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Monday, October 31, 2005 8:11 PM

The Kids Have Spoken

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The voting is finished, the ballots have been cast, and the kids have spoken.
Mish is pleased to announce the winner of this year's Halloween favorites.
Without further ado, the overwhelming favorite for the second year in a row is (drum roll please)......Tootsie Roll Pops.

No, for the record I do not get anything out of this endorsement (other than I have been eating them all day myself too).

This Halloween we offered a basket of candy including, Snickers, M&Ms, Butterfingers, Milky Ways, and Tootsie Roll Pops. When holding out the basket the first choice was (by guesstimate) Tootsie Roll Pops more than 65% of the time.

One "Little Princess" selected a red Tootsie Roll Pop put it down, picked it up and put it down again. Wondering what was on her mind, I offered "It's OK you can take two". She promptly picked up the Cherry Tootsie Roll Pop and then without hesitation selected a Grape Tootsie Roll Pop as her second choice. The original dilemma was not what candy to choose but what flavor to choose.

Boys on the other hand reacted differently. Originally taking one, when told they could have two, just grabbed a handful of everything. Perhaps this means girls are really better at math or perhaps this means boys are better at seizing opportunity when presented. I will leave this debate to Mish readers.

Then again, the latter was not uniform. One "Little Devil" selected a Chocolate Tootsie Roll Pop and that was all he wanted it seems. I had to ask "Are you sure you don't want another one?" He just stood there so I handed him another selection for his bag.

There you have it folks.
By popular demand "The Kids Have Spoken".
Mish is pleased to recommend that next Halloween parents everywhere stock up on Tootsie Roll Pops.

PS. Please buy an extra bag for yourself. Save some for the kids and if there are still some leftover please send them to me.

Mike Shedlock / Mish

Sunday, October 30, 2005 11:38 AM

3rd Quarter GDP

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Here is how the 3rd quarter GDP was actually reported:

Economy Grows at an Energetic Rate in 3Q - Despite Hurricanes

WASHINGTON (AP) -- Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of the economy's stamina even as it coped with the destructive forces of hurricanes Katrina and Rita. The latest snapshot of the country's economic performance, released by the Commerce Department on Friday, even marked an improvement from the solid 3.3 percent pace of growth registered in the second quarter. Growth in the third quarter was broad-based, reflecting brisk spending by consumers, businesses and government.

The expansion in gross domestic product in the July-to-September quarter, the strongest since the beginning of the year, also exceeded many analysts' expectations. Before the report was released, they were forecasting the economy to clock in at a 3.6 percent annual rate.

Despite the sting of high energy bills, consumers continued to spend, doing their part to keep the economy rolling in the third quarter. Consumers' boosted spending at a brisk 3.9 percent rate, the strongest pace since the end of last year.
Here is one possible alternative:
Economy Grows at an Energetic Rate in 3Q - Because of the Hurricanes

WASHINGTON (AP) -- Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of dollars flooding the economy in the wake of the hurricanes. Washington flooded the economy with close to $100 billion in relief efforts. The boost is expected to be temporary as is widely known by economists as "The broken window fallacy".

Benefiting most from these relief efforts were roofers charging the US government as much to temporarily patch roofs with plastic as an entire new roof should cost. Also benefiting from this disaster were truckers hauling ice to nowhere. That ice was never used and either melted or returned to the place of origin. Insurance companies paid out billions of dollars worth of claims and that money was spent as well. Food vendors in Houston benefited by charging extravagant prices to supply food to the refugees.

Gasoline prices skyrocketed, accounting for much of the increase in consumer sales. Despite the string of high energy bills, consumers continued to spend simply because that had to if they wanted to heat or air condition their homes or drive anywhere.

Add it all up and the rise in 3rd quarter GDP was a mirage.
Let's consider all of the likely alternatives and see how they stack up:
  1. GDP really did rise. It's a good thing. God bless consumers.
  2. No one really knows what the GDP did as it is so grossly distorted already and hurricane relief made it even more so. For a look at some of those distortions please consider Grossly Distorted Procedures. Besides, GDP is backward looking and the housing slump to which we can look forward to is just starting. The fallout will be immense.
  3. GDP rose because consumers foolishly went deeper debt spending driving savings rates further into negative territory. This can hardly be a good thing.
  4. GDP rose because of a rapid rise of government spending in the wake of the hurricanes. This is not a good thing and is part of the reason for recently rising interest rates.
Which of those are likely?
For anyone that wants to party now and is not concerned about the hangover later, (which is almost everyone, especially the economic cheerleeders on CNBC), the answer is number 1. To those folks, the answer is always "rah rah siscooom bah, gooooooo consumer" and no possible chance to portray things as being better than they really are is ever passed up. If the GDP was down they would be looking ahead to the "recovery" after blaming the weather. The thinking person on the other hand knows full well the answer is a combination of 2, 3, and 4.

Charles Mackay, writing for the WallStreetExaminer touched upon this line of thinking in The Secret Recession. Let's have a look.
Hidden behind the "strong" GDP figures is an ongoing consumer recession. Buried beneath the mass of heavily manipulated economic statistics, the Bureau of Economic Analysis notes that real* disposable income fell at an annual rate 0.9% in the third quarter. It went from a $8,128.7 billion annual rate in the second quarter to $8,110.5 billion in the third quarter. Already heavily indebted, consumers resorted to draining cash from their bank accounts to maintain prior spending levels. The BEA says the amount of negative savings reached an annual rate of $100 billion in the quarter – or put another way, -1.1% of income. This is duly confirmed by the continuing drawdown in the M1 money supply we have seen for a number of weeks now.

The BEA also issued a stern note of caution about reliability of their GDP figures:

The Bureau emphasized that the third-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency. The third-quarter "preliminary" estimates, based on more comprehensive data, will be released on November 30, 2005.

Government spending rapidly accelerated to a 7.7% rate in the third quarter. This spending may further add to the misconceptions about just how strong the economy really is.
"May add to the misconceptions" or "Did add to the misconceptions"?
I think the latter. At any rate, thanks for the numbers Mr. Mackay, it helped me put the finishing touches this weekend on a piece I started soon after I heard the noise and saw all the pom-poms waving. As always, it was a sight to behold.

Mike Shedlock / Mish

1:21 AM

US. misses softwood deadline

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The U.S. missed a deadline to resolve its softwood lumber dispute with Canada.
Is anyone surprised?

US. misses softwood deadline

Foot-dragging comes days after PM called for proof Washington respects NAFTA

The United States missed a key deadline yesterday for complying with a NAFTA ruling that should have dramatically cut duties in the bitter softwood dispute, denying Canada the gesture of good faith it's been requesting before it would resume talks to settle the conflict.

Yesterday's foot-dragging especially angered Ottawa because it was only on Monday that Prime Minister Paul Martin called on U.S. Secretary of State Condoleezza Rice to provide proof that Washington still respects the North American free-trade agreement.

Canadian-U.S. relations concerning the $8-billion softwood dispute have been in a downward spiral since August, when Washington spurned a different NAFTA ruling that should have ended the conflict.

In this separate case, a NAFTA panel of trade adjudicators has ruled five times -- most recently Oct. 5 -- that the United States's calculation of part of its softwood duties was illegal under U.S. law and it has five times urged Washington to bring its results into line.
NAFTA ruled five times that the US is wrong?
Does the US care?
If so how?
At 5 p.m. Eastern time, the U.S. government announced it had some questions about the panel's ruling and that softwood duties would stay in place. It requested "clarification" of the NAFTA decision and asked for more time to comply. Yesterday was the last possible day for Washington to respond to the NAFTA ruling.
After 5 rulings that the US is in violation of NAFTA, the US wants "clarification" at the 11th hour. What can possibly need to be clarified at this point?
"This seems to be another example of the lengths they will go to avoid offending, at least in the short term, special interest groups like the [U.S. Coalition for Fair Lumber Imports]," an official said.

"I hardly think this can be construed as the signal of good faith that the Canadian government was looking for," said Carl Grenier, executive vice-president of the Free Trade Lumber Council, which represents about 40 per cent of lumber exports to the U.S. market.

The B.C. Lumber Trade Council, representing half of U.S.-bound lumber exports, accused Washington of employing "delay tactics."

The U.S. government, which this week asked Canada to tone down its "apocalyptic language" on softwood, insisted it's playing fair.

"This administration is fully committed to NAFTA and to coming to a lasting agreement with Canada to resolve this dispute," Commerce Secretary Carlos Gutierrez said.

International Trade Minister Jim Peterson called on Washington to respond promptly. "It is up to the United States to show that the institution of the NAFTA means something," he said. "Rules are rules, you can't just pick and choose."
In a nutshell, that is the mistake that Canada and other keep making: The US has proven, time and time again that it can and will pick and choose the rules it will abide by. Waiting for Washington to respond promptly to trade disputes when the US is at fault has proven to be futile.

