As I was floating down impassible rivers
I no longer felt myself steered by the haulers…
– Arthur Rimbaud, “The Drunken Boat”
The news yesterday pushed against us like a gentle wind. Pending house sales were bad. Consumer spending was good. Unemployment was bad. Manufacturing was good.
The Dow rose 47 points. It has moved without much conviction for several weeks. It can’t seem to make up its mind. We thought it had headed down decisively a few weeks ago…and then, it stabilized…and wandered about…
Gold has more sense of destiny about it. It’s been in a bull market for the last 10 years…and shows no sign of wanting to do anything else. It lost $11 yesterday, but still trades at $1,132…not that far from its all-time high.
Gold is in a real bull market. As near as we can tell it is still in the developing stages. There are a few old gold bugs around. But the public is not yet talking about gold. Investors are not yet adding major positions in gold to their portfolios. Ordinary people are not yet expecting gold to go to $5,000 or $10,000 an ounce.
But the news keeps coming…the opinions…the rants…the data…and the theories…
This way and that…we begin to feel like a “drunken boat.” That was the title to a poem written by a 17-year-old Frenchman named Arthur Rimbaud. It describes how we meander. We are driven by the winds…and pushed by the back-eddies… Turning our bow this way …and then that way…
Never quite sure what direction we’re going…or what to think… No one is in control…
And still, the current continues…and we keep heading downstream…carried by the great river…always moving along.
One day we’re fascinated by what is going on in Japan. The next day it’s China. Some days we think we might somehow muddle through…on others, we’re sure something is going to blow up any minute.
But that river just keeps rolling along…and we’re on it.
Where does it lead? Well, that’s the point. We’re not sure…
All we’re sure about is that it doesn’t lead where most people think. They think they see a ‘recovery.’ Forget it. Won’t happen. We could have another speculative period…but it won’t be like the Bubble Epoch of 2005-2007. Houses would have to go up 20% just to get homeowners’ heads above the water. Then, maybe they could borrow and spend like it was 2005 again…but that’s not going to happen. People don’t have the incomes…or the credit…to bid up house prices again.
Here’s a headline from The Wall Street Journal: “Employment of Adult Males at Record Low.”
Where does that lead? We’re not sure…but we don’t think it leads to ‘growth’ in the US economy. Instead, it leads to bankruptcy, deflation…and maybe insurrection.
And what about the Chinese economy? Isn’t that growing at breakneck speed – over 10% per year?
The trouble with breakneck speeds is that you do break your neck. China should slow down…or it’s going have an accident. And if it slows down, the whole world slows down with it…
And as to that ‘growth’ – it’s counterfeit anyway. It’s not real growth…it’s ersatz growth, caused by greater and greater government involvement and spending. The feds (the haulers) pretend to be in control. They want us to believe they are in control. But they are out of control themselves!
Can increasing government spending really make people more prosperous?
Show us an example!
Bill Bonner
for The Daily Reckoning
A River of Debt originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
This is a hot button issue… many federal workers are going to read statistics about how a number occupations in the public sector get paid more than their private sector counterparts and they are simply not going to believe it. Clearly, it’s frustrating for both sides. An article today digs a little further into specifics and helps explain the details behind the discrepancy as well as some explanatory factors that make sense to consider.
From USA Today:
“Accountants, nurses, chemists, surveyors, cooks, clerks and janitors are among the wide range of jobs that get paid more on average in the federal government than in the private sector.
“Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.
“These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.”
Aside from the summary and description of the matter, the article links to a useful list of 40 specific job titles that shows “federal salaries exceed average private-sector pay in 83% of comparable occupations.” The table is found here. Should government jobs be better paid than industry positions? If somehow public employees are contributing more to a productive economy, then sure, it would make sense. Whether or not that is likely, or even possible, is something worth considering.
Visit USA Today’s coverage of how federal pay is ahead of private industry for more information and data to support the findings.
Best,
Rocky Vega,
The Daily Reckoning
You Asked for it: More Details on Overpaid Federal Workers originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
“The world’s largest shopping mall is almost entirely empty,” says a headline now making its way around the Internet. The mall is not one of America’s consumer emporia. It is not in the US at all. Instead, it is in the Middle Kingdom…and twice as large as the “Mall of the Americas.”
The world did not end in 2009. Two things are widely reported to have saved it – stimulus in the West and China in the East.
Harvard economist Robert Barro, writing in The Wall Street Journal, considered the effect of stimulus spending on the US economy. The US government’s 2009 program was originally expected to cost $787 billion. Now it is estimated to come in with a final price tag of $862 billion. What do you get for that kind of money, he wondered? The initial spending appears to work, since the government is spending money without raising taxes to pay for it. But the money has to come from somewhere. Tax receipts inevitably have to go up. Both spending and taxing are subject to “multipliers,” says Barro. Mr. Barro calculates that each dollar of public stimulus spending has a net cost of $1.50 in foregone private spending. A “bad deal…there’s no such thing as a free lunch,” even in fiscal stimulus, he concludes.
Stimulus spending is a net negative in the US; what about in China? The China story is largely a stimulus story too. China’s stimulus, compared to GDP, is the world’s largest ever – four times the size of America’s stimulus program.
When bank loan volume is determined by central planners you are asking for trouble. But last year, faced with a downturn in demand from their main customer, the Chinese authorities put out the word to banks – increase loans. Loan volume approximately doubled – to $1.4 trillion – the greatest increase, in GDP terms, ever – equal to a quarter of the entire national output.
Investment spending has long been an oversize part of the Chinese economy. As Americans spent too much, the Chinese invested too much in factories in order to make them things they could buy – just as the Japanese had done before them. Investment spending in China increased 200% since 2001, making it the world’s biggest buyer of raw materials – by a huge margin. Chinese output is less than 10% of the world’s total but China consumes 30% of the world’s aluminum, 40% of its copper and 47% of its steel. Where does all this stuff go? Thanks to China’s visionary central planners, it goes just where it is not needed most – into more infrastructure and output capacity. Last year, 90% of China’s growth came from this fixed investment spending.
There are about five times as many rivers in the US and five times as many cars…but China now has nearly as many bridges…three quarters as much road surface. But with easy credit, the connivance of local officials, and the blessing of the central government, it builds more.
Last year, approximately one out of every four square feet of commercial office space in Beijing were empty – about 100 million square feet of zombie space. All over town are dark buildings…the Minsheng Financial Center…concrete and glass towers on Financial Street…the China Life Plaza…the Bank of Communications.
This year, the vacancy rate will go up to 30%…possibly 50%, depending on whose estimates you believe. In Eastern Beijing, officials are doubling the size of the Central Business District, even though the vacancy rate there is above 35% already. Overall, the city will add another 13 million square feet of commercial space.
Outside Beijing, the zombies are multiplying too. Whole cities are empty. And in the suburbs of Huairou, a mock alpine village…with a 200ft clock tower…rises improbably in the industrial suburbs. Called the “Spring Legend,” its publicists must be the same people who write fortune cookie forecasts: “The air is so fresh it penetrates your heart,” says the sales pitch. You would normally dismiss such descriptions as puffery. But in China’s industrial suburbs the air is often so acidic that it might penetrate the skull too.
