Stephen Roach says, U.S. Consumer Deleveraging is Just Beginning

Stephen Roach

Stephen Roach

Stephen Roach: “The market is in for a rude awakening,” said the chairman of Morgan Stanley Asia, whose grim outlook seems to remain constant wherever he’s domiciled. “This will be an usually weak recovery,” Roach said. “The damage done to the system [will be] lasting – we are not even close to healing. It’s ‘game over’ for the U.S. consumer. Deleveraging is just beginning.”

Buffett Says, We Are Doomed – We’re Going to Be Crushed Under A Mountain of Debt

A highly influential American has finally hit the panic button about the tremendous mountain of debt the country is piling up.Last year, Warren Buffett says, we were justified in using any means necessary to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we’ll destroy the value of the dollar and many Americans’ life savings.Some not-so-fun facts from Buffett’s editorial today in the New York Times: * Congress is now spending 185% of what it takes in * Our deficit is a post WWII record of 13% of GDP * Our debt is growing by 1% a month * We are borrowing $1.8 trillion a year$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we’ll still need another $900 billion.So, where’s it going to come from? Most likely the printing press. And, ultimately, Buffett says, that will destroy the value of the dollar.

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Bob Prechter “Quite Sure” Next Wave Down Will Be Bigger and March Lows Will Break

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market’s main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.The 2000 market peak market a “major trend change” for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. “The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books – they’re very large,” he says. “The bear market is going to have balance that out with some sort of significant retrenchment.”

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Robert Prechter Says Dollar’s Hit a “Major Bottom”

Forget all the talk about the dollar being in terminal decline. The recent rally in the greenback is for real, says Robert Prechter, president of Elliott Wave International. The man who correctly predicted the 1987 crash and last year’s peak in oil prices now says we’re “going to be up for a year or two in the dollar.”Reuters and other mainstream news outlets attribute the recent uptick in the dollar versus other major currencies to an improving economy signaled by Friday’s “stronger-than-expected U.S. jobs numbers.” Prechter, ever the contrarian, says the U.S. dollar has put in a major bottom but not for the reasons everyone else is pointing to.

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Inflation Not a Problem “Deflationary Depression” in Our Future

Elliott Wave International founder, Bob Prechter thinks Krugman and Bernanke are premature in declaring victory over the credit crunch. Prechter, who famously predicted the 1987 stock market crash, tells Tech Ticker “the march towards depression, which is being fueled by deflationary trend, is pretty well intact.”So forget all you’ve heard about recovery and inflation, “we’ve only seen the first phase,” of the downturn according to Prechter. Next to come, is “a credit implosion” that will once again destroy the value of stocks, commodities and especially real estate. “The biggest area of overvaluation because of credit extension is the real estate area,” he says. “And if you’ll notice that’s the area that’s had the weakest of any kind of attempt at a recovery.”When this next phase of “deflationary depression” happens the only investment advice he can give is: safety first. “Make sure as an individual you’re in the safest possible investments so you can ride this out.” And as discussed in a previous segment, that means investing in dollars or dollar equivalent assets.

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How a Very Pessimistic Ron Paul Would Fix the Economy: Tech Ticker, Yahoo! Finance

Congressman Ron Paul is “very pessimistic” about the state of the economy, largely because – from his view – the Obama Administration “continues to do the things that created the problem in the first place.”Long a proponent of small government and a staunch opponent of the Federal Reserve system, Paul’s main point is that increased spending and higher deficits are not the solution to our problems, but their cause.”You can take care of people, but never with a deficit, never by expanding the spending,” the Texas Republican says in this exclusive video interview, taped in the Capitol Hill Rotunda in Washington D.C. “The more we do to interfere with the correction – the longer it lasts.”Had he been elected, Paul said he would be doing “a lot less” than President Obama and blames Keynesian economics – which advocates increased government borrowing and spending during times of duress — for our nation’s current ills.While admitting a transition to what he views an “ideal society” won’t be quick or simple, Paul’s economic prescription includes: * Allowing bankruptcies to occur vs. rewarding failure with bailouts. * Stop inflation by dismantling the Fed and returning to the gold standard. * Encourage savings and liquidate debt. * Deregulate. * Give tax credits to those who take care of themselves, or the doctors who provide their care. * Cut government spending, especially on international endeavors. “We spend hundreds of billions of maintaining our empire around the world. Let’s bring that money home,” he says.These recommendations will be familiar to anyone who followed (or supported) Paul’s run for the Presidency in 2008. Given all that’s transpired in the past year, one suspects he’d be getting a lot more votes if the campaign were happening today.

