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."
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."
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."
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."
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."
Whoever said, “Opposites attract,” didn’t know what they were talking about…or maybe they did know and just didn’t provide all the details.
The world around us provides ample evidence that opposites do, in fact, attract…but not always toward a favorable outcome. Sometimes opposites attract like gravity attracts a crippled airliner…or like a field mouse attracts a rattlesnake…or a bare foot attracts a rusty nail…or a Rusty Nail attracts an alcoholic…or accounting chicanery attracts a gullible investor.
Accounting chicanery converts sad truths into happy stories and statistics. And no one loves a happy story more than a gullible investor. If it were not so, dear reader, Wall Street would still be an anonymous little alley in Lower Manhattan. Instead, Wall Street has enriched itself by converting sad truths into happy stories as often as possible.
Wall Street doesn’t usually lie; it merely fails to tell the truth. The resulting deceptions cause their clients to suffer delusionary episodes at inopportune moments. Sometimes their clients mistake the very top of a bull market for a “deep value opportunity”; and sometimes they mistake a fraudulent earnings report for “a great growth play.”
These classic investment errors are not entirely Wall Street’s fault. But behind every major investment error you usually find at least one glossy research report. The Wall Street research machinery knows how to tell the kinds of happy stories that will elicit buy orders from gullible investors. And they keep telling these stories because gullible investors keep believing them.
Remember Enron? That was a happy story for many years…so was Boston Chicken…and Worldcom…and AIG…and Fannie Mae…and Lehman Bros. But these infamous disasters all featured a variety of sad truths in their financial statements, well before disaster struck their stock prices. A handful of insightful short-sellers made some money as these stocks collapsed, but gullible investors simply lost everything…or almost everything.
Accounting chicanery takes many different forms, but it always produces the identical result: deception.
Remember, we’re not talking about lying; we’re talking about not telling the truth. Lying is not usually legal; but not telling the truth is not usually illegal. Let’s consider a bit of chicanery that is unfolding right below our noses at this very moment: Many banks across the country are reporting a drop in non-performing loans (NPLs). That’s usually a sign that credit conditions are improving.
But this time around, falling NPLs sometimes has more to do with accounting games than with credit quality. Some banks are utilizing every accounting mechanism in their toolbox to move lousy loans into a loan category – any loan category – other than “NPL.”
The astute minds at M3 Funds, an investment management firm specializing in bank stocks, provide this worrisome observation:
“Much of the enthusiasm in the bank sector [is] based on perceived signs of a turning point in the credit cycle. However, in many cases, improvement in credit quality is the result of loan modifications, a financial sleight-of-hand tactic that only optically improves credit quality in the near-term.
“A modified loan appears when a bank takes an existing loan on its balance sheet (often one that is no longer paying) and alters the terms to keep the borrower from defaulting. Modifications usually take the form of an extension, temporary below-market interest rate, or an interest-only grace period. They help banks delay collateral repossession, but in doing so only push problems down the road. In past cycles, the re-default rate on modified loans was more than 50%. Despite such a high failure rate, banks utilize modifications, in part, because they instantly improve credit, as most institutions do not classify a modified loan as nonperforming.
“Nowhere was this practice more evident than in the regional bank space…SunTrust Banks (STI) reported a 2.5% decline in non-performing loans (‘NPLs’) for the fourth quarter, and many analysts were quick to anoint this second consecutive quarter of improvement as an inflection point in the credit cycle. Consider though, that over the past two quarters, NPLs have declined by $101mm, but modified loans increased by $716mm! Still, shares of STI increased by 20% in January, despite losing $245 million for the quarter. TCF Financial (TCB) and Zions Bancorp (ZION) reported similar trends: modest increases in NPLs coupled with dramatically higher loan modifications…
“With negative trends in commercial loan quality beginning to develop and loan modifications being used as a temporary crutch, we believe the banking sector is still facing meaningful credit losses over the upcoming years…”
Beat the rush; sell bank stocks now.
Eric Fry
for The Daily Reckoning
Sell Bank Stocks: The “Truth” Behind Non-Performing Loans 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 economic center of gravity will not always reside in the United States. In fact, it’s already in the process of shifting from the US to Asia and the Middle East. Forward-looking investors cannot afford to ignore this trend.
One of my favorite ways to invest in the rapidly growing emerging markets is through the back door, so to speak. Invest in companies, wherever they are, that have what these economies need or want, but don’t have. Airliner production is a classic example.
I bet most Americans would be surprised to learn, for example, that the Middle East is a very important market for new jets. The Gulf’s leading airlines – Emirates (out of Dubai), Etihad (out of Abu Dhabi) and Qatar Airways have become big reasons why Boeing and Airbus make any money. “The Middle East is still the hub of aviation growth,” says Airbus CEO, Tom Enders.
