Kudlow on Bernanke Testimony

Larry Kudlow's attempt at reading Fed tea leaves results in his expecting more rate hikes:

Bernanke was a lot tougher in yesterday’s House Financial Services hearing. He was much more hawkish. In response to a question posed to him, he replied that the core inflation pickup is broad based, and not a statistical illusion from the owners’ equivalent rent component of the CPI.

Gold prices fell almost $10 dollars, nearly erasing Wednesday’s gain (which in some sense was based on a dovish misreading of Bernanke.) If the Fed is data dependent, and if Bernanke believes that thecore inflation pickup is broad based, then more fed rate hikes are in the cards.

If Bernanke is Right...

Ethan Harris at Lehman Brothers, via Bloomberg, nails it:

If Bernanke proves to be right in his forecast it would be ``the first time in history'' that the Fed stopped inflation ``without imposing pain on the economy.''

Of course, Bernanke isn't right. The economy is a mess and inflation is worse than Bernanke is publicly stating. Here's Harris again:

``The Fed has a very optimistic view about inflation, and I think they will find out they are wrong and will have to tighten more."

As upward inflation trends become more obvious, the Fed will continue to fight inflation, perhaps raising rates from time to time. But they won't cut rates until there is a crisis in the economy--there will be a lot of pain, though, before the cuts start, a lot of pain.

The Google Numbers

How's this for a business?

Yesterday, Google reported revenues of $2.46 billion for the quarter ended June 30, 2006, representing a 77% increase over second quarter 2005 revenues of $1.38 billion and a 9% increase over first quarter 2006 revenues of $2.25 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC.

Google-owned sites generated revenues of $1.43 billion, or 58% of total revenues. This represents a 94% increase over second quarter 2005 revenues of $737 million and a 10% increase over first quarter 2006 revenues of $1.30 billion.

Google's partner sites generated revenues, through AdSense programs, of $997 million, or 41% of total revenues. This is a 58% increase over network revenues of $630 million generated in the second quarter of 2005 and a 7% increase over first quarter 2006 revenues of $928 million.

Revenues from outside of the United States contributed 42% of total revenues, compared to 42% in the first quarter of 2006 and 39% in the second quarter of 2005. Had foreign exchange rates remained constant from the first quarter through the second quarter of 2006, our revenues would have been $26 million lower. Had foreign exchange rates remained constant from the second quarter of 2005 through the second quarter of 2006, our revenues would have been $18 million higher.

GAAP operating income for the second quarter of 2006 was $815 million, or 33% of revenues. This compares to GAAP operating income of $743 million, or 33% of revenues, in the first quarter of 2006. Non-GAAP operating income in the second quarter was $925 million, or 38% of revenues. This compares to non-GAAP operating income of $887 million, or 39% of revenues, in the first quarter.

GAAP net income for the second quarter was $721 million as compared to $592 million in the first quarter. Non-GAAP net income was $772 million, compared to $697 million in the first quarter.

GAAP EPS for the second quarter was $2.33 on 310 million diluted shares outstanding, compared to $1.95 for the first quarter, on 304 million diluted shares outstanding. Non-GAAP EPS was $2.49, compared to $2.29 in the first quarter.

Western Banker's Elite Doing the Dirty Work for the Kremlin

Who needs the KGB when you have investment bankers to do your dirty work? It's an "elegant solution."

The TimesOnline explains:

The Kremlin may have tortured Yukos to the point of expiration, but it is Western banks that are accused of delivering the coup de grace.
The company’s management and shareholders are pointing a finger at the banks for playing a key role by selling Yukos’s debt to Rosneft and then helping Rosneft to legitimise its acquisition of Yukos’s main asset through a $10.6 billion (£5.7 billion) flotation in London last week.

A consortium of 13 Western banks, represented by Société Générale, sold $482 million in Yukos debt to Rosneft in December 2005.

They then filed for the bankruptcy of Yukos in March 2006, in what Yukos says was a pre-arranged deal with Rosneft.

Tim Osbourne, director of Menatep, which is the main shareholder in Yukos, told The Times: “It goes back to President Putin’s statement in 2004 that the Russian Government would not bankrupt Yukos. The Kremlin therefore had to find someone else to bankrupt Yukos for them.”

