As the financial clouds on the horizon darken, we continue to hear warnings of an approaching crises.
So who is Richard Russell ?
Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics --plus Russell's widely-followed comments and observations and stock market philosophy.
In 1989 Russell took over Julian Snyder's well-known advisory service, "International Moneyline", a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron's, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.
A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.
One of the favorite features of the Letter is Russell's daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell's opinions. But Russell always defers to his PTI. Says Russell, "The PTI is a lot smarter than I am. It's a great ego-deflator, as far as I'm concerned, and I've learned never to fight it."
Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By Year's End
WHOA!
Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:
Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.
That's pretty intense!
Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:
And I ask myself, "Am I seeing things? The April 26 high for the Dow
was 11205.03. The Dow is selling as write at 10557 down 648 points
from its April high. If business is even better than expected, then
why is the Dow down over 600 points? And why, if there were 674 new
highs on the NYSE on April 26, were there only 20 new highs on Friday,
May 14? And if my PTI was 6133 on April 26, why is it down 17 points
since its April high?
The fact is that I've been seeing deterioration in the stock market
ever since early-April, and this in the face of improving business
news. The D-J Industrial Average is composed of 30 internationally
known top-quality blue-chip stocks. These are 30 of "America's biggest
companies." If Barron's is so bullish on the future of America's
biggest companies, then why isn't the Dow advancing to new highs?
Clearly something is wrong. But what could it be? Much as I love
Barron's, I trust the stock market more. If I read the stock market
correctly, it's telling me that there is a surprise ahead. And that
surprise will be a reversal to the downside for the economy, plus a
collection of other troubles ahead.
About Dow Theory -- First, we saw the recent April highs in the
Averages. Then we saw a plunge in both Averages to their May 7 lows --
Industrials to 10380.43, Transports to 4298.12, next a short rally. If
ahead, the two Averages turn down and violate their May 7 lows, that
would be the clincher. Such action would signal the certain resumption
of the primary bear market.
Just as for years I asked, cajoled, insisted, threatened, demanded,
that my subscribers buy gold, I am now insisting, demanding, begging
my subscribers to get OUT of stocks (including C and BYD, but not
including golds) and get into cash or gold (bullion if possible). If
the two Averages violate their May 7 lows, I see a major crash as the
outcome. Pul - leeze, get out of stocks now, and I don't give a damn
whether you have paper losses or paper profits!
Read more: http://www.businessinsider.com/dow-theorist-richard-russell-sell-everything-liquid-you-wont-recognize-america-by-the-end-of-the-year-2010-5#ixzz0oNglP8DO
Wednesday, May 19, 2010
Tuesday, May 18, 2010
GM Has No Shame
If you aren't convinced the next downturn will be a showstopper, take a look at the article below where GM is seeking leniency in loaning to sub prime buyers. Simply shocking.
GM Wants More Subprime Customers Approved For Auto Loans
General Motors, looking to boost sales and gain customers, wants to give more auto loans to consumers with bad credit. But without its own captive lending arm, it is losing customers to other automakers, who are more willing to take on the risk of approving an auto loan to a customer with less-than-perfect credit.
GM's top North American executive Mark Reuss said a shortage of subprime lending is holding back sales in the U.S., the AP reports. GM sold most of its former auto finance unit, GMAC (now called Ally), in 2006.
Ally provides consumer auto loans not only for GM, but for Chrysler, along with dealer floor plan financing. Therefore, Ally, not GM or Chrysler, decides who gets a car loan. If GM decides to try and buy back its stake in Ally or start its own finance arm, it can decide who to give car loans to.
And since Ally lost money in the mortgage crisis, it is nervous to lend money to car shoppers with bad credit. GM knows that bad credit car loans are a good source of profit, since the interest rates tend to be very high at about 10 to 20 percent.
According to Experian automotive, about 16 percent of all new-vehicle loans approved in the fourth quarter of 2009 were to customers with non-prime credit (those with credit scores below 620).
GM Wants More Subprime Customers Approved For Auto Loans
General Motors, looking to boost sales and gain customers, wants to give more auto loans to consumers with bad credit. But without its own captive lending arm, it is losing customers to other automakers, who are more willing to take on the risk of approving an auto loan to a customer with less-than-perfect credit.
GM's top North American executive Mark Reuss said a shortage of subprime lending is holding back sales in the U.S., the AP reports. GM sold most of its former auto finance unit, GMAC (now called Ally), in 2006.
Ally provides consumer auto loans not only for GM, but for Chrysler, along with dealer floor plan financing. Therefore, Ally, not GM or Chrysler, decides who gets a car loan. If GM decides to try and buy back its stake in Ally or start its own finance arm, it can decide who to give car loans to.
And since Ally lost money in the mortgage crisis, it is nervous to lend money to car shoppers with bad credit. GM knows that bad credit car loans are a good source of profit, since the interest rates tend to be very high at about 10 to 20 percent.
According to Experian automotive, about 16 percent of all new-vehicle loans approved in the fourth quarter of 2009 were to customers with non-prime credit (those with credit scores below 620).
Monday, May 17, 2010
U.K. Broke as Joke
"There's No Money Left" = the last lifeboat has left the Titanic
'There's No Money Left,' U.K. Minister Learns
May 17 (Bloomberg) -- Arriving for work at the U.K. Treasury last week, the incoming chief secretary, David Laws, found a note from his predecessor, Liam Byrne, offering advice on the job.
“Dear Chief Secretary, I’m afraid to tell you there’s no money left,” Laws cited it as saying.
“Which was honest,” Laws, whose position is the No. 2 in the Treasury after the chancellor of the exchequer, told a press conference in London today. “But slightly less than I was expecting.”
The note underscores the task facing Britain’s Conservative-Liberal Democrat coalition as it seeks to reconcile demand for improved health and education services with promises to reduce the largest budget deficit since World War II.
It was also in the tradition of Reginald Maudling, Conservative chancellor of the exchequer from 1962 to 1964. Leaving his residence after election defeat, he was reported byJames Callaghan, his successor, to have remarked, “Sorry, old cock, to leave it in this shape.”
Byrne didn’t respond to requests for comment. He was quoted by Sky News as saying the note was a joke. “I do hope David Laws’ sense of humour wasn’t another casualty of the coalition deal,” he said, according to Sky News.
According to the Treasury, the letter read as follows: “Dear Chief Secretary, I’m afraid there’s no money. Kind regards -- and good luck! Liam.”
'There's No Money Left,' U.K. Minister Learns
May 17 (Bloomberg) -- Arriving for work at the U.K. Treasury last week, the incoming chief secretary, David Laws, found a note from his predecessor, Liam Byrne, offering advice on the job.
“Dear Chief Secretary, I’m afraid to tell you there’s no money left,” Laws cited it as saying.
“Which was honest,” Laws, whose position is the No. 2 in the Treasury after the chancellor of the exchequer, told a press conference in London today. “But slightly less than I was expecting.”
The note underscores the task facing Britain’s Conservative-Liberal Democrat coalition as it seeks to reconcile demand for improved health and education services with promises to reduce the largest budget deficit since World War II.
It was also in the tradition of Reginald Maudling, Conservative chancellor of the exchequer from 1962 to 1964. Leaving his residence after election defeat, he was reported byJames Callaghan, his successor, to have remarked, “Sorry, old cock, to leave it in this shape.”
Byrne didn’t respond to requests for comment. He was quoted by Sky News as saying the note was a joke. “I do hope David Laws’ sense of humour wasn’t another casualty of the coalition deal,” he said, according to Sky News.
According to the Treasury, the letter read as follows: “Dear Chief Secretary, I’m afraid there’s no money. Kind regards -- and good luck! Liam.”
Sunday, May 16, 2010
More Than Meets The Eye
Scientists are finding enormous oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long, 3 miles wide and 300 feet thick in spots. The discovery is fresh evidence that the leak from the broken undersea well could be substantially worse than estimates that the government and BP have given.
