The Year In Review

Whispers from 1930... Echoes in 2009 Dec 6, 1930 “No one can doubt that the present depression in business will soon be over and that still greater progress is before us.” – E. Herr, VP Westinghouse January 21, 1930 "Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." - News dispatch from Washington. January 24, 1930 "Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast." - New York Herald Tribune. March 8, 1930 "President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch. Sept 16, 2009 “Even though from a technical perspective, the recession is very likely over at this point, it's still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was."  - Ben Bernanke. Sept 23, 2009 “There is little doubt that we have moved back from the financial brink and toward economic recovery.” - Treasury Secretary Tim Geithner. July 17, 2009 “The number of people searching for the term “economic depression” on Google is down to normal levels.” - White House Economic Advisor Larry Summers.   OTHER PROPHETS: “I noted last week that from a Bayesian perspective, I would estimate a probability of nearly 80% that we will observe a second round of credit losses coupled with a market plunge in the coming year or so. That doesn't imply an all-out “crash,” but more likely a retreat similar in size to what we have often observed following other post-crash rebounds (about -28% on average)… so even without an outright “crash,” it would not be surprising to see the majority of the gains since the March low wiped out. Most likely, we may see a few more years of sideways movement after that, as the economy absorbs the full weight of adjustment to the deleveraging of bad debt and massive increase in government liabilities that we have on our hands.”  - John Hussman "The idea that we will reset to where we came from is false. It is a bumpy journey to a new destination with significant long-term effects." - Mohamed El-Erian

History does not repeat itself, but it rhymes. 2009 was a year in which the delusion and denial of financial institutions and regulators became a desperate attempt to forestall the inevitable truth of the depression. Instead talk of a green shoots recovery was promoted, but it should be obvious to anyone who reads that there was no “recovery” in 2009, and that the depression continues to deepen. Think of it like the “Phony War” between Late 1939 and May of 1940, when France and England had both declared war but nothing seemed to be happening. Then the storm broke. The recovery promoted by the government and media is equally “phony,” because it rests on manipulations in the markets by the Fed and equally manipulated accounting rules and government statistics--an official policy adopted by the Treasury Department to allow toxic mortgages to be extended and carried at full values, in spite of the near 40% decline in property value. The policy is deliberate denial, done solely to protect the banks from collapsing. It will extend the problem for years to come.

There is no mystery as to why this is being done. The damage already done to the banking system is so severe that if acknowledged under normal accounting principles and rules every major bank, and many large regional and community banks would be deemed insolvent. And this is just from the residential real estate crisis. Commercial real estate is the next wave, just off shore. In a rare moment of candor, Treasury Secretary Geithner agreed with this assessment. Speaking of the great crisis of the autumn of 2008 he told congress: “None of [the big Wall Street institutions] would have survived. The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”

So think of 2009 as that moment of awful suspense just after the charges have gone off on a large high rise building. The supporting structure has been broken. The building shudders, begins to sag at the top, yet appears to still be standing even though it is functionally and structurally destroyed. All the men and women in charge of things at the Fed, the Treasury, and Goldman Sachs aren’t stupid. They know this, which is why every effort has been made, by convenient gentlemen’s agreements and liberal fiat “liquidity,” to try and get as many folks out of the building as possible before it falls. And the “folks” were fat cat investors, the same ones President Barak Obama told 60 Minutes he did not run for office to bail out. With them we also covered the bad bets of a host of foreign banks and sovereign wealth funds, the mysterious “counterparties” in the dark universe of securities and derivatives trading schemes. The programs and policies ostensibly created to save the economy from collapse have had absolutely no effect on the failing Main Street scene, however , and the vast disconnect between Wall Street and Main Street was the salient characteristic of this year. Instead the policies put forward to save the system amounted to nothing more than a massive transfer of wealth, as public money gushed to rescue the bad investments of the wealthy and super wealthy.

To mention just one case, Bank of America, the nation’s largest bank by assets, received $45 billion in free TARP money, which was given to bolster their equity and promote new lending. What did they do? Lending is down, month after month, credit card lines have been closed and cut, interest rates there have been mercilessly hiked. Then, to throw off the yoke of government restrictions on compensation, the bank announced it was returning the money. How? They raised $19 billion in new equity, then borrowed the rest, $26 billion, from the Fed. Voila! Just in time for the Christmas bonus payouts! How healthy is this bank? The NYSE recently reported its stock had a P/E ratio of 545.36, meaning it is astronomically overvalued with a stock market cap over 500 times bigger than its actual earnings. To make matters worse, most of the “assets” the bank reports are really overvalued loans held at “mark-to-fantasy” values. The game was extend and pretend, with plenty of free money from Uncle Sam and the Fed whenever needed.