Claire Davidson, spokeswoman for Yukos, said: “It was seen as an elegant solution, that the former poster child of Western investors should be bankrupted by those same investors.” Société Générale declined to comment.

It was not the only instance of Western institutions turning their backs on Yukos once it was targeted by the Kremlin.

Ms Davidson said: “Yukos was the first Russian company to get GAAP accounting, but we were unable to do so this year because no Western firm would do our audit. PricewaterhouseCoopers, who had worked with us for years, said they’d like to help but couldn’t.”

PWC declined to comment.

Mr Osbourne said that Citigroup also asked Menatep to close its Citigroup account, “because they didn’t want to anger the Kremlin”.

The perils of crossing the Kremlin are obvious. A growing list of British investors, lawyers and journalists have been refused entry to Russia for criticising the state or powerful state companies.

CNBC to Become Pro-Gold?

The Texas Hedge speculates:

...why are we of the opinion that CNBC and the rest of the media is about to warm to gold? We think the answer is two-fold. The first reason is that gold will continue to rise on its own, and the media will eventually be forced to cover the precious metals. The second reason is that Wall Street has managed to figure out how to “take their cut” via issuing ETFs as a way for the masses to enter the gold and silver markets. It took a few years for Wall Street and the media to embrace net stocks and oil. So we haven’t been surprised that it has taken a few years for them to embrace gold.

As gold continues to climb, more and more investors will begin to jump on the bandwagon. At this point the average man on the street is not bullish on gold--in fact, he is not even thinking about gold. This is why we expect gold to out pace inflation by a large margin. Not only will inflation be pushing it up, but as more and more investors consider it a legitimate investment, they will be adding new demand for the metal--not to mention new buying from foreign central banks.

But, will the establishment be getting behind gold?

Texas Hedge is certainly correct that major establishment players are putting themselves in a position to profit big time from a run up in gold; GE, for example, sometime back, bought and now owns the major gold coin dealer, Blanchard.

We have had an occasional peek at how GE operates from the inside. If they want to get behind something like gold, they would make Israel's move into Lebanon look timid.

If CNBC (Interestingly also owned by GE) does become pro-gold, it will signal a huge promotion of gold by mainstream media. It will mean that those considering gold as an investment will be greater and occur even faster than we originally anticipated. We aren't counting on mainstream media to turn bullish on gold, but it would be a nice touch.

Bernanke to Real Estate Investors: Drop Dead

Federal Reserve chairman pride themselves on being opaque in their testimony before congress. You always have to read between the lines to find out what they are really saying. Reading between the lines of today's testimony by Fed chairman Bernanke, before the House Financial Services Committee, should be far from comforting to the real estate industry.

Does Bernanke know the housing market is crashing? Oh yeah. During today's testimony, he said: "The downturn in the housing market so far appears to be orderly."

Translation: The housing boom is over. All the numbers point to declining prices from here, but there is no crash yet. At the Fed we call this "orderly." This means there are still a few people out there who think they can buy real estate and flip it in six months. Once we run out of these people, we have no idea how bad things will get.

Does Bernake care about falling housing prices?

Reuters reports on his testimony this way:

One of the things that Bernanke and his Fed colleagues are keeping close tabs on is the extent to which a housing slowdown will put a damper on overall economic activity.

"We recognize the risk ... and we are watching it very carefully," he said.

Translation: The Fed at this point doesn't care about the real estate crash. If things get so bad that there is a major crisis somewhere in the economy, the Fed may stop just watching. But for now the Fed is just watching. Housing market be damned, pass the popcorn.

Roubini: More Fed Hikes Ahead

As we indicated in our posts below, the Fed rate hikes to date are going to cause plenty of damage to the economy. But a pretty damn good Fed watcher, Nouriel Roubini, expects further rate hikes from here.

Roubini writes:

"...another hike in August is, at this point, almost sure - in spite of the wishful hopes of market participants - given the recent inflation news. With an awful PPI report yesterday (with an headline increase of 0.5% in June) and with another core increase of 0.3% today in the CPI the Fed would be reckless not to do another 25bps in August."

This is the start of stagflation. The economy is slowing and the Fed knows this, but the inflation numbers are, as Roubini points out, a problem.

