Big Credit Crisis Landmark, Trillion $ Government Budget, Dollar Rally, Retail Sales, and More!

by Addison Wiggin & Ian Mathias

  • Credit crisis registers new milestone… losses exceed half a trillion bucks
  • The first name-brand bank looking ready to collapse
  • Fed introduces new auction, rings up taxpayer tab to incredible proportions
  • John Williams on the dollar’s “nonsense” rally
  • The latest data point moving today’s market… has the consumer tapped out?

  The “credit crisis” reached a staggering landmark yesterday. Looks something like this:


That’s $500 billion in financial write-downs since the start of the credit crunch. Enough cash to buy Exxon Mobil outright and still have $100 billion left over. Or you could pick up Wal-Mart and Microsoft. Hell, for half a trillion, banks of the world could have taken a pass on those mortgage-backed securities and bought themselves Belgium… or at least Belgium’s entire annual GDP.

Unfortunately, as nasty as $500 billion sounds, the consensus says we’re still only halfway through:

  Wachovia is doing its part to keep this train rolling. The bank announced yesterday a larger-than-reported second quarterly loss. Wachovia bumped up net losses by half a billion bucks, to a second-quarter loss of $9.1 billion. That $500 million boost was used to beef up legal reserves for auction-rate securities… the same debt instruments we warned you about last week.

Wachovia officials also said they’d be firing 11,350 employees, 600 more than they reported last month. While they were at it, Wachovia announced a fun SEC probe, some civil charges and investigations by three different state attorneys. If you’ve got a Wachovia account, now might be a good time to make sure all your holdings are insured.

WCH shares fell 12% pre-market, for good reason. 

  “Let’s just print more money!” rejoiced the Ben Bernanke and his friends at the Federal Reserve. The Fed conducted a new style of TAF this week. The bank gave out $25 billion in loans Monday, but these were the first rounds of 84-day credits. Borrowers usually have “only” a month to pay back their billions. No longer.

Since we seem to be the only media source that cares to keep track… assuming today’s auction goes as planned, the Fed’s TAFs and TSLFs have now dedicated over $1.6 trillion to quelling the credit crunch. It’s too early to say how much money they’ve made by lending your tax dollars, but it’ll likely be billions. That’ll probably be distributed to the people of the U.S…. probably.

  And it’s only the Fed that seems comfortable ramping up lending lately. In a survey released by the Federal Reserve this week, 75% of U.S. banks say they are tightening lending standards across the board. That’s up from 60% in the Fed’s first-quarter survey.

In terms that you and I can relate to… the average rate on a 30-year fixed mortgage is 6.7%. That’s at least a one-year high, and much higher than the 5.5% rates from back in January.

Talk about a quadruple whammy for Joe Taxpayer. Financials are in lousy shape, which weighs on almost all our investments. Banks have it so bad, they’re jacking up interest rates (except for your savings account, of course). The Fed, the only bank with low rates, uses a combination of printed and taxpayer dollars, causing inflation and deeper systemic risks. Oh, and you can’t open an account with the Fed… its just for the financials that got us here in the first place.

  And if we haven’t yet inspired you to “stick it to the man” today… the federal budget deficit tripled in July, to a record $102 billion. According to today’s Treasury Dept. release, the incredible deficit was caused mostly by stimulus checks. But we also note that government spending in July was up 27% since the same time last year. Revenue was down 6%.

And since the government is such a fan of annualization, seasonal adjustments and all that crap, here’s a taste of its own medicine: At the current annualized rate, the Bush administration is on track to produce the first ever trillion-dollar budget deficit. Gross…

The government has spent over $2.4 trillion this fiscal year. That spells a real current annual deficit of over $371 billion. Incredibly, the Congressional Budget Office is still projecting a $389 billion deficit for this fiscal year, ending in October. In other words, the government is somehow expecting to exceed budget spending by only $18 billion over the next two months.

Seriously, have you bought your ticket for I.O.U.S.A. yet? It’s time to stop messing around. We’re 65% of where we need to be right now. And there are only eight days left.

  Despite all this news, the dollar rally continues today. The dollar index has crept up to 76.3. Consequentially, we see 1 euro goes for $1.48 today, down 1 cent from yesterday. The pound is in even worse shape, at $1.86. But we look curiously at the yen. At 108, the Japanese currency has nearly totally recovered from the greenback’s recent rally.

“Per the financial media,” writes John Williams , “the dollar’s strength reflects improving economic conditions in the United States versus the rest of the world. That is nonsense. Shy of gimmicked GDP reporting that few believe, the U.S. continues to see a deepening recession, as evidenced in most other economic reporting. Usually, when the U.S. economy contracts, the rest of the world follows. There is little news there.

