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YRC Trucking And Why You Need To Be Concerned

Robert Jones
http://www.bluebattleflag.com/

There is a tremendous amount of reasons why you should be paying attention to the trucking industry at the current moment. Arrow Trucking just went down the drain on Thursday, December 24, 2009— halting all operations, canceling fuel cards, and telling drivers (by direction of Daimler Financial who funded the entire fleet of trucks) to return their rigs to the nearest Freightliner dealer and get a bus ticket home. I have recently seen this article concerning YRC Trucking (YRC Worldwide) and that GOLDMAN SACHS IS TRYING TO BANKRUPT YRC through bad derivatives and credit default swaps. Keep in mind that YRC(W) is the largest, most comprehensive network in North America and one of the largest in the world for that matter. IT IS OF GREAT CONCERN to pay attention to such a matter.

Trucking Bankruptcies threaten 3 major necessities:

1. Food
2. Goods/Materials (commodities necessary for everyday life [-life essentials/non-life essentials])
3. Fuel Delivery

Why the concern that I insist?……….

The U.S. Army War College warned in 2008 November warned in a monograph [click on Policypointers’ pdf link to see the report] titled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development” of crash-induced unrest:
The military must be prepared, the document warned, for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” The “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.” “An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home,” it went on. “Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance,” the document read.

Why do you need to be concerned with YRC?……because when the trucks stop—
IT ALL STOPS.

In light of a weakening Case Shiller housing index, fears rise that Home Prices May Be Nearing a New Dip.

Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.

The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.

A report from the Federal Housing Financing Agency showed that prices were flat in September from August.

The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.

“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”

He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.

The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.

The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.

Pay Option Arm Time Bomb

If there is no clear, easy way out for housing, then there is no clear, easy way out for Wells Fargo. Wells is sitting in a huge pile of Pay Option Arms in bubble states like California, where prices still have a long way to correct.

iStockAnalyst comes to a different conclusion and states Wells Fargo’s Option ARM Problem Is Not That Bad.

I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.

Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…

In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.

Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:

…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

11% Decrease Forecast For 2010

Inquiring minds might be interested in noting Fiserv Case-Shiller Home Price Insights: U.S. Housing Prices Forecast to Decrease 11 Percent over the Next Year.

The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.

“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”

One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.

Cumulative Declines

Calculated Risk has this chart that nicely shows cumulative declines.

click on chart for sharper image

Extend And Pretend

Los Angeles, San Francisco, and San Diego are all down over 38% from the peak. The Wells Fargo Chief Economist expects a further 10% decline in prices, essentially the same as Case-Shiller.

Yet out of a portfolio of $100 billion in Option ARMs, Wells Fargo assumes that virtually none of those will recast at 125% of the original mortgage balance. That is a preposterous amount of mark-to-fantasy pricing.

Wells Fargo is simply refusing to recast problem loans, putting off today’s problem hoping it will not be as big a problem later. I have news for Wells Fargo. This problem can only get worse with age. There is no good reason to assume home prices will rebound before 2012, and in fact prices might fall for much longer.

In the meantime, most Option-ARM holders are only making the minimum payment with negative amortization increasing monthly. When those loans do recast, anyone in their right mind will hand over the keys. Given that buyers of high-priced homes are more apt to be in a right mind than buyers of low-priced homes, expect to see Wells Fargo the proud owner of a huge number of homes when those loans do recast.

In the meantime, Wells Fargo is collecting insufficient rent on properties it will own in due time. How long the market let’s Wells get away with this extend and pretend fantasy remains to be seen, but eventually it is guaran

teed to sink Wells in due time.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

This is exactly how the central bankers are now ACTIVELY ENGAGED IN THEIR PLAN. No, they are not going to get on the world stage and make the following announcement, “Ah hem…. We, the Central Bankers of the planet Earth, are hereby enacting our plan to control the people, nations, and natural resources of the planet, so that WE can CONTROL the globe and PROFIT from every transaction!”

No, no, that press conference won’t be held until AFTER it is complete. It’s now in progress, here’s how it works… start by infesting the globe with money that can only come into being when it’s backed by debt. Then add in a massive heaping of skanky derivatives and shaky debts, stir up the pot and begin creating one crisis after the other. Then step in like this:

IMF Gets $600 Billion Credit Line to Help in Financial Crises

By Sandrine Rastello

Nov. 25 (Bloomberg) — The International Monetary Fund said it will have access to a credit line of up to $600 billion to make loans during financial crises after contributing countries agreed to fold commitments into one pool.

