The Economy Crisis Is Contained… Yeah, Right!

Some News Links From Contributing Editor RH:

China’s Inflation Hits American Price Tags…
http://www.nytimes.com/2008/02/01/business/worldbusiness/01inflate.html?_r=3&hp&oref=slogin&oref=slogin&oref=slogin

‘It’s going to be much worse’ Famed investor Jim Rogers sees hard times ahead for the United States – and a big opportunity looming in China…
http://money.cnn.com/2008/01/30/news/international/okeefe_rogers.fortune/index.htm

U.S. Economy: Payrolls Fall for First Time Since 2003…
http://www.bloomberg.com/apps/news?pid=20601087&sid=agPvpBGH.EX4&refer=home

Countrywide And Chase sent letters to customers last week telling them they could no longer borrow against their credit lines because the total debt on the home exceeded the market value of the property. The lender says it is using computer modeling to determine which of its customers would have their cash spigot shut off…
http://globaleconomicanalysis.blogspot.com/2008/02/countrywide-and-chase-shut-off-cash.html

Home Depot to lower 10% of headquarters staff. For now!
http://www.marketwatch.com/news/story/home-depot-lower-10-headquarters/story.aspx?guid=%7BB2D577A3%2DA185%2D4D73%2D9AAF%2D377BDC78AB6A%7D

Say It Ain’t So, Municipal Bonds Are the New Junk: Joe Mysak
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mysak&sid=auPmzvv3Al.g

Bush Says ‘Serious Signs’ U.S. Economy Is Weakening…
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJZqcryZJIqw&refer=home

Where a recession is already hitting hard…
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhereARecessionHasAlreadyHitHard.aspx

It’s just the beginning… -RH

Chicken Smith View:

I know, you’re probably thinking; “boy, these people don’t let up that the sky is falling.” Well, it ain’t just us. It’s a lot of people all over the world that recognize the trouble we’re in and the uncharted waters we’re headed towards.

As you can probably see, people are only now starting to wake up to this, just as I started waking up to this towards the end of 2006, and others, much smarter than I, have been predicting a decline for much longer than I have (check out Peter Schiff). Sooner or later you’ll have to recognize it. If you don’t see the signs that we’re in a recession and possibly headed for worse, I can only think of a few excuses for that reasoning at this point in time:

1. Your wealthy – I figure if you’ve got a lot of cash coming in, and someone else is managing your money, you might not feel all the cash that’s going out. I’m choosing to define wealthy as someone who’s combined household income after taxes is above $750,000. Although if you make that amount, chances are you probably have lost some money in the stock market recently, so you must have felt it.

2. You’re a hard working schmuck and your wife handles your money – Well, here’s how I figure it; the more inflation hits us, the more you have to work, the more you work, the less time you have to stop and see what’s really going on. As the bills come in, your wife simply insists that you have to work more, ok, well maybe she’s working more too, but the point is you can’t afford to stop to smell the roses.

3. You’re a student – Everything is already expensive, you already owe a lot of money, and you don’t know any better. Keep reading and learning, these are tough economic times we’re headed towards, similar to our depression years that started in 1929 and lasted well over 10 years.

If you don’t fall into one of those categories above, then surely you must be seeing it everywhere, from food prices to heating prices, from housing crises to financial crisis, from social woes to political woes, from health insurance to home insurance, from the falling dollar to the negative savings rate. Even global weather is lining up right along the rest of our economic uncertainties to produce the “perfect storm” of a world financial collapse that is being spear headed by the U.S. Granted, unless those terrorists decide to attack us again, we’ll all survive this and things will eventually get better, but they’ll certainly get worse before we even see the light at the end of the tunnel.

Our Scary Economy – Spoiled Brat or Dope Junkie?

Chicken Smith View:

“I want more candy!” says the 4 year old. “No, you’ve had enough!” replies the mother. Then the wailing and crying commences with interspersed pleas for leniency, promises of “I won’t ask for more if you give me some” and “please… just a little bit more?” maybe throw in a little temper-tantrum and some more whining as many 4 year olds can and will be prone to do. I’m sure many can relate.

