RWWNL 2005-07

This morning it is my pleasure to feature a guest article from a careful observer of the American economy. Reposted from the May 3rd edition of Counterpunch. –TRW

May 05, 2007

The Harder They Come … A Stock Market Post-mortem

“There’s class warfare, all right, but it’s my class that’s winning.”

–Investment tycoon, Warren Buffett

Mike Whitney

The real estate market is crashing faster than anyone had anticipated. Housing prices have fallen in 17 of 20 of the nation’s largest cities and the trend lines indicate that the worst is yet to come. March sales of new homes plummeted by a record 23.5% (year over year) removing all hope for a quick rebound. Problems in the subprime and Alt-A loans are mushrooming in previously “hot markets” resulting in an unprecedented number of foreclosures. The defaults have slowed demand for new homes and increased the glut of houses already on the market. This is putting additional downward pressure on prices and profits. More and more builders are struggling just to keep their heads above water. This isn’t your typical 1980s-type “correction”; it’s a full-blown real estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won’t be limited to housing–they will rumble through all areas of the economy including the stock market, financial sector and currency trading. There is simply no way to minimize the effects of a bursting $4.5 trillion equity bubble.

The next shoe to drop will be the stock market which is still flying-high from increases in the money supply. The Federal Reserve has printed up enough fiat-cash to keep overpriced equities jumping for joy for a few months longer. But it won’t last. Wall Street’s credit bubble is even bigger than the housing bubble—a monstrous, lumbering dirigible that’s headed for a crash-landing. The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed’s cheap “low-interest”liquor. One wrong step and he’ll plunge headlong into the ether.

The stock market cheerleaders are ooooing and ahhing the Dow’s climb to 13,000, but it’s all a sham. Wall Street is just enjoying the last wisps of Greenspan’s low interest helium swirling into the largest credit bubble in history. But there are big changes on the way. In fact, the storm clouds have already formed over the housing market. The subprime albatross has lashed itself to everything in the economy —dragging down consumer confidence, GDP and (eventually) the stock market, too. The real damage is just beginning to materialize.

So why the stock market keep hitting new highs?

Is it because foreign investors believe that American equities will continue to do well even though the housing market is slumping and GDP has shriveled to the size of a California raison? Or is it because stockholders haven’t noticed that the greenback getting clobbered every day in the currency markets? Or, maybe, investors are just expressing their confidence in the way the U.S. is managing the global economic system?

Is that it—they admire the wisdom of borrowing $2.5 billion per day from foreign lenders just to keep the ship of state from taking on water?

No, that’s not it. The reason the stock market is flying-high is because the Federal Reserve has been ginning up the money supply to avoid a Chernobyl-type meltdown. All that new funny-money has to go somewhere, so a lot of it winds up in the stock market. Evergreen Bank’s Chuck Butler explains the process in Thursday’s Daily Pfennig:

“The Fed may have quit publishing the M3 data, but they continue to publish all the data that goes into the calculation and our friends over at Shadow Government Statistics have a chart which demonstrates why the Fed decided to keep M3 under wraps. A look at the chart shows the Fed is pumping up broad money supply at an astounding rate of 11.8% per year! All of this rapid money supply growth is reflected in an increase in equity prices. The stock market needs to rise just to keep pace with all of this newly-created money. As long as the Fed doesn’t rock the boat with another rate hike or by turning off the spigot of money flowing into the markets, the equity markets will continue to run.”

Ah-ha! So the Fed gooses the money supply, stocks shoot up, and everyone’s happy—right?

Wrong. Growth in the money supply should (closely) parallel growth in the overall economy. So if GDP is shrinking (which it is) and the money supply is increasing then–Viola!–inflation. (”11.8%” to be precise)

Of course inflation doesn’t affect the investor class or their fellow-scoundrels at the Fed—the more money floating around the markets the better for them. It’s just the opposite for the pensioner on a fixed income or the salaried wage-slave who gets a 15-cent pay raise every millennia. They end up getting ripped off with every newly-minted greenback.

