Unofficial Problem Bank List

CalculatedRisk, whom is tracking the unofficial problem bank list, released an update today with recent adds and removals. The one removal was due to Horizon Bank in Florida failing which added to the over bank failures in prior post. [ Read more ... ]

Karl Denninger and Max Keiser On the Economy

Part 1 of 3

Part 2 of 3

Part 3 of 3

Weekly Bank Failures

This week only saw one more bank fail.  This week the state of Florida lost one more bank adding to the total banks failed in 2010 to 119.

Dow from 1000 feet up

If you think we are in a rally maybe this picture will convince you otherwise.  We seem to be moving sideways in the markets right now.  This could be confusion about where the economy is going or a new trend for the next few years as big bank computerized trading continues to encourage remaining investors to coming into the market during rallies and then sells the market short taking their money.  You can see with the green line, we broke the upward trend in the Dow and are now in the channel shown by the Yellow lines.  This is not an exact science, as I have learned over the past years of prior trading, but is a relatively good indicator of direction.  once the channel gets tighter, which it is already starting to do, it will pick a direction out of that channel.  I think the direction depends on a few things that are closely related; Debt and how we are going to repay it without devaluing the dollar excessively (we need a plan),  the second major item is our reserve currency status (implications that go with that like replacing the dollar as a currency and/or replacing it as the reserve currency) and finally how do we become a producing country again ( returning to a positive trade balance once again). 

It is hard to tell, in this manipulated economy, what could sway the direction of the markets (as statistics are heavily manipulated and hard to trust), but for my money it is the major items above.

Insanity with Currency

This is a topic I have posted before, but bears repeating in light of an article Mish Shedlock posted this morning.  I am hearing more and more about replacement currencies for the U.S. Dollar, mainly in the context of replacing its reserve status.  Recently it hit the main media in a few interviews (and by the time they talk about it, its usually 6 to 8 months old when it comes to our economy and the truth).  Though there have been rumors of a replacement currency for the dollar, this idea floated by Citigroup seems to be the dumbest.  It does make you wonder though, with corporations like Citigroup floating these idea, how close are we.  [ Read more ...]

Marc Fabers View of the Economy

Trade Balance Reality

CalculatedRisk has a pretty interesting observation about the trade balance.  The bottom line is that imports were down slightly this month, but general trend is up.  Exports were up slightly, causing the two to bring the balance gap in slightly.  [ Read more ... ]

Nouriel Roubini on the Economy

It would be nice if Maria dug into the UI numbers a bit to realize that the number today isn't really good and not even complete as 9 states did not report UI this week and the gap in revisions is increasing (making it seem like the numbers are terrific then get revised up later).

Unemployment Initial Claims Funny Numbers

After assessing the unemployment numbers I have made a few observations.  First we must thank ZeroHedge for the information that 9 states did not report UI claims due to the holiday, so this number is really understated (look forward to a great revision).  We seem to be widening the gap on the number we announce and what the revised number becomes.  By spinning the number lower when the UI number is announced you make the number look like it improved or make it beat forecasts.  The problem is that the market doesn't look at the revision for last month, because this latest month shows better numbers (and lets face it, it's in the past).  To show you the delta, please look at this chart:

We can see that we have overstated the actual numbers only a few times and not so much in recent weeks.  A majority of the time we understate the numbers and then revise up (over the past year).  Lets look at the raw numbers and observe the effect this has:

As you can see, in prior weeks having the revisions, almost every case the numbers looked worse and it has effected whether we beat forecasts (falsely elevating the market as it looks like a beat).   Market pundits say the market prices in the forecast, therefore a beat makes the market go up, but revisions are not highlighted in an announcement (like the initial number) so it tends to get glossed over and not figured into the market price.  You have to take this information into consideration when looking at the health of the economy.  Don't celebrate too soon.

Trade Balance and Initial Claims

The Trade Balance and Initial Claims numbers came out this morning and on the surface look to be positive news.  I'll get this out briefly now and have a deeper dive later to see what is real and what is not.  The trade balance forecast was -47.4B and actually came in at -42.8B.  The -42.8B number was better than previous number of -49.9B.  Initial claims forecast was 470K and actually came in lower at 451k.  This 451k number also beat the previous number of 478k (revised up).   I'll correct the charts below to reflect revised numbers, but may alter them as well to reflect revisions as they are really distorting the numbers as we don't normally get a formal announcement of revisions, which have been worse.  Markets are not moving on this news, so a deeper dive of the numbers will need to be.  Here are the charts for both:

