Welcome to the Eye of the Storm

July 21, 2009

The Dow has rallied nicely since March of this year.

Washington, D.C. appears to be returning to the good status of “stalemate” which satifies the world.

The “War against Terror” is now the police action against misguided radicals.

All must be well with the world because bankster profits are off the scale and I swear Maria the Money Honey had an actual Bubblegasm reporting Apple’s earnings this afternoon.

Welcome to the eye of the storm. And that storm, as displayed above, is Hurricane Wilma, the most intense storm in recorded history. That storm is getting ready to move again and the most powerful part of the eyewall is about to slam into our economic fantasy land at full force.

Without going into great detail, let me try to outline in brief the series of events which will be swirling like the eye wall storms with 200 mph gusts and record low pressure. Duck if you see one of those buildings coming at you, it’s probably a foreclosed home being wiped off the books.

1. Iran – Israel will not sit by idly waiting on the Messiah to ‘talk’ to them, they will act. Fall would be the perfect time as the Iranian defenses should be exhausted from all the probing.

2. The banking system is still extremely unstable. Despite saving those deemed “too large to fail” now there is too many to save. The rumors about a bank holiday are swirling but what would be logical (good luck with this one) is if they did execute such an action, consolidate or close the 2000 or so bad banks, put the assets into a RTC style liquidation firm, then re-open in less than 14 days, it might work. But the panic it would create would be astonishing at every level.

3. The U.S. Dollar is losing steam and the threats made by the BRIC nations to create separate trading blocs that do not use the USD is becoming reality. Without the reserve currency status, which will not be at risk this year just the threat of that action, the United States is nothing more than a large Argentina with a big navy and ICBMs.

4. Unemployment is deteriorating at a faster and deeper level than any projections. According to numbers produced from various sources unemployment really ranges from 18.2% to over 20.6% which matches some of the estimated 1893 and 1930’s depression levels.

5. Derivatives:

From Martin Weiss July 10th: The Giant Accumulation of High-Risk Debts and Bets Called “Derivatives”

A must read and I really do not have much more to add to this as the risk is now on full display with the CIT circus that is still ongoing.

6. Swine Flu – As of this entry there is still no vaccine and the virus is mutating making it difficult to create a viable vaccine. This challenge could create a pandemic that brings our financial system to a crawl this autumn and winter.

7. Bankruptcies – Personal and Corporate bankruptcies are accelerating and as we head into the fiscal year end for many corporations, Chapter 11 could be a viable option. As individuals lose hope and can not escape the debt spiral they are filing at a pace unseen since the modification to the bankruptcy laws in 2005.

8. The P/E ration for the S&P 500 is an absurd 15.74 on forward earnings and the NASDAQ an even more absurd 19.22. Traditional recession level ratios are between 5 and 8 (Source WSJ, 7/21). Considering the spin being put on earnings this week, the potential for a major corrective move to the downside is wide freaking open.

9. Manufacturing is not recovering and with little evidence that the automotive sector will come back to life and new single family home construction trailing levels unseen since before 1958 there is no logical reason to think the recovery has begun.

10. The retail disaster is ongoing with further bankruptcies likely, including some historic and major names which will add further pressure to an already devastated Commercial Real Estate market.

11. Import/Export data via rail car bookings, TEU container counts, etc. indicates that our export markets are still declining at about 14-29% per month depending on the port and imports at a 20-28% decline year over year. Thus further verifying the manufacturing disaster is continuing if not getting worse.

12. Real Estate Reality – Despite a mass move of foreclosed homes, the banksters are still sitting on numerous months of inventory which have not but put up for bid or worse, have postponed foreclosure action to prevent further market price deterioration. Add in the CRE disaster which is starting to pile up and the projected delinquency rates in the 8K’s for the real commercial banks (not Goldman) and you can see that any improvement is seasonal only and will begin a steep deterioration in the fall.

Thus why I am putting up the hurricane warning sign for everyone. For those of you who have never experienced a storm like this, the eye is the deceiving part. You can either keep the storm shutters on and get ready for the worst part of the storm or you can be like the idiots on Bubblevision and take the storm protection down. For what it is worth, I think Dennis Kneale is that fool you see in every storm with a beer can in one hand trying to lean into the 150 mph winds right before a tin awning cuts him in half. In other words, just like every other economic storm in our history, there is always some fool proclaiming “this is nothing, come on out, enjoy the rain”; famous last words, like these don’t you think:

“…there are indications that the severest phase of the recession is over…”
- Harvard Economic Society (HES) Jan 18, 1930