Roubini continues:

...inflationary pressures are growing throughout the economy regardless of which measure - CPI, PCE, PPI, Energy/Oil - you look at and regardless of which correction you make - headline, core, median - and regardless of which core measure you are looking at (Core CPI, Core PCEPI, “market-based” PCEPI, the core “chained” CPI). It walks, looks, struts, stinks, quacks like an inflation duck whichever way you look at it. And, given the still mistaken market perceptions of Gentle Ben being deep inside an inflation dove, the last thing that Bernanke and the Fed can afford is to be perceived to be soft on inflation; it would destroy the Chairman's credibility and it would stoke inflation expectations if markets were to perceive Bernanke as dovish on inflation at a time when such inflationary pressure are surging at the highest levels in years. Thus, a Fed Funds at 5.5% is almost done deal, barring an awful July employment report suggesting an actual coming recession.

..the problem is that, while the Fed wishes to do another 25bps in August and then pause (if not stop altogether), actual inflationary developments may not allow it to do so. I expect a Fed Funds rate at 6% by, at the latest, February 2007forced to resume after a pause and bring the Fed Funds rate towards 6% by February 2007

Roubini clearly has his eye on inflation. We can not argue about his warnings about the inflation ahead. However, we, ourselves, don't get into the Fed prediction game (Will they hike or won't they?).

Roubini could be very right about the hikes ahead. But the farther out he goes, the more dangerous the forecasts. If there is a major crisis in the economy between now and February 2007, the final interest rate hikes Roubini expects won't happen. It's all going to be about timing {When will a crisis hit?), as to how many more interest rate hikes we get from here, if any. But if we do get more hikes from here, it will be beacuse of the inflation that Roubini correctly points out is ahead.

New Residential Construction Down

Here's an example of why the Fed's just stopping interest rate hikes won't be enough to save the economy from a pretty severe downturn. The rate hikes to date are already doing damage, as numbers from a joint release, out today by The U.S. Census Bureau and the Department of Housing and Urban Development, clearly indicate.The early stages of the downturn are pretty clear.

Building Permits

Privately-owned housing units authorized by building permits in June were 4.3 percent below the revised May rate and is 14.9 percent below the June 2005

Single-family authorizations in June were 6.3 percent below the May figure.

Housing Starts

Privately-owned housing starts in June were 5.3 percent below the revised May estimate 11.0 percent below the June 2005 rate.

Single-family housing starts in June were 6.5 percent below the May figure.

Is Ben Praying?

Fed Chairman Ben Bernanke gave the financial markets his I am praying look during his congressional testimony yesterday.

Ben is going to need to pray in our view, as he hinted that the Fed may stop interest rate hikes. To simply stop raising interest rates will not be enough, though, to reverse the slowdown. Rate hikes to-date are enough to cause the slowdown. If Ben attempts to lower rates, inflation will be even worse than we currently expect--and what we expect in terms of inflation, even now, won't be pretty. In other words, it is all about stagflation. If Ben is praying now, he will be on his knees praying in six months. Remember, this is an economist who co-wrote a 300-plus page book on inflation targeting and didn't mention the word stagflation, in the book at all.

Southern California Home Sales Fall Again

The noose around the real estate market becomes more and more obvious with every report. The latest report, courtesy of the Los Angeles Times, comes from the land of sunshine, beaches and beautiful women.

Southern California's housing slowdown persisted last month as prices rose at their slowest pace in more than six years and sales fell for the seventh month in a row....

The median price for new and existing homes in the six-county region increased to a record $493,000 in June, according to La Jolla-based real estate tracker DataQuick Information Systems. But the 6% year-over-year rise was the smallest gain since May 2000.

And the higher prices came amid a regionwide decline in demand. The number of homes sold in June fell 17.5% from a year earlier to 29,237. It was the lowest sales count for a June since 1999, DataQuick said.

All six counties in the region reported lower sales on a year-over-year basis, led by Ventura County, where sales plunged 32.3%, and Orange County, where sales fell 26.3%.

As the song says, "It never rains in California, but girl don't they warn ya? It pours, man it pours." Well, the clouds are getting thick and gray and it's beginning to pour in Southern California. Housing prices are going to come down and we are trying to warn ya.

