Bob Chapman | August 5, 2009

Bowing to populist anger, the House voted Friday to prohibit pay and bonus packages that encourage bankers and traders to take risks so big they could bring down the entire economy.

Passage of the bill on a 237-185 vote followed the disclosure a day earlier that nine of the nation's biggest banks, which are receiving billions of dollars in federal bailout aid, paid individual bonuses of $1 million or more to nearly 5,000 employees.

This is not the government taking over the corporate sector," Rep. Melvin Watt, D-N.C, said of the House action. "It is a statement by the American people that it is time for us to straighten up the ship."

Employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

The Labor Department said Friday that employment costs rose by 1.8 percent for the 12 months ending in June, the smallest annual gain on records that go back to 1982.

The department said that for the April-June quarter, its Employment Cost Index rose by just 0.4 percent, just slightly above the 0.3 percent rise in the first quarter, which had been the smallest quarterly gain on record.

Companies, struggling to cope during the current hard times, have been laying off workers, trimming wage gains and holding down overtime to save costs.

The 1.8 percent increase in overall compensation for the past 12 months included a record low 1.8 percent rise in wages and salaries, which account for 70 percent of compensation costs.

Benefits, which include such things as health insurance and contributions to pension plans, also rose by 1.8 percent during the past year, the lowest annual gain in this category since a similar increase during the 12 months ending in September 1997.

This past week the market rose slightly. The Dow rose 0.9%, S&P rose 0.8%, the Russell 2000 rose 1.5% and the Nasdaq rose 0.3%. Cyclicals rose 5.5% as utilities fell 2.4%. Banks rose 8.4%; broker/dealers 3.7%; semis increased 0.3% and biotechs 0.7% as high tech fell 0.2% and Internets fell 1.3%. Gold bullion gained $2.10 as the HUI fell 0.2%.

Two year T-bills rose 5 bps to 1.01%, the 10-year notes fell 18 bps to 3.48% and the 10-year German bunds fell 18 bps to 3.305.

Freddie Mac’s 30-year fixed mortgage rates rose 5 bps to 5.25%, the 15’s added 1 bps to 4.69% and one-year ARMs rose 3 bps to 4.80%. The jumbo 30-year fixed rates fell 2 bps to 6.36%.

Fed credit fell $0.06 billion, up 125% yoy. Fed foreign holdings of Treasuries, Agency debt jumped $6.2 billion to a record $2.793 trillion. Custody holdings for foreign central banks have expanded 19.1% ytd and 18% yoy.

M2 narrow money supply rose $8.9 billion, or 8.2% yoy.

Total money market fund assets fell $22 billion to $2.634 trillion. Year-to-date they have fallen 8.9% annualized.

This past week the dollar index, USDX, declined 0.6% to a 2009 low of 78.31.

The stock market continues its bear market rally, which is very similar to the rallies in 1930 and 1932. What we are seeing at this stage of the rally is the shares of smaller companies and companies with low ratings outperforming better issues on low volume. 85% of the market has broken out above its 50-day moving average, but the quality of leadership is very questionable. After 50 years of observing markets we know from experience that these kinds of rallies at this stage end the overall rally. This is a low-quality rally and it is very overbought. That is enunciated by low volume and short covering. The gains at this juncture should be miniscule leaving those who are still long a chance to exit what will end up being a trap. Keep in mind as well that the depression is not ending and unemployment is still climbing. We see no signs of a sustainable recovery. Most of the important earnings reports have been made and absorbed by the market. As long as companies are laying off and cutting back on hours they won’t be increasing inventory, especially with retail sales continuing to slide. There are no signs of a sustainable recovery. Even if inventories are increased it will be a one shot deal. The recovery, if there is to be one, will be production led. How can that happen as layoffs continue and banks continue to cut back on lending? Any recovery is contingent on bank lending. Plus, we are seeing continued deleveraging in all sectors. The credit is not available to support higher production. Capacity utilization is hanging around 85, which means there is already major idle capacity. Consumers are simply not buyers. That happened in the last recession in 2002, but that lack of participation was supplanted by the real estate bubble. We are seeing twice as much asset deflation and triple the job losses of the last slowdown. That means recovery is a long way off. All stimulus packages do is prolong the agony, worsen and distort the systemic problems. Forty percent of total disposable income is coming from government programs, whereas the remainder, wages and salaries from the private economy, are declining at a 3.1% rate. If you add in inflation, which no one seems to talk about anymore, you have at least a 10% annual loss in purchasing power. Even $3 billion in rebates in “cash for clunkers” is not going to have any lasting economic effect. It is just a prolongation of the problem although workers deserve a break, after the Treasury and the Fed commit American taxpayers for $23.7 trillion, most of it going to bail out Wall Street, banks and insurance companies. The administration just threw the workers a $3 billion bone. It should also be noted that what amounts to zero financing has been going on for nine years. The market was saturated and to keep the assembly lines working and workers employed to fend off recession.