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Can The US Federal Reserve Go Broke?

RGE Monitor

RGE Monitor

Can Central Banks Go Broke? Fed Refuses To Disclose Collateral Composition And Recipients Of $2.8 Trillion Loans

  • The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the U.S. GDP, to rescue the financial system since the credit markets seized up 15 months ago. Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion. The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions

  • The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 bn Troubled Asset Relief Program (TARP)–> Regulators refuse to disclose who is receiving how much while Congress starts pushing for transparency and give authority over taxpayer money back to elected officials.

  • see Cumberland Advisor’s real-time graph of Fed’s balance sheet and the contributions of different lending programs.
  • The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
  • Buiter: Can the central bank become insolvent? How and by whom or by what institution should the central bank be recapitalized, if its capital were deemed insufficient? These are relevant questions today wherever central banks have taken on large exposures to private credit risk as in the U.S., the Eurozone, and the UK.
  • Nov 5, RGE: Fed Balance Sheet Expansion: Change in Formula for Interest Paid on Reserves –> banks are providing the reserves for the Fed’s balance sheet expansion themselves.
  • Sep 17: Treasury Announces Supplementary Financing Program to fund the Federal Reserve’s Liquidity Facilities and to manage the balance sheet impact of these efforts.

Go to: for all the details. (Excellent Financial Site – You will recognize the writer, because he has been all over the TV recently.

3 Famous Financial Quotes

Financial Quotes from Top Investors

Financial Quotes from Top Investors

Sir John Templeton  – said, “the best opportunities occurred at the time of maximum pessimism.”

Warren Buffet  – said, “be fearful when others are greedy and greedy when others are fearful.”

Baron Rothschild, who made his family fortune buying up property when the Protestants and the Catholics were slaughtering each other, said, “Buy when blood is running in the streets.”

It’s a recession to 4 out of 5 Americans

CNN Money Poll - We are in Recession

A CNN/Opinion Research poll shows that the nation is becoming more convinced the economy is in a nosedive.

By Catherine Clifford, staff writer

U.S. Stocks Drop to 18-Month Low After Foreclosures Hit Record

Bloomberg News

By Michael Patterson

March 6 (Bloomberg) — U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor’s 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow’s U.S. employment report will show the economy has tipped closer to recession.

The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.

“It’s a tough environment,” Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. “Lending terms are tighter. The willingness to extend credit is less. It’s making it very tough for business.”

Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.

Banks Decline

Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.

Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.

J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.

Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Luxury Department Stores

Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.

The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.

The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.

The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.

`More Bad News’

“People are expecting more bad news,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. “You’re going to have a spillover effect into unemployment. It goes from one sector to another.”

All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.

Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.

Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.

18-Month Low

Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.

Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are “material.” RBC Capital Markets wrote in a research note today that “bankruptcy is now a more likely outcome” for Thornburg. Shares of Thornburg, a “jumbo” home mortgage specialist, had changed hands for more than $12 last week.

Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.

Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor’s lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

Missed Margin Calls

Carlyle Capital Corp., Carlyle Group’s publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

Carlyle Group, started by David Rubenstein in 1987, is the world’s second-biggest private-equity firm.

UBS AG’s U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe’s biggest bank by assets “likely” sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a “fire sale,” JPMorgan said as it lifted its “credit-crisis” writedown estimate for the bank to 18.5 billion francs.

`Painful Exercise’

“Leverage is coming off across the system,” said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. “It’s going to be a painful exercise and I don’t think the equity market has full appreciation of what it’s going to mean and how it’s going to be unwound.”

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

More Capital Needed?

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the “near term” and the company may need more capital to avoid a downgrade.

Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world’s largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.

Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.

Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.

“You don’t know when the next shoe is going to drop and where the next writedown is going to come from,” said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. “The news in the short run is likely to continue to be ugly. You have to have a strong stomach.”