How to Profit from the Upcoming Credit Crunch

One good way to get a good read on trends that investment bankers are expecting is to monitor the types of financial conferences being offered to them. Which is why an email that popped into our inbox this morning from Dealflow Media, promoting a webinar, caught our eye.

The email headline explains it all: How To Position and Profit from the Upcoming Credit Crunch.

The email goes on to advise:

With interest rates rising and the economy slowing, more companies are expected to default on their debt. This webinar will feature leading distressed debt investors and special situations bankers discussing recent opportunities. Find out how you can position yourself to profit from the upcoming credit crunch....As the economy inevitably slows and credit gets tighter, default rates will almost certainly mount, notwithstanding the usual claims that "it's different this time."

Now just why is it that we haven't heard any television talking heads mentioning a credit crunch?

The Bernanke Bump

Gold, the U.S. stock markets and bonds are higher this morning on comments made by Fed Chairman Ben Bernanke. The markets are interpreting Bernanke's comments to me that rate hikes are likely to be over sooner rather than later. Before you pass the champagne around and plunge your life savings into a December S&P; call option, please consider the following.

A halt in intrest hikes is not the same thing as the lowering of interest rates. We believe plenty of damage will be done to markets with interest rates at current levels--only a reversal of Fed policy where rates are lowered would significantly reduce the recessionary problems we see ahead--and a reversal in policy is not coming anytime soon.

Second, even this small hint from Bernanke, weakened the dollar and sent gold higher. The markets are hyper sensitive to inflation and dollar weakness right now. Bernanke would never be able to get away with lowering rates at this point without a tremendous reaction in these markets.

Our conclusion remains: STAGFLATION.

Fed interest rates at current levels will slow the economy, especially in former hot sectors such as real estate. But inflation will remain a haunting menace because of all the dollars printed during the "Easy Money" Alan Greenspan years.

Bernake is trapped. If he even maintains interest rates at current levels, he is going to crash the economy. If he attempts to lower rates, all hell will break loose in inflation sensitive markets.

This morning's Bernanke Bump is just that a bump. It won't last.

Prince Alwaleed Is Not A Happy Camper

HRH Prince Al-Waleed bin Talal bin Abdul Aziz Al-Saud owns 4.3% of Citigroup stock and is its largest shareholder. He clearly isn't happy with the way things are going at Citigroup. Here are some of the comments he made to a Reuters reporter:

The results are positive but they (Citigroup) are not able to get the costs under control ... We have to take draconian, and I say draconian, measures to control the costs"....

"I see the 10 percent rise in revenue and I say, 'Thank you Chuck Prince'," he said in reference to Citigroup's chief executive.

"But when I see the 16 percent rise in costs, I say, 'No thank you Mr. Prince'," he added. "I'm happy with the performance in revenues but the costs have to be cut."

"Costs should be improved dramatically. There has to be a correlation between the one dollar spent and the one dollar of revenue," he said. "The patience of shareholders is getting thin. I'm a shareholder in alliance with Citigroup. I'm patient, but enough is enough."

Wait until the recession hits full force, Prince Al-Waleed. Banks are usually at the forefront of the downturns. You better hope your Mr. Prince has done a superb job of managing risk. Otherwise, we see your unhappiness growing, your highness.

Talking Heads: Extreme Edition

We have always suspected that many television business news correspondents and anchors really don't have a clue--and our suspicions also often include the supposed expert knowledge of some guests. A recent BBC incident has proved the absurdity of many current television interviews. In this case neither the correspondent nor the guest has a clue. But would you have known it in advance, if you had just heard the interview?

Here's the set up.

Guy Kewney was at the BBC studios for an interview. He was driven there by a cabbie, Guy Goma, and was supposed be interviewed with regard to the legal copyright battle between the Beatles' Apple Corps and Apple Computer over the use of an apple symbol.

But somehow Kewney's driver, Goma, ended up in the interview seat and not Kewney. At first, there is clear shock on the driver's face as he realizes that he is being interviewed live and mistaken for Kewney. He, then, recovers and finishes off the interview.

Below is a transcript of the interview, but for the best impact you need to see the video here.