By now it should be point blank obvious that the word of the US (at least the word of this administration) is totally worthless. Therefore, it most assuredly is not up to the US "to show that the institution of the NAFTA means something". Rather it is up to everyone else to make it extremely painful for the US to not honor its trade agreements.

Hardball is the only thing this administration understands.
It is up to Canada to prove it is willing to play hardball.
That is the bottom line. No more, no less.

Mike Shedlock / Mish

Friday, October 28, 2005 1:28 PM

A National Mortgage Broker Chimes in on Boston

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The following is from Dave Donhoff, a national mortgage banker/broker:

Hi Mish,
Regarding: The The party is over in Boston
No buyers? Fancy that. On a $70,000 price cut no less. Let's see, is that a 15% price reduction? Yep. Does that include a 6% fee to the real estate agent/broker? Nope.

Anecdotally I'm seeing increased inquiries in foreclosure bailouts and distressed requests for cashout refis (to fund reserves because payments can't be met... which, of course, we do not do) from Greater Boston, and the California Bay Area.

FURTHER, nationwide the rental levels are breaking from stagnant to a creep to a LEAP in some markets...

If there was EVER a time to get buttoned up as a real estate investor... the markets' about go go on deep-discount sale. Probably "once in a lifetime" buying opportunities will begin opening up to the diligent who are cash & credit strong.

Dave Donhoff
National Mortgage Banker/Broker

Instride on the Motley FOOL replied with:

I am not a realtor and do not play one on the internet. I am a podiatrist who happens to treat a realtor every now and then in my office. The following is scuttlebutt and fungusamentals obtained while extracting fungus while trying not to go mental.

In Weymouth, MA a second generation local family run realtor says that commissions dried up by the end of last year. There were 81 houses listed for sale in town, last year. Sales were very very good. This year, there are 244 listings but sales are dead. Nothing is moving. Three other realtors covering areas Boston south to the Cape and Islands confirm that sales have "dropped off the table this years." To quote one of them, "the glory days of 6 figure salaries are gone." Another said, "Condos are what is moving best right now, but it does not even come close to making up for the lost home sales."

I am also starting to see a phenomenon I have not seen before: for rent signs out in front of homes with for sale signs.

I also saw on the ABC News that a contractor is resorting to E-bay to sell a house he built in Ashland, MA after it did not sell for 3.3 million. He is reducing the 5 bedroom house on 2.6 acres to a "bargain" 2.8 million. I bought a 4 bedroom house on 10.2 acres ubutting a national park in Nova Scotia for 27,000 US dollars just 3 years ago. Now there is value for you.

It seems as if we have similar observations as to the Boston area market that have been arrived at in an independent fashion.

A proud member of the Boston real-Tea party

Mish reply:

Thanks Dave and Instride.
We need to stress patience on that buy side, and that can vary widely market to market. This housing bubble (and yes it is a national bubble) can crash now or it can take years to play out. I suspect local conditions will vary widely. But I sure agree with you that the best opportunities will be for "the diligent who are cash and credit strong". I would also add opportunities will be for those that understand value and local conditions and how fast they can can turn, as well as how extreme both of them can get. We have seen the extremes on the high side. It sure remains to be seen what extremes on the low side will look like. Condos in bubble areas are particularly likely to be smashed.

Mike Shedlock / Mish

9:45 AM

The party is over in Boston

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Turn out the lights. The party is over in Boston.

Greater Boston's once-sizzling home sales have cooled so much this fall that realtors are reverting to a description not heard in a decade: "Buyer's market." From the South End to the South Shore to Cape Ann, the list of unsold properties is growing, and so are reductions in asking prices. Attractive houses in good locations with seemingly appropriate pricetags are getting scant interest. Real estate agents, who six months ago played host to streams of buyers, are now presiding over open houses that draw few if any lookers.

In Jamaica Plain, even a $70,000 price cut -- to $399,000 -- hasn't generated much interest in a two-bedroom, bi-level condo in a 19th century mansion that has been on the market for about a month. Sunday, only four people, including two curious neighbors, came to an open house.

"My seller is willing" to consider a lower price, said the broker, Anne Connolly, "but there's no buyers to deal with." The fall slowdown not only represents a sea change for sellers, who for years have enjoyed multiple offers and higher prices, but also indicates the region's bull housing market is at an end. Real estate agents say a long-predicted market correction appears underway as the gap between the price of housing and peoples' incomes -- now even wider than at peak of the 1980s housing boom -- has become too great to sustain the recent pace of sales and appreciation.
No buyers? Fancy that. On a $70,000 price cut no less. Let's see, is that a 15% price reduction? Yep. Does that include a 6% fee to the real estate agent/broker? Nope. Now bear in mind we do not know how much that house was purchased for or how much the price was jacked up to being listed originally at $469,000 but we do know that a year ago or so there was panic buying of such properties. No buyers left? All tapped out? Perhaps $399,000 is more than a tad expensive for a two bedroom condo.
Certainly, few expect an "80s-style collapse, when home values plunged 25 percent or more". Today, the economy and lenders are far stronger, and mortgage rates, which topped 10 percent when the last boom went bust, are far lower -- currently about 6 percent. In the 1980s, overbuilding, unsound lending practices, and intense speculation by investors, along with higher interest rates, sparked a real-estate crash.
Perhaps more people should expect an "80s-style collapse". Why shouldn't there be one. Today's economy is "far stonger" only because of spiraling home prices supporting consumption. Take away real estate and what have you got? Nothing, that’s what, other than boated home prices to show for Greenspan’s folly at trying to prevent deflation. "In the 1980s, overbuilding, unsound lending practices, and intense speculation by investors, along with higher interest rates, sparked a real-estate crash." Exactly what is different now, other than rampant speculation by the masses orders of magnitude higher. In fact unsound lending practices have probably never been more unsound.
While this may be good news for buyers, a slowing housing market will add a drag to Massachusetts' already sluggish economy. Real estate has been one of the state's few bright spots, generating not only jobs when most other sectors declined, but also wealth, in the form of rapidly appreciating home equity.
Actually it's not good news for anyone, at least anyone leveraged in debt. By itself it will slow the economy far more than any of the talking head economists seem to think.
Last Sunday, Globe reporters visited about a dozen open houses in different Boston neighborhoods and suburban communities. In Rockport, only four potential buyers visited a three-bedroom Cape, on the market since July despite three price reductions to $369,000 from $384,000.

At an open house in Braintree last Sunday, Jeff Brown, a 30-year-old health care professional, said he and his wife, Julie, have a price in their head, and they plan to stick to it as they shop. Last spring, Brown added, they were outbid on five homes, all sold above asking price.

Recently, after viewing a home in Norwell, listed at $645,000, Brown was told as he walked out, "We'll take $535,000."
"We'll take $535,000" huh? Why is it listed at $645,000 then? $645,000 seems a bit unreasonable to me if $535,000 is the proper value. Will anyone even offer $535,000? If so, $535,000 is a whopping 17% reduction right off the bat. Once again, that does not count agent fees. And once again we do not know what this seller paid or how high the ask price was initially jacked up. What we do see however, are signs of a few possibly panicked sellers. There will be more of them as this bubble popping progresses from locale to locale.

I want to add one other comment here. If agents are listing houses 17% too high, how quickly might a general distrust or suspicion of listing prices set in? One or two cases in Boston does not make a national reality, but one has to wonder about what might happen if "buyer suspicion" does set in. I hazard a guess those listing agents did the sellers no good at all if the real value of that house is closer to $535,000 than $645,000.

The party is clearly over in Boston. Those party lights seem to be flickering in other areas as well. I suggest that based on skyrocketing inventories everywhere I look. It is likely those flickering lights will soon be going out all over the place with a FED hell bent on containing inflation, inflation they created with reckless monetary policy. That is the sad bottom line of this mess, and there is going to be hell to pay for it too. At this point I think there are two possibilities as to how this housing bubble plays out: a complete sudden collapse in the bubble areas, or a slow prolonged torture like Japan went through. As I see it, those are the only options and neither is pretty.

Mike Shedlock / Mish

Wednesday, October 26, 2005 2:37 PM

Playing Hardball With Softwood (Part II)

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I did not envision part II coming so quickly. In fact I did not plan one at all. Yet, here it is. Perhaps I had a hunch went I went back and added this finish to my previous post: "Just to make sure people do not mistake this for USA bashing, the EU is equally guilty with their protectionist farm subsidies. The difference being (for now), no one has either the political will or a bat big enough to force changes in the EU. Canada does, and they should use it."