The agreement, yet to be approved by the IMF board, adds as many as 13 members from the current 26 to the so-called New Arrangements to Borrow, including emerging nations China, Russia, Brazil and India, the IMF said in an e-mailed statement.

The decision “marks an important moment for multilateralism and the fund, which will help the IMF’s effectiveness in its response to crises,” Managing Director Dominique Strauss-Kahn said in yesterday’s statement.

The deal goes beyond a pledge by leaders of the Group of 20 nations to contribute up to $500 billion to a credit arrangement that’s currently worth $54 billion, the IMF said. The worst financial crisis since the Great Depression prompted more nations to seek aid from the fund, created after World War II to help ensure the stability of the global monetary system.

The agreement, which merges existing commitments into one facility, makes it easier for the IMF to tap into its supplemental resources. The credit line will be “an effective tool of crisis management as a backstop for the international monetary system,” the IMF statement said.

While a general agreement on the NAB was reached at the G- 20 meeting in Pittsburgh in September, talks on the specifics stalled over divisions between some emerging and developed nations over voting rights relating to the credit facility.

Borrowed From Members
The IMF has estimated that its current credit line was insufficient when the financial crisis boosted demand for loans. It then started to borrow from individual members, such as Japan, to continue lending to countries in difficulty.

To ensure the institution would continue shoring up economies around the world, G-20 leaders in April pledged to add $500 billion to the IMF’s resources.

Some of these contributions were bilateral loans, while China agreed to participate by buying the first IMF notes. Some countries, like the U.S., made theirs directly to the NAB.

When the new credit-line agreement is activated, all the bilateral loans will fall into it, Andrew Tweedie, who heads the IMF Finance Department, said in a Nov. 20 interview. It won’t come into effect before next year, he said.

So, the IMF who comprise the world’s central bankers go the individual central bankers and get money… of course this is just for show and to confuse the world… they could just as easily just create their own IMF money, and I’m sure will, but instead they pretend that they are “borrowing” money from countries around the world. Well, were did that money come from? The same central bankers!

Then, they take the money at the IMF level and do this with it…

Serbia Gets 3 Billion Euros From IMF to Counter Global Crisis

By Aleksandra Nenadovic

March 25 (Bloomberg) — Serbia and the International Monetary Fund agreed on a 3 billion-euro ($4.1 billion) bailout to help the country repair the damage to its economy by the global financial crisis, Economy Minister Mladjan Dinkic said.

The accord will last two years, he told reporters in Belgrade today.

Last year, Serbia opened a $516 million credit line with the IMF, joining countries including Hungary, Ukraine and Latvia in seeking outside help to cope with the effects of the crisis. Like other emerging markets, Serbia is grappling with a lack of credit and a plunging currency as the economy contracts for the first time in a decade.

Serbia is also hoping for additional commercial loans from the World Bank and the European Union that will be negotiated on March 27 in Vienna. Serbia already has received a $600 million aid package from the World Bank.

On March 24 central bank Governor Radovan Jelasic said Serbia’s economy may contract 2 percent this year. There is a “downside risk” to this forecast because the government doesn’t have enough funds to spur the economy through spending, he added.

Finance Ministry spokeswoman Kristina Radovic said on March 17 that Serbia didn’t draw any funds from the original credit signed in November.

BINGO! Ding, Ding… Johnny, we have a sucker on the line! And in this way Serbia now must conform to the conditions of the loan or they will be cut off. What did the central bankers do to “earn” this money? What and who gave them the right to mint money on the global stage and to indebt entire nations? I think you know the answer to that… they gave themselves the power to do so, no one would stop them as the politicians and the judges are bought off along the way.

And because all their “money” is debt, this is the end result…

Dubai Debt Delay Rattles Confidence in Gulf Borrowers

By Laura Cochrane and Tal Barak Harif

Nov. 26 (Bloomberg) — Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since Feb

ruary as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai credit-default swaps climbed 90 basis points to 530 after yesterday increasing the most since they began trading in January, CMA Datavision prices showed.

