IBD Cartoon, Obama, Chavez, Ortega, Castro

RCM Editorial

I posted yesterday a rather uplifting story about the Honduran's protecting their Constitution and deposing a dictator. The dictator, conveniently disguised as a president, wanted to abolish term limits so he could rule the country like Hugo. No matter what your political leanings, right, left or center, there is no way to argue that this power grab is anything other than undemocratic and unconstitutional.

Now I ask you, why would our president, the leader of the supposed free world, condemn the actions of a people trying to remain free and protect democracy and a constitution?

Would it be perhaps because our president is presiding over a government that is stepping all over our constitutional rights and those actions have clouded his judgement? Or is it something altogether more disturbing? Has this country elected a president who does not respect term limits; one who does not believe in a true democracy but instead a type of socialism?

Take a close look at this cartoon from the Investors Business Daily today. It is more tragic than funny and closer to reality than you may want to admit.

Honduran Coup, Jump In Mortgage Rates

News That Moves Markets

RCM Comment: In a world seemingly full of bad news, during a news cycle full of Madoff, Iran and North Korea, I thought you could use a little lift. I thought you would appreciate a story where good triumphs over evil and where a constitution is protected from a despotic leader. Finally, the people of a democratic, capitalistic country are able to defend their rights and avoid being raped and pillaged by another would be Hugo Chavez. Enjoy the read as this chance doesn't come around often...

Honduran President is ousted in coup - NY Times
NY Times reports President Manuel Zelaya of Honduras was ousted by the army on Sunday, capping months of tensions over his efforts to lift presidential term limits. In the first military coup in Central America since the end of the cold war, soldiers stormed the presidential palace in the capital, Tegucigalpa, early in the morning, disarming the presidential guard, waking Mr. Zelaya and putting him on a plane to Costa Rica. Mr. Zelaya, a leftist aligned with President Hugo Chavez of Venezuela, angrily denounced the coup as illegal. "I am the president of Honduras," he insisted. Later Sunday the Honduran Congress voted him out of office, replacing him with the president of Congress, Roberto Micheletti. The military offered no public explanation for its actions, but the Supreme Court issued a statement saying that the military had acted to defend the law against "those who had publicly spoken out and acted against the Constitution's provisions."

RCM Comment: O.K. back to business as usual where the news usually is not good. The increase in mortgage rates is certainly something to keep an eye on for obvious reasons...

Global Money Trends-
Also threatening to undermine the green-shoots rally is the upward surge in the 30-year fixed mortgage loan rate to an average 5.42% in June, up from 4.78% in April, dealing a fresh blow to the housing market. The surge in mortgage rates surprised the Fed, since the central bank thought it could keep mortgage rates locked below 5%, by pledging to buy $1.1-trillion of mortgage bonds from April through the end of August.

The latest 1% jump in mortgage rates comes at a time when foreclosure filings in the US surpassed 300,000 for a third straight month in May and may hit a record 1.8-million by the first half of the year, RealtyTrac said.

Economy Not in Good Shape; Recent Changes to the Way the U.S. Treasury Tallies Demand at its Bond Auctions

News That Moves Markets

RCM Comment: O.K. we have a lot to get to today, so let's get started. First, I've put together a list of economic numbers recently released to offer more evidence in support of my pronouncement that "the economy is not in good shape".

I know this proclamation is not the favored view at the moment. You are, no doubt, reading in Wall Street rags and hearing bobbleheads on CNBC decree the end of economic hardship and the beginning of a new day. There is so much spin you would think flax is turning into gold. But, alas, that is just a fairy tale. In fact, all this spinning reminds me of a favorite childhood pastime. We have all done it. Remember when you stood in the front yard, spread your arms and spun around and around in a circle until you fell down? Now, think back, what happened? You would lay on your back and look up. The world would look different as it spun. But, in reality had anything changed? And in the end when the spinning stopped you would question whether or not your nausea was a result of the spinning or the KoolAid you were drinking.

I hope the information below will help you to avoid the KoolAid stand. As for the spinning, I can only say, enjoy the feeling if you want to but don't believe in the altered state.

Associated Press Headline: May new home sales dip 0.6 percent...

