US IN GREA GREAT DEPRESSION

The news that frequent CNBC guest Peter Yastrow of Yastrow Origer (and formerly with DT Trading) told CNBC that “We’re on the verge of a great, great depression. The [Federal Reserve] knows it” is going viral today.

But this is not news to anyone who has been paying attention.

I provided details last month:

As I noted in January, the housing slump is worse than during the Great Depression.

As CNN Money points out today:

Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.”

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they’re “running out of money” at a faster clip, he said.

“Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.

And – in case you still think that the 29% of Americans who think we’re in a depression are unduly pessimistic – take a look at what I wrote last December:

The following experts have – at some point during the last 2 years – said that the economic crisis could be worse than the Great Depression:

Fed Chairman Ben Bernanke
Former Fed Chairman Alan Greenspan (and see this and this)
Former Fed Chairman Paul Volcker
Economics scholar and former Federal Reserve Governor Frederic Mishkin
The head of the Bank of England Mervyn King
Nobel prize winning economist Joseph Stiglitz
Nobel prize winning economist Paul Krugman
Former Goldman Sachs chairman John Whitehead
Economics professors Barry Eichengreen and and Kevin H. O’Rourke (updated here)
Investment advisor, risk expert and “Black Swan” author Nassim Nicholas Taleb
Well-known PhD economist Marc Faber
Morgan Stanley’s UK equity strategist Graham Secker
Former chief credit officer at Fannie Mae Edward J. Pinto
Billionaire investor George Soros
Senior British minister Ed Balls
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States and Cities In Worst Shape Since the Great Depression

States and cities are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven’t been this bad for state and local governments since the 30s.

Loan Loss Rate Higher than During the Great Depression

In October 2009, I reported:

In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression.

In a new report, Moody’s has just confirmed (as summarized by Zero Hedge):
The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severe than a shortage of liquidity.

Unemployment at or Near Depression Levels

USA Today reports today:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.

Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.

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The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations.

***

“The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.

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Although “this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.

It is difficult to compare current unemployment with that during the Great Depression. In the Depression, unemployment numbers weren’t tracked very consistently, and the U-3 and U-6 statistics we use today weren’t used back then. And statistical “adjustments” such as the “birth-death model” are being used today that weren’t used in the 1930s.

But let’s discuss the facts we do know.

The Wall Street Journal noted in July 2009:
The average length of unemployment is higher than it’s been since government began tracking the data in 1948.
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The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The Christian Science Monitor wrote an article in June entitled, “Length of unemployment reaches Great Depression levels“.

60 Minutes – in a must-watch segment – notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery this flat. 60 Minutes points out that unemployment has been at 9.5% or above for 14 months:

Pulitzer Prize-winning historian David M. Kennedy notes in Freedom From Fear: The American People in Depression and War, 1929-1945 (Oxford, 1999) that – during Herbert Hoover’s presidency, more than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years.

Blytic calculates that the current average duration of unemployment is some 32 weeks, the median duration is around 20 weeks, and there are approximately 6 million people unemployed for 27 weeks or longer.

Moreover, employers are discriminating against job applicants who are currently unemployed, which will almost certainly prolong the duration of joblessness.

As I noted in January 2009:

In 1930, there were 123 million Americans.

At the height of the Depression in 1933, 24.9% of the total work force or 11,385,000 people, were unemployed.

Will unemployment reach 25% during this current crisis?

I don’t know. But the number of people unemployed will be higher than during the Depression.

Specifically, there are currently some 300 million Americans, 154.4 million of whom are in the work force.

Unemployment is expected to exceed 10% by many economists, and Obama “has warned that the unemployment rate will explode to at least 10% in 2009″.

10 percent of 154 million is 15 million people out of work – more than during the Great Depression.

Given that the broader U-6 measure of unemployment is currently around 17% (ShadowStats.com puts the figure at 22%, and some put it even higher), the current numbers are that much worse.