“The other factor at play is related, seen in the nature of finance ministers and central bankers to lie. There has been some heavy, but effective spinmeistering, jawboning and, possibly, supportive covert intervention in support of the dollar. Central banks often do their best to trigger or enhance a desired move in currencies. Such factors exaggerate near-term volatility, but do not have lasting impact.

“Not reflecting any lasting change in real-world conditions, the dollar’s happy gains should prove to be fleeting.”

  Interestingly, gold is standing its ground. Even though the dollar rally is still gaining speed, gold has managed to stop the bleeding around $820 an ounce.

  Crude oil is also holding up as the dollar continues to strengthen. It’s up to $115 a barrel today after a bullish weekly inventory report.

We notice the government also adjusted its 2009 crude oil price forecast. The Energy Dept. shaved $9 off its best guess for next year, to $124.

  Gasoline costs are still plummeting. The national average declined to $3.78 this morning.

  Retail sales in the U.S. are falling. As we predicted after looking at Wal-Mart’s latest numbers, the Commerce Dept. confirmed today that the retail sector is in contraction. Sales declined in July by 0.1%. That’s hardly a massive pullback, but notable for two reasons: First, it’s the only monthly drop since February. Second, retail sales contracted even though the government handed out almost $100 billion in stimulus checks.

  Major indexes in the U.S. have been drifting down this week. Blue chips have been getting it the worst, especially financials. The buzz from a stronger dollar and lower oil prices seems to be wearing off, and market markers are now stuck with the same old stories… credit, housing, recession, etc.

We’re seeing the worst sell-off of the week today. The Dow is down over 150 points as traders fret over Wachovia’s bitter announcement and the retail sales number. We also notice that Deere missed earnings expectations this morning. The ag sector was the hero of the first quarter this year, and cracks in that mighty facade are starting to show.

  “I don’t see how China can be No. 1 anything but the biggest loser in history,” subtly suggests a reader. “It is suffering so much pollution that 80% of its police farces have lung disease. It is riddled with corruption from top down. The people are rebelling against this corruption in tens of thousands of separate incidents every year. Last year, over 50,000 riots were noted, with thousands of people in each incident. China is not going to take over anything.
“China isn’t going to dump American money onto the market. It would destroy itself. China calls that its nuclear bomb, to dump a trillion dollars on the open market and crash the dollar. Ain’t gonna happen. That’s like dropping a nuclear bomb on itself. It may be Communist, but it isn’t suicidal.”

  “Seeing the post about Lawson running for Congress and buying out all the seats of his local showing of I.O.U.S.A.,” writes a reader, “I wanted to find out what party he belonged to. What kind of candidate would recognize and talk about the real problems we face? I searched high and low and I could find any mention, so I reasoned that he must be a registered Republican, because they are most embarrassed to admit their affiliation. They are “vewy, vewy qwiet” about it.
“Republicans talk about fiscal conservatism, but rarely practice it. Democrats at least don’t talk about it. The conservatism/liberalism of power is far different than the liberalism/conservatism found in homes across America. Republican leadership is rife with people who practice ‘Do as I say, not as I do,’ while Democratic leadership is rife with people who practice ‘Please don’t hurt me, just take my wallet and go away.’

“I finally found it hidden away in his bio: ‘I’m a registered Republican, fiscally conservative, but personally strive for generosity.’ Can I smell them or what? Still, I’ve got to give him points for the newer version of ‘compassionate conservative’ — ‘personally strive for generosity.’ That’s brilliant.
“Someone might want to drop him a line so he can scrub this reference also.”

The 5: Heh.

  “Your comment,” responds a reader to Thursday’s 5, “that ‘if the rules of the game are known in advance, then [regulations are] a fair game’ accepts the basic premise that such regulatory activity is OK only if its defects can be ironed out. In fact, the underlying legitimacy of government regulations is that your property is not your own, but that it all belongs to the government.

“The concept of property entails the owner’s right to use and dispose of what is owned, but regulations can utterly dispense with such ownership powers. Thus, government is the effective owner of all. As Mises pointed out, there is no ‘middle way.’ The interventionist state is a fallacy. Interventionism with its attendant regulations always ultimately tilts into socialism or is fought off, allowing society to flourish in an environment of consensual trading of private property titles in a free market.”

The 5: Sounds like you’ve been hanging out with Doug Casey. He said the same thing, except less eloquently and with a lot more swearing… and thrusting of a lit cigarette at the crowd … at our Investment Symposium last month. Listen to his speech here.


Addison Wiggin,
The 5 Min. Forecast


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