Conquer the crash: Bernanke defeats deflation.

At last, the news reports are now fully brimming with optimism and proclaiming victory after victory on the economic front. Despite the fact that the private (and total) credit in the US economy has been and is still contracting at unprecedented multitrillion dollar annual rate, which is deflation by definition in credit based monetary system, the Bloomberg news declares nevertheless that the honorable manager of the privately owned Federal Reserve, Ben Bernanke, has already defeated deflation. Oh say, can you see …

Bloomberg. December 21, 2009.

TIPS Give Way to Inflation as Deflation Yields Drop.

Dec. 21 (Bloomberg) — The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way for him to start withdrawing cash pumped into the economy since 2007.

The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.

Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week.

“It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed.

Rising Yields

The yield on the benchmark 3.375 percent note due November 2019 rose 14 basis points to 3.67 percent at 2:50 p.m. in New York, according to BGCantor Market Data.

Treasuries are poised for their first down year in a decade, losing 2.43 percent after reinvested interest, according to Merrill Lynch & Co.’s U.S. Treasury Master index. They gained 14 percent on average in 2008 as the global recession deepened and investors bet on deflation, or a general decline in prices.

While prices fell, real yields, which takes into account inflation or deflation, widened to an average of 3.64 percent this year, the most since 1998, helping attract investors to the record $1.48 trillion in new cash raised by the government in the bond market in 2009.

TIPS returned 11.1 percent this year as measured by Merrill Lynch indexes, on speculation that the almost $12 trillion lent, spent or committed by the government and Fed to keep financial markets from collapsing would spark inflation.

‘Deflation Fighter’

“The TIPS breakevens moving higher is a sign Bernanke is gaining credibility as a deflation fighter,” said Robert Tipp, chief investment strategist for fixed income at Prudential Investment Management. The Newark, New Jersey-based firm oversees more than $200 billion in bonds.

The securities pay interest on a principal amount that rises or falls based on the consumer price index. Inflation- protected bonds due in 10 years yield 2.34 percentage points less than Treasuries. That gap, known as the break-even rate, has risen from 0.04 percent in November 2008. It averaged about 2.42 percentage points in the five year’s before Lehman went bankrupt.

“A lot of people are investing in the asset class viewing that with the amount of liquidity that the Fed has provided the market and the devaluation of the dollar that inflation’s inevitable somewhere down the road,” said Todd White, who oversees government debt trading at Minneapolis-based RiverSource Investments, which manages $93 billion of bonds. The breakeven rate could widen to 2.75 percentage points, he said.

Q3 2009 private sector credit collapsed at – $1.81 Trillion annual rate.

Deflation is on a firm path in the US economy despite all of the Fed’s efforts to reflate.

The just released privately owned Federal Reserve’s Flow of Funds report for December 10th, 2009  shows that the third quarter of 2009 continued to witness the greatest credit collapse of all time (http://www.federalreserve.gov/releases/z1/current/z1r-3.pdf).

Open Market Paper: Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of -$241.2 billion. (See line 2.)

Banks lending: Credit markets [collapsed] at the astonishing pace of -$801.7 billion per year, their biggest cutback of all time (line 7).

Nonbank lending: (line 8.0) pulled out at the annual rate of -$271.3 billion, also one of the worst on record.

Mortgage lenders: (line 9) pulled out  at an annual rate of - $547.3 billion. 

Corporations were able to buck the trend somewhat (with government backing of course) and on the tide of rising stock market and economic expectations of a “recovery” were able to pull in from investors some $133.3 billion dollars to stay afloat for now (see line 6).

Consumers: (line 10) were shoved out of the market for credit at the annual pace of -$81.6, the worst on record.

The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1481.2 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.

Overall total credit in the economy shrank at an unprecedented annual rate of -$275.6 billion.

Private sector credit fell at an astonishing - $1.8098 Trillion.

Also, after the revisions and updates Q2 2009 private credit collapse was actually -$2.3159 Trillion annual rate, which is worse than -$2.2408 Trillion initially reported.

Retail Sales Data from NPD Shows Consumer Technology Revenue Declined the Week of Black Friday.