But it is important to look at some details.

For example, official Bureau of Labor Statistics numbers put U-6 above 20% in several states:

California: 21.9
Nevada: 21.5
Michigan 21.6
Oregon 20.1
In the past year, unemployment has grown the fastest in the mountain West.

And certain races and age groups have gotten hit hard.

According to Congress’ Joint Economic Committee:

By February 2010, the U-6 rate for African Americans rose to 24.9 percent.

34.5% of young African American men were unemployed in October 2009.

As the Center for Immigration Studies noted last December:

Unemployment rates for less-educated and younger workers:

As of the third quarter of 2009, the overall unemployment rate for native-born Americans is 9.5 percent; the U-6 measure shows it as 15.9 percent.
The unemployment rate for natives with a high school degree or less is 13.1 percent. Their U-6 measure is 21.9 percent.
The unemployment rate for natives with less than a high school education is 20.5 percent. Their U-6 measure is 32.4 percent.
The unemployment rate for young native-born Americans (18-29) who have only a high school education is 19 percent. Their U-6 measure is 31.2 percent.
The unemployment rate for native-born blacks with less than a high school education is 28.8 percent. Their U-6 measure is 42.2 percent.
The unemployment rate for young native-born blacks (18-29) with only a high school education is 27.1 percent. Their U-6 measure is 39.8 percent.
The unemployment rate for native-born Hispanics with less than a high school education is 23.2 percent. Their U-6 measure is 35.6 percent.
The unemployment rate for young native-born Hispanics (18-29) with only a high school degree is 20.9 percent. Their U-6 measure is 33.9 percent.
No wonder Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – says that African-Americans and high school dropouts are experiencing depression-level unemployment.

And as I have previously noted, unemployment for those who earn $150,000 or more is only 3%, while unemployment for the poor is 31%.

The bottom line is that it is difficult to compare current unemployment with what occurred during the Great Depression. In some ways things seem better now. In other ways, they don’t.

Factors like where you live, race, income and age greatly effect one’s experience of the severity of unemployment in America.

Food Stamps Replace Soup Kitchens

1 out of every 7 Americans now rely on food stamps.

While we don’t see soup kitchens, it may only be because so many Americans are receiving food stamps.

Indeed, despite the dramatic photographs we’ve all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression.

In addition, according to Chaz Valenza (a small business owner in New Jersey who earned his MBA from New York University’s Stern School of Business) millions of Americans are heading to foodbanks for the first time in their lives.

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The War Isn’t Working

Given the above facts, it would seem that the government hasn’t been doing much. But the scary thing is that the government has done more than during the Great Depression, but the economy is still stuck a pit.

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The amount spent in emergency bailouts, loans and subsidies during this financial crisis arguably dwarfs the amount which the government spent during the New Deal.

For example, Casey Research wrote in 2008:

Paulson and Bernanke have embarked on the largest bailout program ever conceived …. a program which so far will cost taxpayers $8.5 trillion.
[The updated, exact number can be disputed. But as shown below, the exact number of trillions of dollars is not that important.]

So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:
As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.

Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!

In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.

The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion.

CNBC confirms that the New Deal cost about $500 billion (and the S&L crisis cost around $256 billion) in inflation adjusted dollars.

So even though the government’s spending on the “war” on the economic crisis dwarfs the amount spent on the New Deal, our economy is still stuck in the mud.

Why Haven’t Things Gotten Better for the Little Guy?

Government leaders make happy talk about how things are improving, but happy talk cannot fix the economy.

Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:

Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today

Inequality was another major cause of downturns – including the Depression – but inequality is currently worse than during the Depression
There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. See this and this. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.

RIL hires SBI, other banks to raise over $ 1billion loan

Billionaire industrialist Mukesh Ambani-led Reliance Industries is believed to have hired banking majors SBI , Bank of America and Citigroup among others to raise debt of about $ 1.1 bn (about Rs 5,000 crore).