According to informed guesses, the Middle East will buy 1,400-1,700 planes over the next twenty years, at a cost of $240-300 billion. These planes will support passenger growth of nearly 5% annually over that timeframe. Many other developing nations around the globe are also becoming active buyers of passenger jets. Airbus just signed a $1.8 billion deal with Vietnam Airlines for four A380 super-jumbos and two A350s. Ethiopian Airlines recently put in an order for 12 A350s, at a cost of $3 billion. These are just two examples.
The Asia-Pacific region, despite the impressive growth out of the Middle East, is still the largest buyer of aircraft. Over the next 20 years, for instance, the Asia-Pacific region will require close to 9,000 planes, at a cost of over $1 trillion.
I’ve focused mostly on civil aviation. But there is also defense spending. In the Middle East, defense spending will probably rise to more than $100 billion by 2014, from only $36 billion now, according to a new study by consultancy Frost & Sullivan. That’s why Lockheed Martin recently announced it would double its capacity to produce the C-130 Super Hercules – because of increased demand from the Middle East.
Also, I can’t end without saying a word about the world’s urge to lower carbon emissions. The industry has pledged to cut its carbon emissions in half by 2050 – an effort that will require new planes with lighter material, different design and innovative engines.
Despite all the good news on the aviation front, there is a fly in the soup that Boeing and Airbus will have to fish out before long: They are having a hard time making the planes on time. This is a rather fascinating subject on its own, given the history of aviation. In 1944, for example, Boeing used to crank out 16 B-17 bombers every 24 hours. Today, it’s having a hard time producing one of its ballyhooed Dreamliners after more than two years of trying. Airbus has had its share of delays as well.
Eventually, they’ll sort it out. Eventually, they will build the new planes. There are lots of ways to play on these ideas as an investor, as these new planes ripple through the supply chain.
My favorites are the titanium producers. Titanium is a lightweight metal. In fact, it has the highest strength-to-weight ratio of any metal, making it ideal for aircraft. The newer planes are titanium intensive, more so than in the past.
Our play here is Titanium Metals (NYSE:TIE), the second-largest producer of titanium in the world. It has a solid financial position with lots of cash and no debt. It’s stayed profitable, even through the slump. And Wall Street doesn’t expect much from it, as analysts rate the stock as a poor performer. The potential upside when it comes makes it worth hanging onto. In TIE’s heyday back in 2006, it was a $40 stock. Today, it’s about $13. All cycles turn, remember. And this one will, too. The company only recently signed a new agreement with Boeing that will keep it as a key supplier through 2015.
Titanium Metals has the potential to be a big winner once the aviation cycle gets in full swing again.
Regards,
Chris Mayer
for The Daily Reckoning
Titanium Metals (NYSE:TIE): Investing in Aviation Growth 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 rhetoric is heating up between the Germans and Greeks. In the latest episode, two German politicians told Germany’s bestselling Bild newspaper that Greece should set about selling assets to work down its debt, including publicly-owned uninhabited islands, and national historical treasures like the Acropolis and the Parthenon.
From the Guardian:
“Alongside austerity measures such as cuts to public sector pay and a freeze on state pensions, why not sell a few uninhabited islands or ancient artefacts, asked Josef Schlarmann, a senior member of Angela Merkel’s Christian Democrats, and Frank Schaeffler, a finance policy expert in the Free Democrats.
“The Acropolis and the Parthenon could also fall under the hammer, along with temptingly idyllic Aegean islands still under state ownership, in a rush to keep bankruptcy at bay.
“‘Those in insolvency have to sell everything they have to pay their creditors,” Schlarmann told Bild newspaper. “Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.’”
Naturally, the whole matter got Greeks up at arms about the idea of boycotting German products, including the nation’s consumer federation. You can read more about the developments at the Guardian’s coverage of how, according to German MPs, Greece should sell their islands to keep bankruptcy at bay.
Best,
Rocky Vega,
The Daily Reckoning
Germans to Greeks: Sell the Acropolis, Parthenon, and Your Aegean Islands 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."
Miserable cities…ghost towns…angry voters…
Market flash:
The Dow was flat yesterday. Gold rose $2. And Greece said it was making progress towards cutting its deficit.
Yesterday we looked at America’s most miserable cities. Today, let’s take a gander at its new “ghost towns.”
There are many towns and cities that are losing population…losing key industries…and probably on the verge of extinction. USA Today mentioned some of them in a cover story this Tuesday.