Mish is now wondering: Is it possible to play hardball with mushheads?

Chirac says EU must never become 'mere free-trade area'.

French president Jacques Chirac said ahead of a summit on the future of Europe that the EU must never become "a mere free-trade area" In a piece in the Financial Times, Chirac also refloated his idea of "pioneering groups" to forge ahead with various EU initiatives following the rejection by French and Dutch voters of Europe's constitution.

But the French president made no mention of the contentious issue of the British rebate, which UK prime minister Tony Blair wants to avoid during tomorrow's summit at Hampton Court, outside London. The EU would be betraying its heritage if it gave up its model of the social market economy "France will therefore never let Europe become a mere free-trade area," he said. "We want a political and social Europe rooted in solidarity," he said. Chirac also said that while the EU should respect each of its members, "states wishing to act together in addition to the common policies should be allowed to form pioneering groups." He added: "Such groups must remain open to those wanting to join them. We did so with the euro."
Following is a simple translation of what Chirac is saying:
France must never give up farm subsidies no matter what the UK or anyone else thinks.

On that note, here are a few select comments that were publicly posted in response to Part I .

"The US govt doesn't run the country anymore. It is run by lobbyists. Lobbyists for big business, special interest groups and a certain middle eastern country. It must be terribly frustrating for the millions of intelligent, fair and balanced Americans."

"If the USA can bully Canada in such a manner, just imagine how the USA is bullying other countries. Now it's easy to understand why so many people around the world dislike Americans (but are afraid to say so openly fearing even more bullying)."

"The Bush administration is not in favor of Free Trade. Nor are they against Free Trade. They could care less about Free Trade. Nor do they care about being consistent on any issue or point of view. Instead they care only about rewarding friends and cronies. They are in favor of that which most benefits their corporate backers at any given moment. If 'Free Trade' benefits them when talking about access to energy they are all for it. But if 'Free Trade' does not benefit them when talking about lumber then they are against it. This is the mentality of a petty criminal. This is the mentality of the Bush Administration."

That last comment was posted by "Chive". I absolutely agree but would like to make one modification to the last sentence as follows: "This is the mentality of protectionists in the Bush Administration as well as protectionists in the EU. Heck, it is the mentality of protectionists everywhere, the US and EU merely being the worst of the lot."

Mike Shedlock / Mish

2:43 AM

Playing Hardball With Softwood

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The New York Times Op-Ed contribution Lost in the Woods summarizes nicely the dispute between Canada and the US over lumber. Following are the key paragraphs:

American and Canadian lawyers, lobbyists and negotiators have been fighting on and off over Canadian lumber exports to the United States since the 1980's. In 1982, a coalition of 250 American lumber mills claimed that Canadian provinces were subsidizing lumber exports by charging set "stumpage fees" - the price forest companies paid when harvesting standing timber - while American mills were paying open market prices. While the fight over things like stumpage fees is complex enough, it got a sharp twist in 2000 when Congress passed an amendment giving American companies injured by foreign trade the punitive duties imposed by the United States, which in the case of Canadian lumber exports now amount to about $5 billion.

Never mind that the right of the United States to impose such duties is in dispute, or that the W.T.O. declared the Byrd amendment (named after its creator, Senator Robert C. Byrd) illegal. American and Canadian officials now face two lumber disputes: the old one about timber management practices; and the new one about who owns the money held by the Treasury. Making things uglier are conflicting decisions by a panel convened under the North American Free Trade Agreement and by the W.T.O., with the United States claiming that favorable rulings by the latter trump adverse rulings by the former.

Canadians, including the normally friendly Canadian business community, are particularly outraged that Washington has rejected the Nafta panel decision. In Canadian eyes, this refusal by the United States betrays the central deal that underpinned Nafta in the first place: Canada allowed unfettered access to its energy resources and an end to restrictions on American investment in return for a binding method of settling disputes. As Prime Minister Paul Martin made clear recently, the dispute is coloring everything from the oil and gas trade (Canada is the largest foreign supplier of energy to the United States) to cooperation in the World Trade Organization, the International Monetary Fund and World Bank.
If a supposedly big advocate for "free trade" can not even resolve a relatively minor dispute with its biggest trading partner when it is clearly wrong, what hope do any free trade talks have down the road? One has to wonder just how much the lumber lobby contributed to the Presidential and Congressional campaigns.

Lawrence Herman and Gary Hufbauer, the authors of Lost in the Woods, proposed appointing "a special envoy with the authority to negotiate a final and durable compromise by a date certain, say June 2006".

No! As far as I am concerned there is simply nothing to negotiate. The Byrd amendment is illegal, the US has illegally confiscated $5 billion from Canada, and worst of all the United States betrayed the deal that underpinned Nafta in the first place: Canada allowed unfettered access to its energy resources and an end to restrictions on American investment in return for a binding method of settling disputes. Not only does the US refuse to honor Nafta agreements with Canada, it will not even honor agreements as to resolving disputes.

What's stupid about all of this is cheaper lumber is desperately needed in the US. With the cost of lumber high and lumber demands up in the wake of several hurricanes, not to mention the stupid waste of paying more than necessary to build houses just to make a few lumber barons rich, one would think that it would be to our advantage to increase the supply at a cheaper cost. But no. We do not honor our own agreements with our biggest trading partner, even when it is obviously to our own advantage to do so.

That is a pretty pathetic record on "free trade" in general and Nafta specifically. It is certainly not a record one would expect unless from "free trade' advocates unless there was a lot of money sloshing around somewhere to keep the status quo of illegal tariffs. I suggest it is high time for Canada to demand the US honor its agreements.

If the only way to get trade agreements honored is to make it extremely painful to those not honoring them, then so be it. Canada can end this mess in about two days flat if it wants to. As a free trade advocate, I recommend that Canada threaten to shut off all oil and Natural Gas deliveries to the US on one weeks notice if the US will not abide by its trade agreements.

Playing hardball over softwood would not only end this nonsense in a hurry, it would also send a strong message to every country about the consequences of ignoring trade agreements for political convenience. Just to make sure people do not mistake this for USA bashing, the EU is equally guilty with their protectionist farm subsidies. The difference being (for now), no one has either the political will or a bat big enough to force changes in the EU. Canada does, and they should use it.

Mike Shedlock / Mish

Tuesday, October 25, 2005 8:15 PM

Can't Lose vs. Cashing Out

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RISMedia is reporting Investors Flipping Over Second Homes.

"I don’t see how you can lose money," says Houman Sarmasti who took up a new hobby a few years ago: flipping real estate. "You might not gain a lot, but I don’t think you can lose, especially the way real estate is going."

That faith in real estate values has convinced an ever-growing number of homeowners that one home is just not enough. And this surge in second-home purchases is helping to pace the real estate boom, while raising concerns about a bubble nearing the bursting point.

More than one-third of all American homes purchased in 2004 were for investment or vacation purposes, according to a recent study by the National Association of Realtors.

"It’s the expectation that prices will continue to rise that leads people to spend much more than they otherwise would," says Dean Baker, co-director of the nonprofit Center for Economic and Policy Research in Washington, D.C.

"In the past, a typical buyer might have looked at a place listed at $400,000 and said, 'Can I afford $400,000?' If the answer was no, they wouldn’t buy it. Now, if they think they can sell it for $600,000, it’s a different equation."

Perhaps nowhere is the speculative fervor as great as in South Florida, where huge profits can be made by selling pre-construction condo contracts. The practice is so popular that Miami real estate agent Mark Zilbert launched a Web site, condoflip.com, this past summer. It will allow buyers from around the world to bid in real time on construction contracts for Miami condos that haven’t yet been built.

Thousands of new condos are going up around Miami, and a large proportion of people with deposits on the units -- mainly from the Northeast U.S., Europe and South America -- have no plans to move in, Zilbert says.
Indeed that "Can't lose" attitude of amateurs is exactly why The king of real estate is cashing out.
Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.

"There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. "That's why I'm getting out."
Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.

The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.

At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original price or take their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause the turn in the market," he says.
Whether or not Barrack has the right catalyst or not (personally I think pure exhaustion caused by falling real wages accompanied and rising unafordability will be the reason), the question has to be asked: Who would you rather believe?
  1. Houman Sarmasti, who has been flipping real estate for three years
  2. Tom Barrack who manages $245 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.
Now admittedly we are comparing different classes of property here, but who do you think has a better feel for things in general? My money is betting on door number 2.

In the meantime Realty Times is reporting Silicon Valley Home Prices Fall $27,000.
September's median home price, based on closed sales of single-family detached homes, came in at $733,000, down from $760,000 in August -- the lowest its been since March this year when the median was also $733,000, according to Creekside Realty owner/broker Richard Calhoun's Bay Area Real Estate Market Newsletter.