The interview

Karen Bowerman: Guy Kewney is editor of the technology website Newswireless.


Face of horror


KB: Hello, good morning to you.

Mr Goma: Good morning.

KB: Were you surprised by this verdict today.

Mr Goma: I am very surprised to see... this verdict to come on me because I was not expecting that. When I came they told me somehting else and I am coming. So a big surprise anyway.

KB: A big surprise, yeah, yes.

Mr Goma: Exactly.

KB: With regards to the costs involved do you think now more people will be downloading online?

Mr Goma: Actually If you can walk everywhere you are going to see a lot of people downloading the internet and the website and everything they want. But I think eh It is much better for development and eh to inform people what they want and to get the easy way and so faster if they are looking for.

KB: It does really seem the way the music industry's progressing now that people want to go onto the website and download music.

Mr Goma: Exactly you can go everywhere on the cyber cafe and you can take, you can go easy. It is going to be an easy way for everyone to get something to the internet

KB: Thank you. Thanks very much indeed.

Well This Is a Big Surprise. Not!

Early this week we reported on Yukos' court action in London aimed at preventing the trading of Rosneft stock on the London Stock Exchange.

Despite the obvious looting of Yukos assets by Russian president Putin and his cronies, a British court has ruled in favor of the looters.

Rosneft was effectively cleared to list its shares on the London Stock Exchange after a court rejected arguments by Yukos that the flotation would amount to illegal money laundering.

Although Yukos can seek to overturn this decision in the Court of Appeal, the stock will start trading Wednesday. We hope no one at Yukos is holding their breath over a favorable Court of Appeals ruling. Not going to happen.

Market is at Death Cross

We can't by any means be considered hardcore market technicians. But this does sound cool and we do think the market is headed lower. From CrossingWallStreet.com:

The market has given back all of its gains since November. Since then, the Fed has raised rates an additional 125 basis points.

Mark Anderson of Alt Energy Stocks notes that today's close should confirm a death cross--where the 50-day moving average falls below the 200-day moving average.

Iran's Hizbollah says ready to attack US, Israel

Reuters reports:

Iran's Hizbollah, which claims links to the Lebanese group of the same name, said on Tuesday it stood ready to attack Israeli and U.S. interests worldwide.

"We have 2,000 volunteers who have registered since last year," said Iranian Hizbollah's spokesman Mojtaba Bigdeli, speaking by telephone from the central seminary city of Qom.

"They have been trained and they can become fully armed. We are ready to dispatch them to every corner of the world to jeopardise Israel and America's interests. We are only waiting for the Supreme Leader's green light to take action. If America wants to ignite World War Three ... we welcome it," he said.

Blacks and the Stock Market

The percentage of blacks that own stocks is lower than that of whites. The Assimilated Negro blogger attempts to explain this phenomenon, in a way only he can:

You don't really learn about the market in school. At least I didn't, and I went to fancy-schmancy schools. I think it's more of a family thing. A lifestyle, like Entourage, but not as fun and sensational ... unless you're in the know. Only generations of influence could inspire people to read the Wall Street Journal of their own volition.

*shudder*

So, it would figure that higher-income African Americans are also newly higher-income African Americans. And perhaps they read the WSJ, but there's still a nagging in the back of the head, a lynched negro hanging from a tree telling them that anyday now an old white man is going to bust into their house and say, "HAHA! We got you ni**a!!! Suckers. Just colored suckers, all of you!! *pulls out three fruity lollipops for ironic effect* You fell for the old 'buy & hold' Melanin-Man. Sheeeit, that's the oldest caucasian-con in the book. You give us your money, and we'll hold it for ya. HAHAHA!!! Well back to poverty with you negro. Black Tuesday bitches. Dems the breaks. You read the fine print. 'Past history is no guarantee of future results.' Game over son. Yeah that's right, we're gonna continue to appropriate the cool slang from your culture too ... SON! All us caucasoids are gonna split up your money. Here's a 'Ken Lay Is Still Alive' t-shirt for your trouble."

And thus you get:

"Black investors have focused on real estate and have not incorporated the stock market to the same degree as their white counterparts," said Lisa Toppin, director of human resources and diversity programs for Schwab.