But then that’s the plan—to shift zillions from one class to another through massive equity bubbles. All it takes is artificially-low interest rates and a can of WD-40 to keep the printing presses rolling. It’s so simple we won’t dignify it by calling it a “conspiracy”. It’s just a swindle, pure and simple. But it never fails.

Every time the Fed prints up another batch of crisp $100 bills; they’re confiscating the hard-earned savings of working class people and retirees. And, since the dollar has dropped roughly 40% since Bush took office in 2000; the government has absconded with 40% our life savings.

That’s the truth about inflation; it is taxation without representation, but you won’t find that in the government’s statistics. In fact, the Consumer Price Index (CPI) deliberately factors out food and energy so the working guy can’t see how the Fed is robbing him blind. The only way he can gauge his losses is by going to the grocery store or gas station. That’s when he can see for himself that the money he works so hard to earn is steadily losing its purchasing power.

The big question now is how long will it take before foreign creditors wise up and see the maxed-out American consumer is running out of steam. As soon consumer spending slows in the US; foreign investment will dry up and stocks will tumble. China and Japan have already slowed or stopped their purchases of US Treasuries and China has stated that they plan to diversify their $1 trillion in US dollars in the future. This has lowered demand for the dollar and decreased its value in relation to other currencies. (The dollar hit a new low just last week at $1.36 vs. the euro)

A slowdown in consumer spending is the death-knell for the dollar. That’s when there’ll be a stampede for the exits like we’ve never seen before–with each of the world’s central banks tossing their worthless greenbacks into the jet-stream like New Years’ confetti. According to Monday’s Washington Post that moment may have already arrived. As the Post’s Martin Crutsinger says, “Consumer spending rose at the slowest rate in five months in March while construction activity managed only a tiny gain, weighed down by further weakness in housing”.

The connection between housing and consumer spending is critical. Housing has been the main engine for growth in the US in the last 5 years accounting for 2 out of every 5 new jobs and hundreds of billions in additional spending through home-equity extractions. A downturn in consumer spending means that foreign investors will have to look for more promising markets abroad, which will trigger a steep reduction in the amount of cheap credit coming into the country via the $800 billion trade deficit. This will slow growth in the US while further weakening the dollar.

Can you say stagflation?

The present currency and economic crises were brought on by Bush’s unfunded tax cuts, unsustainable trade deficits, and the Fed’s hyperinflationary monetary policy. These policies were executed simultaneously for maximum effect. They were entirely premeditated. Many people now believe that the Bush administration and the Federal Reserve are intentionally creating an “Argentina-type meltdown” so they can privatize state owned assets and usher in the North American Union–the future “one state” alliance of Canada, Mexico and US–along with the new regional currency, the Amero.

Stay tuned.

Nevertheless, monetary policy is not the only reason the stock market is headed for a fall. There’s also the jumble of scams and swindles which have been legalized under the rubric of “deregulation”. New rules allow Wall Street to take personal liabilities and corporate debt and repackage them as precious gemstones for public auction. It’s the biggest racket ever.

Consider the average hedge fund for example. The fund may have originated with $10 billion of its own cash and swelled to $50 billion through (easily acquired) credit. The fund manager then creates an investment portfolio that features CDOs (collateralized debt obligations) and Mortgage Backed Securities (MBS) to the tune of $160 billion. The majority of these “assets” are nothing more than shaky subprime loans from struggling homeowners who have no chance of meeting their payments. In other words, another man’s debt is magically transformed into a Wall Street staple. (Imagine if you, dear reader, could sell your $35,000 credit card debt to your drunken brother-in-law as if it was a bar of gold or a vintage Ferrari. That, believe it or not, is the scam on which bond traders thrive)

So, the fund is leveraged, the assets are leveraged and (guess what) the investors are leveraged too—either buying on margin or borrowing oodles of cheap, low interest credit from Japan to maximize their profit potential.