When you don’t have government meddling into the free-market price setting mechanisms the prices decline and help consumers save money. Such is the case of consumer electronics that has been experiencing deflation for many years now and the skies did not fall. To the contrary all consumers benefited from natural price declines while the quality and capability of consumer electronic goods have been continuously improving. Now, when most of us badly need lower prices the only bright spots of the economy are where the government is absent and not trying to prop up prices, with our stolen money by the way.

NPD Group. December 09, 2009.

Retail Sales Data from NPD Shows Consumer Technology Revenue Declined the Week of Black Friday.

Strong Unit-Volume Demand Insufficient to Offset Aggressive Discounting

PORT WASHINGTON, NEW YORK, DECEMBER 9, 2009 - Black Friday results showed that consumers continued their 2009 focus on price and value while shopping for consumer technology items*, according to leading market research company The NPD Group’s Weekly Tracking Service**, the industry source for actual point-of-sale data (POS) from Black Friday.  Total revenue for the week of Black Friday*** was slightly more than $2.7 billion, down 1.2 percent from 2008, but an improvement over the 3.4 percent decline noted last year. 

Computers and TVs have led U.S. sales results for technology throughout 2009, and Black Friday week again showed how powerful the combination of must-have categories and aggressive pricing have been for the industry. Spurred by new operating systems, new form factors, and new low price levels, overall computer sales volume increased 63 percent versus last year.  Average prices for notebook computers fell to $500, a $160 decline from 2008.  Flat-panel TVs again showed strong demand, but aggressive price cutting resulted in negative revenue growth versus 2008.  The average selling price of a flat-panel TV fell to $535, which is down more than 20 percent from 2008 and almost $200 from 2007.  Unit volume sales surged by 15 percent, but the high level of discounting drove revenues down by 9 percent.

“Consumers came out this year because there were deals to be had — the same reason they have been shopping for electronics all year,” said Stephen Baker, NPD’s vice president of industry analysis.  “What made Black Friday different this year is how aggressive those price cuts were.  This year retailers and manufacturers knew it wasn’t going to be about increasing revenue, it needed to be about getting consumers excited to shop and moving those products out of the stores.”

Consumer Technology Black Friday Price Declines
	2008	2009
LCD TVs	-5%	-22%
Notebook Computers	-8%	-26%
Camcorders	-7%	-33%
Point and Shoot Cameras	-12%	-7%
GPS	-22%	-14%
Stereo Headphones	-11%	-19%

Source: The NPD Group/ Weekly Tracking Service

Among other core categories in 2009 the results were mixed, although most were able to deliver strong unit-volume results.  Camcorder sales were up 55 percent, Blu-ray player units were up 53 percent, computer hard drive sales rose 33 percent, GPS units increased by 15 percent, and both point-and-shoot cameras as well as multi-function printers posted flat unit sales versus 2008. 

Follow all of NPD’s holiday updates on www.holidaymarketresearch.com.

To get an inside view on what happened on Black Friday, read Stephen’s blog post “Don’t Kick the Holiday to the Curb.”

To get all the Black Friday results and an outlook into the rest of the holiday season register for NPD and DisplaySearch’s joint webinar on Friday, December 11. 

*Consumer Technology sales include IT, imaging, audio, video, and consumables.  It excludes video game products and mobile phones.

**NPD’s weekly POS information is derived from a subset panel of retailers that also contribute to NPD’s projected monthly POS panel.

***Black Friday week sales include sales from November 22-November 28, 2009.

Sovereign Defaults Coming in Second Stage of the Financial Crisis.

The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors.  While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden and delayed. What now?

Now when the time comes in a few years and the junk on the CBs balance sheets will come to maturity and the losses will finally have to be recognized all the CBs’ balance sheets and the Governments whose Treasuries back them up will have to come to terms with the deflation that has already occurred, is occurrring now and is going to continue to occur until it runs its course. When that moment of recognition comes it will likely manifest itself in the form of a series of sovereign defaults (some of them in a chain reaction fashion). Dubai’s governments committment to back up its Dubai World real estate enterprise and its own subsequent failure to do so is just the first harbinger of these deflationary sovereign defaults. But make no mistake, it is neither the last one nor the biggest one. This is only a test. And even with this small fiasco over the Thanksgivings holiday weekend in US, what we saw looked powerful. The US Dollar carry trade did a bit of unwind by plunging EUR/USD from 1.5125 on Wednesday to 1.484 early on Friday. Gold plummeted in same time from near $1200 an ounce down to $1138, the oil reset as much as 7.1% to an intraday low of $72.39 from mid $77, all in a matter of hours, while US Treasuries jumped in a reverse action to the Stock Market indices 200 point plunge.