To put this in terms the common person might understand, Harvard professor Kenneth Rogoff described the free ride given to the banks this way: “If I told you, you could borrow almost 30 times what your house is worth at almost zero percent … I'd bet you'd make money too!”  Think about that. If you own a home worth $500,000, imagine if you could have the same deal the Fed gives the banks—a loan of $15 million at a quarter of one percent interest. Let’s say you had that house rented out but the tenant skipped town and left you with a big mess and three months in arrears.  The house is trashed with at least $200,000 damage. No problem.You can still value it at just what you paid for it, $500K! Take your $15 million, and guess what-- if your investments go bad on that money, not to worry. The taxpayer picks up the tab. So go forth and prosper! And make sure you pay yourself a healthy salary and hefty bonus while you’re at it. When you report your earnings, forget normal accounting. You can use any “internal model” you choose. Just hide all your losses “off balance sheet,” which is a new method we used to call “the second set of books.” Need money to pay back your TARP bailout last year? No problem. The Fed will print and deliver on demand, no questions asked. That’s the deal the bankers who took over the White House, Summers, Rubin and Geithner, cooked up for their banking brethren. Sign me up!

In spite of the new Obama administration’s motto regarding “change we can believe in,” nothing whatsoever was really done to correct the problems that underlie the crisis. Bill Bonner of  the Daily Reckoning writes: “The press reports make it sound like it’s back to business-as-usual. And for the banking industry, it DOES seem as though nothing has changed. They’re lending to cockeyed private equity deals (not the public)…aiding and abetting speculators in the carry trade…and handing out billions in bonuses. Just like old times.” And blogger Charles Hugh Smith is completely correct when he writes: “Absolutely nothing has been fixed in the past year. Band-aids have been positioned over fatal wounds, and the patient has been declared "healed." The sludge of toxic securities was pumped into Fannie and Freddie until they exploded and collapsed. Now it is simply being pumped into Ginnie Mae and the FHA. Nothing has changed.

Matt Tabbi’s scathing article for The Rolling Stone laid out the reasons we have seen no real reform from Obama. Just after he was elected, the key advisors that crafted his populist message to middle America were shipped off to positions insiders describe as administrative “Siberia,” and then the White house was staffed with other insiders, all from the Wall Street crowd, Rubin, Summers, Geithner. They quickly engineered the $306 billion giveaway to save Citigroup from doing a 9/11, and the policies we have seen since have served to gut regulation of derivatives and securities trading, exempt 8000 of our 8200 banks from provisions of new consumer friendly legislation, postpone the implementation of credit card reforms, instate bogus accounting rules, and continue the big payouts to the banking industry. In a nutshell, the government simply decided to pretend the crisis did not occur, assuming massive debt to postpone a real free market accounting and realignment of housing values--all to save the banks.

Ilargi of the Automatic Earth correctly points out that all we have seen is a transfer of wealth from one sector of the economy to another. “It becomes clear that whatever happens inside the system doesn’t solve any problems, but merely transfers wealth (heat) from one part of the system to the other. That is, while banks and investors have been making money over the past 6-month rally, someone else has been losing out. To figure out who, you need look no further than the record numbers of American citizens who are unemployed, homeless and/or living on food stamps. The system as a whole shows no recovery, just parts of it do due to increased misery in other parts.”

Fed Chairman Ben Bernanke summed this situation up in typical soft-spoken understatement: “Despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank-dependent borrowers such as households and small businesses.” Particularly bank-dependent borrowers? Who does he think people borrow from, their cousin? To translate this into more compelling and stark terms: in spite of the massive giveaway to the banks, you, the American public, are getting screwed. You can’t sell or refinance your house. Your credit cards are closed or levied at 30% or higher interest, you can’t get a car loan, and you can’t find a job. But hey…it’s a recovery! Get used to it.  Here’s a few headlines today describing our end of the deal:

 U.S. Foreclosures to Reach Record 3.9 Million in 2009 (bloomberg.com)
 California notices of default hit record (financemymoney.com)
 Notices of default surge 56% in SF Bay Area. (contracostatimes.com)
 Millions More At-Risk of Default (mhanson.com)
 Los Angeles area houses lose $60.8 billion in value through November (latimes.com)
 Forecasters See High California Unemployment Through 2012 (consumeraffairs.com)
 Taxpayers On The Hook For Ginnie Mae's Rampant Growth (Mish)
 Trade deficit, tax credit and fed policies threaten double dip recession (statesmanjournal.com)
 Emergency Jobless Insurance Claims Surge By Most Ever In Prior Week (zerohedge.com)
 A Few Private Health Insurers Will Soon Take ALL Your Money (robertreich.blogspot.com)
 Outlook for 2010: prices have further to fall (money.cnn.com)
 U.S. Homedebtors Lost $5.9 Trillion Since 2006 Peak (bloomberg.com)
 The Bailout Was a Wealth Transfer Scheme (whiskeyandgunpowder.com)
 Decline in house values continues despite spin (sfgate.com)
 Misleading Main Street: The Keys to the Phony Recovery (dailyreckoning.com)