Get the picture; debt x debt x debt = maximum profit and skyrocketing stock prices. That’s why the face value of the market’s equities far exceeds the world’s aggregate GDP. It’s all one, big debt-Zeppelin and it’s rapidly tumbling towards planet earth.


Deregulation works like a charm for the gangsters who run the system. After all, why would they want rules? They’re not thinking about capital investment, productivity or infrastructure. They’re not building an economy that serves the basic needs of society. They’re looking for the next big mega-merger where two monolithic, maxed-out corporations join in conjugal bliss and create a mountain of new credit. That’s where the real money is.

Wall Street generates boatloads of cyber-cash with every merger. This pushes stock prices up, up and away. Deregulation has turned Wall Street into the biggest credit-generating Cash-Cow of all time–spawning zillions through seemingly limitless debt-expansion. These virtual dollars were never authorized by the Federal Reserve or the US Treasury–they emerge from the black whole of over-leveraged uber-transactions and the magical world of derivatives trading. They are a vital part of Wall Street’s house of mirrors where every dollar is increased by a factor of 50 to 1 as soon as it enters the system. Assets are inflated, debt is converted to wealth, and fiscal reality is vaporized into the toxic gas of human greed.

Doug Noland at Prudent explains it like this: “We’ve entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don’t even call “money” by its former name anymore is precisely because we realize at some semi-conscious level that “liquidity” is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops — or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we’ll discover that our money (the US dollar) is actually different from real wealth”.

Noland is right. The market is “a pyramid scheme of revolving credit rackets and percentage spread plays” and no one really knows what to expect the flow of liquidity slows down or “reverses”.

Will the stock market crash?

It depends on the aftereffects of the subprime meltdown. The defaults on existing mortgages are only part of the problem. The real issue is how the “credit dependent” stock market will respond to the tightening of lending standards. As liquidity dries up in the real estate market; all areas of the economy will suffer. (We’ve already seen a downturn in consumer spending) Wall Street is addicted to cheap credit and it has invented myriad abstruse debt-instruments to get its fix. But what happens when investment simply withers away?

According to Jerome Corsi that question was partially answered in a letter from the Carlyle Group’s managing director William Conway Jr. Conway confirms that the rise in the stock market is related to “the availability of enormous amounts of cheap debt”. He adds that:

“This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate and at all levels of the capital structure.” (But) “This liquidity environment cannot go on forever. The longer it lasts, the worse it will be when it ends.Of course when ends, the buying opportunity will be once in a lifetime.”

Ah, yes, another wonderful “buying opportunity”?

You can almost feel the breeze from the great birds flapping overhead as they focus their gaze on the carrion below. Once the stock market collapses and the greenback flattens out on the desert floor; they’ll be plenty of smiley faces preparing for the feast.

Conway is right, though, the stock market IS floating on a cloud of cheap credit created by a humongous trade deficit, artificially low interest rates, and a 10% yearly expansion of the money supply. Like he says, “It cannot go on forever.” And, we don’t expect that it will.

Mike Whitney lives in Washington state. He can be reached at:

April 22, 2007

What? No Worry?

The sub prime problem is over.  The government has figured out a way to make the problem go away.  One major mortgage lender has received an offer of 96.5% of their loan portfolio.  Hmmm!  Wonder who would make that offer.  Who in their right mind would buy these mortgages when over 10% of them are not good loans, and that percentage will probably go up.  Thankfully we have the government and the fed to keep us from going under.  The news organizations are helping too.  The news cycle is now over for that problem, and they are off to more important issues.  There is even advertisements for ìcheap” loans being offered.