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will, of course, be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

‘Debt Burden’
“We understand the concerns of the market and the creditors in particular,” said Sheikh Ahmed Bin Saeed Al- Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, in the first statement to come out of the Dubai government since the announcement about debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”

The MSCI Emerging Markets Index of stocks had the biggest decline in four weeks, falling 2.2 percent, led by Russia and China. Europe’s Dow Jones Stoxx 600 Index lost 3.3 percent in London, the biggest decline since April 20. South Africa’s rand and the Turkish lira weakened 2.1 percent against the dollar. Hungary’s forint lost 1.7 percent per euro. Credit-default swaps on Russia increased to 205 basis points from 192.
The MSCI World Index of 23 developed markets has risen 26 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

‘Shock’ Announcement
“The announcement was a shock,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London. “It is strongly affecting European markets.”

Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom to transform the economy into a regional tourism and financial hub. The emirate suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

Moody’s Investors Service and Standard & Poor’s cut the ratings on Dubai state companies yesterday, saying they may consider Dubai World’s plan to delay debt payments a default.

Gulf region default swaps jumped, with contracts linked to Bahrain adding 29 basis points today to 223.5, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 23 basis points higher at 159.5 today, according to London-based CMA. Qatar default swaps rose 13 basis points to 117, adding to yesterday’s 11 basis-point increase.

‘Further Defaults’
“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.

Saudi Arabia default swaps climbed the most since February, adding 18 basis points to 108. The British Bankers’ Association asked the U.K. government to intervene with Saudi authorities over debts of at least $20 billion owed to as many as 100 banks by Saad Group and Ahmad Hamad Algosaibi & Brothers Co., two family holding companies based in the oil city of Al-Khobar, according to a letter dated Nov. 20.

Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record 181 basis points to 540.5 yesterday and were priced another 72 basis points higher today at 612, according to CMA data.

Manmade islands and gleaming new cities in the middle of the desert all devoid of people and real commerce. Of course the people who provided the financing deserve to lose their money and this will ripple around the globe, just one of several problems interrupting our markets (DOW futures are down more than 200 points this Thanksgiving even though the markets are closed). Amazing how news like this occurs when the U.S. markets are closed.

The people of the world need to wake up. Their futures and their natural resources are being robbed. There is a much, much better way, details coming soon. Meanwhile the Central bankers are already enacting their plan as they sing to Serbia, “Got you where I want you…”

The Fly’s – Got you where I want you:

Outstanding artwork done by AZRainman

Last night after a 10 hour drive I was up at 5:00AM watching the futures plunge but not knowing why. Now we know: Dubai default fears spook investors

Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.

The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.

US markets are closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2 per cent.

As the European trading day progressed it became clear it was Dubai World’s difficulties that had hit a particular nerve, reminding investors of the lingering damage wrought by the financial crisis.

Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.

Greek and Irish government five-year credit default swaps also moved higher as nations with supposedly precarious fiscal positions were punished. In contrast, investors sought out comparative haven assets, pushing the yield on the German Bund down by 8 basis points to 3.16 per cent.

Dubai Debt Delay Rattles Confidence in Gulf Borrowers

Please consider Dubai Debt Delay Rattles Confidence in Gulf Borrowers

Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.

Gold And The Watched Pot Theory

While some were spouting US government debt default theories or dollar devaluation theories others were looking for the “unwatched pot”.

Inquiring minds are taking another look at Gold And The Watched Pot Theory written October 07, 2009.

Message Of Gold

The reason for the strength in gold is not US inflation. As I have pointed out many times, gold fell from 850 to 250 over the course of 20 years, with inflation every step of the way. Thus, the inflation story just does not fit.

However, it should be clear that a major financial crisis is in store following a long period of competitive currency devaluation and massive debt and derivatives expansion by nearly every major country on the planet.

Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.

There is seldom a mention of the problems in European banks who foolishly lent money to the Baltic States in Euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans cannot be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US.

Spain has unemployment approaching 20% yet must suffer through the same interest rate policy as Germany. Seldom does one hear about this either.

Certainly the UK is a complete basket case with its banks on government life support. Iceland has already blown up, who is next?

Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow’s problem, not today’s.

Watched Pot Theory Revisited

A watched pot may boil, but it’s not likely to explode, especially when everyone watching the pot expects an explosion any second.

Indeed, it would be fitting if the Ridiculous Hype Over Secret Oil Meetings, helped form a bottom on the US dollar.

Yet, it’s easy to see that a financial crisis is brewing.

Somewhere, something is going to blow sky high, but from where I sit, it’s as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.

Hyperinflation?!