You can take my HD, but you can't take my home. Hard to argue with that logic.

Assimilated may think it is hard to argue with that logic, except that real estate is about to crash. It has nothing to do with white or black. It is about the Federal Reserve. White or black, you have to know how the Federal Reserve plays its game.

It is the same with the stock market. What Assimilated writes about many blacks' view of the stock market is probably true. They may think that the white man is lurking in the background ready to take what he has earned, but it ain't all white men. It's the Federal Reserve. The Fed eventually wipes out all who don't understand the game--and very, very few understand the game.

Our advice to whites and blacks is to get to understand the game. Reading The Case Against the Fed, by Murray Rothbard is a good start. Here is a taste: "By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency ...The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit.."

Options Investigations and 9-11

The Wall Street Journal recently placed a story on its front page that details an investigation by WSJ that showed many companies granted their executives stock options following the 9-11 related drops in their stocks. So what? Where is it written you can not buy stock or set options when your stock is down? If execuitves believe in their companies, one would hope they do exactly this.

But while WSJ seems to have no problem going after corporate America for doing something that is clearly legal, the WSJ continues to be silent on the real 9-11 options scandal. We continue to hear from sources inside the CBOE that there was a cover-up as to who bought put options on airline stocks just before 9-11. It remains a state secret as to who exactly profited from 9-11 through the purchase of those put options.

Our sources tell us that the CBOE was told to stop the investigation into who bought the put the options. "Documents were destroyed," a friend at the CBOE tells us.

Will the Power Grids Hold?

Grid operators are breaking all-time power-use records as a result of soaring temperatures across the United States.

States that have not seen major upgrades in their power infastructure, such as parts of California and Connecticut, will be very vulnerable to power failures.

We have reports of some outages in the greater Denver, Colorado area.

Mrs. Charles Bronson Gets Caught in the Real Estate Slowdown

Mrs. Charles Bronson, wife of the late actor, is having trouble selling her New England pastoral north country Vermont home, despite the fact that it has four guest cottages.

WSJ reports: "Ms. Bronson put her home on the market more than a year ago at $4.9 million, then shaved the price by $1 million in April. 'I'm really surprised it hasn't sold,'" she says. "I don't think Vermont and New England is going with the same real-estate flow as the rest of the universe."

Oh yes, Mrs. Bronson, Vermont and New England are going with the same real estate flow. In fact, it appears they are leading the universe in the real estate flow, which, unfortunately for you, is all down hill.

This Week's Federal Reserve Show

Economists will be playing "Let's Catch Ben in a Slip-Up," later this week.

Federal Reserve Chairman Ben "The Artist" Bernanke is scheduled to testify before the Senate Banking Committee on Wednesday.

Bernanke is scheduled to testify before the House Financial Services Committee on Thursday.

Thursday the Fed is also scheduled to release minutes from the Federal Open Market Committee's June meeting.

Yukos Seeks to Block Rosneft Trading

Yukos Oil is asking a British court to suspend the listing of the Russian oil company Rosneft on the London Stock Exchange, saying that allowing the shares to be traded would violate laws against money laundering.

Since Russian president Putin and his cronies basically stole the assets of Yukos, Yukos may have a point. But Yukos is likely to lose its court bid, since this is the way these things go--which should embolden Putin and his cronies in their eventual looting of Rosneft.

Meanwhile, former Yukos president Mikhail Khodorkovsky sits in a Siberian jail, where the jail and surrounding area are said to be heavily contaminated with radioactive waste which is seeping into the water table. According to The Independent, the region, which borders Mongolia and China, also suffers from extreme weather. Right now, it is suffocatingly hot but in the winter the temperature can drop to 30 degrees below zero. Khodorkovsky’s family lives in Moscow and has to travel six hours by plane and another fifteen hours by train to visit him.

Did this guy, a former billionaire, play his cards wrong, or what?

Repo Madnes: Car Loans Defaults Rise with Gas Prices

You should be able to get a good deal on a used car soon. With U.S. domestic car makers already suffering from lower car sales, delinquencies in car loans are on the rise. NyPo has the details:

Delinquencies in car loans were already rising quietly even before the blowout in oil prices that's causing gas pump prices to skyrocket overnight...Most car loans in the market are risky because about 60 percent of them were made en masse by dealers and Detroit automakers to buyers with bad credit, or so-called subprime borrowers, according to industry data.

