Friday, February 5, 2010

“I am really worried about the United States … more worried than I’ve ever been in my career” Bob McDonald, CEO, Proctor and Gamble

John J. Castellani, president of the Business Roundtable, an association of chief executive officers of large U.S. companies, had this to say in May when Obama first proposed the changes: “President Obama’s plan today to increase taxes on American corporations is the wrong idea at the wrong time for the wrong reasons. This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn’t come at a worse time.”
"I worry a lot about the United States," McDonald told Reuters in an interview from his company's Cincinnati headquarters. "I worry about the deficit, I worry about an uncertain future."
McDonald said he has told government officials that they must "create greater certainty for business." The shift in tax policy toward multinational companies "would be a dumb thing to do" as it would make U.S. companies less competitive versus foreign ones.

Stocks Dip, Then Reverse Course Into Close

U-6 Unemployment Rate Explodes to 18%, a Post-War High!

from Zero Hedge blog:
The January NFP number came in at -20,000, a mere 5k away from Goldman's -25,000 estimate. Consensus was for +15,000. December, as all prior months, saw an expected major downward revision to -150,000 from -85,000. The January Birth/Death adjustment was for -427K from +25K in December. Despite a deterioration in every metric, the unemployment rate dropped from 10.% to 9.7%, even with a consensus at 10.0%. A glitch in the excel model is further corroborated when one considers that the civilian labor force participation rate actually rose in January from 64.6 to 64.7.

Yet a number that avoids some of the constant fudging by the BLS, the Non-Seasonally Adjusted number, hit a new recent record: instead of 9.7%, this number was 10.6%, a 0.9% increase from December!
The same can be seen in the U-6 data. NSA U-6 is now at a record 18%, even as the seasonally adjusted number declined to 16.5%.
SA U-6:

And here is the Non Seasonally Adjusted U-6:

Mixed Message on Unemployment

This morning's unemployment report form the BLS has mixed messages. While the unemployment rate dropped to 9.7%, at the same time, 1.1 million Americans stopped looking for work because they were so discouraged, so they were no longer counted! Stocked erased most of the overnight lows, with the equivalent Dow level being below the 10,000 level, but the mixed message has prevented stocks from rising also.

Thursday, February 4, 2010

Obama's Budget Scam

from BLoomberg:
Feb. 4 (Bloomberg) -- Look through President Barack Obama’s proposed 2011 budget, and you’ll see a line calling for a $235 million increase in the Justice Department’s funding to fight financial fraud. Lucky for them, the people who wrote the budget can’t be prosecuted for cooking the government’s books.
Whether on Wall Street or in Washington, the biggest frauds often are the perfectly legal ones hidden in broad daylight. And in terms of dollars, it would be hard to top the accounting scam that Obama’s budget wonks are trying to pull off now.
The ploy here is simple. They are keeping Fannie Mae and Freddie Mac off the government’s balance sheet and out of the federal budget, along with their $1.6 trillion of corporate debt and $4.7 trillion of mortgage obligations.
Never mind that the White House budget director, Peter Orszag, in September 2008 said Fannie and Freddie should be included. That was when he was director of the Congressional Budget Office and the two government-backed mortgage financiers had just been seized by the Treasury Department.

The White House is already forecasting a $1.3 trillion budget deficit for 2011, which is about $3 of spending for every $2 of government receipts. By all outward appearances, it seems Obama and his budget wizards decided that including the liabilities at Fannie and Freddie would be too much reality for the world to handle. So they left the companies out, in a trick worthy of Enron’s playbook, except not quite so hidden.
New Beginning
While the president had nothing to do with the mortgage zombies’ collapse, this was supposed to be the administration that, in his words, would put an end to “the era of irresponsibility in Washington.” Instead, he has provided us a new beginning.
Fannie and Freddie aren’t merely wards of the state. Practically speaking, they are the entire U.S. housing market. Their liabilities are the government’s liabilities. As Orszag said at a Sept. 9, 2008, news conference, two days after Fannie and Freddie were seized: “The degree of control exercised by the federal government over these entities is so strong that the best treatment is to incorporate them into the federal budget.”

That control is stronger today. Congress and the Treasury have given the companies a blank check to blow through whatever taxpayer money is necessary to keep the U.S. housing market afloat. Anyone buying large quantities of U.S. government bonds knows these liabilities exist. So why pretend they don’t?
Making Fudge
Obama’s White House didn’t invent this kind of fudging. President George W. Bush, for example, kept most war costs out of the budget. Obama’s proposal shows about $289 billion of war costs for 2010 and 2011, plus a $50 billion placeholder estimate for each year after that. Those dollars are small compared with the numbers at Fannie and Freddie, though.
Without federal backing, the mortgage guarantees issued by Fannie and Freddie might not be worth much. In that case, the $973 billion of mortgage-backed securities held by the Federal Reserve would be worth substantially less, rendering its $52 billion capital cushion illusory. Of course, it’s ridiculous to think the government would let this happen.