New U.S. home sales fell slightly last month, another sign that the housing market's recovery is likely to be gradual and prolonged."

Department Of Commerce News Release: click here.

Key Numbers: New Houses Sold Unadjusted: 32,000, Year Ago: 49,000, Year Over Year %: -34.69. Median Price Unadjusted: $221,600, Year Ago: $229,300, Year Over Year %: -3.36.
Last Month's Numbers: New House Sold YoY=-32.65%, Median Price Yoy=-3.36%


Census Department Durable Goods Manufacturers New Orders Down 24.5%


ECONX More than Meets the Eye in Personal Income and Spending Report
The Personal Income and Spending report produced some nice headlines, with income increasing 1.4%, spending rising 0.3% and core PCE increasing just 0.1%. The pleasing nature of the headlines is based on the understanding that consensus estimates for those components were set at 0.3%, 0.3%, and 0.1%, respectively. Additionally, the personal income increase for April was revised up to 0.7% (from 0.5%) while the spending number for April was revised to unchanged from an originally reported -0.1% decline...

There was more to the May report, though, than meets the eye. Real disposable personal income was up 1.6% in May; however, when excluding the benefits of the American Recovery and Reinvestment Act (read: lower personal taxes and higher government transfers), real disposable income was up just 0.2%. That's OK, yet it certainly doesn't have the pleasing quality of the leading headline, especially when one also takes into account that private wage and salary disbursements fell -0.2%, marking the ninth straight monthly drop in that series.

In turn, the personal savings rate increased to 6.9% from 5.6% in April, which underscores the consumer's bid to save more and spend less, which isn't the best combination when contemplating the prospects of a quick and robust recovery effort...

RCM Comment: (EXTREMELY IMPORTANT) The story above about personal spending and the story you are about to read are two egregious examples of the government's desire to spin, lie and cheat its way out of this economic crisis. The spin about personal income and spending was positive but clearly misleading as "the benefits of the American Recovery and Reinvestment Act" are the real reasons for the uptick.

In the same manner, the "recent changes to the way the U.S. Treasury tallies demand at its bond auctions" is a blatant attempt to confuse the markets and lie about the true demand coming from foreigners. This chicanery reminds me of a Ben Bernanke decision in 2006. Almost immediately after taking control of the Fed, Ben decided to eliminate the reporting of money supply as reflected by M3. He did his best to cast aspersions at the figure and claim it had no purpose. However, time has shown that he proliferated this lie to help hide the amount of US$ he was creating. Of course, the world is now catching on and China (Wary of dollar, China wants super-sovereign currency - Reuters.com), Russia and the like are calling for a new reserve currency as the value of the Greenback is faltering under the weight of Ben's creation scheme.

Ben's 2006 M3 ploy was one of the contributing factors that led us to launch our Fortune's Favor Precious Metals Fund. Our commitment to precious metals across our entire assets base is without a doubt a key reason for our success to date. Likewise, understanding the ramifications of the new U.S. Treasury bond auction reporting changes will likely be a major piece to the puzzle of success going forward.

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating "indirect bids," a category used by investors as a loose proxy for foreign demand.

Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market. At the very least, the Treasury's shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.

Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday's two-year note sale, and exceeding 62 percent at Wednesday's sales of $37 billion in five-year notes. "We're not going to make much of that, given the information we've gotten on the rule changes," said John Spinello, fixed-income strategist at Jefferies, a primary dealer. "The indirect bids are now going to be higher given the change in procedures."

Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions. Top officials in China (Wary of dollar, China wants super-sovereign currency - Reuters.com) and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures. The Treasury's changes, contained in a June 1 entry to the Federal Register, relate to what it considers a "guaranteed bid." Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer's own.

The matter was technical enough to confuse even industry veterans. "We are not precisely sure what this all means," said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey. "We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register." The Federal Register entry can be found at http://www.gpo.gov/fdsys/pkg/FR-2009-06-01/html/E9-12787.htm

Coping with Government Sponsored Market Manipulation

RCM EDITORIAL

RCM Comment: We live in a world where markets are manipulated by governments. To argue this point is to howl at the moon. We are not conspiracy theorists; we are realists. In order to successfully manage a portfolio in this environment one must understand the playing field and the rules. There is no point in complaining about the manipulation or pointing fingers. This type of behavior is an exercise in futility. No, we must accept the situation and turn it to our advantage.