The Nabob says... Put most simply, the single underlying characteristic of the collapse of 2008 was this: unsustainable DEBT, at every level of our society, from sovereign balance sheets to central banks, the banking system itself, business at every level, states, county and city budgets, and right down to households and individuals. Unsustainable debt cannot be cured by taking on yet more unsustainable debt, which is all the government and the Fed did. There was no solution in 2009, just the creation of staggering amounts of new debt. The “liquidity” of it all was enough to keep things floating, but all debt must be serviced, repaid, or defaulted on. We are now in a situation where servicing the existing debt has become nigh on impossible, and default much more likely--at every level, from Morgan Stanley walking away from big underwater commercial investments right down to individual homeowners walking away from underwater property and defaulting on their credit cards.

Heck of a Job...

Their work of protecting Wall Street and the big banks well underway, the new White House team set about with the “green shoots” meme to convince America that their policies were actually bringing recovery and ending the recession. The liberally doctored statistics on employment, where millions were just quietly dropped out of the work force and not counted as unemployed , served to further promote the idea. Things like cash for clunkers and the $8000 tax credit let the dead cat economy bounce briefly, and we were told that the recession was now over. But the Nattering Nabob has emerged once again from his long hibernation and he continues to assert that nothing could be farther from the truth.

So 2009 was the year where denial, illusion, manipulation and fraud were put forward to mask what was really happening in the stratospheric realms of high finance—a grand heist involving trillions of dollars, some real, but the rest mostly created by Fed programs and policies. This was a $23.6 trillion dollar event, eclipsing funding committed to all other U.S. government programs in history. The money spent to finance all our wars, all our R& D programs, the moon race—all of it combined—does not equal the funding committed to bail out the wealthy bankers and investor class. This $23.6 trillion dollar event comprises the most significant expenditure in human history, all to protect the dealings of high finance and the people and institutions that now control it, and by extension, control the governance of this and many other nations.  Barclays, for example, has a balance sheet that exceeds that of the UK government itself!  And the most glaring truth that most people continue to overlook is that the “Federal Reserve” at the heart of all these machinations is not a government agency at all. It is a consortium of private banks, where much of the ownership interest controlling those banks consists of other foreign banks and “investors.”

Obama actually made the statement that we must continue to “spend our way out of this recession.” Jim Rogers was quick to point out: “The idea you can solve a problem of too much debt and too much consumption with more consumption and more debt defies belief. I cannot believe that grownups would stand there and say that.”

The Nabob offers this obvious nugget of advice: you can assert a wall is simply not there, and rush blindly forward—until you hit it.  The truth will out in 2010.

Predictions for 2010

What does the Nabob see in 2010? (Though nothing he says should be taken as “investment advice.” The Nabob does not trade stocks, bonds, equities or currencies. He merely offers opinions based on his voluminous reading on the economy and his own sense about what is likely to happen. Call it good old fashioned horse sense, something the economists could use a little more of. They completely missed the onset of the recession and the crash predicted by the Nabob and others years in advance. In fact the men in charge like Fed Chairman Bernanke went so far as to deny there was a housing bubble, then state that the sub-prime problems would pose no threat to the broader financial world or Main Street economy. How wrong could a person possibly be? He should read the blogs, where truth is seen and reported on daily. And Time Magazine had the audacity to name Bernanke “Person of the Year,” an honor he now shares with Titans like Newt Gingrich, George Bush Jr., and Joseph Stalin.)

The Rally

The remarkable bear rally of 2009 was the greatest manipulation of the year, masking the underlying momentum of the recession as it slowly evolved into an impending depression. It was a rally that seemed to defy gravity, persisting far longer than the Nabob and many other analysts imagined. It defied fundamental weakness in the economy, faltering world trade, the lack of any real “green shoots,” anemic volume in daily stock trading, voluminous insider selling, outrageous P/E ratios, all indicators of weakness that portend an imminent correction.

The Nabob thought the markets would rally in the spring and fade by the fall. He was correct in his predicting lows of 7000 on the Dow and 700 on the S&P 500 but he thought the rally would not persist as it has. Why did the rally last so long, persisting through the normally bearish month of October into December? The answer: abysmally low interest rates offered by the Fed allowed banks to borrow for next to nothing and a “dollar carry trade” developed. This meant that a lot of cheap dollars were finding their way into gold, oil futures, commodities and stocks, which all rose on the new current of cash. To put it simply, the Fed, with a mandate to protect the dollar, deliberately adopted policies that served to weaken it instead. But this is just one aspect of the rigged market. The Fed most likely stepped in directly to purchase futures on the S&P. Tyler Durden of TrimTabs has speculated how this worked, noting that almost all the upside in the market occurred after ours, during futures trades.