The environmental, economic and international impact of this catastrophe cannot be understated. This new information indicates the initial spill numbers were lowballed and some estimates indicate that the oil volcano spews off the equivalent of an Exxon Valdez like spill every 4 days.
Giant Plumes of Oil Forming Under The Gulf
Scientists are finding enormous oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long, 3 miles wide and 300 feet thick in spots. The discovery is fresh evidence that the leak from the broken undersea well could be substantially worse than estimates that the government and BP have given.
“There’s a shocking amount of oil in the deep water, relative to what you see in the surface water,” said Samantha Joye, a researcher at the University of Georgia who is involved in one of the first scientific missions to gather details about what is happening in the gulf. “There’s a tremendous amount of oil in multiple layers, three or four or five layers deep in the water column.”
The plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes.
Dr. Joye said the oxygen had already dropped 30 percent near some of the plumes in the month that the broken oil well had been flowing. “If you keep those kinds of rates up, you could draw the oxygen down to very low levels that are dangerous to animals in a couple of months,” she said Saturday. “That is alarming.”
The plumes were discovered by scientists from several universities working aboard the research vessel Pelican, which sailed from Cocodrie, La., on May 3 and has gathered extensive samples and information about the disaster in the gulf.
The environmental, economic and international impact of this catastrophe cannot be understated. This new information indicates the initial spill numbers were lowballed and some estimates indicate that the oil volcano spews off the equivalent of an Exxon Valdez like spill every 4 days.
Giant Plumes of Oil Forming Under The Gulf
Scientists are finding enormous oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long, 3 miles wide and 300 feet thick in spots. The discovery is fresh evidence that the leak from the broken undersea well could be substantially worse than estimates that the government and BP have given.
“There’s a shocking amount of oil in the deep water, relative to what you see in the surface water,” said Samantha Joye, a researcher at the University of Georgia who is involved in one of the first scientific missions to gather details about what is happening in the gulf. “There’s a tremendous amount of oil in multiple layers, three or four or five layers deep in the water column.”
The plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes.
Dr. Joye said the oxygen had already dropped 30 percent near some of the plumes in the month that the broken oil well had been flowing. “If you keep those kinds of rates up, you could draw the oxygen down to very low levels that are dangerous to animals in a couple of months,” she said Saturday. “That is alarming.”
The plumes were discovered by scientists from several universities working aboard the research vessel Pelican, which sailed from Cocodrie, La., on May 3 and has gathered extensive samples and information about the disaster in the gulf.
Thursday, May 13, 2010
Ireland Boiling Over
Countries with north of 20% unemployment and 50% or more for those 18-25 are in for some major problems.
The Illusion of Market Health
Commercial real estate has been overrun by wildcat charlatans that have leveraged themselves out of their assets. Their is used lightly as equity positions by major players is typically 1-5%...AT MOST. Let's call them group C and get to them in a moment.
Institutional commercial real estate is completely dominated by pension funds and sovereign wealth with a bit of independent wealth funds thrown in for good measure. Groups like CALPERS, CALSTERS, MRPT, China Investment Corporation and Singapore Investment Corporation controll the lion's share of equity in the market. This is what we call group A.
Group B includes managers like Invesco, Goldman Sachs and JP Morgan who court the equity for fees and assume the roll of deploying it. Most of the time when these groups "buy a building" they are doing so on behalf of a client.
Group C includes developers and owners who position to win the business of the money managers in finding and servicing commercial real estate assets.
At the end of the day Group C really owns next to nothing - only the right to service these assets. With this in mind, why in the world would they continue to be awarded business with their dismal track record? One hears from every group C player that they have hundreds of millions if not billions to deploy...the problem is they are all drawing from the same sources...group A (at least most of this and let's save REITS for another day).
It remains to be seen how much liquidity is truly in the market after the GGP, Tishman and Beacon Portfolios are taken down. My feeling is not much...particularly now that Europe is totally out of the game.
Gone are the days of building an empire the hard way - through cash flow. Below you will see the sugar coated line "sent to special servicer" which is really a fancy way of saying DEFAULT!
When we roll from the Bear Stearns of the Soverign Debt Crisis (Greece) on to the Lehmans, Fannie & Freddie and AIG's of the world the SWHTF and some of these "assets" will be worth less than zero when consider the cost of maintenance, utilities and taxes.
Loan on Simon's Lakeforest Mall to Special Servicer
A $141.05 million loan on the 1.045M SF Lakeforest Mall in Gaithersburg, MD, has been transferred to a special servicer amid doubts that the property's owners will be able to pay the loan back when it becomes due, according to Fitch.
According to CMBS.com, the loan is now at $121,050,000 with a 4.895 percent interest rate and comes due on July 8, 2010.
Simon Property Group owns 25 percent of the mall, according to filings with the SEC. Located off I-270, Lakeforest Mall is 25 miles northwest of downtown Washington, D.C. Here's the information from Fitch:
Transaction: BSCMS 2005-Top20
Property: Lake Forest Mall
City/State: Gaithersburg, MD
Property Type: Retail
Balance: $141,050,000
MS: Wells Fargo
SS: C-III Asset Management, LLC
Reason for Transfer: Imminent Default
Beacon Portfolio Placed With Special Servicer
A Beacon Capital Partners portfolio that includes 11 Washington-area properties was transferred to a special servicer April 7, but some in the real estate industry say the transfer is a strategic move that would allow the Boston-based firm to hold onto the properties and renegotiate the loan.
Four of the area properties in the portfolio are in the District and seven are in Virginia. The group of local properties includes 11911 Freedom Drive at the Reston Town Center, the Booz Allen Hamilton Inc. complex on Greensboro Drive in McLean, and The Polk and Taylor buildings on Clark Street and Crystal Drive in Arlington, as well as the Market Square at 701 and 801 Pennsylvania Ave. NW and Liberty Place at 325 7th St. NW in D.C.
Beacon borrowed $2.7 billion for the 20-building portfolio in 2007. At the time, the buildings were 94.6 percent leased with a debt service coverage ratio of 1.25. When that ratio falls below 1.0, that indicates negative cash flow.
That ratio fell to 1.0 with building occupancy at 89.5 percent for the nine months ending in September 2009, according to an April 16 report by Standard and Poor’s Financial Services LLC.
Beacon said that debt service coverage ratio will be just 0.2 after it pays off its capital and leasing expenses, according to the report, and it is not willing to reach into its own pockets to fund leasing costs and capital improvements in the buildings.
Master servicer Wells Fargo Bank placed the portfolio with special servicer Centerline Servicing LLC.
An April 23 report on the portfolio by the Seattle Times said the placement with a special servicer — a necessary step before renegotiations can begin — came at Beacon’s request.
Beacon could not immediately be reached for comment, but Beacon reportedly is not in default on the commercial mortgage backed securities loan. With CMBS loans, it is typical for a property owner to request a special servicer to initiate discussion to extend a loan or amend its provisions.
“In our view, the cash flows generated by the properties will not be sufficient to support future debt service and capital expenditure requirements,” said Standard and Poor’s regarding the transfer.
“I think there are plenty of borrowers that are saying — in this market — we are coming out of pocket to support our property or we can’t possibly refinance right now, so let’s approach the servicer to see what we can work out,” said Manus Clancy, managing director of New York-based Trepp LLC, a commercial mortgage data and analytics firm. “If Beacon is in that situation, they would be crazy not to see what they could work out.”
Clancy said the chances of Beacon getting relief from the transfer will depend on a number of things, including the subordinate debt on the portfolio, which is debt that tends to have a higher return, but is riskier because it takes a lower priority in bankruptcy liquidation proceedings.