National politicians determine the availability of capital. Local ones have a hand in ‘investing’ it. Typically, development projects involve bankers, developers, and local politicians – much like Japan’s huge public works’ projects of the past 20 years. Local governments are deep in debt – with total local government debt equal to about a third of GDP. But they keep spending. In Huaxi, for example, they’re still planning to build the world’s second tallest building, a few feet shorter than Dubai’s pyrrhic monument. Huaxi is also the home of the New Sky Village…another project that is lost in the toxic clouds.
Property prices are still spiking up. People are still speculating. Ships with dirt and rocks still head for Chinese ports. The capital spending boom goes on.
It looks like growth. But it is zombie growth. People build bridges to nowhere rather than working for profit-making enterprises. Concrete is used to put up cities where no one lives. Savings that might have been used to start a new bank is instead used to prop up an old one.
Japan has been doing it for years. Encouraged by government miscues in the ’80s, private industry created Japan’s zombies. Then, after the bubble burst, the government kept them alive. They’ve been sucking blood from the living ever since.
Bill Bonner
for The Daily Reckoning
Zombieland originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
by Addison Wiggin & Ian Mathias
Iraq will pump up oil production from 2.4 million barrels a day now to 12 million barrels by 2017. That’s the promise of Prime Minister Nouri al-Maliki, who’d like to hold onto his job after elections on Sunday.
Welcome to the Delusional Friday edition of The 5.
It’s not 2004 anymore. And it’s no longer in Washington’s interest to play up purple fingers in Iraqi elections. So let’s bring you up to speed on what’s been happening there since the “surge” was deemed a success:
We still have 100,000 American troops in Babylon trying to make sure that non-American oil companies like BP and China National Petroleum Corp. have reasonably secure access to the giant Rumaila oil field. (ExxonMobil got a small consolation prize in the bidding.) We marvel at the spectacle.
The delusion that “short selling” is what nearly took down Citigroup in 2008 was being peddled on Capitol Hill yesterday. Citi chief Vikram Pandit blames that foul, unpatriotic trading strategy…. but paid no mind to the reams of foolish loans made by his employees.
Even in Congress, the idea didn’t fly. Elizabeth Warren, chairwoman of the Congressional Oversight Panel bird-dogging the TARP program, wondered why Citi was the only bank that needed a second bailout after the first. “I just want to understand why Citi is special,” she quipped.
“His bank has got the highest [credit] loss rate of any of the big four,” Christopher Whalen from Institutional Risk Analytics added. “The shorts were just responding -- the emperor had no clothes.”
Our own stock market vigilante would do the same. For more on Dan Amoss’ Strategic Short Report and a 62% discount, read here.
Another delusion gaining traction this morning: Gold is “the ultimate Ponzi scheme.” Honestly, the folks at CNBC are starting to become unhinged.
Gold is “an inanimate object that sits in a dark, damp cellar somewhere,” host Simon Hobbs posited to Gloom Boom & Doom Report’s Marc Faber, “that may or may not be in short supply, may or may not glitter in the correct light, but really has no productive power. Isn't gold the ultimate Ponzi scheme?"
Faber was entirely too polite in smacking this down: "No, I don't think it's a Ponzi scheme, and it's not a liability of someone else... its quantity cannot be increased at the same rate as you can print money... I’m not saying that the dollar will go straight away down, because other currencies, apparently, like the euro, are even worse at the present time. But eventually, if you print money, the purchasing power of money will lose."
If you can stand it, watch the whole thing here.
Faber and our friend Doug Casey agree on the outlook for that delusion in currency collectivism known as the euro. Greece will get an indirect bailout from the European Central Bank, says Faber. And it won’t work. And the rest of the PIIGS countries will follow. Lather, rinse, repeat.
“I think it was inevitable,” says Casey, “that the euro would burst apart at the seams, sooner or later. This isn't the first straw in the wind, by any means, but it's a major, unmistakable sign that the EU currency union is going to break up and the euro itself is on its way out. And the EU itself will meet its inevitable doom not too long after that.
“When you stop to think about it, the EU was really a stupid idea to begin with. It started out as a coal and steel free-trade zone, which made a lot of sense. But as time went on, as people in general often seem to do, and Europeans in particular seem to love to do, they bureaucratized the thing and made it into a pseudo-government.
“They wrote a constitution hundreds of times longer than the one that served the U.S. so well until it was abandoned. They took on micromanaging everything, down to producing huge, phone book-sized regulations on the composition of French cheeses, and so on. There's a burgeoning bureaucracy in Belgium trying to consolidate the 27 member states into one giant country, and it's absolutely not going to work.”
Both Doug and Marc Faber will join your editors and a host of Agora Financial regulars in Vancouver this July at the Agora Financial Investment Symposium in Vancouver. David Walker, Bill Bonner and Petrobras veteran Marcio Mello will be there, too. Our symposium chief Bruce Robertson has outdone himself this year. Register here. Early bird discounts still apply.
And of course, this morning, it’s time for that ritual exercise in delusion that comes on the first Friday of the month, otherwise known as the Labor Department’s monthly employment report. Let’s go to the tape…
· Payrolls fell about 36,000 -- less than mainstream analysts expected
· The worthless U3 unemployment rate held steady at 9.7%
· The U6 figure that includes discouraged workers and part-timers who want full-time jobs grew from 16.5% to 16.8%.
Amazing how 15,000 temporary Census jobs can take the edge off an otherwise-lousy report, huh? And those temporary government jobs are just starting to ramp up.
Still, from the stock market’s standpoint, these are Goldilocks jobs numbers -- stronger than expected, but not so strong that anyone expects the Fed to go and do something crazy, like, you know, raise the fed funds rate.
The major U.S. indexes opened up 0.5% in the first few minutes of trading. And the airwaves were filled with fund managers heralding the good news.
Gold is holding up nicely at $1,133. Oil has perked up a buck, to over $81.
So much for the delusion that extending the homebuyer tax credit would keep pumping up the housing market. Pending home sales fell 7.6% in January, according to the National Association of Realtors -- which is already trying to lower expectations for the February number by pointing out that people tend not to look at homes when they’re buried under three feet of snow.
From the “times are tough all around” department comes word that the widow of Enron chief Ken Lay is having trouble shopping her Houston penthouse among private buyers (showings by invitation only) for $12.8 million.
So it’s been publicly listed for $11.9 million.
“Italian Renaissance-inspired,” the listing says. Reminds us of that gag about the Holy Roman Empire: It’s not Italian, it’s not Renaissance and it’s definitely not inspired.
The 12,827-square-foot spread features six elevators, five half-baths, four balconies, three fireplaces and two toilets in the master suite. No partridge in a pear tree, alas.
A spokeswoman for Linda Lay says only she’s looking for a smaller home. It’s also possible she’s trying to come up with some scratch to generate a couple of pennies on the dollar for Enron’s creditors. But if she’s made any sort of deal with the Justice Department, we won’t find out about it -- the court records are sealed.
“Once again, your unchecked facts are designed to match your preconceptions, instead of reality,” scolds a reader. “In fact, the inauguration date was changed for Roosevelt's second term, in 1936, not his first in 1932. His first term was actually shortened by about six weeks due to this. Here are the particulars from WikiAnswers:
“The date of Jan. 20 for the presidential inauguration was established by the 1933 ratification of the 20th Amendment, which changed the start date of the new presidential term from March 4.