Even with the $27,000 price plunge, the median price is $103,000 more than it was a year ago, a 15.25 percent increase.
OK but what about the person that bought anytime since March? Is that 8 straight months with no appreciation? Are any of those "can't lose" investors leveraged to the hilt on zero% down loans getting nervous?

Mark Hicks, broker/owner of the Seabrooke Group in Campbell, CA reported that sales fell, year-over-year, for the tenth month in a row and at one point in September inventory surged past the 3,000 unit mark to post its first year-over-year inventory gain since July 2003.

First year over year inventory gain huh? Is that making any of these "Can't Lose" investors a bit nervous?

Not to worry. Demographics will bail out California property owners, or so they say.
Everyone wants to live in California. Right?
On that note, let's play a fun little game of Question and Answer.

Q. Who can afford to live in California?
A. Practically no one. Housing affordability in California has slipped to about 14% overall. In some areas such as Los Angeles and San Diego, affordability is as as low as 10%.

Q. Are home prices vs. incomes now irrelevant?
A. To get to 14% affordability levels, income and wages had to be irrelevant for quite some time.

Q. Can this environment go on forever?
A. In spite of what anyone says, this is not a "totally new paradigm", and in the long run valuations and affordability matter regardless of what anyone says about "fundamentals" such as population growth or low interest rates. It is a simple economic fact that home prices just can not forever stay above people's ability to afford them. The current situation therefore is simply not sustainable. It is a speculative bubble that is 100% guaranteed to pop. One of two things will happen: wages will rise or housing prices will fall. I am 98% confident of the latter. Even IF wages start to rise, they can not possibly rise quick enough to have a meaningful impact given that affordability levels are so low.

Q. Is California a Mecca for job creation?
A. California was a Mecca for job creation. Much of that job creation was centered around a booming real estate industry. Watch what happens in a housing slump. I guarantee you it will not be pretty.

Q. Are some California residents seeing the light and attempting to cash out and move out of state or rent?
A. That is exactly what rising inventory implies. Inventory is skyrocketing in many locations.

Jobs and wages are two of the keys to sustaining the California boom. Will the following make any of these "Can't Lose" investors a bit nervous?

Construction layoffs could signal trend.
San Diego construction companies, which have long been the main driver of local employment growth, cut 200 positions last month. And that may be the shape of things to come, economists warn.

"There might be some seasonal reasons for the construction losses, but the decline could be a sign that our overall employment growth is slowing," said Alan Gin, economist at the University of San Diego.

Gin said the construction layoffs are one more sign that the housing boom, which has created jobs for builders, mortgage brokers and real estate agents, is winding down.

"The number of home sales is down, price appreciation on most homes is not as great as it used to be, and it's taking longer to sell homes," Gin said. "That could mean less growth in construction work."

Financial services cut 200 jobs last month, largely related to real estate and mortgage operations. Scientific services cut 400 jobs. Temporary employment firms – another major driver in local employment over the past several years – added no workers.

Ryan Singer, economist at the San Diego Regional Chamber of Commerce, warned that the economy is likely to worsen in coming months, as high fuel costs and rising mortgage rates force consumers to cut their spending.

"We're entering a period of risk for the national economy, which will show up here as well," he said. "Energy-related prices, higher interest rates and the growing realization that housing prices may have peaked means that people will get a lot more cautious."
Mish, is this California "soft spot" just for San Diego?
No, not really. Here is more supporting evidence.

According to the LA Times, California Sheds 23,700 Jobs in September.
California's economy lost a net 23,700 jobs in September, the Labor Department said today, a surprising decline that suggested the state's economy might have hit a soft patch.

It was the state's first net job loss since December 2004. And it came as the state has been enjoying relatively stable employment growth this year, averaging more than 23,000 new jobs a month after being sluggish for much of the first three years after the 2001 recession.

California's September job swoon was surpassed only by Louisiana and Mississippi, both devastated by Hurricane Katrina.

A good chunk of the California decline was due to seasonal factors, economists said. Many school districts started their years in August instead of September, which shifted employment growth from September to August, said Howard Roth, chief economist for the state Department of Finance. August employment was revised upward by a hefty 22,600 jobs as a result, he said.

But even after factoring in that shift, the state's job growth in September was still relatively sluggish compared to recent months, Roth said. "It's a fairly weak report." He suggested that higher gasoline prices might have taken a toll on hiring, but it would take several months of poor job reports before anyone could conclude that the state's economy was slowing significantly.

Other economists and employment specialists said the state's job market was stronger than the latest numbers suggested.

"We don't see any reason to panic," said Jesse Harriot, vice president of research for Monster Worldwide, a leading online job search firm. He noted strong demand in the Los Angeles area for jobs in such sectors as aerospace, manufacturing and construction.
Hardly anyone ever sees a need to panic. By the time anyone does, everyone does, then it is usually too late. Just remember, the best time to panic is before everyone else does.

Mike Shedlock / Mish

Monday, October 24, 2005 5:24 PM

Totally Out of Touch with Reality

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Congress is totally out of touch with reality.
Now most people have long been aware of that for quite some time, but following are a few extreme cases reported just today. The first is a New York Times interview with Connie Mack, the Chairman of the President’s Advisory Panel on Tax Reform.

Here are some Questions for Connie Mack, followed by his replies.

NYT: You have already announced a proposal to eliminate the alternative minimum tax for individuals, which will cost the government $1.2 trillion in lost income over the next decade. Do you find it difficult to cut taxes post-Katrina, when the government is desperate for revenue?
CM: The Congress and the president can address that issue. Of course, the president already has addressed that issue. He said there won't be any increases in taxes.

NYT: Well, the U.S. government has to get money from somewhere. As a two-term former Republican senator from Florida, where do you suggest we get money from?
CM: What money?

NYT: The money to run this country.
CM: We'll borrow it.

NYT: I never understand where all this money comes from.
CM: When the president says we need another $200 billion for Katrina repairs, does he just go and borrow it from the Saudis? In a sense, we do. Maybe the Chinese.

There you have it.
The President’s Advisory Panel on Tax Reform and has no idea where money comes from other than we borrow it from the Saudis and perhaps the Chinese. If the president needs another $200 billion, no problem, we just borrow it.

These are the clueless people running our country. There is no hint of fiscal sanity by anyone in this administration or this Congress. Here we are, well into Bush's second term and the President has yet to veto a single appropriations bill, or for that matter any bill. No one seems to think of this as real money. We just borrow it.

Well it really isn't real money since it is not backed by gold or any other assets for that matter. We need money, we just borrow it.
If no one will loan it to us, we just print it. No one cares, for now anyway.

Given that the appropriations process is painless (until this mess blows up in a credit crunch), there is simply no limit to the stupid things we spend this borrowed money on incluing (as ridiculous as it may seem) spending money to prevent terrorists from playing Bingo.

Are Terrorists playing Bingo?
One might think so given this funding to prevent it:

Kentucky lands grant to protect bingo halls from terrorists.

Kentucky has been awarded a federal Homeland Security grant aimed at keeping terrorists from using charitable gaming to raise money.

The state Office of Charitable Gaming won the $36,300 grant and will use it to provide five investigators with laptop computers and access to a commercially operated law-enforcement data base, said John Holiday, enforcement director at the Office of Charitable Gaming.

The idea is to keep terrorists from playing bingo or running a charitable game to raise large amounts of cash, Holiday said.
"The idea is to keep terrorists from playing bingo...". Wow, I sure am glad we are solving that problem. The devastation that could be caused if terrorists started playing bingo instead of blowing up subways could be catastrophic.

It's hard enough to believe someone would even propose such silliness let alone it would receive actual funding. Granted, the amount of funding is small, then again this stupidity all adds up.

Speaking of stupidity adding up, please consider the Bridge to Nowhere.
Sen. Ted Stevens, R-Alaska, sponsored legislation to build a "bridge to nowhere" that would connect Ketchikan, Alaska, to an offshore island where only 50 people live, appears to be indestructible. The highway bill allots $223 million for that project and $229 million for another boondoggle bridge near Anchorage.

Sen. Tom Coburn, R-Okla., violated an unwritten rule when he dared to advance a measure to trim some of his colleagues' expensive and unnecessary pet projects from that bill. Coburn wanted to withdraw funds for the bridges and shift $75 million to rebuild a Louisiana bridge damaged by Hurricane Katrina. It should be a no-brainer that the needs of the devastated Gulf Coast are greater.

Sen. Ted Stevens, R-Alaska, was personally insulted, however. Alaska, which ranks No. 1 in per capita federal spending, was being unjustly singled out, he argued. The 37-year Senate veteran threatened to resign and "be taken out of here on a stretcher" if the Senate killed off perhaps the most egregious example of wasteful spending in the massive highway bill.

