Oh Tidings of Economic ... chaos.

Just a thought ... do you think that if Hil-liar jumps on some lunatic liberal bandwagon, makes a film and then does some speeches, that she too can win a Nobel Prize? I mean, wouldn't that just take the biscuit?

Back to the World Economy....

6 large(ish) American public companies have gone "Chapter" in the last 15 days or so (Tropicana Entertainment, Linens n Things, Kimbal Hill , and some others, banks too). You know things are bad when casinos go Chapter 11.

The debt of 174 US public companies is trading at "Distress Levels" with spreads over 1000bp over Treasuries.

And credit card debt has jumped almost 7% in Q1 '08 to almost a trillion dollars. Or almost $6,000 for every American between the ages of 18 and 65. Good news for the banks that are receiving interest rates of 18% on the debt, but bad news for those institutions relying on getting paid back that principal: personal bankruptcies are climbing at a frightening rate.

Vallejo, CA, a smallish city of 100,000 or so inhabitants just declared Chapter 9 seeking protection. Why? The usual: its revenues no longer match its spending (typically spending on schools eat up the lion's share of small town revenues). How did this come to pass? Property prices have tanked, sending the chief source of revenue -- property tax -- into a tailspin. And as we all know, when you get used to a certain level of spending, it is very hard to wean yourself from earlier extravagance. And teachers are not going to let you take away their perks and bennies, the PTA won't think about poor Johnny and Sarah having to pay for their school lunches or the football team go without the newest HDD video gear. Today, the various municipal unions came back to the bargaining table ... they were afraid to lose their contracts entirely. Those contracts contained clauses guaranteeing 20%+ pay increases over three years.

And hundreds of California towns and cities are now in the same boat. And California is not alone in this "jam" either. Just about every zone of inflated housing prices will feel the same pinch -- all along the "Sunbelt" -- Florida, Texas, Arizona have all had astounding property value spikes. And the local governments shared in the new-found wealth ... except that it was bubble wealth, fool's gold, hocus-pocus, the Emperor's Clothes. As soon as people stopped believing the there was always someone who would buy their $1,000,000 3 br "ranch" for $1,200,000, the rot set in. But spending -- the politician's universal salve -- had already expanded to soak up "surplus" wealth. It had to, otherwise the town next door would have better schools and higher property prices...!

Think we are out of the woods? I doubt it. Goldman Sachs (who called the sub-prime mess and sold their holdings, positioning themselves to make windfall profits while Citi and Merrill thought there was always going to be a "bid") believe that the housing market has a way to go yet. Goldman figures a national retrenchment of property prices of 25% or so -- and we have seen barely 15% -- and places like California can see far higher price deflation. Maybe 50% depending on the area. And all this while at least 10 million households are already into negative equity. Can you say "default?"

Think that oil is a one-way street? Think you'll see $200 oil? Think again. You see, that price is predicated on China: China's thirst for oil is staggering. And that thirst is predicated on an ever-increasing global demand for Chinese goods and a Chinese economy that is growing at 8-10% p.a. But with the U.S. economy about to merde-the-bed, and the UK and many parts of EU close behind, that level of growth might be over-optimistic. A fall in demand for Chinese goods might lead to over capacity (its already there) by the Fall, and that will cause some problems ... and a drop in oil demand. And what happens when too many fat men try to squeeze through the exit door of their long positions? Something similar to housing prices in San Jose, Ca., but worse and faster. We may be reaching a point where the demand elasticity of oil becomes a little less elastic.

But don't expect lower oil prices to translate to anything that the US consumer can use right now. It can't and won't. Many U.S. households are spending over 10% of their disposable income on energy. And that was before the latest price rises have been calculated in. It may be higher now. Do you suppose that anyone is buying SUVs? No, neither do I. Which in turn means that GM, Chrysler and Ford are about to poop the bed again. Their single most profitable vehicles are about to become large paper weights. Stinking albatrosses. The talk of the town in the United States is the shock of the $100 fill-up. Welcome to the real world. Worse, as we all know GM is a pension company that happens to make automobiles ... and GM's other twin, GMAC is finance company. Just how viable do you think that their position is?

And do you think that the EU will escape this perfect storm? Really? As the UK slides down the tubes of Vallejo, CA -- Mr. Brown is a frikkin idiot, and his taxation-crazy Labour party will preside over this coming financial tsunami -- Europe will not escape. It can't. Spain is merrily sliding into its own morass of over-construction, debt and inflated pricing. France is not far behind -- how many holiday homes can you build or pay for when the foreigners who bought them are going bankrupt at home? Spot the overpriced market there.... How will the French Government pay to appease its restive Muslim hordes in the Banlieus? With what taxes squeezed from what stones? You have to sell goods and services to tax.

