Friday, April 22, 2011

Wow! This one nails it on the head!  

By Charles Hugh Smith, Of Two Minds blog! 

It's one or the other, Ben: you either push the real economy over the edge or you push stocks and the risk trade off the cliff.
Now that you've pushed the dollar down, Ben, it's your pick on what to push off the cliff: your beloved risk trade or the real economy. Here's a chart of the U.S. dollar and crude oil. Notice they're on a see-saw: when the dollar tanks, oil skyrockets. When the dollar recovers a bit, oil declines.

Ben Bernanke and the Fed are replaying their 2008 game plan: drive the dollar down to goose the risk trade in stocks. But a funny thing happened on the way to blowing another equity bubble: oil bubbled up, too, and that killed the real economy.
For the past three years, Ben has been trying to resuscitate the real economy via "the wealth effect": if your portfolio of stocks is rising, then you'll feel richer and your "animal spirits" of borrowing and spending will be aroused. The only proven way to goose stocks is to crush the dollar so overseas corporate earnings will be boosted by the currency depreciation (when transferred back into dollars, even flat profits look like they're rising), and U.S. exports will be cheaper to our trading partners.
Flooding the U.S. market with liquidity and keeping interest rates at zero had another consequence, one adamantly denied by the Ministry of Truth: it sparked a carry trade in which cheap dollars could be borrowed for next to nothing and exported around the world to seek higher returns.
Unsurprisingly, much of this free money flowed into commodities, which retained their value as the Fed pushed the dollar down. Also unsurprisingly, oil exporters raised the price of their oil in dollars as the dollar tanked.
Ben and his motley crew at the Fed reckoned that the financialized U.S. economy would respond positively to the lower dollar and the goosing of the risk trade in stocks. But the guys and gals seem to have forgotten that the real economy is dependent on oil. All the folks at the cocktail parties attended by Yellen et al. may be gushing over their hefty stock gains, but in the kitchen and carpark the workers are grousing about the rising prices of food and gasoline.
Now the cost of oil--the lifeblood of the real economy--is close to the point that it will push the real economy into recession. This sets up a difficult choice for Ben: if he pushes the dollar down to new lows, then oil leaps up and pushes the real economy off the cliff.
Alternatively, Ben renounces QE3 and "surprises" the markets with a rate increase, thus rescuing the dollar from freefall and pushing oil down. But that will send his precious risk trade and equity Bull off the cliff.
The politicos won't like either choice, but sacrificing the real economy will cost them their seat. All the fatcats who've raked in tens of billions from the risk trade Bull will be demanding that Ben "save" the financialized economy, but the politicos will see their political obituaries being written. Yes, the fatcats will shower them with millions in campaign contributions, but even those millions won't change the fact that Americans reliably vote their pocketbooks.
If rising oil pushes the real economy over the cliff, voters will not be re-electing incumbents in 2012.
Welcome to reality, Ben. Your "let's pretend the recovery is real" game is nearing an end. If you push the dollar down any more, then oil will go up and tip the real economy into a recession that QE3 will only make worse as you send the dollar into freefall. If the dollar rises, then your beloved "wealth effect" dies a horrible death on the rocks below.
Take your pick, but choose wisely.

The Case Against Government Debt

This from Zero Hedge and The-Privateer:

The most exciting episode of the neverending (and always distracting from far more important matters) political soap opera is without doubt the ongoing debate over the debt ceiling (which may legally be breached as soon as the week of May 1). For what it's worth, this is a complete sideshow as i) the ceiling will be raised, ii) both parties will blame each other for this outcome while shaking hands behind the scenes in expectation of more "gifts" from Wall Street and iii) the world will realize just how broke America is now that its debt ceiling, which we believe will be raised by just over $2 trillion to last the country until after the next presidential election, will for the first time ever be greater than its GDP, an event that has never before occurred. And so the distraction will shift to another even more meaningless debate. In the meantime, few ask themselves the key question: why is there government debt? In that regard, many have made the point against government debt, but few have done so as successfully and as succinctly as Bill Buckler does in his latest issue of the Privateer. In the below segment, Buckler does the definitive and most commonsensical reduction of the "government debt" issue and why what America is doing is nothing short of allowing itself to be hijacked on the road to a dictatorship.

The Case Against Government Debt - PERIOD:

A debt is an unfinished TRANSACTION. It is an agreement voluntarily entered into by BOTH lender and borrower to exchange present goods for future goods. Any economic transaction presupposes the existence of the goods being exchanged. If no goods exist, no transaction can take place.

In the marketplace, a loan is successful for the lender if and when the terms of the loan are met in full by the borrower. It is successful for the borrower if and when he can fulfill the terms and stand with capital  left over afterwards. If the terms of the loan are not fulfilled, both lender and borrower lose. The lender loses part or perhaps all of what was lent. The borrower may end up in jail. At the very least, he will findit more difficult or impossible to borrow in future.

In the “private” world of the marketplace, the lender has no power to create what is lent out of thin air and the borrower has no power to create the means of “payment” using the same method. The goods or money must first be created or earned and then SAVED. The means of paying back the loan must be acquired the same way. In all cases of MARKET lending, force cannot enter the picture. There is no way to force anyone to accept a “legal tender” which settles “all debts public and private”.