The energy-to-retail conglomerate plans to utilise the fresh five-year term loan to refinance its existing higher interest rate debts, sources said.

When contacted, a company spokesperson did not comment on the debt raising plans.

The banks hired for raising $ 1.1 bn of loans include SBI, Stanchart, Bank of America, RBS, HSBC, ANZ Bank, Bank of Nova Scotia, Bank of Tokyo Mitsubishi UFJ, Barclays, BNP Paribas, Citigroup, DBS and Sumitomo Mitsui.

Earlier this month, Chairman and MD Mukesh Ambani said at the company's AGM that RIL would become debt-free on net basis in the current financial year ending March 2012.

RIL had an outstanding debt of Rs 67,397 crore ($ 15.1 bn) as of March 31, 2011, as against Rs 62,495 crore ($ 13.9 bn) a year ago.

At the same time, RIL had cash and cash-equivalents of Rs 42,393 crore ($ 9.5 bn) as on March 31 this year, which was nearly double the level seen a year ago.

The company began a process last month to raise fresh loans worth about $ 1.5 bn.

Out of this, loans worth about $ 1.1 bn are for repaying its existing loans maturing in next two years, while the company would also look at further $ 400-500 million of fresh borrowings from abroad.

Last year in October, RIL had raised $ 1.5 bn for the first time through bonds denominated in US dollars.

While it raised $ one bn through 10-year bonds, another $ 500 million were arranged through sale of 30-year bonds. These funds were raised through RIL's wholly-owned subsidiary Reliance Holding USA Inc.

This $ 1.5 bn bond sale was the company's first such bond issue after 13 years. Besides, it was the largest ever public market offshore bond offering by RIL and largest ever corporate bond from India.

This debt raising exercise was followed by plans to raise funds through sale of bonds in global markets by other Indian companies.

These companies included the likes of Anil Ambani group firm Reliance Communications , ICICI Bank , Axis Bank , Essar Energy, JSW Steel and IDBI Bank .

Tatas overtake both Ambani groups together on market wealth

Tatas may not be known for being on the stock-based rich lists, but changing market dynamics have led to the salt-to-software conglomerate overtaking the combined market wealth of the two Ambani groups put together.

The share prices have been tumbling in recent past for both the Reliance groups, led by the billionaire brothers Mukesh and Anil Ambani, and the analysts put the blame on a string of controversies surrounding them for many months now.

On the other hand, a host of Tata group firms have grown stronger, in terms of stock market valuation, while shrugging off an overall bearish sentiments in the broader market and even some controversies related to them.

In the process, the stock market wealth of the entire Tata group has grown to close to Rs 4,40,000 crore -- highest for any corporate house and bigger than the combined figure of the two Ambani groups together at about Rs 3,67,000 crore.

This marks a sharp reversal of the things seen about an year ago, when Tatas were smaller than the Mukesh Ambani group alone. Tatas have about 30 listed companies, while the Mukesh Ambani group has only two.

As per the latest market value of individual groups, Tatas rank on the top, followed by Mukesh-led Reliance group at second position with about Rs 2,85,000 crore.

The Reliance Anil Dhirubhai Ambani Group (R-ADAG), which ranked third after the Mukesh-led RIL group and Tatas a year ago, does not figure even among the top 10 groups now.

In the past one year, R-ADAG's market wealth has plunged by over Rs 60,000 crore to close to Rs 82,000 crore now.

The Mukesh-led group's valuation has also fallen by about Rs 73,000 crore, but that of Tatas has grown by more than Rs 1,00,000 crore in the same period.

The Tata companies that have added significant market wealth in the past one year include TCS , Tata Motors , Tata Steel , Titan, Tata Coffee , Tata Chemicals and Rallis.

On the other hand, all the companies of the two Ambani groups, barring the smallest of them Reliance Broadcast Network , have lost market value since July last year.