Now, take the not too dissimilar scenario of a dope junkie trying to get another fix from her “sugar-daddy”. I don’t even need to change the quotes from the 4 year old above. The dialog is practically the same and the problem is practically the same — an absurd insistence for something that may satiate an immediate desire, but will, in the long-run, cause more harm than good (ie, bad teeth, bad personality, and bad health for both the child and the junkie).

Let us take a look at what is and what has been going on and let’s try to determine if we are witnessing the same type of problem in our economy: the rationale of a 4-year-old and the addiction of a junkie.

For starters, everyone is always referencing the “Business Cycle” as proof that markets, and therefore our economy, will naturally go up and down as part of the “cycles” although eventually it all goes up in the long run. What they generally don’t take into account is one little wrench that can skew many an upward trending chart: inflation.

Business and economics is much more complicated than what relegating it to a simple up and down line graph tends to portray. Living in our U.S. of “A” glass-bubble has caused us to ignore the fact that economies around the world have historically tumbled and shown long periods of downward trending line charts that seem all but a mystery to us on American soil. But make no mistake, charts do not discriminate and can and will make use of positive and negative trends on any continent.

We are currently witnessing inflation in our country at levels not felt since 1973. While that may sound reassuring in a round-a-bout sort of way (ie, “well at least it’s something we’ve already been through”), the fact is that we are at the start of a recessionary cycle, not the end of one, so this is only the beginning. If inflation continues the way it has been recently, we’ll easily exceed those 1973 levels and start entering into uncharted territory.

Think there’s no inflation, because the Fed says so? Think again. When the Fed says inflation is under control, they are only referencing core-inflation (as in long-term, according to their magic ball). Unfortunately, core-inflation does not include food and energy prices, which, if you’ve gone shopping for food or have been paying your energy bills within the past few years, you may have noticed how much they have shot up.

Energy is increasingly becoming more expensive due to emerging economies and their increasing demand for it. The same goes for food, as our American population has increased dramatically in the past century, while our farmlands have remained about the same. So now we purchase a lot of our goods from abroad — at world-market prices.

Inflation, of course, has caused our dollar to weaken, as you now need more of it to buy what you could last year with less of it. That, in turn, causes other currencies to have more value in relation to our dollar. Take the Canadian Dollar for instance. Just three years ago, one American Dollar would get you $1.30 Canadian, today, that same American dollar gets you about 95 Cents Canadian. That’s more than a 25% depreciation in under 3 years! It’s no wonder Canadians are flocking across the border on weekends to purchase goods here. It’s all at 25% off!

We are clearly experiencing increased levels of inflation that will have significant repercussions the longer it continues. And, unfortunately, it looks like inflation is here to stay for a while.

So, going back to our original premise, we have an economy that is beginning to slide downward with heightened inflation. So why do the markets look like they’re doing so well? Again, inflation. The reason the charts look so good is the same reason that’s causing prices to go up. Inflation. Because you now need more dollars to buy something today than you did yesterday, everything goes up in relation. Hence the Dow Jones Index has gone up close to 2,000 points since last year. Naturally, it’s not all due to inflation, but a lot of it is based on the illusion of a sound and strong economy with controlled inflation, when that’s clearly not the case.

Obviously, there needs to be a “correction” as many like to call it. However, what the economy needs is not a mild correction, it needs a major shake-up. Not by my desires, mind you, but rather by what is naturally supposed to occur in a market driven society. That means, once prices become over-inflated, as is currently the case (yes, they are, as everyone has become too accustomed to credit, whether it be credit cards, home equities, or other forms), people need to recognize the situation and cut back on spending to let prices adjust to pre-inflationary levels.

Instead, we do everything possible to avert “disaster” (the mild correction), but what is really happening is we are simply delaying the disaster for a later day and making it bigger in the process. How have we been averting it? The Federal Reserve. At the smallest sign of trouble or the smallest clamor of the people, it succumbs to their pleas and simply lowers interest rates to “stimulate” spending. In effect to squelch the cries of the people, but ignoring the larger implications.