Deflation needs to happen, it is natural and it will happen, particularly in light of artificial speculative price increases on every investment class and consumer good that you can find that the criminal and illegal actions of the central banks caused by decades of currency debasements.

What we need is more defaults, more price drops, more speculators wiped out. The ideal solution would be toppling of the entire financial system based on fraud and crime even according to the laws written by the politicians now in charge (as en extension of the wishes of their sponsors). When political systems fall, they tend to result in physical elimination of at least of some of the parasitical politicians and their supporters. If this were to happen, it would be the deflation to remember. But it would also make the lives of the ordinary people a lot easier as cost of living would plunge, the politics of taxation (expropriation) and inflation would be ended and the people could breathe easier again.

Deflation is going to save us by ridding us of the parasitical forces that we can’t throw off our backs on our own.

Dubai default is DEFLATION.

When a debtor reneges on its loan repayment obligations or asks to postpone them this is deflation by definition. The debts that cannot be repayed are defaulted on and so the total debt outstanding in the economy deflates. And what about prices? The prices on real estate in Dubai are down as much as 50% since the beginning of the world financial crisis. So when debt deflation takes hold assets lose value and cause even more defaults. We say that we are in a deflationary spiral then. When it stops is a big question, but given world wide government intervention in free markets this almost assures that the so much needed adjustment will take a long and painful haul. Yet the prices will get to their natural level in spite of all government actions to support them.

One can hope that the Dubai default situation will give a much needed kick to accelerate the process of deflation and wipe out the speculators and their central bank friends.

Here goes Dubai.

Bloomberg. November 26, 2009.

Dubai Debt Delay Rattles Confidence in Gulf Borrowers.

Nov. 26 (Bloomberg) — Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai credit-default swaps climbed 90 basis points to 530 after yesterday increasing the most since they began trading in January, CMA Datavision prices showed.

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will, of course, be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

‘Debt Burden’

“We understand the concerns of the market and the creditors in particular,” said Sheikh Ahmed Bin Saeed Al- Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, in the first statement to come out of the Dubai government since the announcement about debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”

The MSCI Emerging Markets Index of stocks had the biggest decline in four weeks, falling 2.2 percent, led by Russia and China. Europe’s Dow Jones Stoxx 600 Index lost 3.3 percent in London, the biggest decline since April 20. South Africa’s rand and the Turkish lira weakened 2.1 percent against the dollar. Hungary’s forint lost 1.7 percent per euro. Credit-default swaps on Russia increased to 205 basis points from 192.

The MSCI World Index of 23 developed markets has risen 26 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

‘Shock’ Announcement

“The announcement was a shock,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London. “It is strongly affecting European markets.”

Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom to transform the economy into a regional tourism and financial hub. The emirate suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

Moody’s Investors Service and Standard & Poor’s cut the ratings on Dubai state companies yesterday, saying they may consider Dubai World’s plan to delay debt payments a default.

What deflation will do to future US GDP.

It is now an established fact that Japan has been mired in deflation for the last 18 years. It meant no economic growth as manifested in the below GDP graph. Assuming that USA is now in the early stages of a similar, if not much stronger, deflationary depression, we may be able to project future US Gross Domestic Product growth/contraction based on the Japanes experience.

Google. USA vs Japan GDP chart.

Treasury Three-Month Bill Yields Turn Negative.

