U.S. at Risk of Default as Cost to Insure U.S. “Ponzi Scheme” Against Default Rises Sharply

Gold and silver are lower today with profit taking, Chinese bond buying and increased risk appetite being cited for the price falls. Gold is marginally lower in all currencies and is 0.2% lower in U.S. dollar terms despite the dollar coming under selling pressure again this morning. Risky assets have recovered somewhat from recent losses with Asian and European equities and commodities receiving a bid.

Reports of China buying Eurozone government debt may have led to a rise in the euro and equities. However, the scale of sovereign debt risk internationally is such that even significant and ongoing Chinese buying would be unlikely to contain the crisis.

Sovereign debt risks in Europe and internationally continue to threaten the increasingly fragile economic recovery.

While most of the focus has been on Greece and Eurozone sovereign debt issues, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt.

Risk of a U.S. default can be seen in the credit default swap (CDS) market. 1 year U.S. CDS has risen from 23 to 37 or by 60% in the last six trading days (see chart below). According to this measure, the U.S. is now more likely to default than Slovenia and Indonesia in the next year.

In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. The U.S. is considered more likely to default in 5 years time than South Africa, Malaysia, Panama, Brazil and Colombia.

Credit default swaps on U.S. debt saw a flutter of activity in the past week with investors placing 135 trades in U.S. CDS in the week ended May 20, far above previous weeks, when in some cases only one contract trade was seen.

This compares to 360 CDS trades in the week on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy.

Volumes in U.S. CDS have been ticking up, though at about $4 billion they remain significantly lower than the $9 trillion in outstanding U.S. Treasuries.

The squabbling between Democrats and Republicans last week as the U.S. debt ceiling of $14.3 trillion was being reached did not help sentiment towards U.S. debt.

Gold Seek

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China Drought Ignites Global Grain Supply Concerns

A prolonged drought in China could hit grains output in key growing regions, further squeezing global supplies and putting upward pressure on prices, but plentiful domestic wheat stocks will act as a cushion and keep import volumes low.

Analysts are closely watching the weather in China, warning any further supply shocks in the grain markets would fuel a further rally in U.S. corn and wheat futures, already stoked by harsh crop weather in the United States and Europe.

"Parts of China have been too dry and if we did see crop failures in that part of the world they are going to look to the global market for supplies," said Luke Mathews, a commodity strategist with Commonwealth Bank of Australia in Sydney.

"They are going to be looking to North America and Europe and there is significant amount of concern whether those particular countries will be able to satisfy those needs."

Chicago Board of Trade corn has climbed 80 percent since the start of May last year, while wheat has risen around 50 percent. Last week alone corn and wheat jumped more than 10 percent on expectations of a global squeeze in supplies.

CNBC

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http://www.cnbc.com//id/43188915
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The U.S. Postal Service Nears Collapse

Delivery of first-class mail is falling at a staggering rate. Facing insolvency, can the USPS reinvent itself like European services have—or will it implode?

Phillip Herr looks like many of the men who toil deep within the federal government. He wears blue suits. He keeps his graying hair and mustache neatly trimmed. He has an inoffensively earnest manner. He also has heavy bags under his eyes, which testify to the long hours he spends scrutinizing federal spending for the U.S. Government Accountability Office, the congressional watchdog agency where he is Director of Physical Infrastructure Issues. As his title suggests, Herr devotes much of his time to highway programs. But for the past three years he has been diagnosing what ails the U.S. Postal Service.

It's a lonely calling. "Washington is full of Carnegie and Brookings Institutes with people who can tell you every option we have in Egypt or Pakistan," laments Herr, who has a PhD in anthropology from Columbia University. "Try and find someone who does that on the postal service. There aren't many."

Yet Herr finds the USPS fascinating: ubiquitous, relied on, and headed off a cliff. Its trucks are everywhere; few give it a second thought. "It's one of those things that the public just takes for granted," he says. "The mailman shows up, drops off the mail, and that's it."

He is struck by how many USPS executives started out as letter carriers or clerks. He finds them so consumed with delivering mail that they have been slow to grasp how swiftly the service's financial condition is deteriorating. "We said, 'What's your 10-year plan?' " Herr recalls. "They didn't have one."

Congress gave him until the end of 2011 to report on the USPS's woes. But Herr and his team concluded that the postal service's business model was so badly broken that collapse was imminent. Abandoning a long tradition of overdue reports, they felt they had to deliver theirs 18 months early in April 2010 to the various House and Senate committees and subcommittees that watch over the USPS. A year later, the situation is even grimmer. With the rise of e-mail and the decline of letters, mail volume is falling at a staggering rate, and the postal service's survival plan isn't reassuring. Elsewhere in the world, postal services are grappling with the same dilemma—only most of them, in humbling contrast, are thriving.

