Inflation vs. Deflation debate

[Mullenite]

Here's a report of economic importance, from Dec 09, that merits review, if you haven't seen it yet:

http://www.shadowstats.com/article/hyperinflation-2010

[Jason]

Here's a report of economic importance, from Dec 09, that merits review, if you haven't seen it yet:

http://www.shadowstats.com/article/hyperinflation-2010

John's rant on hyperinflation! It probably would be the case....if there were no conspiracies.....and the LDGs running the show weren't intent on transferring assets. And the fact that the Federal Reserve would need to literally drop money from helicopters to make that happen....which I haven't seen yet. Not saying its impossible....just haven't seen evidence of that yet. You know.....something like $100k tax refunds. Now we actually did have a boost in tax refunds but more along the lines of -

WASHINGTON, March 22 (Reuters) - The massive U.S. economic stimulus plan is increasing average tax refunds by about $260, or nearly 10 percent, the White House said on Monday.

http://www.reuters.com/article/idUSN221 ... arketsNews

Of course $260 doesn't go very far when you lost your job or got a 10% reduction in wages. Meanwhile tax collections are plummeting signaling massive decline in real wages. So the stimulus is just another facade....and at most a little injection here or there to control the rate of descent. Odds are....nearly all of the money went to the bottom of the pile to shore up the bottom while those in the middle fall faster!

What I see is downward spiral of job losses, wage reductions, collapsing demand, debt defaults, and asset values.....which equals deflation. I have also seen some signs of tightening....and rumors of more.....so those actions will only enhance the deflationary spiral!

The dollar is actually trending up....with the US becoming the lender of last resort (look into the $108 billion last summer to support the IMF - http://69.84.25.250/blogger/post/Somthi ... asury.aspx). UK, Europe, China, Japan, etc are all in bad shape.....this is along the lines of who's worst of the worst.

We definitely have our problems....but its a deflation problem right now.....and no one is tossing their currency in the garbage (except for the Geico commercial)....when that starts happening....I'll reconsider my stance on deflation!

Lady mentioned a week or two back that she purchased her house in nice area of Salt Lake for $1.4 million a couple years ago......and currently houses in the neighborhood are selling (listed...not much actual selling) between $400-$600k. House is usually the biggest purchase most people make in their lifetime.....and that worthless dollar certainly buys a lot more house these days.......and that trend is still going strong!

Even the military is laying people off....

(MILITARY TIMES) The Air Force is digging even deeper into the force than it said it would in November.

Air Force officials announced Wednesday the need for a second enlisted date of separation rollback, aimed at accelerating the separation of enlisted airmen based on their years of service and re-enlistment eligibility or assignment availability codes.

The announcement comes four months after the Air Force asked 2,074 officers and 1,633 enlisted airmen to separate voluntarily or to end their terms ahead of schedule. The affected airmen were in overstaffed career fields or already planning to leave the Air Force.

Enlisted airmen being encouraged to leave were those with fewer than 14 years of service and those with more than 20 years of service who were eligible for retirement as of April 30. For officers, the service was seeking volunteers.

Under the new rollback, airmen must separate no later than June 30 or retire no later than July 1 if they have a code that prevents them from re-enlisting.

Air Force leaders have been concerned that the weak civilian economy has resulted in fewer airmen leaving the service, forcing them to look at additional measures to stay within the service’s authorized end strength of 331,700.

As of Thursday, officials did not know how many airmen might be affected by this rollback.

http://militarytimes.com/news/2010/03/a ... n_031910w/

and....

David Rosenberg points out two important observations that go to the heart of what has been propping up the market for so long - cheap, abundant liquidity. As Rosie shows, both Money Of Zero Maturity (MZM) and M2 have now officially rolled over: "The liquidity backdrop is becoming less alluring — MZM has declined YoY for the first time in 15 years and the trend in M2 is down to a mere 1.5% from 10% when the bear market rally began in March 2009."

And while Rosenberg is cautious in saying that equities are "overvalued by more than 20% on a normalized Shiller P/E ratio basis" the real stunner emerges when one considers just how mispriced the market is based on a combination of Q ratio and the CAPE index. According to economist Andrew Smithers, equities are about 50% rich currently, which should be at least a little concerning to all the electronic mountain of worry climbers.

Here is Smithers' commentary on why the market, at least according to just these two metrics, is fairly valued at about 800 on the S&P. Once the algos realize someone will have to buy everything when everyone goes to sell mode (read: a gentle spike in volume), and that someone does not exist, this target will be promptly revisited.

With the publication of the Flow of Funds data up to the end of 2009 (on 11th March 2010) we have updated our calculations for q and CAPE, which show very little change from our previous calculations.

Non-financial companies, including both quoted and unquoted, were 52% overvalued according to q at the end of 2009. Net worth is virtually unchanged from Q3 to Q4. Domestic net worth fell through dividends ($83 bn.) plus net equity buy-backs ($95 bn.) being greater than net domestic profits after tax ($164 bn.), but this was offset by some small upward revisions to asset values. There was a small increase in the value of US foreign investment abroad ($27bn.), but this was less than the amount of foreign earnings retained abroad, probably due to currency adjustments.

The listed companies in the S&P 500 index, which include financials, were 50% overvalued according to our calculations for CAPE, based on the data from Professor Robert Shiller’s website. (It should be noted that we use geometric rather than arithmetic means in our calculations.)

Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 - 2002 by Stephen Wright published in the Review of Income and Wealth (2004) and for 1952 to 2009 from the Flow of Funds Accounts for the United States (“Z1”) published by the Federal Reserve. Data for our calculations of CAPE are take from the data published on Robert Shiller’s website.

Some additional observations on the bull market from Rosenberg:

* India just raised rates unexpectedly (ahead of its quarterly policy meeting) by 25bps to 5.0% on the repo rate to combat an inflation rate that has accelerated to a 16-month high.

* Greece is not yet out of the woods — going to the IMF will be a very bearish signal for the euro. Moreover, 61% of the German public opposes a Greece bailout, only 20% are supportive and another survey shows 40% of Germans would welcome an exit from the Eurozone, for more see page 4 of today’s FT.

* The U.S. is pressuring China to revalue even though China's trade surplus has all but vanished. Meanwhile, the Peoples Bank of China continues to tighten overall credit conditions, having mopped up $31 billion in liquidity from last week's open market operations (hence the nosedive in commodity prices to round out the week).

* At least one BoE policymaker has raised the specter of a double dip recession (10-year Gilts very quietly have rallied to their low point of the year — breaking below the 4% mark). All of this uncertainty is showing through in a firmer tone to the U.S. dollar, which therefore eliminates a very important crutch to the U.S. profits recovery.

It’s amazing that so many pundits are still talking as if we are still in the bear market rally because the S&P 500 has managed to fractionally take out the interim January high, when in fact, at 1,160, it has really done little more than range trade since the middle of October. That’s really five months of basically nothing.

And, the notion that there is really anything beyond a statistical bounce in the data over the past year in the aftermath of bank bailouts should be put to rest after you read the article about New York City on the front page of the Saturday NYT showing that the number of people living on the streets soared 34% in the past twelve months (New York Cites Spike in People Living In Street). The technical recession may well have ended but the depression is ongoing.

Also it is refreshing that Rosenberg shares our view on the consumer "resilience" as a function almost purely of extreme refunds.

WHY THE CONSUMER IS HANGING IN

First, as we mentioned last week, strategic mortgage defaults have added a full percent to consumer spending as delinquent homeowners divert their monthly payments towards discretionary expenditures. Remember, the villain banks have no recourse and it is no longer a shame but somehow fashionable to be behind on your mortgage obligations. Add to that the juicy tax refunds (courtesy of last year’s fiscal package) — up 10% or $206 per filer to a record average of $3,038 (recall that the Recovery Act provided a $400 tax credit for low-income earners).

Lastly, for our Canadian readers, Rosie discusses the Canadian bubble, referencing a paper posted on Zero Hedge by Alexandre Pestov.

Go have a read of the paper by Alexandre Pestov for the Schulich School of Business (The Elusive Canadian Housing Bubble — February 2010) and draw your own conclusions. The combination of extremely lax CMHC guidelines over the past three years coupled with ultra-low interest rates have triggered a housing mania in Canada that rivals what we saw state-side from 2003 to 2007. Now the Bank of Canada is on the precipice of raising rates, and if the consensus and money markets are correct, then the wave of borrowers that opted for short-term mortgages are going to be paying the proverbial piper in coming quarters.

http://www.zerohedge.com/article/all-im ... to+zero%29

Link to the paper -
http://www.zerohedge.com/sites/default/ ... Bubble.pdf

Just in case anyone needed confirmation that the DOL data is just a little, how should we say it, cooked, here comes Gallup with their March 15 undermployment number, which just hit a 2010, and series, high of 20%. This is obviously worse compared to both the beginning of the year (19.5%) and February (19.8%). Unlike the Dept of Labor's arcane voodoo which lately is based more on executive confidential memos and snowfall observations, Gallup's underemployment measure is based on more than 20,000 phone interviews collected over a 30-day period and reported daily. Furthermore "Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks." We wonder if the abnormally hot March weather will used as an excuse for a deterioraiton in the most recent NFP numbers.

http://www.zerohedge.com/article/undere ... to+zero%29

Analysis of major industries and price movements -
http://globaleconomicanalysis.blogspot. ... nalysis%29

And more....

For example, let's flashback to Aug 14 2009 when Jim Sinclair announced 85 days to go! for the dollar to crash in The Motivation Behind The Countdown.

China as spokesman for the BRICs has publicly stated their desire for the institutions of a Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

It is my understanding that the BRIC countries, not China alone, have given the US until early November to deliver.

As a result of the above I see 81 days left for the US dollar.

I commented on the above prediction a couple weeks later in Countdown To Dollar Implosion Madness

Predictably Wrong

Maybe something happens in November, maybe not, but this dollar implosion countdown based on unnamed sources regarding impossible to believe demands and a trade chart interpreted @#$ backwards is more than just a bit silly. Yet, every day someone asks me about it, thus this reply.

The thing about these kind of predictions is how predictably wrong they have all been.

Based on interpretations of the Commitment of Traders Reports (COT) we have see a couple countdowns to running out of gold and or silver on COMEX by various people. Those never happened. We have seen "gold to the moon" hyperinflation calls based on backwardation. Those never happened, either.

There is also a bunch of hype going around right now about bank holidays and a devaluation of the dollar vs. all major currencies coming up this Autumn. The across the board dollar devaluation idea is potty because the US dollar floats. There is nothing to devalue it to. And even if there was, Europe and Japan do not want stronger currencies and would not go along. For that matter the US would not want to do it either fearing a market crash. Yet, the theories persist.

If something does happen in November, it will not be because some blogger knows something. It will be happenstance.

But for those counting, it's about 70 days. I can hardly wait.

A quick check of my calendar shows that November 2009 has come and gone. So has December 2009, January 2010, and February 2010. March 2010 will soon be gone as well.

Sinclair posted the following chart with this comment:

"I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar."

Simple Math

The US runs a trade deficit with China. That means China will accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

China runs a surplus and buys US Treasuries. When the US deficit slows, China's buying of treasuries slows.

On March 11, in US 30-Year Treasury Bond Direct Bidders See Value, Step Up To The Plate And Buy I cautioned that falling demand from indirect bidders (foreign buyers such as China, Japan) was not a sign of weakness.

A Very Good Auction

In contrast to what many think about treasuries ready to blow up because of falling foreign demand, I repeat what I have been saying all along: US demand will pick up.

That aside, it is also important to point out that indirect bidding is related to trade deficits. When the trade deficit is high and rising, foreign buyers step up treasury buying as a purely mathematical function of parking inflows, although there is nothing that forces the buyers to go that far out on the yield curve.

Renewed Deflation

On the March 11 Auction, indirect bidders fell to 23.9% yet yields were lower than expected. This shows US demand is more than adequate.

Hmmm. What is it the bond market sees that the equity market doesn't? Why have yields been consistently contained on the upside?

I will tell you in two words "renewed deflation".

http://globaleconomicanalysis.blogspot. ... nalysis%29

Say goodbye to China's "export economy" paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers. From China's official daily newspaper: "The country will probably see a "record trade deficit" in March thanks to surging imports" and "will "fight back" if Washington labels China a currency manipulator." Perhaps this finally explains where all the excess liquidity has gone: with China now not exporting to the US consumer, it has instead refocused on its own "middle" class. This means that Chinese administrators are much more focused on maintaining a stable economy, and will be much more concerned about economic overheating, which goes in line with the recent indications of material liquidity tightening out of Beijing. Market News reports that the actual deficit will come in at $8 billion for March, the first deficit since April 2004, when the gap was $2.26 billion. Maybe Albert Edwards will just have the last laugh with his iconoclastic prediction of a CNY devaluation.

The scariest implication: China is quickly running out of dollars which it can then recycle into US Treasuries. This is surely the biggest nightmare scenario for Tim Geithner. While this explains the decline in indirect bidding, it also may go to refute the whole premise of China being behind the direct UK-based bidders is flawed. And if so, is it merely just the Federal Reserve doing all the buying in a covert fashion (via BlackRock or othewise) as some of the more conspiratorially-minded market followers have speculated?