In 2001, our economy was in a sad state of affairs. We were still going through the dot com bust when all of a sudden we get 9/11. Jobs were being sent overseas, prices were going up, and we were headed for a recession. The Fed, in an effort to “avert” further disaster, decided to lower the interest rates to “stimulate” spending in the economy. In light of the circumstances, one can give them a pass on this. However, two years later, the Fed was still lowering the rates, month after month. All to satiate the whines and moans of the addicts (all of us) begging for just one more rate cut. This, can be said, stimulated the economy a bit too much.

The over availability of cheap money (ie, credit at low interest rates) brought about the biggest boom in real estate and our overall economy since World War II. This certainly brought us out of the slump we were in, however it also took us past the correction point and into an inflationary period. This was due to the huge demands of homes and all the other goods and services that were being purchased as a result of a booming economy. Unfortunately, all on credit.

When things are looking good and money is changing hands so fast and small fortunes are being created left and right, people are willing to spend more money, thereby exacerbating the problem (inflation). We are now done with this period of irrational exuberance (to quote ex-Fed Chief Alan Greenspan, one of the architects of this mess), and the problems to come are many and long-lasting.

So now come the problems. Employment weakens (don’t just look at today’s numbers, see the big picture), foreclosures go up, the dollar goes down, inflation goes up, and again, the people (everyone, not just you and me, government and especially businesses) cry out for rate cuts. The same rate cuts that got us into this mess in the first place.

The Fed, unfortunately, has delivered. Is their hope to satiate the desires of a drugged society or to improve the economy? If the latter, rate cuts, no matter how much the 4 year old cries, is not the solution.

Employment Plunges, Credit Tightens, Gold Climbs, Market Crash Forecast, Great Depression Ahead

The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987,” Greenspan was quoted by the newspaper as saying… http://www.reuters.com/article/ousiv/idUSN0640900320070907

Citigroup Unit Won’t Take New Mortgage Bank Clients… http://www.bloomberg.com/apps/news?pid=20601087&sid=aP1Ebhaa1J30&refer=home

The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing…. http://www.rgemonitor.com/blog/roubini/213894

33 percent of home loans didn’t close last month. A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says… http://www.mcall.com/business/local/all-mortgages.6029291sep06,0,7164270.story

Countrywide May Cut Staff by 12,000. Countrywide Financial Corp., the nation’s biggest mortgage company, may reduce its workforce by 10,000 to 12,000 in the next three months, a 20 percent cut… http://www.bloomberg.com/apps/news?pid=20601087&sid=aQhytb8fv1Tk&refer=home

LEHMAN CUTS 850 MORE JOBS: Lehman Brothers Holdings Inc., which shut its subprime mortgage business last month, is cutting 850 more jobs, mostly at a U.S. subsidiary catering to borrowers with decent credit scores…http://www.nypost.com/seven/09072007/business/lehman_cuts_jobs_in_alt_a.htm

IndyMac to Cut 10 Percent of Jobs; May Post a Loss… http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azgqnpf9trLM

Don’t you just feel real sorry for gold? Look at that poor chart below and weep. …Actually weep for those idiots who cannot recognize a gold bull market when they see one. Hah! Gold will yet go where gold wants to go and perhaps where it has never been before– higher Margarita… http://www.kitco.com/ind/vaughn/sep072007.html

Gold Prices Climb As Stocks, Dollar Fall… http://www.forbes.com/fdc/welcome_mjx.shtml

Debugging Wall Street’s funky math. Big chunks of investment banks’ earnings are from assets that few know how to value. Should investors and regulators be concerned??? http://money.cnn.com/2007/09/06/magazines/fortune/eavis_level3.fortune/index.htm?postversion=2007090710

As Housing Market Cools, Far Fewer Become Agents… http://www.nytimes.com/2007/09/07/business/07agents.html?em&ex=1189310400&en=78ece3289daf0498&ei=5087%0A