Area properties included in Beacon's portfolio:
* 1300 North 17th St., Arlington
* 1616 Fort Myer Drive, Arlington
* Polk and Taylor Buildings, 2521 S. Clark St. and 2530 Crystal Drive, Arlington
* Booz Allen Complex, 8251 Greensboro Drive, 8281 Greensboro Drive, 8283 Greensboro Drive, McLean
* 11111 Sunset Hills Road, Reston
* Reston Town Center, 11911 Freedom Drive, Reston
* 8300 and 8330 Boone Blvd., Vienna
* One, Two and Three Lafayette Centre, 1120 20th St. NW, 1155 21st St. NW, 1133 21st St. NW, District
* Market Square, 701 and 801 Pennsylvania Ave. NW, District
* Liberty Place, 325 7th St. NW, District
* Army and Navy Club Building, 1627 I St. NW, District
Vornado Realty Trust's Springfield Mall Sent to Special Servicer
Vornado Realty Trust’s loan for its Springfield Mall property was referred to a special servicer on Thursday.
Loans are generally placed with a special servicer when they are in or approaching default. The special servicer will pursue workout strategies, according to Vornado (NYSE:VNO).
“Vornado is in discussions with the lender to restructure the loans on the Springfield Mall,” the company said in a statement.
The loan’s special servicer, C.W. Capital, cited “imminent default” as the reason for the transfer of the $160 million loan, which is made up of two $80 million loans.
According to Trepp, a New York-based commercial mortgage information and analysis firm, the property was 67 percent occupied and had a debt service coverage ratio of .26 as of June 30. A ratio of less than 1 means negative cash flow. Trepp also said the Springfield loans were current as of Dec. 1.
Leasing representatives from the Springfield Mall could not be reached to confirm the level of occupancy.
Vornado Realty may now have to rein in some of its renovation plans for the 80-acre site, which include adding 175,000 square feet of new retail space, 1.1 million square feet of new office space and a 225-room hotel.
Jeff McKay, the Fairfax County supervisor representing the Springfield Mall's district, said that though he did not know the specifics of the property’s financial status, he is confident that the mall site will still see redevelopment.
“The value of the site is so great that regardless of whose money is used, I’m convinced it will be revitalized whether it’s done completely by Vornado or through a creative partnership,” McKay said.
Vornado paid $36 million in 2005 to enter an option agreement to buy the mall from an undisclosed owner.
The property’s mortgage was $181 million at the time and will be reduced to $149 million when it matures in 2013.
Vornado currently manages the 1.4 million-square-foot mall.
Institutional commercial real estate is completely dominated by pension funds and sovereign wealth with a bit of independent wealth funds thrown in for good measure. Groups like CALPERS, CALSTERS, MRPT, China Investment Corporation and Singapore Investment Corporation controll the lion's share of equity in the market. This is what we call group A.
Group B includes managers like Invesco, Goldman Sachs and JP Morgan who court the equity for fees and assume the roll of deploying it. Most of the time when these groups "buy a building" they are doing so on behalf of a client.
Group C includes developers and owners who position to win the business of the money managers in finding and servicing commercial real estate assets.
At the end of the day Group C really owns next to nothing - only the right to service these assets. With this in mind, why in the world would they continue to be awarded business with their dismal track record? One hears from every group C player that they have hundreds of millions if not billions to deploy...the problem is they are all drawing from the same sources...group A (at least most of this and let's save REITS for another day).
It remains to be seen how much liquidity is truly in the market after the GGP, Tishman and Beacon Portfolios are taken down. My feeling is not much...particularly now that Europe is totally out of the game.
Gone are the days of building an empire the hard way - through cash flow. Below you will see the sugar coated line "sent to special servicer" which is really a fancy way of saying DEFAULT!
When we roll from the Bear Stearns of the Soverign Debt Crisis (Greece) on to the Lehmans, Fannie & Freddie and AIG's of the world the SWHTF and some of these "assets" will be worth less than zero when consider the cost of maintenance, utilities and taxes.
Loan on Simon's Lakeforest Mall to Special Servicer
A $141.05 million loan on the 1.045M SF Lakeforest Mall in Gaithersburg, MD, has been transferred to a special servicer amid doubts that the property's owners will be able to pay the loan back when it becomes due, according to Fitch.
According to CMBS.com, the loan is now at $121,050,000 with a 4.895 percent interest rate and comes due on July 8, 2010.
Simon Property Group owns 25 percent of the mall, according to filings with the SEC. Located off I-270, Lakeforest Mall is 25 miles northwest of downtown Washington, D.C. Here's the information from Fitch:
Transaction: BSCMS 2005-Top20
Property: Lake Forest Mall
City/State: Gaithersburg, MD
Property Type: Retail
Balance: $141,050,000
MS: Wells Fargo
SS: C-III Asset Management, LLC
Reason for Transfer: Imminent Default
Beacon Portfolio Placed With Special Servicer
A Beacon Capital Partners portfolio that includes 11 Washington-area properties was transferred to a special servicer April 7, but some in the real estate industry say the transfer is a strategic move that would allow the Boston-based firm to hold onto the properties and renegotiate the loan.
Four of the area properties in the portfolio are in the District and seven are in Virginia. The group of local properties includes 11911 Freedom Drive at the Reston Town Center, the Booz Allen Hamilton Inc. complex on Greensboro Drive in McLean, and The Polk and Taylor buildings on Clark Street and Crystal Drive in Arlington, as well as the Market Square at 701 and 801 Pennsylvania Ave. NW and Liberty Place at 325 7th St. NW in D.C.
Beacon borrowed $2.7 billion for the 20-building portfolio in 2007. At the time, the buildings were 94.6 percent leased with a debt service coverage ratio of 1.25. When that ratio falls below 1.0, that indicates negative cash flow.
That ratio fell to 1.0 with building occupancy at 89.5 percent for the nine months ending in September 2009, according to an April 16 report by Standard and Poor’s Financial Services LLC.
Beacon said that debt service coverage ratio will be just 0.2 after it pays off its capital and leasing expenses, according to the report, and it is not willing to reach into its own pockets to fund leasing costs and capital improvements in the buildings.
Master servicer Wells Fargo Bank placed the portfolio with special servicer Centerline Servicing LLC.
An April 23 report on the portfolio by the Seattle Times said the placement with a special servicer — a necessary step before renegotiations can begin — came at Beacon’s request.
Beacon could not immediately be reached for comment, but Beacon reportedly is not in default on the commercial mortgage backed securities loan. With CMBS loans, it is typical for a property owner to request a special servicer to initiate discussion to extend a loan or amend its provisions.
“In our view, the cash flows generated by the properties will not be sufficient to support future debt service and capital expenditure requirements,” said Standard and Poor’s regarding the transfer.
“I think there are plenty of borrowers that are saying — in this market — we are coming out of pocket to support our property or we can’t possibly refinance right now, so let’s approach the servicer to see what we can work out,” said Manus Clancy, managing director of New York-based Trepp LLC, a commercial mortgage data and analytics firm. “If Beacon is in that situation, they would be crazy not to see what they could work out.”
Clancy said the chances of Beacon getting relief from the transfer will depend on a number of things, including the subordinate debt on the portfolio, which is debt that tends to have a higher return, but is riskier because it takes a lower priority in bankruptcy liquidation proceedings.
Area properties included in Beacon's portfolio:
* 1300 North 17th St., Arlington
* 1616 Fort Myer Drive, Arlington
* Polk and Taylor Buildings, 2521 S. Clark St. and 2530 Crystal Drive, Arlington
* Booz Allen Complex, 8251 Greensboro Drive, 8281 Greensboro Drive, 8283 Greensboro Drive, McLean
* 11111 Sunset Hills Road, Reston
* Reston Town Center, 11911 Freedom Drive, Reston
* 8300 and 8330 Boone Blvd., Vienna
* One, Two and Three Lafayette Centre, 1120 20th St. NW, 1155 21st St. NW, 1133 21st St. NW, District
* Market Square, 701 and 801 Pennsylvania Ave. NW, District
* Liberty Place, 325 7th St. NW, District
* Army and Navy Club Building, 1627 I St. NW, District
Vornado Realty Trust's Springfield Mall Sent to Special Servicer
Vornado Realty Trust’s loan for its Springfield Mall property was referred to a special servicer on Thursday.
Loans are generally placed with a special servicer when they are in or approaching default. The special servicer will pursue workout strategies, according to Vornado (NYSE:VNO).