“The reason given was that due to the modern conveniences of better communications, the election results could be confirmed faster than in olden times. They did not want to make our Congress and president wait until almost the end of the first quarter of the year to begin their service.”
The 5: We stand corrected on the dates. Of course, we were merely being flippant. If you choose to believe the unchecked facts are designed to propagate our own delusions, that’s your prerogative. That particular factoid is a matter of pride, actually. March 4 is this Wiggin’s birthday. Thanks for setting us straight on the details.
“I have to take exception to the comments by the reader about UPS giving the package to the post office,” writes another, “I worked for UPS for 30 years. UPS delivers to every address, while the postal carrier will leave the mail at the mailbox, UPS will take it to the door.
“As a driver in rural Arizona, I delivered to ranches that were 10 or more miles from the mailbox. The postal carrier would leave the package or mail at the mailbox and I would drive to the ranch, leaving the package at the door.”
“The Postal Service cannot be fixed,” writes another reader, who gets the last word. “It is hopeless. I know, I worked at USPS headquarters in Washington, D.C. They do not even understand how horribly inefficient they are. I could fill an entire Web page and not scratch the surface, but you wouldn’t believe it. Needless to say, I was blown away over at the incompetence.
“By the way, why should we all subsidize mail delivery to people who choose to live in the boonies? They pay more for just about everything else in life (fuel delivery, groceries, etc.), but expect the same mail service, for the same price, we get in densely populated areas.”
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. “It's emerging markets that are driving the bull market in this [commodities] cycle,” comments our managing editor Chris Mayer in a MarketWatch piece out this morning. More of his thoughts here.
TUSCALOOSA, Ala.—Former Birmingham Mayor Larry Langford was sentenced Friday to 15 years in federal prison for taking some $235,000 in bribes in return for lucrative bond work.
But investment banker Bill Blount pleaded guilty to making the payments, and lobbyist Al LaPierre admitted being the middleman. Mr. Blount, the former state Democratic Party chairman, last week was sentenced to more than four years in prison. Mr. LaPierre, the former executive director of the state Democratic Party, got four years. Mr. Blount also was ordered to pay $1 million to the government, and LaPierre $470,000.
Wait a second....
How come Blount and LaPierre only got four years?
And how much did these guys - and these banks - get?
Mr. Langford was accused of telling major Wall Street banks J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and the now-bankrupt Lehman Brothers to include Blount's investment banking firm if they wanted to handle the county's bond work.
They just got sued, right?
Yep.
Just a "cost of doing business"?
Kinda like Pfizer and the Federal Reserve Board of NY?
No wonder these banksters keep at this crap - we prosecute and lock up the people they screw around with, but the banks themselves, just like the big drug companies, get fined in tiny amounts that amount to one percent or less of their market cap.
Yeah, that's a deterrent against criminality.
Iraq will pump up oil production from 2.4 million barrels a day now to 12 million barrels by 2017. That’s the promise of Prime Minister Nouri al-Maliki, who’d like to hold onto his job after elections on Sunday.
It’s not 2004 anymore. And it’s no longer in Washington’s interest to play up purple fingers in Iraqi elections. So let’s bring you up to speed on what’s been happening there since the “surge” was deemed a success:
We still have 100,000 American troops in Babylon trying to make sure that non-American oil companies like BP and China National Petroleum Corp. have reasonably secure access to the giant Rumaila oil field. (ExxonMobil got a small consolation prize in the bidding.) We marvel at the spectacle.
Addison Wiggin
for The Daily Reckoning
Securing Iraqi Oil Fields…for US Competitors originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
“The US is insolvent,” says a report from a hedge fund. As of the third quarter of last year, the federal government had assets of $2.67 trillion and total liabilities of $14.12 trillion.
That leaves a net negative position of more than $11 trillion. By the way, this is projected to get a lot worse, fast. The feds are expected to increase their debts by about $3 trillion more over the next 2 years. Federal spending is out of control…the feds have lost control of their own budget, let alone the economy.
Typically lenders look for what they call ‘debt coverage’ – debt compared to revenue. If you take the US revenue as a whole, you find federal debt currently equal to a bit more than 80% of GDP. But that number is going up quickly. It will be over one hundred percent in just 2 or 3 years.
Well, so what? As long as you have the income to support it, you don’t worry, right? Well, let’s look at it from that angle.
Hmmm… Doesn’t look so good from that perspective either. The income tax only generates 43% of the budget. The feds get a little more from corporate and other taxes, but the deficit is enormous…from a third to a half of all expenditures.
This is not looking good. Most of the deficits do not come as emergency reactions to a financial crisis. Most of red ink is ‘structural’ – the result of programs already in place before the crisis hit. They are hard to curtail, since it requires major acts of political will to undo them. So, they tend to continue.
Which means, the US needs to borrow huge amounts of money just to continue drifting along in the style to which it has become accustomed. There is no end in sight to the deficits…no practical way to reduce them…and no way out of the debt whirlpool. Which means, financing them has got to be a losing proposition for the lenders.
Nothing new in that…
Still, we drift…we wander…we float from one bank to the other…and wonder when we will finally sink.
Regards,
Bill Bonner
for The Daily Reckoning
Losing Control of the US Debt Machine originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
... about fixing housing finance through a completely redesigned system instead of trying to "fix" Fannie and Freddie (I know, believing a politician is not lying is always dangerous) I offer up the following suggestions.
However, if we're going to leave FHA and VA loans in place (and we can do the issuance via Ginnie Mae, which already exists) we need to seriously restore underwriting standards. Specifically, the following are minimums I believe we must demand:
Task the DOJ with enforcement of all statements on mortgage loan applications and paperwork. You lie, you go to prison. Period. End of discussion. No more "fraud for housing" .vs. "fraud for profit" - fraud is fraud, you go meet Bubba and lose your house. Investors have to be able to fairly evaluate what they're buying and so does the government!
In the private market I would radically revamp the securitization system such that:
That would be a good start.
PS: As I write this the pumptastic CNBS crooners claim that Barney Frank has repudiated his statements. Even though he apparently made them originally in public.
Mr. Frank, did you truly wake up and decide to do the right thing or not? I think you owe everyone an answer.
It’s almost never a good idea to follow a crowd, but it’s certainly wise to be aware of where it’s headed. In today’s case, a Bloomberg survey has shown that some 73 percent of surveyed traders believe that sovereign debt problems in Europe may serve to boost the price of gold. More below…
According to BusinessWeek:
“Nineteen of 26 traders, investors and analysts surveyed by Bloomberg, or 73 percent, said bullion would rise next week. Six forecast lower prices and one was neutral. Gold for delivery in April was up 1.1 percent for this week at $1,131 an ounce at 11:30 a.m. in New York yesterday.
“Demonstrators in Greece, which is struggling to narrow a budget deficit, blocked streets in Athens yesterday to protest austerity measures. Fellow euro-zone members Spain, Portugal and Ireland also face budget gaps. Gold rose to a six-week high of $1,145.80 on March 3 as holdings in the SPDR Gold Trust, the largest bullion-backed ETF, gained to the highest level in seven weeks.