When you have US Treasury yields sitting at historic lows at prolonged periods of time and across the entire yield curve, it only means one thing – delfation is here and anywhere you look on the horizon. But when you have yields turn negative, which really means investors paying privately owned Federal Reserve to hold their money as it has become the only safe place to keep it, this is a sign of a crash or some impending credit event which is also deflationary. Someone somewhere knows something. Only indication we, the common folks get of an impending crisis, is the sharp jump in excess reserves held with the Federal Reserve banks by other financial institutions. The excess reserves rose by almost $250 Billion between July of 2009 and November 2009, while the stock market has been setting yearly highs and “recovery” has been gathering pace, or so the powers that be would want us to beleive. Add to this the November 19th, 2009 delay in release of “Reserve Bank credit H.4.1 weekly report” and you get a shiver down your spine that something is about to hit the proverbial fan.

Bloomberg. November 19, 2009.

Stocks Plunge as Treasury Three-Month Bill Yields Turn Negative.

Nov. 19 (Bloomberg) — U.S. stocks extended a global drop as concern grew that the rally has outpaced the prospects for economic growth. The yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year.

The MSCI World Index of equities 23 developed countries dropped 1.7 percent at 4:31 p.m. in New York, its steepest loss this month. The Standard & Poor’s 500 Index fell 1.3 percent to 1,094.90 as Bank of America Corp. downgraded chipmakers, sending Intel Corp. and Texas Instruments Inc. down at least 3.4 percent. The yen climbed against all 16 of its most-traded counterparts and the Dollar Index rose as much as 0.5 percent. Aluminum and copper led declines in industrial metals.

Stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year to 1.9 percent in a report today, while saying that mounting debt burdens will keep the expansion in check.

“It makes perfect sense that the market’s going to take a little bit of a breather,” said Michael Mullaney, who manages $9 billion at Fiduciary Trust Co. in Boston. “Sentiment had gotten a little too bullish.”

Fall From Peak

The S&P 500 retreated from a 13-month high for a second day even as the Labor Department said the number of Americans filing claims for unemployment benefits held at a 10-month low and the Federal Reserve Bank of Philadelphia’s general economic index rose more than estimated. The Dow Jones Industrial Average lost 93.87 points, or 0.9 percent, to 10,332.44.

Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.

‘Painful Level’

“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.

Today’s slide in the S&P 500 was the biggest since Oct. 30, when the benchmark for U.S. stocks dropped 2.8 percent.

Intel, the world’s largest maker of semiconductors, fell 4.1 percent and Texas Instruments, the second-biggest, dropped 3.4 percent. Dan Heyler, head of Asian semiconductor research at Merrill, said the supply of chips is growing faster than demand, putting earnings at risk. Intel and Texas Instruments were lowered to “neutral” from “buy” and the global chip industry was cut to “negative” from “positive.”

Chip Stocks, Alcoa

Semiconductor stocks in the S&P 500 lost 3.7 percent as a group, the largest tumble among 24 industry groups.

Alcoa Inc. declined 3.9 percent for the second-steepest drop in the Dow as aluminum, copper, lead, nickel and tin all retreated.

ConocoPhillips, the third-largest U.S. oil company, slipped 1.9 percent and Chevron Corp. lost 2 percent as crude fell for the first time in four days. Schlumberger Ltd., the world’s biggest oilfield-services provider, lost 3.3 percent. Crude for delivery next month tumbled 2.6 percent to $77.50 a barrel.

Energy producers in the S&P 500 fell 2.1 percent as a group, the biggest drop among its 10 industries. Technology shares, the largest group in the index, lost 1.6 percent and contributed the most to the decline.

‘Grossly Overvalued’

Bank shares slid after Meredith Whitney, the analyst who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, said lenders “are still grossly overvalued” and reliant on government purchases of mortgage-backed securities.

JPMorgan Chase & Co., the second-largest U.S. bank, and Wells Fargo & Co., the fourth-biggest, each dropped 1.9 percent. The S&P 500 Financials Index slumped 2 percent.

Writedowns of mortgage-backed debt contributed to a combined $1.7 trillion of losses by financial companies globally since the beginning of 2007. Mortgage delinquencies have continued to rise as job losses render consumers unable to stay current on their debt payments.

One out of every six home loans insured by the Federal Housing Administration was late by at least one payment and 3.32 percent were in foreclosure in the third quarter, the highest for both since at least 1979, the Mortgage Bankers Association said today.

Europe’s Dow Jones Stoxx 600 Index fell 1.7 percent in the first three-day decline this month after Groupe Danone SA, the world’s largest yogurt maker, cut its forecast for annual sales growth. The company cited “profound” changes in consumer spending. Danone lost 4.4 percent in Paris.