Ravenswood, W. Va., for example. It has 4,000 people and one major business. It’s a one-horse town, in other words, and the nag is leaving. The aluminum works are partly shuttered already, says USA Today; the rest is for sale.
What’s going to happen to Ravenswood? It could become a ghost town.
There are already dozens of towns in West Virginia that are inhabited mostly by ghosts. They’re relics of the booms and busts of the past. Mining, logging, railroads – each one created it own towns. Then, the profitable industries of the 19th and 20th century became unprofitable somewhere along the line. People left. Those who remain live among the shades.
The booms and busts of our time are simply claiming more victims. Cleveland is losing population. So is Baltimore. So are dozens of US cities.
“In the America where things are made the recession has a depression,” continues the report. “According to a new Northeastern University study, one in every six blue-collar industrial jobs have disappeared since 2007.”
And one in five adult males of prime working age is out of work. There are fewer and fewer factory towns in the US…and fewer and fewer jobs for people who work in them. And now comes word that auto sales in February fell nearly 4%. And early estimates suggest that the job report coming tomorrow will be depressing.
“Industrial workers are dinosaurs,” says one laid-off worker, now retraining to be a traveling nurse.
Hmmm… Let’s see. How does this work? No one makes anything anymore. We all become service industry workers…looking out for one another. I give you $5 for cutting my lawn. You give me $5 for cutting your hair. Neither of us has a penny more. How then do we afford to buy anything?
“An industrial town makes products that bring wealth into a community; a post-industrial ghost town as a zero-sum economy – people in marginal jobs ‘serving and paying each other,’” says USA Today.
Services don’t make people wealthier. They may make them more comfortable. But real prosperity requires real stuff – food, cars, tables, light bulbs, iPads.
Of course, you could offer services to people who make these things. A small nation, such as Singapore, for example, could earn a living by offering financial services. A Caribbean island could offer vacations. But what can a great nation like the US offer? It can’t get by on services. And it can’t support half its population on welfare, unemployment and food stamps. It needs manufacturing…it needs to make things…and sell them.
Why doesn’t it do that already? How come so many people are out of work? How come men can find jobs?
Ooh la la…too many questions. But when was the last time you heard a mother proudly announce that her son was going into manufacturing? Or that he was learning to be a machinist? When was the last time you saw a major factory under construction? When was the last time you picked up something in a shop, turned it over and found “Made in America” stamped on the underside?
Bill Bonner
for The Daily Reckoning
America the Service Industry 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."
Happy inauguration day! Today we begin with this little known factoid: For the first 143 years of the American Republic, presidents were inaugurated on March 4, the only day of the year that is also a command.
The date was moved up to Jan. 20 in 1932 when the activist president Franklin Delano Roosevelt couldn’t wait to wring his hands around the neck of the US economy. Roosevelt set in motion 78 years of what the economist Friedrich von Hayek called the “fatal conceit” – the arrogant belief that anyone could know enough at any one time to plan an economy.
Today, we’re paying the price. A little-noticed Treasury report that’s supposed to provide an honest accounting of the government’s finances is now being manipulated just like everything else.
The Financial Report of the United States Government applies generally accepted accounting principles to arrive at a realistic appraisal of the annual deficit. In a typical year, that’s up to twice the official number. But in fiscal 2009, the “real” number is actually lower than the official record-shattering $1.4 trillion.
Statistical watchdog John Williams laments this year’s report reflects “accounting that might be considered questionable if it were used in the private sector. The relatively ‘positive’ 2009 results reflected capitalization of much of the government’s bailout efforts, a late ‘profit’ from TARP, questionable handling of some post-fiscal year liabilities and changes in actuarial assumptions.
So hinky are the numbers, the Government Accountability Office refuses to sign off on the report. In a statement, the acting comptroller general invokes “material” questions of how the Treasury is valuing bailout-related liabilities and assets. In other words, Treasury under Tim Geithner is employing mark-to-make-believe just like the banks he used to oversee when he ran the New York Fed.
Addison Wiggin
for The Daily Reckoning
Not-So Honest Accounting of Government Finances 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."
Is annualized M1 money supply growing at three times the rate the Federal Reserve is reporting? This is a critical question recently explored by Zero Hedge, which believes the actual growth rate of US dollars “is approaching hyperinflationary levels.”
According to Zero Hedge:
“For historical reasons unimportant to the point of this analysis, the Federal Reserve in the past has only created cash currency. However, the unprecedented changes it has engineered over the past two years have resulted in a vast amount of deposit currency being created by the Fed. Instead of purchasing paper from the banking system solely with cash currency – its traditional form of payment to ‘monetize’ assets by turning them into currency – the Federal Reserve since the start of the financial crisis has increasingly relied upon deposit currency to purchase paper.
