Dollar's Decline Presents Bernanke With Faustian Bargain

This week it was revealed that the euro and the yen have supplanted the dollar as the currency of choice at foreign central banks.

This is a major development, but one that has been a long time coming.

According to Barclays Capital, over the last three months, banks put 63 percent of their new cash into euros and yen, and just 37 percent into dollars. A decade ago, the dollar's share of new cash in central banks was two-thirds.

The once mighty dollar has fallen considerably as the currency choice.

The IMF says that dollars currently account for about 62 percent of the total currency reserve at central banks -- the lowest on record.

The printing of trillions of dollars by the Federal Reserve – the very definition of inflation – has sparked concerns that the value of the dollar is eroding. That has sparked a worldwide flight to other currencies.

Investors and central banks are also snubbing dollars because near-zero interest rates are keeping the currency too weak.

Those investors and central banks are getting paid back by a currency that is worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

The only thing that will stem the tide is for the Fed to raise interest rates – considerably. Some economists think that rates may have to spike to the high single digits to make the dollar attractive once again.

That would kill any economic recovery by halting investment and growth. Stocks would nosedive and housing would be further crippled.

The massive amounts of excess liquidity floating around world markets would also have to be mopped up by the Fed – a considerable task.

According to Peter Schiff, president of Euro Pacific Capital, Ben Bernanke's other choice is equally stark.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it."

It's hard to decide which is the lesser of two evils. Either choice seems like a Faustian bargain.

Dow 10,000: a Charade

"I think there's a bubble-like atmosphere going on here in the rush back to 10,000. Caution should rule the day. We're not out of the woods yet." – Rich Yamarone, director of economic research at Argus Research

On Wednesday, the Dow Jones closed over 10,000 for the first time in over a year.

Don't believe the hype.

The US economy has suffered a real estate collapse, a banking crisis that led to a near systemic collapse on a global scale, a credit crisis, the worst economic downturn since the Great Depression, and an unprecedented global recession.

Because of all that, the stock market rightly crashed during the winter and spring, bottoming out at 6469 on March 6 — the market's lowest level since November, 1996.

Just eight months earlier, the market had been over 11,000.

But now, despite the fact that the US gross domestic product and consumer spending are declining, the stock is in the midst of an unfathomable rally. It has soared more than 50% since March, while the economy has remained in a tailspin.

This makes absolutely no sense. Consumers are deleveraging and the flow of credit has slowed. One in five Americans is unemployed or underemployed.

The government's U-6 unemployment figure - the true jobless rate - now stands at a whopping 17%. Yet, the government recently admitted that it has been systematically underestimating job losses for the last three years.

Additionally, one of the President's closest economic advisors, Austan Goolsbie, has noted that roughly 1% to 2% of our population's unemployed are downright unaccounted for on a monthly basis due to a variety of factors. And those who run out of unemployment benefits are no longer counted among the ranks of the unemployed.

With all of this in mind, how could the Dow have possibly surpassed 10,000?

It's due to a herd mentality, not fundamentals. Investors are bidding up the stock market in a delirious frenzy, hoping to recoup previous losses, or get rich buying at what is perceived to be an opportune time. Hey, everyone else is buying, right?

Simply put, lots of new money is flowing into the stock market and pushing up the average. It's not because a recovery is underway. And this means that a lot of people stand to get burned.

The relatively strong earnings reports that have lifted the markets in recent days are being driven by cost cuts and layoffs, not strong revenue growth. But that will only put further downward pressure on jobs and wages, and result in weaker economic growth and a deeper downturn.

The merry-go-round will end up right back where it started.

Wall Street is a pretty poor barometer of the economy's performance since it is simply a bet on the future performance of a select group of companies listed on three stock exchanges. Additionally, the majority of the country doesn't have any direct investments in the stock market.

The Dow Jones is currently trading at 28 times earnings. The S&P is even worse; historically, its median P/E is 16,, but is now trading at 139 times earnings. That alone is reason not to invest. It is simply unsustainable.

Yet, the fools have rushed in, enthusiastically.

But the institutional investors, the real market movers, will soon take their profits and quickly pull the escape lever. The herd will try to follow, but not all of them will be able to squeeze out the emergency exit at the same time. There will be a bloodbath.

By some estimates, "high frequency trading" is responsible for close to 70% of all volume in US markets. Computers can track hot stocks and immediately buy up all available shares, subsequently selling them at higher prices. Millions of shares can also be dumped in just milli-seconds.

The markets are manipulated. Sadly, there is a very heavy price to be paid because of this. Billions of dollars will be lost, yet again.

Report: Treasury Misled Public With TARP

The Federal Reserve Chairman Also Misled the Public. The Treasury and Fed Work in Tandem. See a Pattern? A Problem?

Despite critics expressing alarm about the Fed’s immense power during the financial crisis, Ben Bernanke still insists that the Fed should be put in charge of regulating the nation’s biggest financial institutions.

Yes, the Fed Chairman actually favors this extraordinary concentration of power, despite his total inability to thwart, or even foresee, the Great Recession. Not only didn't Bernanke foresee the economic storm that was on the horizon, he actually said that things were quite rosy at US banks.

"Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.” - Fed Chairman Ben Bernanke, 2006

“Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits” - Ben Bernanke, May 17, 2007

Clearly, Bernanke saw no reason for regulation or oversight. Everything was just fine — until it wasn't.

Perhaps realizing the Fed's failure to see what many others could, or merely bowing to political pressure, Bernanke says responsibility for monitoring broader risks in the financial system should go to a council of regulators.

But Bernanke says the Fed would be merely one of several players on the new council, and endorses the Obama administration’s proposal to have the Treasury lead that council.

How convenient, since the Treasury and the Fed are joined at the hip like Siamese twins engineered by Dr. Frankenstein.

Ultimately, the Treasury is no better than the Fed and the two work together hand in glove.

A new report on the bank bailouts says the Treasury misled the public and was the benefactor of the mega banks.

Neil Barofsky, the special inspector general who oversees the government’s bailout of the banking system, says the Treasury may have unfairly disbursed billions to the biggest banks under the Troubled Assets Relief Program.

Nine of Wall Street’s largest players were given billions of dollars of taxpayer money by the Treasury through the TARP.

Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

On October 14, 2008, Treasury Secretary Hank Paulson said that the banks were “healthy” and accepted the money for “the good of the U.S. economy,” so that they could increase lending to consumers and businesses.

In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general contends.

On October 5th, the day his new report was released, Barofsky discussed Paulson's bogus claim, and the TARP, with CNBC.

"As we disclose and describe in our audit, this just wasn't an accurate statement," Barofsky told CNBC. "The Treasury and the Federal Reserve had serious concerns about the health of some of these institutions. They didn't really do a test, they didn't really review, there really wasn't a criteria — when they made the decision to give this $125 billion — about the relative health of these institutions. And as we note in our report, those statements raised expectations and it hurt Treasury's credibility."

Barofsky believes that there is an important lesson to be leaned from all of this.

"It's very important, when we look back, to learn these lessons. And I think that one of the key ones that we learned from this is that transparency, being honest with the American people, it's important — not just for the sake of transparency, but because of the long term, unintended, negative consequences that come when we're not honest, when we're not forthcoming. The bottom line is that the American people saw very shortly thereafter that these were not all healthy institutions, and lending didn't increase. So that hurts the credibility of the program... Even in times of crisis — particularly in times of crisis — let's make sure when we're making public statements that they're accurate and that they're truthful."

Citigroup, JP Morgan Chase, Bank if America, and Wells Fargo were among the nine financial giants to receive billions in taxpayer assistance.

When asked by CNBC if he thought it was inevitable that taxpayers would wind up losing some of the TARP money, Barofsky replied, "I think it's extremely unlikely that we're going to have a dollar-for-dollar return. And I don't think the program, as designed, is made to have a dollar-for-dollar return."

So, forced to prop up banks deemed "too big too fail," the taxpayers have been burned once again.

It's said that sunlight is the greatest disinfectant. Both the Treasury and the Fed — especially — need lots of disinfectant.

Let the sun shine.

Shadow Inventory Will Impede Housing Recovery

"The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary." - Amherst Securities Group

In a September 23 report, Amherst Securities estimates that 7 million housing units are destined to default, and then be seized by lenders. This is a "shadow inventory" that hasn't yet hit the market, but soon will.

That number represents well over a year's worth of home sales. Amherst believes that this housing overhang is the single biggest obstacle to a housing recovery.

To put that into perspective, existing home sales total around 5.2 million units — so the overhang is approximately 1.35X one year of existing home sales.

This shadow inventory has grown measurably in recent years; there were just 1.27 million such units in 2005.

Based on the current pace of existing home sales, Amherst analysts say it would take 1.35 years sell these properties — assuming no other homes are on the market. Naturally, that is a highly unlikely scenario.

Amherst noted that efforts to rework mortgages and avoid foreclosure will not make much of a difference, with perhaps a reduction of 1 million from this shadow inventory. Amherst also noted that "many of these borrowers would default later, if they remain in a negative equity position."

For that estimate to be accurate, Amherst concluded that those 1 million modifications would have to be more successful than historical modifications. That makes such an outcome seem optimistic, if not unlikely.

Amherst is a securities firm specializing in trading and advising investors on home-loan debt.

Earlier this year, Barclays' analysts wrote that once it starts, the housing recovery will be dulled by a “pent- up supply” of homes from owners who have put off sales during the slump. That inventory will further dilute an already weak market.

Banks are loathe to acknowledge this large shadow inventory, for fear of what it wold do to their already troubled balance sheets. However, they can't keep this supply hidden indefinitely. At some point it will have to be acknowledged, and the supply will once again begin depressing home prices even further.

According to the Mortgage Bankers Association (MBA) Quarterly Delinquency Survey, about 55.9 million homes in the United States have a mortgage. At the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency.

That suggest that some 7 million are already in the delinquency pipeline and will eventually liquidate.

Unemployment Benefits Running Out for Huge Numbers of Desperate Americans

In ordinary times, unemployed workers who've lost their jobs can draw unemployment benefits for up to 26 weeks.