Standard & Poor's issued a report last week saying delinquencies in those risky car loans rose in the second quarter, without giving any data.

The American Bankers Association said its latest data showed delinquencies of dealer-made loans jumped by 9.1 percent in the first quarter vs. a year earlier.

Even the better-quality car loans made directly by banks and credit unions are fast tumbling into delinquency, rising by 3.5 percent it the first quarter from the prior quarter, the association said.

The underlying problem, analysts say, was that dealers extended loans twice as long as customary, or up to six years, just to move car sales.

"The problem was that when you traded in your old car and still had $3,000 on the old loan, dealers would roll it over to a new loan and extend it to 72 months," said Peter Schiff, president of Euro-Pacific Capital.

"It didn't matter if you had bad credit, too much debt, no downpayment or any verification," Schiff said. "People were being paid $1,000 by dealers to take cars off the lot."

"Now the loans are under water," he said.

"People are asking, 'Why pay off a $20,000 loan on a gas guzzler maybe worth $12,000? I can't afford to drive it. I can't afford to make the payments. My solution?' Give the keys back."

The Warren Buffett Interviews

Google Video has now posted to its site the three-part interview series Charlie Rose conducted with Warren Buffett.

We have often suspected that Warren Buffett has felt more comfortable giving interviews to women. He has probably given Carol Loomis more one on one interviews than anyone else. And when Buffett decided it was time to bring an equity analyst in to examine Berkshire stock more closely, he chose a woman. But, Buffett is clearly comfortable with Charlie Rose in this series of interviews, which makes the interviews quite fascinating. Rose gets Buffett to talk. We get the sense these are the stories Buffett would tell if it was just two guys sitting at a bar.

For those interested in Buffett's stock picking thoughts, Part 2 in the series will be most valuable.

In Part 3, Bill Gates is around for the entire 60 minutes and he seems as comfortable as we have ever seen him in front of the camera (probably because he is with his good buddy Buffett). Part 3 of the Buffett inteviews also give us a peek at Gates' wife, Melinda. She comes across as a having a pretty strong personality of her own. We probably haven't heard the last from her.

Part 3 also contains Buffett's comments claiming that the free markets failed in solving the problem of disease in third world countries, which prompted Thomas DiLorenzo to call him an economic ignoramus.

Here are links to the three-part series:

Part 1

Part 2

Part 3

NYT: Adjustable Rate Mortgages 'All The Makings of a Classic Horror Story"

The New York Times is the latest to report in on the looming real estate crisis. They almost get the full story.

"The raising of interest rates on millions of adjustable rate mortgages over the next several years has all the makings of a classic horror story," NYT writes. This is true.

NYT then continues:

"Lenders will adjust about $500 billion in mortgages this year and $700 billion next year, according to Freddie Mac, the quasi-government agency that repackages mortgages for investors. Expect to find the mailbox stuffed with refinancing offers." But lenders "may not be interested in refinancing a home loan when the value of the home is below the loan amount. That could happen because a homeowner took out all the equity in a previous refinancing... It could happen if the price of the house has fallen or if the owner has been making only the minimum payment on a payment-option loan so that the loan balance has actually grown. (It is what the industry calls a negative-amortization loan)." This is also accurate.

But, from the above solid reporting, the NYT then gives this advice: "The best option then is probably to sell the house and scale back. Homeowners may also want to sell if they can clearly see that there is no way they can make the higher, refinanced payment."

Oh yeah, this advice will work. Sell the house? And just who exactly will be the buyer, when prices are crashing and the Fed stays tight with credit?

What many fail to realize, and NYT apparently falls into this category, is that the real estate market is about to decline whether or not there are ARMs out there. There have been real estate crashes long before ARMs existed. When the Fed tightens, there is simply less money around for the real estate market. All ARMs will do is intensify the decline and speed it up.

There will be no one around at anywhere near current housing prices to buy all the houses that will come on the market. The housing market is about to learn about supply and demand. Increasing supply and falling demand means lower prices. The NYT had it right at the start of their report. It is a horror story in the making, but it is not just about ARMs, it is about the entire real estate market.