We must recognize that markets are not free to trade and therefore do not react as we would expect to certain news events. Sometimes this manipulation is a good thing. Take for example the market reaction to 9/11. After being closed for four days the equity markets surged higher with the help of massive PPT buying of S&P futures contracts. Unfortunately, governments tend to bastardize a good thing and we are now faced with a market that is rigged to suit government needs in the short term. However, you can rest assured that true market direction will prevail over the longer term.

So, our struggle is to understand the long term view but not allow the government manipulated markets to cut up our capital in the short term. We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time. Example: the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital. Again, if you wish to argue this point I suggest you go down to the water's edge and scream at the tide. Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days. This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go? Only time will tell, but I will offer this thought process:

The economy is not in good shape.

The Fed must work to keep rates low.

The stock and bond markets have been trading in opposite directions for months.

Therefore, if the Fed focuses on supporting the bond market going forward then the equity markets may be in for trouble.

The economy is not in good shape: Proof

The weekly Railfax Rail Carloading Report still looks grim. A report from the real world

Moody's: "Sellers Beginning To Capitulate To Realities Of CRE Markets."

Moody's has released its April Moody's/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don't grasp, that even Moody's has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn out. Read more...

Redbook Retail Index Plunges Again

The Johnson Redbook Index is a sales-weighted year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. Same-store sales are sales in stores continuously open for 12 months or longer. Read more...

I have included the story below simply for your own edification. The explanation below illustrates how the manipulation works and I hope it helps you understand and cope with seemingly incongruous market volatility.

Market Skeptics.com: Understanding the PPT and market manipulation

The PPT operation has access to unlimited funds because it was formed by the Treasury which can create money out of thin air. My guess is that the organization is structured through an offshore hedge fund established by the ESF as a front group. They do their buying and selling from perhaps the Bahamas or the Cayman Islands.

One thing we know is that they place their orders through several of the big brokerages in New York such as Goldman Sachs, JP Morgan, or Merrill Lynch. This way no one at the brokerage houses or on the exchange floors actually sees any massive buy orders from Washington bureaucracies.

The way they work the scheme is whenever the market is going too low and threatening to crash, the PPT initiates buy programs on margin for S&P futures contracts in large enough volume to check the market fall and panic short sellers into covering their short positions. This creates a "short squeeze" and explodes prices upward. Hedge funds and institutional buyers then rush into the market to buy in order to catch the rally. This extends the rally and effectively ends the potential market crash as investor mood shifts from bearish to bullish.

The rally is created in the way that lighting a match to kindling ignites a roaring fire. The S&P futures contracts are so highly leveraged that a $200 million buy can be initiated for $10 million in the PPT account with JP Morgan. A $500 million buy can be initiated for $25 million. These margins are chump change for the Treasury-ESF(Exchange Stabilization Fund)-PPT(Plunge Protection Team) operatives. As the rally proceeds, the PPT then sells their contracts back to the hedge funds and institutional buyers that follow after them. The PPT then goes to the sidelines to await the next crisis when they will need to stem a potential crash.

RCM Editorial: Democratic Lawmakers Urge Reduction in Lending Standards / Barney the Dino Strikes Again

RCM Comment: We here at RCM have uncovered the mystery behind the housing troubles in the U.S. We have heard countless explanations and witnessed our colleagues struggle with the conundrum. Well, the super sleuths that we are, we have leaped the why in a single bound and here it is, get ready... "Barney Frank, the Massachusetts Democrat, is chairman of the House Financial Services Committee":

Changes urged to rules on condo loans - WSJ
Democratic lawmakers are calling on Fannie Mae (FNM) and Freddie Mac (FRE) to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery. In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70% of the units have been sold, up from 51%. Fannie Mae also won't purchase mortgages in buildings where 15% of owners are delinquent on condo association dues or where one owner has more than 10% of units, which the firm sees as signals that a building could run into financial trouble. Freddie Mac will implement similar policies next month. In a letter to the chief executives of Fannie and Freddie, Reps. Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, and Anthony Weiner (D., N.Y.) warned that the 70% sales threshold "may be too onerous" and could lead condo buyers to shun new developments. (Isn't that the point? New developments that are shaky need to stop so all the supply from overbuilding can come back into equilibrium with demand.) The legislators asked the companies to "make appropriate adjustments" to their underwriting standards for condos.