Senators were so moved by Stevens' sense of outrage — or the idea that their own pet projects could be next — that they voted 82-15 to keep funding the bridges. The Senate also refused to defund a $500,000 sculpture park in Seattle and $950,000 for a Nebraska museum parking facility.

Those wasteful projects are only a few of the 6,371 "earmarks" legislators pushed into the transportation bill alone.
With our federal highways in a sad state of repair (at least they are around Chicago), I sure am glad we have our priorities straight. I can think of no finer use for transportation funding than a $500,000 Sculpture Park in Seattle. Can you?

Pray tell, what else is buried in that transportation bill?
Bah, who cares? It's all borrowed money anyway. Or so says, the Chairman of the President’s Advisory Panel on Tax Reform.

Mike Shedlock / Mish

Monday, October 17, 2005 7:10 PM

Ben Bernanke Inflation Fighter

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Some ideas are just too stupid to not comment on. Hyping $Ben Bernanke as an inflation fighter is one of those ideas. It’s not just one person who lost his mind either. Both Tom Schlesinger, executive director of the Financial Markets Center, and Mark Zandi Economy.com chief economist have simultaneously gone off the deep end in proposing that "Helicopter Drop" Bernanke is an "inflation fighter". That absurd idea was proposed in a CNN Money article about who will replace Greenspan as next FED chairman entitled Favorites pull ahead in Fed derby. Let's take a look:

Glenn Hubbard, the former chairman of the CEA who is now teaching at Columbia, is also frequently mentioned as a strong candidate and viewed as less of an inflation hawk than Bernanke. Bernanke is seen as the long-time champion of explicitly pegging Fed interest rate moves to the rate of inflation.

"I would be nervous about picking an inflation-targeting champion as my next Fed chairman given the potential impact on employment growth," said Tom Schlesinger, executive director of the Financial Markets Center.

"No matter who is Fed chairman, they're going to inflation target either explicitly like Bernanke wants to do or implicitly," said Zandi. "Someone without his inflation-fighting credentials might have to do more to win the markets' trust of their inflation-fighting credentials."
That comment by Zandi is so stupid I just have to repeat it:
"Someone without his inflation-fighting credentials might have to do more to win the markets' trust of their inflation-fighting credentials."

Anyone that thinks Bernanke is an "inflation fighter" must not have read Bernanke's most famous speech Deflation: Making Sure "It" Doesn't Happen Here
Following are some "choice" snips from that famous speech:
I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult.

Preventing Deflation

First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.

Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.

Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.

As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way.

As I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.
Mish, that article was from 2002 do you have anything more current?

Well that's a good question but if I critiqued every silly thing Bernanke has said since 2002 we just might be here for a while. That said, enquiring Mish readers deserve answers so let's look at a couple of recent articles about Bernanke.

In The Fed's Wild Imagination Kurt Richebächer takes apart Greenspan's and Bernanke's views on the "global savings glut" theory.
In his testimony to Congress on July 20, 2005, Mr. Greenspan declared it quite likely that the world is currently experiencing a global savings glut. Agreeing with Ben Bernanke, he mentioned this glut as one of the factors behind the so-called interest conundrum, i.e., declining long-term rates despite rising short-term rates.

Having read a lot from the Fed's luminaries, their inability to distinguish between rampant global credit excess and a global savings glut does not surprise us. In this view, the Federal Reserve has come to the rescue of a world where excessive saving is threatening depression by eliminating savings.

Attracted by superior rates of return on U.S. assets, investors around the world have been scrambling to pour their excessive savings into direct investments, stocks, bonds and real estate in the United States, in this way financing the resulting huge U.S. trade deficit.

While this explanation may seem to make sense, there is one big snag: Not one word of it is true. First of all, in reality, private foreign investors have drastically curbed their investments in the United States. According to the Bank for International Settlement - the international organization of the world's central banks - Asian central banks financed 75% of the U.S. current account deficit in 2004.

First, private capital flows into the United States have slumped. Without the massive interventions by the Asian central banks, the dollar would have collapsed long ago.

Second, the dollars with which these central banks have been buying U.S. Treasury and agency bonds have definitely nothing to do with Asian savings. Evidently, the central banks are recycling the dollars, no more, no less, which they receive from U.S. trade and capital flows. These dollars have come into the central banks' possession through their interventions in the currency markets, to prevent a rise of their currencies against the dollar.

To speak of a global savings glut as a possible cause of the surprisingly low U.S. long rates in the face of these blatant facts is truly the height of insolence and absurdity. That this opinion comes from the leading figures of the Federal Reserve is more than shocking.
Here is what Bernanke was saying on Tuesday, Oct 11, 2005 as reported by Reuters in More Asia FX flexiblity needed.
White House economic adviser Ben Bernanke said on Tuesday greater currency flexibility in Asia and stronger economic growth among U.S. trading partners were needed to help reduce global trade imbalances.

He also told the group that while energy prices were pushing up U.S. inflation, it did not appear they were having much of a spillover impact on so-called core prices.
Anyone that thinks that a higher RMB is going to solve US's trade gap with China is point blank nuts. For starters it would push up the price of goods coming from China, thereby causing inflation. Secondly, at 20-1 wage differentials between China and the US it will not bring back jobs to the US or by itself restore trade balance either. For the record, I actually agree with Bernanke that energy prices are not having too much of a spillover effect on the economy, but that certainly is not the view of inflation fighting hawks.

Two dark horse candidates in the race to replace Greenspan are said to be current fed governors Roger Ferguson and Donald Kohn according to this article entitled Greenspan Chooses a Successor.
Both are highly skeptical of Bush's tax cuts, despite the strong economic recovery the cuts have spurred. Both could be expected to continue raising interest rates, in part to punish the president for not raising taxes and failing, in their view, to pay enough attention to the budget deficit. Their likely idea of a tacit deal next year with the White House: You raise taxes, we'll stop boosting rates.
If that is true, does anyone think this president would appoint either of them?

Martin Feldstein, the president of the National Bureau of Economic Research, is seen as an almost co-favorite with Bernanke but given Feldstein's position as a director of the scandal plagued American International Group, as well as his likely political independence as compared to Bernanke, the choice may be a foregone conclusion.

There you have it folks, $Ben Bernanke IFE "Inflation Fighter Extraordinaire" is the odds on next Fed Chairman simply because he will likely be the loosey-goosey free for all Bush suck up this administration wants and no other candidate has those exact qualifications. I hope I am wrong. If I am wrong, it will not be either the first or the last time. If I am right, please remember this: $Ben is gold’s best friend.

Mike Shedlock / Mish

Friday, October 14, 2005 9:52 PM

Personal Bankruptcy Followup

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I received some interesting Emails regarding Personal Bankruptcies Soar.
I would like to share a few of them with you.

From Rich:

It's actually worse than you can possibly imagine. The purpose of the bill is to make sure that no one files a Chapter 7 (which forgives all debts) bankruptcy. Every page you turn in the bill has another "kick 'em when they're down" clause intended to make it more difficult, more expensive, and more time consuming. My wife is a bankruptcy lawyer, so I've heard it all.

But then, what would you expect? The banks and credit card companies spent $400 million on bribes...er, campaign contributions...over an 8 year period to get this bill. Lawyers from banks wrote the bill. It is a mean, nasty, vicious, unconstitutional bill that was bought and paid for. When Bush signed the bill, he turned to Charles Grassley (the senator who sponsored it) and said, "It's a done deal."

The AARP is the only organization that wins in this deal. In return for not lobbying against the bill, the law says Social Security (and unemployment benefits) cannot be counted as income. That will help retirees, currently choosing between food and drugs, to get Chapter 7 bankruptcies.

Today, just one week before the new bill goes into effect, no lawyer can file a case under the new law. There are no forms, no approved local credit counselors (three nationwide services, one in Texas and one in Florida, of course, but no local agencies), no software packages yet, and the bill has yet to clear the committee that is supposed to clean up all the inconsistencies. So, on October 17, nobody will be able to file bankruptcies -- the old law will have expired, and the new law won't be ready yet.

Look for lawyers to abandon their bankruptcy practices. The law is so complex and filled with penalties for lawyers, that it won't be worth it. Can you imagine telling defense lawyers that they can't advise clients about the best defense? Or making a defense attorney swear under penalty of disbarment that every document filed by the client is absolutely true? Or, as Mish said, "Another provision of the bill places the burden of proof for bankruptcy on the debtor's lawyer, requiring the attorney's signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid." Bankruptcy lawyers have these and more dumb rules hanging over their heads, any of which can lead to disbarment. The purpose is to make it impossible to get a bankruptcy by making bankruptcy lawyers give up the profession and go chase ambulances or do divorces instead.