Excluding Fannie and Freddie, the national debt held by the public is about $7.9 trillion. With them, it exceeds last year’s $13.2 trillion gross domestic product. Even the geniuses at Moody’s Investors Service are warning that the country’s AAA rating might not last. No country can owe more than its yearly productive output for long without giving up its accustomed lifestyle and influence.
Catching On
The nation’s debt has become so immense that it’s corroding the government’s fundamental relationship with its own people. Put yourself in the shoes of a young couple thinking of buying their first home. The government needs folks like them to buy into the market to keep demand for houses up.
Yet without all the trillions of dollars of subsidies the government has pumped into housing, home prices would get creamed even worse than they already have, spurring greater loan defaults and saddling the Treasury with ever-higher costs from the guarantees Fannie and Freddie sold. What’s sickening is that the government can’t afford the subsidies. Suddenly, that $8,000 tax credit for first-time homebuyers looks like a nasty teaser aimed at sucking America’s newlyweds into a giant Ponzi scheme.

Worst of all is the example the government is setting for its citizenry. There still have been no indictments of senior executives at any of the big financial institutions that cratered in 2008 while sporting pristine balance sheets. No wonder. The government lacks moral standing to prosecute crimes such as accounting fraud when its own books lack integrity.
And how does Orszag explain his about-face on including the government-sponsored enterprises in the federal budget? Here’s the response I got in an e-mail from Kenneth Baer, a spokesman for the White House Office of Management and Budget: “The relationship between the GSEs and the federal government is in flux. Until it is settled, it would be too disruptive to change how they are accounted for in the budget.”

That didn’t answer my question. (Are we supposed to believe the relationship wasn’t “in flux” in September 2008 after Fannie and Freddie got seized?) So I asked again. Baer replied: “Our statement is our statement.”
It speaks volumes, too, confirming what we otherwise could only surmise: They don’t have a good explanation.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

China's Monstrous Currency Reserve Bubble

from Bloomberg:
Feb. 4 (Bloomberg) -- Real estate, stocks, credit. China sure has its share of bubbles. Oddly, little attention is paid to the biggest one of all.
China’s currency reserves grew by more than the gross domestic product of Norway in 2009. Its $2.4 trillion of reserves is a bubble all its own, one growing before our eyes with nary a peep out of those searching for the next big one.
The reserve bubble is actually an Asia-wide phenomenon. And we should stop viewing this monetary arms race as a source of strength. Here are three reasons why it’s fast becoming a bigger liability than policy makers say publicly.
One, it’s a massive and growing pyramid scheme. The issue has reached new levels of absurdity with traders buzzing about crisis-plagued Greece seeking a Chinese bailout. After all, if economies were for sale, China could use the $453 billion of reserves it amassed last year to buy Greece and Vietnam and have enough left over for Mongolia.
Countries such as the U.S. used to woo the Bill Grosses of the world to buy their debt. Now they are wooing governments. Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., is still plenty important to officials in Washington. He’s just not as vital as the continued patronage of state asset managers in places like Beijing.
Next Step
You have to wonder what folks at the International Monetary Fund are thinking these days. Their aid packages tend to come with messy requirements, such as “get your economy in order.” China’s are merely about scoring resources or geopolitical points. We have already seen China throw lifelines to Wall Street giants, including Morgan Stanley. Entire countries seem like the natural next step.
China’s huge arsenal of reserves is increasing its global influence. The trouble is, China is trapped in an arrangement of its own making. As China and other Asian nations buy more and more U.S. Treasuries, it becomes harder to unload them without causing huge capital losses. And so they keep adding to them.
“This is a titanically large foreign-exchange trade,” says David Simmonds, London-based analyst at Royal Bank of Scotland Group Plc. “It’s the biggest one history has ever seen and there’s nowhere for these reserves to go.”
China aims to diversify out of U.S. Treasuries into other assets and commodities. The question that governments are grappling with is which markets are deep enough to absorb China’s riches? Gold? Oil? Euro-area debt? The Madoff family’s next Ponzi scheme?
Ending Badly
The challenge for China alone is like trying to park an Airbus A-380 super-jumbo in a Volkswagen. Like all pyramid schemes, there’s no easy end in sight and things could end badly. If the dollar collapses, panicked selling by central banks looking to limit losses would shake global markets more than the U.S. credit crisis has.
Two, reserves are dead money. The wisdom of currency stockpiling came from the chaos of 1997. Speculators sensed authorities in Thailand were sitting on few reserves, and they were right. Their attack on the Thai baht set the stage for an Asian meltdown. Governments spent the 2000s determined not to repeat the mistake.
Asian economies have too much of a good thing on their hands. In July 2007, on the 10th anniversary of Thailand’s devaluation, Asian Development Bank President Haruhiko Kuroda said the accelerating accumulation of reserves was a major concern for the region. Too bad nobody listened to him.
Vast Sums
These huge sums of money could be used to improve infrastructure, education, health care and reducing carbon emissions. Never before have we seen such a misallocation of such vast resources. Asia can do better with its money.
Three, reserves add to overheating risks. When policy makers buy dollars, they need to sell local currency, increasing its availability and boosting the money supply. Next they sell bonds to mop up excess money in economies. It’s an imprecise science that often leads to accelerating inflation. The strategy works out to be an expensive one.
The stakes are rising fast. The risks in Asia are skewed firmly in the direction of inflation. The focus is now on central banks to see if they will pull liquidity out of economies with higher interest rates. More attention should be on how reserve management is working at odds with that goal.