RCM Comment: Once again Barney illustrates his complete ignorance, stupidity, philistinism (Click here to continue the cathartic release) with regard to anything resembling sound economics. Has Barney learned nothing from the crisis? Last year I watched him accuse Fannie and Freddie of the very same weak lending practices he is now championing. We ask: Can anyone be this obtuse? What's the hidden agenda? Will we find out Barney stands to benefit financially if condo communities are artificially inflated?

Let's not forget that Freddie and Fannie are bankrupt entities. Any reduction in lending standards will likely lead to another trillion of losses. Who will pay for that? The American tax payer. Thanks Barney! Sixty-four thousand dollar question: When will Barney's constituents wake up and vote him out of office?

RCM Editorial: US$/US T-Bonds/Gold, The Con. Game In Quotes

RCM Comment: As readers you may recall in March we advised shorting the US$ and US Treasury Bonds while maintaining and/or building a long position in Gold. We believed (and rightfully so) that the $300 billion quantitative easing announcement by the Fed would have negative implications for the US$ and Bonds. However, over the last week or so we have seen a bit of a correction across the board with regard to this trade. The usual nest of neophytes rush to extol the virtues of the US$, the strength of the Fed chairman and the ensuing economic recovery, all the while deriding the value of Gold.

Rest assured, we have not changed our outlook. We will from time to time use extremes to add to or reduce positions as we deem necessary. This behavior is simply prudent portfolio management but our primary convictions are not swayed by Government or Fed comments, which are notoriously misleading. In fact, I have a running debate with a colleague who seems determined to drink the Kool-Aid the Fed chairmen and treasury secretary are serving. He quotes testimony as if it's gospel and I fear for his portfolio safety.

To that end, I am publishing the following two stories in the hopes the information will snap him out of the Bernanke mind meld and the Geithner hypnosis.

From Prvt'r..June 14
IN THE LAST DITCH ON THE US DOLLAR FRONT

The US Dollar’s position as the world’s reserve currency isn’t under threat. Our trust in US Treasuries is absolutely unshakable.” - Japanese Finance Minister Kaoru Yosano - June 10, '09

(Russia) “does not see any changes in our policy with regards to dollar-denominated paper over the next year or more.” - Russian Finance Minister Alexei Kudrin - June 12, 2009

German Finance Minister Peer Steinbrueck was reported to “not be concerned” with
the Euro’s value against the US Dollar

IMF Managing Director Dominique Strauss-Kahn “doesn’t see a weak US Dollar”.

We must invoke here nineteenth century German Chancellor Otto von Bismark’s “law” - “Never believe anything in politics until it has been officially denied three times”. There’s four for you, and there were undoubtedly many more during the G-8 Finance Ministers’ meeting in Italy.

RCM Comment: The US$ has gained strength on these stories. Does the fable of the fox and the gingerbread boy ring any bells?

The Confidence Game In Quotes: Courtesy of the Austrian Filter

February 28, 2007 - Dow Jones @ 12,268

March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

March 30, 2007 - Dow Jones @ 12,354

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

April 30, 2007 - Dow Jones @ 13,063

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

May 31, 2007 - Dow Jones @ 13,627

June 20th, 2007 – Bernanke: (the subprime fallout) ``will not affect the economy overall.''

October 15th, 2007 – Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

December 31, 2007 - Dow Jones @ 13,265

January 31, 2008 - Dow Jones @ 12,650

February 14th, 2008 – Paulson: (the economy) "is fundamentally strong, diverse and resilient."

February 28th, 2008 – Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

March 16th, 2008 – Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."

March 18th, 2008 - Bear Stearns Bailout Announced

May 7, 2008 – Paulson: 'The worst is likely to be behind us,”

May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.

May 30, 2008 - Dow Jones @ 12,638

June 9th, 2008 – Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned,

July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized"

July 20th, 2008 – Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

July 31, 2008 - Dow Jones @ 11,378

August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)

September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation’s balance sheet.