Here is the most recent prophetic insight from Edwards, as of March 2, pertaining to this critical shift:

Clearly to the extent that the rise in China?'s official reserves depended on the size of its trade deficit, there will be reduced purchases of US Treasuries. But China has, in part, merely been swapping official dollar purchases of US Treasuries with surging imports of dollar-denominated commodities on the trade account (see chart below).

http://www.zerohedge.com/article/stunne ... icit-march

Another opinion stating it comes down to deflation or hyperinflation (obviously you can't have both) -

Ebullio Capital Management which basically blew up over the past week, due to some unpleasant experiences in the London tin market, has some relatively wise (as much as one who loses nearly 90% of their AUM in one month can be called wise) parting words in the great inflation-deflation debate.

Either we are going to get hyperinflation and all tangible assets will explode 100 pct or more to the upside, gold will be at $5000/oz and paper money is history. Or we are getting Japan in the ‘90s with no chance of inflation because consumers will save, not spend no matter what the politicians do and all markets will be down 50/80 pct from here.

Pay your money and make your choice.

Since our getting long against conviction play early January 2010, we have been doing some thinking and come to the conclusion that the Japan scenario has at least been tried and tested in the real, civilized world, whereas the hyperinflation (discounting Weimar Germany and various kleptocratic African quasi States) has not.

Thus we come firmly down on the Japan scenario and expect these markets to go much, much lower once the diversification-into-commodities-as-aninflation-hedge by the big pension funds and other institutions has been done and people realize that China cannot go it alone (just as Japan couldn’t), and whilst our main focus is on extracting the great value inherent in our physical activity for the foreseeable future, we will be placed to take advantage of the eventual collapse.

http://www.zerohedge.com/article/blown- ... ion-debate

[Jason]

The double dip in housing is getting worse by the month. After hitting a nearly 6.6 million in existing home sales in late 2009, the number has now plunged to 5.02 million, a decline of 0.9% sequentially, and a major drop from the artificially induced peak. Sales for single-family homes were down and were up for condos and co-ops, indicating a preference for smaller, cheaper units among a population concerned with record unemployment and expiring homebuyer taxes. The number came on top of expectations of 4.98 million, with the range being from 4.75 million to 5.2 million units. Sales in the Northeast and Midwast improved slightly, even as sales in the South and recently bubble West declined. Yet the biggest stunner was the months of supply on market which jumped by a 20 year high, from 7.8 months to 8.6 months.

The double dip in the data is unmistakable.

http://www.zerohedge.com/article/existi ... to+zero%29

[Jason]

Arizona: Recent budget cuts signed by Governor Jan Brewer could jeopardize as much as $6.96 billion in federal Medicaid money, because the federal legislation would require states to keep up their Medicaid spending, says the Arizona Republic.

http://www.stateline.org/live/details/s ... adlines%29

March 23 (Bloomberg) -- The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities.

The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data.

http://www.bloomberg.com/apps/news?pid= ... hz4Y&pos=2

$44 Billion 2 Year Auction Closes At 1.000%, 3.00 Bid To Cover, Indirects Drop, Directs Jump
* High Yield 1.000%, WI rate at 1:00 PM 0.993
* 56.32% allotted at high
* Bid To Cover 3.00 vs average 3.23 (3.33 previous)
* Indirect take down plunges to 34.78% from 53.56% in prior auction, last year average 44.55%
* Direct take down surges from 8.2% to 13.8%

http://www.zerohedge.com/article/44-bil ... rects-jump

The Air Force is digging even deeper into the force than it said it would in November.

Air Force officials announced Wednesday the need for a second enlisted date of separation rollback, aimed at accelerating the separation of enlisted airmen based on their years of service and re-enlistment eligibility or assignment availability codes.

The announcement comes four months after the Air Force asked 2,074 officers and 1,633 enlisted airmen to separate voluntarily or to end their terms ahead of schedule.

http://militarytimes.com/news/2010/03/a ... n_031910w/

As pivotal Washington weeks go, last week was one of the most dizzying: a full House vote on a wildly unpopular bill, backroom deals, a president pressuring disobedient members of his own party, a canceled trip to Asia. Twisted arms, votes won, and an intraparty brawl. The vote itself ended a week of developments that have challenged the country’s core.

But another sort of history was made this weekend as well. Few in Washington, D.C., have experienced the kind of electrifying atmosphere that lit up the nation’s capital in the final two days before House Democrats prevailed shortly before midnight on Sunday. Washington is typically lousy with professional lobbyists and special interest groups. Washington is not accustomed to the citizen activists who descended there on Saturday morning. The city is not used to seeing a visceral link between ordinary citizens and the minority of legislators fighting for them.

Thousands stood under Speaker Nancy Pelosi’s Capitol “hideaway” office, chanting: “Kill the Bill!” Later, in haunting tones: “Naaancy. Naaancy.”

It was a transformative moment inside the Capitol building: Buttoned-up congressmen, aides, and pages looked on in awe at the insurrection. They pumped their fists in the air and tens of thousands roared their approval below.

The week did not start out auspiciously for health care opponents. They held a small tea party rally on the Capitol grounds on Tuesday, March 16. The Capitol Police denied them the right to build a stage or a sound system. They used a bullhorn; someone found a park bench. About a thousand people showed up.

“Welcome freedom fighters!”

http://pajamasmedia.com/blog/libertys-a ... obamacare/

I've been telling readers and subscribers that the housing market has a considerable amount to fall before we reach income parity. With income currently falling along with rising underwriting standards, that point is actually being pushed even farther into the (event) horizon!

From the WSJ.com: Home Resales Drop

The latest data on the housing market underscored its fragility and showed that a glut of homes for sale and a wave of foreclosures and fire sales are holding down housing prices...

Sales of existing homes fell 0.6% in February from a month earlier to a seasonally adjusted annual rate of 5.02 million, the National Association of Realtors said...

The median price for an existing home was $165,100 in February, down 1.8% from February 2009, the Realtors said. Distressed homes, generally sold at discount, accounted for 35% of sales last month.

A separate report Tuesday from Federal Housing Finance Agency showed that house prices fell 0.6% in January and December's numbers were softer than previously reported. The FHFA index -- which tracks the prices of the same houses over time, but only those sold to or guaranteed by Fannie Mae, Freddie Mac or the Federal Home Loan Banks -- is 13.2% below its April 2007 peak.

Inventories of existing homes increased 9.5% at the end of the month to 3.59 million available for sale, the Realtors said. That represented a 8.6-month supply at the current sales pace, compared with a 7.8-month supply in January.

Of course this isn't news at all to the Green Shoots disbelieving BoomBustBlog subscriber. Excerpts from previous posts over the last quarter that ran in direct contravention of both mainstream media and sell side analyst reports are below:

http://boombustblog.com/201003221353/Bo ... Sharp.html

For the first time in nearly three years since I’ve been tracking MLS data for Southern California, the public inventory number has increased. The low was reached in October of 2009 and this was when across the six Southern California counties 64,000 properties showed up on the MLS. Today that number is now over 70,000 (an increase of 9.3% in 6 months). I’ll include a graph later in this article showing the trend. The L.A. Times ran a couple of articles discussing option ARMs and additional defaults coming down the pipeline. Now whether this happens in mass or slowly will be something we will find out soon enough. With high unemployment and a fragile market, housing prices will remain stagnant in lower priced areas for years to come but in more select neighborhoods, we will see prices adjust.

Let us now look at 5 major trends hitting the market today.

http://www.doctorhousingbubble.com/five ... e+SoCal%29

[Jason]

WASHINGTON (Reuters) - Sales of newly built U.S. homes fell for a fourth straight month to a record low in February

"The housing market is really struggling to find its footing despite huge government support efforts. The near-term outlook for the housing market remains quite poor," said Zach Pandl, U.S. economist at Nomura Securities International in New York.

The data came on the heels of report on Tuesday showing existing home sales fell for a third straight month in February while the supply of houses on the market jumped.

A report by the Mortgage Bankers Association on Wednesday showed U.S. mortgage applications fell for a second straight week, with demand for home loan refinancing sinking to its lowest level in a month as interest rates jumped.

The Federal Reserve will end purchases of mortgage-related securities next week, which had lowered the cost of home loans to record lows.

http://finance.yahoo.com/news/New-homes ... et=&ccode=

LOS ANGELES — California's budget crisis and overcrowded prisons have led to a new reality for thousands of convicted felons: Parole is getting a lot easier — no more random drug tests, travel rules or requirements to check in with an officer.

Restrictions have been relaxed for nonviolent criminals like burglars, drug offenders and swindlers under a new law that aims to shrink the prison population by reducing the number of minor parole violations that send ex-cons back to prison.

"It's a pretty significant concern from the public safety standpoint," said Cmdr. Todd Rogers of the Los Angeles County Sheriff's Department. "There's a really good chance these guys are going to go out and caper again."

The rules, which took effect Jan. 25, come as the state desperately tries to close a $20 billion budget gap. Nearly 11 percent of the state budget goes to prisons. Officials estimate the measures will save the state about $500 million its first full year.

http://www.google.com/hostednews/ap/art ... AD9EL1OFG0

States faced with unprecedented declines in tax collections are cutting benefits and payments to hospitals and doctors in Medicaid, the health program for the poor paid jointly by state and U.S. governments. The costs to hire staff and plan for the average 25 percent increase in Medicaid rolls may swamp budgets, said Toby Douglas, who manages the Medicaid program for California, which hasn’t joined the lawsuits.

“The states are coming through the worst fiscal period in the history of record keeping,” said Vernon Smith, a former Medicaid director for Michigan and now a principal at the research and consulting firm Health Management Associates in Lansing, Michigan. “Medicaid is the most significant, most visible and most costly part of this expansion and states fully expect to see increases in their spending.”

http://www.bloomberg.com/apps/news?pid= ... wSWE6H1kHM

France is facing its own 'spring of discontent' as strikes shut schools, courts, railways and metro services, and trade unions vowed mass protests across the country.

http://www.telegraph.co.uk/finance/news ... mount.html

[Jason]

Remember yesterday's 2 Year which closed at 1.000% and everyone was so happy? Oops. One short day later and the bond has hit 1.11%, leading to "massive" (not our word) losses for all those who bought on expectations that the 2 year part of the curve would be subsumed by the Fed's "near term" part of the window. Not happening. The weakness from today's 5 year as well as various other factors have contributed to one of the biggest broad curve sell offs so far in 2010. With about a trillion in issuance still to come in the near future, things are only going to get uglier.

Look for much more weakness in the upcoming auctions, as the Fed's window of curve fudging slowly disappears (more on this in the next post).

http://www.zerohedge.com/article/invest ... to+zero%29

...and the follow up post...

A recent detailed analysis of the composition of US Federal debt has made us question just how much dry powder the Fed has left to manipulate interest rates. We ignore all tangential issues such as what the end of QE will mean on MBS, and by implication 10 Year, rates, and focus purely on the structural composition of the curve, which leads us to some very troubling observations. In summary: the Treasury is running out of time in which to orchestrate a massive rush away from risky assets into the sweet spot for UST interest rates: risk-free Bill holdings. In other words, a stock market crash is long-overdue if the Treasury does not want to face a major spike in rates and drop in Treasury demand in the immediate future.

First, and this is no surprise to anyone, the US is on collision course with an unmitigated funding disaster. As the chart below demonstrates, the US has been issuing roughly $147 billion a month for the past 17 months, in a period in which total US Federal debt has increased from $10 trillion to $12.6 trillion. With recently passed healthcare reform, look for the red line indicating total debt to go increasingly exponential.

Like we said, nothing surprising here as we spend ourselves into bankruptcy. The only reason why this has not escalated yet has been the Fed's ability to keep rates low on the short end, translating into modest low long-end rates as well, despite the curve being at record wides. The progression over time of average interest rates by Bills, Notes and Bonds, as presented by Treasury Direct, is shown below. This should also not come as much of a surprise, as it has been well known that the Fed's only prerogative in the past two years has been to buy every yielding security in sight to keep rates low.

Now where it gets quite interesting is an analysis of the composition of the total components of the debt, on a relative basis. The chart below demonstrates the amount of various pieces of debt by tenor as well as the inclusion of non-marketable debt and trust funds held by the Treasury.

We wrote recently that while China may or may not be bailing on US debt, one thing that is certain is that it is not rolling, and in fact may well be selling, its Bill exposure, i.e., short-term Treasuries that mature within a year.

Indeed, the recent scramble away from Bills is confirmed by the prior two charts which indicate that the portion of Bills as percentage of total marketable debt has fallen from 30.1% in February 2009 to just 21.8% in February 2010. The reason for this is that the Fed had been previously posturing that it is attempting to push the average debt maturity from 4 to 6 years and over. In order to do this the Fed needs to issue less net Bills. And therein lies the rub.

As rates have fallen, the average interest on Bills has dropped from 1.4% in October to essentially zero over the past several months (0.2% to be precise). In effect, the Treasury gets the benefit of holding $1.7 trillion in debt which pays no interest. Yet as its rolls out of Bills, its ability to take the implicit benefit of the Fed's ZIRP disappears. As the Fed's monetary policy impacts most of the the interest rate on Bills, with Bonds and Notes much more a function of medium- and long-term inflation/deflation expectations (and with the yield curve at record levels, the expectations see some less than smooth sailing down the line), as the Treasury rolls down its Bill holdings, as it has been doing, the Fed's ability to influence rates is getting progressively less and less. Couple this with an ever increasing record amount of total US debt, and you have a recipe for disaster, or as we call it, the curve Black Swan.