Share Sales

Asian stocks declined, dragging the MSCI Asia Pacific Index down for a third day, as share-sale plans at Japanese companies raised concern the value of existing holdings will be reduced. Mitsubishi UFJ Financial Group Inc. sank 3.7 percent and Nomura Real Estate Residential Fund Inc. slumped 8.6 percent after filing to sell stock.

Sixty-five percent of companies in the MSCI World Index that reported earnings since Oct. 7 have beaten analysts’ estimates, Bloomberg data show, and 80 percent of S&P 500 companies have topped estimates. The two indexes have rallied since March 9 on signs government stimulus policies and record- low interest rates are helping to pull the global economy out of the recession.

Fewer ‘Buy’ Ratings

The MSCI Emerging Markets Index dropped the most in a week, losing 1.4 percent. Emerging-market analysts cut “buy” ratings on Brazil to 44.6 percent this month, the lowest since Bloomberg began tracking them in 1997, after a 139 percent surge in the benchmark Bovespa Index pushed equities to their priciest levels in six years. Brazil’s Bovespa Index lost 0.3 percent today.

The yen appreciated 0.6 percent against the euro and 0.3 percent against the dollar. The dollar advanced 0.3 percent to $1.4916 versus the euro as it strengthened against all 16 major counterparts except the yen.

“The yen and U.S. dollar have been supported by the continued upturn in risk-averse conditions,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report. “Current conditions remain unfavorable for risk assets, leaving them vulnerable to a correction lower.”

The combined economy of the OECD’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris- based organization said. Output will contract 3.5 percent this year. The 2010 forecast compares with the 0.7 percent growth predicted by the OECD in June, when the major economies were just beginning to emerge from their worst recession in more than half a century.

Losing Confidence

President Barack Obama said in an interview with Fox News recorded in Beijing that the U.S. must get the federal deficit under control. If the government continues to pile up debt, “people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.

The U.S. will auction $44 billion of two-year notes on Nov. 23, $42 billion of five-year debt on Nov. 24 and $32 billion of seven-year securities on Nov. 25. The $44 billion in two-year notes matches a record and the five- and seven-year amounts are both records.

Demand deflation.

In a deflationary environment the psychology of economic agents, be it lenders or borrowers, is such that neither is motivated to engage in credit transactions. This is because consumer attitudes in a deflationary environment are leaning towards conservation not expansion and consumption. Thus, making it economically discouraging for business to expand. The deflationary times follow an expansionary period which ends in an oversupply of goods and services, and overcapacity in production that makes them happen. As the below article indicates:

“We see an economy characterized by an excess supply of goods, an excess supply of labor and an excess supply of credit…” and “In theory, that would suggest prices need to fall even further to stimulate demand. In the real world, that still points to a painfully slow recovery and little that the White House can do to speed it up.”

The whole story is a textbook example of what happens in deflation. Unfortunately for us, the decision makers in the upper echelons of government and corporate world are not tiny bit interested in having this depressionary situation resolved, but rather about keeping alive the corporate welfare system that feeds them all at the expense of the rest of us.

Reuters. November 11, 2009.

Credit thawing, but U.S. firms balk at borrowing.

WASHINGTON (Reuters) – For all the talk of U.S. banks not lending, the bigger problem may be that credit-worthy companies simply do not want to borrow.

This presents a quandary for President Barack Obama, who is scrambling to find ways to spur growth and hiring with the jobless rate at 10.2 percent and likely to keep rising well into 2010, even as the economy climbs out of a recession.

So far, much of the effort in Washington has focused on loosening credit conditions to make borrowing easier. But if companies don’t want to take on more debt right now, that strategy can’t be very successful.

“The demand for credit is in short supply; there is not a major shortage of credit supply,” said William Dunkelberg, chief economist at the National Federation of Independent Business, which represents small companies.

“What small business needs is customers.”

Dunkelberg’s group released a monthly survey of small businesses on Tuesday that found few companies planned to increase capital spending or hiring, and only 4 percent listed getting financing as their biggest problem. In the early 1980s, the last time the jobless rate was this high, some 37 percent of those polled listed financing as their top concern.