The bankruptcy bill is the worst piece of legislation ever purchased in the history of the United States. Not only is it a sham, it proves that the Congress and the Presidency are both for sale. Price for a bill these days: $400 million will get you whatever you want.

My wife isn't giving up her practice. She plans to expand it into fair debt collection. That's when a bank or credit card company harrasses a debtor in violation of the law, and my wife hits them with a big fat lawsuit. Not only is it poetic justice, it couldn't happen to a nicer bunch of vicious bastards.

By the bye, did you realize that increases in bankruptcy fees are going to pay tsunami victims? Not hurricane victims, mind you. You won't find that tidbit in the bankruptcy law, though. It was written into the Tsunami Relief Act to hide it from us.

Rich from Iowa
From E.D.
Very interesting article on bankruptcy. Candidates should be advised that it could be years before they can obtain a credit card. I was in bankruptcy last year for 6 months due to a 2 million dollar judgment against me. My credit was perfect. Citibank cancelled my card (it had no balance) and now they will not issue a new one. No one will give me a card.
From Sir Charles:
For once, fellas, I am speechless.
About the only thing made in the US of A is whiskey and gunpowder anymore so no wonder the US of A is broke,,,so what should one do??? drink more whiskey or eat more gunpowder??? or both???
Sort of confused about that last one but it seemed interesting enough to post.
From Carol:
I didn't particularly have this planned, but then again gall bladder surgery with no insurance wasn't planned either.

With that hanging over my head, the news that my credit card's minimum payments would soon double was the final straw. I would have been stupid to delay my decision a minute longer. It took me awhile to accumulate the funds, but it is over. I kind of blind sided the credit card companies because I had never been late and had been attempting to pay the amounts down. They on the other hand tried to blind side me with a doubled minimum payment probably hidden in some find print.

What really bothers me is that I was charged four times more for uninsured gall bladder surgery than my friend paid who had insurance. The excuse the hospital gave me was so laughable I couldn't believe it. They tried to convince me my bill was higher because others pay an insurance company and the insurance company contracts to pay them 1/4 the cost? Since I wasn't paying an insurance company I had to pay four times that? Insurance companies contract, but they don't pay hospitals retainers, so this made no sense to me at all.

My work friend is filing today or tomorrow as she has insurance but her son's overnight emergency room bill was $8,000 more than her insurance paid? The medical field and HMO's are out of control.

I never thought about the credit card companies cutting their own throats with this new legislation. I like the idea. After missing one payment my interest rate went to 30.99 percent. Rotten SOB's. I bet Abraham Lincoln is rolling over in his grave. He thought he ended slavery.

Thanks for your thoughtful articles.
The New York Times reported on last minute filings in the October 15th article
Debtors Throng to Bankruptcy as Clock Ticks
It may have looked like a frenzied rush for rock concert tickets, but the thousands of people standing patiently in line for hours outside federal courthouses were waiting to file for bankruptcy. It was the final workday before a tough new federal law takes effect.

"I have a lot of medical bills and, unfortunately, I can't pay them," said Mercedes Estrada, a legal assistant and single mother of three young children from the Bronx, who rattled off a list of more than $50,000 in debts. "It's overwhelming and stressful."

"This is a day of last resort," added Stephen L. Morris, a lawyer bringing his clients' bankruptcy petitions to the court in Lower Manhattan.

Through Oct. 8, consumers had filed more than 1.47 million bankruptcy petitions, a 19.4 percent increase over the same period in 2004, according to Lundquist Consulting, a company in Burlingame, Calif., that compiles bankruptcy statistics. Almost 103,000 petitions were filed in the first three days of this week alone.

"We have never seen anything like this," said Barbara J. May, a consumer bankruptcy lawyer in St. Paul. "We knew it would be an upswing, but this is pandemonium."

In Los Angeles, the lines were thin because clerks took completed petitions at makeshift outdoor stations to handle the more than 4,000 filings expected by the end of the day. Typically, the court receives 200 to 250.

"The law seems draconian to debtors," said Glenn Marston, while waiting in line at the bankruptcy court in Boston. "I don't know how it applies to me, but I didn't want to go through everything if it did."
Here is another fresh article on last minute filings. Crowds Race to File Bankruptcy Petitions
Facing a weekend deadline, thousands of people armed with bulging files of paperwork lined up at courthouses around the nation Friday to seek bankruptcy protection from creditors before a new law makes it much more difficult to shed debt.

The number of cases filed before the law takes effect Monday was expected to set not only a national record but individual records in a number of states. Some clerks said bankruptcy filing records were beaten every day this week.

In Denver, the line at bankruptcy court formed before dawn and quickly grew to more than 300 people as it stretched outside. Some pushed babies in strollers, while others sipped coffee and sodas.

Nursing assistant Colleen Christian brought her 14-year-old son to help her punch figures into a court computer after spending long days on Chapter 7 paperwork at her home in tiny Cotopaxi, 100 miles south of Denver. With credit card debt hovering around $25,000, she said she had no choice but to file before the law changed.

"It was a very hard decision because I've incurred these debts and I need to pay them," she said. "But it was such a weight."

In Chicago, people crowded the hallway outside a packed waiting room for their initial meeting with a bankruptcy trustee.

Substitute teacher Barbara Moore said she had been mulling a Chapter 7 filing for a few years when she heard about the pending law change. She was fearful medical expenses from a cancer diagnosis could add to her mounting credit card debt.

"That's when I decided to stop dillydallying," said Moore, 51. "It just sounds like it's going to be much more difficult and expensive later."

Since President Bush signed the law in April, the number of personal bankruptcy petitions has soared. Preliminary estimates expect a record 200,000 petitions to be filed this week alone, according to Burlingame, Calif.-based Lundquist Consulting, which compiles bankruptcy statistics. The firm said the current record of 102,863 was set last week.

Clerk Yvonne Evans at the U.S. Bankruptcy Court in Atlanta said all 123 employees were called in to help deal with last-minute filers.

"I can't even begin to tell you how extraordinary this is," she said. "The line is wrapped all the way around the 13th floor. It's wild."

Filings were allowed in person through Friday, though attorneys making electronic court filings have until midnight Sunday.

Christian, whose husband just found work nine months after losing his job, said bankruptcy will enable her to pay what she can. "I think everybody should be able to wipe the slate clean and start over," she said.

Similar stories could be heard at courthouses across the country.
"Similar stories could be heard at courthouses across the country" huh. Well fancy that.

Surprise, Surprise, Surprise

Mike Shedlock / Mish

Thursday, October 13, 2005 10:53 PM

Oil Priced in Euros. Would it matter?

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What would happen if oil were priced in Euros? Lately, everyone seems to be making a big deal out of that idea. Some people even think the war in Iraq was started because of a threat from Saddam Hussein to price oil in Euros. The idea that we went to war to prevent oil from being priced in Euros is laughable. In fact, the idea that it matters at all is completely suspect. Nonetheless, whether or not oil priced in Euros would matter has been the subject of many a heated debate on various message boards that I participate on for quite some time. I now declare victory in the debate.

As proof of my victory claim I offer this news story (with a complete rationale to follow):
Chavez: Venezuela moves reserves to Europe

Venezuela has moved its central bank foreign reserves out of U.S. banks, liquidated its investments in U.S. Treasury securities and placed the funds in Europe, Venezuelan President Hugo Chavez said Friday.

"We've had to move the international reserves from U.S. banks because of the threats," from the U.S., Chavez said during televised remarks from a South American summit in Brazil.

"The reserves we had (invested) in U.S. Treasury bonds, we've sold them and we moved them to Europe and other countries," he said.

Chavez, a sharp critic of what he calls "imperialist" U.S.-style capitalism, has often criticized foreign banks for the power they wield in international financial markets at the expense of poorer countries.

Chavez again proposed the creation of a South American central bank that would hold the foreign exchange reserves of all the central banks in the region.

"I'm ready right now with the Venezuelan central bank ... to move $5 billion (euro4.15 billion) (of Venezuelan reserves), to a South American bank," Chavez said.

Central bank officials could not be immediately reached for more details.

Chavez has also argued against central bank autonomy, saying excess foreign reserves should be spent on economic development projects.

Under his presidency, Venezuela's mostly pro-Chavez Congress changed central bank laws earlier this year so the government could tap reserves for spending, despite criticism that it would lead to devaluation of the local currency and higher inflation.

Every year the central bank must now compute an "optimum" amount of reserves and hand over the rest to a newly created national development fund.

Money held in the fund will be used for overseas purchases and to pay off outstanding debt.