In fact this can be seen in the chart below: a comparison of average blended interest rates, and overall (accrued) implied monthly interest, demonstrates that even as the blended interest rate has dropped to an all time low of 2.57%, the actual annualized cash out on marketable debt (excluding the Trust Fund shell game), has returned to levels last seen in December 2008, of about $204 billion per month. The last time the annualized interest was this high, the actual interest rate was 3.2%, or 60 bps higher! Furthermore, even as rates have been declining, actual interest expense has been increasing consistently since May of 200 (and all this even as the actual blended interest rate is at an inflection point: it will likely trough in the mid 2.5% range as the low hanging Bill fruit has been plucked away).

The reason for this: 1) rates on Bills can only go 0.2% lower before hitting zero, and 2) nobody wants Bills anymore. China certainly has been selling Bills, and US citizens, balking at money market rates, are definitely not going to lock their money into Bills which yield the same if not less. The Treasury's natural response - bringing back the SFP 56-Day Cash Management Bills back. Today, the Treasury auctioned off the 5th $25 billion SFP chunk, on its way to filling up the $200 billion CMB tank full. Yet this is merely a stop-gap measure, and it is responsible for the slight bump higher in February Bill holdings compared to January. Alas, the Treasury will need to generate wholesale interest for Bills in some way in the near future, or else it will drown itself in the vicious cycle combination of increasing interest payments pushing rates higher, etc. And what creates a scramble for Bills better than anything?

Why a massive market crash of course.

Are we predicting one will happen? Of course not; in this market what is expected to happen is that last thing that will happen. We merely point out the logic and what the empirical evidence is demonstrating. Either the Treasury will need to expand the SFP program to far beyond the $200 billion cap, or it will need to get rates on Notes and Bills even lower at a time when the broader market is already expecting a rise in Rates. And in the meantime, it will continue issuing roughly $150-200 billion in debt each and every month to fund in increasingly bankrupt government.

What we can predict with certainty, is that the Treasury is on an inevitable collision course with insolvency, courtesy of a government run amok. And absent a major shift in capital out of risky assets into risk-free equivalents, it is going to get increasingly more difficult to control the runaway beast of rabid and uncontrollable deficit spending.

http://www.zerohedge.com/article/fed-ru ... sets-bills

One sure way to interpret the articles above.....the risk is going higher! Usually when the risk goes higher....interest rates go higher!

I'm leaning towards a massive stock market crash....but I imagine there is a huge emphasis on timing....in terms of taking full advantage of the crisis. We have the increasingly blunt war talk on Iran, on the verge of massive market collapse, unemployment steamroller that is picking up speed again after slowing down for a couple months, housing market that continues to spiral down, commercial real estate decline that is picking up speed, and a major political year. Its gonna stay interesting....I can promise you that!

The spread between the 10 Year and the Bund has surged today to a 3 year wide. After hitting an intraday slide of 14 bps (a massive move in a world in which each basis point is leveraged thousands of times), the UST-BUND is now at 73 bps. The risk aversion trade in Europe has made 10 year Geman bonds yield just over 3%, even as the near-failed 5 Year auction in the US has spooked the bond market, and an unexpected drill has forced the Primary Dealers out of hiding and into purchasing everything past 5 years to prevent a full out rout in bonds. And all this is occurring as the ECB just warned that IMF involvement in the overhyped and two-month delayed Greek bailout will be the beginning of the end for the euro and will throw the Eurozone's economy, "which has shown fresh signs of recovery, into renewed turmoil."

http://www.zerohedge.com/article/ust-bu ... to+zero%29

Well, its official (sort of). Greece, a member of the European Union, will probably join the ranks of countries like Latvia (where policies are limited by the choice of the currency regime), Iceland (where the crisis has resulted in a very heavy external debt burden), the Ukraine (which is still affected by financial and political fragility) and a bevy of third world and emerging market countries in distress from the (not very) esteemed club of IMF financial aid recipients. What does this portend for the Euro? Well, I have blogged earlier in the year that the Euro's credibility is now highly suspect and those pundits who dared contemplate the Euro potentially replacing the dollar as the global reserve currency now see the folly of their ways. The chances of a break-up are significantly higher and quite realistic. Credit Agricole's currency strategist puts it succinctly:

“If Greece goes with the IMF, that says something terrible about the political process within Europe,” said Stuart Bennett, a senior foreign-exchange strategist at Credit Agricole Corporate and Investment Bank in London. “This undermines any confidence in the currency."

Greece will probably end up defaulting on their debt, with or without the aid of the IMF, and they will probably have good company with several other EU members. I say so, and so does UBS Economist Donovan.

“I think it’s in an impossible situation,” said Donovan, who is based in London, in an interview with Bloomberg Radio today. “Europe has failed to clear its first serious hurdle. If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work. It’s a bad idea.”

How dare I make such a proclamation? Well, because I am telling the truth based upon facts and the many forecasts from the various sovereign nations are basically based upon lies, fiction and farce!

http://www.zerohedge.com/article/lies-d ... to+zero%29

[Jason]

We are being asked to believe....that by some miracle....the massive distortion, whereby MBS securities yield about the same as Treasuries.....will continue after the Fed’s $1.25 trillion program (plus $250 million in agencies) ends this month.

”Analysts” are drinking the Kool-Aid when they suggest that mortgage rates will only back up a 1/4 percent. For every 1% increase in interest rates you'll knock at least another 10% off the value of homes.....without any influence by other market fundamentals. Meaning a 2% increase in interest rates (which isn't that unlikely) will bury another 30-40% of homeowners with a mortgage that aren't underwater (currently about 25% of homes with a mortgage).
- source Russ Winter with my additions

New York Gov. David Paterson has submitted emergency plans to fund essential state operations for the first two weeks of its next fiscal year, which begins April 1.

The bills are the latest sign that Paterson, among others, believes a budget agreement can’t be enacted by the state’s March 31 deadline. The state faces a $9.2 billion deficit.

Paterson described his legislation as a “bare bones” allotment of money to keep government functioning on a temporary basis, if the state enters April without a budget in place.

The bills, which must be passed by the Legislature, cover liabilities required to be paid by contracts or state law, and they fund state payroll through April 14.

“It will be preparing the people of this state for some very, very tough sledding,” Paterson said.

http://www.bizjournals.com/albany/stori ... ily30.html

Basically, the stars are starting to align for something really big to happen.

First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.

Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).

Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).

Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?

Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs.

Sixth, despite signs of economic cooling in Q1 (around 2.5% growth and half the Q4 pace) and lower inflation expectations, the 10-year Treasury note yield is ratcheting up (in a destabilizing fashion) and devoid of any bearish economic data (for a range of technical/fund flow reasons as was the case in the summer of 2007 — we never said at the Grant’s conference in New York that it was going to be a straight line down).

Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs. Bond yields are rising temporarily and this will very likely prove to be a good buying opportunity; however, over the near-term, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates. Recall that the 10-year yield had a March to June 2007 spike of 90bps before the rate and credit collapse took hold in the back half of 2007! Could it be that history is rhyming again? The March-June period has been seasonally weak for the Treasury market in five of the past six years.

Add to all that is the further extra intrigue of the S&P 500 having just ‘celebrated’ the 10th anniversary of the first bubble peak reached in 2000. As painful as it is for the bulls to see, the equity market is still down 23.5 % from those March 2000 highs, not to mention still in the red by 25.4% from the record high posted in October 2007. The Nasdaq is still a Japanese-like 53% shy of its 2000 all-time high.

And lastly, there is no V-recovery anywhere, except in the Fed-prodded stock market.

Look at the consumption/housing subindex (see Chart 3) and tell us what sort of V-shaped recovery we have going on. The equity market needs a reality check in a major way — this is 75% of GDP we are talking about that is still flirting with record lows. No traction at all.

http://www.zerohedge.com/sites/default/ ... 032510.pdf

quote from Kindleberger’s “The World in Depression”.

For a considerable time there was no understanding of what had happened. Then it became clear. The spurt in activity from October 1936 had been dominated by inventory accumulation. This was especially the case in automobiles, where because of fear of strikes, supplies of new cars had been built up. It was the same in steel and textiles - two other industries with strong CIO unions. When it became evident after the spring of 1937 that commodity prices were not going to continue upward, the basis for the inventory accumulation was undermined, and first in textiles, then in steel, the reverse process took place. Long-term investment had not been built to great heights and did not fall far. The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on illusion. The reason that the citation strikes a nerve is found in the 4th Quarter GDP. As you may recall, it spiked a stunning 5.9%.

Optimists saw enough “green shoots” to make a salad for everyone in China. It was soon realized, however, that almost all the growth came from inventory replacement – just the kind of growth that Kindleberger was talking about. Let’s hope – “This time it’s different”.

let’s start with an assessment by the very savvy Peter Boockvar of
Miller Tabak which was cited in Barry Ritholtz’s Big Picture Blog:

With the backdrop of a 5 yr note yield at the highest level since mid Jan, the 5 yr auction was not good and the higher yield was still not tempting enough. The yield at 2.605% was well above the when issued level of about 2.56-2.57%. The bid to cover of 2.55 is above the one year average of 2.46 but is the lowest since Sept ‘09. Indirect bidders totaled 39.7% which is the smallest since July ‘09 and direct bidders came in at 10.8%. I don’t know if it was the healthcare bill and the budget/debt concerns associated with it, or the Fitch downgrade of Portugal, or a reaction to the slow recent creep up in LIBOR rates or a delayed reaction to the optimistic message the stock market has sent on the economy or a reaction to the improving economy, however modest but something has changed in the US Treasury market and the benchmark 10 yr rate is just within 1-2 bps of breaking out.

While the auction certainly could have used a flea collar and a chew toy, bonds were markedly weaker before the auction results hit. There have been signs that the climate may be changing in the Treasury markets for days.

The ten year “swap spread” turned negative for the first time since swap trading began. Some of it is a function of people hedging purchases of riskier but better yielding corporate bonds. Part of it may be due to Libor inching up as hedges work on razor thin margins. Whatever the reason or reasons, it is a troublesome sign.

I have written of a possible bond credit bubble building as money flees from no return money market funds to reach for better yields. I am reminded of a marvelous quote from Ray DeVoe in his letter of March 9-10. The quote comes at the end of a paragraph on reaching for yield.

Pension and Investment Magazine regularly reports the increasing number of college endowment funds that are allocating more of their funds to “high yield investments,” which to me means “expletive deleted” bonds. The “shudder” reaction followed reading the lead column front page article in the New York Times of March 9, 2010 titled “Public Pensions Are Adding Risk to Raise Returns.” Another similar reaction came with the subtitles “Companies Shed Stocks as States Try to Make Up Lost Ground” and “More Than Half of Corporate Funds Are Reducing Their Stock Investments.” It was like a time travelling trip – to be back in 1999 again, only this time with bonds. Always repeated when institutions are adding risk is DeVoe’s Unprovable But Highly Probable Rule #3, that “More money has been lost reaching for yield than at the point of a gun.”

http://www.zerohedge.com/article/mornin ... t-cashin-4
Bold and Underline mine

[Jason]

Vermont officials have reached agreement on a teacher pension plan that could become a model for financially-strapped states seeking ways to reduce the rising cost of employee retirement benefits.

The accord between the Legislature, the state treasurer and Vermont’s largest public employee union will result in most teachers working additional years and making higher contributions to the pension fund but receiving a larger pension check on retirement. The state will initially save $15 million a year, or about 10 percent of Vermont’s current budget shortfall.

http://www.stateline.org/live/details/s ... adlines%29

Sounds like a Ponzi scam to me....big promises for the future while they take more money from you now to pay out the oldest investors!

Future government employees throughout Illinois would have to work longer to get full retirement benefits, and the size of those pensions would be limited under a measure that zoomed through the General Assembly on Wednesday after years of calls for reform.

The idea is to save billions of dollars in the coming decades for taxpayers who will have to dig deep to cover retirement costs for teachers, lawmakers and many public servants throughout state government, universities, cities, counties and park districts.

But the pension cutbacks won't apply to anyone currently in the retirement systems, only to new government hires and state officials elected after the measure takes effect.

And the measure won't do much to whittle down Illinois' worst-in-the-nation pension debt, which is estimated to be $77 billion to $90 billion.

http://www.chicagotribune.com/news/loca ... adlines%29

More of the same...

Treasuries slid on a disappointing auction of seven-year debt.

Two-year Treasury yields rose 2 basis points to 1.11 percent. Ten-year yields rose 6 basis points to 3.92 percent.

The record-tying $32 billion sale of seven-year notes today attracted a yield of 3.374 percent, compared with the average forecast of 3.372 percent in a Bloomberg News survey of 8 of the Federal Reserve’s 18 primary dealers. The current seven-year note yield rose 5 basis points, or 0.05 percentage point, to 3.34 percent.

The dollar strengthened against 10 of 16 major counterparts and the Dollar Index, which gauges the U.S. currency against six major trading partners, increased 0.3 percent to 82.065, the highest since May 20.

http://www.bloomberg.com/apps/news?pid= ... I6WE&pos=1

Explanation....

As we pointed out a few days ago when we noted that China is about to disclose a March trade deficit, Soc Gen's Albert Edwards was right on the dot, and has been since November. Sure enough, today he (rightfully so) revels in his vindication:

Many clients have congratulated us for flagging up this outturn back in November last year ?- see Global Strategy Weekly 23 November -? link. We said back in November that ?China will be heading into a trade DEFICIT (!) throughout 2010. This is a mega-call and will have major financial market implications?. Unfortunately I have not pushed this call hard enough. Why not? Well, because as the implications are so very non-consensus, I knew noone would take it seriously. With the pre-announcement of March?s deficit, investors are now more willing to listen.

