Tuesday, September 15, 2009

Summer in review

Even if the much touted recovery is real (which I do not believe) there is still a great deal of pain ahead for many people.

Over 500,000 U.S. workers still lost their jobs last month and while this number it may shrink over the next year or so what about all those fresh faced graduates who don’t get counted as unemployed having never been employed in the first place? What about all those people in the first wave of layoffs that are about to lose their unemployment benefits and will in some bizarre government accounting scheme no longer be counted as jobless?

These unemployed Americans (counted or uncounted) still have bills and mortgages to pay, Some of these will undoubtedly lose their homes; fail to pay their credit cards, property taxes and car payments. Banks, credit companies, car manufacturers, local and State governments will all share this pain as will debt free citizens who will have theirs savings and purchasing power devalued as more and more new money is created to keep the illusion alive for just a while longer. Commodities are rebounding with food and energy leading the pack; and you should remember that it is possible to have inflation in the money supply and rising prices in commodities while housing is destroyed simply because the obscene glut of properties which is still too big to be effected by the current level of money creation. Food and energy however are not in a major glut and will react much sooner to monetary inflation.

Here in Canada we’ve seen some signs of marginal growth in jobs (mostly part time, private sector) but with new bodies entering the work force this has not been enough to lower unemployment.

In Canada food costs are rising and even housing is stronger than I would have guessed despite all the deflationist arguments.

As for the reported recovery, if there is no employment growth who will spend enough to create this magical recovery? Canadian industrial capacity has dropped to 67.4%, this is not the sign of a recovery.

On the world stage this article from the weekend shows that a ghost fleet of 500 unutilized cargo ships is growing near Singapore as world trade dries up. Not only has shipping dropped off but orders for new ships are negligible and many existing new builds will be never be delivered as purchasers default on completion payments.

Long term some shippers and some ship builders will undoubtedly fail.

“Surely there is some sign of recovery?” you might ask.

Well the TV pundits certainly claim that renewed earnings and increased stock values show a recovery but how many of those earnings are from Government handouts or access to cheap money at the discount window? How much of those earnings are from cost cutting and efficiencies that cannot be repeated year after year? In my opinion unless things like total sales numbers and non service jobs improve there is no recovery. The false economy of having entire countries that do nothing but sell shit they didn't make with money they borrowed from overseas cannot and most certainly will not last much longer.

One major story of the summer was the continued destruction of U.S. regional banks now totally 92 for the year. My prediction for the year was only 78 and to pass that goal early in August makes it obvious that 120 by years end is now doable.

Perhaps the most important stories of the summer was the court ruling stating the Fed must disclose where the $1.5 Trillion they gave out went and list the assets pledged against it. The immediate appeal was no big surprise as transparency to the Fed is like sunlight to a vampire, a death sentence. Disclosure will prove the Fed and the Government used much of the $1.5 trillion to buy off foreign banks that were making waves about the crap CDO Wall Street was selling. Either way it will be seen that both domestic and foreign banks will have pledge nearly worthless assets to get this handout and that the tax payer is on the hook for the bill.

The next big story is the Audit the Fed legislation championed by Ron Paul who is perhaps the only honest man in Washington. Don't get me wrong I'm not an extreme libertarian but on many of these monetary issues Paul is the man!

This legislation is actually a rough situation for many politicians, if they come out against transparency the public with neuter them next election cycle. However, if the legislation passes the facts revealed will shake the nation. Thankfully most politicians are so stupid they don’t suspect what an audit will prove or how the public will react.

One recent "WTF" story were comments by China that they would allow state owned ventures to default and walk away from commodity based derivatives. Yes we all know that many of these derivatives are overly complex garbage bets masquerading as hedges but caveat emptor folks, I you’re too damn dumb to understand a contract you signed, too bad.

Whether these statements are truthful or just a warning shot it’s important to know that contracts and the rule of law in China are only as strong as the dictatorship wants them to be. Can the U.S., the worlds biggest debtor dare do anything against their biggest creditor should they default? Not bloody likely.