“’The growing issue of sovereign debt continues to draw investment demand into the market,’ James Moore, an analyst at TheBullionDesk.com in London, said in an e-mailed statement.”
The contrarian play would be to bet against the crowd and for some downward pressure on gold prices. There’s certainly a case for that strategy, relative to sovereign debt, in light of the measures that Greece seems to be aggressively developing (for the time being). Still, the traders may be right in the short run, which is rarely going to be straightforward to predict. Gold may have some additional room to gain in value as the inevitable wrinkles in the austerity plan get ironed out, publicly and tumultuously.
Regardless of how you choose to interpret the data, you can review the full details on how gold may gain on concern about sovereign debts at BusinessWeek.
Best,
Rocky Vega,
The Daily Reckoning
Sovereign Debt Worries Lighting a Fire Under Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
March 5 (Bloomberg) -- Fannie Mae and Freddie Mac bondholders shouldn’t assume the government will make them whole on their investments as Congress retools the companies, House Financial Services Committee Chairman Barney Frank said.
Heh, who's the biggest individual bondholder?
Mr. Bernanke, the bond market is on line #1!
Frank continues:
A “whole range” of options is being considered for investors in the two government-seized companies, “from paying nothing to a haircut to whatever,” said Frank, whose committee oversees Fannie Mae and Freddie Mac.
Nothing? You mean zero, zilch, bupkis?
That would be rich. After Bernanke stepped in and bought some $200 billion of their debt, to have it "marked to zero" would be the ultimate slap in The Fed's face for buying that which I have argued is impermissible under the law.
What an elegant solution to a difficult problem - "oops - tear 'em up jackass - you should have known better than to buy something that you weren't allowed to and was patently worthless!"
The irony of that outcome would be delicious. Yes, I know I'm dreaming here - or am I?
“Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be, I don’t feel any obligation to bail you out,” Frank said. Congress will “certainly not” extend any new protections to bond and mortgage-security investors beyond what exists, Frank said.
Oh. You mean that the face of those prospectuses mean what they say? You mean this is real?
Uh, the market is kinda ignoring that right now, isn't it?
Yes, I think it is.
How about this for a clear statement?
“We’re not remaking Fannie and Freddie,” Frank said. “We’re going to start from scratch and do housing finance.”
Go ahead folks, keep buying. This is spelled "opportunity", thank you very much. Now please excuse me while I go put a few chips on "red."
PS: Why are these stocks still listed again?
All the euphoria about the end of the euro (EUR) selling got deep-sixed yesterday on two counts… 1. The European Central Bank (ECB) decided to extend stimulus measures, which led the markets to believe that the ECB would remain on hold with their interest rates, and once again, the markets believed that the US would begin to raise rates before the ECB… 2. Moody’s downgraded Deutsche Bank (Germany’s largest bank).
Well… On the first count… I still believe the markets are barking up the wrong tree when they believe that the Fed is going to begin rate hikes soon… And on the second count… Poor Germany… They’ve got to be feeling like Charlie Brown in the old song… Charlie Brown, he’s a clown… Why’s everybody always picking on me?
For when is Moody’s going to have the intestinal fortitude to downgrade US debt? When, I ask… Just when? Or, even the financial institutions that are still walking on eggshells, here in the US? But nooooooooo! Let’s go pick on Germany’s largest bank!
Now… Here’s what I found yesterday to be the biggest story… Greece was going to seek the aid of the IMF… Whoa there partner! The ECB is going to have none of that! And I told Chris Gaffney just that, yesterday… For if the IMF were to come in to save Greece, the ECB would have egg all over their faces.. And an admission that the ECB can’t deal with problems in its own region.
Instead… I proposed this last week at our editors meeting in Scottsdale… That the European Union set up its own monetary fund and call it the European Monetary Fund, to act like the IMF, but it would be made up of nothing but European nations, and would help when times got bad… Sounds like a viable plan to me! Hey! Maybe, they should put me in charge over there! HA!
And looky there! I’m now seeing a story on ECB President Trichet saying that Trichet pressed Greece to halt their flirtation with the IMF, and instead work with European Union officials to tame their deficits.
Well… Today, being the first Friday of the month, is a Jobs Jamboree Friday here in the US… I would have to think that the government officials who claim that the stimulus created/saved jobs last year, would be dreading the print of the jobs report… You see, somewhere along the line, that line about “saving jobs” is nothing but rearranging the deck chairs on the Titanic… All the while, the job losses, albeit not as deep as they were a year ago, continue to mount… And that’s what’s expected this morning… More job losses…
I’ll tell you this now, so you when you hear it on your cable news station, or wherever you get your news, that February’s job losses are going to be blamed on the weather… That’s right, all the snow in February will be blamed for the job losses… More rearranging going on, I see!
The data yesterday, again, did not inspire me to think that the Fed is going to raise rates any time soon… Pending Home Sales here in the US fell 7.6%! That’s right… The number of buyers who agreed to purchase previously occupied homes fell sharply in January, a sign that demand for housing is sinking. (I’m sure there was some reference to the snowy weather, too!)
The National Association of Realtors says its seasonally adjusted index of sales agreements fell 7.6% from December to a January reading of 90.4. It was the lowest reading since last April.
The Weekly Initial Jobless Claims printed at 469,000, putting the four-week average at 470,750… So, the job losses keep coming… What the Bureau of Labor Statistics claims is that on the other side of the job losses there is job creation going on. Well, that’s what I call “ghost jobs”…
The US Factory Orders printed a very solid 1.7% gain in January, so that was good! The bad part is that the gain was dominated by a one-time increase in aircraft… So, don’t get too lathered up with that number!
Ok… Enough of that!
Yesterday, I told you that Canada was going to present their budget… And… I took a peek at it… WOW! Canada is planning on cutting their deficit spending, and bringing their balance sheet back to balanced by 2014! Now… We have to take this with a grain of salt, given the known fact that in 1999, the US Budget Office predicted that in 10 years, (that was last year) we would be nearing a budget surplus! Yeah, like that even had a chance to happen, once 9/11 happened, and eight years of the previous administration’s spending, and so far one year of the new administration’s spending!
But, getting back to Canada for a minute, for they deserve this moment in the spotlight… I applaud the Canadian government for their efforts to cut spending… And before anyone gets the idea that Canada’s deficit is similar to ours, you need to think again… For the Canadian deficit is a mere $54 billion!
Hey! It sure looks to me as though gold has reversed its downward mini-trend! I don’t know if you’ve been keeping score at home or not, but gold has quietly inched higher and higher, until it erased the downward movement! This should get interesting from here… And.. I hope you took advantage of the price dip in gold… It sure was very much cheaper for a while, there!
My friend, David Galland, was talking about the Taylor Rule, in his most excellent newsletter yesterday… This Taylor Rule is a formula that calculates what the Fed Funds rate should be, based on inflation, and other data… It showed that during the years around 2004, when I claimed rates were too low, for too long and fueled the housing bubble, the calculation confirms that rates were too low… And for now? Well, for now, it shows that the Fed Funds rate should be 4%… Not 0.25%… Lucy! You’ve got some splainin’ to do!