The Federal Reserve’s quarterly survey of senior loan officers, released on Monday, showed larger companies were also reluctant to borrow. Demand for credit weakened since the Fed’s July report, albeit at a slower pace.

Even among companies that are tapping credit markets, there is evidence the money is going to shore up balance sheets rather than to pay for hiring, investment or expansion.

Oleg Melentyev, a debt analyst with BofA Merrill Lynch Global Research, said so far this year, high-yield debt issuers had used 75 percent of the proceeds to refinance existing debt, the highest proportion in at least 13 years.

“As the saying goes, you can lead a horse to water, but you can’t make it drink,” he wrote in a note to clients.

“Our data shows that the fact that credit-worthy borrowers can once again tap the debt market on reasonable terms doesn’t mean that many of them are eager to do so for any reason other than refinancing their existing debt.“

SECOND STIMULUS?

In the aftermath of a financial crisis fueled by over-borrowing, it is understandable that businesses are keen to reduce debt. But that doesn’t do much to kickstart the economy and generate the level of private-sector growth needed to bring down the unemployment rate.

Obama has tried to encourage lending to small businesses as a way to create jobs, directing about $15 billion of the $700 billion bank bailout fund to support small-business lending.

NFIB’s Dunkelberg called that a “nice gesture” but said it would probably fall flat because business owners have no reason to borrow as long as sales are weak and confidence low.

“Record low percentages cite the current period as a good time to expand, more owners plan to reduce inventories than to add to them, and record low percentages plan any capital expenditures,” he said.

Obama hinted at new policy steps on Friday when he said his administration was considering increased spending on roads and bridges, business tax cuts, refitting buildings to make them more energy efficient, easing the flow of credit to small businesses and boosting U.S. exports.

But those efforts, aimed largely at creating jobs, may still fall short if most consumers remain wary about spending.

What if the problem is that there is just too much stuff — houses, furniture, clothing, televisions, whatever — and not enough people willing or able to buy? That is the diagnosis of Wells Fargo Chief Economist John Silvia, and he is concerned that public policy is making matters worse.

“We see an economy characterized by an excess supply of goods, an excess supply of labor and an excess supply of credit,” he said.

For the economy to grow fast enough to generate jobs, those excesses will need to be brought back into balance.

In theory, that would suggest prices need to fall even further to stimulate demand. In the real world, that still points to a painfully slow recovery and little that the White House can do to speed it up.

Japan sees long deflation in US, bets on falling Treasury yields.

“The recovery is very weak and the U.S. is running the risk of deflation…” say the Japanese investors as they are piling into US Treasuries while expecting the yields to drop sharply. They may be the only ones in current economic environment that have extensive experience investing in deflationary times and so it may be worth wile heeding their advice:

“Demand for Treasuries is very good because of the idle money in the banking system…” 

“The medium term risk toward inflation is being caused by potential policy missteps by policy makers in regards to monetary and fiscal policy and the weakening dollar…”

“Any economics textbook would tell you that the massive stimulus from the central government will eventually cause inflation, but the Japanese know it doesn’t have to turn out that way…”

“The U.S. economy has faced a double whammy: the recession and credit contraction. The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.”

Bloomberg. November 09, 2009.

Japan Tops China Buying Treasuries as Lost Decade Survivors Buy.

Nov. 9 (Bloomberg) — Japanese investors who lived through a decade of deflation and recessions say U.S. Treasuries are a bargain even with yields at about the lowest levels since at least the 1960s.

Japan bought a net $105 billion of U.S. government debt through August, exceeding China as the biggest foreign buyer and boosting its holdings to $731 billion, or more than 10 percent of the total market, Treasury Department data show. The 17 percent increase is the most since a 25 percent surge in 2004.

Mizuho Asset Management Co. and Mitsubishi UFJ Asset Management Co. are among the investors buying U.S. bonds because they see similarities between America’s response to the recession and their government’s efforts during the so-called lost decade of the 1990s. An index of Japanese debt securities compiled by Bank of America Corp.’s Merrill Lynch unit returned 90 percent in the 1990s, while the Nikkei 225 Stock Average fell as much as 67 percent between January 1990 and October 1998.