In the MDA group, Reliance Industries has lost about Rs 72,000 crore, while the only other listed firm Reliance Industrial Infra Ltd has also lost about Rs 650 crore.

Among ADAG firms, the losses are about Rs 21,000 crore for RCOM, about Rs 20,000 crore for R-Power, Rs 14,000 crore for R-Infra and over Rs 5,000 crore for Reliance Capital .

While the Reliance companies have been traditionally known as very aggressive when it comes to the stock market, Tatas have been mostly known as conservatives on this front.

Investors have historically preferred Reliance stocks for wealth creation, but situation is changing drastically as both Ambani groups are giving below-market returns.

Amid the dwindling investor interest in Reliance stocks, Tatas have not been the only beneficiaries but a whole lot of groups known to be professionally-run have also gained.

These include the likes of the Birla, Mahindra, HDFC, Adani, Bharti, L&T, Jindal and Bajaj groups, experts said.

"Reliance stocks are more controversial at the moment, whereas others like HDFC or Mahindra groups are not," Religare Securities Executive VP (Retail Research) Rajesh Jain said.

"Moreover, a weak stock is more prone to get affected by any negative news. That implies to RIL and ADAG stocks. RIL has underperformed the market in the past one year," he added.

Way2Wealth's Chief Operating Officer Ambareesh Baliga also said that it was negative set of news playing spoilsport for the ADAG stocks.

"For RIL, it was the lower gas production at the KG-D6 basin which has discouraged the investors," Baliga said.

Foreign investors are still 'sold' on India

Contrary to popular perception, overseas investors' love affair with India has hardly soured. Or so says Christopher Wood , the Hong Kong-based CLSA equity strategist with something of a rock star reputation in the Asian investing world for the astute commentary he dispenses in his widely read newsletter, Greed & Fear. If anything, the top-ranked analyst with his trademark shock of curly, shoulderlength, salt-and-pepper hair finds the absence of selling pressure from foreign investors "remarkable", considering the huge disappointment that investing in the Indian market has been for foreigners in 2011.

The numbers tell the story: by June 10 this year, the Sensex had slumped about 11% in US dollar terms from end 2010, securing a place alongside Egypt and Tunisia among the world's 10 worst-performing equity markets (see graphic 1).
Yet, foreign institutional investors (FIIs), who poured $29 billion into Indian equities last year, haven't panicked. Their cumulative net investment in India up to June 9 was $52.5 million.

It's not a number to write home about - not only is it a fraction of the money that the Indonesian and the Taiwanese markets have received, even Pakistan has done better than India (see graphic 2). But although net foreign buying, which subtracts sales from purchases, has been in the negative territory for most of this year, the divestment by foreigners has been relatively benign compared with 2008, a year most investors in the Indian - and indeed global - markets would like to forget.

Wood says he can only attribute the resilience of foreign investors "to the continuing belief in the potential of the Indian growth story, both from a top-down and bottom-up perspectives".

Rational To Bet On India?

Is this a rational belief? On that question, opinion is divided.

Growth in the Indian economy is slowing. Jim Walker of Asianomics in Hong Kong cites the 0.1% dip in gross fixed capital asset formation in the March quarter, the first decline in almost two years in this broad measure of investment demand across the economy, to conclude that "capital expenditure cycle in India has turned decisively for worse".

Even maintaining 8% expansion in gross domestic product this year will prove "challenging", notes Walker.
The deterioration in investment demand is also evident in corporate order books. According to data compiled by Morgan Stanley analysts Akshay Soni and Pratima Swaminathan, order backlogs for engineering and construction companies show that the recovery from the credit crisis that had begun in the December 2009 quarter - after the United Progressive Alliance (UPA) government returned to power in May of that year minus the baggage of the Left parties - began to peter out just a few months later at the onset of the European debt crisis. The slowdown in capital-goods order growth worsened in the final months of 2010 and the first quarter of calendar year 2011 as sordid tales of widespread corruption started surfacing - the 2G spectrum allocation scam; the loans-againstbribes swindle; the Adarsh Housing Society scandal; the Commonwealth Games loot; the list goes on.