There is some good news from China for silver bugs as Official Chinese TV began flogging the ownership of silver bullion as a good investment that is cheaper and better valued than gold. With the size of China’s market investment demand is bound to expand and eat up a lot of physical demand, Yipee!

Overall the summer unfolded as it should with the U.S. dollar down, bullion up, banks failing and a growing recognition that the next wave of chaos caused by commercial properties, option ARMs and defaulting credit cards is about to break. The last part of the year should be colourful

What I did no my summer off,
(kinda like that grade 4 essay you did)

As peak oil and emergency preparations are also important issues to the Canadian silver bug, we spent our summer increasing our efforts at gardening, seed saving and canning, putting up tomato sauce, relish and jam so far with hopefully more to come.

While I've not been as successful as I'd have liked it is a start in the right direction in both lifestyle and expectation, as well we made progress regaining those skills lost to most of our generation. Should power or food distribution fail I suspect we could easily function for well over month on our food, both canned and commercially packaged. Once the root crops come in and I buy a winters worth of rice and wheat I think we could stretch it out to 3months. Storing adequate water however is a much bigger challenge, where the hell do you stash 1 gal/person/day?

Anyway my summer hiatus is over and I’ll be back again soon!


Anonymous said...


nitroglycol said...

Well, there's a couple of other honest folks in Washington... one of them is sponsoring the counterpart of Paul's bill in the Senate.

The Mad Scientist said...

From John Mauldin's letter,
And speaking of holes, let's look at a huge one that is looming at the FDIC. Institutional Risk Analytics (IRA) is maybe the premier bank-analyst service in the country. They charge over six figures for their flagship service. Good friend and Maine fishing buddy Chris Whalen runs the show and was kind enough to send me some of his new data, which they have not yet released to the public. You get it here first. (www.institutionalriskanalytics.com)

IRA takes the data from the FDIC and crunches it with their own set of risk parameters. While the FDIC has a little over 400 banks on its current "watch" list, IRA gives 2,256 banks an "F." They project that over 1,000 banks will either fold or be taken over during the current cycle. To date in 2009, a total of 92 banks have failed across the country, compared with 25 for all of 2008, according to the FDIC. 900 more to go. Ouch.

How much money are we talking about? The banks rated F have total insured assets of $4.46 trillion. So far in this cycle banks that have been taken over by the FDIC are showing losses of 25%!

Turning to a note from IRA: "An important point in the analysis is that estimated losses for failed bank resolutions by the FDIC are running around a quarter of failed bank assets, a level much higher than between 1980 and 1995, when failures cost an average 11 percent. Our firm's long-held view of the likely loss rate peak for the US banks in this credit cycle is 2x 1990 loss rates or, as noted by the IMF, around 4 percent of total loans. Since total loans and leases held by all FDIC-insured banks was some $7.7 trillion as of Q2 2009, the IMF estimate implies a cumulative loss of over $300 billion.

CSB said...

Honestly I think there are scores of banks ready to fold that are being held back because the FDIC cannot process them fast enough. Just last fall I heard they were going out to hire retires who had dealt with bank failures before because the current staff was too small and not experienced in dealing with failures.

1000 banks over the cycle is certainly possible but how long do they say the cycle is.
I thought 78 this year would be it but expected 3x that for next year. It looks like 120-30 for this year and if that tripled their prediciton could only take 3 years. It's doable. At some point the FDIC will not be able to do this on a weekly scale and a bank holiday will be called.

The Mad Scientist said...

Oh Yes a Banking holiday is coming . The only way they can avoid that is to have an accounting holiday, as even with these mystical accounting standards that are being implemented, just based on pure charge offs these banks will all go under.

Skye said...

You could always dig a well, or install a cistern in your basement. Out here a lot of old houses had a concrete walled room like a small swimming pool. Often the eaves-troughs would be redirected into this room where the water would be stored.
Rainwater is very nice for bathing, and washing clothes.
Did you get the grain mill yet?