America is already in a recession and the U.S. Government is flat broke to the extent of 8.9 trillion dollars. In other words, every man, woman and child in America owes $29,672 dollars in Government debt… http://www.opednews.com/articles/opedne_allen_l__070830_america_broke__2f_aver.htm

US Economy: Drowning in Debt… http://www.opednews.com/maxwrite/link.php?id=21979

American Dream Slashed Along with Home Values… http://www.opednews.com/maxwrite/link.php?id=37915

The Great American Dream still exists — in Iraq! http://www.opednews.com/articles/opedne_jane_sti_070329_the_great_american_d.htm

America’s House of Cards Economy… http://www.opednews.com/articles/opedne_michael__070814_house_of_cards.htm

Economic Armageddon Is Coming… http://www.opednews.com/articles/opedne_joel_s___070423_economic_armageddon_.htm

Bush’s Economy Is Poverty Stricken, Bleeding Jobs and Ready to Crash… http://www.opednews.com/articles/opedne_dan_meri_070524_bush_s_economy_is_po.htm

China’s Passenger Cars Leave US in the Dust… http://www.opednews.com/articles/genera_braden_g_070327_china_s_passenger_ca.htm

Chicken Smith View:

I know what you’re thinking; “how can this great, rich, powerful, generous and glorious country collapse?” Well, starting with the fact that the Egyptians, the Greeks, the Turks, the Ottomans, the Romans, the Mayas, the Spanish, the British and basically anyone that’s ever been in or part of a “great empire” all thought the same thing (even more so right before it collapsed), and then proceeding to the fact that we are facing similar historical events that preceded their demise, I think it’s highly likely that our great nation can see a reversal of fortunes in the near future.

What to do? Save your money! Have some gold and/or silver (no I don’t sell any). Consider the possibility of moving overseas (or across the border, Canada eh?). Get some useful skills such as learning to modify a car to run on cooking oil, building a solar panel, fortifying your home against intruders, digging a well in your back yard, learn another language, and anything else that can prep you for some tough economic times (which in turn can lead to some tough social times). Hey, if nothing else happens, at least you’ve got some good skills that will help you in our new world economy.

Media Outlets Taking Notice Of The Pending U.S. Financial Crisis

More Clippings About Our Economy From Contributing Editor RH:

“Its going to get worse before it gets better. How much worse, I don’t know,”
http://www.nypost.com/seven/07122007/business/hedge_horror_business_paul_tharp.htm

The catalyst for this latest dollar weakness is concern that the US consumer, for years the mainstay of the economy, could be flagging. Such worries followed evidence that the US housing market still does not appear to be finding a bottom along with news that retailers are suffering….
http://www.ft.com/cms/s/9d692cde-2fdb-11dc-a68f-0000779fd2ac.html

The Coming Crash — Winners and Losers…
LOSER: People who actually believe that Bear Stearns, Merrill Lynch, Goldman Sachs, Citigroup, Wachovia, JP Morgan Chase, etc. actually give a crap about your retirement account, you personally or your money. If you actually go out and read the news, you will see the numerous stories where companies like these have been “fined” for misusing and abusing your accounts and your money. Churn and burn baby, because if you still think they care, you need a lobotomy. The disaster underway is of their doing and they will have all the help they need from you, the taxpayer to straighten it out.
WINNER: All homeowners who are in secure industries who did not take out an exotic re-finance agreement, have no credit card or other unsecured debt, and are actually able to save money. This means having a financial plan including a retirement program which includes safe investments (precious metals, non-US government bonds, etc.) and having at least three to six months salary socked away safely in case of sudden unemployment….
http://wallstreetbear.com/board/view.php?topic=47743&post=152263

The dollar dropped to a record low against the euro as
troubles in the U.S. mortgage and credit markets continued to dampen the currency’s appeal…
http://www.reuters.com/article/topNews/idUKN1238289820070712?rpc=44

Foreclosure Rates Continue to Climb Around the Nation and Taking Major Jump in California…
http://abclocal.go.com/kfsn/story?section=local&id=5469514

Disappointing results from retailers are renewing concerns that the housing market’s troubles may start weighing more heavily on consumer spending…
http://blogs.wsj.com/economics/2007/07/12/economists-watch-for-housing-to-weigh-on-spending

After the credit binge, markets fear the crunch is on the way…
http://business.timesonline.co.uk/tol/business/economics/article2062073.ece

Chicken Smith View:
The forthcoming economic collapse of our nation is under way. What’s been predicted for so long, with so many media outlets outright denying that we’re in any danger, many of them are now starting to see what’s happening and, actually reporting on it.

