the east coast who knows a CPA with several previously high income clients who have lost their jobs, have not made mortgage payments for months and yet have not heard anything from their banks. Those are an example of mortgages that should be declared delinquent but have not been yet. There also have been several recent articles in the media alluding to this phenomenon of banks delaying delinquency notices."
 
 
 
So these banks are cooking the books?  No......well maybe.  The game is still running full steam and sooner or later these houses will be hitting the market....hard.  The banks can only hold these on their books for so long.  They have found it very expensive to foreclose so they are "being nice".  Maybe when the jig comes up the government will have a "cash for shacks" program and pay people to sell their "energy inefficient" house for a new one.  Then a government official will come in and torch the old one.  I better shut up before some congressman sees this and thinks it's a good idea.
 
So the automobile market is coming back strong (with the aid of government coupons), how about the housing market?  Look at this from contrary investor:
 
 
 
 
 
 
 
Does that look like things are getting better to you?  Hmmm.  We are still at alltime lows.  I guess there is a slight move up there.  I'm not buying this.  The banks still have tons of houses that are behind in payments and now they AREN'T foreclosing.  They have found that it is better to take a lesser payment than to foreclose.  Foreclosure leads to vandalism and maintenance issues so they are holding off.  They can't hold off forever and eventually these folks will be losing their houses.  I fully expect the government to step in here and offer payoffs to the banks similar to the cash for clunkers program.  This is only postponing the inevitable.  If you want to sell your house, now is the time.  The next 6 months or so will be the best house market your likely to see until sometime in 2013.
 
Please read this story because it applies to the United States:
 
 
Catching Wild Pigs
A chemistry professor in a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (exchange student) who kept rubbing his back, and stretching as if his back hurt.

The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country's government and install a new communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, 'Do you know how to catch wild pigs?'

The professor thought it was a joke and asked for the punch line. The young man said this was no joke. 'You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come everyday to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in The last side. The pigs, who are used to the free corn, start to come through the gate to eat, you slam the gate on them and catch the whole herd.

Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

The young man then told the professor that is exactly what he sees happening to America .. The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc.. While we continually lose our freedoms -- just a little at a time.

One should always remember: There is no such thing as a free lunch! Also, a politician will never provide a service for you cheaper than you can do it yourself.

Also, if you see that all of this wonderful government 'help' is a problem confronting the future of democracy in America , you might want to send this on to your friends. If you think the free ride is essential to your way of life then you will probably delete this email, but God help you wh en the gate slams shut!

Keep your eyes on the newly elected politicians who are about to slam the gate on America ...

" A government big enough to give you everything you want, is big enough to take away everything you have "
Thomas Jefferson
 
We are the pigs.  These programs like cash for clunkers, health care "reform" and refinancing your mortgage are the fence posts on the fourth side of the pen.  It won't be too much longer until the door is installed and shut.  It is probably too late to save the country without a large disaster occurring but YOU can be ready.  Gold and silver have performed very well this summer which is very unusual.  The Fall into December is typically much stronger for the precious metals.  Position yourself accordingly.  As always, if you need help, let me know.  currymagic@gmail.com