September 16th, 2008 - $85 Billion AIG Bailout “Loan”

September 19th, 2008 - $700 Billion Bailout Plan Announced

September 19th, 2008 – Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system."

September 19th, 2008 - Bernanke: "most severe financial crisis" in the post-World War II era. Investment banks are seeing "tremendous runs on their cash," Bernanke said. "Without action, they will fail soon."

September 21st, 2008 – Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

September 23rd, 2008 – Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy,"

September 23rd, 2008 – Bernanke: "My interest is solely for the strength and recovery of the U.S. economy,"

October 31, 2008 - Dow Jones @ 9,337

March 31, 2009 - Dow Jones @ 7,609

News that Moves: Single Biggest Development - BRIC Countries Dumping Treasuries

RCM Comment: The following stories represent the single biggest development effecting the markets today. I'm dedicating the blog to this development in the hopes that you, the reader, give this story the respect it deserves. There will be those among you who try to minimize the story or wish to overlook it in the vain hope that our government rescue plans trump all else.

But here's the rub: government rescue plans historically don't work. Let me repeat that: government rescue plans don't work! They can delay, they can stall, they can draw out, but ultimately they cannot stop the natural progression of the markets. History is replete with this paradigm.

My Momma always says, "There is a time in every problem where it is big enough to see and small enough to solve." That time is long gone and what we have now is the turning point in the problem where it has become so big it swallows itself like a black hole. Historians will point to the stories below as a key turning point in this Greek tragedy of a situation.

China, Japan, Russia, Brazil cut Treasuries holdings in April - Bloomberg

Russian Central Bank to cut US Treasury holdings, according to Interfax - DJ
DJ reports Russia plans to reduce the proportion of gold and foreign exchange reserves it invests in U.S. Treasury bonds, central bank Deputy Chairman Alexei Ulyukayev said, the Interfax news agency reported. Ulyukayev said reserves are just over 30%-invested in U.S. Treasurys at present, but didn't specify by how much that figure would fall. He said reserves would instead be placed on deposit and invested in bonds issued by the International Monetary Fund.

Brazil, Russia trade T-Bills for IMF clout - WSJ
The Wall Street Journal reports Brazil and Russia are set to unload U.S. Treasury bonds as they acquire $10 bln each of new IMF securities designed to bolster the institution's aid programs, officials in the countries said Wednesday. The moves are part of a bid by the so-called BRIC nations to play a bigger role at the IMF and other intl institutions. The announcements helped push Treasury yields to their highest level this year on concern that rising U.S. debt has hurt T-bill demand among big holders of U.S. dollar reserves. Leaders from the BRIC countries, who gather next week in Russia, are seeking to forge a bigger global voice on economic issues for the group. A big part of that is getting more of a say in IMF lending decisions; providing more funding to the institution is a first step toward that. Strapped for cash, the IMF has been designing a bond that would meet the demands of Brazilian and other central banks since Jan. In addition to pledges by Russia and Brazil, China is considering the purchase of up to $50 bln.

India is expected to announce a purchase in the range of the Brazilian and Russian pledges. "This is an investment that Brazil is doing with part of its reserves and making available financing so that the IMF may help emerging countries, especially developing countries which face today a shortage of capital because of the global financial crisis," Brazilian Finance Minister Guido Mantega said at a news conference. While Mr. Mantega said the main intent of the bond purchases is to win a bigger voice at the IMF, the move is a diversification away from U.S. dollar-denominated assets. The IMF bonds would represent about 5% of Brazil's total reserves, which are mostly denominated in dollars.

News That Moves: Clarity on the Jobs Report, Integrity of the US$ In Question, Rule of Law vs "Shared Sacrifice"

RCM Comment: A little clarity on the Friday Jobs report...

Fleckenstein Capital:

Unfortunately for the economy, the headline job-loss number is somewhat bogus. It was helped by a birth/death model that assumed 220,000 jobs had been created last month. Even more suspect is the fact that this 220,000 plug factor was boosted 27% year-over-year. The BLS assumed new jobs were being created in financial services and construction, even as it reported actual job losses for those two sectors combined of 89,000 last month -- which makes no sense whatsoever.