Bloomberg

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http://www.businessweek.com/magazine/content/11_23/b4231060885070.htm?campaign_id=rss_topStories

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The real economy is already seeing a contraction

Today's GDP numbers have confirmed our previous forecast of a real continued contraction in the economy and second wave in this downturn. First off, any numbers reported by the government should always be taken with heavy skepticism. Let's remember the government applies hedonics and an artificially low inflation rate to this number, so what could look like growth is often time price inflation. We should also note that there is a lot of economic activity from people not paying their mortgages from strategic defaults. Obviously, if you don't have a mortgage payment, you will have a little more spending money to go out to eat, shop, and enjoy the finer things in life.

Low interest rates and government spending also has a lot to do with our current positive GDP. With that said, let's look at the components of the latest official number announced this morning. Three components caught our eyes, 1. Personal expenditures were 21% below expectations, a 2.8% number was forecast and it officially printed at 2.2%. 2. Fixed Investmentsfell from 0.93% to just 0.26% and 3. a build up of inventories which added 1.19% to growth, which was actually revised up from 0.09%. This build up in inventory means that growth was actually less than 1%. If you account for all the fraud in the way they calculate the number, plus the easy money going into the economy from additional fraud, the real economy is already seeing a contraction. As far as the official number, GDP increased at an annual rate of 1.8% in the first quarter of 2011. The last official GDP number from the last quarter of 2010 was 3.1%.
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20 Questions To Ask Anyone Foolish Enough To Believe The Economic Crisis Is Over

If you know someone that is foolish enough to believe that the economic crisis is over and that our economic problems are behind us, just ask that person the following questions....

#1 During the 23 months of the "Obama recovery", an average of about23,000 jobs a month have been created. It takes somewhere in the neighborhood of 150,000 jobs a month just to keep up with population growth. So shouldn't we hold off a bit before we declare the economic crisis to be over?

#2 During the "recession", somewhere between 6.3 million and 7.5 million jobs were lost. During the "Obama recovery", approximately 535,000 jobs have been added. When will the rest of the jobs finally come back?

#3 Of the 535,000 jobs that have been created during the "Obama recovery",only about 35,000 of them are permanent full-time jobs. Today, "low income jobs" account for 41 percent of all jobs in the United States. If our economy is recovering, then why can't it produce large numbers of good jobs that will enable people to provide for their families?

#4 Agricultural commodities have been absolutely soaring this decade. The combined price of cotton, wheat, gasoline and hogs is now more than 3 times higher than it was back in 2002. So how in the world can the Federal Reserve claim that inflation has been at minimal levels all this time?

#5 Back in 2008, banks had a total of 27 billion dollars in excess reserves at the Fed. Today, banks have a total of approximately 1.5 trillion dollars in excess reserves at the Fed. So what is going to happen when all of this money eventually hits the economy?....
#6 If the U.S. economy is recovering, then why are shipments by U.S. factories still substantially below 2008 levels?

#7 Why are imports of goods from overseas growing much more rapidlythan shipments of goods from U.S. factories?

#8 According to Zillow, the average price of a home in the U.S. is about 8 percent lower than it was a year ago and that it continues to fall about 1 percent a month. During the first quarter of 2011, home values declined at the fastest rate since late 2008. So can we really talk about a "recovery" when the real estate crisis continues to get worse?

#9 According to a shocking new survey, 54 percent of Americans believe that a housing recovery is "unlikely" until at least 2014. So how is the housing industry supposed to improve if so many people are convinced that it will not?

#10 The latest GDP numbers out of Japan are a complete and total disaster. During the first quarter GDP declined by a stunning 3.7 percent. Of course I have been saying for months that the Japanese economy is collapsing, but most mainstream economists were absolutely stunned by the latest figures. So will the rest of the world be able to avoid slipping into a recession as well?

#11 Next week, Republicans in the House of Representatives are going to allow a vote on raising the debt ceiling. Everyone knows that this is an opportunity for Republican lawmakers to "look tough" to their constituents (the vast majority of which do not want the debt ceiling raised). Everyone also knows that eventually the

Republicans are almost certainly going to cave on the debt ceiling after minimal concessions by the Democrats. The truth is that neither "establishment Republicans" nor "establishment Democrats" are actually serious about significantly cutting government debt. So why do we need all of this political theater?