Todd Harrison of MarketWatch.com put things this way: “Following a gut-wrenching decline that threatened the very survival of free -market capitalism, the government unleashed its liquidity spigot, changed the rules of engagement and manufactured the single greatest upside reversal in financial history.”  I note the word “manufactured” was well chosen. As free market capitalism failed under the weight of cascading default and loss of investor confidence, the Fed stepped in and simply set the free market aside. It no longer exists.

The Fed manipulated the stock rally with free money just as it manipulated the apparent solvency of banks. FASB accounting rules were discarded, toxic assets were tucked away “off balance sheet,” and those that remained were revalued to boom time levels or dumped at the Fed as collateral for these low interest loans. Bernanke bought up more than a trillion in bad securities in 2009. It was a game of pretend and extend—a simple gentlemen’s agreement. The Fed told banks to pretend their bad RE loan portfolios were all just fine, accepted worthless securities as if they were still at peak values, and opened up the vaults to provide easy cash—by the trillions. This, along with billions in government greenbacks through TARP and other programs, kept the economy alive, though in a deep coma through much of the year. I shudder to think of what the real economy would have endured without the $23 trillion committed to it, a number that is twice the annual GDP of the U.S.

Thus the Nabob believed the rally would be a “Bull Trap” and he still holds to this opinion. In the short run he thinks Bernanke’s dollar carry trade will result in dire consequences when the foreign appetite for weak dollars goes south, or when the market forces the dollar higher, burning the bets made in the carry trade. Either movement of the dollar has its own set of bad consequences. And at some point the Fed will have to stop secretly buying futures as well. Zero hedge reported that the most recent “insider” trading data showed a ratio of 28 shares being sold for every share being bought. The rats who own the so called “smart money” are fleeing the ship. What do they know? Perhaps what Bill Bonner of the Daily Reckoning knows when he talked about the possibility of a big market correction: “The extent of the correction is equal and opposite to the deception that preceded it.” So the Nabob continues to assert that a second big wave of losses is impending for stocks in 2010. The lows of 2009 will be retested. What to do, buy gold? Bloomberg reported on Dec 8 that: “Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5,000 years during the last peak in January 1980….gold investors are still 79% away from getting their money back” (on gold purchased as long ago as 1980!)

But given the rampant and abusive interventions and manipulations, all aimed at propping up a dead market, a dead housing industry, and dead banks, who in their right mind believes we still have a “free market economy?”  The Nabob feels it is therefore foolish to think of the stock market with any normal view of it being a real free market. The old maxim from the Vietnam era applies here: they had to destroy it to save it. And once this sort of direct manipulation begins, it will certainly continue. Predictions based on fundamentals or even common sense are therefore useless here. Ask yourself instead if Bernanke could allow the market to crash as before. It is just as likely he will continue to inflate it with digital cash, indefinitely.

Employment

As the Nabob stated last year, unemployment was the real threat to the economy, no matter what the wealthy investor class did in the stock and commodities markets. His prediction of at least 9% official unemployment and 17% real unemployment was spot on. The numbers hit 10.2% and 17.6% respectively in 2009. Unemployment reveals the real pulse of the Main Street economy, and all year long it rose as predicted, until even the official U-6 BLS number reached 17.6%. Even this number was manipulated lower by simply shrinking the work force by removing unemployed people from the count.  Most of the jobs created to reduce the net loss number came in the service sector, which always sees big gains during the busy shopping season. Over 54,000 service jobs reportedly added were just temporary Christmas positions. So November’s BLS number of “only 11,000 jobs lost” was touted as the long awaited recovery for jobs. This got the headline, while another announcement was largely ignored—that the BLS reports from the two previous months had to be adjusted down by over 200,000 more jobs lost than previously thought. Independent analysts actually peg the real job loss count for November at 255,000, but I suppose we’ll have to wait until January for the BLS to admit that with another quiet downward revision of its numbers.

I’ll note that November was the 23rd consecutive month for job loss, though the numbers have been getting better. I’ll also note that of those considered “employed” by the BLS, 9.23 million are holding temporary jobs. This number will mean that job creation may come slower than many expect, as part time workers will be converted to full time and others will have their hours extended. (The average work week now is only 33 hours). John Williams at Shadowstats.com points out that the BLS has admitted it “overstated” payrolls by 824,000 throughout this year. They will “adjust” their numbers by that amount early next year, so don’t look for any rapid improvement in the job scene. He pegs the real U.S. unemployment number at 22% as of November, 2009. The Nabob says you should simply remove the middle letter from the BLS to get the real meaning of their statistics: BS.