Less money available to buy homes (because of Fed tightening) is at the core of the problem, ARMs will add fuel to the fire by pushing homes onto the market at a time when the market will be declining anyway---but don't mistake the ARMs debacable as the beginning or end to the problem. It's a lot bigger problem than that.

"The Market Slowed Down on Me"

This week's in the trenches report on the real estate market comes from the Washington Post:

In the Washington area, more than 25,000 new condos are on the market, up from 18,000 a year ago. Developers are planning to introduce an additional 26,000 units over the next 36 months. Furthermore, about 9,000 more condos are competing for buyers’ attention in the resale market...many developers say they are closely watching the market and adjusting plans. LaZerrick Howard, who owns about 25 apartment units in several District buildings, converted four of his units on the eastern edge of Capitol Hill and began selling them as the Courtney Condominiums in March. After two months, he dropped the asking price from $290,000 to $275,000. In June, he lowered it to $260,000 and sold two of the four units.

“The market slowed down on me," said Howard, who also offered to pay for a year’s worth of condo fees and increased incentives offered to real estate agents. In the beginning, "I thought they would sell themselves. I was thinking, 'Do I even need an agent?’ But the market changed so quickly. I had no choice but to regroup and figure out what you need to do to sell.”

Howard doesn't know how lucky he is. When problems intensify, not even a real estate agent is going to be able to help him.

Bush Blocks WTO Entry for Russia

So much for peace through trade, President Bush has blocked Russia's entry into the World Trade Organization.

AP reports:

There was a quick handshake but little warmth between Bush and Putin during a photo opportunity opening their talks. For the second day, Bush spent part of it mountain biking..."I talked about my desire to promote institutional change in parts of the world like Iraq where there's a free press and free religion," Bush said at the news conference, "and I told him that a lot of people in our country would hope that Russia would do the same thing."

Putin, in a barbed reply, said: "We certainly would not want to have the same kind of democracy as they have in Iraq, I will tell you quite honestly." Bush's face reddened as he tried to laugh off the remark. "Just wait," Bush replied about Iraq.

Putin also said Russia would not take part "in any crusades, in any holy alliances."

Although you don't really need to be a member of the WTO to become a successful international trading country, Russia clearly wants to become a part of the club.

The WTO is a 149-nation group that sets various rules for world trade between its members. Membership in the WTO would assure Russia that it would receive the same favorable tariff rates for its products as all other nations in the WTO. Other countries also would have had to follow WTO rules in trade disputes with Russia, protecting it from unilateral sanctions not authorized by the WTO. The United States is the only country that has not signed off on Russia's membership.

Most recently, The Kingdom of Tonga was admitted as a member of the WTO in December 2005.

China was admitted in 2001.

National Bureau of Economic Research Economist: The U. S. Government is Bankrupt

The Federal Reserve Bank of St. Louis has posted at its web site a paper that warns the United States government is technically bankrupt.

"...the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds'' writes NBER economist and Boston University professor Laurence Kotlikoff.

In the paper, Kotlikoff continues:

"There are 77 million baby boomers now ranging from age 41 to age 59. All are hoping to collect tens of thousands of dollars in pension and healthcare benefits from the next generation. These claimants aren’t going away. In three years, the oldest boomers will be eligible for early Social Security benefits. In six years, the boomer vanguard will start collecting Medicare. Our nation has done nothing to prepare for this onslaught of obligation.... Countries can and do go bankrupt. The United States, with its $65.9 trillion fiscal gap, seems clearly headed down that path."

This paper should be read to understand the tremendous obligations that are ahead as baby boomers begin to retire. However, we disagree with Professor Kotlikoff's assessment that this may force the United States government into bankruptcy. The government, through the Federal Reserve, will simply print as much money as needed to meet its obligations. This, of course, will be highly inflationary-which also suggests an alternative investment strategy, gold.

If you think the government is going to be able to pay off its baby boomer obligations without inflating the currency, then just sit back and wait for your social security check to roll in. If on the other hand, a $65.9 trillion fiscal gap suggests that the government will be doing quite a bit of money printing, then you need to get your hands on some money the government can't print: gold.