And this leads me to say, once again, that the Fed is and will continue to be behind the inflation 8-ball… And that, my friend, will lead us down the road of inflation! Yes, monetary inflation, not wage inflation, for that couldn’t happen in a million years, when you have 21% unemployment! The Fed will bungle this operation, and we’ll be left holding the bag… You see, buying those mortgage backed ARMs from lenders is going to have unintended consequences for the Fed… To raise interest rates, the Fed would take HUGE losses on the trillion-dollar ARMs holdings… To not raise interest rates, the Fed will, and already is, allowing inflation to rule the roost.
So… That’s just peachy, eh? We’ve got the reduced purchasing power of a weak dollar, and whatever dollar value we have left is going to be eaten away by inflation. WOW! Where do I sign up for that? Shoot Rudy, that’s pretty good stuff, right there.. Yes sir, may I have another?
To recap… The currency rally, led by the euro, from Wednesday, faded yesterday, when the ECB announced extended stimulus plans, which led many to believe the US rates would be higher soon… Deutsche Bank saw their rating cut by Moody’s… Today is a jobs jamboree, and Canada is taking steps to eliminate their deficit!
Chuck Butler
for The Daily Reckoning
Deutsche Bank Rating Downgraded originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
Now this is getting interesting; we appear to have a police department that has invited an 18 USC 1983 lawsuit:
The district even set up a secure Web site so the police could have access to pictures and other information, according to attorneys in the case.
"Quite honestly, the police knew about these devices," said Marc Neff, a lawyer representing Perbix. "They were not in the dark about the fact that these computers were being tracked."
Policemen don't have the authority to issue search warrants. Only judges have that authority.
Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress, except that in any action brought against a judicial officer for an act or omission taken in such officer’s judicial capacity, injunctive relief shall not be granted unless a declaratory decree was violated or declaratory relief was unavailable. For the purposes of this section, any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia.
Good luck to the local police department - they may need it, along with the school district.
Active cooperation of the school and police department to violate 4th Amendment rights against searches without a warrant having issued is a potentially-huge problem.
It's bad enough when the school attempts to arrogate to itself the right to search your home.
It's even worse when they conspire with the local cop shop and "don't bother" to get a judge involved to sign a search warrant.
Never mind the school who tried to claim originally that this was "just a little IT thing" used for internal purposes to find stolen laptops. Now we discover that the cops had their own little backdoor into the spying system, courtesy of the school administration and IT department, all used without lawful search warrants.
Hint to the lawyers: Sometimes it's better to keep your mouths shut.
Here in the States everyone is keen to see the non-farm payrolls report. It comes out on Friday. Anecdotal evidence (what people say) suggests that the employment situation here is still pretty bad. But government statistics can say pretty much whatever you want them to say.
If you’re looking for the internals of the market, try breadth. That is, if you want to judge how intrinsically strong a rally is, look at how broad it is. Is it just concentrated to a few of the big stocks (banks and basic material, for example). Or are all stocks marching up in lock stop on higher earnings and higher valuations. Is the equity premium visible?
Take a look at the chart below. It’s the advance-decline index on the New York Stock Exchange from early 2007 unto today. The scale of the chart is less important than the trend. The index tracks the difference between advancing and declining issues on any given day. When there are more advancers than decliner, the index is bullish. When there are more decliners than advancers, it’s bearish.
NYSE A/D Ratio Looking Toppy
If you’re trying to use the A/D ratio as a predictor of what’s next (and who isn’t?) then what does it really tell you? The chart above shows you that market breadth started to deteriorate months ahead of the actual high in the Dow Jones (which came later that year in October.) The June-July revelations that two Bear Stearns funds were in trouble accelerated the deterioration.
The March 2009 low in the A/D ratio more or less coincided with the low in the index. There wasn’t any advance warning from the index. That’s likely because the March lows were reversed by the active (and perhaps direct) support of the Federal Reserve via interest rates and a program of Treasury bond buying.
Whether the Fed worked a way, via its primary dealers, to get stocks moving too (another word is ‘manipulation’) is an interesting but ultimately unanswerable question. The important point here is that nothing in the fundamental mechanics of the market indicated a reversal. It was an external event.
And what about now? The A/D ratio is going up, up, and away. It could be that corporate cash positions are solid, the employment market won’t get worse, and that the end is in sight for the U.S. housing market. Some combination of these factors could explain the steady advance of stocks since last March. But maybe not.
Our guess is that this is simply evidence of the Fed’s Great Reflation (see Marc Faber’s March Gloom, Boom, and Doom Report). All the new money created by the Fed, and the new lines off credit made available to U.S. financial institutions, made its way into the stock market by force off habit. It was easy to borrow and there was only one sensible place to put it: stocks.
But is that still the best trade going now?
No.
Your best bet, as we’ve said for a while, is to retire now. Gradually liquidate your stock portfolio and pare it down. People are buying stocks now because it’s what they’ve always done and what they’re still told to do. But as a wealth survival strategy, the stock market is a death trap.
You should, by our reckoning, own a small portfolio of stocks leveraged to positive Black Swans (low probability but high magnitude events that drive a share price higher…like the discovery of a new ore body or the development of a new drug). These are the sort entrepreneurial ventures that will create new wealth. A portfolio of these business experiments is like a call option on the world we’ll live in after governments have gone bankrupt and lost the ability to perpetuate the follies of the previous credit bubble.
But for now, the public sector campaign to bail out the plutocrats in the private sector is in full force. And in the meantime, the public sector in Europe is trying to save itself. Markets in Europe have reacted with contented indifference to the affair in Greece. Has anything important happened there?
Well, the Greek government presented a plan to cut spending by $6.8 billion. If effected, it will reduce the deficit-to-GDP ratio from 12.7% to 8.7% in the next year, which is pretty ambitious. The Greeks plan to do two things: raise revenue and cut spending.
The Greeks will raise taxes on fuel, tobacco, and sales taxes. And if the communist unions don’t derail the plan, bonus payments to public sector servants will be cut by 30% and wages will be frozen for civil servants.
If Greece is having a fiscal crisis, why is anyone in the government getting a bonus payment at all?
The Greeks have $20 billion in sovereign debt maturing in April and May of this year. The negotiations between the Greeks and the rest of Europe are trundling along. But to what end? The Germans refuse to pony up for a bail out. But will the EU sacrifice Greece to save the Euro as a currency?
Nobody knows. But our main point today is that you should not think Greece has gone away. It’s true that since February, the cost of insuring sovereign governments against default has fallen. According to the folks at Bespoke Investment Group, only Vietnam, Argentina, and Egypt have seen wider credit default swap spreads in the last two months.
So we have a pause in the crisis-think. Markets rally on reflationary monetary and fiscal policy. But the underlying structure of the fiscal welfare/warfare state is badly damaged. This is still an excellent time to reduce your exposure to stocks and add, on the dips, your exposure to precious metals and precious metals equities (in full knowledge that even gold stocks are going to decline on another general decline in stocks).
It’s probably not just stocks you should re-think, though. Last week we mentioned that fund manager Colonial First State (owned by the Commonwealth Bank) has told investors in its Mortgage Income Fund that it could be as long as four years before they get their money back. The average age of the 17,000 investors in the fund is 74 years old.