In reality, job losses have piled up at a much faster rate than that which occurred in 1930 at the onset of the “Great Depression,” and this is a much more foreboding metric on the overall prospect of a recovery than any other statistic. The job losses directly relate to increasing foreclosures, defaults, and the sluggish “consumer.” People can’t buy things when they are unemployed, nor can they pay their mortgages or bills. To think that some analysts believe one in five employment age people are without work in this country should be a sobering look at the prospects for recovery in 2010. Where will job creation come from? We will have no new housing boom, no new Internet boom, and companies will be cautious and chastened, unwilling to expand or hire for lack of finance. The Nabob does not see any substantial recovery in 2010. Quite the contrary, the depression will deepen.

The Nabob thinks employment growth will be sluggish, and that “official” bogus (U-3) numbers will remain in the 9-11% range in 2010, with the more realistic (U-6) number at 16% to 18%. Even these will not report the true level of unemployment, which will be 20% to 25%. Some states will see real unemployment as high as 30%, and some counties and cities will face 40% unemployment. This is Depression era pain.  Look at the numbers projected now for 1931 vs 2010 on the chart above. Imagine what will now happen to “job creation” if we get another big correction in stocks or trouble in the bond markets. And once unemployment this deep sets in, look how long it tends to persist.

Credit and Retail Sales

Last year the Nabob said credit would contract, card defaults rise, lines would be cut, and banks would reap as much profit as possible before the new rules take effect in February of 2010. He was accurate on every prediction here, and in 2010 he sees credit remaining tight, particularly in commercial real estate rollovers and consumer credit. He claimed auto sales would tank and at least one major US maker would fail. The reality was even worse, with both GM and Chrysler in bankruptcy and falling auto sales that spiked for a single month when the government handed out free money in its “Cash for Clunkers” program. In 2010, expect more of the same—tight credit and sluggish sales for everything that relies on easy finance. The consumer is not coming back any time soon, and this fact, a sluggish Christmas, and increasing commercial real estate losses will leave office parks and strip malls abandoned all across the nation. In short—no real growth should be expected in the main street commercial economy in 2010. It will limp along, with constricted credit and high unemployment frustrating the recovery. Only a massive government jobs program could affect this outcome, and the Nabob sees this as unlikely.

On Main Street the vacancy rate at small strip malls has reached the highest level in 10 years. (10.6%) It rose to 8.6% at larger regional malls. This will get worse. Much worse.

Average people, already being squeezed out of the credit system, will increasingly have to rely on cash, and when that is not available they will turn to bartering  and underground black markets for vital needs. As Dimitri Orlov warned in his insightful articles comparing the U.S. situation to Russia when their economy collapsed, it will soon be a case where who you know and what you know will be much more valuable than what you have in terms of money. The FDIC reported that 17 million U.S. citizens do not even have a bank account! 40% are now living below the official poverty line. Business Week conducted a survey in December and reported that 46% of respondents said they could not come up with $2000 in an emergency, by any means: cash, credit cards, friends or family. Even 25% of good wage earners, those earning over $100,000 per year, said they could not raise the money in 30 days! Think of this when you consider how banks receive truckloads of free money from the Fed and government, and ask yourself if the banking system is doing anything at all that benefits our society now. We are witnessing the slow destruction of the Middle Class, where the greatest percentage of our population once enjoyed the highest standard of living ever seen in human history. 2010 will see far more than simple belt tightening. It will not be a matter of just finding a few ways to cut back to “make ends meet.” People will be in real need, and this does not bode well for the general social order.

Housing and RE

Contrary to popular belief, the Nabob asserts there was no real bounce in housing, just feeding on a false bottom and ill-advised subsidies from the government through the $8000 tax credit. The artificially low interest rates and a massive Fed purchase of housing securities produced little more than a modest bump in the decline for housing values. Banks still can’t structure a decent mortgage that can stand on its own. All the loan business formerly guaranteed by Fannie and Freddie is now being underwritten by the FHA and Ginnie Mae. Banks will simply not make a loan without such guarantees, which is reason enough to believe they know there is no recovery at hand. Cash investors, thinking a housing bottom was now in, have been feeding on distressed properties. Cash short sales make up the greatest percentage of transactions in housing at the end of 2009. The Nabob says all these enterprising investors are in for yet another unpleasant surprise. Housing has not bottomed, and will continue to lose value in 2010 and 2011. Mortgage applications are now at 1997 levels. The market remains dead.