Have you visited The Mortgage Lender Implode-O-Meter website lately?  You might be surprised.  The number of mortgage lenders that have met their demise is now 62 and rising.  Mortgages are getting harder to obtain.  Home sales are going down.  House pricing will soon follow the escalator down.  What would you do if your house was suddenly worth much less that what you owed on it?  Give it back to the loan company that gave you the loan?  The real issue is that this is not a short term problem.

The stock market is going up.  This helps to increase the value of retirement funds.  People feel richer, so they can spend us into prosperity.  Don´t you feel better now?

The FED is in quite a quandary.  The dollar has been falling for some time.  What should they do with the interest rates?  Should they increase rates to help the falling dollar, or decrease rates to support the housing market?  Increasing rates will put the economy into a free fall situation, so the only option is to decrease rates.  The question is when.  There are several countries that are looking at increasing their rates to help their currencies.  This will hurt the dollar in the role as the reserve currency.  Not to worry.  This will only affect people traveling or buying products from foreign countries.  What if one of the countries looking at increasing rates was China?  What would we do if all the cheap products from China became more expensive?  Do not worry.  The government will figure out a way to take care of us.

I hope that I am not the only person that is thankful that the Anna Nicole news event is coming to a close.  It may last longer that any of us would hope.  We still have the custody battle to contend with, and legal battles over the money that is the primary reason that the custody battle is so important.  We are now on to more important events.  The Virginia Tech mass murders have become the important issue.

Thirty three people have died.  This includes 32 students, teachers, and the killer himself.  This was a tragic occurrence, but it is over.  It is over except for lawyers that now have taken over the news cycle.  That will take over the important news for the next week.  The healing process for the families will take much longer.

We must have answers to the all important question:  How will we prevent this from happening again.  First alert systems are becoming available that will operate just like early warning for weather alerts.  The difference is that you will get the alert on your computer or cell phone.  Maybe we need to add more psychiatrists to the school system to identify the crazed individuals that reside in them.  I am sure that these will only be government recommended psychiatrists.

Let us get rid of all guns.  Yes, that is the answer.  If only the government had guns, this would not have happened.   Now let me get this straight.  We have over 10 million ìillegal” people in this country, and we can not find them all.  We have over 100 million guns in this country, but if we made them illegal, they would all go away.  This must be some kind of new math.  We had better add it to the school curriculum.

Until next time,

Terence R. Wilken
Editor in Chief, RWWNL

March 18, 2007

The Mortgage Companies that cried Wolf

About two weeks ago I read an article in our local newspaper.  The poor people in Oklahoma were going to see a large reduction in their benefits.  This was occurring because of a ìhuge” shortfall in the money coming in from Oil and gas revenue.  Revenue is the governments buzz word for taxes.  The government of Oklahoma had expected an increase of $300 million dollars, and now the increase would be only about $200 million dollars.  Does anyone see a problem with this analysis?  Evidently the journalists do not.

Today was another article that told of a significant tax reduction that may take effect this year.  This would be very beneficial to the citizens of the state.  The journalists are on a roll.  Both articles were front page news.  I guess that if you write for the paper, you can say anything, and because it appears in the paper, it must be right.

The above was written to show that there are very few who truly understand the consequences of financial changes.  If you have been a regular reader of the RWWNL, you would know that money and the markets are all controlled and in the hands of the government.  It is now happening again.  It is taking shape with the mortgage Companies position in the housing as well as other markets.  The government determined that it was a persons right to have a house.  This was true even for people who had bad credit, and had already shown that they were not financially capable of paying off a loan.  How did the government do this?

They provided (through mortgage brokers) what is called ìsubprime” mortgage vehicles to people who had poor or bad credit.  I am sure that you have received many E-Mails offering low interest rate loans for a house where your bad credit would not be a problem.  You could even have interest only loans.  Now you know how it got started.  There were even people sucked into this program that had good credit.

The goal was to bring in new homeowners.  This was accomplished.  The tease was a mortgage with very low rates.  The kicker was that the rates would go up with any increase in the ìprime” rate.  This increase would occur over a period of time.  As we all know, this rate went up.  The rates for these hapless homeowners also went up.  In some cases, even higher than the prime rate.  You have to read the fine print.