Central banks face a difficult task. They must withdraw excess liquidity without devastating their economies and running afoul of politicians. Only now is Asia finding out how some of its economic-protection tactics are amplifying the challenge.
Asia has been holding down currencies to support exports for more than a decade. It’s silly to ignore the side effects of that strategy for the region’s economies.
Think about how Dubai shook the global economy, or how the mere hint that Chinese growth may dip below 8 percent inspires panic. These disappointments pale in comparison with the turbulence that may come from Asia’s biggest bubble popping.

Obama's Keynesian Pyramid Schemes

Feb. 3 (Bloomberg) -- Jobs, jobs, jobs. Meet the new mantra, same as the old mantra.
No longer will President Barack Obama be content to cite specious numbers about “jobs saved or created” as a result of last year’s $787 billion fiscal stimulus. Now he’s proposing $100 billion of new spending to “jumpstart job creation,” according to White House Budget Director Peter Orszag. It’s part of a $3.8 trillion budget for fiscal 2011, unveiled Monday, that projects a $1.3 trillion deficit next year, following a $1.6 trillion deficit this year.
Spend money to save money. Spending dressed up as a jump- starter is still spending by another name.
The only thing missing from the energy-cleansing, rural- community-assisting, climate-change-mitigating, health-food- promoting blueprint is money for pyramid building. In Chapter 10, Section VI of “The General Theory of Employment, Interest, and Money,” John Maynard Keynes advocated building pyramids as a cure for unemployment.
In fact, “Two pyramids, two masses for the dead, are twice as good as one,” he wrote in his 1936 treatise.
There are no masses for the dead in the president’s 2011 budget, only a few dead programs in the discretionary budget. It’s the part of the budget on automatic pilot -- entitlement spending on Medicare and Social Security and interest on the public debt -- that has to be addressed if restoring fiscal discipline is the goal.
Incentive to Cheat

The budget’s job-creation initiatives include funds for infrastructure investment; loan guarantees and tax credits for small businesses to spur hiring; cash assistance to states; and an extension in unemployment benefits, which is a disincentive for job seekers.
While the nation can always use better roads and bridges, a tax cut for new hires, which is popular with both parties, is more problematic and hard to implement, according to Greg Mankiw, professor of economics at Harvard University and former economic adviser to President George W. Bush. How do you differentiate between employment churning -- firing Peter to hire Paul -- and a new hire? How do you treat new firms?
In an October blog post, Mankiw proposed a cut in the payroll tax, something simple and universal rather than complex and targeted. Any attempt to apply more favorable tax treatment to marginal jobs than existing ones “creates a range of unintended consequences,” he said, not to mention an incentive to game the system. Tax Treatment
The budget increases taxes on the rich, living and dead, by allowing the Bush tax cuts to expire at the end of the year. It eliminates capital gains taxes for investments in small firms and raises income, dividend and capital gains tax rates for individuals earning more than $200,000 a year, $250,000 for households. It imposes fees on big banks. (For some reason, the Treasury Department listed the tax cuts as bullet points under job creation and stashed tax increases under fiscal discipline and responsibility.)
In bad times, presidents let themselves be seduced by the Keynesian notion that government can tax or borrow from the public and use that money to pay people to perform work of its choosing without sacrificing something. (See Friedman, Milton: “There is no free lunch.”)
The sacrifice is private-sector investment in human and physical capital. If you accept the premise that the profit- driven private sector is better than bureaucrats at delivering the goods and services people want at the prices they’re willing to pay, then the trade-off isn’t worth it.
Flawed Metrics
How well do government stimulus programs work? Outside of some econometric model prediction, we don’t know. It’s impossible to run a real-world control experiment.
We do know that on Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act. While the Obama administration insists it was not a jobs bill, the first goal, according to the Web site, was to “create new jobs as well as save existing ones.”
Thus began the “jobs created or saved” imbroglio, an attempt to quantify something unquantifiable. On Oct. 30, the Obama administration reported that 640,329 jobs had been created or saved from Feb. 17 to Sept. 30. (The Web site has since added 20 jobs to that total.) Watchdog groups smelled a rat, sifted through the data and found jobs that weren’t created in districts that didn’t exist.
Shamed by revelations of bureaucratic ineptitude, the government redefined its metric. Going forward, it would tally all jobs funded by ARRA, even if they already existed.
Pay Without Performance
On Jan. 30, posted a second report claiming 599,108 jobs were funded in the fourth quarter of last year. While the numbers from the two reporting periods aren’t comparable, the measures are so flawed and the job count so farfetched as to render them close enough for government work, and our purposes as well.
Between Feb. 17 and Dec. 31, the government doled out $57,864,901,449 in federal contract, grant and loan awards yielding 1,239,457 jobs (no inexact rounding for this administration!). That computes to $46,686 per job created, saved, funded or fabricated.
Why not simply write a check in that amount to each new job holder? It would be a lot easier and cheaper than funding a bureaucracy to orchestrate the effort.
OK, I hear you. A job is more than the money it yields. It gives us a sense of purpose, improves our self-esteem and provides a reason to get up in the morning.
The point is, government can always put people to work. It can hire teams of men with shovels to labor for weeks doing the work one earth-moving machine and operator can accomplish in one day.
The goal is to create permanent jobs, increase productivity and contribute to the wealth of the nation. Pyramids don’t cut it. But they’re a good place to bury dead theories.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
Click on “Send Comment” in sidebar display to send a letter to the editor.
To contact the writer of this column: Caroline Baum in New York at