“Regardless how the Federal Reserve pays for the paper it purchases – cash currency or deposit currency – it is creating dollar currency and perforce expanding the money supply. But the traditional definition of M1 does not accurately capture this process when the Fed uses deposit currency to pay for its purchase. In fact, it is totally excluded. Because the Federal Reserve did not create deposit currency in the past, none of the Ms take it into account.
“Consequently, the traditional definitions of the Ms are outdated because they do not capture the total quantity of dollars in circulation. Because M1 is underreported, so too is M2.
“Unprecedented Deposit Currency Creation by the Fed
“There has been an unprecedented amount of deposit currency created by the Fed over the past two years. The following chart illustrates this point. It shows the quantity of demand and checkable deposits, i.e., the amount of deposit currency, at the Federal Reserve since December 2002.
“From December 2002 until the collapse of Lehman Brothers in September 2008, the quantity of deposit currency created by the Fed averaged $11.8 billion, an amount that is relatively insignificant compared to total M1. Presently, it stands at a record high of $1,246.2 billion, which of course is highly significant.
“More to the point, none of this deposit currency is captured in the traditional definition of the Ms. The quantity of dollar currency is therefore significantly underreported…”
The full description of how the deposit currency creation process may be hiding hyperinflation is available from Zero Hedge. Visit its coverage of the underreported US dollar money supply, including a second chart, for all the details.
Best,
Rocky Vega,
The Daily Reckoning
Underreported Money Supply may be Disguising Hyperinflation 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."
Okay, I will admit that we had a little accidental gunfire around here recently, but nobody was hurt, and all that really happened is that I wasted a lot of very expensive ammunition and scared the hell out of a lot of people, including myself, a commotion which instantly activated my Amazing Mogambo Reflexes (AMR), making me drop the delicious Hostess Cupcake that I was noisily eating and take cover on the floor, falling, as I did, on top of the aforesaid cupcake, smashing it all over myself, and all over the floor, which made it taste terrible after that.
But the surprising gunfire was not my fault, as I had just read that the Federal Reserve is being as dangerously incompetent as ever by continuing to massively increase the money supply (which is so horrible because it causes inflation in prices) so that they can buy up (monetize) at least a part of the massive, monstrous, mega-moolah Treasury debt issuance that will be necessary to fund the unbelievable sum of, as I understand it, $1.9 trillion in government deficit-spending in the upcoming One Freaking Year (OFY) as a result of the massive spending of the terrible, awful, worse-than-I-had-feared, demon-from-hell Obama administration, plus trillions more for the needs of the private sector, and a trillion or so in Congressional “supplemental appropriations” throughout the year as Congress periodically, almost ritually in a Satanic kind of way, “discovers” that their original estimate of their borrowing needs was inadequate, and – surprise! – that these slimy, lying bastards need LOTS and lots more money!
I can see by rereading that paragraph that I was so wrapped up in heaping Massive Mogambo Scorn (MMS) on the arrogant, radical-Left Obama, on every sniveling Democrat in the place, most of the Republicans, and on the despicable, guilty-as-charged, incompetent Federal Reserve that I never actually got around to telling you how much money and credit the Fed created last week, which was the original point I was going to make for some reason other than decrying such irresponsible expansions of the money supply that will guarantee horrific, economy-destroying, dollar-destroying, soul-destroying inflation in prices, but I forgot what I was planning to say about it, to tell you the truth, but with or without it, the increase in Fed Credit last week was another $5.2 billion, which (although terrifying), is less than his usual increase, and at $5.2 billion, is merely twice the usual weekly rate of money and credit creation by the monster Alan Greenspan, former chairman of the Federal Reserve, who – single-handedly! – created all the economic mess of the world by merely creating $10 billion-or-so per month of new Federal Reserve money and credit!
Now, Fed chairman Ben Bernanke, a clueless academic, still stubbornly hews to that same, tired, insipid-yet-stupid neo-Keynesian econometric theory that has now been shown to be not only wrong, wrong, wrong, but also stupidly and catastrophically wrong, which doesn’t say anything at all about the morons, like Ben Bernanke and Alan Blinder, who are themselves mere representative examples of the neo-Keynesian econometric bozos rampant in the world today, all of whom believe in such imbecilities as their precious economic theories in the face of, literally, overwhelming evidence to the contrary! It is absurd on its face! Ya gotta laugh! Hahahaha!
Interestingly, a crucial part of the stupid Keynesian nonsense holds that the government can, by virtue of borrowing the money, replace any perceived lost “consumer demand”, in any economic downturn, by merely borrowing and spending money, even if borrowing and spending money was the cause of the original downturn, and that there are no repercussions that cannot be solved by more borrowing and spending, and that inflation in prices has nothing to do with the money supply but with irrational exuberance! Which doesn’t even make any sense! Hahahah! It doesn’t even freaking make sense!!