“Vornado is in discussions with the lender to restructure the loans on the Springfield Mall,” the company said in a statement.
The loan’s special servicer, C.W. Capital, cited “imminent default” as the reason for the transfer of the $160 million loan, which is made up of two $80 million loans.
According to Trepp, a New York-based commercial mortgage information and analysis firm, the property was 67 percent occupied and had a debt service coverage ratio of .26 as of June 30. A ratio of less than 1 means negative cash flow. Trepp also said the Springfield loans were current as of Dec. 1.
Leasing representatives from the Springfield Mall could not be reached to confirm the level of occupancy.
Vornado Realty may now have to rein in some of its renovation plans for the 80-acre site, which include adding 175,000 square feet of new retail space, 1.1 million square feet of new office space and a 225-room hotel.
Jeff McKay, the Fairfax County supervisor representing the Springfield Mall's district, said that though he did not know the specifics of the property’s financial status, he is confident that the mall site will still see redevelopment.
“The value of the site is so great that regardless of whose money is used, I’m convinced it will be revitalized whether it’s done completely by Vornado or through a creative partnership,” McKay said.
Vornado paid $36 million in 2005 to enter an option agreement to buy the mall from an undisclosed owner.
The property’s mortgage was $181 million at the time and will be reduced to $149 million when it matures in 2013.
Vornado currently manages the 1.4 million-square-foot mall.
Wednesday, May 12, 2010
When Money Dies
When Money Dies: The Nightmare of the Weimar Collapse is widely known as the most complete assessment of the Weimar Republic's runaway inflation and includes narratives describing the insanity of the time. The free text has been removed online due to the publisher's complaint and copies begin at $800 online. Keep your eyes open. Two excerpts obtained from online sources below.
Money is no more than a medium of exchange. Only when it has a value acknowledged by more than one person can it be so used. The more general the acknowledgement, the more useful it is. Once no one acknowledged it, the Germans learnt, their paper money had no value or use — save for papering walls or making darts. The discovery which shattered their society was that the traditional repository of purchasing power had disappeared, and that there was no means left of measuring the worth of anything. For many, life became an obsessional search for Sachverte, things of 'real', constant value: Stinnes bought his factories, mines, newspapers. The meanest railway worker bought gewgaws. For most, degree of necessity became the sole criterion of value, the basis of everything from barter to behaviour. Man's values became animal values. Contrary to any philosophic assumption, it was not a salutory experience.
In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.
Money is no more than a medium of exchange. Only when it has a value acknowledged by more than one person can it be so used. The more general the acknowledgement, the more useful it is. Once no one acknowledged it, the Germans learnt, their paper money had no value or use — save for papering walls or making darts. The discovery which shattered their society was that the traditional repository of purchasing power had disappeared, and that there was no means left of measuring the worth of anything. For many, life became an obsessional search for Sachverte, things of 'real', constant value: Stinnes bought his factories, mines, newspapers. The meanest railway worker bought gewgaws. For most, degree of necessity became the sole criterion of value, the basis of everything from barter to behaviour. Man's values became animal values. Contrary to any philosophic assumption, it was not a salutory experience.
In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.
Welcome to the Global Dystopia
This is worse than Ayn Rand ever imagined. All forms of work and education are now suffering from diminishing returns. First you get indifference, then you get desperation, then you get anger, then you get conflict. The gates are open.
States: Let Taxpayers Cover Your Mortgage
NEW YORK (CNNMoney.com) -- Unemployed? Owe more on your mortgage than your home is worth? Your state might one day pay your mortgage.
Giving people free money to cover their home loans is just one of the radical ways that four states -- Florida, Michigan, California and Arizona -- plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.
Many consumer advocates have said the government should help cover the payments of these troubled homeowners, lest the mortgage crisis continue spinning out of control and dragging down everyone's property values. But other housing experts warn that paying off loans creates a moral hazard and could actually dissuade people from looking for work.
Innovative programs, however, are exactly what the administration was hoping for when it unveiled the Hardest Hit Fund initiative in February. Officials are looking to help the unemployed and underwater, who are now at the heart of the crisis. Despite the administration's best efforts to stabilize the market, home prices are still sliding and foreclosure filings are at record highs.
States have radical ideas to stop foreclosures
The federal government is doling out a total of $2.1 billion to 10 states, which also include Nevada, North Carolina, South Carolina, Rhode Island, Ohio and Oregon. The others have not yet submitted their plans to Treasury for approval or have not made them public.
To be sure, the proposals will only a touch a small percentage of the unemployed and underwater homeowners who need help. But it will provide assistance to some of those who presently don't qualify traditional loan modifications.
Administration officials will spend the next few weeks reviewing the proposals, but Assistant Treasury Secretary Michael Barr told CNNMoney.com that they contained some good ideas.
Subsidizing troubled homeowners
The recently unveiled initiatives are not identical, but they have two common themes: Helping the unemployed by subsidizing part or all of their monthly mortgage payments for up to two years and paying down underwater homeowners' loan balances.
The states want the loan servicers and investors to match their largess, hoping to woo them by paying down as much as $50,000 of underwater homeowners' loan balances.
But until now, financial institutions have been reluctant to reduce principal.
These proposals may irk Americans who are keeping up with their mortgage payments or don't want tax dollars used to help their neighbors. But Alan White, a law professor at Valparaiso University, said all homeowners will suffer if neighboring properties fall into foreclosure.
"There are benefits for all of us for stopping foreclosures any way we can," White said.
Plus, he added, many of the people who would be helped are those capable of paying their mortgages again once they find work. By example, he pointed to a longstanding Pennsylvania program that provides loans to the unemployed, which gives them assistance while they look for new jobs.
Also, covering homeowners' mortgages is a better use of government funds than giving incentives to the servicers and relying on them to assist borrowers, said Paul Willen, senior economist at the Federal Reserve Bank of Boston. This way, he said, states have more control over who benefits from the initiatives.
"Every dollar spent will go to families who need it," he said.
But delinquent homeowners aren't the only ones who would benefit from these subsidies. In fact, the banks would come away with a huge win, said Mark Calabria, director of financial regulation studies at The Cato Institute. Not only would they have government money securely in hand, but they'd avoid the time and expense of the foreclosure process.
"This is a lot more than they would have collected otherwise," Calabria said. "The lenders should bear the losses for this. They are the one who made the loans."
Another concern is that these proposals will dissuade the unemployed from finding work or from relocating to an area with better job prospects, said Casey Mulligan, an economics professor at the University of Chicago. Such programs incent people to maintain their financial hardships.
"Why should anybody work if you are going to be in your house either way?" he said.
States: Let Taxpayers Cover Your Mortgage
NEW YORK (CNNMoney.com) -- Unemployed? Owe more on your mortgage than your home is worth? Your state might one day pay your mortgage.
Giving people free money to cover their home loans is just one of the radical ways that four states -- Florida, Michigan, California and Arizona -- plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.
Many consumer advocates have said the government should help cover the payments of these troubled homeowners, lest the mortgage crisis continue spinning out of control and dragging down everyone's property values. But other housing experts warn that paying off loans creates a moral hazard and could actually dissuade people from looking for work.
Innovative programs, however, are exactly what the administration was hoping for when it unveiled the Hardest Hit Fund initiative in February. Officials are looking to help the unemployed and underwater, who are now at the heart of the crisis. Despite the administration's best efforts to stabilize the market, home prices are still sliding and foreclosure filings are at record highs.
States have radical ideas to stop foreclosures
The federal government is doling out a total of $2.1 billion to 10 states, which also include Nevada, North Carolina, South Carolina, Rhode Island, Ohio and Oregon. The others have not yet submitted their plans to Treasury for approval or have not made them public.
To be sure, the proposals will only a touch a small percentage of the unemployed and underwater homeowners who need help. But it will provide assistance to some of those who presently don't qualify traditional loan modifications.
Administration officials will spend the next few weeks reviewing the proposals, but Assistant Treasury Secretary Michael Barr told CNNMoney.com that they contained some good ideas.