So what are these homeowners going to do?  The answer is:  What they have done before!  Default on these mortgages!  The only entities that will be hurt are those mortgage companies that got them in trouble to start with.

The problem is what to do with the house.  The mortgage company must sell it.  So the mortgage Companies that started these programs put the houses on the market.  The flood of these homes for sale caused the selling price to go down in some areas.  The mortgage companies started losing money.  Now they are going bankrupt.  To know how many have failed so far go here: This is not over. The readjustment of mortgages still has a while to run.

Some of the mortgage companies understood the risk. They joined in obtaining the mortgages, but when done, they bundled the mortgages together and sold them to Freddie and Fannie.  This absolved them of risk, and put the US government on the hook for any losses. There were also companies that wrote derivative agreements on these baskets of loans. Where is it all to end.


One answer to this dilemma is that the government can offer assistance to those in need.  This will solve the problem.  It will all go away soon.  Now let me get back to what is happening with Anna Nicole’s Estate!

Terence R. Wilken
Editor in Chief, RWWNL

May 30, 2005

The bubble is coming, the bubble is coming!

Do any of you remember the TV serial called The Prisoner?  It was a British story that starred Patrick McGoohan.  It was a story that involved a British under cover that got caught and imprisoned on an island.  He had his own apartment, and there were other townspeople that lived on the same island.  They were all happy, and pleased with their plight.  He was not.  He tried to escape in every episode.  When he was about to escape, the
“guards” sent a big clear bubble after him.  It enveloped him inside and returned him to civilization.

Will the same thing happen to the housing market?  The bad news is that it may have already started.  When everyone jumps on the housing market as the latest money making fad, it may be time to get out.  The first sign of a bubble is when everyone decides to join the money making scheme.

Interest rates are relatively cheap.  People are of the opinion that the price of housing can never go down.  They are buying housing with 0 down, and interest only payments.  If housing ever starts down, there will be a lot of owners trying to get out at the same time.  The bubble will burst.  If it gets too bad, the Paul Volker may have to return.  He is the person who took interest rates on homes and other purchases to over 20 per cent in order to wring the excesses out of the economy.  This even resulted in reverse amortization loans.  I can tell you that Alan is no Paul Volker.  Alan wants to go out as our savior, not the villain.

What could cause the bubble to happen?  Inflation that causes a rapidly increasing interest rate would do the trick.   As we know, the government has managed to convince us that there is no inflation.  Short term interest rates are only going up at a slow and steady pace, and mortgage rates are actually going down.   This does not compute, but then when the fed is in charge of our finances, that is not surprising.  The idea is to keep panic at bay.  Yahoo Finance recently did a study and found that over 28 percent of people in the US have not even heard that there could be a housing bubble.  The fed may succeed in providing us with a controlled panic.  Now would that not be grand.  First of all, they need to teach us the three rules of being the father of the bride.  These rules are:

1. Sit Down

2. Shut up, and

3. Shell Out

Now let us now go out and buy another house to keep the economy going.

Terence R. Wilken
Editor in Chief, RWWNL

May 17, 2005

And yet, there is no INFLATION

If anyone has filled their gas tank, or bought groceries, they would take exception to the above statement.  The government is faster than the human eye.  They have taken these off the consumer price index list.  They are too volatile.  This helps them post these statements.  If they say it often enough, they can even get all the economic analysts to repeat the mantra.  When you control the money, you also control all the rules.

If the above statement is true, than why do we have to increase interest rates at all?  Allan is doing exactly that even though it is only “slowly and steadily.”  I guess that if you only do it
“slowly and steadily”, it will not have the same affect as fast and erratically.  The only problem I see is that in the end it has the same effect.  It also has an effect on those Companies that made the decision that interest rates would stay low forever.  They bought that Mantra hook line and sinker.  After all, there was no inflation!