Keep reading reports from around the world and do not rely on any one source for all your news. However, do learn to spot trends and market movements. The Dow Jones is obviously not a good indicator, as it is highly illogical and mainly motivated by emotions and ignorance rather than actual market conditions. Otherwise, why would the Dow Jones be doing so well, while the dollar continues to make all-time record lows?

Are companies really doing that well? Look at retail numbers, look at employment numbers. Look at entire industries such as manufacturing. Look at our debt and you’ll know all is not well. Start saving your pennies gold, as financial and, might I add, social devastation the likes none of us, not even our grandfathers who went through the Great Depression have seen, will begin affecting every facet of society.

These are new times. While we have greatly advanced in many areas such as science and technology, we as a society have not advanced in financial literacy, nor have we been as financially prudent as we should have been. Instead, we’ve been taught how to be mindless consumers with absurd levels of debt that shackle us to our jobs, yes, even those who are self-employed are shackled. The victors? Corporations and their shareholders… for the time being, however the collapse will affect many. Some will be better off, most will not.

More Signs of the Times…

From Around the Web (thanks to contributing editor RH):

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.’‘
http://www.bloomberg.com/apps/news?pid=20601109&sid=akV2sasSGUY8&refer=home

The Financial Times and CNBC are reporting that J.P. Morgan Chase, Deutsche Bank and Merrill Lynch have been selling more than $1 billion in investments seized as collateral from two troubled hedge funds at Bear Stearns.
http://www.portfolio.com/news-markets/top-5/2007/06/20/Gunning-for-Bear

An investor in Europe, who didn’t want to be identified, says he’s been trying to get his money out of the hedge fund since February…
http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm

“We were restrained by a slowing US economy,” said Fred Smith, FedEx chairman, president and chief executive. “The weakened industrial sector is currently limiting demand for transportation services.”
http://www.ft.com/cms/s/7315b590-1f2a-11dc-ac86-000b5df10621.html

A wealth of conflicting market signals that no one seems able to explain makes it difficult to figure out when the music will stop and the bills will come due. But it’s time to get ready…
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TheMarketsGameOfMusicalChairs.aspx

Chicken Smith View:
The articles speak for themselves. There are way too many negative market conditions (not to mention governmental & social ones) that are lining up to form what could be a tremendous collapse to our economy and, in turn, our society. The storm clouds are gathering… will you be prepared for the storm?

“There’s an insanity out there that I don’t understand” -Alan Greenspan, 3/15/07

Chicken Smith View:

The events that have unfolded over the recent past are evidence that our current U.S. economy is faltering and is headed for a major depression.

The reports in the mainstream media of a weakening economy which were hard to find around this time last year, are ever more visible as of late than ever before. The general public is finally waking up to the debt and the financial crisis that is about to shake this country.

Signs of a Recession:

Bank Failures – Metropolitan Savings, with total assets of approximately $15.8 million at the end of the third quarter 2006, was closed by the Pennsylvania Department of Banking. “Worries about financial stability start to creep in” according to Prechter’s Market Perspective. The Mortgage Lender Implode-O-Meter reports 39 lenders (and counting) have now gone kaput

Foreclosures Rise – Late mortgage payments rose to a 31/2-year high in the final quarter of last year, and new foreclosures surged to a record as borrowers with tarnished credit histories had trouble keeping up with their monthly payments, the Mortgage Bankers Association reported on 3/13/07. Hold on to your assets. The deepest housing decline in 16 years is about to get worse. Reported Bloomberg.com on 3/12/07.