Stock Market Exodus

It seems we have another week of retail investors exiting the stock market.  Another $7.5 billion was moved out of Mutual funds in the week ending September 1.  This is showing the retail investors lack of faith in our rigged markets.  This is the largest outflow in the stock market from retail investors since flash crash week in 2010.  This action by retail investors really shows that investors are tired of the gaming going on in the markets.  [ Read more ... ]

Consumer Credit

The Consumer Credit number is released monthly and measures the change in the value of outstanding consumer credit that requires installment payments.  It is supposed to be a measure of consumer spending and the willingness of lenders feel comfortable issuing loans.  On the consumer side, psychologically it shows that the consumer feels confident in the economy and is willing to spend instead of saving.  The September 8th report covers the month of July 2010.  The number was forecast to come in at -4.2B and actually came in at -3.6B, which was better than expected.

So what does this mean?  Well it means that consumers are pulling back on spending and trying to pay down debt.  It also reflects the banks willingness to lend money.  This is not a surprise due to the negative environment in the economy.  In the U.S. economy, this is a bad thing as our economy is consumer and credit driven.  Again, this was viewed as good as it came under forecast so markets seemed unaffected by this negative data.

Employment Revision Confusion

Our friends at CalculatedRisk.com did an analysis of the BLS jobs reports.  The Analysis shows a chart that has unemployed over hired in July that would account for 168,000 jobs lost in July, not the revised down 54,000 jobs (using data from the BLS itself).  This is very confusing as to why the BLS then revised down to the 54,000 jobs.  Using the 168,000 jobs lost data into the unemployment rate would have created a higher rate of unemployment making the economy look worse.  This goes to show that the numbers being produced seem to be fictitious at best.  [ Read more ... ]

Health Care Costs to Rise

More European Woes

Europe seems to be having additional problems within the EU banking system (no surprise there, as a lot of its debt has not been publicly realized yet).  Irelands banks are constantly needing additional bail outs, as well as Greece.  The cost of borrowing is increasing, as getting buyers to fund debt becomes more difficult.  This is just a taste of what is to come for the U.S. if we do not contain our debt.  [ Read more ... ]

Finally Some Reality

This article posted on zerohedge.com is a must read, with real analysis from David Rosenberg on the health of the economy.  If you really want to know more information about the recent economic numbers and what they really point too. [ Read more ... ]

More Stimulus

President Obama is now introducing another plan to pile in $50 billion more in stimulus (oops we are not supposed to call it stimulus) money for infrastructure and $200 billion in Tax cuts.  The tax side of it is to get the consumers and businesses to spend.  I don't think that will give us much of a nudge (very temporary like cash for clunkers), the infrastructure investment side doesn't sound like a bad idea as it is something real and has a possibility of creating some jobs.  It would be better to allow weak areas to fail and retrain the unemployed into more productive job areas (creating more permanent jobs as opposed to temporary 2-3 year jobs) through new a new energy grid.   If we are going to spend the money, lets make it something the economy will actually benefit from long term.  If the last two years are any indication of where our tax dollars in the form of stimulus are going, this will be like flushing $50 billion down the debt toilet.  A good point in the video is that large corporations are flush with cash and are holding onto it, so you have to ask yourself why?  Large corporations see trouble ahead and they are doing the prudent thing by reigning in spending and holding on to capital to survive a dramatic downturn.  So why would these companies spend money, beyond what will give them the tax cut. I think extending the Bush tax cuts and investing in our country's productive capacity seems like a better use of money, if your bent on spending the money.  I think Joe LaVorgna is kidding himself if he thinks GDP for Q3 is going to be at 2% and over 3% the next quarter.  Apparently he has not looked at new orders, export new orders, inventory, backlog and prices for materials in the ISM reports (PMI & NMI).

President Obama says that the $50 billion dollars over time would not cost the tax payers, yet we passed $175 billion dollar infrastructure bill before and where did it get us.  When you borrow billions of dollars, especially over time (interest will go up) it will cost us, it already has been costing us.

Is U.S. Debt Junk?