Fear! It's Ba-aaack!

Dollar and treasuries are significantly higher today, with a broad sell-off in equities thrown in for good measure. Tomorrow's unemployment report had better be good, because if it disappoints, it could get ugly. Very ugly!

If all confidence breaks into a freefall, gold will rocket higher again, as even the Dollar and Treasuries could plunge. That would be economic chaos!

US Dollar


Dow Barely Hanging On to 10,000 Level

Dow is now down almost 250 points.

Moody's Warns of US Debt Load

Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the country’s budget deficit.
In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”.
Steven Hess, senior credit officer at Moody’s, said the deficits projected in the budget outlook presented by the Obama administration outlook this week did not stabilise debt levels in relation to gross domestic product.
“Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” the rating agency added in an issuer note.

Social Security Is Insolvent NOW!

from Yahoo Finance and Fortune Mag:
Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.
A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.
Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.
No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.
The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).
This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.
Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.
It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.
Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.
To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.
But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.

Jobless Claims Data Sends Stocks Plunging Off a Cliff!

Dow is off 150 points! Jobless claims this morning showed losses increasing four weeks in a row, with the moving average also increasing four weeks in a row. Yesterday's ADP data, suggesting that lay-offs are going to begin to accelerate at large companies, combined with tomorrow's anticipated revisions, are horrendous news. Only a great surprise to the upside tomorrow will save stocks from further downside momentum. It's probably not likely, given that the jobless claims this past month were all disappointing.

Wednesday, February 3, 2010

Massive Downward Revision in Jobs Due Feb 5

Feb. 3 (Bloomberg Multimedia) -- The U.S. may lose 824,000 jobs when the government releases its annual revision to employment data on Feb. 5, showing the labor market was in worse shape during the recession than known at the time.
Click here for a Bloomberg Multimedia interactive visual analysis of the economy’s job losses.

Grains Bearish Again, Too!

Corn is at its most recent lows around $3.56/bushel for March corn.

The Bears Are Back In Charge for Today

More morose!

Double Dip Recession Coming

from Barrons:

Credit isn't easing and taxes are going up. Formula for growth?