Amazingly some see this as hyperinflationary.

Nadeem Walayat writing for the Market Oracle says Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend

Nov 18, 2009 – 12:58 AM

The jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.

Why do deflationists have it wrong ?

It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble ‘should’ contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!

The DEFLATIONISTS ARE DEAD WRONG !

The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months – it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG!

What’s amazing is how hyperinfl

ationists who have blown the call for 10 years running now accuse deflationists in advance of rewriting history.

Here’s the deal. Deflation happened, the only debate is how long it lasts. It is more than premature to proclaim the end of it on the basis of an 8 month period. Things do not progress in a straight line and a rebound after a 51% plunge in the S&P 500 and 10 year treasury yields close to 2% was expected.

That rebound is a much proof of the end of deflation as any of half a dozen 50-100% rebounds in the Nikkei over the last two decades, or the massive rebound in the DOW in 1931 before it plunged to new lows.

Many of those pointing to 8 month timelines as if that is what matters ignore an even bigger timeline in which stocks fell that 51%. If this rally is proof of inflation the the plunge must be proof of deflation.

The reality is neither is true. What is true is that in a credit based fiat economy, what matters is ability of the Fed and Central Banks in general to foster bank lending. And that is not happening.

Total Bank Credit

click on chart for sharper image

More Deflationary Writeoffs Coming

click on chart for sharper image

Allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.

The $trillions poured into the economy got a measly 2.8% rise in GDP.

Now what? Jobs are still contracting, businesses are not borrowing, banks are reducing credit card limits, etc, etc.

Those are not conditions of inflation, let alone hyperinflation. Now concerns are rising in Congress and the administration over the national debt. Meanwhile, more defaults loom: on housing, on commercial real estate, and on credit cards.

Two year treasury yields are at a record lows of .74 and five year treasuries are at 2.11.

If hyperinflation is coming, buy houses. Nowhere else can you get the leverage you can get in houses. It’s a sure thing. Meanwhile I suggest gold has been rising for another reason: credit stress and fears of deflationary economic collapse.

Dubai just stepped up to the plate out of the blue, defaulting on debt. Defaults are part of the deflationary process. Prepare for more of them because they are coming.

I see no reason to change my stance that the US is in for a long slug of hopping in and out of deflation for quite some time. Ironically it is the hyperinflationsts who are rewriting history. The hyperinflationists had it wrong, deflation happened first.

Deflation is here, the only debate is how long it lasts. Some of us saw it coming, the rest still scream about the massive inflation that is supposedly coming. They may be correct eventually, but when?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

John Hussman is always a good read. A week after it came out, I am catching up on reading reading “Should Come as No Shock to Anyone”.

Hussman is about as level-headed as they come, so it was interesting to see him accuse the Fed and Geithner of “Unconstitutional Abuse of Power”. Here is the pertinent snip:

There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed’s position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed’s actions, and can’t make long-term loans with these funds anyway.

Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government.

This strikes me as a huge mistake, because it effectively impairs the Fed’s ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress’ ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner’s actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

Needless to say, I emphatically support recent Congressional proposals to vastly rein in the power (both statutory and newly usurped) of the Federal Reserve. Starting with the Bear Stearns deal, the Fed under Ben Bernanke has made a sharp and distinct departure from its historical role, in violation of its charter. As I noted when the bondholders of Bear Stearns were rescued, “The troubling aspect of the Fed’s action was not that it lent to a non-bank entity. That ability is clearly authorized by Section 13(3) of the Federal Reserve Act. The problem is that it made its “loans” as “non-recourse” funding – meaning that it would not stand to be repaid if the collateral itself was to fail.” This is still what the Fed seems determined to accomplish.

In my view, deeper loan losses are ahead, and if we deal with the next round the same way that we dealt with the last, we will ultimately succeed in debasing the U.S. dollar. There’s little inflationary pressure at present, and chances are that fresh credit concerns will create enough demand for government liabilities to forestall inflationary pressures for several years more. But we cannot reimburse the losses of irresponsible lenders with trillions freshly issued government liabilities without those liabilities ultimately eroding in value. The probable real, after inflation return on stocks and bonds over the coming decade is likely to be very unsatisfactory.

I certainly agree and that is why we need the Fed audited in Ron Paul fashion, not some watered down proposal that makes allowances for and covers up the Fed’s unconstitutional abuse of power.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.