This is a great video on CNBC, Micheal Pento makes some great points that apparently Erin does not like very much, as she doesn't let him finish his points either.  Joseph Balestrino, while making a very short term point, isn't as clued in as he should be for the long term.  Mr. Pento is right on with his assessment of where we are going with our debt and whether others will continue to desire to fund it.  True enough in the short term we do find some buyers (the Fed has been buying up a lot lately to hold down interest rates, but that just inflates our debt further).  Erin argues that we can borrow more because interest rates are so low and we appear to be able to pay it back.  I would argue that if we take it to far and interest rates rise (beyond the Feds ability to suppress it) then we most likely won't be able to pay it back.  This would bear further consequences to the American public.  Mike makes the point that we have $8.9 Trillion dollars in publicly traded debt which will rise to at least $14 Trillion by 2015 and the Fed has single handedly held down the yield curve (but cannot continue to do so forever).  Mike also points out that instead of paying just 5% of all federal revenue on interest expense we will be paying 30% at a bare minimum in just a handful of years and that interest rates must rise dramatically in response.  Joseph Balistrino says "this is a long term problem and that we are the safe haven currency, so until our currency goes down on bad market days we will remain the safe haven currency".  That seems like a really bad assumption (especially with the IMF pushing SDR's and rumors the Fed wants the same).  Given the sell off in the Euro today, the Swiss Franc actually served pretty well as a safe haven for investors to flee to.  Joseph Balistrino from Federated adds "nothing is in a bubble when people want to buy it" in response to whether he thought the U.S. Bond market was in a bubble.  Really, what kind of crazy thinking is that.  Most people do buy during a bubble and then suffer when it implodes, does he advocate people buying bubbles and losing money?  Watch for yourself.

Jim Rickards Tells his Clients to get out of Stocks

A great article came out of zerohedge.com today, summarizing an in-depth interview by King World News with Jim Rickards.  Mr. Rickards discusses the manipulation in the markets and how they are destabilizing market clarity.  Investors become uneasy about investing capital when they cannot see the market clearly.  We have seen through various articles posted this last month, analyzing economic indicators (like ISM and Unemployment), that these indicators may no longer be trusted as they seem to be hyping any trace of good and down playing or avoiding the bad.  Along with manipulations in the stock, gold and futures markets (among others) makes it hard for investors to make sound decisions.  Jim also discusses the Feds ultimate goal.  [ ">Read more ... ]

Jim Rickards and the Future of the Dollar

Starting to look like SDR's is the way the Fed may want to go in the future. Devaluating the dollar further will be the plan to get out of debt. This is something I just blogged on recently about the devaluation of the dollar.

European Markets and Euro Fall

European Markets are down this morning and the Euro continued to fall during the night, due to the Wall Street Journal's article questioning the European Banking stress tests (per the main media).  U.S. Futures are down currently.  Notice in the chart the the Euro started its free fall at 5pm EST Monday and has continued down to hit a low of 1.27355 from a high in the previous day of 1.29173.

Euro Falls Due to Renewed Bank Fears

Seems the European stress tests may not have been all they were cracked up to be.  Alternative media atttacked this issue right after the stress tests resulted in a rally.  Back in July of 2010 Calculated risk reported on the lack of stress in the stress tests.  Wall Street Journal reported today that the stress tests understated some lenders' holdings of potential risky government debt.  [ Read more ... ]

Volitility Outlook Increases

As investors come back from their summer holidays volatility should increase over the next few months due to troubling economic data.  The direction of the market comes down to  earnings season and the success of the government to convince the people that the economy is recovering when the data does not agree.  Due to uneasiness in the stock market and possible increased volatility investors seem to be fleeing from the stock markets into gold and forex, as seen by golds' rising price and record daily trading assets in the forex market.

U.S. National Debt as a Security Threat

The U.S. Debt has been a thorn in the economy's side and shows no sign of waning.  The white house is scheduled to release another housing aid program on Tuesday (throwing good money after bad).  With cuts already effecting our forces how will be continue to fund the wars and social programs going forward.

U.S. Students Drowning in Debt

The U.S. Dollar's Value (A Primer)

The other day I had a discussion with a person who seems to believe that the U.S. Dollar could never go to zero or near it.  After discussing things with him, I realized that a lot of people need a better education on how our money appreciates/depreciates and its role as the reserve currency.  I think it is appropriate to discuss what it means to be a reserve currency first.  A reserve currency is one that is used to purchase products from around the world like oil, gold and other commodities.  These commodities/goods are purchased in the reserve currency worldwide, therefore governments around the world have to hold the reserve currency to purchase their imports of oil and such.  The U.S. Dollar has the privilege of being such a currency, as it was the most stable currency in the world to date.  This means that if Japan wants to import oil, they need to first purchase U.S. dollars and then make their purchase of oil in dollars.  This establishes a strong demand for U.S. Dollars as everyone needs to have them to get what they need.  The reserve status also gives the U.S. the ability to purchase things cheaper than other countries as they don't have to pay the spread or transaction cost to convert the money.  For larger nations the transaction cost is cheaper, for others it is higher.  This also lets the U.S. borrow money at at a better rates as their will always be demand for the U.S. currency (due to its reserve status).