Earnings increases came at the cost of major unemployment over the past six months assisted by mark-to-model pricing of assets and other games of 3-card Monte. Be as it may in today’s culture of crime the market has priced in a 40% increase in earnings next year, which is ridiculous. Worse yet, financials have flattened out and they were among the leaders upward and discretionary consumer stocks have taken over the lead. As well stocks profoundly affect by the depression, such as gaming stocks, homebuilders, home furnishings, advertisers, hotels, automakers and retail shares. In two weeks the back to school retail numbers will start coming in and they will not be nice. That should trigger downside in the market. Prices are being cut 30 to 70 percent. How can companies make money that way? All they will do is reduce inventory. Discretionary spending is out. The game has changed. Incidentally, Europe and the UK are experiencing the same thing. As well there is lots of negativity being driven by the swine flu propaganda. A falling dollar and rising gold and silver prices will point out what trouble the US and world economy has gotten itself into.

Boomers, some 80 million strong, accounted for 47% of national spending and now they are saving. They provided 78% of spending growth up until recently. What we find of special interest is that boomers aged 54 to 63, even though told over and over again to prepare for retirement only 31% are prepared. If the Dow falls to 4,000 and house prices fall another 20%, how much smaller will the percentage shrink? The number of plus 55 year olds reentering the workforce to survive, is cutting off jobs for younger members of society. In addition about 50% of corporations are now looking for new college graduates. This is the situation that existed during the late 1940s, 50s and into the 1960s. Those who got jobs were lucky and they kept them. If you can believe it these grads were fortunate to make $400 a month. This is where we are again headed.

A phenomenon we have observed over the past 15 years is professional low-balling of earnings, which allows for corporate earnings to perpetually look good. Even at that only about 60% of corporations beat professional earnings estimates. Revenues have so far fallen 10%, thus earnings objectives have been reached by firing personnel. Incidentally that drop in revenues is ten times worse than in 2003.

Unemployment at 20.5% for U6 will rise to 22% this year and 25% or more next year. Although the rise of the minimum wage from $6.55 to $7.25 an hour will aid low-income workers, but it will also stop hiring and will lead to more layoffs. It will take two years for unemployment to bottom out after the depression is over and it is nowhere over as yet.

This time around the number of part time jobs has doubled to more than 9 million above the norm. Those hours are at an all-time low of 33 hours as we learned last week. That leaves us short 8 million jobs if you include the 150,000 people entering the workforce monthly. Most of these jobs have been lost permanently due to free trade, globalization, offshoring and outsourcing, unless Congress legislates tariffs on goods and services. More than 7 million jobs have been lost due to globalization over the past ten years. Few of those who have lost jobs have been retained. We need better education, but as long as the federal government dictates how children will be educated we see no recovery. Can you imagine what this will do to productivity? There are no easy solutions. We are still on the same course sculptured for use by the Illuminists and there is no turning back.

Behind all the problems sit the central bankers they have deliberately allowed massive leverage in banking of some 50 times assets, which in turn led to the credit crisis of the past two years. Market forces should determine interest rates and we should return to targeting money and credit once the system has been purged. The control of monetary policy should be in the hands of the treasury, not controlled by the Fed. It has been 30 years since we targeted monetary aggregates and it is about time we returned to that device to reign in the excesses we have witnessed since 1980. Remember, only central banks are capable of creating excessive money and credit, ridiculously low interest rates and inflation.

Bankers fully understand that unrestrained credit is inherently unstable and that eventually has to bring hyperinflation and eventually deflationary collapse. That is why for centuries gold was used to back currencies. It kept the central bankers honest. This undisciplined display of money and credit expansion by most all central banks has been done deliberately. These people are not dumb; they know exactly what they are doing.

Just to give you an idea how serious the situation is in MBS, mortgage backed securities, issuance has gone wild. In June, MBS, held and guaranteed by Fannie Mae was $3,194 trillion, up $423.9 billion on the month. Freddie’s book grew $12.2 billion. In other words, MBS issuance is almost at levels seen in 2007 and 2008. The media doesn’t carry such information because it is inconvenient for government. Most of these loans are of sub prime and ALT-A character, which guarantees us another crisis a year down the road as homeowners default and two years hence as these loans reset. This will cause more new downward pressure on real estate prices. What abject stupidity, or perhaps there is another agenda and that is to guarantee a total collapse of the economy, during hyperinflation two years from now.