Sharp-eyed Junior Mogambo Rangers (JMRs) will recognize the two exclamation points as indicators of something, usually the preceding sentence (as in this case), as being very important, as, now that I notice, it is, in this case, in that it is Beyond Freaking Crazy (BFC)!!!
Horrors! The punctuation using the rare triple exclamation point! You can tell I am on a roll here! I suggest you go to someplace safe in your house where your enemies would have to attempt a painful frontal assault against you, and as you wait, you think to yourself, “Obviously, this is extremely important! As indeed it is, now that I think about it after it has been drawn to my attention, thanks to the Magnificent Mogambo (MM), because you do not get anything except total, unmitigated disaster from inept management by people who cannot be controlled and who are Beyond Freaking Crazy (BFC)!”
I am very proud of you for thinking this, as it shows that it has all become clear: The preponderance of people on this planet, and in our universities, and in our media, and in our governments, and in our central banks are BFC lunatics if they think that borrowing (racking up debt) and spending money will “cure” the bust of the boom produced by borrowing (racking up debt) and spending the money! Hahahaha!
I immediately think of the joke, “Doctor! I’ve been gorging myself, but I never lose any weight!” but it doesn’t seem to fit the conversation, somehow, and it doesn’t really seem to have anything to do with anything I was talking about, which makes me think that maybe my subconscious is telling me that I SHOULD have been talking about it, which doesn’t make any sense, either, because I don’t think anyone needs advice on how to gorge themselves, and in fact, people seem quite disgusted when I do it, although it makes their kids laugh, meaning that the kids like me better than they like their own parents, which is a small victory for me and, although small, is a victory.
So I say to the kids, who just showed how much they love me, “Hey, kids! Tell your parents that they are idiots unless they buy gold, silver and oil right now, because unless they do, they are going to be poor when excessive government deficit-spending and excessive Federal Reserve over-creation of money and credit make prices soar as the buying power of the dollar falls, which means that you will be poor, and you tell them how you don’t want to be poor, and how you have been thinking about, in an idle sort of economic self-defense way, the many, many advantages of being too young to be charged with a capital crime should they fail to acquire the aforesaid gold, silver and oil!”
This is where the parents turned around and gave me this “dirty look”, which I interpreted to mean, “I surrender, under protest, to your magnificent, powerful presentation of the case for gold, silver and oil, enhanced by the paranoid notion that my own children are threatening to kill me in some bizarre extortion racket involving gold, silver and oil that you have planted in my head, which I realize is all for my own good because I now see that only an idiot would not buy gold, silver and oil when the government and the banks are acting so despicably! Thank you, handsome stranger!”
The name’s Mogambo, ma’am. It’s my job.
The Mogambo Guru
for The Daily Reckoning
Borrow and Spend Economics to Pay for Borrowing and Spending 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."
What a day the currencies had yesterday! The euro (EUR) gained ground all the way back to 1.3730 (but saw some profit taking at the end of the day) and all the other currencies followed in step… Now… There’s two ways to look at this… Either the euro is like a star that’s getting ready to burn out… (It always shines brightest before it burns out), or… It’s like a star that had been covered up by another planet, and is coming back into view!
I tend to think it’s the latter of the two… But, the euro is not out of the woods, with regards to Greece, and any thoughts to that end will be quickly met with disappointment, I’m sure!
The news overnight was quite damaging to the euphoria that the aid package of 34 billion euros provided the other day. German Chancellor, Angela Merkel, whom I’ve quoted many times in the past and believe she “gets it”, put a dagger in the heart of the aid package when she said that a planned meeting with the Greek Prime Minister, “won’t be about aid commitments”… Uh-Oh! What’s Ms. Merkel telling us? That the 34 billion euro package to Greece that the media reported on last Saturday is not going to materialize? That stinks!
Look, as I said the other day, I’m NOT for bailouts, and in the Eurozone, one bailout of Greece would probably beget another bailout of the next sister state of the poor; the needy would be lined up at Germany’s doorstep looking for a handout… However, it looked the other day when it was announced like this bailout was what the markets wanted to see, to provide calm to the region. So, in that vein I’m all for it… But… Now Ms. Merkel has thrown a cat among the pigeons.
The French finance Minister seemed to be singing from the same song sheet as Ms Merkel, as she said, “if there is a need for assistance, there will be a way to do it, but there is no need at this time.”