To be sure, only economists who still reference 1984 textbooks and write uninspired columns could not see this coming. Shockingly, this was indeed the dominant view. And inevitably it will take a long time before the ramifications of what a Chinese deficit means, finally sink in.

Edwards attempts to make llife for those whose world is about to be turned upside down, a little easier.

In part, the timing of such an announcement is political, ahead of moves in the US to label China a ?currency manipulator?. Chen said, "China's trade surplus with the US has been turned into a key excuse by American economists to pressurize the Chinese government to revalue the yuan," but, ironically, the calls have been growing stronger even as the "surplus keeps falling". Although the timing of the announcement may be political, the trend towards a sustained trade deficit is very real. It comes on the back of an aggressive stimulus package focused on infrastructure spending which has sucked in massive imports of commodities. The import of these dollar-denominated assets has additionally meant the need for official purchases of dollar-dominated Treasuries has lessened.

http://www.zerohedge.com/article/albert ... to+zero%29

For once, some actually good insight from a CNBC guest. Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. "Trichet said the Greeks are crooks, and they've been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that sameone takes the spotlight soon, and that may be the United States."

http://www.zerohedge.com/article/ecu-gr ... ollapse-us

This graph shows the cumulative MBS purchases by week. From the Atlanta Fed:

# The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 17. This purchase brings its total purchases up to $1.24 trillion, and by the end of the first quarter of 2010 the Fed will have purchased $1.25 trillion (thus, it is 99% complete).

The NY Fed purchased an additional net $8 billion in MBS for the week ending March 24th. This puts the total purchases at $1.248 trillion or 99.84% complete. Just $2 billion and one more week to go ...

Note: The Fed's balance sheet shows significant less MBS. As mentioned before, the difference is the NY Fed announces the purchases when they contract to buy; the Federal Reserve places the MBS on the balance sheet when the contract settles. The Fed's balance sheet will probably expand by close to $200 billion over the next two months as the remaining contract settle.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

It's a game of high-stakes chicken -- with thousands of New York City jobs on the line.

Mayor Michael Bloomberg released a doomsday scenario Tuesday, saying if Albany goes through with cuts to city aid he will be forced to make massive layoffs -- possibly the worst in decades.

It's a grim equation for a grim time. Bloomberg said that Albany's threatened cut of $1.3 billion in state aid equals the elimination of 19,000 jobs.

http://wcbstv.com/local/nyc.budget.cuts.2.1583545.html

Florida's new attempt to not be outdone by the others....

There is a bill (HB… 1319/SB 1902) moving in Tallahassee that will significantly change the Florida Retirement System if passed. Some highlights of HB 1319/SB 1902 include:

Retirement compensation will be computed based on the average salary over ALL years of service. The average of the “highest five years” rule will be repealed. There is no grandparenting clause, so this will apply to existing employees participating in the FRS system who continue to work after July 1, 2010.

All new hires as of July 1, 2011, and all with DROP participation dates beginning on or after July 1, 2011, would pay a 1% contribution of gross income into the FRS system.

Reduction in annual multiplier from 1.6% to 1.44% for regular class; reduced from 2% to 1.8% for senior management class; and reduced from 3% to 2.7% for special risk class (cops, firefighters, etc). There is no grandparenting clause, so this would apply going forward to existing employees participating in the FRS system who continue to work in qualified positions beyond the effective dates.

Normal retirement service years and DROP ages increased to 33 years/age 65 (currently: 30 years/age 62), and by +3 years for all special risk categories.

http://tangerinefl.wordpress.com/2010/0 ... employees/

[Jason]

The real risk to the economy is inflation, which has been encouraged by the Federal Reserve's monetary policies, according to UCLA Anderson Forecast senior economist David Shulman.

But the Fed understands this risk and will tighten monetary policy, keeping inflation under control, he wrote.

http://news.xinhuanet.com/english2010/w ... 223580.htm

What a joke! How's this for inflation...

ALBANY — The prospects of approving a state budget on time faded rapidly on Wednesday, as Gov. David A. Paterson said that his differences with the Legislature over spending were too great to bridge by the March 31 deadline. State officials, meanwhile, began preparing an emergency measure to keep the government functioning after the deadline.

Although Democrats in the State Senate earlier this week embraced Mr. Paterson’s proposal to cut more than $1 billion in education aid to help bring the state’s finances in order, Democrats in the Assembly, who unveiled their own budget proposal on Wednesday, said they would seek to restore roughly $600 million of that amount.

The Assembly proposal would also restore hundreds of millions of dollars in state money for homeless shelters, aid to New York City, bus and subway passes for city schoolchildren and other spending that Mr. Paterson has sought to cut. The Assembly plan also rejects, as the Senate’s does, the governor’s proposal for a new tax on sugared beverages that was expected to bring in $465 million.

To replace the cuts, Assembly Democrats are proposing to borrow $2 billion, a move that Senate Democrats have balked at.

http://www.nytimes.com/2010/03/25/nyreg ... udget.html
Bold and Underline mine

All I see is continued high unemployment, tax increases, lending contractions, falling incomes, defaults, and soon to be rising unemployment as state and local governments slash spending.

LOS ANGELES -- Shomari Jennings was willing to pay the $70 ticket he received for driving without a seatbelt, but not the slew of tacked-on fees and penalties that ballooned the cost more than tenfold.

Every $10 of his base fine triggered a $26 "penalty assessment" for courthouse construction, a DNA identification program, emergency medical services and other programs. Other fees ranged from $1 to $35.

"It's the new tax," Jennings, 30, complained while waiting in traffic court to contest a staggering bill compounded by a $500 fine for missing a court date.

And motorists can only expect more of the same as cash-strapped cities and states consider measures ranging from expansion of red-light camera systems to charging drivers for cleanup after accidents.

http://www.washingtonpost.com/wp-dyn/co ... 01729.html

Twenty-seven states recorded over-the-month unemployment rate increases, 7 states and the District of Columbia registered rate decreases, and 16 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in 46 states and the District of Columbia and declined in 4 states.
...
Michigan again recorded the highest unemployment rate among the states, 14.1 percent in February. The states with the next highest rates were Nevada, 13.2 percent; Rhode Island, 12.7 percent; California and South Carolina, 12.5 percent each; and Florida, 12.2 percent. North Dakota continued to register the lowest jobless rate, 4.1 percent in February, followed by Nebraska and South Dakota, 4.8 percent each. The rates in Florida and Nevada set new series highs, as did the rates in two other states: Georgia (10.5 percent) and North Carolina (11.2 percent).

Three other states tied series record highs: California, Rhode Island and South Carolina.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

http://www.nytimes.com/2010/03/25/busin ... q1AAL46rOg

Here’s a chart showing percentage changes in lending YoY:

http://dailycapitalist.com/2010/03/25/n ... italist%29

Personal income in 42 states fell in 2009, the Commerce Department said Thursday. Nevada's 4.8% plunge was the steepest, as construction and tourism industries took a beating. Also hit hard: Wyoming, where incomes fell 3.9%. Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation.

http://online.wsj.com/article/SB1000142 ... TopStories

Six years early...imagine that!

March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.

None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

http://www.bloomberg.com/apps/news?pid= ... l9vTKXKYyk

More fraud and corruption....

March 26 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”

http://www.bloomberg.com/apps/news?pid= ... 2DT4&pos=1

Rising interest rates coming our way....

For the MBS countdown I've been using the Atlanta Fed numbers and there was some rounding involved. Instead of $2 billion more to go, the Fed will buy $6.075 billion in MBS over the final week.

The program ends in a few days, and Adam Quinones at Mortgage News Daily was kind of enough to send me his spreadsheet (thanks!).

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.

http://online.wsj.com/article/SB2000142 ... 86742.html

For some more perspective, here's a month's worth of 10-year not yields. The move is hard to miss.

http://www.businessinsider.com/everyone ... z0jJQ7bH1O

Chart at link above...

Treasury Auction Result for the Week of March 15, 2010

http://treasuryauctionwatch.blogspot.co ... of_23.html

This site (freebuck.com) came up in a Google search this morning, and it was just full of good cheer. Enjoy! In the future (if the guy is reading this), please link back to the blog).

2010 will also be challenging for G7 Sovereigns as they TRY to rollover inconceivable sums of existing debt while borrowing NEW money to pay for the WELFARE states’ spending. Trillions of dollars of borrowing challenges lie directly ahead; let’s look at some illustrations of the rollover requirements for Germany, France, Portugal, Ireland, Italy, Spain and Greece fromwww.newyorktimes.com and Reggie Middleton’s Boom Bust blog

These are just the rollover requirements for the United States and do not include NEW BORROWING of $1.6 TRILLION. So, a total of OVER $3.5 Trillion is required, providing that the deficits are as projected by the CBO (are they ever accurate?). That’s almost $300 Billion a month, or $10 Billion a day (10,000 million a day). Mind numbing numbers! Inconceivable sums. Now let’s look at European rollovers from Reggie Middleton:

http://boombustblog.com/201003251356/Th ... Thing.html
http://www.freebuck.com/articles/tandro ... andros.htm

See the links above for charts and pictures...

While some are proclaiming the Great Recession over, nearly half a million Americans filed new claims for unemployment benefits last week, and the unemployment safety net is still at the breaking point.

http://www.propublica.org/article/busin ... ce-system-

Following up on Paul McCulley somewhat disingenous piece we discussed earlier, the Fashion Island bond guys are out with another report, this time by Managing Director Mark Kiesel, who basically is saying it is time to "Sell, Mortimer."

From PIMCO:

Strong growth in emerging markets (EM), the inventory cycle and accommodative fiscal and monetary policy continue to support the global economy. However, the handoff from the public sector to the private sector in most developed countries is likely to be weak due to a lack of animal spirits exhibited by businesses as well as consumers, high and growing sovereign debt burdens and ongoing deleveraging in the private sector (Chart 1). The U.S. economy’s recent growth has been underpinned significantly by government policy, yet this short-term cyclical support will likely fade in the second half of 2010. As a result, investors should take advantage of the tighter credit spreads and focus on de-risking their portfolios in order to prepare for the increasing long-term secular headwinds stemming from the growing deterioration in public sector balance sheets in many developed economies.

Simply put, private sector demand remains weak and public sector support is set to fade.

http://www.zerohedge.com/article/pimco- ... s-and-sell

16,500 more IRS agents needed to enforce Obamacare

New tax mandates and penalties included in Obamacare will cause the greatest expansion of the Internal Revenue Service since World War II, according to a release from Rep. Kevin Brady, R-Texas.

A new analysis by the Joint Economic Committee and the House Ways & Means Committee minority staff estimates up to 16,500 new IRS personnel will be needed to collect, examine and audit new tax information mandated on families and small businesses in the ‘reconciliation’ bill being taken up by the U.S. House of Representatives this weekend. ...

Scores of new federal mandates and fifteen different tax increases totaling $400 billion are imposed under the Democratic House bill. In addition to more complicated tax returns, families and small businesses will be forced to reveal further tax information to the IRS, provide proof of ‘government approved’ health care and submit detailed sales information to comply with new excise taxes.

Americans for Tax Reform has a good breakdown of the bill by the numbers.

Isn't it reassuring that at a time of recession, government will do what's necessary to ensure its growth?

http://www.washingtonexaminer.com/opini ... z0jJP6d4Ae

http://www.youtube.com/watch?v=v0YjBpI2qss

The Commerce Department reported Friday that the economy grew at a 5.6 percent pace in the October-to-December quarter in its third and final estimate of economic activity during the period.

Why won't the big growth spurt be repeated? Because the main force behind it is already ebbing.

Most of last quarter's growth came from a large bump up in manufacturing -- but not because consumer demand was especially strong. In fact, consumer spending weakened at the end of the year, even more than the government previously estimated, contributing to the slightly lower reading on overall economic growth.

Instead, factories were churning out goods for businesses that had let their stockpiles dwindle to save cash. If consumer spending remains lackluster as expected, that burst of manufacturing -- and its contribution to economic activity -- will fade.

http://finance.yahoo.com/news/Yearend-g ... et=&ccode=

Long term treasury yields are on the verge of breaking out. In the March 25 issue of Breakfast with Dave, Rosenberg mentions various factors in play.

I concur with Rosenberg this is not an inflation related phenomenon. And with the economy slowing, fundamentally treasury yields out to be dropping.

Then again most do not believe the economy is slowing. However, new home sales hit fresh record lows, state tax revenues that have collapsed, and the Chicago Fed National Activity Index dropped to –0.64 in February, down from –0.04 in January.

http://globaleconomicanalysis.blogspot. ... nalysis%29

[Jason]

Lots of confused chatter in the bond community as to why the negative swap spread story (anywhere between 7Y and 30Y) is being largely ignored by the media. After all, the associated market, which according to the BIS was roughly $154 TRillion in June 30 makes the Greek bond debacle and various sovereign CDS discussions in the media pale in comparison. As several bond traders pointed out, the likelihood of negative spreads having been modelled out by the TBTFs is very low, if any, meaning that unhedged bank IR-swap exposure is suffering massively, and is likely to surpass all record past prop desk losses. In fact, rumors abound that a few of the desks having placed leveraged bets on spread divergence over the past months and years are currently in critical condition, yet nobody is discussing this for fear of another round of bank run concerns among the TBTF banks. What is odd, is that the Primary Credit borrowings are now at almost financial crisis lows of just under $9 billion, leading many to speculate that banks now satisfy all of their short-term funding needs via the fungibility of excess reserves (and indicating once again that the Fed's discount rate hike was the most irrelevant action in a history of irrelevant actions). And just in case there is still confusion as to what negative swap spreads mean, here is a useful primer.