Who, we ask is going to continue to fund $2 trillion in US Treasuries as the amount increases by the minute for years to come? The demands will be exponential. The Fed is already monetizing Treasury paper and the demands to continue to do so in the future will grow louder as time goes on. This is called debasement, and it is the tact the Fed has chosen to follow until the deflationary plug is pulled. The only way to defend your assets and guarantee wealth preservation is to have gold and silver related assets.

In another sign of the times Smith and Hawhen, an upscale garden supply chain is in liquidation. The owner, Scott Miracle Gro, couldn’t find a buyer.

Times are tough for illegal aliens as they begin to have money sent back to the US, so they can exist. Many have not worked for two years and, of course, they are not counted among the unemployed. On the other hand money leaving the US for Mexico has fallen by some 70%. Last year legal and illegal aliens sent $50 billion back to their home countries. Year-on-year the amount of foreign currency on deposit fell 7% in the Dominican Republic, 12% in India and 6% in Mexico. The money coming back to the states won’t last long, because most of the funds were spent on living expenses.

Almost a year ago AIG, American International Group, One the world’s largest insurance company, received $182 billion from taxpayers, in exchange for a 78% stake. Of that money $165 million went for bonuses for its Financial Products Group, which in part caused the firm’s failure. This is the gang that sold credit default swaps. AIG ran naked on these deals. They had no collateral back up for the contracts they had entered into. Out of $105.4 billion that secretly was run through AIG to cover their bad bets to US and foreign bankers, Goldman received $12.8 billion. The reason, after much prodding, Treasury Secretary Paulson wanted to keep the names and where the money had gone secret, was that this was a secret taxpayer bailout of banks worldwide. It was not until Paulson left office that what he had done became public knowledge. In order to avoid detection of what they were up too at AIG they deliberately and frequently assigned the risks assumed to their different North American insurance companies. They created a game of musical chairs to deceive state regulators as well. They had assumed liabilities far beyond their ability to pay on those obligations. There is no question in our mind that former CEO and guiding light at the Council on Foreign Relations, Hank Greenberg, engineered this terrible deception. It so far has cost taxpayers $182 billion. We wonder how much more it will cost us?

You may not know it yet, but we are winning. The Internet, shortwave and Satellite have the elitists on the run. This is even more pronounced today than at the Bilderberger Meeting in Greece in June. Governments and central banks are under severe pressure. Just look at irate constituents at Town Hall meetings and 277 co-sponsors of Ron Paul’s HR 1207, a bill to investigate and audit the Fed. Ex-treasury Secretary Paulson and Fed Chairman Bernanke were just treated to the worst grilling in the history of the House and were called crooks and criminals by Congress people. Bernanke couldn’t explain where $500 billion came from and as well the disappearance of $2 trillion. When these events happened the dollar strengthened, but Bernanke only found this to be a coincidence. Congressman Grayson laughed in Bernanke’s face. We had this tape in the last issue in the US section, and after we ran it, it mysteriously disappeared from C-Span. So much for a free media and open society.

The $500 billion was spread far and wide; actually $531 billion went to central banks worldwide to prop up the dollar. This is what these swaps were all about, as was the attempted gold suppression, which happened simultaneously. That was unsuccessful because Europeans do not want to sell more gold, and that is borne out by the lack of central bank sales this year, besides the US cannot be a seller to suppress prices, because if they have any gold left it is in the form of coin melt. There has been no gold audit since 1955.

This time the Fed does not have currency swaps to defend the dollar and that is why there was no defense of 78 on the USDX this week.

That means the Fed has to quickly create $500 billion more monetized dollars for more currency swaps, so that it can sell more foreign currencies to stem the fall of the dollar. If that does not happen the dollar will keep on plunging. The market action over the next four months should be spectacular.

The ISM report on prices paid increased to 55 from 52. This again shows prices are not retreating – they are rising. This heavily weighs on the dollar, so it is no wonder the dollar continues to sink. We are in a depression in the inflationary stage and as long as money and credit and Fed monetization continues inflation will rise. The Fed is well aware of all this, because they deliberately created this situation.

Once again bean counters ‘fooled’ with inflation to produce higher GDP than warranted.