I guess the results from today’s auction of a 10-year Greek syndicated bond offering will dictate whether there is “need” or not, eh? I mean, if Greece can’t get bonds sold, that’s pretty telling, right there! More on Greece in the “then there was this section”…
I guess we’ll have to tip toe through the tulips with the currencies right now, it’s just not out of the question…
The news on the day brought us information on how the US service sector ramped up, which reminds me of the status of the US economy before the financial meltdown. We had become a service sector economy (and our service was horrible!), which is not exactly what good economies are made of. You need to make things… Manufacture things… Grow things… And so on… Not just service someone else’s products that are shipped to your country and made elsewhere! This makes us big on consumption… And I used to say this over and over again back in the day, that consumption does not build wealth! In fact… The Big Boss, Frank Trotter, tells a story about consumption… He says that he was walking through an old cemetery and most of the long perished people had recorded that they had died from consumption… So, even back then it was not a good thing!
But with 21% unemployment, I can’t imagine that consumption would get to the levels it got to before the financial meltdown…
Oh! And add one more state to the list of states here in the US that have basically gone into default, failing to pay this, that or the other thing… Massachusetts, went into the red on their pension payments last month, and had to borrow from the government to make the payments… Recall a couple of weeks ago, when 49 of the 50 states had snow on the ground? I’m afraid we’re headed toward that same kind of roll call when it comes to defaulting states here in the US.
One of the best performing currencies of the past week has been the Brazilian real (BRL)… Recall when the Brazilian Sovereign Wealth Fund (BSWF) first came on the scene promising to buy dollars and make the real weak… I said, “it would only work temporarily, and only as long as the BSWF has an appetite for dollars”… Well, from the looks of it, the BSWF’s appetite for dollars was satisfied… Or… They are setting a trap… I’ll say to tread carefully here, for a while; do not go “all in”.
More good news from Australia last night… Australia’s trade deficit narrowed more than expected in January… Exports of raw materials increased and imports for fuel decreased… Now that’s a winning formula! The Aussie dollar (AUD) was over 90-cents most of yesterday, then succumbed to profit-taking and fell below the 90-cent figure briefly overnight… But it has rallied back to the figure early this morning… It seems that 90-cents has been a real big hurdle for the Aussie dollar to get past since falling below it in January. So… Without a chart, I would say that it looks like a line of resistance… Or… Traders just don’t want to get behind it above 90-cents until the problems in the Eurozone fade. I personally like the latter of the two!
Oh! And the trade deficit narrowed by A$1.18 billion in January to A$2.17 billion! WOW! A couple of good months and that could be wiped out completely!
My friend, Ashish Advani, will be very happy this morning, as the Indian rupee (INR) has gone below the 46 figure with a huge leap! Unfortunately, this is where the Indian Central Bank normally steps in to stop the rally of the rupee. But, hey! We can hope the central bank doesn’t act, and that the rupee can continue on its own happy path higher… Just wishin’, and hopin’, and thinkin’ and prayin’.
Over on this continent… Canada will be seeing the color of the budget for the first time today. I would think that Canadian officials would be quick to get the budget passed as to not upset the applecart of what’s positive in Canada right now. Speaking of what’s right… The economy… The latest report of manufacturing will print today, and is expected to reflect the manufacturing index to surge higher. If so, that’s another notch in the belt of the rate hike campers!
The European Central Bank (ECB) and the Bank of England (BOE) both meet this morning, but both are meeting with handcuffs on, for they couldn’t raise rates if they wanted badly to do so! In the ECB, I’m sure the official statement by ECB President, Trichet, will center around when further stimulus may be removed. And in the BOE, I’m sure they will be discussing the continuance of quantitative easing, as things in the UK economy remain pretty dire.
It’s Thursday, and that means…. Drum roll please… That means we’ll see the latest Weekly Initial Jobless Claims report! We’ll also see a factory orders report, and the stupid non-farm productivity report… So… The Jobless Claims carry the BIG STICK today, data wise!
Carrying the big stick tomorrow will be the Jobs Jamboree! More on that tomorrow…
And… It appears that there’s yet another smoking gun in US Treasury Secretary Geithner’s office… This time it centers on his participation in the AIG bailout, on a different angle than previously discussed… I can’t believe that the Treasury Secretary is still around, quite frankly. It seems that he could have been sacrificed to save face for the government by now… Maybe as this story unfolds, that will be the case… Not that I want to see him lose his job, mind you… I just think this whole thing while he was President of the NY Fed stinks!
Then there was this… It seems that the Greeks didn’t like the 6 billion euro spending cut that the Greek government put together yesterday to calm the markets. Greece’s federation of civil servants unions decided on a work stoppage tomorrow beginning from midday, and a protest rally in Athens to oppose the government’s austerity measures… There was also a report that the Finance Minister’s building was blocked by protesters.
