The Two Most Important Measures, Another Housing Rescue, IMF & China Team Up on the Dollar and More!

by Addison Wiggin & Ian Mathias

  • Bad signs for the economy’s two most important measures
  • Since it’s working so well already… Obama administration widens housing rescue plan
  • Bill Bonner on what the years ahead will most likely resemble
  • A 50-year chart that looks right into our future
  • China, IMF hit the dollar with a one-two punch

  We’ve said it before: This depression will be defined by two measures. Housing — most people’s largest store of wealth and employment — the backbone of any economy. Millions of people without jobs stuck in homes they can’t afford will not be able to “put the economy back on track,” as the current administration likes to say. This morning, we see big news on both fronts… and it’s not so good.

  First, as we forecast yesterday, the Labor Department issued a worse-than-expected jobs report this morning. The U.S. economy shed 467,000 jobs in June, they claims. As this chart shows, the Street was betting on the current trend to stay intact. Job losses have decreased every month since their January peak… until now.

B-list data points from this morning’s jobs report were equally lousy: The average hourly workweek fell to 33 hours, but hourly wages stayed the same. Those out of work for six months or more now exceed a record 4.4 million. And continuing claims for unemployment benefits remained at 6.7 million, just below an all-time high.

By the government’s count, a record 14.7 million people are now unemployed. That makes for a 9.5% unemployment rate, a 26-year high.

  On the housing front, mortgage applications have fallen to a seven-month low. According to the Mortgage Bankers Association, requests for new home loans fell 19% last week while refis plunged 30%, both to levels unseen since November. While mortgage rates are well off March’s 4.6% record low (30-year fixed), they’re still at a reasonable 5.3%, a full 100bps below the average rate this time last year.

  And since it worked so well the first time around: The Obama administration announced they will expand the “make home affordable” program to an even wider range of deadbeat borrowers. Previously, homeowners with mortgages worth more than 105% of their home’s value did not qualify for President Obama’s manipulated refi rates. That limit has been bumped up to 125%… incredible.

Even more amazing: One in five mortgage borrowers are “underwater,” meaning the value of their loan is worth more than the price of their home. That’s nearly 20 million homeowners.

  “Housing and jobs are the two cornerstones of American middle-class wealth,” reiterates Bill Bonner. “If they can’t hold the weight of a building economy, there is little chance of a broad recovery in the United States… or Britain.

“In Britain as in America, the real economy is falling off just as investors, analysts and commentators think they see a recovery. They think rising stock prices – U.S. stocks are up 40% since March 9 — predict and precede a growing economy. Stocks, they say, ‘look ahead.’

“People will believe anything. If stocks had been watching where the economy was going, they never would have traded at such high levels in ’07. They clearly had no idea what was ahead. Nor do they now…

“What we see is this: The United States prospered in the 20th century not because of the Roosevelts, but in spite of them. The American economy was expanding… it was still young, strong, competitive and prosperous. The empire grew with economic power.

“But the years ahead are not likely to resemble the post-Roosevelt years. America’s position relative to the rest of the world is weak and in decline. She is not a creditor; she is a debtor. She is not a low-cost competitor; she is a high-cost competitor. She no longer has a free and flexible economy; she has one freighted with central planners, regulators and busybodies.”

Year in and year out, Bill is a consistent crowd favorite at our Investment Symposium. This year might top them all, as we help him celebrate The Daily Reckoning’s 10-year anniversary. There will be speeches, libations, food, music, friends and much more… but only if you’re with us in Vancouver. If you haven’t signed up yet, the time is now. Please join us at our annual Investment Symposium.

  The unemployment scene in Europe is turning ugly too. The unemployment rate in the 16-nation eurozone hit 9.5% in May, the EU statistics office announced early this morning. That’s a 10-year high.

If you’re looking for work over there, steer clear of Spain. Spaniards rank at the top of the EU’s jobless list, with an unemployment rate of 18.7%. Job seekers are better served in the Netherlands, where only 3.2% are unemployed. (How one currency can represent all these nations is still beyond us.)

The European Central Bank chose to keep lending rates at 1% this morning, a record low.

 China wants to add a new global reserve currency debate to next week’s G-8 meeting. Unnamed Chinese officials asked the organizers of the G-8 gathering to include such a discussion yesterday. Whether or not they’ll get it, we’re not so sure… but that’s not the point. Last year, we heard little hints here and there of China’s dollar unease. Now they are practically shouting it from the rooftop. This could get interesting soon.