“The U.S. economy has faced a double whammy: the recession and credit contraction,” said Akira Takei, head of non-yen denominated bonds at Mizuho Asset in Tokyo, a unit of Japan’s second-largest bank. “The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.”

The 3.625 percent benchmark U.S. 10-year note due in August 2019 closed last week at 101 1/32 to yield 3.5 percent. The yield has averaged 3.19 percent in 2009, the lowest since the Federal Reserve began providing daily data on the securities in 1962 and down from 3.64 percent for all of 2008.

Takaei’s Forecast

Takei, who helps oversee the equivalent of $21 billion, bought Treasuries in July and predicts 10-year yields will decline to 2.75 percent by year-end. An investor who purchased $10 million of the notes would earn about $715,000 if yields dropped to Takei’s forecast, according to data compiled by Bloomberg.

Government securities have lost 2.8 percent since December, when 10-year yields fell to 2.04 percent, according to the Merrill Lynch U.S. Treasury Master Index data. Treasuries are on a pace to post their first annual losses since 1999 as the recovery in the global economy following the worst financial crisis since the Great Depression reduces the appeal of the debt as a haven.

Similar to Japan’s response to its real estate collapse in the 1990s, the U.S. is flooding the economy with cash only to see financial institutions sock the money away in bonds instead of making loans.

Inflation Protection

The Fed and the U.S. government have spent, lent or guaranteed $11.6 trillion to spur the world’s biggest economy from recession and curb a decline in asset prices. The Standard & Poor’s 500 index has gained 58 percent to 1,069.30 from its low this year of 676.52 on March 9, though it’s below the peak of 1,576.09 reached in October 2007.

“Japanese investors have been skewed to expecting deflation because of their own experience, but the more pressing concern over the intermediate term is inflation,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers that trade with the Fed.

Pond favors Treasury Inflation Protection Securities, or TIPS, and said Asian investors, including the Japanese, have been buying the bonds on concern the dollar will continue to decline and inflation will accelerate. Barclays expects consumer prices to rise 1.9 percent in 2010, after a decline of 0.4 percent this year, data compiled by Bloomberg show.

During the 1990s, Japan’s economy grew at an average rate of about 1 percent a year as asset prices tumbled. It hasn’t fared much better this decade, with gross domestic product expanding 0.2 percent on average and consumer prices falling 0.2 percent.

Consumer Prices

The threat of deflation, a general drop in prices that enhances the value of a bond’s fixed payments, makes Treasuries attractive to Japanese investors even with bond yields rising from last year’s lows. U.S. consumer costs fell 1.3 percent in September from a year earlier, according to the Labor Department. They dropped at a 2.1 percent annual rate in July, the most since Harry S. Truman was president in 1950.

Ten-year notes pay a real yield, or what investors get after accounting for the cost of living, of 4.91 percent, above the five-year average of 1.42 percent.

“The recovery is very weak and the U.S. is running the risk of deflation,” said Hideo Shimomura, who helps oversee the equivalent of about $55.4 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset, part of Japan’s largest bank.

Surpassing China

Mitsubishi UFJ bought Treasuries in October, said Shimomura, who expects 10-year yields will fall to 3 percent by year-end.

Japan’s purchases exceed those of China, which has boosted its holdings 9.6 percent, or $69.7 billion, to $797.1 billion, Treasury data show. Japan’s buying spree started in May 2008, after its U.S. debt dropped to a four-year low of $575.3 billion.

The Fed’s pledge last week to keep interest rates near zero for an “extended period,” the absence of a recovery in U.S. real estate and hoarding of cash by banks has Japanese investors such as Shimomura saying the parallels are too close to what happened in Japan.

The S&P/Case-Shiller home-price index for 20 U.S. cities fell 11.3 percent in August from a year earlier. Bank holdings of government securities and debt of mortgage companies Fannie Mae in Washington and McLean, Virginia-based Freddie Mac increased to $1.39 trillion in the week ended Oct. 21 from $1.26 billion a year earlier. Commercial and industrial loans fell 17 percent from an all-time high a year ago to $1.37 trillion as of Oct. 21, a record decline.