I see the same kind of insurrection in this country if our government were to make “real spending cuts”… But for now, we don’t have to worry about that, for, our government, bless their hearts, is not making “real spending cuts”, instead, they are spending more money we don’t have, and will never be able to repay!
To recap… The currencies really had a nice performance yesterday, but that was wiped out, first by profit taking, and then the putting of the Greece bailout on hold for now… Has the Brazilian Sovereign Wealth Fund’s appetite faded for dollars? It appears likely… And the best performers on the day appear to be Canadian loonies, and Indian rupees…
Chuck Butler
for The Daily Reckoning
Greek Spending Cuts Lead to Civil Unrest 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."
I have to say front and center this morning, that while it may have taken the currency traders half a day to realize that Australia had raised rates, they finally began pushing the Aussie dollar (AUD) higher versus the green/peachback. I was beginning to think that I would have egg all over my face again, when the Aussie dollar didn’t respond right away… But it was all right on the night.
I had someone send me a note yesterday that was a little confused about the statement I made about the euro (EUR) getting dragged through the same mud as pound sterling (GBP) on the crosses… So for anyone else who’s thinking that this didn’t make sense… Here’s the skinny… If traders are beating up sterling through the sterling/dollar pair… Then the dollar is getting bought… But for those who have euro/dollar pairs, they get caught in the crosshairs of the sterling/dollar pair. It doesn’t have anything to do with the fact that sterling isn’t a part of the euro, etc… It’s in the crosses… If there’s so much dollar buying versus sterling, the dollar buying will carry over to euro, and other currencies… It’s not a one for one thing… And it takes a lot for a currency like the euro to buck the trend when the dollar is so strong versus sterling.
So… Just when I talked about that yesterday, sterling began to rally versus the dollar! HA! I said to myself…
I read some research reports yesterday that suggest that the short positions with euro are beginning to fade… Hmmm… That brings me to something that I referred to yesterday on my writer rage… Recall when I told you that George Soros said he believed gold to be the ultimate bubble, but then it was revealed that his fund had been buying gold?
Yes, get you all to sell your gold, so he can buy it cheaper… Well, that’s exactly what was going through my mind when I read the story about him calling for the collapse of the euro… I wouldn’t trust that guy if he was swearing on a stack of bibles! Anyway… The research I read was a shot in the arm for yours truly who had been feeling a bit beaten and left for dead with all the bad stuff written about the euro… Yes, the euro deserved to take some losses due to the debt problems there… But again, put into the proper perspective, these losses should have been held to a minimum when compared to the debt problems here, and in Japan!
I see where the US government is telling hedge funds not to destroy trading records on euro bets… This all stems back to the thing I told you about with Goldman Sachs, where they helped Greece pull the wool over the eyes of the Eurozone with their derivatives on debt, and then created a company on the other side that shorts the euro, knowing that eventually the toxic stuff they sold to Greece would explode… Hey! I don’t make this stuff up, folks; it was reported all over the place!
Now, though… The US government is going to stick their hands in there, acting like they know what’s going on… This ought to be good…
So, to continue on with Greece… It looks like the “Chicken Littles” are returning to the roost regarding Greece’s debt, as not only is the 34 billion euros package helping, but Greece itself has announced some spending cuts that are of size, so at least they are taking this battle to heart, eh?
More good economic news in Australia last night, following up on the Reserve Bank of Australia’s (RBA) rate hike, we saw the color of the fourth quarter GDP, which climbed 0.9% from the third quarter, when it gained a revised 0.3%. I know that this isn’t near the red hot Canadian GDP which gained 5% in the fourth quarter… But… It’s now not a question of whether the economy will grow this year, but rather how strong it will be! And… Shows that the RBA’s four rate hikes so far in the past six months are warranted! There’s no longer a need to stimulate the economy, I would think, eh?
Let’s move north from the South Pacific to Japan, where there was some startling news on wages… Let’s go to the tape! Japan experienced the first gain in monthly wages in 20 months last quarter! Does this mean that Japan could really, truly, and undeniably leave deflation behind? NO… Not yet… We’ve seen these “signs” before, only to be disappointed the following month. But for now, at least, it sure looks like things are getting better for Japan’s deflationary economy.
Well… How about that Canadian dollar/loonie (CAD)? The markets took the hawkish sounding words by the Bank of Canada (BOC) yesterday and ran the loonie higher and higher versus the US dollar. Imagine there’s no US debt problem, it isn’t hard to do, imagine there’s no toxic waste on the Fed’s books through and through, imagine all the people, making things difficult for the loonie to rise… But it does anyway!