Inflation Up – The government said before trading started in New York that the February PPI rose 1.3%, more than double expectations. One reason was rising food costs, which showed the highest increase in three years. – Forbes.com, 3/15/07

Cost of Labor Up – The Labor Department reported that the cost of the labor needed to produce each unit of output soared by 6.6 percent, far higher than the 1.7 percent initial estimate and well above the 3.2 percent increase Wall Street was expecting. Reports the AP in a Boston Globe article on 3/7/07.

Manufacturing Orders Down – New orders for manufactured goods in January decreased $22.9 billion or 5.6 percent to $383.1 billion, the U.S. Census Bureau reported on 3/6/07.

Dollar Down - In recent years, the U.S. Dollar has dropped to record lows against the Euro. In addition, it has reached record lows against several other currencies as well. There’s doubts about how strong the U.S. economy is. Reports Bloomberg.com on 3/16/07

Overall Debt Up - The greatest economic threat today isn’t deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession. MSN Money 2/23/07. This is because there is compelling evidence that a recession is dead ahead. MSN Money 9/25/06.

Greenspan is Sounding the Alarm – If home prices keep falling, there could be more of an impact on the broader economy’s momentum, he indicated. Consumer spending fuels two-thirds of national economic activity. CNN Money.com 3/15/07.

Forget Web 2.0, Next Up Is Great Depression 2.0

“In real terms, the economy is already in recession… Industrial output continues to flag (in January it was down by another .5 percent) while millions of good-paying factory jobs are being airmailed to China where labor is a mere fraction of the cost in the USA. Also, automobile inventories are up while factory production is in freefall.” - Online Journal, February 22, 2007

Chicken Smith View:

Let’s look at a couple of charts from the government’s Bureau of Economic Analysis (BEA):

This chart represents our current trade defecit. Yes, it’s negative. Yes, it means that we import more than we export. We also spend significantly more than we make. So how can we do that? Credit. Just like you can buy all you want on your credit cards and only pay the minimums each month, so too does the rest of our economy. From a regular person like you or me all the way up the food chain including investors, corporations, our government, everyone in our country is living on credit. Which leads us to this next chart:

This chart shows our ever increasing debt. And of course, there’s no collective plan to reduce that in any way. Unfortunately, these credit defecits can’t go on forever. Eventually some market condition changes (ie, foreign investors start dumping their dollars, too many banks collapsing, a market crash, too many bankruptcies, etc.) and the credit bills will become due. That’s when no one will have the money to pay them back and everyone will start waking up to the fact that credit is not infinite.

So, how will all this end up? Economists don’t know, the Fed doesn’t know, investors don’t know, banks don’t know, and the government doesn’t know. The fact is that because the future is so uncertain, it’s in a lot of people’s best interest not to know, or worse, say that everything is going well “there’s nothing to see here, move along…” and it’s all blue skies ahead.

The truth is, that the signs are all lining up, just like they did prior to the first Great Depression, and the signs are all pointing to a dramatic down-turn in our debt-ridden economy. But wait, aren’t we a world power, the richest, the biggest spenders, the best? Well, sure, but we’re also the the biggest debtors, close to 60% of all world-wide credit is consumed by us. One of the major factors of the Great Depression was buying on margin. This is true today, and we’re so deep in credit that there’s really no way out unless the market corrects itself via Great Depression 2.0.

BTW, do read the Online Journal article by Mike Whitney if you get a chance. It lays out the causes of the next depression in greater detail.

Signs Are Starting To Show. First Up… Banks.

British-based HSBC Bank has encountered a problem with its US-based lending division. An unexpected rise in sub-prime loan defaults.

“A growing number of debt-ridden Americans defaulting on their mortgages have forced British banking giant HSBC Holdings to increase its provision for bad loans…” -Forbes, February 8, 2007.

“The problems follow warnings from experts throughout last year that a slowing US economy and rising borrowing costs would lead to an increase in bad loans by homeowners” - Gulf Daily News, February 9, 2007

“Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind.” - MarketWatch, February 8, 2007

American based sub-prime lenders such as Delta Financial, Countrywide Financial, American Home Mortgage Investment, Washington Mutual, IndyMac Bancorp Inc., New Century Financial, and Marshall & Ilsley Corporation, some of which are really large outfits, are seeing and will continue to see a rise in defaults. How much of this pounding they’ll be able to absorb is anybody’s guess.