Morgan Stanley's conclusion is that, independently of our concerns, US Treasury rates are about to spike. To be sure, MS has been pushing for high rates and major curve steepending for a while: recall it is their call that the 10 Year will hit 5.5% this year.

The issuance of UST debt is dwarfing Libor-related issuance. For example, we expect UST net issuance to be $1.7Tr and net issuance of MBS to be zero. Thus, the relative issuance of UST’s vs. Libor-based products mainly accounts for the inversion in swap spreads. This is a first sign of stress leading to higher UST yields and is not to be missed.

And back to our question: is there currently a massive P&L hit to some or all of the Big 5 US banks as a result of this very much unexpected inversion? While surely the full $154 trillion or so amount is not applicable to the 7Y+ inversion, the OCC as of its most recent report does indicate that there is $27 Trillion in Interest Rate swaps outsanding with a maturity greater than 5 years.

And when looking at IR holdings by bank, it would seem that JPM, Goldman, Bofa, and Citi are most impacted. While JPM, GS, BofA, Citi and Wells have about $131 billion in IR swaps among them, more relevantly, JPM, Goldman and BofA have $9, $7 and $5 trillion in >5 year IR swaps. This is very troubling.

Maybe some of those fantastic financial analysts who were telling the general public to buy Lehman a few days before its bankruptcy, and are now saying financial companies will quadruple over the next few years, can do something useful for a change and ask the executive teams of the above mentioned banks 1) how big their exposure to negative swap spreads is and 2) what the negative P&L impact as a result of this unprecedented spread inversion is?

http://www.zerohedge.com/article/more-m ... -trillion-

I have been working with a young couple for a year now. They have been up against it. They look pretty typical. They bought an apartment with a first mortgage and low down payment. Then they made improvements with a HELOC. He lost his good job and now works for less. She works long hours and they have a kid.

They are underwater on the 1st mortgage so the HELOC is worthless. Their monthly cash flow including debt service has been negative for a long time. They have been paying the mortgage(s) by drawing down more on the HELOC.

I advised them a year ago to stop the madness. They tried to contact their lenders for assistance but were told they did not qualify for a re-financing, as they were current on their mortgage.

I told them to stop paying. But they would have none of that. They had built up a credit rating that they were both very proud of. They did not want to lose that. But more importantly they felt that walking on IOUs was something that morally they could not do. I told them they were nuts but that I was proud to know them.

I sent them a link to last week’s Barney Frank letter to the big banks telling them to write down non performing second mortgages. I sent them the link for the BoA story and their program to write down principal for delinquent mortgage debt.

They called just now. They made up their minds. They will not pay either the 1st or the 2nd this month. The “entrance fee” to getting the debt relief they need is to not pay any longer. The cost will be a tarnished credit. They no longer care.

Does this story mean anything in the Macro Big Picture of defaults? I am certain that it does. A rising trend is about to become a rogue wave.

http://www.zerohedge.com/article/new-wave-defaults

Perfect storm - obscene record high debt rollover requirements, obscene record high new debt requirements, record high unemployment, collapsing asset values, government stimulus coming to a close, state and local government budget crackdowns, and soon interest rates are going to shoot up slaughtering anyone holding a variable rate loan!

About to witness hyper-deflation or hyper-printing in action!!! By bet is on hyper-deflation....not saying the government won't do it....just not seeing evidence of it!

[Jason]

The call for hyperinflation to appear shortly -
http://usawatchdog.com/inflation-is-going-to-get-worse/

The BEA released its February Personal Income and Outlays data: continuing the trend of PI outpacing or same as Expenditures, the sequential change in February Personal Income came in at 0.0%, lower than the 0.1% consensus. On the other side, expenditures increased by 0.3%. Previous revisions indicated that January PI has been an increase of 0.3%, while PCE was greater by 0.4%. Most troubling, this implies that the Personal Savings Rate declined by 0.3% from 3.4% to 3.1%, the lowest this metric has been in over a year.

http://www.zerohedge.com/article/person ... to+zero%29

The unemployment rate remains locked in a range that recalls the economic doldrums of the early 1980s. Housing is stuck in a ditch, with foreclosures rising. And consumers are still reluctant to part with the little cash they do have.

Yet the stock markets are partying like it's 2003, when hiring was brisk, real estate was booming, wallets were fat -- and the major stock indexes started a four-year rally that would double their value and push them to new heights just before the financial crisis hit.

Judging from stock prices alone, one would think the economy was poised for a roaring comeback. But the federal government plans to unplug the economic life-support programs that stimulated production, kept interest rates low and placed a thick cushion under the real estate market.

Some analysts see ample reason for caution in equities, with many economists, including those at the Federal Reserve, forecasting tepid growth in the near term.

"The market is as overvalued now as it was undervalued a year ago," said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm. "There's a very high degree of complacency."

http://finance.yahoo.com/banking-budget ... et=&ccode=

LONDON (Reuters) - British fund firm Jupiter's high-profile investor in financial stocks, Philip Gibbs, has put more than half his fund into cash as uncertainty around the UK election and western government debt hamper visibility.

Gibbs, who made his name when a heavy cash position helped his financials fund turn a profit during the credit crisis, had 52 percent of the portfolio in cash as of end-February against 13 percent at the end of 2009, a factsheet showed.

http://finance.yahoo.com/news/Jupiter-f ... et=&ccode=

The Investment Company Institute notes that the week of March 17 saw the largest inflows into domestic equity mutual funds since just before the February correction. At $1.6 billion, the inflow was the second highest in 2010, and only topped by the January 20 number of $2.2 billion. Yet the year to date number is still negative by a large margin at ($2.6) billion, even as the market has risen by 3% since the beginning of the year. The money to push the market higher has certainly not come from domestic equity mutual funds. And as we pointed out in the most recent TIC analysis, foreigners had sold a record amount of Corporate Bonds in January, likely translating in a lack of desire for US equities as well. Where did the demand come from? Why primary dealers, who continue to acquire zero interest Bills and use the proceeds to purchase stocks in a continuation of the Fed-funded carry trade.

http://www.zerohedge.com/article/flows- ... lows-still

The US Treasury is filling the Primary Dealer demand for ultra-short term, zero interest Bills. Today it announced it would auction off:

* $31 Billion in 4 week Bills, maturing April 29
* $25 Billion in 56-Day Cash Management Bills, maturing May 27
* $17 Billion in 18-Day Cash Management Bills, maturing April 19

While this is the 6th 56-Day auction since the SFP reopening in February 24, the 18-Day is a new addition to plug the endless PD demand for cheap money which can be used for other much more lucrative purposes, such as buying equities for example. We expect all these Bills will come out at a yield of about 0.1% as banks do all they can do take advantage of ZIRP for as long as they can.

http://www.zerohedge.com/article/treasu ... t-few-days

Walter Burien's challenge -

It was not from the options offered but what was not shown. Collective local governments in California are now over 14,000. The State Government is the largest but collective totals from local governments from within the State dwarf the revenue pool of the state.

Collective CA local government's each have many specialty investment accounts (many thousands of separate funds large and small). The total from all are in excess of eight-trillion dollars. (conservative estimate)

To resolve the so called "Budget Shortfall" I would do a standing audit of "all" local government investment funds and then from each deduct an equal percentage to satisfy any budget shortfall "with" a 50 billion dollar cushion to last through the rough times... the "equal" percentage would probably be less than 2% to accomplish that objective, and done deal..

People have been sound-bite conditioned to think Government only generates tax income and that is where the public's focus is directed. In reality in combination of all local governments and the state from CA the investment capital is massive (noted above in excess of 8 trillion dollars) that generates in return revenue greater than all taxation collected in the state.

The public has been kept oblivious to the scope and size of these collective funds and through intentional misdirection pointed at tax income and expenditures dealt with. So your pie charts that give the impression of 100% is actually just 1/3rd of the pie when it comes down to government's true "gross income"

Now you will hear expressions like: "Here is our rainy day fund" and in reality that is like your pocket change jar you keep in the kitchen compared to the many other thousands of other government investment funds never mentioned.

You will also hear when investments are mentioned: "Oh, that is our employees retirement Funds" WRONG... The retirement funds are but one category.. (a large one) then you have self insurance funds; advance forward liability funds; special liability funds; enterprise forward project funds; and the list goes on and on. Just on the state level you are looking at around 12,000 separate specialty investment funds large and small. And with an audit of all local government specialty investment funds would be well in excess of 100,000 specialty investment accounts.

Never a peep about this to the public, and the reason why? DUE TO THE MONEY AND CONTROL involved! Governments from all across the country have been developing their non-tax income for over 65 years.

The public was presented with "Budget Reports" to account for where "Tax" income and expenditures were applied "for the year". To see the same local governments "gross income; standing investment wealth derived over decades; the investment return generated; and the enterprise operations massive wealth generated, you must look at the same local governments Annual Financial Report, or as government calls it, their: Comprehensive Annual Financial Report (CAFR). A Google search will pull up many.

For the CA State CAFR just put on the search line: "The State of California" CAFR

The state CAFR will pop up for downloading. You can do the same for "The city of Los Angeles" or Burbank, San Francisco, Sacramento, County of Los Angeles, etc., etc., etc....

Now a local government like the State of CA can say: "We have a fifty-billion dollar shortfall on our budget" (Tax Revenue) and a "true" review of the state's Comprehensive Annual Financial Report could show the state 200 billion in the black. The budget will be shown in the CAFR and it is only 1/3rd of the pie when it comes down to gross income...

Some people have referred to this as having two sets of books. Well, there are not two sets, there is only one and that is the CAFR of which the budget is a segment thereof.. an inferior report to the CAFR.

The silence (is golden) maintained as far as not a peep as to government's Annual Financial Report and non-tax income shown that most Cities: Counties; School Districts; State Universities; Enterprise operations; and the states prepare each year I call "The Biggest Game in Town" of which I put a video up on Google 12/25/08 that had over 870,000 views in the first 5 days worldwide and not a word from the media; controlled education; the political parties; or government itself. That silence is golden rule present over the last several decades is well entrenched due to the money and control involved. The public would not be pleased to find out that they have been played like this to say the least..

I challenge the SFC to publish in the next 30 days, and do so conspicuously the links to download the top 200 local California government CAFRs with it noted: "The SFC strongly suggests that every taxpayer carefully review their local government's Comprehensive Annual Financial Report (CAFR)"

http://cafr1.com/challenge.html

Gerald Celente : This time they will close Banks & Wall Street 03/27/10
http://eclipptv.com/viewVideo.php?video_id=11019

[Jason]

The U.S. dollar has been strengthening, gold is sputtering, rents are declining, wages decelerating, core consumer prices flattening and now money supply growth is vanishing. It may take the equity market time to absorb all of this, but for those who believe that at some point the economic fundamentals will come to dominate the landscape, it may pay to gaze at the charts below that depict the current economic cycle relative to the average of its predecessors. These charts show everything from real GDP, to real final sales, to employment, to industrial production, to retail sales, to housing and it is plain to see that this goes down as the weakest post-recession recovery on record despite the fact that it is being underpinned by the most intense level of government support on record. That indeed is cause for pause.

http://www.zerohedge.com/article/are-pi ... to+zero%29

Charts -
http://www.zerohedge.com/sites/default/ ... 032910.pdf

Excerpts from link above -

April is a key month, no fooling:

• Last week’s bond auctions did not go well. It seems that Japan and China did not show much interest. The lack of bids was no better underscored than in the 7-year Treasury note auction where the median yield was 3.29% versus 3.05% a month earlier. April is a cruel month for the U.S. Treasury market, with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7, and by an average of 25 basis points. (As Alan Greenspan said on Bloomberg News last week, higher yields are “the canary in the mine”.)

• That, in turn, could spook the equity market since another 25bps of upside pressure could then generate a fund-flow spiral as was the case in the summer of 2007 — 3.85% (where we are now) ostensibly is a trigger point for selling of mortgage bonds. As rates rise, homeowners are less likely to pay their mortgages early, which extends the life of the mortgage and that in turn encourages mortgage investors to neutralize the duration of their portfolios by selling T-bonds and notes. We have seen this happen before and while it will likely provide a nice buying opportunity given the deflationary headwinds the economy now faces, the prospect of a spasm in the Treasury market is worth considering. Every equity market correction in the past — 1987, 1994, 1998, 2000, and 2007 — was preceded by what turned out to be a brief but significant runup in yields. See Stock Rally at Mercy of Rising Rates on page C1 of today’s WSJ). And, the more overvalued the equity market is, the more the downside risks if bonds begin to provide greater yield competition in the near-term. Jeffery Hirsch over at the Stock Trader’s Almanac is in today’s NYT predicting a 20-30% correction ahead (see Stocks Soar, But Many Ask Why on page B1) — he notes the modest number of stocks hitting new 52-week highs with every new interim peak being reached by the overall market.

• The leading indicators are all pointing to a slowdown, and this could show up in a critical data-release week in mid-April with retail sales on the 14th, industrial production on the 15th, and housing starts, as well as consumer sentiment, on the 16th. The broad money supply measures are contracting again as the Fed is no longer boosting its balance sheet at a time when both the money multiplier and money velocity are showing no signs of turning higher.

• Greece will be put to the test in April when €15 billion of bonds have to be rolled over (through the end of May).