BULLS ON THE ECONOMY are taking victory laps after Friday's news of 5.7% growth in gross domestic product in the fourth quarter. But even if you believe in that fairy-tale number, there's little reason to have confidence in a sustained-robust expansion in the face of continued tight credit and the likelihood of sharply-higher taxes.
My colleague on the print side, Alan Abelson, deftly dissected the GDP number in his Up and Down Wall Street column of Barron's this week and found the sum of the parts wholly underwhelming.
After stripping away the effects of reduced-inventory liquidation and a smaller trade deficit, what's left (dubbed "real final sales to domestic producers" in economists' inelegant terminology) actually slowed down to a 1.7% annual rate of expansion after inflation in the latest quarter, Gluskin Sheff's David Rosenberg pointed out. That was down from the 2.3% pace in the third quarter -- just the opposite of the pickup in headline GDP to 5.7% from 2.2%.
And to add one more point, real final sales to domestic producers is what policy makers can influence, since it represents broadly what U.S. consumers, businesses and government buy. If those purchases come off the shelves of inventory or from abroad, it will detract from GDP. Conversely, it is the rate of change of inventories that affects GDP; a slower rate of liquidation translates to a plus in the most widely watched economic measure.
But forget all this macroeconomic mumbo-jumbo. Do you think the voters of Massachusetts believed the economy accelerated to a booming 5.7% annual-growth rate in the fourth quarter from 2.2%, as the GDP data indicated? Or did they think the economy slowed to a sluggish 1.7% pace from an already tepid 2.3%, as the real-final sales to domestic producers indicated? And did they see any improvement in jobs as a result?
The latest readings from the Institute for Supply Management did seem to confirm the sunny view of the economy, however. The purchasing managers' index for January popped to a higher-than-expected 58.4, from 54.9 in December, and well above the 50 mark denoting increasing factory activity.
As Ian Shepherdson, chief U.S. economist at High Frequency Economics, observes, the nonmanufacturing-ISM gauge has been tracking some 5.1 points under the factory number, or three times the usual gap. And given manufacturing's fading importance to the U.S. economy, the nonmanufacturing-ISM gauge (due out Wednesday) carries lots more weight.
Apart from what the statistical bean-counters in Washington or the ISM publish, better to pay attention to what Mr. Market is saying. Michael Kahn, writing in his Getting Technical column Monday, pointed out big cyclical stocks have gotten hit hard . Big industrial stocks such as Caterpillar (CAT), Alcoa (AA), CSX (CSX) and Steel Dynamics (STLD) have broken down on the charts in the face of all the happy talk on the economy.
The typical accelerants to ignite a recovery -- expanding credit and fiscal stimulus -- are lacking however.
The Federal Reserve found no let-up in tight bank-lending standards in its latest quarterly survey of senior bank-lending officers released Monday.
And the Obama Administration's proposed fiscal 2011 budget includes massive tax increases on upper incomes -- those who pay the lion's share of taxes and are most likely to invest, expand new businesses, and hire employees.
The tap on bank lending was shut tightly in the credit collapse of the fourth-quarter 2008, and as yet hasn't been opened up meaningfully. The only faint sign of easing in the latest survey was in commercial and industrial loans for large and mid-sized firms -- just the sort of borrowers that can tap the capital markets, where credit is readily available, and thus have no need for bank loans. Precisely three banks in the Fed's survey said they were loosening up a bit, while 52 said they were maintaining their previous -- that is, stringent -- standards.
As Gluskin Sheff's Rosenberg noted in his Monday missive to clients, bank lending continued to contract in the latest reporting week, with C&I loans down $500 million, real-estate loans down by $2 billion and consumer loans down by $4.6 billion. All told, the contraction in bank credit has totaled some $600 billion. This may be why the sustainability of the recovery once government stimulus programs end is being questioned by Mr. Market, he adds.
On the fiscal side, the reversion of taxes to former peak-marginal rates as high as 39.6% on high-income individuals would come as part of a $1.9 trillion tax hike across the economy under the proposed Obama Administration budget for 2011. Regardless of your opinion of the equity of those tax rates, the increased burden won't help the feeble economy.
In addition, the budget proposes increasing the current 15% federal-tax rate on dividends and capital gains to 20% for upper-income taxpayers. All in all, the only winning investment to come out of the budget proposals appears to be tax-exempt bonds.
A long-term 4.5% municipal bond would be equivalent to a 9% taxable yield for an investor facing a combined federal, state and local bracket. But then you'd have to avoid bonds from state and local issuers being squeezed in the vise between falling tax revenues and rising expenditures.
Nothing is easy, least of all when the economy is sluggish at best and the only thing certain to rise is taxes.

Monday, February 1, 2010

Presidential Priorities

from WSJ:

One of the greatest spend-while-you-can documents in American history.

One rule of budget reporting is to watch what the politicians are spending this year, not the frugality they promise down the road. By that measure, the budget that President Obama released yesterday for fiscal 2011 is one of the greatest spend-while-you-can documents in American history.
We now know why the White House leaked word of a three-year spending freeze on a few domestic accounts before this extravaganza was released. No one would have noticed such a slushy promise amid this glacier of spending. The budget reveals that overall federal outlays will reach $3.72 trillion in fiscal 2010, and keep rising to $3.834 trillion in 2011.
As a share of the economy, outlays will reach a post-World War II record of 25.4% this year. This is a new modern spending landmark, up from 21% of GDP as recently as fiscal 2008, and far above the 40-year average of 20.7%.
In the "out years" in mid-decade, the White House promises that spending will fall all the way back to 23% of GDP. Even if you choose to believe such a political prediction, that still means Mr. Obama is proposing a new and more or less permanently higher plateau of federal spending.
And here you thought the "stimulus" was supposed to be temporary. This is also before the baby boomers retire and send Medicare and Social Security accounts soaring.
If this budget is Mr. Obama's first clear demonstration of his long-term governing priorities, then it's hard not conclude that this spending boom is deliberate. It is an effort to put in place programs and spending commitments that will require vast new tax increases and give the political class a claim on far more private American wealth.
Despite talk of "tough choices" in yesterday's document, the Administration wants $25 billion in new spending for states for Medicaid, $100 billion for yet another jobs "stimulus," big boosts in spending for low-income family programs, for health research, heating assistance and education. If Mr. Obama's priorities become law, federal outlays will have grown an astonishing 29% since 2008.
As further proof, the White House proposes to convert long-standing "discretionary" spending that requires annual appropriations into permanent entitlement programs. A case in point is the Pell Grant program for college, which the budget would shift into the "mandatory" spending column at a cost of $307 billion over 10 years. The political goal here is to make a college education as much of a universal entitlement as Social Security.
All of this spending must be financed, and so deficits and taxes are both scheduled to rise to record levels. The deficit will hit 10.6% of GDP this year, far more than Ronald Reagan ever dreamed of. The deficits are then predicted to fall but still to only a tad below 4% of GDP on average for the rest of the decade. We wouldn't mind those numbers if they were financing tax cuts to revive growth.
But the reality is that even these still-high deficits are based on assumptions for growth and revenue gains from record tax increases starting January 1, 2011. And what a list of tax increases it is—no less than $2 trillion worth over the decade. The nearby table lists some of the largest, all of which the Administration and its economists claim to believe will have little or no impact on growth. If they're wrong, the deficits will be even larger.
Our favorite euphemism is the Administration's estimate that it can get $122.2 billion in new revenue via a "reform" of the "U.S. international tax system." Reform usually means closing some loopholes in return for lower tax rates. But this is a giant tax increase on American companies that operate overseas, and it includes no offsetting cut in the U.S. 35% corporate tax rate, which is among the highest in the world. The Administration agreed last year to drop this idea when it was seeking the help of the Business Roundtable to pass health care. But so much for that, now that the White House needs the money.
Even these tax increases won't be enough to pay for the spending that this Administration is unleashing in its first two remarkable years. On the evidence of this budget, the Massachusetts Senate election never happened.