  In a similar vein, the IMF announced today it will issue more bonds denominated in Special Drawing Rights — a fancy phrase for a basket of global currencies. After much demand from BRIC nations, the IMF said it will print bonds worth $150 billion, each denominated in a basket consisting of the dollar, euro, pound and yen. China, Brazil and Russia have already promised to buy $70 billion worth of the bonds… a convenient way to diversify out of the dollar and gain some say in the governance of the IMF’s war chest.

  China’s call for an alternative global reserve currency put the dollar index down almost a full point. But traders refuse to leave their recent range… after falling as low as 79.5 yesterday, the dollar index is already back up to 80.1.

  The American stock market reacted harshly to this morning’s jobs report… no surprise, given the Street missed the number by nearly 100,000 jobs. The Dow and S&P 500 opened down over 2%.

  “If asset prices accurately reflect all the available information,” writes Rob Parenteau, “about future cash flows and the appropriate discount rates on those cash flows, as is required under the efficient market view, then we have to ask ourselves, what has the roller-coaster ride of the past decade and a half been all about? Compare the difference between the ratio of household net worth to disposable income before and after 1995 in the chart below.

“If you lived through this roller-coaster ride as an investor — especially as an investor approaching retirement — the experience is seared into your mind, and it has probably left a few scars on your heart as well. So we have to ask ourselves, what has changed so dramatically in the ability of capital equipment to generate profits or houses to generate rental income to homeowners over the past decade and a half? Alternatively, what has changed so dramatically in the long-run yield on Treasury bonds, considered the default risk-free rate, and therefore a key component of the discount rate on future cash flows?

“The answer, my friend, is indeed blowing in the wind, because the answer is basically as empty as air. What changed was the approach toward a decidedly asymmetric directive (no intentional popping allowed, just mopping up the mess afterward), and the remarkable skewing of the incentive structure facing investment professionals — incentives that basically encouraged the pursuit of asset bubbles regardless of the state of the fundamental factors like reasonable estimates of future cash flows and reasonable discount rates on those cash flows. As evident in the opening chart, there was no Great Moderation in asset markets — only a greater corruption of asset-pricing mechanisms. In retrospect, it is truly remarkable that the financial system held together as long as it did through the last years of Dr. Richebächer’s illustrious career.”

For Rob’s 2009-2010 forecast, be sure to check out his latest special report.

  The California budget crisis continues. Gov. Schwarzenegger declared a state of fiscal emergency today and ordered many state offices to close for three days each month (without pay) until June 2010. His administration will also issue a new swath of IOUs today… if you get one, let us know.

In the oil patch, light sweet crude finally fell out of its recent range. The front-month contract is down two bucks and change as we write, to $66 a barrel. That’s no matter to you, of course, ’cause you followed Byron King’s advice last week to take some oil profits off the table.

  Gold is still consolidating. An ounce goes for $930 as we write.

  “The comments of your readers,” writes a reader today, “regarding having all of their eggs in one Madoff basket and the stupidity of doing so is curious. How many Unites States investors have diversified their investment portfolio away from all dollar-based investments? If you think about it, our life insurance, stocks, bonds, real estate, Social Security and other retirement programs are all dollar based. A few of us might have a little gold/silver or some foreign bonds, but I bet over 80% of your readers have made the Madoff mistake and not recognized it.

“If/when the dollar collapses, the losses Madoff incurred will be a speck of fly s%*$ compared with what happens to U.S. investors. Thanks for a great read.”

The 5: Amen.

For years, we’ve been sending our readers to EverBank, which has a truly unique array of products that help everyday folks attain true financial diversification. They’re currently putting the final touches on a product that’s garnered our attention: The MarketSafe BRIC CD. In short, it’s a principal-protected CD that allows investors to gain exposure to the real, ruble, rupee and yuan. If you’re interested too, stay tuned… details will emerge in the next few weeks.

(Our legal department would like to remind you that we have a business relationship with EverBank. We know that may shock you, but yes, we like to partner with people that sell useful things.)


Ian Mathias

The 5 Min. Forecast

P.S. The market is closed tomorrow, so we will take the day off as well. We wish you a revelrous Independence Day.

P.P.S. By the time we write you again, we may run out of Byron King’s limited-edition report — Set for Life: Eight Keys to Getting “Miserable Rich” With Gold.

We only have a few handfuls left on our virtual shelves… grab yours here before we run out.


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