• The Fed ceases to buy mortgage securities on Wednesday and this is happening at a time when mortgage rates have already climbed back above 5% and the housing market is showing signs of rolling over again. See Spike in Treasury Yields Jolts Mortgages on page C2 of today’s WSJ. There is also pressure from within the Fed (Plosser the latest) to soon begin to sell securities outright. One thing that is very likely on its way again is another 50bps hike on the discount rate — has anyone noticed the TED spread beginning to widen ahead of this? The banks, going forward, will not have easy access to the window and will have to rely on each other for funding.

• April 15 looms as a critical day from a geopolitical standpoint. It is the day that the Treasury Department will issue its report concluding whether or not China is a currency manipulator. If it is viewed as such then trade sanctions are likely to ensue and very likely some bilateral tensions. This could be very good news for the bullion market (as well as the Bloomberg News report today stating that gold imports in India are surging right now — up six-fold from a year ago — as there are an expected 1 million marriages planned for April and May).

• Speaking of geopolitical risks, President Obama has allowed U.S. relations with Israel to deteriorate to such an extent, and is handling the Iran nuclear situation with such a kid-gloves approach, that disturbing columns like this are now popping up in newspapers like the NYT (Rift Exposes Larger Split In Views On Mideast — page A4), the National Post (Iran Preparing to Build Two More Secret Nuclear Sites in Mountains, Experts Say — page A8), and the WSJ (How the Next Middle East War Could Start — page A23). Even the prospect is enough to underpin the energy stocks, which are currently priced for $69/bbl on WTI.

Household purchases, which account for 70 percent of the economy, are on track to expand at a 3.4 percent pace this quarter, the best performance in three years, according to a forecast issued after the government’s report by economists at Morgan Stanley in New York.

Today’s figures also showed prices cooled. The inflation gauge tied to spending patterns rose 1.8 percent from February 2009, down from a 2.1 percent increase in the 12 months ended in January.

The Fed’s preferred price measure, which excludes food and fuel, was unchanged in February for a second month and was up 1.3 percent from a year earlier.

“The risks are that inflation may continue to decelerate,” John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston, said in a note to clients, supporting the view that Federal Reserve policy makers will hold interest rates low for a long time.

http://www.bloomberg.com/apps/news?pid= ... VZXc&pos=3
Bold and Underline mine

Decelerating inflation....isn't that Deflation??? LOL Only reason spending is up is because saving rate is evaporating (not that there was much to start with)....and 10% higher tax refunds....and when you quit paying the mortgage - you have more money!

Personal income increased $1.2 billion, or less than 0.1 percent ... Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 0.5 percent in February, following a revised 1.9 percent increase in January [revised down from 3.1%]. The latest drop put the SA index at 108.5 (2000=100), down from 109.1 in January.
...
Compared with February 2009, SA tonnage increased 2.6 percent, which was the third consecutive year-over-year gain. For the first two months of 2010, SA tonnage was up 3.5 percent compared with the same period last year. For all of 2009, the tonnage index contracted 8.7 percent, which was the largest annual decrease since 1982.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

This graph shows total Residential Investment, and single-family structures, both as a percent of GDP.

Residential investment (RI) is one of the best leading indicators for the economy. Usually RI as percent of GDP is declining before a recession, and climbs sharply coming out of a recession.

Note: The 2001 recession was a business led recession. Some readers will notice the sharp decline in 1966 and wonder why the economy didn't slide into a recession - the answer is the rapid build-up for the Vietnam war kept the economy out of recession (not the best antidote).

But this time RI is moving sideways. This time is different.

The reason RI is moving sideways is because of the huge overhang of existing housing units (both single family and rental units). And this is one of the key reasons I think the current recovery will be sluggish and choppy - and that unemployment will stay elevated for some time.

Stated simply: One of the usual engines of recovery - residential investment - isn't contributing this time.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

Arizona and Delaware started borrowing from the Fed this month for unemployment spending. After a dipping about 12% in February national unemployment borrowing is now surpassing the highs set in January by a percent or two. California, for example, averaged $47.4 million per day in unemployment borrowing last week. The week prior average was $35.8 million per day. The average for the 2nd week of March - $15.8 million per day.

At the first of the year most states raised unemployment taxes increasing the revenue coming in....but most likely that increased revenue wasn't seen until February....thereby explaining the drop in borrowing across the states. Also states only cover the first 26 weeks of unemployment and then the unemployed transition to the Fed system. Judging from the rising unemployment borrowing.....the recently unemployed are growing again. Despite higher taxes and the numbers of unemployed transitioning out of the state stewardship.....the numbers are hitting new records.

As of yesterday states have borrowed $37.8 billion. California is king with $8.3 billion of unemployment debt that doesn't show up anywhere in their budget.

Yesterday's numbers -
http://www.treasurydirect.gov/govt/repo ... ssched.htm

March 29 (Bloomberg) -- Greece, the European Union’s most indebted member, offered more than five times the yield premium of comparable Spanish debt to lure investors to its first bond sale since a bailout was agreed to for the nation.

Greece priced the 5 billion euros ($6.7 billion) of seven- year bonds to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed.

http://www.bloomberg.com/apps/news?pid= ... Qocc&pos=2

More taxes???
http://www.youtube.com/watch?v=2640Q8JL ... r_embedded#

Entitlement mindset -
http://www.youtube.com/watch?v=EpoitL8W ... r_embedded

[Jason]

The just completed 4 week auction closed at the worst level since August 2009: the Bid to Cover of 3.58 and the High Yield of 0.15% were the weakest since mid-August. As the chart below demonstrates, since last closing at 0.000% on January 26, yields on the 4 week have spiked, making life for Ben Bernanke increasingly difficult. This also means that the cost for massively leverage primary dealers who sell the front-end and use the proceeds to purchase equities is starting to become increasingly prohibitive. Watch the 2s10s and 6m30s for an indication if this is actual broad tightening, or just a curve shift wider overall.

http://www.zerohedge.com/article/curve- ... to+zero%29

Even as the adjusted Case-Shiller index came in at a 0.4% sequential increase, the deterioration in the index' unadjusted series continues, with the number a mirror image across the X-axis, coming in at -0.4%, the biggest decline in over a year. After having troughed in October of 2009, the unadjusted index had declined by 0.2% in November and December, and in January took another new leg down by 0.4%, as house price declines across the major MSA accelerated yet again.

http://www.zerohedge.com/article/case-s ... deteriorat

[Jason]

Beginning in January 2009, and every single business day since then, the Fed has been buying up Mortgage Backed Securities (in a very non transparent market). The program, which ends tomorrow, will have transferred $1.25 trillion of MBS "on behalf" of the US taxpayer, representing the single biggest asset on the Fed's balance sheet, and backing up such liabilities as currency in circulation (yes, that dollar in your pocket is collateralized more than half by rapidly devaluing, and in many cases cash flow non-producing houses) and excess reserves. Ironically, this year's biggest April fool's joke may end up being not only quite scary but very much true: on midnight of the night of March 31 into April 1 the Fed's MBS program ends, and the market will be on its own for the first time in over one year. What happens next is anyone's guess but here are some suggestions.

From Market News, here is a list of the things that the mortgage market has going for it and against it:

POSITIVES:

1) Fast and real money accounts are known to be very underweight or short the MBS market. Some have already covered recently as option adjusted spreads have widened. Others will wait for widening in nominal spreads. How long they will wait is a big unknown;

2) The recent backup in Treasury prices caused foreign investors to have renewed interest in the market, particularly for Ginnie Mae paper. A further drop in dollar prices could encourage other investors to come back into market;

3) Banks have been supporting the market for a while now and, with short-term interest rates low, they are expected to continue to pursue the carry trade. As long as the Fed's low interest rate policy stays in effect for an extended period, this is widely fostered investment strategy;

4) Freddie Mac already finished its delinquent loan buyback program. But Fannie Mae's buybacks take place over the next several months and are likely to amount to about $150 billion. Surely some of this money will be reinvested in MBS;

5) The housing market still shows no signs of a turnaround and credit is still very tight. This should keep new origination supply very manageable in the absence of the Fed buying. If and when it ever picks up again, it is hoped the MBS market will have its sea legs back on;

6) The Fed has been buying all the lowest coupons around, the coupons no one wanted. But The government-sponsored enterprises' buybacks and the ongoing changes to the government's Home Affordable Modification Program (HAMP) have recently wreaked havoc with the higher coupons. Consequently, that is pushing some investors into the lower coupons;

7) Finally, the market strongly believes if the housing and/or the mortgage markets got in severe trouble, the Fed would have no choice but to begin buying assets again.

NEGATIVES:

1) When everyone is on the same side of the boat, it often ends up badly. In other words, the idea that the investment community is heavily short does not guarantee success;

2) Even with a short investor base, the market still lacks a "backstop" bid like it used to have in the old days when the GSEs would buy MBS when they widened out to attractive levels. Without the Fed, and with the GSEs crimped, who will become the new backstop bid;

3) It may not happen for a very long time, but eventually the economy will recover and the Fed will raise rates. Over time, 10-year note yields are expected to rise. If that is the case, why buy any fixed income product now;

4) How high 10-year rates get down the road is anyone's guess. But market sources say the end of the Fed MBS buying, heavy Treasury supply and the potential of a boycott by overseas investors in the Treasury market could send yields from the current 3.87% to 4.25% or even 5.25% over time;

5) It is highly doubtful that the Fed will sell any of its huge MBS holdings for a very long time. But the possibility is there and it has made the market very nervous;

6) Before the Fed sells assets, it would likely do reverse repurchase operations with its MBS holdings. Market sources say that will most surely raise the cost of carrying MBS securities;

7) Because the Fed was such a large buyer of MBS and it did not hedge its positions, hedging convexity has not been something the market has worried about for well over one year. But now that the Fed is no longer buying, the new duration that comes into market will have to be hedged. Indeed, part of last week's selloff was blamed on convexity selling.

With the Fed having gone all in and then reraised tenfold courtesy of fractional reserve banking, there is no way that the Fed will allow house prices to drop further, which is why we are particularly partial to the option that the Fed will immediately reinstitute QE at the first hint of mortgages at or approaching 6%, as a 1% widening in mortgage rates will be the equivalents of a several hundred billion loss in household net worth. And the administration can not have that in an election year.

http://www.zerohedge.com/article/24-hou ... to+zero%29

I'm of a different opinion....I think its the next stage down in pulling the carpet out from under our feet.

http://www.youtube.com/watch?v=qybUFnY7Y8w

"It is the abuse of the Federal Reserve System to which we object. Every little while some smart Alec mounts the bema and roars about the great good that the Federal Reserve System has accomplished. It is called the Savior of Credit and Industry. But it is misbranded. There's a vast difference between the picture on the tomato can and the contents of the can."

The Federal reserve monster (1922)
By Jim Jam Jems, Wallace Campbell, Sam H. Clark
http://books.google.com/books?id=JECL0V ... navlinks_s

[Jason]

March 31 (Bloomberg) -- Companies in the U.S. unexpectedly cut payrolls in March, according to data from a private report based on payrolls.

The 23,000 decline was the smallest in two years and followed a revised 24,000 drop the prior month, data from ADP Employer Services showed today. Over the previous six months, ADP’s initial figures have overstated the Labor Department’s first estimate of private payroll losses by as little as 2,000 in February to as much as 151,000 in November.

Today’s ADP report showed a decrease of 51,000 workers in goods-producing industries including manufacturers and construction companies. Service providers added 28,000 workers.

Employment in construction fell by 43,000, while factories lost 9,000 jobs, ADP said.

Companies employing more than 499 workers shrank their workforces by 7,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 4,000 jobs and small companies decreased payrolls by 12,000, ADP said.

http://www.bloomberg.com/apps/news?pid= ... BSTM&pos=2

CNN Money calling for inflation based on the CPI index -
http://money.cnn.com/2010/03/30/news/ec ... Stories%29

The Chicago Purchasers index of production decreased to 60.5 from 65.2 in February. The gauge of inventories jumped to 52.4 from 42.4.
A measure of prices paid for raw materials fell to 66.6 from 67.7, which was the highest level since September 2008.

http://www.bloomberg.com/apps/news?pid= ... Ho6w&pos=1

Based on data going back 90 years, whenever the 12-month rate of change (ROC) in the Dow Jones Industrials Average has exceeded 40 percent, it has generally signaled trouble ahead.

In three cases, a 12-month ROC above that level has only marked a short-term pause, after which the market traded higher.

But on 11 other occasions, similarly rapid advances have been followed by notable corrections, including the collapses that followed the 1929 and dot-com era peaks, as well as the 1987 crash.

Given those odds, increasingly exuberant bulls might want to have a rethink.

http://www.financialarmageddon.com/2010 ... sider.html

For those wondering what caused the market to take a beating at 9:42 AM Eastern, it was the 3 minute advance release of the Chicago PMI to subscribers (a topic we have discussed previously). The index came out for the general mort consumption at 9:45 AM, when the bulk of the loss had already taken place. As for the actual data, add the PMI to the latest set of double dip inflection indicative data. After declining sequential increases of 5.8%, 4.8%, and 1.8%, the March PMI recorded a substantial downward move of -6.1%, from 62.6 to 58.8. And as you can see on the chart below, if it had not been for the Inventories subcomponent, which surged by 24% from 42.4 to 52.4, the index would have likely posted a double digit drop. As for the credibility of an inventory build up so late in the stimulus cycle, we will leave that to the integrity of the actual data.

http://www.zerohedge.com/article/chicag ... to+zero%29

Restaurant operators reported negative same-store sales for the 21st consecutive month in February, with the overall results similar to the January performance.
...
Customer traffic also remained soft in February, as restaurant operators reported net negative traffic for the 30th consecutive month.
...
Along with continued soft sales and traffic performances, capital spending activity continued to drop off.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

The refinance share of mortgage activity decreased to 63.2 percent of total applications from 65.0 percent the previous week. This is the lowest refinance share recorded in the survey since the week ending October 23, 2009.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

I've been saying since the start of this cock-and-bull game being played by the media that there is no real recovery happening in the economy. I can't find it anywhere - I find some evidence of a leveling off of the declines, but that's not the same thing as growth.