Subsidizing troubled homeowners
The recently unveiled initiatives are not identical, but they have two common themes: Helping the unemployed by subsidizing part or all of their monthly mortgage payments for up to two years and paying down underwater homeowners' loan balances.
The states want the loan servicers and investors to match their largess, hoping to woo them by paying down as much as $50,000 of underwater homeowners' loan balances.
But until now, financial institutions have been reluctant to reduce principal.
These proposals may irk Americans who are keeping up with their mortgage payments or don't want tax dollars used to help their neighbors. But Alan White, a law professor at Valparaiso University, said all homeowners will suffer if neighboring properties fall into foreclosure.
"There are benefits for all of us for stopping foreclosures any way we can," White said.
Plus, he added, many of the people who would be helped are those capable of paying their mortgages again once they find work. By example, he pointed to a longstanding Pennsylvania program that provides loans to the unemployed, which gives them assistance while they look for new jobs.
Also, covering homeowners' mortgages is a better use of government funds than giving incentives to the servicers and relying on them to assist borrowers, said Paul Willen, senior economist at the Federal Reserve Bank of Boston. This way, he said, states have more control over who benefits from the initiatives.
"Every dollar spent will go to families who need it," he said.
But delinquent homeowners aren't the only ones who would benefit from these subsidies. In fact, the banks would come away with a huge win, said Mark Calabria, director of financial regulation studies at The Cato Institute. Not only would they have government money securely in hand, but they'd avoid the time and expense of the foreclosure process.
"This is a lot more than they would have collected otherwise," Calabria said. "The lenders should bear the losses for this. They are the one who made the loans."
Another concern is that these proposals will dissuade the unemployed from finding work or from relocating to an area with better job prospects, said Casey Mulligan, an economics professor at the University of Chicago. Such programs incent people to maintain their financial hardships.
"Why should anybody work if you are going to be in your house either way?" he said.
Monday, May 10, 2010
A Few Thoughts On Gold
World Gold Production
World Populatoion
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Put together you have a situation where the number of ounces per gold being produced per human being on this earth is falling.
World Populatoion
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Put together you have a situation where the number of ounces per gold being produced per human being on this earth is falling.
Saturday, May 1, 2010
Batten Down The Hatches
John Williams of Shadowstats gives a powerful interview and warns explicitly of a coming hyper-inflationary depression.
A Hyper-Inflationary Great Depression Is Coming
The Gold Report: John, last December you stated, "The U.S. economic and systemic crisis of the past of the past two years are just precursors to a great collapse," or what you call a "hyper-inflationary great depression." Is this prediction unique to the U.S., or do you feel that other economies face the same fate?
John Williams: The hyper-inflationary portion largely will be unique to the U.S. If the U.S. falls into a great depression, there's no way the rest of the world cannot have some negative economic impact.
TGR: How will the United States' decreased economic power impact global economies? Will the rest of the world survive?
JW: People will find to their happy surprise that they'll be able to survive. Most businesses are pretty creative. The thing is, the U.S. economic activity accounts for roughly half that of the globe. There's no way that the U.S. economy can turn down severely without there being an equivalent, at least a parallel downturn outside the U.S. with its major trading partners.
When I talk about a great depression in the United States, it is coincident with a hyper-inflation. We're already in the deepest and longest economic contraction seen since the Great Depression. If you look at the timing as set by the National Bureau of Economic Research, which is the arbiter of U.S. recessions, as to whether or not we have one, they've refused to call an end to this one, so far. But assuming you called an end to it back in the middle of 2009, it would still be the longest recession seen since the first down-leg of the Great Depression.
In terms of depth, year-to-year decline in the gross domestic product, or GDP, as reported in the third quarter of 2009, was the steepest annual decline ever reported in that series, which goes back to the late '40s on a quarterly basis. Other than for the shutdown of war production at the end of World War II, which usually is not counted as a normal business cycle, the full annual decline in 2009 GDP was the deepest since the Great Depression. There's strong evidence that we're going to see an intensified downturn ahead, but it won't become a great depression until a hyper-inflation kicks in. That is because hyper-inflation will be very disruptive to the normal flow of commerce and will take you to really low levels of activity that we haven't seen probably in the history of the Republic.
Let me define what I mean by depression and great depression, because there's no formal definition out there that matches the common expectation. Before World War II, economic downturns commonly were referred to as depressions. If you drew a graph of the level of activity in a depression over time, it would show a dip in the economy, and you'd go down and then up. The down part was referred to as recession and the up part as recovery. The Great Depression was one that was so severe that in the post-World War II era, those looking at economic cycles tried to come up with a euphemism for "depression." They didn't want to create the image of or remind people of the 1930s. Basically, they called economic downturns recessions, and most people think of a depression now as a severe recession.
I've talked with people in the Bureau of Economic Analysis and the National Bureau of Economic Research in terms of developing a formal depression definition. The traditional definition of recession—that of two consecutive quarters of inflation-adjusted contraction in GDP—still is a solid one, despite recent refinements. Although there's no official consensus on this, generally, a depression would be considered a recession where peak-to-trough contraction in the economy was more than 10%; a great depression would be a recession where the peak-to-trough contraction was more than 25%.
We're borderline depression in terms of where we're going to be here before I think the hyper-inflation kicks in. You've certainly seen depression-like numbers in things such as retail sales, industrial production and new orders for durable goods, where you're down more than 10% from peak-to-trough. In terms of housing, you're down more than 75%, and that certainly would be in the great depression category. With hyper-inflation, you have disruption to the normal flow of commerce and that will slow things down very remarkably from where we are now.
TGR: After a period of recession, isn't inflation considered a good sign?
JW: There are a couple of things that drive inflation. The one that you're describing is the relatively happy event where strong economic demand is exceeding production, and that's pushing prices higher, as well as interest rates. That's a relatively healthy circumstance. You can also have inflation, which is driven by factors other than strong economic activity. That's what we've been seeing in the last couple of years. It's been largely dominated by swings in oil prices. That hasn't been due really to oil demand, as much as it has been due to the value of the U.S. dollar. Oil is denominated in U.S. dollars. Big swings in the U.S. dollar get reflected in oil pricing. If the dollar weakens, oil rises. That's what you saw if you go back to the 1973-1975 recession, for example. That was an inflationary recession.
Indeed, the counterpart to what you were suggesting earlier about the strong demand and higher inflation is that usually in a recession you see low inflation. The '73 to '75 experience, however, was an inflationary recession because of the problem with oil prices. That's what we were seeing early in this cycle, where a weakening dollar rallied oil prices, and then the dollar reversed sharply and oil prices collapsed. We have passed through a brief period of shallow year-to-year deflation in the consumer price index, but, as oil prices bottomed out and headed higher since the end of 2009, we're now seeing higher inflation, again.
I'm looking at hyper-inflation, which is a rather drastic forecast. This has been in place as an ultimate fate for the system for a number of years. Back in the '70s, the then Big 10 accounting firms got together and approached the government and said, "Hey guys, you know you need to keep your books the way a big corporation does. You're the largest financial operator on earth." The government then, as well as today, operates on a cash basis with no accrual accounting and such. Yet, over a period of 30 years, the accountants and government put together generally accepted accounting principles, or GAAP, accounting for the federal government and introduced formal financial statements on that basis in 2002, which supplement the annual cash-based accounting.
If you look at those GAAP-based statements and include in the deficit the year-to-year change in the net present value of the unfunded liabilities for Social Security and Medicare, what you'll find is that the annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009. Now to put that into perspective, if the government wanted to balance its deficit on a GAAP basis for a year, and it seized all personal income and corporate profits, taxing everything 100%, it would still be in deficit. It can't raise taxes enough to contain this. On the other side, if it cut all government spending except for Social Security and Medicare, it still would be in deficit. With no political will to contain the spending, eventually the government meets its obligations by revving up the currency printing press.
TGR: With all this new paper money coming into the system, wouldn't we see a bigger bubble than we've ever seen prior to a hyper-inflationary great depression?
