Economists at HSBC, Hong Kong Shanghai Bank Corp., believe a bubble exists in real estate. That is a far different appraisal from what the Federal Reserve Bank of New York said last week. The Fed said it found little evidence of a nationwide housing bubble, but then again, the Fed has always had trouble discerning truth from fiction. HSBC says house prices relative to income, rent, replacement-cost and home equity have all set new highs that are unsustainable. The 47-page report from HSBC said a “hard” landing is typical after a housing bust because of the wealth effects, which can affect consumers’ spending from real estate, are more powerful than from stocks.

            The US government has refused to adequately fund the INS and the Border Patrol. That means millions of illegals are flowing across our border and worse yet, illegal aliens are being preyed upon more then ever. After taking them across, cayotes lock these unfortunates up and force relatives to pay higher fees or they will not be released. Just in the past few months around Los Angeles, authorities have discovered more than 650 illegal immigrants being held captive by smuggling rings inside trucks, motel rooms, in squalled bungalows and even in brothels. Around Phoenix, more than 200 suspected smugglers have been apprehended since last fall. Authorities have seized 110 weapons and more than $5 million in cash from them. The trade is so lucrative that criminal groups are muscling into the market by ambushing smugglers. Kidnapping is now widespread. The ringleader is called El Diablo (the devil.) Agents are apprehending 2,500 illegal immigrants a day in Arizona alone. This is the legacy of George and the neocons and their amnesty policy, which under a Kerry presidency would be just as bad.

            World current account deficits now amount to three percent of GDP or about three times the gap in 1991. The US has accounted for fully 98% of the cumulative increase in dollar-based world GDP over the 1995 to 2002 period. Economists call this dis-equilibrium. The Fed, of course, has been responsible for the massive injection of liquidity in the economy and low interest rates that created a carry trade. Low interest rates allowed for home refinancing that amounted to more than five percent of disposable personal income in 2003. These low interest rates caused house prices to rise and allowed the refinancing. The process of normalization is in the process of happening. As US interest rates climb, the economy will slow and in turn the economies of China, Japan and Germany will slow, which will prove very disruptive. By way of comparison, the mix of global growth was much more balanced over the 1990-95 period and the US accounted for only about 25% of the cumulative increase in dollar-based world GDP instead of today’s 98%. Today’s distortion is 150% worse than in 1994-95. That spells acute vulnerability. In 1994-95, the US current account deficit was 1.5% to 2% of GDP; today it is 5.1% of GDP. This creates a major problem. The additional result of higher interest rates and normalization will be a fall in the dollar, stocks, real estate and bonds and the appreciation of gold and silver related assets. Considering all this leverage, America is headed for a very hard landing irregardless of what Wall Street and George and the neocons tell you. This time there is no cushion and your financial future cannot be taken lightly.

            The value of mergers and acquisitions during the first half of the year increased 37% after a three-year turndown, but confidence displayed earlier has started to wane, particularly in Europe. The latest CFO outlook showed companies are still worried that fears of domestic terrorism, interest rate increases and wage inflation could threaten both economic growth and earnings. Eighty percent thought oil prices would moderate. Thanks to low interest rates, companies are more willing to use cash rather than stock for acquisitions.

            The bond bubble has burst. In the first six months of the year, global new issues of investment-grade corporate bonds were down 40% to $180 billion compared with $300 billion in the same period of 2003. This was the weakest first half since 1997. The US fell 50%. Companies have continued to lower their capital expenditure and debt levels and to buy back their own bonds. The fall in new issues should accelerate in the second half of the year. Oddly enough, junk bonds had a better first half, especially in Europe, where issuance was more than double the first half of 2003. Junk makes up 10% of the US market. Asset-backed and mortgage-backed securities have fallen globally from last year’s record first half levels, but Europe again, a much less mature market than the US, showed growth of 40%. We expect all bonds to have three more poor years and the junk and ABS sectors will be pounded.

            May personal income was up 0.6% and spending was up 1%. The PCE deflator year-to-year was up 2.5%, which is bad news for the Fed. Corporate profits are not what they seem to be. Profits, adjusted for capital depreciation and changes in the value of inventories, rose to $1.23 trillion last quarter. The reality is that profits before tax with inventory valuation adjustment is the best available measure of industry profits because estimates of the capital consumption adjustment by industry do not exist. This measure reflects the depreciation-accounting practices used for federal income tax returns. According to this measure, domestic profits of financial corporations increased, and domestic profits of non-financial corporations decreased. Decreases in profits of non-financial corporations were widespread among major industry groups with the largest occurring in manufacturing and in wholesale trade; only retail trade increased. Financial engineering once again for the corporatist-fascist state. Of course, none of the major media carried any of this. Profits before taxes decreased $25.4 billion in the first quarter, in contrast to an increase of $192.2 billion in the fourth quarter. Ex-inflation profits fell. Real federal government consumption expenditures and gross investment increased 8.5% in the first quarter versus an increase of 0.7% in the fourth. National defense increased 13.2%, versus an increase of 3%. This is why in 1988 the government switched from GNP to GDP as it fell from the world’s largest creditor to the world’s largest debtor. Real GDP rose 3.4% in the first quarter versus 5.5% in the fourth. Net receipts of income from the rest of the world decreased $13.2 billion the first quarter after increasing $36.4 billion in the fourth quarter. In the first quarter, receipts decreased $0.6 billion and payments increased $12.6 billion. National income grew 1.8% in the first quarter; personal income grew 1.5%. Disposable income chained dollars increased only 1.2% and this is supposed to be a booming recovery. That is not what the real figures say.

            The Bank of England has warned that a sudden correction could trigger instability in financial markets and push the world back into recession. It said investors have taken on increasingly risky positions to maximize their profits. Banks have relaxed their lending criteria as interest rates fell and the housing market boomed, leaving lenders exposed and struggling to pay off debt burdens.

            The OECD says China overtook the US in direct foreign investment in 2003. The US declined from $167 billion in 2001 to $72 billion in 2002 to $40 billion in $2003. China was $53 billion versus $55 billion in 2002.

Saudi Arabia, which has been producing 9.1 million barrels per day of oil since June 1, says now that oil is off 15% in two weeks that $36.00 a barrel is a fair price. OPEC meets in three weeks to consider a 500,000 B/P/D increase. The big question really is, will the Saudi government be overthrown, or will George and the neocons invade before it happens?