Commercial real estate will see a severe contraction in value, and sales and leasing will enter a deep freeze. Why? Over 80% of this market is now underwater. The national vacancy rate is over 15%. The default rate doubled from 3% to 6% in just one year. It will double again to 12% in 2010. To make matters worse, 70% of these loans will not qualify for refinancing. Every sector of this market is in distress—malls, office parks, hotels, commercial apartment buildings. This is the second wave in the real estate tsunami sequence. If these losses were acknowledged and written down it would destroy the banking system in the U.S. virtually overnight. Banks know it is coming and are shoring up their levees with free Fed money while they can. Therefore expect another song and dance on the flip side of “extend and pretend” as the Fed tries to figure a way around the crisis. Allowing the pain to play itself out could do such short term damage that the Nabob thinks Bank loving Bernanke will come up with another Fed program to offer short term finance to this market. The effect will simply be to postpone the problem, extending the depression for many more years without a real solution. You cannot cure a debt problem with yet more debt. Official policy allowing loans to be carried at full values instead of being remarked to market reality is keeping rents high and inhibiting business startups and bottom line profits. Who does it help? The banks.

The government has made it’s choice. It has decided to save the banks and forsake the rest of us. If property loans were forced to current market values the banks would take an enormous writedown. Many would fail, but others would step in to fill the gaps, But this is the key: all the rents and payments on those loans would also be reset lower, and the income people now have would go much farther. In short, allow the market to reset the value of real estate and you bolster the real economy. Allow FASB accounting rules to hold property at Mark to fantasy values and you continue to stifle the economy while saving the bonus fat bottom line of the big banks. It is no surprise that the bankers who now run the government have decided to weigh in with the extend and pretend policy we have now.

In the meantime, the Nabob thinks we have another 20% to 30% to fall in housing and commercial RE. Foreclosures will continue unabated all through 2010. The “Shadow Inventory” of properties in default already exceeds all homes presently on the market in many communities, and this shadow will crush any hopes of a housing revival. It will go much lower before it finds a true bottom, particularly in California, the Option ARM capital of the world, where tens of thousand of loans are scheduled to reset to higher levels. Prices will remain depressed for years to come. This means that people buying homes now with 20% down can expect to lose that entire down payment, and all their equity, within just two years time. Rent now. Buy in 2012 and beyond. The Nabob hath spoken.

The Almighty Dollar

Last Year the Nabob wrote: “There will be up and down cycles where the dollar is concerned. Money seeks safe havens, and at present it is hiding in U.S. Treasury bills. Sudden swings in the value of the dollar are possible when money moves, as in a “flight from treasuries,” where yields are now ridiculously low, virtually zero, back into commodities or gold. A new bubble in treasuries has been created by the Fed, and it will burst like all bubbles must. Investors are already seeking insurance protection from a possible U.S. Treasury default! Some even feel the Fed wants the dollar to go lower, as its balance sheet has ballooned with bad debt and weaker dollars paying that debt are less costly than stronger dollars.” The sudden swings the Nabob predicted have been more apparent in recent months, with a 9% spike that ICE has to quash by refusing to honor dollar index trade contracts above 76 . (In short, they simply refused to admit what was happening on the index, and reset the numbers! And they did this twice in the last 60 days!) On balance, the dollar weakened, falling to 74.23 from its March high of 89.62 this year. Look at the steady downward trend since the Fed’s easy money policy.



Indeed the Fed deliberately kept interest rates low to create the dollar carry trade and bolster stocks and commodities. Yet there will be consequences.  The Nabob has watched the dollar staging dramatic rallies, like a sleeping giant trying to awaken again. A “flight to safety” in the markets will lead to a dramatic rally by the dollar. Any uptick in the value of the dollar threatens to savage investors extended in the cheap dollar carry trade.

Also, throughout the year we have had stories hinting at trouble in the bond markets. The U.S. has taken on trillions in additional debt. It will have to sell treasuries to service this debt, but buyers are thinning out. China, our long time debt financier, made a point in buying no US treasury certificates in the month of October, and the Fed itself was forced to buy up treasury notes in 2009! Two Japanese “gentlemen” were caught trying to smuggle billions in treasury certificates into Switzerland this year. And ugly rumors are being whispered about Japan deciding to sell off $100 billion in Treasury note holdings. When real trouble starts again, it will involve the bond markets. The Nabob said to watch them closely last year, and he thinks this is again the danger point for 2010.

A dollar spike and unwinding of the carry trade will be a foreshock, but it will be a temporary event.  Expect more dollar distress in 2010 as foreign nations deleverage their dollar holdings in favor of gold or other real assets like resources and commodities. It will become more and more difficult to finance and service our national debt. Therefore the Nabob asserts the bond markets are the key metric on U.S. financial health. This is a dangerous road that can lead only to the darkness of default on a national level.

The dollar’s days are clearly numbered as the world’s primary reserve currency. The Gulf States, including Saudi Arabia, have just announced that they will combine to create a new common currency, (the Gulfo?), and unpeg the sale of oil to the dollar. Russia and China have already stated they would support some new international currency option, such as “Special Drawing Rights” from the IMF. The Nabob placed a flagging dollar bill on the graphic header for this article for a reason. When trade in oil, and world trade in general, ceases to be primarily denominated in dollars, the value of the greenback will collapse. Everything we import will suddenly cost more, and price shocks will stun the already struggling economy.

