Central Bank Intervention, CA July Foreclosures, and Consumers Tap their Credit Cards

Mystery Solved (7 August 2008 — GoldMoney Alert from James Turk)

So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here's the proof.

When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 million of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 million, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve's custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.

To summarize, foreign central banks followed up their ‘words’ over the past few weeks with $52 billion of direct dollar support over only a three-week period. And this represents only the purchases we know about. The BIS (Bank of International Settlements, the ‘bankers bank’) has several openly published research papers that explore the best ways for central banks to manipulate currencies using proxy banks to hide their tracks.

At any rate, they are desperately trying to manage the poor effects of their past decisions by manipulating the dollar, and, by extension, commodities, stocks, and bonds. So far, they’ve succeeded by driving paper assets in a positive direction and commodities in a steeply negative direction.

My view? I think this level of intervention and central-style planning is destined for failure and that the central banks are ill-advised in their efforts. Instead of helping to reduce the very imbalances and moral hazards that brought us to the brink of systemic collapse, they are now encouraging a deeper foray into those territories.

Yet, despite all of these high-level market interventions, houses are still being foreclosed at record rates and consumers are plunging deeper into debt. It would seem that the central banks are stuck in the past and are trying to wag the economic dog with the market tail.

Record Foreclosures Sweep CA in July (Aug 7 – Mr. Mortgage Market)

July was another record month for foreclosures in the state of CA with all hell breaking lose and banks taking back roughly 26,500 homes for $12.5 billion. ’Record-breaking’ is not a good thing in the foreclosure universe. This 25% increase breaks all records ever posted and all foreclosure estimates.

This $12.5 billion in foreclosures were from Notice-of-Defaults (NOD) from the February time frame. It takes roughly 140 days in CA to go from NOD to foreclosure auction currently due to the back log. In Feb we had a drop in NOD’s to about 37k due to Feb being a short month. But from March through June we saw NOD’s shoot back up to record levels of about 43k per month (see chart below). This means that the number and dollar amount of foreclosures from Sept through Oct at least should be even greater than July by 10-20% depending on fluctuating cure rates.

This is the reality on the street. The largest state with the highest house prices is experiencing foreclosure rates that are beyond all previous records. These will translate into massive dollar losses and declines in economic activity. As Mr. Mortgage makes clear, there is worse in store, as foreclosures are preceded by so-called Notices of Default (NODs).

Against this, we are to believe that “investors” have suddenly decided to sell yen in vast quantities in preference for the dollar, and to go on a stock buying spree that saw Home Depot advance 8% today.

What’s next? Unemployment at 15% and the Dow at 20,000? I wouldn’t put it past the desperate bankers as they seek to paper over reality using whatever tricks they can.

Consumer Debt Grows At Fastest Rate in 7 Months

U.S. consumer credit expanded at the fastest rate in seven months in June as Americans turned to their credit cards to keep up spending in the face of rising food and energy costs, a report Thursday showed. June consumer credit rose $14.33 billion, or at a 6.7 percent annual rate, to $2.586 trillion, the Federal Reserve said.

The vaunted US consumer, cut off from Refi money and HELOC borrowing, has turned back to credit cards as the fuel to maintain consumption. This shows two things. First, that we are addicted to living on borrowed money, and second, that this behavior won’t change until it is forced to change. This is why I am so dead-set against the propping of the US imbalances by foreign central banks. It enables exactly the wrong sort of behaviors that created this mess in the first place.

It is time for us to stop consuming beyond our means, both individually and as a nation. As we saw with gas prices, practically nobody changed their habits until prices forced the issue. Here, too, the cure for excess borrowing is to hike the cost of borrowing.

I roughly calculate that US borrowing costs would be twice as high if we didn’t have foreign central banks buying tens of billions of dollars worth of US debt each week, serving both to drive down their currencies in relation to the US dollar and to keep US interest rates low, thereby enabling a nation of over-consumers to continue digging at the bottom of a very deep hole.