Has anyone noticed the financial situation with GM and Ford?  Their bonds have been regulated to junk status.  They sold their cars at really cheap interest rates in order to meet sales targets, and now they will have to pay back these loans at higher interest rates.  The regulators do not think that they made the best decision, so they are saying that their ability to pay back has been diminished.  This may even be exasperated by the fact that their sales have started to go down.  There are some that say that GM may be the next Enron.  They may go bankrupt.  Say it cannot be so.

The same is occurring with AIG (the big insurer) and Fannie Mae.  They bet on the wrong side of the move in interest rates.  The biggest part of this is that these and other Companies have made the same mistake.  They have made it even worse by using derivatives in order to make their play—bet.  Now where have we heard that term before?  Let us hope that this does not lead to a derivatives crisis, but if it does, it will affect a lot more than the Companies involved.  Is not that always the case?

We must stand by and watch Alan save the World for us.  He must keep up his slow and steady pace.  Of course, if bonds go up, if the stock market goes down, if a housing bubble starts, or if some other financial crisis start, we might just have to reverse course and lower rates at a fast and panicked pace.

Now let us now go out and buy some more goods to keep the economy going.

Terence R. Wilken
Editor in Chief, RWWNL

May 05, 2005

The Truth about Social Security

What has brought this issue to the front of the national agenda is that the current administration has brought the idea forward that this program needs fixed now.  To add insult to injury, the idea that we need to consider the idea of privatizing part of the money that is put into the program is also on the agenda.  How dare anyone promote these ideas.

The idea of changing social security has brought out the doomsayers.  One response is that this idea will cost us trillions of dollars.  Another is that there is not a problem.  We need not do anything.  Why is it so hard to believe either of these?  I think that the answer to that question is to ask ourselves who is doing the responses.

Why will setting up private accounts cost us Trillions?  As I understand it, private accounts will be a voluntary program that allows some of the people the opportunity to put part of their “contribution”to social security into personal accounts.  As part of this, they will have to accept less money from the program when it comes their time.  That sounds like a fair trade off to me.  This sounds even fairer if one has the choice of whether to opt in or out of the program.  The money that they set aside is theirs, and if something happens to them, it goes to whom they want.  The only reason I can think of that would create this statement (cost will be trillions) is that the social security system is not really a retirement program.  It is a Ponzi scheme.  Current retirees are paid by current workers.  If it is allowed to go on in its current mode, it will come down like a house of cards, and obligations as we know them now will not be met at some point in the future.   Offering personal accounts will require that the government pay part of the current payout until sometime in the future.  We are told that there is a current surplus in SS, but let us not confuse the issue.  Let us only discuss the trillions of dollars that we have to come up with.

To do nothing is not an option either.  At some point in time, we will run out of money.  Do we have to do something now?  No we do not.  The only problem is that the social security program will not be able to sustain itself.  The longer we wait to make changes, the harsher the changes will have to be.

One final cry of wolf is coming from the AARP.  I am sure that you have seen their ad.  For a clogged drain, you will have to rebuild the entire house.  Then they proceed to destroy the house.  I guess that the AARP thinks that as we get older that we also lose our ability to think.  They have certainly lost my annual contribution.

The truth is that there are only two ways to fix the social security program as we know it.  Increase taxes, or reduce benefits.  These are the only methods that work when running a Ponzi scheme.  Either decision will take congress to admit that there is a problem.   Houston, we have a problem.   Now that we have that out of the way, let us bring all ideas to the table.  Maybe if we can get Congress to address the social security problem, we can get them to start on other issues.  Let us hope that they come to their senses.

There is a third option.  Allow all younger workers to opt out of the system, and contribute the 15 percent of their pay to their own accounts.  Let them fend for themselves.  No, we can not have that.  The government knows best how to take care of us.

Terence R. Wilken
Editor in Chief, RWWNL