RCM Comment: This story continues to gain momentum. US$ dominance on the world stage is coming under heavy fire. This trend is having - and will continue to have - serious influence over the equity, bond and commodity markets.

MOSCOW(Reuters) - Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia's president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.” http://in.reuters.com/article/economicNews/idINIndia-40109820090605

Japan's shadow finance minister wants single Asian currency

Nakagawa said people must "take into account the possibility that the dollar might not function as the key currency any more in the medium and long term" as the world seeks a new order in the post-Cold War era.Until an Asian common currency emerges, he said, "the Japanese government should make efforts to have the "Asia zone" use the yen, not the dollar, for trade settlements. It's time for Japan to launch this plan."Japan's government could extend lending to the International Monetary Fund on condition that it is in yen while guaranteeing bonds by Asian countries if they are denominated in the Japanese currency, he said.

RCM Comment: Add the above stories to the following breakdown of the TIC report and you begin to see the enormity of the problem weighing on the integrity of the US$.

The Astounding Reversal Continues: Bernanke’s Nightmare April 16, 2009
Yesterday, the U.S. Treasury released the Treasury International Capital (TIC) report for February 2009. It shows another outflow of capital. “Monthly net TIC flows were negative $97.0 billion. Of this, net foreign private flows were negative $106.3 billion, and net foreign official flows were positive $9.3 billion.”

The figure for January was updated to minus $147b from the previously reported minus $149b.http://www.ustreas.gov/This is a huge reversal. That is almost a quarter of a trillion dollars in just two months. Foreigners are not bailing out the Treasury any longer. They are pulling out. They are net sellers.This means that domestic buyers must be found — not just for the gigantic wave of debt already on the books but also for the foreigners who are saying sayonara.The FED has not budgeted for this. It has pretended that the much-heralded glut of international savings would continue. It’s over. It’s not just over; it’s imploding. We are now seeing a glut of selling. This will create havoc for the government. The bailouts from outside the country have gone into reverse.

RCM Comment: To those of you who voted for Obama based on the belief he would bring change to the political system and expunge the influence of special interests as he repeatedly promised on the campaign trail, I have one question. Are you prepared to admit the naivete of that decision? If not, please read the following story and focus on the red highlight. I would welcome any comment that would explain to me how this government manipulation of the bankruptcy process is anything other than a giant pandering to the special interest of the UAW. What a brilliant way to increase your approval rating and gather future votes: Stick it to the bondholders (the small group without whom you wouldn't have a company) and gift it to the bigger group whose behavior is arguably one of the major causes of the bankruptcy.

June 3 (Bloomberg) -- Bondholders have a new risk to contend with -- the Obama administration’s policy of “shared sacrifice.”...The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations....The president, Einhorn said, had introduced a “quixotic idea” into credit markets: “that creditor recoveries in troubled situations can be determined by an arbitrary sense of shared sacrifice rather than legal agreements and long- established prior practice.”...“When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?” he asked. “Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?”...“The UAW gets a recovery of five times the bondholders’ under reasonably upbeat scenarios,” CreditSights Inc. analyst Glenn Reynolds wrote in a research note. “This is just the fact.”

News that Moves: Specious Jobs Report, Yellen Concerns, Carnage in State Budgets

ECONX Jobs Report Surprises

The market got a kick out of the May employment report, as it cheered the news that "only" 345K nonfarm payroll jobs were lost during the month. That was indeed much better than the consensus estimate of -520K. Moreover, the April nonfarm payrolls data was revised up to show a decline of -504K positions versus an originally reported -539K...

The other headline that jumps out is the unemployment rate, which spiked to 9.4% from 8.9% and is at its highest level since 1983. The big uptick is owed in part to an increase in the civilian labor force, meaning there were more people looking for jobs. That is being read in counter-intuitive fashion, though, as a sign that it reflects increasing confidence in the economic recovery...

RCM Comment: The markets are fluctuating wildly as all try to digest the payroll numbers. My take - trying to make decisions today using this payroll information is an exercise in futility. Why the disdain you ask? Well here are a few reasons:

The payroll numbers are notoriously volatile

The numbers will be revised in the months to come, which is a nice way of saying they were wrong to begin with

The government creates the numbers and, to say the least, we have a healthy skepticism for government creations

And perhaps most important, as an experienced trader I can testify that the direction markets take on payroll announcement days often has no followthrough.