Eastern Europe is entirely focused on selling goods and services to a healthy and thriving Western Europe. That's bad news for them, their lot looks increasingly dire. All of a sudden an oil-rich Russian patron does not sound so bad. You can count on improving ties with Russia for them. Speaking of which -- Europe is completely addicted to the heroin of Russian natural gas ... who wants to bet that this particular situation will be left unexploited given an economic slump in Europe?

Not done yet.

Let's look at some really gloomy possibilities: China implodes. IF, all of a sudden, the millions upon millions of Chinese who have moved out of the country to the cities and factories to improve their lives suddenly find themselves out of work. Without jobs and that golden ring that was so recently dangled in front of them. What then? Unrest? Sure. Serious unrest? Uh huh. Chaos? Possibly. But screw them, what might the Chinese Government do? This is where things might really get interesting. Need some cash? How about selling U.S. Treasuries? Or, if executing a major clamp down and some millions of Chinese get squished in the wheels of the Red Army, might one President Barack Obama like to stand up for the rights of the oppressed? Sounds possible if not probable.... The Chinese might wave container loads of U.S. government paper in our faces ... "you want us to sell these?"

For the financially illiterate, that means global financial Armageddon. Prices for U.S. paper go to par with Kleenex and interest rates sky high. I mean 100% and easily higher. Credit completely ceases for all intents and purposes and everyone with debt defaults. Our financial institutions collapse, property collapses, trade credit ceases, and the global economy shrinks by 2/3.... Oil? You couldn't give it away. Who would need it? To run what?

But, I hear you say, the EU is disconnected from the financial cesspit that is American greed and overspending. Ya think? Who else holds American paper? And if all investments in the US go belly up, and America ceases to be an economic engine, do you think that you want to hold Euro-paper? Nah, I didn't think so. Also, did you happen to catch the recent reports on EU-land output? Not exactly storming growth ... in fact, the U.S. looks comparatively robust!

So while the Chinese might threaten a sell-off, the consequences would be too dire for even them to consider. But it would give them unbelievable leverage to do whatever they wanted to in terms of securing whatever position they felt like. Oil -- sure just take it. That's OK with us. Tibet? Where is that? Taiwan? Huh? Isn't that some kind of game like dominoes?

Societe Generale -- not that the French are particularly financially astute -- have an investment banking arm, as do most large banks. They have called for a reduction of equities in their portfolios to 30% and under. Their holdings of AAA bonds (govie and equity) has been raised to 50%. They feel that nothing will be safe in the impending melt-down. Nothing. They are forecasting an equity collapse of 50-75%. Wonder where gold fits into this?

So the recent equity recovery -- maybe the worst is over - could be what we used to call a "dead cat bounce." I sure as hell would not be lunging into a long equity position for at least 6 months to see how this all plays out. Perhaps longer.

Let's think for a moment about triggers for chaos. An invasion of Iran would certainly cause a "Rolaids" moment. Actually, just about any hostile act to or by Israel could set something unpleasant rolling -- love what Hamas and Hezbollah are doing? Wanna bet that they can still kill some Israelis? Or that the Israelis can kill some of them? The Lebanese must be crying at their great city of Beirut being laid to waste again by Shi-ite morons financed by Iran.

The dollar could also be the deciding factor: it is ironic indeed that America should be hostage to the Saudis and Chinese in the determination of "whither the dollar?" The Saudis need a stronger dollar to make sure that the price of oil does not rise too much, because all that does is to cause a still weaker dollar, driving down U.S. demand, and perversely, their dollar-based revenues. China has no wish to see a weaker dollar, because it makes Chinese goods more expensive, decreasing demand for their plastic trash that American love so much and that keeps its factories full. A stronger dollar, however, just means more U.S. paper -- which by now must be seen as worthless to them. A claim on debt that can never be repaid.

But the U.S. Government, likes a weak dollar because it boosts U.S. exports and curtails imports. Nothing like paying back debt with debased currency!! But too weak and the dollar will go into free-fall as people try to sell or hedge their U.S. exposure. What if nobody accepted the dollar anymore as tender for goods and services? What if we had to buy our oil in Euros?

And the fact of the matter is that the dollar is already seriously undervalued on a purchasing power parity basis.... If we could only shake our Chinese junk goods habit. Or outsourcing everything for miniscule gains. What did I hear on the radio this morning? "Summer means outdoors ... and Wal-Mart." Parse that: in the Summer we will go outdoors and need equipment. We will buy that equipment from Wal-Mart (being the lowest cost vendor), which will in turn buy said goods from China or some other "developing nation." Thereby exacerbating our trade deficit, weakening the dollar, increasing China's store of U.S. Treasuries to pay for the goods we cannot afford. Just great. "Wal-Mart, for a better quality of life."

Uh, huh.