Chicken Smith View:
With such revelations from HSBC, it now becomes a clearer picture as to why their HSBC Direct Internet Savings division is currently offering a 6% interest rates on their savings account. They clearly need the money to bail them out of some really bad investments (sub-prime loans).

Remember the inverted yield curve? I mentioned it in an earlier post or a personal e-mail, regardless, this is a very important indicator of the times we are in. The simplest way to explain it is as follows; money invested for a short period of time earns a higher interest rate than money invested for a long period of time.

In general, a yield curve is not supposed to be inverted. Think of a regular savings account and a Certificate of Deposit (CD). The savings account is liquid and can be accessed at any time (provided the bank is open). Because you’re not committing to keeping your money in the bank for any length of time, the amount of interest you earn will be relatively low compared to a CD which requires the money remain in the bank for a set period of time (ie, 12 months). This is generally how things are supposed to work.

However, when the curve is inverted, the opposite is true. Hence you can put your money in a savings account and earn 6% right now or you can place your money in a CD and earn a paltry 3% over the course of a year. It doesn’t seem to make sense. And it shouldn’t, as Inverted Yield Curves, historically predict a down-turn in the economy.

This, my friend, is what I’m talking about. The signs are everywhere, the defaults, the inverse curves, the outsourcing, the job losses, the weakening dollar, the rising price of gold & gas (just wait), the drop in the housing market, the drop in construction, the loss of manufacturing, the rise in personal debt, the rise in corporate debt, the rise in national debt. It’s all happening at the same time. Each factor is pressing against it’s limits. The good times have never lasted forever, and I doubt this time will be an exception.

What to do?

I’m not telling you to head for the hills, just be aware. Save your pennies, better yet, save your pre-1965 dimes and quarters. Don’t spend your money frivolously, as a dollar devaluation will require more of it to purchase less than you can today. I’m not a big fan of the stock market, and my fear is that it will take a dive right along with the rest of the economy, so a minimal amount of investing in paper currency and stocks would be my recommendation. If you invest in anything, it’s probably best that it be a hard asset, something real and tangible, like a tangerine farm or a chicken coop (with chickens). I’m sure you can come up with better ideas.

Just realize that things are not right, no matter what the press, politicians, your friends, or some bosses try to tell you. Look for the facts. See the signs. If the banks start taking it in the rear, don’t think you’ll somehow escape unscathed.

Times are booming! Really…

“So why, when America is in the midst of an apparently never-ending sweet spot, are American families in the same precarious financial position that they faced during the Depression?” -Moneyweek.com Feb. 7, 2007

Chicken Smith View:

Why is it that while everyone at the top keeps saying that all is well, all those beneath them echo the same happy-go-lucky, lemming-minded sentiment, even when all is not well for them? Are we all suffering from delusions of grandeur? And no, the middle is not the top. The top is doing well, if you’re not part of the top, then chances are conditions will be changing for you in the near future.

As consumers, it seems that we’ve all been lulled into this sense of prosperity, even when there is none. For example, why is it that so many are spending money they don’t have on frivolous items such as Playstation 3s, BMWs, Sony Bravias, iPods, Coach, and Victoria’s Secret when they quite literally have ZERO dollars in savings and tens of thousands in debt?

It almost defies logic. I refer back to that Lending Tree commercial where the guy has it all (the new car, golf club membership, big house, etc.) and admits “I’m in debt up to my eyeballs… somebody help me”. Yet he’s smiling the whole time and sarcastically asks for help, knowing full well that he doesn’t really want any.

And why should he want help? He’s having too good a time living it up and enjoying the life he always dreamed of without having had to work too hard for it. It’s almost a no brainer come to think of it… while others sacrifice years of their lives trying to get ahead so they can afford some luxuries, the “smart” ones get to put it all on credit. It’s perfect. No need to struggle, sacrifice, take risks, start your own business, none of that.

