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Train Wreck of the Week
By Bob Chapman
April 22 2006
A couple of issues ago we told you about European authorities confiscating Argentine soy flour shipments from three Spanish and one British port, on orders from Monsanto. Almost a year ago Monsanto starting suing European importers, alleging patent infringements and violation of intellectual property rights because Argentina won’t pay royalties on the transnationals genetically-modified Roundup Ready (RR) soy gene. The confiscations took place as Monsanto and Argentina were negotiating on the issue. RR technology is not patented in Argentina.
Former FBI whistleblower Sibel Edmonds filed a motion asking for the recusal Judge Reggie Walton from her pending case filed under the Federal Tort Claim Act. Walton is also currently hearing the case involving I. Lewis Libby who under orders from the President and Vice President leaked the name of former CIA undercover operative Valerie Plame Wilson to the media.
The recusal is based on Walton’s disclosure statement for 2003, which is almost totally redacted, which is in violation of the Ethics in Government Act. Edmonds and thousands of others contend Walton’s assignment to these cases is not coincidence. The insiders want these two cases to be disposed of in favor of the neocons. In 2004, Walton disposed of Edmond’s First Amendment case on the basis of the State Secrets Privilege. Walton prevented 9/11 attorneys from asking a majority of the proposed questions related to the attack. There is no question Walton and his handlers are manipulating the system to hide what really went on 9/11 and these other two cases. As you can see, our legal system no longer works.
March industrial production rose 0.6%. February was up 0.5%. Capacity utilization rose to 81.3% from 81, the highest in more than five years. Industries used 81% of capacity on average over the last 30 years. This index and low unemployment are associated with much higher inflation.
In the San Francisco Bay area, almost 75% of mortgage loans taken out last year allowed borrowers to delay payment of principal and, in some cases, interest. Forty-three percent of new mortgages, whether to purchase or refinance a home were interest only loans, which are adjustable rate mortgages that require no principal payments for a set number of years. That is roughly the same percentage as in 2004, but double 2003. So-called ARMS jumped to 29% from 10% in 2004. Among options the smallest payment includes no principal and less than 100% of the interest due. The unpaid interest gets tacked onto the principal, creating negative amortization, which is why these are known as “neg-am” loans.
53.2% of purchasers and 35.3% of refinancers or 88.5% chose interest-only loans last year, while 22.5% of purchasers and 33.9% of refinancers chose option ARMS.
Nationally the same pattern holds true, but on a smaller scale. 34.2% of purchasers and 20.7% of refinancers chose interest-only loans, that’s 54.9%, while 7.7% of purchasers and 11.4% of refinancers chose option ARMS. Our guess is the vast majority are cash-out refis and that people are taking alternative loans so they can take out more cash. Homes are being used to finance everything because the interest is deductible. This puts homeowners and lenders at a terrible risk. Lenders such as Golden West Financial – World Savings say more than 90% of the loans it makes are option ARMS. Let’s see how they fare this time.
If you are expecting an auto industry bailout of US manufacturers similar to that of Chrysler in the early 1980s don’t hold your breath. This is planned destruction. There will be no cash infusion and no trade barriers unless Congress comes to its senses. The share of GDP from motor vehicle output is down a third since the late 1970s to 3.2%. In 1978, makers of cars and auto parts employed 1.4% of all private sector workers. It’s less than 1% today. Even in Michigan, the sector employment has fallen 50% to 6% of all non-farm jobs.
Earnings of major US newspapers continue to fall. In the first quarter, net income fell 14% at McClatchy, 28% at Tribune Co., and 69% at the NY Times.
This following recap is from last week. It didn’t appear because we published on Friday.
The 2-year US Treasury note yield rose 5 bps to 4.95%; the 5’s were up 6 bp to 4.97% and the 10’s closed at 5.05% for the first time since 6/02. This is just as we predicted. The next stop is 5.25% and then 5.50%. That puts the 30-year fixed mortgage at 7% to 7 1/2%. The 15’s at 6 5/8% to 7 1/8% and the ARMS at 6 1/8% to 6 5/8%.
CDOs, Collateralized Debt Obligations, are now bigger than the (junk) high yield bond market. These are pools of debt of dozens of different borrowers, repackaged into slices with different levels of risk. Global CD5 issuance jumped almost 60% last week to more than $250 billion. Less than $200 billion in junk was issued globally last year.
The MBA Applications Purchase Index declined 4.7%. Purchase apps were down 11.9% y-o-y, with dollar volume down 8.0%. Refi apps fell 6.6%. The average new purchase mortgage rose to $237,600, while the ARM declined to $253,000. Bank credit rose again $5.8 billion to a record $7.729 trillion, with a y-t-d gain of $223 billion, or 11% annualized. Year-on-year it’s up $693 billion or 9.8%. Securities credit jumped $12.1 billion. Loans and leases declined $6.3 billion for a y-t-d gain of 10.3%. Commercial and industrial loans have expanded at a 15.7% rate y-t-d and 13.8% y-o-y. Real estate loans have expanded 10.6% y-t-d and 12.1% y-o-y. On the liability side, previous M3 component, Large Time Deposits, jumped $14.5 billion.
M2 was up $23 billion to $6.798 trillion. Year-to-date it’s up $85 billion, or 4.7% and y-o-y it’s up $320 billion or 4.9%. Commercial paper fell $1.7 billion. Total CP issuance of $31.1 billion y-t-d or 6.5% y-t-d and 14.4% y-o-y.
ABS was up $6 billion. Year-to-date total ABS is $198 billion or 7% ahead of 2005’s record pace, with y-t-d home equity loan ABS issuance of $146 billion running 20% above last year’s record.
Fed foreign holdings of Treasury, agency debt, held for foreign accounts, fell $1.5 billion to $1.592 trillion for the week ended 4/12. Custody holdings rose $73.3 billion y-t-d, or 16.7% annualized and $203 billion (14.6%) y-o-y. Federal spending is running 8.7% ahead of 2005, with receipts up 10.5%. March retail sales rose 8.7% y-o-y.
David Walker, Comptroller of the US, in a speech at the London School of Economics said he is deeply concerned about the US’s deteriorating financial condition and worsening long-term fiscal outlook. He noted the federal budget deficit for fiscal 2005 was $319 billion, but added far more troubling is the fact that the government’s liabilities and unfunded commitments reached $46 trillion that year, up from $20 trillion just five years ago. The debt is far worse than advertised.
Today’s monetary experts, such as Bernanke and Eichangreen, on the Great Depression, have a curious disregard for the fundamental role played by credit and speculation in fostering the fearful bubble this despite centuries of financial history illuminating their central responsibility. Yes, the Fed refused to inflate the money supply in the early 1930s and the gold standard was constricting, but the Fed knew full well what they were doing. Increases in tariffs came later and were too low to make a big difference. The real problem was interest only real estate loans and 90% margin in stocks. The Fed caused the depression just as they are in process of doing so again.
Now not only has the Fed been issuing credit and printing money, we also have outside the banking system massive credit creation.