Some have predicted a severe dollar crash that leads to a 3 for 1 devaluation of the dollar in 2010, and the eventual introduction of a new dollar or “Amero.” The Nabob has little faith in the greenback but he thinks it will stick around next year. Don’t look for a new “North American Union” in 2010, but our dire debt situation will soon be “called” by sovereign wealth funds struggling to refinance their own debt. (Consider Dubai). Foreign holdings of short term U.S. securities and Treasury bills have tipped into decline. This bodes ill for the dollar and the U.S. economy as a whole. We are seeing a sneak preview of what happens in a collapsing bond market in Greece, which is now about to implode. The Nabob says this will stress the Eurozone, temporarily strengthening the dollar, but it is a warning of what lies ahead for the U.S. The FDIC quietly announced that it will double its budget for the handling of failed banks and add an additional 1600 staffers. They know what is coming soon to a retail banking center near you. Each bank they now take over is found to have assets worth far less than they claim on paper. The truth will out.

Energy

Last Year the Nabob wrote: “In 2009 we will see the inverse of the oil price curve we saw in 2008. In ’08 prices started high, peaked in the summer, then fell near year’s end. In 2009, prices will be lower at the outset, and even fall further, then rise again by year’s end.”  This was an accurate prediction of what happened in 2009 as oil moved from the $40 dollar range to over $80, and hovered there by year’s end.  The Nabob thinks even this price is being inflated by round trip trading and other schemes. While his long term view is that oil prices must go higher yet because of fundamental shortages in supply that will become more severe in the years ahead, he realizes that demand destruction and the “flight to safety” will keep strong downward pressure on the price of oil. He sees prices in the $60-$90 range for the year ahead—unless Israel strikes Iran, as he has predicted for some time. In that case oil tests $150. again. Dollar distress will also put upward pressure on oil prices this year, but demand destruction will counterbalance this. In the long term, however, the Nabob warns that the days of $4.00+ gas are not behind us, but ahead of us.

World Events

The Nabob correctly predicted that Israel would initiate an operation in Gaza, and Operation “Cast Lead” was their way of saying “Happy New Year” to Palestinians in the world’s largest concentration camp of Gaza City. Last year the Nabob also wrote: “The IAF will be used to delay or curtail suspected Iranian enrichment operations some time in 2009.” He has tracked the rumors of war for months, and still believes that: 1) Iran is indeed trying to build a nuclear bomb and, 2) Israel will strike rather than allow that to happen. Ominous news was reported in early December of 2009 when German Intelligence reported Iranian scientists have successfully “simulated” the detonation of a nuclear warhead in laboratory conditions. They know how to proceed now, and just need the fuel. You can be sure that Israel is watching this closely. The year has not yet ended, so the Nabob will wait and see. But he thinks war is inevitable here, no matter what the timing.

Last year the Nabob wrote: “Under Obama, the US will begin to draw down troops in Iraq, and redeploy them to Afghanistan.” He stated that the buildup number would be at least 50,000 more troops. This is exactly what we have seen, but the Nabob believes the buildup in Afghanistan is fruitless and misguided. It will fail in the long run, just as the US failed to ever really control Iraq. He thought Guantanamo would close its Gulag in 2009, but all we have had is a promise to do so and a lot of discussion--another sad disappointment from President Obama.

2010 will also see a “little trouble in big China,” and it will not be anything that Kurt Russell or a green eyed girl can cure. Prices have been surging, particularly in their real estate market due to the infusion of 1.6 trillion Yuan in loans. This is yet another asset bubble that is doomed to implode. Those who are looking to China to lead the world out of the depression will be disappointed yet again.

On the terror front, Al Queda tried to pull another Richard Reid, which had the effect of tightening the already annoying security regulations at airports. First we all take off our shoes. Now must we all remove our underwear as well? The Nabob says: “Forget terrorism. It is statistically insignificant. You have a much greater chance of be harmed by falling out of your bed than you do from any terrorist attack. It is much ado about nothing. The harm done to the nation by the bankers is ten thousand times worse than that accomplished by every terrorist attack in history combined. If you want to fight terrorism, start with the banking system. Nuff said.”

Other Predictions

Health Care. The Nabob said we would not get a national plan in 2009. We didn’t. He sees a compromised plan emerging in 2010, but health care will remain stubbornly unaffordable for millions of Americans in spite of this.