Foreign exchange reserves held by the central bank stood at $30.434 billion (euro25.27 billion) as of Sept. 28, according to central bank data.
Was Chavez able to move his reserves out of US dollars into Euros even with oil priced in dollars? Obviously the answer is yes. Could Saudi Arabia or Iran or China do the same? Of course they could. Would it matter if oil was priced in dollars, Yen, or Swiss Franks? After today it should be perfectly obvious the answer is no. Unfortunately it will not be. I fully expect to see more nonsense about oil priced in Euros within a couple of weeks.

Mish readers, this is the bottom line: Outside of pricing oil in Yap Island stones or some other totally illiquid form, it is 100% meaningless what oil is priced in. If oil was priced in Euros could Venezuela or Saudi Arabia or Japan or China still hold their reserves in US dollars? Of course they could. With that answer in mind, here is the Mish bonus question: Does an oil pricing currency mandate the currency that forex reserves are held in? The bonus question answer should be obvious: "of course not".

Thus we did not go to war because Iraq threatened to price oil in Euros. The idea is totally preposterous but every month that rumor seems to resurface. Whether or not oil is priced in Euros or Dollars or Yen is totally meaningless. Really it is, as Chavez just proved.

If you disagree and still think whether or not oil is priced in Euros is meaningful, then please explain how oil priced in dollars stopped Chavez from pulling all Venezuelan reserves out of US dollars. It can’t be done because it did not stop Chavez one bit. Could Saudi Arabia or China or Japan move all of their reserves out of US dollars tomorrow? Of course they could. Would it take oil to be priced in Euros to do it? Of course not. The idea that oil priced in Euros matters should now be shattered.

The key points that no one seems to understand can be summarized as follows: What oil is priced in is totally meaningless. However, where a country holds their currency reserves is another story. Venezuela has just spoken. Will anyone else be saying the same thing? If no one wants to hold US dollar reserves, the US is in a world of hurt and US interest rates will soar. Regardless of what currency oil is priced in, if foreign countries are willing to hold US dollar reserves then the US dollar is less threatened.

Now that we have resolved the oil pricing issue, we can turn our focus to the real question: Is this the start (or continuation) of a forex reserve trend away from US dollars or is this just random noise from one left wing nut job? In other words, how likely is it that Iran, Saudi Arabia, China, or Japan, or other countries do the same thing? That is the real question. Whether or not oil is priced in Euros vs. US dollars is a meaningless sideshow.

Mike Shedlock / Mish

Wednesday, October 12, 2005 10:40 PM

Personal Bankruptcies Soar

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Personal bankruptcies have skyrocketed lately. Is anyone surprised? The primary reason is not Katrina or Rita as some might think, although I am sure hurricane floodwaters pushed quite a few over the edge. The real culprit is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Following are some of the highlights of the bill.

1) Before anyone can file bankruptcy under the Bankruptcy Reform Act, they must receive a certificate from an approved non-profit credit counseling agency that states that they have received a briefing on opportunities for available credit counseling and have been assisted in performing an individual budget analysis. The legislation mandates that the agencies offering the counseling be nonprofit in nature, such as the Consumer Credit Counseling Service of America (CCCS). But according to Jeffrey Morris, resident scholar at the American Bankruptcy Institute, the amount of time necessary to complete the counseling may take debtors away from work, which would put the struggling debtor even farther behind.

2) A small but vitally important part of the 500-page bill is the six-page section dealing with a "means test." The "means test" is the system by which the IRS determines who can legitimately file for bankruptcy and who cannot. The test is a rigorous process involving examination of the debtor's income and expenses, calculations as to whether or not their expenses meet the standards of their area, and judgments relating to whether or not they genuinely qualify for a Chapter 7 filing. If the combined gross income of your family is greater than the median family income in your state, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 bankruptcy where your debts are eliminated. The "means test" is an inflexible standard designed to leave no leeway for debtors to abuse the system, but in the process it is bound to penalize a great many people who have fallen into bad circumstances through no fault of their own.

3) If required to file a Chapter 13 under the means test, your monthly expenses will be compared to the IRS National and Local Standard Expense guidelines. The Bankruptcy Reform Act strictly limits the amounts you can claim as expenses.

4) Another provision of the bill places the burden of proof for bankruptcy on the debtor's lawyer, requiring the attorney's signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. Many lawyers will demand their fees up front, or they will decide the case isn't worth their time.

Back in April I chimed "Anyone currently on the edge will be best advised to file for bankruptcy BEFORE this bill takes affect in October. There is an incentive now, if at all in doubt to file now and get it over with. I expect a dramatic increase in bankruptcies before this bill kicks in."

Well Surprise, Surprise, Surprise. Here we are with bankruptcy filings soaring as the October 17th deadline looms. The following chart says it all.

Thanks to The Washington Post for that chart. Let's tune in to what the article is saying:

Two weeks before a new, more restrictive national bankruptcy law goes into effect, financially strapped Americans are rushing to file for protection from their creditors, with filings climbing to an unprecedented average of 13,000 a day last week.

Week after week records are toppled. Last week's 68,287 filings surpassed the record set the week before by 24 percent, and this week's total is likely to be higher, according to data released yesterday by Lundquist Consulting Inc., a financial research firm. Daily filings averaged 10,367 in September, compared with an average of 6,079 in September 2004.

The surge is in anticipation of the new bankruptcy law, long sought by the financial industry, which takes effect Oct. 17. The law will make it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy.

"We are seeing a rush, mainly from people we saw a year ago," Northern Virginia bankruptcy lawyer Robert Weed said. A year ago his clients thought they would be able to work their way out of debt without filing for bankruptcy, he said, "but now they're in a panic to get in before the law is changed."
The Charlotte Business Journal is singing verse two of the same song. Let's take a look:
It's boom time for bankruptcy in the Charlotte region. But it's hard to find a personal bankruptcy lawyer who's happy about it. "We're scraping by with as little sleep as possible," says Susan Robicsek, a solo practitioner who does bankruptcy work for individuals. "The number of calls is staggering."

"We are seeing some people who say, 'I have heard it will be hard for me later, so I will go ahead and file now,'" Robicsek says.

The increase in filings began in the spring, when Congress approved the provisions and President Bush signed them into law.

Cases filed in the three divisions of the U.S. Bankruptcy Court covering the 12-county Charlotte region are up 25% from a year ago. As of Tuesday, 4,110 Chapter 7 filings have been made in the region this year, up from 3,127 by that point in 2004.

"I'm getting very close to booked up -- and very tired," says Dave Badger, dean of bankruptcy lawyers in the region.

The new bankruptcy rules were more than a decade in the making. Pushed largely by the credit card and banking industries, it seeks to curtail the use of personal bankruptcy to wipe out debt.

The law imposes a means test to determine who can file for Chapter 7. And it authorizes judges to penalize individuals and their attorneys if they file but don't qualify.

Other requirements include a six-month counseling period before filing.

The means test attempts to determine how much of a person's income goes to essential living expenses. If an individual has enough left after those expenses to pay 25% of unsecured debt, and the person makes more than the state's median income, the individual cannot file for Chapter 7.

Experts predict the rush in filings will end abruptly after Oct. 17. But the filings will rebound, Robicsek predicts. The economy, she notes, has been difficult for many working people. Gas prices are high. Layoffs have been frequent. Many have been forced to take lower-paying jobs than they had in the past.

"You can change the law, but the problems underlying a decision to file bankruptcy don't change," she says.
Indeed. That last sentence says it all. It’s also why I have a hard time feeling sorry for credit card companies with interest rates of 30% and fees for damn near everything bitching about not collecting every last penny from people they have no business lending to in the first place. Profits are at record levels but greed has been insatiable. Yes, some people have taken advantage of the system, but the bulk of filers have been those hit with huge medical bills, the loss of a job, or nasty divorce proceedings. Bush's "ownership society" striving to make second class citizens out of renters has not helped, nor have teaser rates on loans. With the economy slowing there will be another rush of filings next year in the aftermath of Katrina and Rita and the bursting of the housing bubble.

The idea behind the law is simple: to make debt slaves out of people forever. With that in mind, I have been thinking about ways the "means test" could backfire. Without knowing the legal specifics, it seems one way to pass the test is to make sure you have no job and no income when you file. I believe it's easy enough to get fired if you need to. Cap off the loss of a job with a six month mandatory counseling period during which lots of expenses are racked up, and writeoffs just might increase, not decrease as a result of the bill. I also think the law will backfire in another way. Anyone going thru this process will think twice about unnecessary expenses and credit card purchases for a long, long time. That of course is a good thing, except of course for the greedy credit card companies thriving on usury and absurdly high fees.

Bottom line: I think the credit industry slit their own throats with this bill, in more ways than one. Except for the additional suffering incurred by someone trapped with huge sudden medical expenses, that is just fine by me.