JW: No, in fact, it's a very unusual circumstance that we have now. Put yourself in Mr. Bernanke's situation—he had to prevent a collapse of the banking system. He was afraid of a severe deflation as was seen in the Great Depression, when a lot of banks went out of business. The depositors lost funds and the money supply just collapsed. He wanted to prevent a collapse of the money supply and keep the depository institutions afloat. Generally, that has happened. The FDIC expanded its coverage and everything that had to be done to keep the system from imploding was done. The effects eventually will be inflationary.
In the process, what Mr. Bernanke did was to expand the monetary base extraordinarily, more than doubling it over a period of a year. The monetary base is money currently in circulation plus bank reserves. If you go back to before September 2008, the bank reserves were in the $50 to $60 billion range. Where the currency was maybe $800 billion, we've gone over $2 trillion in total reserves. Most of that is in excess reserves and not required reserves that banks have to keep to support their deposits. Normally banks would take their excess reserves and lend them out into the regular stream of commerce, and in doing so, that would create money supply. Instead they're leaving the excess reserves on deposit with the Fed. Money supply and credit are now generally contracting. We're going to see an intensified downturn in the near future. I specialize in looking at leading indicators that have very successful track records in terms of predicting economic or financial turns. One such indicator is the broad money supply.
Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It's happened four times before now, in modern reporting. You saw it in the terrible downturn of '73 to '75, the early '80s and again in the early '90s. In December of 2009, annual growth in real M3 turned negative. It's now at a record low in terms of decline, down more than 6% year over year. What that suggests is that in the immediate future you're going to see renewed downturn in economic activity.
In all the prior instances that I mentioned, this event led recessions, except for '73 to '75. That's when you had the oil spike and a recession that came from that. When the money supply turned down in that recession, the economy accelerated in its decline. We're going to see something along those lines, now, with about a six-month lead time. You're going to have negative economic growth this year. The implications for that are extraordinary, because the projections on the federal budget deficit, a number of the state deficits, and the solvency and stress tests for the banking system all were structured assuming positive economic growth in the 2% to 3% range for 2010. Instead it's going to be negative. Many states are going to be in greater difficulty than they thought. Most likely, you're going to have federal bailouts there. The banks are going to have more troubles. All this means more government support, more government spending, greater deficits and greater funding needs for the U.S. Treasury. We have a global market that already is increasingly reluctant to hold the dollars and U.S. Treasuries.
TGR: The U.S. dollar is still the reserve currency, and it's holding its value while the euro struggles. Wouldn't decoupling precede hyper-inflation?
JW: I don't know if it will decouple from being the reserve currency formally, but it will de facto. The reserve status is the reason the dollar didn't collapse per se a year and a half ago during the September '08 panic. The movement is already afoot, however, to try to relegate the dollar to some status other than a reserve currency. For example, OPEC purportedly is looking to price oil in something other than U.S. dollars. The pressure is there to change the status.
Again, if you start to see a great depreciation of the U.S. currency or a tremendous increase in lack of confidence in the soundness of the government's fiscal condition, there is a problem. You mentioned Greece, for example. The sovereign solvency issues there are minuscule compared to what we have with the United States, which is the elephant in the bathtub. The markets know it's there. The central bankers know it's there. Again, with the downturn in the economy, all the issues are going to be brought to a head. As they come to a head, there will be that effort to dump the dollar. I would expect that, indeed, it will be decoupled from its reserve status, although it could follow after the fact as opposed to before the fact.
TGR: Major economic indicators suggest significant improvement; even the IMF has stated that we've averted a global depression. What are you seeing that these governing bodies are not?
JW: What I'm using is a leading indicator of economic activity: year-to-year change in inflation-adjusted broad money supply. We're now seeing a very sharp year-over-year decline, which has not been seen since the 1990 recession. This indicator does not work always in the upside; it doesn't necessarily give you a signal for a rising economy. It is, however, basic. If you strangle liquidity you can always contract an economy. Deliberately or not, liquidity's being strangled. You're seeing very sharp declines in consumer credit, commercial and industrial loans and commercial paper outstanding.
You are getting happy news from governments, central banks, financial markets, Wall Street analysts and the popular media, which does tend to cater to Wall Street. Such is standard practice. Happy news is what sells and you don't want to discourage people. The Obama administration, interestingly, started talking-down the economy when it wanted to get its stimulus package in place. As soon as that was done, it started talking-up the economy. Everything was just fine and dandy again. This is the most extraordinary downturn most people living today have ever seen. In terms of modern economic reporting, which basically started after World War II, we've never had a downturn as long or as severe. Perversely, the extreme nature of the downturn actually has warped recent reporting of seasonally-adjusted data to the upside.
TGR: Earlier you mentioned that business around the world will survive in the event of a depression. Aren't there sustainable businesses in the U.S. as well? Won't an influx of printed currency and green-tech job creation offer some value? At some point, doesn't stimulus money become real cash producing real goods? Surely the economy would be viable at some level?
JW: Not without income growth. There's nothing there that you've described to me that is growing, aside from inflation. To have sustainable growth in the economy, you have to income growth, net of inflation. That is not happening, and there is nothing in existing government stimulus that will cause real income growth.
Beyond income issues, the problem with the hyper-inflation is that very quickly the use of cash will cease. Let me contrast our circumstance here with a very popularly followed hyper-inflation case that's now run its course in Zimbabwe. There you had probably the worst hyper-inflation that anyone's ever seen. After devaluation upon devaluation, they successively lopped the zeros off the bills. If you took a $2 bill that they first issued back in the '80s and then tried to come up with the equivalent of a $2 bill in the last form of the currency, it would be very difficult to do because it was so worthless. If you put a pile of those together to equal the original $2 bill, it would actually stretch from the earth to the Andromeda Galaxy. We're talking light years. There are not enough trees on earth to print them. Yet the Zimbabwe economy survived and functioned. They had a lot of problems, but they operated. The reason they functioned was because they had a back-up system, which was a black market in U.S. dollars. People switched out of the Zimbabwe dollar to U.S. dollars. They could live with that. In the U.S., we don't have a back-up system.
TGR: You mentioned in a recent interview with CNN that you're recommending individuals move into both cash and gold. With the euro and the dollar in jeopardy, where does that leave us?
JW: I don't like the euro. I don't think that's going to hold together, and I've thought so for some time. If it should break up and you have a new German currency, a new mark or something like that might be a strong one option. At the moment I like the Canadian dollar, the Australian dollar and the Swiss franc. For anyone living in the United States, rather than looking at the short-term volatility in the markets and trying to make money off of that, this is the time to batten down the hatches and to look to preserve your wealth and assets.
In terms of preserving the purchasing power of your assets, the best thing I can think of is physical gold. That's worked over the millennia. I'm not per se a gold bug. It just happens to be a circumstance in which it's the cleanest asset around for that. You don't need to put all your assets into gold, but hold some. Hold some silver. I'd look to get some assets out of the U.S. dollar and look to get some assets out of the U.S. When I say outside of the U.S. dollar, again, I look at the Canadian dollar, Australian dollar, Swiss franc in particular. I think they will tend to do particularly well, whereas the U.S. dollar is going to become effectively worthless.
As the dollar breaks down, you'll also likely see disruptions in supply chains, including shipments of food to grocery stores. People should consider maintaining stockpiles of basic goods needed for living, much as they would for a natural disaster. I sit on the Hayward fault in California. I have a supply of goods and basic necessities in case something terrible happens—natural or man-made—that will carry me for a couple of months. It may take that long for a barter system to evolve, which I think is what you're going to end up with; at least until a new currency system is reorganized and you get a government that's able to bring its fiscal house into order. No currency system in the U.S. is going to work unless the fiscal conditions that drove it into oblivion are also addressed.
On a global basis, where the dollar is the world's reserve currency, 80% of currency transactions involve the U.S. dollar. There's going to have to be an overhaul of the global currency system. To gain credibility with the public, the powers that be likely will design a system that has some kind of a tie to gold, but that's purely speculative.