Instead of wasting our time dissecting specious numbers, let's analyze something a little more important to the health of the economy and perhaps a little more concrete. Take a close look at the following graph and meet me at the bottom....





















The key to this graph is the red line. The 'New Notice of Defaults' was surging even before mortgage rates spiked. In the last 30 days mortgage rates have spiked roughly 20% from low to high. I'm loath to see how this increase will effect notice of defaults in the coming months. Fed governor Yellen voiced her concern today when she said the, "rise in Treasury, mortgage yields is "disconcerting".

RCM Comment: I mentioned in the June 1st post that other states were going to follow California into the budget abyss. Well....

Carnage in state budgets is getting worse - NY Times
NY Times reports the carnage in state budgets is getting worse, a report said, with places like Arizona being hurt by falling revenue on multiple fronts, like personal income and sales taxes. Other states are having mixed experiences, with some tax categories stable, or even rising, even as others fall off the map.

The report, by the National Conference of State Legislatures, also provided a scorecard for how well drafters of state budgets read the recession's economic tea-leaves — and the short answer is, not very well. Thirty-one states said estimates about personal income taxes had been overly optimistic, and 25 said that all three major tax categories — sales taxes, personal income taxes and corporate taxes — were not keeping up with projections. Even gloomy-Gus states that saw the recession coming and low-balled their tax estimates had little room for celebration, the report said. "The handful of states that have weathered the economic decline reasonably well are starting to report adverse revenue developments," it said. "The news is alarming."

News that Moves: GM Bankruptcy & Obama Comments, Fed Mortgage Efforts, California's 'A' rating in question

Securitization is like fertilizer. You can grow tomatoes or blow up buildings.

-Simon Mikhailovich

RCM Comment: The government sponsored bankruptcy of GM goes into effect today. President Obama tried to give an encouraging speech this morning from the White House stressing his desire not to run a car company. He tried to make it clear that government ownership of corporations was not the goal. As Shakespeare would say, "The lady doth protest too much, me thinks." - Hamlet (III, ii, 239)

US treasury bond prices plummet (yields rise), the US$ continues to sell off vs. a basket of currencies, oil up another 3%; the markets are speaking and they don't like this fiscal irresponsibility.

Food for thought that may have salmonella: The government sponsored programs' total cost to date equal more than 18% of GDP. This is a gargantuan number. To put it into perspective, during the entire depression of the 1930s the government programs' cost totaled just 7% of GDP. Gold rallied $100 in the month of May, oil up 25% -- that roar you hear is the wave of hyperinflation headed our way.

RCM Comment: When governments interfere with business this is usually the result...
Fed mortgage efforts prove costly - WSJ
WSJ reports the U.S. Federal Reserve's program to keep mortgage rates low by buying securities and Treasury bonds so far has been costly and seems to be having a fleeting impact. An analysis of the timing of the Fed's purchases of mortgage-backed securities by J.P. Morgan Chase shows the Fed is "under water" on its portfolio by about 10%, and it would have to take about $5 billion in losses if it were to mark its portfolio to the market. The Fed has spent about $2,500 per borrower, by J.P. Morgan's analysis -- more than it costs a typical mortgage borrower to refinance their debt. Higher fees and adjustments based on a borrower's credit score or home's value have been an impediment to borrowers looking to refinance a mortgage, damping the refinancing wave the Fed hoped for, analysts say.

RCM Comment: This is just the beginning, other states to surely follow...
Fitch revises to negative the outlook of the state of California's 'A' rating
Fitch Ratings affirms the 'A' long-term general obligation (GO) bond rating on the State of California and revises the Rating Outlook to Negative from Stable. The revision in the Outlook to Negative also applies to the state's GO Veterans, economic recovery, and other bonds tied to the general credit of the state. The state's long-term 'A' rating is based on its broad economy and a moderate, though growing, debt burden. However, California's 'A' rating is the lowest among U.S. states, due to its revenue volatility and the fiscal inflexibility posed by voter initiatives. The revision of the Outlook to Negative reflects growing concerns with the state's widening budget and cash flow deficits....