The dishonesty in the media in this regard has been breathtaking. Just yesterday Bloomberg ran the following article:

March 30 (Bloomberg) -- The two-year slide in tax collections that opened a $196 billion gap in U.S. state budgets has stopped, easing pressure on credit ratings and giving leeway to lawmakers as they craft spending plans for next year.

This sounds like they actually measured the end of deterioration, right? You'd be wrong:

The 15 largest states by population forecast a 3.9 percent gain in tax revenue in fiscal 2011, budget documents show. The 50 states on average may increase collections by about 3.5 percent, the first time in two years the figure is expected to grow, said Mark Zandi, chief economist at Moody’s Economy.com,

FORECAST? By MOODY's?

The very same Moody's that claimed that all those subprime and ALT-A mortgages were "AAA" yet were laced through-and-through with fraudulent origination, hiding of debts, overstated incomes and bogus appraisals?

If you continue to read through the story you see that essentially all of the so-called "gains" are in fact predictions, not reality.

Yes, corporate tax receipts increased 3.4% - but remember, corporations pay taxes only on profits - and those profits have improved to a material degree. How? By firing people, that's how! Yes, this means that some tax revenue comes in from corporate income taxes, but the fired employees in turn don't pay taxes.

As in the 1930s, the truth always comes out.

It is just a matter of time.

http://market-ticker.org/archives/2140- ... 3,000.html

Consumers Draw Down Savings For Personal Consumption
http://dailycapitalist.com/2010/03/30/c ... italist%29

Irish Banks Need $43 Billion in New Capital as "Worst Fears Have Been Surpassed”
http://globaleconomicanalysis.blogspot. ... nalysis%29

States have $5.17 Trillion in Pension Obligations, Gap is $3.23 Trillion; State Debt as Share of GDP
http://globaleconomicanalysis.blogspot. ... nalysis%29

From bucolic bliss to 'gated ghetto'
http://www.latimes.com/business/la-fi-h ... 1923.story

The Treasury just closed its 6th consecutive 56-Day $25 Billion auction, and the result, to those who followed yesterday's weakest 4-week auction since August, should not be a surprise. The Bid-To-Cover was the weakest 56-Day SFP CMB auction and the weakest SFP turn out since August 3, 2009. Additional the High Rate of 0.16% was the highest, and compares to yesterday's 4 Week bill High of 0.15%. The Treasury curve is now getting aggressively spooked on the short end. All this is occurring as the UST has realized its folly of trying to duration shift the curve to longer maturities: yesterday we auctioned off an 18-Day CMB, and tomorrow will see the first 10-Day CMB: this is the shortest CMB since September 2008 when we saw a 7-Day Bill, and the exception of a 4-Day CMB issued on December 10, 2009. As for who the biggest participants were - no surprise: dealers accounted for 81.2% of the auction take down. That's another $20 billion worth of stock buying dry powder costing PDs just 0.16% to gun the market for the next 56 days.

http://www.zerohedge.com/article/short- ... ousy-4-wee

Fannie Mae reported its January total serious delinquency rate for single-family houses: the rate hit a new record of 5.54%, a jump from the December's 5.38%, and double the 2.77% in January 2009. All in all a perfect time for the Fed to be moving away from the mortgage market, pardon, to no longer being the mortgage market. The one saving grace for the Fed, was that new issuance keeps declining: $43.9 billion in MBS was issued in February, 7% less than the $47.6 billion in January. Yet $44 billion is not zero, and we anticipate ongoing new issuance which will need to find private buyers now that taxpayers are out of the picture. And even as Fannie's total book of business grew at a 1% annualized pace to $3,229,645 MM, the actual guaranteed MBS and mortgage loans declined at 0.9% to $2,882,552.

http://www.zerohedge.com/article/januar ... uble-year-

[Jason]

Bank Of England Estimates Global Output Losses From Financial Meltdown At Up To $200 Trillion
http://www.bankofengland.co.uk/publicat ... ech433.pdf

State unemployment borrowing now running nearly $5.5 billion a month -
http://www.treasurydirect.gov/govt/repo ... ssched.htm

[Jason]

Driven lower by high prices and the recession, gasoline sales in California fell for the fourth year in a row during 2009, state officials reported Tuesday.

Californians bought 14.8 billion gallons of gas last year, down 1.5 percent from 2008, according to the state Board of Equalization.

Any drop used to be considered rare. Even during recessions, gasoline sales typically rose year after year, if for no other reason than population growth putting more cars on the road. But California's gas sales have been sliding since 2005, when the state's average price for a gallon of regular topped $3 for the first time. The rising prices forced drivers to conserve.

Annual gas sales in California peaked at 15.9 billion gallons in 2005 and have tumbled 7 percent since then. Analysts are still waiting to see whether the decline will continue after the economy turns around.

http://www.sfgate.com/cgi-bin/article.c ... z0jnwapvFH

[Jason]

So, in other words, Fed demand accounted for 90% of all net US$ fixed income issuance in 2009. This is why we do not assume that 2009 bond or credit market conditions will persist in 2010 and 2011. Corporate de-leveraging reduced supply in 2009, but the longer tenors of upcoming Treasury issuance, and the lack of support from the Fed, suggest that the real challenges for Treasury supply absorption are just beginning. Only a continuation of Fed purchases could change that.

Are collapsing interest rate swap spreads telling us anything? It depends whom you ask (and you may not want to) Ten-year swap spreads vs Treasuries are negative for the first time4. Market interpretations differ sharply on why (“just technical noise, please move along” vs “a scary leading indicator for bond yields”). The arguments may seem esoteric, and they are. But interest rate swaps are a $14 trillion market (that’s market value; notional values are 25x higher), so it’s important to understand what negative swap spreads might mean:

Bottom line: we are preparing for higher long-term U.S. interest rates

Some humility is called for here, since Japan’s rising debt burden was accompanied by a decline in long-term interest rates. But it’s not clear that the Japanese experience is a universal one. Rising long term rates do not have to be an insurmountable problem for risk markets (credit, equities, real estate), when rising rates are a by-product of normalizing market conditions.

Signs of a self-reinforcing recovery are rising, and we all knew higher Treasury yields came with the territory as risk aversion fades. However, given massive U.S. budget deficits, a changing demand/supply equation, and the bilateral marriage of contempt and convenience between the U.S. and China, 10-year Treasury rates that rise much higher than 5% could be a big problem. Our fixed income durations are short, and we hold ammunition in reserve for what may lay ahead.

http://www.zerohedge.com/sites/default/ ... h%2030.pdf

Good post on the skyrocketing Fannie delinquencies. What does that mean for the guys that are 20x leveraged and took the first loss piece of the most adversely selected loans of Fannie (and Freddie) during the bubble years of 2005-2007? Why, it means that PMI, MTG, and RDN are trading at 52week highs, and their CDS is rocketing tighter, of course. Makes perfect sense.

http://www.zerohedge.com/article/gse-de ... to+zero%29

On top of the previously announced record delinquency rate for Fannie, here comes some even worse news out of commercial real estate, which together with record high downtown vacancy rates, should be enough to push all REITs to 1052 week highs tomorrow. RealPoint has just released its March CMBS delinquency data, according to which delinquencies hit an all time high 6%. Not to be ignored, according to TREPP this number is even worse, at nearly 8%, after the single biggest monthly spike in 30 day + delinquencies.

In February 2010, the delinquent unpaid balance for CMBS increased by another $1.87 billion, up to $47.82 billion from $45.94 billion a month prior. Aggregate delinquency increased despite a slight decrease in 30-day delinquency. The overall delinquent unpaid balance is up almost 300% from one-year ago (when only $11.98 billion of delinquent unpaid balance was reported for February 2009), and is now over 21 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 26th straight month – up by $2.88 billion (9%) from the previous month and $29.36 billion (420%) in the past year (up from only $6.98 billion in February 2009).

As Stuy Town is still current on its payment, RealPoint expects an even greater acceleration in CMBS delinquencies over the coming months:

With the $4.1 billion delinquency of the Extended Stay Hotel loan, the expected delinquency of the $3 billion Peter Cooper Village / Stuyvesant Town loan, and the recently experienced average growth month-over-month, Realpoint now projects the delinquent unpaid CMBS balance to continue along its current trend and grow to between $60 and $70 billion by mid 2010. Based upon an updated trend analysis, we now project the delinquency percentage to grow to between 8% and 9% through mid 2010, potentially approaching and surpassing 11% to 12% under more heavily stressed scenarios through the year-end 2010). This forecast / outlook is driven by the watchlist reporting of several Realpoint identified High Risk Loans from recent vintage transactions that continue to show signs of stress and are on the verge of delinquency, along with continued balloon maturity defaults from more seasoned transactions. As part of our monthly surveillance efforts of every CMBS transaction, we continue to monitor in detail many large Realpoint Watchlisted loans that have never met their pro-forma underwritten expectations. This includes a large amount of loans that remain current in payments but have already been transferred into special servicing - many of which may ultimately default based upon a denial of requests for loan modifications or debt restructuring by the special servicers, or a decision by borrowers to surrender the collateral.

And RealPoint is the optimist. The other commercial real estate expert, TREPP, estimates that the situation is much, much worse, with March 30+ Days % delinquent CMBS hitting 7.61% after being just 6.72% in February. Then again TREPP already counts Stuy Town as in "foreclosure", something RealPoint still refuses to do due a technicality.

The delinquency rate for commercial real estate loans in commercial mortgage-backed securities (CMBS) stepped up sharply in March. After February’s numbers showed delinquencies beginning to moderate, there was some guarded optimism. February's increase had been the smallest bump in nine months. March data threw cold water on any notion that CMBS delinquencies might be nearing their peak. The delinquency rate for commercial real estate loans in commercial mortgage-backed securities (CMBS) stepped up sharply in March. After February’s numbers showed delinquencies beginning to moderate, there was some guarded optimism. February's increase had been the smallest bump in nine months. March data threw cold water on any notion that CMBS delinquencies might be nearing their peak.

According to TREPP the lodging sector is still the worst hit, followed by multifamily, retail, industrial and office. We anticipate that the strength in Offices is a function of aggressively renegotiated leases, which will impact office REITs most, once the projected cash flow never shows up.

http://www.zerohedge.com/article/march- ... to+zero%29

[Jason]

April 1 (Bloomberg) -- Hotel foreclosures in California climbed 27 percent in the first quarter from a year earlier as unemployment cut business travel.

Foreclosures, including the 469-room Los Angeles Marriott Downtown, rose to 79 properties from 62 in the first three months of 2009. Defaults increased 6.5 percent to 327, Irvine, California-based Atlas Hospitality Group said in a statement. The company specializes in selling hotels.

The U.S. lodging business is struggling with declining room rates and falling occupancy in the wake of the deepest recession since the 1930s.

http://www.businessweek.com/news/2010-0 ... ravel.html

Private residential construction spending is now 62.9% below the peak of early 2006.

Private non-residential construction spending is 29.0% below the peak of late 2008.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during February 2010 was estimated at a seasonally adjusted annual rate of $846.2 billion, 1.3 percent below the revised January estimate of $857.8 billion. The February figure is 12.8 percent below the February 2009 estimate of $970.4 billion.

http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

April 1 (Bloomberg) -- Manufacturing grew in March at the fastest pace in more than five years, raising the odds the U.S. has embarked on a prolonged economic expansion.

The Institute for Supply Management’s factory index rose to 59.6, the highest level since July 2004 and exceeding the most optimistic forecast in a Bloomberg News survey of 77 economists. Readings greater 50 signal growth.

The Tempe, Arizona-based group’s export gauge rose to the highest level since 1989, inventories grew and orders and production accelerated.

‘Strong’ Momentum

“The degree of momentum going into the second quarter is very strong,” Norbert Ore, chairman of the group’s factory survey, said in a telephone interview. “2010 will be a year of continuing recovery. We have the benefit of a global recovery.”

Not all the news today was good. Construction spending fell 1.3 percent in February to the lowest level in more than seven years, signaling this part of the economy remains in a recession, figures from the Commerce Department showed. The decrease followed a revised 1.4 percent drop in January that was more than twice as large as previously estimated.

http://www.bloomberg.com/apps/news?pid= ... CBFE&pos=2

Three Reasons Public Sector Workers Are Killing The Economy; Pittsburgh's Pension Liability Hits $1 Billion; Pittsburgh Is Bankrupt
http://globaleconomicanalysis.blogspot. ... nalysis%29

If jobs are being created, how come state and local governments are firing, as reported by Challenger:

Employers announced plans to cut 67,611 jobs in March, according to outplacement firm Challenger, Gray & Christmas Inc. That's up 61% from February, when 42,090 jobs were lost, the lowest level in nearly four years.

Anecdotally I've been hearing of major reductions in state and local employment for the last couple of months, as "stimulus" transfer payments run out and budgets must be balanced on a state level. A recent surge in Facebook groups coalescing around the government leeches howling about pay, benefit and job reductions are quite impressive, with literal thousands squealing about New Jersey's moves to bring teacher, firefighter and cop leech, er, "employee" pay and benefit levels in line with private sector costs.