Redemptions in the $850 million fund were frozen not long after the Federal government guaranteed bank deposits. High-yield mortgage trusts are not bank accounts. Investors and pensioners who treated them like high-yield bank accounts — because that’s how they were sold — were suddenly not generating needed income on precious savings. And now the savings are locked up.
But it wasn’t just the government guarantee that pummeled the mortgage and property funds. It was the underlying securities. On February 9th, Colonial announced it would wind down the Mortgage Income Fund because the bad debts on some of the underlying property loans were, “too big to manage.” It has another $1 billion of pensioner savings locked up in similar funds.
Now without knowing the composition of assets in the other funds, it would be hasty to say that mortgage funds in general are lousy investments. However we’re inclined to think just that. But more importantly, there’s a point here about having your money locked up in large pools of capital these days.
These large pools of capital — mortgage funds, property funds, super funds, 401(k) plans in the States — are extremely attractive to people who need capital. Call it “captive capital.” Banks covet it because it keeps them cashed up when facing declining asset values in commercial and residential property.
Governments covet the capital even more. It’s a ready source of funding for government deficits. If you can compel banks to buy government bonds (via credit requirements), or if you can compel savers to own government bonds for “safety” and “annuity” reasons, then you can force people to fund your deficits. That means you may not have to cut spending so deeply that you lose an election because of it.
So what should you expect and what should you prepare for? Higher taxes are a given. “Nutter expected to tax sugary drinks, set trash fee,” reports a Philadelphia newspaper. The Nutter in this case, quite appropriately, refers to the Mayor. He’s taxing fizzy drinks and garbage to raise extra money for the city. At the city and state level, you can expect a lot more of these creative ways to finance spending — along with cuts in services.
This is part and parcel of the over-reach of the Welfare state. If the U.S. Warfare State has over-reached in Iraq and Afghanistan, it’s been over-reaching domestically for years with programs paid for out of an empty pocket. The same is true in Europe, Japan, and increasingly, in Australia.
Some places are better off than others. Australia has a relatively smaller public sector debt burden. But the country overall, if you look at the net foreign debt, owes its prosperity to foreign lenders. You can expect the strain on public sector finances to only increase in the coming years.
All of that suggests, to us anyway, that you should re-think your reliance on traditional income and savings vehicles. Look for changes to be made that make it harder for you to get at your money. Or, if you can withdraw it from certain accounts and schemes, you will do so at a massive penalty. Governments need capital. And when they can’t compel you to use yours to finance their spending, they are going to get at least a pound of flesh if you choose to remove your money from the system.
What should you do instead?
As we said above, a small portfolio of stocks — business projects leveraged to very high returns — is nearly the only good reason to stay in stocks. The other good reason is that as governments monetize debts and confidence in paper money fails, stocks may beat inflation a lot better than cash. The rally of the last year is evidence of that.
Next week, when we get back to Australia, we’ll take on the main objection to all of this: deflation. That argument is simple. As the global debt burden becomes too heavy, it will crush asset values, leading to falling asset prices across the board, including precious metals. We have too many objections to this to list here. But stay tuned next week. Until then!
Regards,
Dan Denning
The Daily Reckoning Australia
Whiskey & Gunpowder
March 5, 2010
Why the Stock Market Is a Horrible Wealth Protection Strategy was originally featured on Whiskey and Gunpowder
The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”
That's exactly what I said would happen more than two years ago.
EVERY LOAN.
If there was appraisal fraud OR
If there was income fraud OR
If there was DTI fraud OR
If the automated underwriting was gamed OR
If there was asset fraud
THEN the bank gets rammed with a repurchase demand on the bad paper - paper that is 90 days+ and, in essentially every case, dramatically underwater.
The "dream" that this will result in "only" $7 billion in losses (30% of the repurchased amount) is a fantasy.
The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.
Ding ding ding ding ding ding.
The truly ugly news isn't found in these mortgages. It is found in the second lines - HELOCs and "Silent Seconds" - that are behind these agency mortgages. Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value - which is zero.
There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is "money good." 80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.
The assumption that these loans are "money good" is blatantly and intentionally false. It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.
Oh, JP Morgan's net income for all of 2009? $11.7 billion.
They recorded $1.6 billion last year for this "expense", and I'm willing to bet that it's double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.
That would be roughly 20% of their net earnings - not exactly an immaterial amount of money.
PS: $21 billion is tiny compared to the tsunami headed these folks' direction. In the end every piece of this bad paper is going to head back to the securitizers and originators. All of it - and the seconds behind that paper are all going to wind up marked to zero, because they are subordinate to an underwater first. It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.
Resentment of the U.S. government and suspicions over the 9/11 attacks have surfaced in writings by the Californian identified as the gunman who shot two Pentagon police officers before he was mortally wounded in a hail of return fire.
Oh, that's not a right-wing thing - that's a lefty paradise! Specifically:
Signs emerged that Bedell harbored ill feelings toward the government and the armed forces, and had questioned the circumstances behind the Sept. 11, 2001, terrorist attacks.
The user named JPatrickBedell wrote the Sabow case was "a step toward establishing the truth of events such as the September 11 demolitions."
Demolitions eh?
Ah, a 9/11 Troofer. Got it.
The mark of the hard left, who are convinced that Dick Cheney ordered the towers blown up with explosives as a way to goad the United States into invading Iraq - all for that evil Texas Tea, of course.
I wonder how long it will be before we see the bastions of the left in the mainstream media call this what it is - home-grown terrorism conducted under the banner of the "troofer" who are convinced that our government killed 3,000 of our own citizens on 9/11.
"What is never, Alex."
Such intellectual honesty you have, Mr. Media Man.
So now we have Senator Dodd saying:
"I can't write regulations, this is way beyond the competency of Congress"
Really Mr. Dodd?
How about "Bankruptcy Reform"?
How about the CARD act, which as you can see from my Ticker yesterday, was instantaneously circumvented by the banks. Instead of "jacking interest rates" they simply put a CALL feature into their account disclosures, which now means you get raped by having the entire balance on your card due and payable literally on demand. (As an aside, how hard would it have been to say "no adverse actions" as a consequence of universal default, instead of what was actually done? Oh, and did banking lobbying interests recommend the language you did adopt?)
"The business community needs certainty on this issue," he said. "We ought to leave it to them to make the recommendations."
Really? Like the business community "recommended" OptionARMs, automated underwriting, blacklisting appraisers that didn't participate in outright fraud on property valuations, bankruptcy "reform", Credit Default Swaps, Synthetic CDOs and more?
Who's on the other side of the table? What other voice is there on input into this process?
None.
Now let's look at results. I would have no quarrel with a wildly business-friendly environment if it produced prosperity.
But it did not.
It instead produced asset-stripping, fraud, scams of various dimension, a huge housing and credit bubble and threatened the nation, if Hank Paulson is to be believed, not just with economic depression but literal martial law.
If I in concert with others took actions that threatened the destruction of our government by force, and thus gave rise to an argument that martial law would have to be declared, I would (justifiably) be held on charges of seditious conspiracy. Can someone explain why firms and individuals, acting between themselves in a fashion that leads them to effectively demand a $700 billion bailout lest the tanks roll, fails to meet this definition under the law?