#12 Why are so many of our once great manufacturing cities being transformed into hellholes? In the city of Detroit today, there are over 33,000 abandoned houses, 70 schools are being permanently closed down, the mayor wants to bulldoze one-fourth of the city and you can literally buy a house forone dollar in the worst areas.

#13 According to one new survey, about half of all Baby Boomers fear that when they retire they are going to end up living in poverty. So who is going to take care of them all when the money runs out?

#14 According to the U.S. Bureau of Labor Statistics, an average of about 5 million Americans were being hired every single month during 2006. Today, an average of about 3.5 million Americans are being hired every single month. So why are our politicians talking about "economic recovery" instead of "the collapse of the economy" when hiring remains about 50 percent below normal?

#15 Since August, 2 million more Americans have left the labor force. But the entire period from August to today was supposed to have been a time of economic growth and recovery. So why are so many Americans giving up on looking for a job?

#16 According to Gallup, 41 percent of Americans believed that the economy was "getting better" at this time last year. Today, that number is at just 27 percent. Are Americans losing faith in the U.S. economy?

#17 According to the U.S. Census, the number of children living in poverty has gone up by about 2 million in just the past 2 years, and one out of every four American children is currently on food stamps. During this same time period, Barack Obama and Ben Bernanke have told us over and over that the U.S. economy has been getting better. So what is the truth?

#18 America has become absolutely addicted to government money. 59 percent of all Americans now receive money from the federal government in one form or another. U.S. households are now receiving more income from the U.S. government than they are paying to the government in taxes. Americans hate having their taxes raised and they hate having their government benefits cut. So is there any hope that this will ever be turned around before disaster strikes?

#19 The combined debt of the major GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to 6.4 trillion in 2011. How in the world is the U.S. government going to be able to afford to guarantee all of that debt on top of everything else?

#20 If the U.S. national debt (more than 14 trillion dollars) was reduced to a stack of 5 dollar bills, it would reach three quarters of the way to the moon. The U.S. government borrows about 168 million dollars every single hour. If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days. So how in the world can our politicians tell us that everything is going to be okay?

The Economic collapse

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Obama: We're Working on Gun Control 'Under the Radar'

On March 30, the 30th anniversary of the assassination attempt on President Ronald Reagan, Jim Brady, who sustained a debilitating head wound in the attack, and his wife, Sarah, came to Capitol Hill to push for a ban on the controversial "large magazines." Brady, for whom the law requiring background checks on handgun purchasers is named, then met with White House press secretary Jay Carney. During the meeting, President Obama dropped in and, according to Sarah Brady, brought up the issue of gun control, "to fill us in that it was very much on his agenda," she said.

"I just want you to know that we are working on it," Brady recalled the president telling them. "We have to go through a few processes, but under the radar."


Read more: http://nation.foxnews.com/guns/2011/05/25/obama-were-working-gun-control-under-radar#ixzz1NV0ktohA
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US Economy Damaged More Than Thought by Japan Quake

The Japanese earthquake and tsunami in March appears to have damaged the US economy much more than expected and could set back hopes for a robust recovery.

A series of analysts have recently cut their second-quarter gross domestic product projections, based in large part on impact that the Japan disaster is having on the automotive industry.

Factory shutdowns and ensuing problems with getting parts have slowed vehicle production, a move likely to drive up prices, increase unemployment and slow consumer spending, according to recent projections from economists at Goldman Sachs and Deutsche Bank.

Japan is having an impact across a swath of the economy, but is being felt most acutely on vulnerable Detroit automakers, whose business was just beginning to recover when the disaster hit March 11.

"As expected, the hardest-hit sector of the economy appears to be motor vehicle production," Goldman Sachs economist Andrew Tilton wrote in a research note for clients. "Shortages in supply of the key components—notably auto microcontrollers—have led to production shutdowns at US facilities, particularly those owned by Japanese manufacturers."

Consequently, Goldman has cut its second-quarter GDP estimates to 3.0 percent—growth for sure, but below trend and off hopes that the consensus had as the year progressed.

An economic report Wednesday from the US Commerce Department reflected how deep the damage was running.

Orders for durable goods—long-lasting items such as cars and appliances—tumbled 3.6 percent in April, much worse than the 2.2 percent consensus forecast and indicative of how much slowdown effects from Japan are hampering the US recovery.

New orders for transportation equipment plunged 9.5 percent, while shipments for transportation equipment fell 3 percent.
CNBC

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http://www.cnbc.com//id/43169530
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