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May 30, 2011
Issue 149  -  Is It Really That Bad?
There are many people pontificating on the state of our nation and with vastly differing views.  So just where do we stand?  Are things as bad as this guy's haircut?  The truth is, because of our deceptive government officials and statistics, it's very hard to know.  I believe it's very, very bad.  Not unsaveable bad, but close.  I want to just go through some highlights to make this point.
One of the key cornerstones to a society is the housing market.  If it is weak or failing, that portends a gloomy future with little chance of meaningful recovery .  As you know from reading this blog, I don't think housing will bottom out until after 2013 at the earliest.  This is due to massive overbuilding in the 2000s and the artificial prices that were paid for many them.  Here is a snapshot into the current housing market:

U.S. pending home sales dive 11.6 pct in April

WASHINGTON, May 27 (Reuters) - Pending sales of existing U.S. homes dropped far more than expected in April to touch a seven-month low, a trade group said on Friday, dealing a blow to hopes of a recovery in the housing market.

The National Association of Realtors Pending Home Sales Index dropped 11.6 percent to 81.9 in April, the lowest since September. Pending home sales lead existing home sales by a month or two.

Economists polled by Reuters had expected pending home sales to fall 1.0 percent.

The housing market is stalling.  The trend is dipping back down which is never a good sign.  Here is the latest Case/Shiller chart:
The $8000 tax credits did what was plainly obvious....pull sales forward.  Any artificial stimulus of a market only leads to stealing future sales.  Very few people bought homes with the credit who WEREN'T going to buy a house at all.  Most were already looking or were intending to buy in the next year or two.  Now, as the tax credit is gone, there are no more buyers to take the place of those who bought earlier.  This will be a drag on things for some time.
Another bedrock of a nations health is it's credit market.  Ideally, a country's debt should be low, which will make it easy to sell debt as a country has the tax levying capability behind their debt.  Because the U.S. has such a huge credit load, the private citizen is not much of a buyer in the government debt market.  This makes us more reliant on foreign entities to buy our debt.  How is that going lately:
Second Biggest Weekly Drop Ever In Treasurys Held In The Fed's Custodial Account As Foreigners Dump

Tyler Durden on 05/26/2011 20:55 -0400

There was one truly interesting observation in this week's Fed balance sheet update: not that the actual balance sheet hit a new all time record (which it did at $2.779 trillion), or that the Fed added another $24 billion in Treasurys to its balance sheet, or that total reserves hit a new all time record, increasing by $53 billion to $1.59 trillion. No. The biggest surprise was that in the just ended week, Treasury securities held in custodial accounts at the Fed, considered by some the best real-time representation of foreign holdings of US Treasurys considering that the TIC update is not only wildly inaccurate in its monthly update, but is also 3 months delayed, dropped by the largest amount in 4 years. From a total of $2.704 trillion, USTs held in custodial accounts declined by $18.7 billion to $2.685 billion. This is the second largest decline in history, only topped by the $22.1 billion in the week of August 15, 2007 which is the week that followed the great quant crash of 2007 that wiped out, among others, Goldman Alpha. This observation is in stark contrast to the recent record strength of bond issuance, after both the 5 and 7 Years auctions posted record Bid to Cover investor interest.

One explanation is that while foreign investors are aggressively buying up the belly of the curve, they are even more aggressively selling the other parts of the curve, namely both the short (sub 2 Year) and the Long (10-30 Year). Another explanation is that the weekly change in Custodial data is largely noise and has no bearing on total foreign holdings of debt, which however we would largely discount. Another question is whether the large outflow from bonds is a consequences to recent market volatility, or is the basis for one: i.e., will the money be used to purchase stocks, or, if as China is posturing, is this merely capital leaving the US and entering Europe. Lastly, the nearly $20 billion in USDs likely will have to be converted to another FX denomination: should any notably USD weakness be observed in the next several days, this could well be a reason.


So the foreignors are dumping our debt which is adding pressure to our rating.  If it weren't for the Federal Reserve buying our debt (which is absolutely insane if you think about it) our interest rates would be much, much higher.  Eventually this game will end and interest rates will rise, it's just very difficult to know when the game will shift.  It's kind of like those chemical experiments where one extra drop of the agent causes a catastrophic change in the fluid's color.  I see that happening in our markets.  One day the switch will be flipped and all hell breaks loose.  At that point if you don't have your financial life boats (physical gold and silver) it will be VERY difficult to secure any and the price will be multiples higher.
The following graph (contraryinvestor) also clearly shows the problems that this country is facing:
As you can clearly see, the consumer is becoming less and less likely to spend on "extras."  With the rise in gasoline, there is less and less for other things.  People are putting off buying clothes and eating out less or at cheaper restaurants.  This will in no way whatsoever lead to a zooming economy which is what the "budget balancers" are looking for in their projections.  It just isn't going to happen.  Take a look at another chart:
Look at the right side of the chart and economic activity that has come from the stimulus.  As the quote on the graph says, "think where we would be without the $3 trillion."  We are only treading water!  No gain whatsoever.  We have reached the point where without trillions of stimulus, we would be crashing.  The economy would be cratering.  This can't continue.  Here's a video giving more details about our troubles: (thanks Craig)
These guys make some very good videos.  As it says in the video, if interest rates rise to normal levels, and I believe they will, our country will not be able to function without draconian measures.  Think Greece is on austerity measures?  Our measures will make them look like they're having a picnic in the Hamptons.  We're talking massive cuts across the board.  Now just what is going to happen when cuts have to be made to this:
All time record levels of food stamp recipients.  I'm just guessing that it wouldn't go over very well to have this program cut.  People aren't very happy when don't have enough to eat.  There will be big problems when we hit the wall.  As I've argued many times, hyperinflation will be the only answer.  The system is essentially broken and there will be a "readjustment" to make things right.  I have two videos from vastly different people about why the union is in jeopardy.  First Ron Paul:
Yes, the continuing erosion of rights is troubling while the president and congress claim more and more powers not permitted by the constitution.   The main gist here is the enhancement of the war powers act into a virtually unlimited war starting authority.  The powers act is supposed to limit "exercises" to 60 days but that "rule" is just ignored.  Then again they need to do this as it helps fight against deflation.  More wars are on the way.  This of course will only fill the system with more and more "free" money.  Wall Street takes more and more chances with a "heads I win, tails you lose" mentality.  Here is how Carl Icahn a multibillionaire expressing his feeling about how the system is on a crash course with another "problem:"
This is an older, very rich guy and is not afraid to tell it like it is.  This is the exact thing I'm worried about which will leave our stock market several levels lower.  So while it's not defcon 5 stuff here, it is definitely looking like things could turn down quickly.  Be careful out there....
GORO  (closed $27.75, down $1.80, average price paid $6)
Mexus Gold  (closed $.20, even, average price paid, $.22) 
Alexco Resource Corporation -  AXU  (closed $8.10, up .47, recommended at $7.90) 
Stocks    (Current status, out, sold on March 18)
Physical Gold  (Closed $1,537,  up $24`,  average price paid $395)
Physical Silver  (Closed $37.94,  up $2.84,  average price paid $5.31)
This week's video is aptly titled the "worst rap battle ever."   Even if you don't like rap, this is funny stuff.  The second contestant makes has some hilarious rhymes.  There is a little profanity but nothing like a normal rap song.  Have a great week!