Ben's Migraine

A series of really bad economic reports have come out in the last two weeks, all indicating that deflation and fear have got the real economy in a vice grip and is cranking down hard.

* Yesterday we got the existing home sales report; it was expected to be down because the tax credit for first time home buyers had ended, and boy were they right: May existing home sales plunged far below expectations, coming in at an annualized -2.2% rate, compared to consensus of +6.0%, and a revised 8% in April.

* Then today we get the new housing numbers, which were also expected to be bad, and oh baby were they: New home sales plunged by an unprecedented 32.7%, nearly double the expected -18.7, compared to a previous reading of 14.7%. The median sales price of new houses sold in May 2010 was $200,900, lowest since December 2003, and drop of 9.6% YoY. This number represented the worst plunge on record.

* In an attempt to punish those who simply walked away from their mortgages, Fannie today announced that they will no longer back the mortgages of strategic defaulters: "it won't back new mortgage loans for seven years for homeowners who walk away from their mortgages although they were able to pay or did not seek a workout in good faith with their lender." This is an outstanding way to ensure that perhaps a million people who are employed and are looking to repurchase homes at a lower price will be effectively locked out of the housing markets. This should help the above listed home sales numbers in the months to come like gasoline does a forest fire.

* The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $362.5 billion, a decrease of 1.2 percent from the previous month. This is 14%/year if this keeps up. Bernanke hated this report.

* The Baltic Dry Index, which measures shipping tonnage and thus manufacturing and trade activity, fell 3.5% in May, the sixth month in a row it's declined and the steepest monthly decline since early 2009. This is a very important measurement of how the economy is doing; many economists list this index as well as railroad traffic indices (which are also declining) as the most important of all statistics printed.

* Only half of small businesses that tried to borrow last year got all or most of what they needed, according to a survey by the National Federation of Independent Business. In the mid-2000s, 90% of businesses said they got the loans they needed. The requests banks are getting these days are "disproportionately from businesses that we would have a difficult time lending to with confidence we'd get the money back," says Marc Bernstein, who heads small-business lending at Wells Fargo & Co. This is their way of saying "it's simply easier and safer to loan to Uncle Sam than risk loaning to a business in this sh!tty environment".

* Europe: Portugal's 5 year auction which came in at 4.657%, almost a full percentage point worse compared to the last auction on May 26, which closed at an average yield of 3.70%. Markit reporting that Greek Bund Spreads have suddenly exploded by 65 bps to 776, the highest since May 7, and inches away from the all time record of 900 bps, even as CDS blows out to over 900 bps. The Greek 5-Year Bond reached a yield of 10.77 percent. The Greeks, Portuguese and Spanish Governments should just get on with the end game here.. default and be done with it. With these rates, Greece has essentially been frozen out of the credit markets; Portugal and Spain are rapidly approaching Athenian levels of credit worthlessness, if not their levels of sheer incompetence in government and book keeping skills. European (especially Spanish) banks are not able to get interbank loans except through the ECB. This alone is a really bad sign.

* The ten year US Bond is nearing a record low of 3.1%; this is happening because of fear in the markets which cause people to pile into US Gov't Bonds and out of other riskier asset classes. This sucks cash out from the real economy as investors are less and less willing to loan to or invest in anything not backed by Uncle Sam.

Any one of these would've warranted an article from me; all of them together are a sign that things are going south much faster than even the doomsayers anticipated, much of this caused by deflation and flagging confidence. Ben Bernanke, flask in hand washing down fistfulls of ibuprofin pills, will not sit idly by for long. The money helicopters are being fueled up as we speak; caution to those of you who are long the USD. I kinda think we might see some sort of Lehman-era business lending facility reinstated. I can also see him dipping into the Muni Bond markets to give state and local governments a helping hand as well.