We keep talking about how the government "saved us" from the depths of Hell - literally - with their "extraordinary measures." Whether it is Congress, The Administration or The Fed, all are credited with keeping the nation (and perhaps the world) from going over the cliff and straight down into the land of brimstone and sulfur.
But are we actually standing on terra firma, or are we playing Wile-E-Coyote dangling in the air?
Let's look at the facts.
Now consider this: There is neither the capital or the political will to go through another bailout cycle. Not now, not any time in the foreseeable future.
IF a sovereign nation starts a chain-reaction default (e.g. Greece, Spain, etc), IF there is a massive fraud discovered at one of the big banks, IF there is a speculative attack on a currency, any of a thousand IFs.
We won't be able to stop it.
Not The Fed, not The Government, not anyone.
We have been given the ability - a gift really - to pull the fuse on this mess. To lock up the nuclear financial weapons away from the kids. To let the adults in the room.
So far, we've not only done none of the above, we've gone further to concentrate and increase systemic risk.
We cannot withstand another attack.
Everyone wants to talk about health care. Sorry folks, that's a misdirection. A scam. It is simply a way to try to get more tax revenue - right now - to stave off a possible federal funding crisis. Treasury knows it, Obama knows it, and Congress knows it.
They won't tell you, but they know the truth.
We cannot withstand another attack.
We must break up the large financial institutions that caused this mess. What sort of act is more anti-competitive than going to the government and threatening it with economic armageddon if it does not hand you billions of taxpayer dollars? Whether it's a loan or a handout makes no difference - the very issuance of such a threat is a declaration of trust behavior banned under The Sherman Act, among others. We need no new laws to deal with this situation - we simply can and must enforce the existing ones.
We cannot withstand another attack.
Stiglitz, in a remarkable display of truth, said today that The Federal Reserve System is corrupt. He's right, of course. What other explanation is there for an institution that literally sat back and watched more than $10 trillion in fraudulent credit creation take place - all so a bunch of banksters could make billion-dollar bonuses? This must change - here and now.
We cannot withstand another attack.
But we're gonna suffer one, and soon, if we don't pull the fuse.
The Credit Default Swap monster has to be caged. I know I sound like a broken record, but it has to happen. Now. Today. I don't give a damn if the banks like it or not. I don't care if bankrupts all of them. It has to happen now.
The off-balance-sheet crap has to be exposed and valued, along with everything else, at the market. Yes, I know it will cause major problems for the banks. I don't care. It has to be happen now.
We have to get control of federal spending. We cannot spend $1.3 trillion more a year than the government takes in via taxes. We just can't. We're getting away with it right now because everyone is scared that Greece is about to blow the Euro Zone to pieces. But once that either happens or the fear recedes, the speculators will point their weapons of financial destruction here. We have either fixed the problem before then, or we're next.
And finally, we must know what The Fed is holding, what they've bought, what they've monetized, who got paid off and what sort of trash is hidden in the black hole known as their balance sheet. This means full audits - now and evermore in the future. No exceptions.
If you remember back when Paulson's "bazooka" was first discussed I said that the market calls all bets.
It did.
Within days.
We're there again folks, about to witness the market calling our leaders' bet again, and we are enjoying a respite only because there are other hookers in the room of nations with a worse case of crotch rot than we have.
But that's not a sign of strength - it is a sign of danger, for our own particular financial STD has not been cured.
We're running out of time to take the penicillin.
And hereeeeeeeeeees..... CENSUS!
In February, employment in the federal government edged up. The hiring of 15,000 temporary workers for Census 2010 was partially offset by a decline in U.S. Postal Service employment.
Yep.
Headline number was -35,000 and the unemployment rate held at 9.7%, both headline. Everyone's fear of a huge weather impact was instantly dashed, as the BLS said they couldn't quantify any changes in their sampling "accuracy." Given their methodology the most-likely place for any real impact to show up is in the hours worked, not the actual employment rate, and that did tick down by a tenth.
The internals in the household survey, however, showed real improvement.
Unfortunately we're nowhere near the 200,000 or so net job adds that we need to find in order to cover new entrants to the workforce, but these tables are a marked improvement over the previous months:
Essentially flat-lined. That's good, actually, off the household numbers.
Ah, that's where it came from. Essentially all of the "improvement" in the monthly household data came from those formerly leaving the labor force coming back in.
That is, there was no net hiring of new entrants to the labor force, but the insane rate of "drops" reversed and some of those who were discouraged re-entered the workforce. And indeed, if you look at the U-6 number you'll see that not-seasonally-adjusted it fell from 18.0 to 17.9. Note that on a seasonal adjusted basis BLS claims that the U-6 rate increased by three tenths (to 16.8 from 16.5), which is curious and implies that the seasonal expectation is for a big rise in shift out of "not-in-labor force" and other "marginally attached" people - and they didn't get it.
Interestingly enough if you look at the previous years monthly numbers do show a significant spike in this month. Is the BLS overly pessimistic with their seasonal adjustments or are we seeing a real turn? No idea - yet - but seasonal adjustments won't account for Census temporary hiring, which will continue through the spring (and then result in firing come summer!)
Everyone (myself included) expected census hiring to be significnat, and it is. The release of the data caused an immediate spike upward of a few points in the futures, but it also hammered the ten year Treasury rate (upward.)
The key is sustainability, and unfortunately the census employment will skew this in a way that is going to be extremely difficult to back out until the summer months when it ends and those people are laid off. If that hiring and the pay disbursed as a consequence produces a significant upward swing in spending, there could be a salutary knock-on effect in the private sector. But that's a big if, as it requirs that those people employed by the Census spend the money instead of paying down debt and deleverage their personal balance sheets.
All-in the report is a definite positive but right in line with expectations, given government activity. My short-term concern is the offsets from announced job actions in various state and local governments as they attempt to avoid their own insolvency, balanced by the Census activity.
Krugman sharts once again with an amazing bit of partisan hackery:
But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.
Ah, here we go - an appeal to morals. Why did I know - right in the second paragraph (and why did you bury the leade, Paul?)
Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.
But this makes an assumption Paul, and one that you and the rest of the Democrats have refused to face (to their credit, the Republicans haven't faced it either!): This sort of "bridge" or "pump priming" only works if there is underlying final demand that can come back.
But here's the problem - the so-called "stimluls" didn't do much in the US. Why not? It stimulated China!
The Senators have singled out a particular wind project in Texas for criticism. China's Shenyang Power Group, the U.S. Renewable Energy Group and a Texas company called Cielo Wind Power are involved in a joint venture to build a 648MW wind farm. The Senators says the project is on the verge of receiving $450 million in grants, despite the fact it uses Chinese-made turbines, and that the lion's share of jobs it creates are in China.
Yeah.
In point of fact, that 1603 "green" recovery act stuff has, thus far, diverted eight out of ten dollars outside of the United States.
This belies the real issue that underlies all of this.
Take Chicago. It used to be home to the Zenith picture tube plant in Melrose Park which, as you might surmise, made television picture tubes. It had been there for a long time.
But in 1998 it was announced that the plant would close, as the company was losing $300 million annually trying to compete with offshored production by people working in near-literal slave conditions with no environmental laws to add cost to the product. Thousands of good-paying local jobs disappeared.
I used to drive by that plant on a regular basis, the proud sign of American manufacturing throwing its illumination on I-294. My parents owned a Zenith television when I was growing up.