‘Yields to Fall’

Banks in Japan such as Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., the two largest by assets, own 116.9 trillion yen of government securities, the most since Bank of Japan figures started in 1993.

“Demand for Treasuries is very good because of the idle money in the banking system,” said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $60 billion in assets. “In 2010, there will be a second dip in the economy. There will still be room for yields to fall.”

Fukoku plans to add to its holdings if 10-year yields rise to 4 percent, he said.

Paul McCulley, a partner at Pacific Investment Management Co., which runs the world’s biggest bond fund, said Oct. 29 that investors should sell riskier assets such as stocks and high- yield corporate debt because the U.S. recession “might not even be over.” Those types of assets carry “lofty valuations,” McCulley said a report posted on Pimco’s Web site.

New Normal

Officials at Newport Beach, California-based Pimco say there is a “new normal” in the global economy that includes heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S.

Pimco began adding longer-maturity Treasuries to the $192 billion Total Return Fund during the third quarter, according to the firm’s monthly reports.

Prospects for economic growth combined with the record amount of debt the U.S. is selling are enough to prevent Daiwa Asset Management Co., part of Japan’s second-largest brokerage, from buying. After contracting 2.5 percent in 2009, the U.S. economy will expand 2.4 percent next year and 2.85 percent in 2011, separate surveys of economists by Bloomberg News show.

Budget Deficit

“The economy will be picking up throughout the next year,” said Tsutomu Komiya, a Daiwa investment manager in Tokyo who helps oversee the equivalent of $77 billion. “The huge issuance will make Treasury yields go higher.”

The U.S. budget deficit widened to a record $1.42 trillion in the 12 months to Sept. 30 as the administration increased spending to revive the economy. The Treasury is scheduled to sell $40 billion of three-year notes today, $25 billion of 10- year debt tomorrow and $16 billion of 30-year bonds on Nov. 12. The amounts are all-time highs for each maturity.

“The medium term risk toward inflation is being caused by potential policy missteps by policy makers in regards to monetary and fiscal policy and the weakening dollar,” Pond said.

Barclays forecast that 10-year yields will rise to 4.60 percent by the end of next year. Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 15 percent to 75.819 last week from its high this year of 89.624 on March 4.

Borrowing Estimate

Record U.S. debt sales may be peaking. The Treasury Department cut its estimate for borrowing in the current quarter by 43 percent on Nov. 2, largely because of reductions in a program for helping the Fed manage its balance sheet. Borrowing will total a net $276 billion from October through December, compared with a previous estimate of $486 billion.

While the difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, widened to 2.18 percentage points from almost zero at the end of 2008, it’s equal to the five-year average.

In Japan, the so-called breakeven rate is negative 1.1 percent, when measured using nine-year bonds, the lowest among all government inflation-index debt.

“Any economics textbook would tell you that the massive stimulus from the central government will eventually cause inflation, but the Japanese know it doesn’t have to turn out that way,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey and a former official at the Monetary Authority of Singapore, that nation’s central bank.

U.S. Unemployment

Rising unemployment in the U.S. means Treasuries are still worth buying, said Shuhei Mochizuki, assistant manager in Tokyo at the foreign-bond section at Sumitomo Life Insurance Co., which oversees the equivalent of $221 billion. Ten-year yields will be 3.25 percent by year-end, he said.

The unemployment rate reached a 26-year high of 10.2 percent in October as payrolls fell by 190,000, the Labor Department said Nov. 6.

“Employment conditions are worsening,” Mochizuki, assistant manager in Tokyo at the foreign-bond section at Japan’s fourth-largest life insurer. “Yields will fall.”

Bank excess reserves with Federal Reserve signal coming loan losses.

This latest chart from November 5, 2009 release of the privately owned Federal Reserve’s report on the excess reserves is showing a sharp increas even over a few months of suppossedly “recovery” and economic “growh”. This sharp increase in excess reserve levels in a seemingly improving economic environment signals that banks know of something else. That something else is causing them to hoard cash and keep it in safest place possible, i.e. accounts at Federal Reserve banks themselves. This menacing something is likely to be huge loan losses that are result of defaults and bankruptcies by debtors. This is, of course, very deflationary.

Factors Affecting Reserve Balances.