Gold Up $25/Oz. As Dollar Takes a Beating!

Gold up $25

Dollar Takes a Beating

Massive Public Employee Lay-Offs Coming

This includes most of the states surrounding me. Ouch!

Market News Summary

from NYT:
WASHINGTON (AP) — The latest report showed an increase in personal income and spending rose in December, but a second report indicated that construction spending continue to lag last month.
The first report indicated personal incomes rose more than expected in December and consumer spending increased for the third consecutive month, helping the economy slowly recover.
The second noted that construction spending dropped sharply in December to its lowest level in more than six years as home building fell by the steepest amount in seven months.
The Commerce Department said Monday that incomes rose 0.4 percent, the sixth consecutive increase. That was slightly better than analysts’ expectations of 0.3 percent growth.
Income growth was spurred by a large, one-time Social Security payment. Wages and salaries rose 0.1 percent, or $9.1 billion, after increasing 0.4 percent, or $27 billion, in November.
Consumer spending, meanwhile, increased 0.2 percent, less than analysts’ forecasts of 0.3 percent. The department also revised November’s figure to show a 0.7 percent increase in spending, higher than the initial estimate of 0.5 percent.
Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. In last year’s fourth quarter, consumer spending rose 2 percent, down from a 2.8 percent increase in the July-September period.
That helped lift the nation’s gross domestic product, the broadest measure of the economy’s output, by 5.7 percent in the fourth quarter, the fastest growth in six years. The economy grew at a 2.2 percent rate in the third quarter after a record four straight quarters of decline.
Still, many economists are concerned growth will likely sputter to a 3 percent pace or below in the current quarter once temporary factors such as government stimulus and a slowdown in inventory reductions fades. Many economists expect the economy to grow at about a 2 percent pace this year.
That will not be fast enough to reduce the unemployment rate, which currently stands at 10 percent.
In the second report, the Commerce Department said that spending on new homes, office buildings and highways fell 1.2 percent in December to a seasonally adjusted annual rate of $902.5 billion, the lowest since August 2003. That was much worse than analysts’ expectations of a 0.5 percent drop.
November’s figures were revised down to also show a 1.2 percent decline, below the 0.6 percent drop initially reported.
Construction spending on new homes and apartments fell 2.8 percent, the worst downturn since May 2009. Spending on new office buildings and other commercial projects rose 0.2 percent after falling for seven consecutive months. That was a surprise, given the difficulty many commercial developers have had in obtaining credit.
Housing starts fell 4 percent in December, the government said last month, held back by unusually cold weather. But building permits, an indication of future activity, rose sharply, a sign that activity could rebound in January.
Housing activity was also weak in December because a new homebuyer tax credit was originally slated to expire in November and many buyers rushed to complete purchases before the deadline. Congress has extended the credit through April and expanded it.
The report closes out a difficult year for the construction industry, which has shed hundreds of thousands of jobs. Overall construction spending fell 12.4 percent to $939.1 billion in 2009, the department said, the steepest drop on records dating back to 1964.
Federal construction spending rose by 2 percent to an all-time high of $30.5 billion in December. But cash-strapped state and local governments cut their spending by even more. That caused overall public construction spending to drop by 1.2 percent in December. State and local governments have cut spending on construction for six consecutive months.
In other economic news, a private trade group reported that United States manufacturing sector grew for a sixth consecutive month in January, to its strongest level since August 2004, as factories pumped up production while their customers restocked inventories, a private trade group says.
The Institute for Supply Management said its manufacturing index read 58.4 in January, compared with 54.9 in December. December’s figure was revised lower from 55.9. Analysts polled by Thomson Reuters had expected a level of 55.5. A reading above 50 indicates growth.
New orders, a sign of future growth, jumped to their strongest level since 2004.
Manufacturing has helped lead the U.S. economic recovery as companies replace depleted stockpiles, and a weak dollar boosts exports to fast-growing countries in Asia and Latin America.