Shortages: Food shortages envisioned for 2009 did not occur in the markets, but rather on the tables of consumers, who now use food stamps to get by. The system simply had too much viability in it and has remained strong. But the Farmer’s Markets the Nabob predicted have grown and grown, and people are now using them in greater numbers. In spite of the fact that our store shelves remain well stocked, the food crisis is integrally related to the income crisis for millions. A shocking 37.2 million Americans now use food stamps. The Nabob continues to assert that global and national food production is precarious, and could lead to “unexpected” shortages that will shock the average American, accustomed to a cornucopia of foot available 24/7. The weakening buying power of “consumers” the world over will also result in product shortages, a condition that Americans have not experienced in recent decades. Nuff said.

Social Order: in 2009 we began to see stories much like the “Mucker” attacks reported on daily news in Science Fiction  writer John Brunner’s landmark novel Stand on Zanzibar. “Mucker” was a new term describing someone who simply ran amuck, killing indiscriminately. Sadly, we will see more of these as people pressed to the breaking point snap. But perhaps worse than these headline grabbing incidents will be a slow and steady rise in property crime. Conspicuous displays of wealth could be hazardous to your health in 2010, when so many will be struggling to provide bare necessities.  The dream is clearly over in the U.S. as far as the Middle Class is concerned. The question is this—how long will petty and trivial distractions like Oprah’s decision to move on, or Tiger Woods philandering problems keep the public quiescent? We will soon be witnessing a nationwide episode of “Survivor,” the TV show that has topped ratings in recent years. Oh, how we long for the days of Home and Garden TV’s “Flip That House!” But they will not return. Recent days have seen street riots in Greece, toppling that government as that nation careens toward the first national default in Europe since Germany after the war. Financial collapse leads to commercial collapse, and then on to political collapse. Social collapse is what follows that if solutions cannot be found. We have squandered a year in delusion and denial, but fixed nothing. Pressures leading to social disorder have intensified. The apparent normalcy of our daily lives could be stressed in 2010. Expect trouble, both in the US and particularly abroad.

The Rumors:  Bank holidays?  FEMA Camp roundups?  Martial law? Dollar Devaluation? Banks being told to make room for new currency in 2010? A New North American Union?  The Nabob see these as needle spikes on the fear tachometer, but not all likely to happen in 2010. Bank holidays are perhaps the most likely on this list, with Martial law and FEMA camp roundups the least likely. But he warns that current conditions could lead to such extreme measures in the years ahead if we do not change course soon and find real solutions: acknowledge and write down debt, abolish derivatives trades and other unregulated shadow market securities, get rid of the Fed and break the strangle hold the banking system has on government, stabilize the money system, take a hard look at “fractional reserve lending,” and prosecute the fraud so rampant in our financial system. The Nabob is not holding his breath on any of these. He sees no will for real change and reform in current leadership and sadly believed the current fantasy system will simply have to fail before something new replaces it. This failure will be painful at every level of our society.

The Nabob asserts that the damage to the economy was largely done by the time Obama assumed office. Yet he has foolishly consented to the extend and pretend strategy now in place, and allowed the enormous commitment of financial resources to banks while doing little for the Main Street economy. He has squandered precious time and lost a huge amount of political capital as well. But the Nabob said long ago that the Neocon inspired malfeasance of the 8 year Bush administration has not perished. The vampires have simply slipped back into their coffins. The Neocon mindset sees the building falling down in a thunderous pile of rubble under the Obama administration, which will be as helpless to forestall what is happening as the NYFD was on 9/11. Come 2012, an ominous year, they will only be too happy to mount the rubble pile with a megaphone and put forward a plan to “save” the country. Yet the change we will be asked to believe in at that time will be a dark changeling cousin to that promised by Obama. If you thought their “Patriot Acts,” (I and II) were bad, remember that Act III and IV are yet to come in 2012 and beyond. This is the time when martial law and FEMA camps will again enter the lexicon. But not in 2010.

All these predictions should be obvious to anyone who reads these days—in the blogosphere, that is. And even the main stream media are starting to realize the disconnect between what has actually happened in 2009, and what the public is being told about it. It will soon be obvious that there was no recovery in 2009, and that there will be no recovery in 2010. The banks remain insolvent in spite of the accounting rules changes. There is no real money velocity in the system due to constricted credit and lending. There is no driver for job creation. The housing/equity extraction game is over, dead and gone. There will be no new Internet boom; no new housing speculation boom. And speaking of booms, the Baby Boom generation is now starting to retire, and it will take a huge amount of spending out of the economy as it does, while further stressing budgets for things like Social Security and Medicare. In short, current conditions are now the new “normal,” and the old way of life is not coming back for a very long time, if ever. Frugality, necessity, saving and making do with less and less are the new norm.

As for the continued lies and distortions in government statistics and media cheer leading, the Nabob simply quotes the Buddha on all of this: “Three things cannot be hidden: The Sun, The Moon, and the Truth.”

The Nabob Hath Spoken...

Article By: John Schettler

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