That's a microcosm of what's happened. We've offshored our production, by and large, to places like China. What has replaced these jobs are positions in finance, which is a parasitic enterprise - that is, it obtains the money that is "earned" not from producing things, but from siphoning off cash flow from everything it touches.
Such a shift is inherently destabilizing. We made up for it by running our credit cards to the moon, both figuratively and literally. We blew a bubble first in Internet stocks and then in housing, which allowed people to then "access" (the true word, "extract", is so ugly isn't it) the faux value that we claimed it. We, on balance, did so and spent it.
The error in Krugman's analysis is that he believes that all this "pump priming" will do the job and the economy will recover, allowing us to pay back what he avers is an effective loan.
My question to Paul and all those like him: How?
We can't support a financial system that consumes 1/4 of every dollar that goes into the economy, siphoning it off. The margins are not there to permit that. They never were, but refusing to attend to this, as Paul and his cohorts have done (and to be fair, the Republicans are no better in this regard!) is how we wound up with a debt bubble.
So what's the solution?
As much as you don't want to hear it there are only two answers:
Both of these outcomes require that the financial system's "grift" shrink dramatically. It cannot be otherwise. But #2 means the end of the social program "backstop" that we currently have, because it cannot be sustained.
We cannot spend $1.3 trillion more than we take in via taxes for these "support programs" indefinitely. Krugman thinks we can, but he's wrong. Iceland thought this, Greece thought this, Argentina thought this.
You know what happened in the former and latter, right? The middle nation in that list might meet the same fate. Their so-called "austerity measures", from my back-of-the-envelope calculation, won't work. It's nowhere near enough!
Now let's look at what did happen to Greece. Their 10 year bond offering went off at 6% - double what Germany is paying to borrow for the same amount of time.
What happens if our bond carrying costs double?
We carry, today, $8,026 billion (that's $8.026 trillion) in publicly held debt in the United States. Ignoring the $4.482 trillion in "intergovernmental holdings" (that's fancy speak for Social Security and Medicare "current issue" promises that we won't keep, as those "promises" back 20x that in claimed benefits for the next 75 years!) if we were financing the debt at our current 10 year rate we'd pay $289 billion a year.
Of course we don't do that - some of it is longer duration, some shorter. Last year it cost us about $180 billion in total, mostly because of the collapse in interest rates.
Now let's assume that we have a "Greecefire" here in the US and our Ten Year rate goes to 7%. Interest costs would go from $289 billion to $562 billion.
But that assumes we don't add to the debt, and we are. In fact, we added $1.4 trillion last year and will add $1.7 trillion this year. If we keep "pump priming" through the end of the decade (as the CBO says we will given their projections - and they are projecting GDP growth in the 4% range for the entire period!) we will go from the current $8.02 trillion to approximately $14 trillion in public debt by the end of the decade.
That figure, at 7%, would produce an interest cost of close to $1 trillion a year - or about half of all federal tax receipts.
So which is it Paul?
At some point we have to face the facts: We can't continue to spend more, as a nation or as individuals, than we make. We cannot make promises that are impossible to fund, instead putting it off with more borrowing. We must face the imbalances we have fostered in our economic system, along with the trade imbalances that we not only have fostered over the last 20 years but are feeding with so-called "stimulus" that instantaneously flows overseas instead of helping Americans.
There's plenty of blame to go around, but what is not helpful, and solves nothing, is ranting about how Jim Bunning's demand that these extensions in unemployment payments be offset with federal spending cuts somewhere else, or that they be taken from already-budgeted funds such as the TARP.
That, Mr. Krugman, was his objection. Not that the benefits were being extended, but rather that they were not paid for.
The liberals are always quick to pull out the national credit card. They've been doing so for the last 30 years. But this sort of spendthrift approach to everything that ails us has left us with a severely-imbalanced economic structure that no longer produces enough to carry its own weight.
The (credit) drunk needs a stint in detox Mr. Krugman, not another bottle of whiskey.
The Greek story is a universal tale… It will soon be played by the UK…and then it will be the US.
Let us summarize: Innocent fellows are seduced by debt. They fall in love with deficits. Debt proves to be an evil temptress. Our heroes are ruined.
Isn’t the story more or less the same in Britain and America too?
And now the pound is falling. It dropped below $1.50 on Tuesday. Instead of being a refuge against the troubled euro, investors are fleeing the English currency. Why? They figure that what happened to Greece could also happen to England. Britain’s budget deficit – at 12% of GDP – is almost the same as Greece’s, twice as big as the European average.
“If you really want a fiscal problem, look at the UK,” said Mark Schofield, a fixed-income strategist at Citigroup.
Not only does the government owe a lot of money, so do ordinary citizens. The overall level of debt is the second highest in the world, according to a Mckinsey study – right on the heels of Japan.
The falling pound makes it more dangerous to lend money to Britain. Investors have to worry not only about a default…but about a loss due to currency decline. This should push up the cost of financing Britain’s deficits, putting the nation in the same fix as the Greeks. Like Greece, Britain needs foreign lenders to fund its deficits. And like Greece, it will be forced to promise austerity measures, if lenders balk.
“This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.”
“If rates go up, it will be a very dangerous situation for me… It might lead me to consider bankruptcy,” said Sheridan King, a UK sales manager. “We are just struggling to get by with all this debt,” he added. “It’s time the government got its house in order.”
Bill Bonner
for The Daily Reckoning
Global Budget Deficits: A Timeless Love Story originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
Providing the world’s reserve currency has its privileges. Not the least of which is the continued willingness of foreigners to soak up the massive amounts of debt issued by the US despite the nation’s continued debasement of the dollar.
Yet, what if the foreign nations stopped buying? We’ve certainly heard of the calamity that should result from China cutting the US off, but perhaps we shouldn’t be so certain that’s the case.
Let’s suppose for a minute that it’s not. Mike Cosgrove investigates an eye-opening upside of a US without a market for its debt.
From Investor’s Business Daily:
“The Chinese and Japanese are our friends for two reasons: (1) Their net purchases help keep bond yields low, and (2) Chinese warnings about not buying more Treasuries or in fact selling Treasuries can send shock waves through capital markets.
“Congress and the Obama administration don’t seem overly concerned with huge federal deficits. But the administration does understand the crisis that would be created in capital markets were the Chinese to become net Treasury sellers, even for a short period of time.
“The Chinese can act as a constraint on the reckless federal spending of Congress and the administration. In fact, the Chinese may be the only realistic constraint in 2010…
“…The Chinese can lecture the administration about excessive federal outlays, but nothing would be more effective than dumping Treasuries, even for a short time. Such action would panic investors, and as a result the administration may well agree to constrain spending to placate the Chinese.”
In the scenario Cosgrove plays out, China has the potential to act like a caring relative who, familiar with the Alcoholics Anonymous process, is ready to perform an intervention. It’s hardly a painless process, but perhaps the US debt market needs to hit rock bottom before the administration will walk the road to recovery.
You can read more about Cosgrove’s theory in an Investors.com editorial on why the Chinese can’t dump our debt too soon.
Best,
Rocky Vega,
The Daily Reckoning
China Dumping US Debt Could be Great for America originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