Gold Rebounds Forcefully

Sunday, January 31, 2010

Bailout Czar: TARP Has Failed

from Fox Business:
The government’s top bailout cop said Sunday that more than a year after the financial crisis hit, many of the goals of Washington’s $700 billion bank rescue program remain unmet and that policymakers still have not addressed fundamental problems that triggered the crisis, leaving the financial system vulnerable to another collapse.
In a 224-page quarterly report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP), acknowledged that TARP had stabilized the financial system. But he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure.
And in a slap at Congress and the Obama Administration, Barofsky said that “it is hard to see how any of the fundamental problems in the system have been addressed to date.”
He said the bailout “will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”
The top Republican on the Senate Homeland Security and Governmental Affairs Committee, Sen. Susan Collins, (R-MA), said she was “deeply troubled” by the report.
“It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance,” she said. “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.”
But Barofsky warned that in his view, little had changed to head off another financial crisis:
• “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.”
•” To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
• “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been
little fundamental change in the excessive compensation culture on Wall Street.”
• “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the federal government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.” (Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies now insure more than 90% of all mortgages from the risk of nonpayment.)
Barofsky also said that TARP goals to increase bank lending and prevent home foreclosures “have simply not been met” – “lending continues to decrease, month after month” and “foreclosures remain at record levels (and) the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages.
“To the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP,” he added.

from Yahoo Finance:
WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.
The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.
"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.
Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Mauldin: "We Are Soooo Screwed!"

"Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that 'this time is different.'
"That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy."
- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)
When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. "The subprime problem will be contained," said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about...

The Statistical Recovery Has Arrived

Before we get into the main discussion point, let me briefly comment on today's GDP numbers, which came in at an amazingly strong 5.7% growth rate. While that is stronger than I thought it would be (I said 4-5%), there are reasons to be cautious before we sound the "all clear" bell.
First, over 60% (3.7%) of the growth came from inventory rebuilding, as opposed to just 0.7% in the third quarter. If you examine the numbers, you find that inventories had dropped below sales, so a buildup was needed. Increasing inventories add to GDP, while, counterintuitively, sales from inventory decrease GDP. Businesses are just adjusting to the New Normal level of sales. I expect further inventory build-up in the next two quarters, although not at this level, and then we level off the latter half of the year.
While rebuilding inventories is a very good thing, that growth will only continue if sales grow. Otherwise inventories will find the level of the New Normal and stop growing. And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. "Domestic demand" declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of "Cash for Clunkers," but even so that is not a sign of economic strength.
Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.
Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%.
Fourth (and quoting David): "... if you believe the GDP data - remember, there are more revisions to come - then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising - just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.
"Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed's National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won't do."
Finally, remember that third-quarter GDP was revised downward by over 30%, from 3.5% to just 2.2% only 60 days later. (There is the first release, to be followed by revisions over the next two months.) The first release is based on a lot of estimates, otherwise known as guesswork. The fourth-quarter number is likely to be revised down as well.
Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.
So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis.

This Time Is Different

While I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff, on my new Kindle, courtesy of Fred Fern.
I am going to be writing about and quoting from this book for several weeks. It is a very important work, as it gives us the first really comprehensive analysis of financial crises. I highlighted more pages than in any book in recent memory (easy to do on the Kindle, and even easier to find the highlights). Rather than offering up theories on how to deal with the current financial crisis, the authors show us what happened in over 250 historical crises in 66 countries. And they offer some very clear ideas on how this current crisis might play out. Sadly, the lesson is not a happy one. There are no good endings once you start down a deleveraging path. As I have been writing for several years, we now are faced with choosing from among several bad choices, some being worse than others. This Time is Different offers up some ideas as to which are the worst choices.
If you are a serious student of economics, you should read this book. If you want to get a sense of the problems we face, the authors conveniently summarize the situation in chapters 13-16, purposefully allowing people to get the main points without drilling into the mountain of details they provide. Get the book at a 45% discount at
Buy it with the excellent book I am now reading, Wall Street Revalued, and get free shipping.

A Crisis of Confidence

Let's lead off with a few quotes from This Time is Different, and then I'll add some comments. Today I'll focus on the theme of confidence, which runs throughout the entire book.
"But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."
"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government's policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."
And this is key. Read it twice (at least!):
"Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.
"Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public's expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to "multiple equilibria" in which the debt level might be sustained - or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite."
How confident was the world in October of 2006? I was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. I was on Larry Kudlow's show with Nouriel Roubini, and Larry and John Rutledge were giving us a hard time about our so-called "doom and gloom." If there is going to be a recession you should get out of the stock market, was my call. I was a tad early, as the market proceeded to go up another 20% over the next 8 months.
As Reinhart and Rogoff wrote: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits."
Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.
We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.
Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff's work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.
The point is that complacency almost always ends suddenly. You just don't slide gradually into a crisis, over years. It happens! All of a sudden there is a trigger event, and it is August of 2008. And the evidence in the book is that things go along fine until there is that crisis of confidence. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say "This is it." It is different in different crises.
One point I found fascinating, and we'll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence - because they actually feel they have superior systems - developed countries can dig deeper holes for themselves than emerging markets.
Oh, and the Fed should have seen this crisis coming. The authors point to some very clear precursors to debt crises. This bears further review, and we will do so in coming weeks.