Now that we have established demand for U.S. currency, lets discuss how do other countries get it.  Most currencies are traded by banks on the foreign exchange market or Forex market.  Central banks purchase the countries reserves on the forex market where there is an established spread in the cost of the currency desired.  It is only in the past few decades that the Forex market was opened up to retail investors who can purchase on leverage along side the banks.  Currencies are sold in pairs.  An example of currency pairs are USD/JPY (U.S. Dollar/Japan Yen), EUR/USD (Euro/U.S. Dollar) or USD/CAD (U.S. Dollar/Canadian Loonie).  Here are some examples of currency pairs, the in order from left to right the pairs are EUR/USD, USD/JPY and AUD/USD.

The significance of the first currency in the pair  (take the EUR/USD) is that if you were to buy the pair, you'd be going long the Euro and short the dollar.  Inversely, if you sold the currency pair, you'd be going short the Euro and long the dollar.  You can see the spread in EUR/USD is 3 pips (price per point), you buy 3 pips higher than the sell price (that is the spread or the price you pay for the transaction).

Given the demand for the USD and the means by which to obtain it, you can see how demand for dollars keeps the USD relatively stable against other major currencies.  You can see how the reserve status gives the USD that stability as it forces demand for our currency.  Another main ingredient to our dollar is faith.  The USD was backed by gold up until the 1970's when President Nixon took us off the gold standard to make us a fiat currency (backed by the full faith in the U.S. government).  The reason we were taken off the gold standard was due to inflation in commodities and the spending on the Vietnam war, which was not counteracted by spending cuts in other areas and a worsening trade deficit caused a situation where the USD was worth less than the gold it was backed by (you can draw parallels to today).  Foreign holders of USD demanded redemption of their dollar for gold. President Nixon was concerned this would deplete the US supply of gold, so he took us off the standard over a period of a few years.

Courtesy of Wikipedia

From the picture above you can see how the USD devaluated considerable in milligrams of gold.  Since then we have driven up our nations debts funding wars, housing, economic recoveries and such.  Money supply has expanded (printing of dollars, whether it by by credit expansion or creating new money), interest rates are at all time lows, and productivity (GDP) is low (among other things).  Some think this is a phenomena that has recently occurred, but it has been occurring since the mid 70's late 80's, we've just put it into hyperdrive.  Here is a current chart of the USD valued against the Japenese Yen.

Either we are moving sideways with currencies or we are devaluating against them.  The Euro has its own problems as the European block has multiple crisis' that make it devaluate along with the USD.  Since the Euro reached its high in 2008, the USD has been appreciating against it (reflective of the crisis with European fiat currencies).

Recently countries have noticed where the US fiscal policy has been going and have asked for a new reserve currency.  China, Russia, India and some middle eastern countries (to name a few) have insisted on using a basket of currencies.  The IMF is proposing using SDR's to use as a reserve currency.  This did not get very far, but some countries have begun selling their exports to non-US interests in their currency or the Euro.  This is being done due to a lack of faith in our currency, as a stable currency.  China has begun diversifying their foreign reserve holdings into the Japanese Yen and the Euro.  These are disturbing trends for the USD, as these assets start to trade in other fiat currencies, the USD's demand will start to diminish causing it to devaluate further.  If these countries and/or the IMF succeed in changing the reserve currency, this could send the USD into a free fall.  Even though this is not the case today, the USD has depreciated considerably over time.  Using normal CPI numbers (kept artificially low) a $20 item purchased in 1950 would cost $180.92 today (a 804.6% increase).  A $20 dollar item purchased in 1970 would cost %112.38 (a 461.9% increase).  So you can see, that not only is it possible to go to zero or near zero, we have been devaluating in terms of purchasing power for quite some time.  Only recently are we seeing large swings in the currency prices.

Having said all that, the contrary argument is that it is not in the best interests of other countries currently to allow the USD to fail.  China holds upwards of a trillion in US debt holdings and about 1.6 trillion in U.S. reserves.  We need to watch them closely to see how the dollar will react as China has recently been diversifying their reserves and selling small amounts of U.S. reserves.  China also converted long term U.S. debt to short term debt as they did not want the exposure.  China movings in and out of assets slowly (like the way they are increasing gold holdings) as to not effect the price too much, so small sells of U.S. assets is what you have to watch for.  China recently warned against a monetary system denominated by the dollar and possible depreciation.  [ Read more ... ]