TGR: From a personal investment point of view, you emphasized that this is a time to conserve assets, including gold and other currencies. How else can investors protect themselves?
JW: I like physical gold and silver. I look to gold as a primary hedge. If you can come out of this holding gold, you'll be in a position where you'll be able to take advantage of some extraordinary investment opportunities that will follow. With inflation, real estate is usually a pretty good bet. It tends to hold its value over time. There may be periods of illiquidity, though, and it's not portable. Neither of those limitations is an issue with gold. Maybe gold will become the black market to support U.S. economic activity. It certainly would be the area that people will try to transfer their assets to as time goes along.
You see people now as gold gets to a new high saying, "Oh my goodness, I bought at $200, and I can sell out at $1,100 making a good profit." What people don't realize is that they haven't made a real profit. What they've done is retained the purchasing power of the dollars that they invested in gold, and they've lost proportionately the purchasing power of the amounts left in dollar-denominated paper assets over the same time. Gold is a long-term wealth preserver. Again, where many people are used to an investment environment where they can buy a stock, make a quick profit and then sell, with gold you need to hold on for the long haul as an insurance policy, not as a quick investment.
TGR: Thank you very much for your time.
A Hyper-Inflationary Great Depression Is Coming
The Gold Report: John, last December you stated, "The U.S. economic and systemic crisis of the past of the past two years are just precursors to a great collapse," or what you call a "hyper-inflationary great depression." Is this prediction unique to the U.S., or do you feel that other economies face the same fate?
John Williams: The hyper-inflationary portion largely will be unique to the U.S. If the U.S. falls into a great depression, there's no way the rest of the world cannot have some negative economic impact.
TGR: How will the United States' decreased economic power impact global economies? Will the rest of the world survive?
JW: People will find to their happy surprise that they'll be able to survive. Most businesses are pretty creative. The thing is, the U.S. economic activity accounts for roughly half that of the globe. There's no way that the U.S. economy can turn down severely without there being an equivalent, at least a parallel downturn outside the U.S. with its major trading partners.
When I talk about a great depression in the United States, it is coincident with a hyper-inflation. We're already in the deepest and longest economic contraction seen since the Great Depression. If you look at the timing as set by the National Bureau of Economic Research, which is the arbiter of U.S. recessions, as to whether or not we have one, they've refused to call an end to this one, so far. But assuming you called an end to it back in the middle of 2009, it would still be the longest recession seen since the first down-leg of the Great Depression.
In terms of depth, year-to-year decline in the gross domestic product, or GDP, as reported in the third quarter of 2009, was the steepest annual decline ever reported in that series, which goes back to the late '40s on a quarterly basis. Other than for the shutdown of war production at the end of World War II, which usually is not counted as a normal business cycle, the full annual decline in 2009 GDP was the deepest since the Great Depression. There's strong evidence that we're going to see an intensified downturn ahead, but it won't become a great depression until a hyper-inflation kicks in. That is because hyper-inflation will be very disruptive to the normal flow of commerce and will take you to really low levels of activity that we haven't seen probably in the history of the Republic.
Let me define what I mean by depression and great depression, because there's no formal definition out there that matches the common expectation. Before World War II, economic downturns commonly were referred to as depressions. If you drew a graph of the level of activity in a depression over time, it would show a dip in the economy, and you'd go down and then up. The down part was referred to as recession and the up part as recovery. The Great Depression was one that was so severe that in the post-World War II era, those looking at economic cycles tried to come up with a euphemism for "depression." They didn't want to create the image of or remind people of the 1930s. Basically, they called economic downturns recessions, and most people think of a depression now as a severe recession.
I've talked with people in the Bureau of Economic Analysis and the National Bureau of Economic Research in terms of developing a formal depression definition. The traditional definition of recession—that of two consecutive quarters of inflation-adjusted contraction in GDP—still is a solid one, despite recent refinements. Although there's no official consensus on this, generally, a depression would be considered a recession where peak-to-trough contraction in the economy was more than 10%; a great depression would be a recession where the peak-to-trough contraction was more than 25%.
We're borderline depression in terms of where we're going to be here before I think the hyper-inflation kicks in. You've certainly seen depression-like numbers in things such as retail sales, industrial production and new orders for durable goods, where you're down more than 10% from peak-to-trough. In terms of housing, you're down more than 75%, and that certainly would be in the great depression category. With hyper-inflation, you have disruption to the normal flow of commerce and that will slow things down very remarkably from where we are now.
TGR: After a period of recession, isn't inflation considered a good sign?
JW: There are a couple of things that drive inflation. The one that you're describing is the relatively happy event where strong economic demand is exceeding production, and that's pushing prices higher, as well as interest rates. That's a relatively healthy circumstance. You can also have inflation, which is driven by factors other than strong economic activity. That's what we've been seeing in the last couple of years. It's been largely dominated by swings in oil prices. That hasn't been due really to oil demand, as much as it has been due to the value of the U.S. dollar. Oil is denominated in U.S. dollars. Big swings in the U.S. dollar get reflected in oil pricing. If the dollar weakens, oil rises. That's what you saw if you go back to the 1973-1975 recession, for example. That was an inflationary recession.
Indeed, the counterpart to what you were suggesting earlier about the strong demand and higher inflation is that usually in a recession you see low inflation. The '73 to '75 experience, however, was an inflationary recession because of the problem with oil prices. That's what we were seeing early in this cycle, where a weakening dollar rallied oil prices, and then the dollar reversed sharply and oil prices collapsed. We have passed through a brief period of shallow year-to-year deflation in the consumer price index, but, as oil prices bottomed out and headed higher since the end of 2009, we're now seeing higher inflation, again.
I'm looking at hyper-inflation, which is a rather drastic forecast. This has been in place as an ultimate fate for the system for a number of years. Back in the '70s, the then Big 10 accounting firms got together and approached the government and said, "Hey guys, you know you need to keep your books the way a big corporation does. You're the largest financial operator on earth." The government then, as well as today, operates on a cash basis with no accrual accounting and such. Yet, over a period of 30 years, the accountants and government put together generally accepted accounting principles, or GAAP, accounting for the federal government and introduced formal financial statements on that basis in 2002, which supplement the annual cash-based accounting.
If you look at those GAAP-based statements and include in the deficit the year-to-year change in the net present value of the unfunded liabilities for Social Security and Medicare, what you'll find is that the annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009. Now to put that into perspective, if the government wanted to balance its deficit on a GAAP basis for a year, and it seized all personal income and corporate profits, taxing everything 100%, it would still be in deficit. It can't raise taxes enough to contain this. On the other side, if it cut all government spending except for Social Security and Medicare, it still would be in deficit. With no political will to contain the spending, eventually the government meets its obligations by revving up the currency printing press.
TGR: With all this new paper money coming into the system, wouldn't we see a bigger bubble than we've ever seen prior to a hyper-inflationary great depression?
JW: No, in fact, it's a very unusual circumstance that we have now. Put yourself in Mr. Bernanke's situation—he had to prevent a collapse of the banking system. He was afraid of a severe deflation as was seen in the Great Depression, when a lot of banks went out of business. The depositors lost funds and the money supply just collapsed. He wanted to prevent a collapse of the money supply and keep the depository institutions afloat. Generally, that has happened. The FDIC expanded its coverage and everything that had to be done to keep the system from imploding was done. The effects eventually will be inflationary.
In the process, what Mr. Bernanke did was to expand the monetary base extraordinarily, more than doubling it over a period of a year. The monetary base is money currently in circulation plus bank reserves. If you go back to before September 2008, the bank reserves were in the $50 to $60 billion range. Where the currency was maybe $800 billion, we've gone over $2 trillion in total reserves. Most of that is in excess reserves and not required reserves that banks have to keep to support their deposits. Normally banks would take their excess reserves and lend them out into the regular stream of commerce, and in doing so, that would create money supply. Instead they're leaving the excess reserves on deposit with the Fed. Money supply and credit are now generally contracting. We're going to see an intensified downturn in the near future. I specialize in looking at leading indicators that have very successful track records in terms of predicting economic or financial turns. One such indicator is the broad money supply.
Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It's happened four times before now, in modern reporting. You saw it in the terrible downturn of '73 to '75, the early '80s and again in the early '90s. In December of 2009, annual growth in real M3 turned negative. It's now at a record low in terms of decline, down more than 6% year over year. What that suggests is that in the immediate future you're going to see renewed downturn in economic activity.
In all the prior instances that I mentioned, this event led recessions, except for '73 to '75. That's when you had the oil spike and a recession that came from that. When the money supply turned down in that recession, the economy accelerated in its decline. We're going to see something along those lines, now, with about a six-month lead time. You're going to have negative economic growth this year. The implications for that are extraordinary, because the projections on the federal budget deficit, a number of the state deficits, and the solvency and stress tests for the banking system all were structured assuming positive economic growth in the 2% to 3% range for 2010. Instead it's going to be negative. Many states are going to be in greater difficulty than they thought. Most likely, you're going to have federal bailouts there. The banks are going to have more troubles. All this means more government support, more government spending, greater deficits and greater funding needs for the U.S. Treasury. We have a global market that already is increasingly reluctant to hold the dollars and U.S. Treasuries.
TGR: The U.S. dollar is still the reserve currency, and it's holding its value while the euro struggles. Wouldn't decoupling precede hyper-inflation?
JW: I don't know if it will decouple from being the reserve currency formally, but it will de facto. The reserve status is the reason the dollar didn't collapse per se a year and a half ago during the September '08 panic. The movement is already afoot, however, to try to relegate the dollar to some status other than a reserve currency. For example, OPEC purportedly is looking to price oil in something other than U.S. dollars. The pressure is there to change the status.
Again, if you start to see a great depreciation of the U.S. currency or a tremendous increase in lack of confidence in the soundness of the government's fiscal condition, there is a problem. You mentioned Greece, for example. The sovereign solvency issues there are minuscule compared to what we have with the United States, which is the elephant in the bathtub. The markets know it's there. The central bankers know it's there. Again, with the downturn in the economy, all the issues are going to be brought to a head. As they come to a head, there will be that effort to dump the dollar. I would expect that, indeed, it will be decoupled from its reserve status, although it could follow after the fact as opposed to before the fact.
TGR: Major economic indicators suggest significant improvement; even the IMF has stated that we've averted a global depression. What are you seeing that these governing bodies are not?
JW: What I'm using is a leading indicator of economic activity: year-to-year change in inflation-adjusted broad money supply. We're now seeing a very sharp year-over-year decline, which has not been seen since the 1990 recession. This indicator does not work always in the upside; it doesn't necessarily give you a signal for a rising economy. It is, however, basic. If you strangle liquidity you can always contract an economy. Deliberately or not, liquidity's being strangled. You're seeing very sharp declines in consumer credit, commercial and industrial loans and commercial paper outstanding.
You are getting happy news from governments, central banks, financial markets, Wall Street analysts and the popular media, which does tend to cater to Wall Street. Such is standard practice. Happy news is what sells and you don't want to discourage people. The Obama administration, interestingly, started talking-down the economy when it wanted to get its stimulus package in place. As soon as that was done, it started talking-up the economy. Everything was just fine and dandy again. This is the most extraordinary downturn most people living today have ever seen. In terms of modern economic reporting, which basically started after World War II, we've never had a downturn as long or as severe. Perversely, the extreme nature of the downturn actually has warped recent reporting of seasonally-adjusted data to the upside.
TGR: Earlier you mentioned that business around the world will survive in the event of a depression. Aren't there sustainable businesses in the U.S. as well? Won't an influx of printed currency and green-tech job creation offer some value? At some point, doesn't stimulus money become real cash producing real goods? Surely the economy would be viable at some level?
JW: Not without income growth. There's nothing there that you've described to me that is growing, aside from inflation. To have sustainable growth in the economy, you have to income growth, net of inflation. That is not happening, and there is nothing in existing government stimulus that will cause real income growth.
Beyond income issues, the problem with the hyper-inflation is that very quickly the use of cash will cease. Let me contrast our circumstance here with a very popularly followed hyper-inflation case that's now run its course in Zimbabwe. There you had probably the worst hyper-inflation that anyone's ever seen. After devaluation upon devaluation, they successively lopped the zeros off the bills. If you took a $2 bill that they first issued back in the '80s and then tried to come up with the equivalent of a $2 bill in the last form of the currency, it would be very difficult to do because it was so worthless. If you put a pile of those together to equal the original $2 bill, it would actually stretch from the earth to the Andromeda Galaxy. We're talking light years. There are not enough trees on earth to print them. Yet the Zimbabwe economy survived and functioned. They had a lot of problems, but they operated. The reason they functioned was because they had a back-up system, which was a black market in U.S. dollars. People switched out of the Zimbabwe dollar to U.S. dollars. They could live with that. In the U.S., we don't have a back-up system.
TGR: You mentioned in a recent interview with CNN that you're recommending individuals move into both cash and gold. With the euro and the dollar in jeopardy, where does that leave us?
JW: I don't like the euro. I don't think that's going to hold together, and I've thought so for some time. If it should break up and you have a new German currency, a new mark or something like that might be a strong one option. At the moment I like the Canadian dollar, the Australian dollar and the Swiss franc. For anyone living in the United States, rather than looking at the short-term volatility in the markets and trying to make money off of that, this is the time to batten down the hatches and to look to preserve your wealth and assets.
In terms of preserving the purchasing power of your assets, the best thing I can think of is physical gold. That's worked over the millennia. I'm not per se a gold bug. It just happens to be a circumstance in which it's the cleanest asset around for that. You don't need to put all your assets into gold, but hold some. Hold some silver. I'd look to get some assets out of the U.S. dollar and look to get some assets out of the U.S. When I say outside of the U.S. dollar, again, I look at the Canadian dollar, Australian dollar, Swiss franc in particular. I think they will tend to do particularly well, whereas the U.S. dollar is going to become effectively worthless.
As the dollar breaks down, you'll also likely see disruptions in supply chains, including shipments of food to grocery stores. People should consider maintaining stockpiles of basic goods needed for living, much as they would for a natural disaster. I sit on the Hayward fault in California. I have a supply of goods and basic necessities in case something terrible happens—natural or man-made—that will carry me for a couple of months. It may take that long for a barter system to evolve, which I think is what you're going to end up with; at least until a new currency system is reorganized and you get a government that's able to bring its fiscal house into order. No currency system in the U.S. is going to work unless the fiscal conditions that drove it into oblivion are also addressed.
On a global basis, where the dollar is the world's reserve currency, 80% of currency transactions involve the U.S. dollar. There's going to have to be an overhaul of the global currency system. To gain credibility with the public, the powers that be likely will design a system that has some kind of a tie to gold, but that's purely speculative.
TGR: From a personal investment point of view, you emphasized that this is a time to conserve assets, including gold and other currencies. How else can investors protect themselves?
JW: I like physical gold and silver. I look to gold as a primary hedge. If you can come out of this holding gold, you'll be in a position where you'll be able to take advantage of some extraordinary investment opportunities that will follow. With inflation, real estate is usually a pretty good bet. It tends to hold its value over time. There may be periods of illiquidity, though, and it's not portable. Neither of those limitations is an issue with gold. Maybe gold will become the black market to support U.S. economic activity. It certainly would be the area that people will try to transfer their assets to as time goes along.
You see people now as gold gets to a new high saying, "Oh my goodness, I bought at $200, and I can sell out at $1,100 making a good profit." What people don't realize is that they haven't made a real profit. What they've done is retained the purchasing power of the dollars that they invested in gold, and they've lost proportionately the purchasing power of the amounts left in dollar-denominated paper assets over the same time. Gold is a long-term wealth preserver. Again, where many people are used to an investment environment where they can buy a stock, make a quick profit and then sell, with gold you need to hold on for the long haul as an insurance policy, not as a quick investment.
TGR: Thank you very much for your time.
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