Greeks Bearing Gifts

On Monday, the government of Greece offered a "gift" to the markets of 8 billion euros worth of bonds at a rather high 6.25%. The demand was for 25 billion euros, so this offering was rather robust. Today, those same Greek bonds closed on 6.5%, more than offsetting the first year's coupon. Greek bond yields are up more than 150 basis points in the last month!
Why such a one-week turnaround? Ambrose Evans Pritchard offers up this thought: "Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse. Many of the investors were 'hot money' funds that bought on rumors that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit."
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries.
When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That's a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.
Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week's market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let's assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.
That would guarantee a very deep recession. Just a 10% suggested pay cut has Greek government unions already planning strikes. Nevertheless, the government of Greece recognizes that it simply cannot continue to run such huge deficits. They have developed a plan that aims to narrow the shortfall from 12.7% of output, more than four times the EU limit, to 8.7% this year. That reduction will be achieved even though the economy will contract 0.3%, the plan says. The deficit will shrink to 5.6% next year and 2.8% in 2012.
The market is saying they don't believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.
Both French and German ministers made it clear that there would be no bailout of Greece. But here's the problem. If they ignore the noncompliance, there is no meaning to the treaty. The euro will be called into question. And the other countries with serious fiscal problems will ask why they should cut back if Greece does not. If Greece does not choose deep cutbacks and recession, the markets will keep demanding hikes in interest rates, and eventually Greece will have problems meeting just its interest payments.
Can this go on for some time? The analysis of debt crises in history says yes, but there comes a time when confidence breaks. My friends from GaveKal had this thought:
"What is the next step? Having lived through the Mexican, Thai, Korean and Argentine crises, it is hard not to distinguish a common pattern. In our view, this means that investors need to confront the fact that we are at an important crossroads for Greece, best symbolized by a simple question: 'If you were a Greek saver with all of your income in a Greek bank, given what is happening to the debt of your sovereign, would you feel comfortable keeping all of your life savings in your savings institution? Or would you start thinking about opening an account in a foreign bank and/or redeeming your currency in cash?' The answer to this question will likely direct the next phase of the crisis. If we start to see bank runs in Greece, then investors will have to accept that the crisis has run out of control and that we are facing a far more bearish investment environment. However, if the Greek population does not panic and does not liquefy/transfer its savings, then European policy-makers may still have a chance to find a political solution to this growing problem.
"What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it's one thing to save your domestic banking system ... but why save Greece?)."
If Greece is bailed out, Portugal and Ireland will ask "Why not us?" And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out?
A few months ago, the markets assumed that not only Greece but Portugal, Italy, Spain, and Ireland would have a few years to get their houses in order. This week, the markets shortened their time horizon for Greece.
Even so, we get this quote, which may end up ranking alongside Fisher's quote in 1929, that the stock market was at a permanently high plateau, or Bernanke's quote that "The subprime debt problem will be contained."
"There is no bailout problem," Monetary Affairs Commissioner Joaquin Almunia said today at the World Economic Forum's annual meeting in Davos, Switzerland. "Greece will not default. In the euro area, default does not exist."
The evidence in This Time is Different is that default risk does in fact exist. You cannot keep borrowing past your income, whether as a family or a government, and not eventually go bankrupt.
Are we at an inflection point? Too early to say. It all depends on the willingness of the Greek people to endure what will not be a fun next few years, for the privilege of staying in the Eurozone. And on whether the bond market believes that this time is different and the Greeks will actually get their fiscal house in order.
Oh by the way, did I mention that the history of Greece is not exactly pristine in terms of default? In fact, they have been in default in one way or another for 105 out of the past 200 years. Aristotle, can you spare a dime?
And one last thought. The US is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own "Greek moment." Look at the graph below, and weep.
Obama offering to freeze spending by 17% in US discretionary-spending programs, after he ran them up over 20% in just one year, is laughable. Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt.

John Mauldin
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Roubini Sees Dismal Growth

Feb. 1 (Bloomberg) -- Nouriel Roubini, the New York University professor who anticipated the financial crisis, said the U.S. growth outlook remains “very dismal” and White House economic adviser Lawrence Summers said the economy is still mired in a “human recession.”
Speaking at the World Economic Forum’s annual meeting in Davos, Switzerland, after the U.S. reported the fastest growth in six years, their comments underscored concern that that emergency measures to rescue banks and fight the recession may be withdrawn too soon.
“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini said in a Jan. 30 Bloomberg Television interview following a U.S. Commerce Department report that showed economic expansion of 5.7 percent in the fourth quarter. “I think we are in trouble.”
Roubini said more than half of the growth was related to a replenishing of depleted inventories and that consumption was reliant on monetary and fiscal stimulus. As these forces ebb, the rate will slow to 1.5 percent in the second half of 2010.
Roubini, who chairs New York-based Roubini Global Economics LLC, has become famous for his pessimistic projections. In 2007, he correctly predicted a “hard landing” for the world economy. He said last year that the global recession would shrink through 2009, only for growth to resume in the middle of the year