Government, of course, has long been populated with leeches. Indeed, by definition every government employee is a leech, since the money to operate a government program can come only by taxing it away from those who produce in the economy to be redistributed to these "essential" programs.

Some of these services are indeed important - or even essential. But over the last 20 years or so we have changed a government job from something you do because you want to be of service to something you do to extract as much money as possible from your neighbor across the street - or next door.

http://market-ticker.org/archives/2143- ... -Cuts.html

Even as the BLS and DOL would like us to believe that the unemployment picture is getting better, we present a chart comparing the initial and continued claims as presented by the Dept. of Labor and compare these to actual government outlays. Even as the two combined series have been declining (offset by increasing much discussed EUCs), the most recent Unemployment Insurance Benefit outlay reported by the Treasury (as of March 30 - there is still one more day of data for March), just hit an all time record high of $15.4 billion.What this means is that in March the average paycheck from Uncle Sam for sitting dong nothing, surged to an all time high of $1,447/month.

It appears that in March either the government decided to payout an additional roughly 20% per unemployment paycheck, or once again, there is a shadow population of beneficiaries, which are not caught in any of the standard cohorts. Keep in mind that the average monthly paycheck has traditionally been indicated as being about $1,000.

http://www.zerohedge.com/article/treasu ... -time-high

This also matches the data I have been collecting on state unemployment borrowing from the Fed.....big dip in February but we are now surpassing January's highs!

There may be a flaw in the thinking our economists, financial leaders, the MSM and (even) the bloggers. Everyone is looking at the debt issue based on some ratio of total debt to GDP or debt service to GDP. This is the way it has always been done and is both right and appropriate. How much debt can be afforded is a ratio of the borrowers income whether it is an individual, a company, a State or a Sovereign. But there is (to me) evidence of a new metric developing. Supply is quickly becoming the determinant for the cost of borrowing, not debt to GDP levels.

Consider California. They have a monster GDP. Their debt to GDP is one of the best in the country. They have debt equal to only 6% of GDP. Massachusetts and Rhode Island are north of 20%.

But California is the official junk borrower. They just paid 5.8% for ten-year money. On a taxable equivalent yield that comes to 9%. Cali's CDS spreads are also in the tank. Their spreads are trading even up to Bulgaria. It is not their GDP that is the problem it is their visible supply of paper.

The inversion of the ten-year swap spread is completely crazy. It is almost impossible to think that this could happen. But it has. This is all about supply folks. $200b a month of new IOUs is the issue. The Debt to GDP ratio for the US is a disgrace. It is still favorable to most other sovereigns. But we’re now trading to a AA. We pay more for term debt than many other nations.

The US has $8+T in federal paper outstanding to the public. That will increase by 50% or more in the next five years. The Agency paper in public hands is an additional rollover problem. It is likely that Social Security will be a net seller during this period. They once funded 50% of our deficits.

Will someone please tell me who is going to take this on? Consider the list of existing big holders. I will give you an argument against any of them solving this supply problem. Please don't tell me that US households are going to pony up for this. And don’t tell me that I shouldn't worry about supply because Ben B. will buy whatever is necessary. We would be destroyed in less than three years if he did that. And he knows it.

At every step of the way over the past twenty-four months the “markets” have forced the policy makers hands. From Bear to Lehman, to AIG, TARP, ZIRP, QE, Bizzaro Budgets, Clunkers, HAMP and all the rest. The objective was always to blunt the markets. The Stock, Treasury bond, Real Estate, Corporate bond, MBS, ST/LT interest rates, currency, swaps and derivatives markets have all been manipulated for some time now. The question is, “who has been manipulating whom?” More important is, “who is winning?”

At this point I see that the ‘markets’ have successfully forced the global policy makers to absorb the absolute giant share of the credit losses of the bubble. A monumental cost will come from the D.C. lenders. They are hobbled with bad debts, while the remaining private financials have earned a bundle on the ZIRP. The market has forced the socialization of total debt/bad debt to a point where the remaining nut is manageable.

With the end of QE the cycle is now complete. The maximum amount of risk in the form of credit exposure and aggregate debt has now been passed to the public sectors around the world. As markets are wont to do, they are likely to turn on their benefactors now that they have succeeded. If total supply and visible supply are going to become more powerful forces than traditional metrics of determining debt pricing, it will have to end up at America’s doorstep. We are the ‘category killer’ when it comes to supply.

http://www.zerohedge.com/article/whats- ... -or-supply

The Treasury just announced the auction schedule for next week: a total of $165 Billion in gross issuance of which $74 Billion in coupons, and $8 billion in a 10 Year TIPS reopening.

* $28 billion in 3 Month Bills, Auction date April 5
* $29 billion in 6 Month Bills, Auction date April 5
* $26 billion in 52 Week Bills, Auction date April 6
* $40 billion in 3 Year Bonds, Auction date April 6
* $21 billion in 9 Year 10 Month (reopening), Auction date April 7
* $13 billion in 29 Year 10 Month (reopening), Auction date April 8
* $8 billion in 9 Year 9 Month TIPS (Reopening), Auction date April 5

As a reminder, on March 30, the total outstanding debt of the US was $12,628,419,000,000.

http://www.zerohedge.com/article/165-bi ... on-coupons

Yesterday we noted that Fannie just announced a record number of delinquencies at 5.52%. Today, not to be outdone, Freddie follows up and discloses that total delinquent loans also hit another fresh high of 4.08%, an increase from January's 4.03% and double the 2.13% from last February. Also yesterday we noted that CMBS delinquencies are likely in the 6-7% range, as both the residential and commercial real estate market continue experiencing unprecedented weakness.

Also, as reader Tin Cup points out, "The credit enhanced book of business (loans insured by the private mortgage insurers) also hit a record high or 8.59%, up from 8.52% in January (and also double last year’s 4.54%). Again, despite trillions being throw at the housing market, delinquencies continue to rocket upwards."

Sure enough, the market continues to ignore all negative news and just focuses on the direct consequences of a waning fiscal and monetary stimulus program.

http://www.zerohedge.com/article/follow ... ously-deli

Full Report -
http://freddiemac.com/investors/volsum/pdf/0210mvs.pdf

[Jason]

More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash.

Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.

“Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.

Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages.

“Fewer people are trying to save their homes,” Katherine M. Porter, a University of Iowa law professor and bankruptcy expert, said in an interview by phone on Thursday. “They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable.”

Statistics from the United States Trustee Program, the Justice Department office that oversees bankruptcy cases, show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.

“We think that means fewer and fewer families think they’re really going to save their homes,” Professor Porter said. “They don’t have any equity, so why try to keep up with their home payments?”

The nation’s high unemployment rate is one more reason for people to choose Chapter 7, Professor Porter said. “To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they can’t use Chapter 13 because they don’t have that income to pay into the plan,” she said.

Finally, Professor Porter said, March is the high season for bankruptcy filings because many people in financial distress get a tax refund check that they can use to pay the $1,500 to $3,500 that a bankruptcy lawyer charges.

“People use their tax refunds to pay their attorney fees,” she said.

http://www.nytimes.com/2010/04/02/busin ... uptcy.html

Employment-Population Ratio
http://www.calculatedriskblog.com/2010/ ... ed+Risk%29

Job news today -

Final Thoughts

On the plus side: Job gained across the board, the first we have seen in years.

On the negative side:

* Involuntary part-time employment increased by 738,000 workers in two months.
* The number of long-term unemployed (those jobless for 27 weeks and over) increased by 414,000 over the month to 6.5 million.
* 72,000 jobs this year are from census hiring. Those jobs will vanish by midsummer.
* There is still no driver for jobs as housing and family formation are exceptionally weak.


All things considered, this report looks OK on the surface, and horrendous underneath.

Also bear in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, the union parasites will not see it that way, nor will the politicians.

Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot. ... nalysis%29

Daily Job Cuts -
http://www.dailyjobcuts.com/

[Jason]

The just completed 3 Month and 6 Month Bill auctions were the weakest ones conducted so far in 2010. Out of 14 auctions conducted so far across both maturities this year, the 3 Month closed at the highest rate seen since December, at 0.175%, coupled with the lowest Bid To Cover over the same period, coming in at 3 month low of 3.6. The same is true for the 6 Month: the closing high rate of 0.265% was the highest in 2010, combined with the weakest Bid To Cover YTD, at 3.63. Direct bidders once again came in to save the day.

The Direct takedown for the 3 Month was 11.5%, the strongest since March 1. The Direct bid size was massive at $11.17 billion resulting in a low Hit Ratio of just 27.4%. For the 6 Month, Direct take down was enourmous at 19.2%, double the yearly average of 8%. There were $12.9 billion in Direct Bids - the second largest Direct bid in the 6-month auction. The Hit Ratio was a substantial 41.6%.

Coupled with weak 4-Week auctions recently, and the Bond market is increasingly getting concerns about the short end.

http://www.zerohedge.com/article/weakes ... to+zero%29

For all who doubt the Obama administration will raise tax rates into the stratosphere in the very near future, here is a chart created by dshort.com which compares the total level of debt to GDP with Federal tax brackets over the past century. The correlation between the two isunmistakable . Unless the administration promptly finds a way to reduce the massive amount of debt that it continues to issue (in March alone the US Treasury issued a massive $333 billion in net debt), tax rates will have no option but to spike to levels not seen since the 50's. And that means a tax bracket for the highest earners of about 90%... You didn't think socialism comes cheaply now did you?

http://www.zerohedge.com/article/inevit ... to+zero%29

[Jason]

On April 30, the Home Buyer Tax Credit expires. If you’re a buyer, you shouldn’t care because when the credit disappears house prices will drop the same amount. If you’re a seller or real estate agent, you should be scared shitless because you’ll need to drop your price the same amount to keep people interested.

On a scarier note, during a recent Charlie Rose interview with housing expert Robert Shiller, Shiller offered some mind-numbing insights into Uncle Sam’s position in the US housing market:

Charlie Rose: You’ve said that 90% of the housing market is supported by the government.
Robert Shiller: Well, it’s 80% or 90%. Really almost the whole market now is government. And we know this can’t last.

Rose: And that means prices are being artificially inflated?
Shiller: It seems to. Government support is especially prominent in sales of existing homes, which shot up to over 6 million on an annual rate in November 2009, the month that the home buyer tax credit initially was supposed to expire.

On the unsupported side of the housing market, Fannie Mae reported the rate of serious delinquencies (90 Days overdue) for conventional loans in its single-family guarantee business jolted to to 5.52% in January from 5.38% in December. This is a 100% increase since January 2009.

The next eight weeks in the housing market should be very interesting.

http://wallstcheatsheet.com/breaking-ne ... t+Sheet%29

[Jason]

American Monetary Institute (AMI): History of money, monetary reform, and public action. 3 of 6
http://dailycensored.com/2010/04/04/ame ... ensored%29

[Jason]

Greece Is NOT Under Control
http://market-ticker.org/archives/2158- ... ntrol.html

Unemployment Remains Unchanged in March
http://dailycapitalist.com/2010/04/02/u ... italist%29

Los Angeles Likely To Exhaust Reserve Fund By May 10, To Be In The Red By End Of June
http://www.zerohedge.com/article/los-an ... d-end-june

[Jason]

In a nutshell this describes our current situation -

Here in San Francisco picking up a garbage costs about $37/can per week.

A contractor I know got fed up, canceled his service as did his neighbor. They simply loaded both houses garbage into his truck, took it to the dump and paid the $40 to get rid of it. He charged his friend $10.

As a contractor he had to go to the dump all the time anyway. Pretty soon he had a small business, neighbors paying him $10 instead of $37, a difference of over $1400 per year or the price of a vacation or plasma TV for the family.

He sorted their garbage and turned in the recycling for more money. Normally the neighbors had to keep two cans, sort their garbage themselves and the Garbage monopoly took all the recycling fees anyway.

Pretty soon he hired a couple of neighborhood kids and his crew of 3 did both sides of residential streets at the same time. If you had an old monitor or TV, motor oil, or paint to get rid of he'd take that too, sometimes he'd charge you $5 + what the dump charged for the special item. Need an extra pickup? No problem. He'd work from 5am to 8am and he was earning $200 per day and his workers $75.

The amazing thing he kept telling me was that the larger the truck you had the more money you could make. He was amazed that with only a modified large pickup truck he could make money at a third of what the Garbage company charged.

When the local garbage company and its union found out about "Joe" they complained to the city. Within a year a law was passed stating that garbage service was now mandatory for all residents at the price the city's monopoly charged, which was shortly raised. And Joe? For a while he still took our recyclables until he was fined $4000, even though he had our permission. It appears our household recyclables are owned by the Garbage company, not us, as it subsidizes our low cost of garbage service!

It is clear that monopolies are bad in business or unions and monopoly unions exist to enrich a class of privileged workers at the expense of ordinary workers.

Cheers, Michael

http://globaleconomicanalysis.blogspot. ... nalysis%29

WASHINGTON—Labor unions, corporations and wealthy individuals are preparing to break spending records to influence the November elections. But more than in recent years, they will be focusing on races for governor and state legislatures.

Their goal is to win control of state governments ahead of the state-by-state process for redrawing congressional districts after the 2010 census.

Each party says that winning key statehouse campaigns would give it the power to draw district lines that could cause 20 to 25 seats in the U.S. House of Representatives to change hands. There are 253 Democrats and 177 Republicans in the House now

http://online.wsj.com/article/SB1000142 ... adlines%29