Somebody asked me the other day, why I include Illinois with California when I talk about the states in the US that have debt problems greater than the PIIGS (Portugal, Italy, Ireland, Greece, Spain)… Well, it just so happens that our bond guru, Don Ries, sent me a note yesterday from the UK Telegraph, where you’ll usually find the most excellent writer, Ambrose Evans-Pritchard… Let’s hear what mister Pritchard had to say about Illinois…
“‘Barack Obama’s home state of Illinois is near the point of fiscal disintegration. ‘The state is in utter crisis,’ said Representative Suzie Bassi. ‘We are next to bankruptcy. We have a $13 billion hole in a $28 billion budget.’
“The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. ‘It’s a catastrophe’, said the Schools Superintendent.
“In Alexander County, the sheriff’s patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid.
“Bad news: we’re back to 1931. Good news: it’s not 1933 yet.
“Ben Bernanke warns more is needed to help stabilize the financial system… $800 billion boost for flagging US economies in Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5%, and imposed a 5% levy on pension fees.
“The Economic Policy Institute says states face a shortfall of $156 billion in fiscal 2010. Most are banned by law from running deficits, so they must retrench.”
That’s all scary stuff, folks; and stuff we should be concerned with… Not whether or not Greece meets the Maastricht budget deficit target!
Gold sure had a great performance yesterday, adding $18 to its figure… As I said on Monday, gold was the number one pick of the presenters at the FX University Conference last week, with Norwegian krone (NOK) coming in second. Of course, I was a bit different than the rest of the presenters, as usual… I said that we could look for gains in Aussie, Canada, and Norway, along with gold and silver…
Then there was this… The US Postal Service projected $238 billion in losses over the next decade. Postmaster General John E. Potter plans to press lawmakers and the Postal Regulatory Commission in the coming weeks to eliminate Saturday mail deliveries and allow the mail agency to raise prices beyond the rate of inflation, if necessary.
Can you believe that? Another government owned business running in the red… I can see it costing us a buck to mail a letter at some point in the future! OUCH!
But… This is just another brick in the wall… We don’t need no austerity measures… We don’t need no cost controls… All in all it’s just… Another brick in the wall… The debt wall, that keeps going higher and higher.
To recap… It took a while for it to settle in, but the Aussie dollar finally began to get some wind in its sails after raising rates a fourth time in the past six months. Greece announced some austerity measures that will reduce spending, and the shorts on the euro have begun to fade. The US states that are in deficit trouble continue to grow.
GDP and Dollar Growth: It’s All Happening in Australia 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."
It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose-colored glasses handed out by our nation’s leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The “remedies” are postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.
However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.
I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.
Beyond the question of “how” the spending could be achieved, is the deeper question of “why” such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?
During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate related riches.
However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.
The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace – the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.
Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being “created” by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.
Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it’s not just about confidence; it’s about cash.
The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.
That, in a nutshell, is our government’s plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.
Regards,
Peter Schiff
for The Daily Reckoning
Don’t Bet on a Recovery 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."
US fiscal policy has been out of whack for so long that both Democrats and Republicans share a part in the blame. But, for a recent column in the Financial Times Gideon Rachman focuses on the Republican role in debt creation. In particular, he looks at how Ronald Reagan’s strengths and weaknesses in office have evolved over time into a muddled mess of tax and spending strategy.
From the Financial Times:
“The Republican party – with Ms Palin to the fore – is currently decrying the huge deficits being run by the Obama administration. But this is a recent conversion. Ever since the Reagan years, the Republicans have been the party of deficit spending.
“Conservatives once believed both in lower taxes and in balancing the budget. Under Reagan, they simply became the party of tax cuts, without any commitment to fiscal responsibility.
“Dick Cheney, George W. Bush’s vice-president, admitted as much when he told a cabinet colleague: “Reagan proved deficits don’t matter.”
“A mystical belief took hold that if you just cut taxes, the economy would grow fast enough to cover the shortfall – or government would shrink, almost by magic. Somehow it would all come right.
“This drift in Republican thinking was actually profoundly anti-conservative – because it elevated ideology (cut taxes at any cost) over a pragmatic commitment to good governance.”
The idea that tax cuts alone — without a reduction in spending — can increase the wealth of the nation was unrealistic at best. Over time that shortcut thinking has only lead to worse ideas, such as the belief mentioned above that deficits are no longer important. Unfortunately, there still appears to be no magic cure for deficits.
You can read more details in Rachman’s Financial Times commentary on how Reagan ruined conservatism.
Best,
Rocky Vega,
The Daily Reckoning
Tax Cuts Without Spending Cuts are a Mistake 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."