Mike Shedlock / Mish

Tuesday, October 11, 2005 8:50 PM

Focus on Autos

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MarketWatch is reporting Ford's SUV sales halved in September.

Ford Motor Co. reported Monday that sales of its traditional SUVs plunged 51% in September, as consumers continued their mass exodus from the thirstiest vehicles on the road amid record gasoline prices.

Overall, Ford turned in a 19% decline in U.S. sales last month to 228,157 cars and trucks. Crossover and passenger car sales actually improved, but not nearly enough to make up for the steep decline of its bulkier SUVs.

Sales of the Ford Explorer and Expedition were both off about 60% from a year ago while the much smaller Escape, which is available with a hybrid engine, shed only 4%.

And the trend doesn't appear to be going away anytime soon, according to Steve Lyons, head of Ford North America sales.

"Traditional SUVs will continue to face headwinds in the coming months," he said, adding that customers did most of their buying in the summer months when employee discounting sparked an industry-wide sales boom.

Sales of the top-selling F-Series truck fell 30% to 69,643.
Ford was not alone with SUV woes. General Motors SUV and pickup truck sales were down by one third. Now that sounds pretty bad to me. I would assume it would sound pretty bad to everyone but that is not the case. GM sales analyst Paul Ballew described sales as pretty comforting.
"I would describe final industry results as actually pretty comforting," said GM sales analyst Paul Ballew. "We're still waiting for a portion of the industry to report, but from the estimates we have, as well as what's been released to date, the industry right now is at or above our expectations heading into the month."

General Motors posted a 24% decline to 349,202 vehicles. Car sales fell 14.5% while truck sales plunged 29.5%.

Some of the biggest decliners included the Cadillac Escalade ESV, down 39.5% and the Chevy Suburban, off 56.6%.

The world's top automaker blamed a tough comparison to last year when it was promoting zero-percent financing. The diminishing effect of its employee pricing plan was also a factor, GM said.

GM is looking for its new GMT900 lineup, due out next year, to boost sales in the sluggish SUV segment.
It does not take much to get these guys excited does it? Since when is a 33% decline in sales anything to take comfort in? While GM is ramping up production of SUVs, Toyota and others are ramping up production of hybrids like Prius.

Toyota Q1 profits jump 28.8%.

This is what Toyota is doing: "Starting in the April-October 2005 period, Toyota plans to increase its production capacity of its popular hybrid Prius vehicles by 50 percent to 15,000 units a month from the current 10,000."

Yes those are Q1 profits but I am looking for forward strategy and leadership. Toyota seems to have it. GM and Ford do not. This is just a hunch, but with soaring gasoline prices I bet those hybrids do very well.

Mish, is that the extent of GM's problems? Hardly. Let's summarize all of the problems I can think of off the top of my head.
  1. Falling sales
  2. Enormous debt
  3. Union strife
  4. Delphi and supplier problems
  5. Cost disadvantages vs Toyota to the tune of several thousand dollars per car
  6. Piss poor management
  7. Poor quality vs. foreign competition
  8. Lack of industry vision
  9. Medical benefit problems
  10. Pension woes
Those were the problems that came to mind in about 15 seconds flat. There are probably more.

Mish, didn't GM say their pension funding problems were solved and they were fully funded? Yes they did. Unfortunately G.M. and a U.S. Agency See Pensions in Different Lights.
The federal government contends that General Motors' pension fund is $31 billion short of what it owes its work force, according to closely held government data, a figure in stark contrast to G.M.'s assurances that its pension plans are "fully funded."

The government's finding of a huge imbalance suggests that the pension fund may have much larger claims on the company than G.M.'s financial filings have indicated. It was calculated by the Pension Benefit Guaranty Corporation, the federal agency whose job it is to insure employee pensions if a company fails to meet its obligations.

Both the government agency's and G.M.'s methods of tracking pensions are legally acceptable, and their ability to produce such widely varying results shows the difficulty that employees or shareholders have in trying to ascertain the true condition of a corporate pension fund. But the disparity in such estimates has grown increasingly important as some large companies like United Airlines have gone bankrupt, leaving the agency, which took over United's pension plan, with far greater unfunded obligations than previously thought.

The discrepancy between the government's and the company's figures is the result of different assumptions made about how long G.M. would keep operating the pension fund. The federal guarantor made its estimate on what is called a termination basis - it measured the amount that G.M. would owe its workers if it were to terminate its pension plans immediately. G.M.'s calculation that its pension plan is fully funded assumes that the fund will keep going, rather than being ended.

Since 1994, companies with weak pension funds have been required by law to calculate the value of their pension funds on a termination basis and to send the information to the pension guaranty agency. But Congress also enacted a measure keeping the information secret, in response to the stated concerns of companies, who argued that the information could be misconstrued if shared with the public.

The pension agency did not release G.M.'s own estimate of its pensions on a termination basis, which continues to be secret. G.M. said it sent its most recent calculation to the agency about a year ago. The agency made its own calculation at the end of June and released the figure in response to a request under the Freedom of Information Act.

In response to questions about the federal agency's calculation, G.M. released a statement saying it considered it "unrealistic and not indicative of G.M.'s ability to provide future retirement benefits."

"G.M. takes its pension obligations very seriously," the statement continued. "The corporation has contributed more than $56 billion over the last 12 years to fund our pension plans and meet our obligations to our current and future retirees."
Now I don't know about you, but I have a problem taking seriously a company that is comforted when sales decline a mere 33% while banking on selling more SUVs with soaring gas prices. The article continues in explaining the discrepancy. Let's tune back in.
G.M.'s pension fund is actually made up of two big plans, one for salaried employees and one for hourly workers. At the end of 2004, G.M. reported that the two plans had total assets of $91 billion, and total benefits owed of $89 billion, for a surplus of $2 billion.

The government's calculation involves a variety of different assumptions about the future value of benefits the company owes. Terminating the fund means workers would no longer build up any new benefits, and G.M. would no longer provide cash from its continuing operations. But someone - either the government or an insurance company - would still have the obligation to pay all retirees the benefits they had earned, on schedule, in the future.

(Companies with plenty of money can also terminate their pension plans by paying an insurance company to take over the obligations. In G.M.'s case, the government estimated that an insurer would charge $31 billion in addition to the money in the fund.)

The government says its figure gives the more truthful picture of the plan's condition. The current pension accounting standard specifically cites the Pension Benefit Guaranty Corporation's method as "appropriate."

But most companies have resisted using the termination method, both because it can make their pension plans look very weak, and because they say they do not intend to end their plans. Business groups say that reporting pension values on a termination basis would needlessly alarm and confuse employees.

But as big corporate bankruptcies and pension plan failures accelerated in the last few years, weakening the entire pension system, a small but growing number of economists, accountants and government officials began to take the position that companies with low credit ratings - like G.M. - should be required to disclose the termination values of their pension plans.

Labor Secretary Elaine L. Chao called for such disclosure in a speech in January. Access to the termination data, now secret, would "empower workers, investors, regulators and the public," Ms. Chao said.

"The goal is to ensure that the assumptions that go into measuring a plan's liability better reflect whether or not it will be terminated."

United Airlines, for example, kept reporting its pension values on the usual, continuing basis, even in its third year of bankruptcy, when it was no longer making the minimum contributions required by law and it was clear that termination was inevitable. On this basis, United, a unit of the UAL Corporation, reported a $6 billion shortfall as of the end of 2004.

But when the government agency finally took over the plans this year, it recalculated them on a termination basis and found a total shortage of $10.2 billion. United's work force and the Pension Benefit Guaranty Corporation will bear that shortage.
The article said that the PBGC will bear any shortages. That unfortunately is not entirely accurate. The PBGC is just an arm of the Federal Government. Pension shortages when a company goes under will be covered in one of two ways.
  1. Reduced benefits
  2. Taxpayer bailouts
When it comes to GM, I expect both to happen. An existing law due to expire in December let companies get away with murder on their pension assumptions. Presumably it was enacted to help companies tide themselves over while the "recovery" was gaining traction. Well here we are with a recovery that seems all but dead just as we are about to head into the recession of 2006. By postponing the problem, all we did was make things worse. I guess we will now see if Congress has the guts to mandate full funding of pension plans on a conservative basis as well as change the rules for pension accounting as applied to corporate quarterly earnings statements or if it will kowtow once again to industry lobbyists.

In the meantime, anyone working for GM that has a chance at an early retirement and a lump sum pension payout might wish to talk to a financial advisor about taking it. I remain convinced that GM is headed towards bankruptcy unless and until they confront that mammoth list of problems head on. I see no reason to believe they can or they will.

Mike Shedlock / Mish

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