Here’s the “secret”: A) Get a job, any job. B) Open 3-5 credit cards. C) Build your credit for 3-5 years. D) Buy a house with no down-payment (all you need is a pulse and some creative application filling techniques). E) Start spending. F) whenever you can’t make the minimum payments, simply play hot potatoe between the 10 credit cards you probably have by now. G) If that gets tough, and if some time has passed, or screw time, if the housing bubble is in full swing, get an equity mortgage and “buy” some more toys or go on more vacations. H) Sit back and enjoy. If the house of cards that you built starts tumbling down around you (it can take years or even decades), file for bankruptcy or call Lending Tree and try again.

So why bother working and saving for the American dream, when you can have it all now on credit! While the example is a bit extreme, there are many who have worked hard, have studied to get higher degrees, have struggled and taken risks, but yet somehow they still fell for the credit trap. It’s something that sneaks up on people, even those who say “that would never happen to me”. The allure of shiny new things is all too appealing and hard to resist.

The sad state of affairs however, is that while all this is happening at the local consumer level (you and me), other factors in our economy are in full play. Because so many are too busy having a good time, they really aren’t intereseted in putting much effort into their work. So American companies have, over the past few decades, been outsourcing jobs to other countries. I guess they figure the work can’t be much worse and at least it will be much cheaper.

Besides, since other countries don’t have such easy credit as we have here in America, the workers there, more than likely, will be in desparate need of those 75 cents per hour to put food in their kids’ mouths. Employee loyalty will be higher, employee turnover will be lower, wages will be much much much lower, benefits will be non-existent, and the fat cats back here (those at the top) will pocket the added profits. So why wait? Let’s lay off more Americans!

Don’t think that this isn’t happening every day. We are losing jobs. And while traditionally they have been blue-collar manufacturing jobs, other areas such as programming, accounting, analysis, and graphic design are being exported too. Job losses that are in the hundreds of thousands every year and showing no signs of stopping.

Don’t believe me? Just last week, J.P. Morgan Chase & Co. CEO Jamie Dimon said “We can do business anywhere around the world, we would like to see New York thrive because we have a lot of people here, but I don’t think it would damage us dramatically,” [if more business moved overseas]. And he’s not alone. Huge “outsourcing consultant” firms like Accenture are raking in tons of profits advising all sorts of companies and industries on how to export American jobs overseas.

So, you see, times are good for those at the top and the companies they run. As I’ve stated before, just because corporate america is doing well, does not mean that Joe-six-pack is doing well. Talk to average folks, not just those in the cubicles around you, not just those business aquaintances and sales people who generally try to prove they’re doing well so you can have confidence in working with/for them, not just friends who are often trying to hide the fact that they’re in debt up to their eyeballs, talk to strangers, the waitress, the cleaning person, the contractor, the painter, the immigrant, the day laborer. These are the ones who feel it first. Then talk to the telemarketer, the tech support person, the graphic designer, and the investment banker who just got laid off from a sweet job.

Housing was a big part of what kept our economy afloat after 2001. That was mostly due to the Fed’s lowering of interest rates. Last year the fed stopped lowering the rates. We are currently in a holding pattern and the market is setting records every other day. However, housing has already taken a big dive and is yet to see more. The dollar has been going down and other countries are diversifying their portfolios (ie, dumping dollars). Our nations’ debt levels are at record highs and our savings are at record lows. Foreclosures are also at record levels and all this consumer credit will have a significant impact on the banking industry and our economy.

Winter in general is a time of uncertainty, but there isn’t much that will improve in the warmer months ahead. Well, not unless you count over inflated stock prices that will rise further before they are due for a sudden correction later in the year. At that point people will start to notice, but it may be too late.

A lot of our current upbeat economy news has been modified to showcase the “positives” and down-play the “negatives”. However, if you dig deeper, you’ll see that the economy is really placing its bets on consumer spending which, unless you count purchasing everything on credit and paying only the minimums as actual spending, means our economy is headed for disaster.