But Congress enacted emergency extensions during this recession, allowing laid-off workers in nearly half the states to collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.

However, in the other 26 states, the unemployed can only collect for a period ranging from 46 to 72 weeks.

Unemployment insurance, with payments averaging just over $300 per week, is now a lifeline for nine million Americans. But that lifeline is about to run out for many of them.

That's because 1.5 million people nationwide are expected to reach the maximum threshold for unemployment insurance benefits by the end of the year, according to the National Employment Law Project (NELP).

Perhaps they shouldn't worry; Ben Bernanke says the recession is over.

Despite the Fed Chairman's upbeat attitude, U-6 unemployment - the true jobless rate - now stands at a whopping 17%.

Those who don't find work before their benefits run out will be facing a crisis.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

Dr. Katz says that when people exhaust unemployment and health insurance, many of them end up applying for disability benefits, which become a large, unending drain on the Treasury.

So, regardless of whether or not benefits are extended by Congress — yet again — the cost to the already burdened Treasury will be hefty.

Housing Collapse Turning Homeowners Into Reluctant Landlords

Despite mainstream media reports about a recovery in the housing market, the problem is far from over and is in fact getting worse.

More than 15 million homes are mortgaged for more than their value, according to an August report by real estate research firm First American CoreLogic.

If that doesn't seem like an especially large number, consider this; about one in three homes with a mortgage fall into this category.

That means that tens of millions of Americans are now "upside down," with mortgages that exceed the value of their homes.

As a result, many have become reluctant landlords, renting homes they cannot afford to sell. Some homeowners are even renting out rooms in their homes to help cover costs.

Since 2007 about 2.5 million homes have been converted into rentals, according to an analysis by Foresight Analytics. This accounts for about 85 percent of the increase in rental homes.

The rate of home ownership hit a record high in 2004 but has since decreased by about two percent, according to Census Bureau data. It's the lowest homeownership rate since 2000.

Home prices nationally are down 31 percent from their 2006 highs, according to the S&P/Case-Shiller Home Price Index.

The problem is a glut of available housing.

According to Matthew Anderson, a partner at Foresight Analytics, there was a surplus of five million housing units produced between 2001 and 2008 compared to demand. That resulted in too many homes built for too few people.

At present, there are about 4.4 million empty homes for rent, census figures show. The vacancy rate is among the highest ever recorded, according to census data that goes back to 1956.

According to Anderson's analysis, from 2005 to June 30 of this year, 3.2 million homes were converted into rentals.

At the end of 2004, there were about 36.9 million homes either occupied by tenants or empty and available for rent, census figures show. As of June 30, that number increased nearly 11 percent to 40.9 million units. Of that four-million home increase, 3.2 million were conversions into rentals.

The 4.4 million empty homes are creating a glut of rentals, forcing rent prices down, and putting pressure on apartment building owners who now have to compete with single-family homes.

And unless, or until, those homes are sold or rented. they will also continue putting downward pressure on an already depressed national housing market.

Ranks of Jobless Swelling, True Unemployment Reaches 17%

The September jobs report was released on Friday, and it was bleak.

Last month, another 201,000 jobs were lost and the "official" unemployment rate rose from 9.7% to 9.8%.

However, the so-called U-6 employment measure — the figure that includes jobless Americans who have become discouraged and those working part-time but desire full-time jobs — has reached 17%, or a total of 26.5 million Americans.

The average workweek for production and nonsupervisory workers has fallen back to 33 hours, a record low. Those workers will see their hours increase before new jobs are created.

The number of long-term unemployed — workers who have gone jobless for 27 weeks or more rose — by 450,000 to 5.4 million. In September, 35.6 percent of unemployed persons had been jobless for 27 weeks or more.

In the 21 months since the downturn began, there has been a net loss of 7.6 million jobs, wiping out all job creation this decade. This will be remembered as the lost decade of employment.

Advance Realty and Rutgers produced an issue paper last month, America’s New Post-Recession Employment Arithmetic, which noted the following:

As of August 2009, the nation had 1.3 million (1,256,000) fewer private sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

The U.S. Bureau of Labor Statistics projects the nation’s labor force to grow by approximately 1.3 million persons per year between 2006 and 2016. Therefore, the nation has to add 1.3 million total jobs per year— consisting of private-sector and government payroll employment as well as contract (nonpayroll) employment—simply to accommodate a growing labor force [as consequence of population growth].

Given conservative estimates of further employment declines (even if the recession ends in the third quarter of 2009) and the continued increase in the labor force, the nation’s employment deficit could approach 9.4 million private-sector jobs by December 2009.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the jobs deficit!

* Addendum: The Bureau of Labor Statistics later made the largest benchmark revision in at least the past dozen years. From March 2008 to March 2009, the BLS overestimated payroll employment by some 824,000 jobs, or nearly 70,000 jobs per month.

We now know that the government has been systematically underestimating job losses for the last three years. So as bad as the most recent employment report was, in reality it was even worse. The revision will not officially be incorporated into the job figures until February, and could be revised yet again.