Graft and bad governance are only part of the story. Investor sentiment has also been shaken by the rising cost of capital. Aggressive interest-rate increases by the Reserve Bank of India (RBI) have reduced the expected return on equity capital in many infrastructure projects to below the hurdle rate at which investors would like to undertake these risky endeavours.

target tips for equity

Indian share market

Nearly half of US think new recession is coming: Poll

The nation`s gloom over economic conditions poses a serious threat to President Obama's re-election chances, according to a new NBC News/Wall Street Journal poll.
The survey shows that nearly half of all Americans, and two-thirds of Republicans, believe the country is headed back into recession. A 54% majority disapproves of Obama's handling of the economy.
"The public is incredibly pessimistic about the future," said Peter Hart, the Democratic pollster who conducts the NBC/WSJ poll with his Republican counterpart Bill McInturff.
Added McInturff, "The president has substantial advantages, but is still in for a difficult race."
President Obama's overall job approval dipped back to 49% from 52% in May. That signals that the popularity boost he received after the special forces raid that killed Osama bin Laden has faded.
That 49% approval remains higher than some of his predecessors received at similar points when the economy was struggling.
Hart pointed toward the public`s positive feelings for Obama personally, and the fact that 62% of Americans say economic conditions reflect circumstances that he inherited rather that those he caused.
But the challenge facing the president was evident when voters are asked whether they intend to support him or the Republican candidate in 2012. Obama led by a narrow 45 to 40 margin, down from 49% to 30% in May.
His leading Republican challenger, former Gov. Mitt Romney of Massachusetts, is emphasizing the economy almost exclusively in his campaign. Romney leads among prospective GOP primary voters with 30%, compared to 14% for Sarah Palin, 12% for Herman Cain, 7% for Ron Paul, and 6% for Newt Gingrich.
Tim Pawlenty and Rick Santorum both received 4%, Michelle Bachmann 3%, and Jon Huntsman, who plans to enter the race next week, 1%.
Some 45% of Republican voters called themselves dissatisfied with the field of presidential candidates, more than double the proportion who answered that way at a similar point in the 2008 campaign.
That signals an opening for potential contenders who have not yet entered the race, including Palin, Huntsman, and Texas Gov. Rick Perry.
The survey showed continued deep concern about government spending; some 63% said Washington should focus more on reducing the deficit even if it slows economic recovery, and a 45% plurality of Americans believe the 2009 economic stimulus didn`t help the economy.
On raising the federal debt ceiling, Americans are split. A 39% plurality said it should not be raised, while 28% said it should be and 31% said they didn`t know enough.
The telephone survey of 1,000 Americans, conducted June 9-13, carries a margin for error of 3.1% points.

JK Paper raises Rs 225 cr thru FCCB

JK Paper has raised close to Rs 225 crore through the foreign currency convertible bonds (FCCB) route on a private placement basis to three investors — FMO (Netherlands), DEG (Germany) and Proparco (France).

The issue has been priced at Rs 65 a share with a face value of Rs 10 each. FCCBs may be converted into equity anytime after three and a half years from the date of issue. The stock closed at Rs 49.05 on the BSE, a fall of about one per cent.

The instrument would be repaid between the fifth and the seventh year, if the FCCBs are not converted.

The FCCB would part fund JK Paper's Odisha plant that is to be set up at an estimated project cost Rs 1,653.37 crore.

The project entails setting up of a new or augmented fibre line which can produce approximately 2,15,000 tpa of pulp and a paper machine for manufacturing 1,65,000 tpa of wood free copy paper

Alpen Capital India Private Ltd acted as a merchant banker, along with Rabo India to issue these unsecured FCCBs