A government produces NOTHING. Since it produces nothing, it has no ECONOMIC means of servicing or repaying any debt obligations it may take on. Its means are strictly “political”. The only way a government can service and repay ANY level of debt it takes on is to extract the means from those who do produce wealth. Those who rely on the “full faith and credit” of government are relying on the exercise of naked political POWER. They are relying on the government to extract the means of payment from its citizens - or - to manipulate the terms of the loan (usually by manipulating interest rates) - or - to depreciate the purchasing power of the “legal tender” to make “payment” possible. In reality, government “creditors” are relying upon all three methods. The key to any government’s power is its ability to consume more than it extracts in taxes and charges. Until that power is curbed, no solution to the global financial crisis is possible. Until it is abolished, no return to genuine political freedom is possible.
We hope that more Americans realize that this is the key, and only, issue. Not whether Geithner can issue another $35 billion in 3 Year notes all of which will ultimately end up going to pad the uber rich's pocket even more. Not even whether America has a AAA or DD rating. It is whether we are willing to give up, day by day, the key freedom that once upon a time made America the great countries that future generations will only read about in history books.

High Gas and Food Prices May Kill Economy

The combination of rising gasoline prices and the steepest increase in the cost of food in a generation is threatening to push the US economy into a recession, according to Craig Johnson, president of Customer Growth Partners.

Gas station in San Francisco.

Johnson looks at the percentage of income consumers are spending on gasoline and food as a way of gauging how consumers will fare when energy prices spike.
With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending—a level that Johnson says is a "tipping point" for consumers.
"Energy is not quite as essential as food and water, but is a necessity in today's economy, and when gasoline costs more than bottled water—like now—then it takes a huge bite out of disposable spending," he said, in a research note.
Of the six US recessions since 1970, all but the "9-11 year 2001 recession" have been linked to—of not triggered by—energy prices that crossed the 6 percent of personal consumption expenditures, he said. (During the shallow 2001 recession, energy prices had risen to about 5 percent of spending, which is higher than the long-term 4 percent share.)
What may make matters worse this time around, is there has been a steep increase in food prices that occurred as well. In other recent recessions food costs were benign, at between 7.5 percent and 7.8 percent of spending.
This year food prices have climbed 6.5 percent since the beginning of early January, according to Consumer Growth Partners.
"The combined increase in the necessities of food and energy creates a harsh double whammy for already stressed consumers," Johnson said. The last time this happened was in the recession that lasted from 1973 to 1975.
Johnson estimates that food and energy eat up about 15 percent of consumer spending at today's prices, compared with about 12.7 percent two years ago.
Of course, at lower income levels, these percentages are much higher. One sign of the stress some consumers are already feeling is that some AAA offices have already seen an increase in out-of-gas service calls, as motorists try to put off filling their tanks or drive around trying to seek out the gas station with the least expensive price.
Also some regions are being hit harder than others. Gas prices in Hawaii continue to set new highs, according to AAA data. The average price on Wednesday was $4.51, topping the prior record of $4.50 for a gallon of regular unleaded set in July 2008.

Thursday, April 21, 2011

Americans In Morose Mood

from NYT:

Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.
At a time of rising gas prices, stubborn unemployment and a cacophonous debate in Washington over the federal government’s ability to meet its future obligations, the poll presents stark evidence that the slow, if unsteady, gains in public confidence earlier this year that a recovery was under way are now all but gone.
Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month. Though there have been encouraging signs of renewed growth since last fall, many economists are having second thoughts, warning that the pace of expansion might not be fast enough to create significant numbers of new jobs.
The dour public mood is dragging down ratings for both parties in Congress and for President Obama, the poll found.
Disapproval of Mr. Obama’s handling of the economy has never been worse — up to 57 percent of Americans — a warning sign as he begins to set his sights on re-election in 2012. And a similar percentage disapprove of how Mr. Obama is handling the federal budget deficit, though more disapprove of the way Republicans in Congress are.
Still, for all the talk of cutting the deficit in Capitol Hill and Wall Street, only 29 percent said it would create more jobs — the issue of greatest concern — while 27 percent believed it would have no effect on the employment outlook, and 29 percent said it would actually cost jobs.
When it comes to reducing the deficit and the costs of the nation’s most expensive entitlement programs, the poll found conflicting and sometimes contradictory views, with hints of encouragement and peril for both parties.
Mr. Obama has considerable support for his proposal to end tax cuts for those earning $250,000 a year and more: 72 percent of respondents approved of doing so as away to address the deficit; 24 percent disapproved.
And, in what he can take as a positive sign for his argument the nation has a duty to protect its most vulnerable citizens, about three-quarters of Americans think the federal government has a responsibility to provide health care for the elderly and 56 percent believe it has a similar duty to the poor.
“Keep people’s taxes and give them medical benefits,” Richard Sterling, an independent voter of Naugatuck, Conn., said in a follow-up interview.
In what Republicans can take as a positive sign as they seek a more limited government, 55 percent of poll respondents said they would rather have fewer services from a smaller government than more services from a bigger one, as opposed to 33 percent who preferred the opposite, a continuation of a trend in Times/CBS polls.
And slightly more Americans approve than disapprove of a proposal by Representative Paul D. Ryan of Wisconsin to change Medicare from a program that pays doctors and hospitals directly for treating seniors to one in which the government helps seniors pay for private plans, though that support derived mostly from Republicans and independents, not Democrats. That result was at variance with that of a recent Washington Post/ABC News poll that found 65 percent opposed Mr. Ryan’s plan, suggesting results can vary based on how the question is asked.
Twice as many respondents said they would rather see a reduction in spending on federal programs that benefit people like them than an increase in taxes to pay for such programs.
Yet more than 6 in 10 of those surveyed said they believed Medicare was worth the costs. And, when asked directly about Medicare, respondents said they would rather see higher taxes than a reduction in its available medical services if they had to choose between the two.
Given an option between cutting military, Social Security or Medicare spending as a way to reduce the overall budget, 45 percent chose military cuts, compared with those to Social Security (17 percent) or Medicare (21 percent.)
For the most part, Americans split sharply along party lines when it comes to whom they trust most when it comes to the deficit, Medicare and Social Security.
But with 70 percent of poll respondents saying that the country was heading in the wrong direction, the public is not exhibiting particularly warm feelings toward officeholders of either party.
Most Americans think neither the Congressional Republicans nor Mr. Obama share their priorities for the country. Mr. Obama’s job approval remains below a majority, with 46 percent saying they approve of his performance in office as opposed to 45 percent who do not. And support for his handling of the military campaign in Libya has fallen off sharply since last month: 39 percent approve and 45 percent disapprove. In a CBS poll in March, 50 percent approved and 29 percent disapproved.
Republicans have their own challenges. More than half of poll respondents, 56 percent, said they did not have a favorable view of the party, as opposed to 37 percent who said they did. (The Democratic Party fared somewhat better: 49 percent did not have favorable views of it and 44 percent did).
At a time when the House speaker, Representative John A. Boehner of Ohio, increasingly becomes the face of his party in Congress, more disapprove of his job performance (41 percent), than approve of it (32 percent); 27 percent said they did not have opinion of him.
The general displeasure with office holders of both parties is reminiscent of the mood that prevailed last November, when anti-incumbent sentiment swept Democrats out of power in the House and diminished their edge in the Senate.
Frustration with the pace of economic growth has only grown since, with 28 percent of respondents in a New York Times/CBS poll in late October saying the economy was getting worse and 39 percent saying so in the latest poll.
“They’re saying it will get better, but it’s not,” Frank Tufenkdjian, a Republican of Bayville, N.Y., said in a follow-up interview. “I know so many people who are unemployed and can’t find a job.”

Marjorie Connelly, Marina Stefan and Dalia Sussman contributed reporting.

Earnings, Unemployment Both Higher

Earnings had sent stocks to near post-recession new highs, but an unexpected spike for the second week in new unemployment claims has dampened the spirit in the past few minutes. Stocks are still higher for the day.

Smashing Barriers

Crude oil -- $112
Gold -- $1500
Silver -- $46
S&P 500 - previous high of $1308
Dollar index -- 74

Wednesday, April 20, 2011

Redistribution of Wealth is No Fix

Income redistribution will not solve our nation’s budgetary problems
President Barack Obama’s budget speech was delivered at George Washington University Law School on April 13, 2011. What is most notable about the speech was not the predictable and partisan reaction to it. Rather, it was the president’s deft use of rhetorical tropes to pull off his increasingly transparent maneuver of talking right while moving left.
As is par for the course, the speech contains enough platitudes to make it appear that the president is a fair-minded man—a man who understands the difficult trade-offs that must be made in order to balance the imperatives of market growth with the just provision of government resources to all individuals. In the end, however, this presidential straddle will fall to ruins because of its implicit assumption that transfer payments will do no harm to total production, even as they redress the inequality of fortunes in this country. Not so. But rather than jump ahead in the story, it is best to track Obama’s argument as if it were an exercise not of partisan politics, but of political theory.
Illustration by Barbara Kelley
The opening gambit in Obama’s speech contains his usual homily to free markets: "From our first days as a nation, we have put our faith in free markets and free enterprise as the engine of America’s wealth and prosperity." What’s more, according to Obama, is that America is truly, among the nations of the world, a country of "rugged individualists." The usual "but," however, was not long in coming. And it came when Obama quoted Abraham Lincoln: "through government, we should do together what we cannot do as well for ourselves."
Without a doubt, this point has some real power. The provision of classical sorts of public goods—police protection, sanitation, public highways and infrastructure —often requires government support. There is, for example, no way that the government can provide protection against foreign aggression for some individuals unless it provides that protection for all. The nonexclusive nature of classical public goods means that the nation can no longer rely on the voluntary coordination of individuals, or even of states, to deliver these services. What’s more, the government must impose national taxes to overcome this failure.
Levy taxes in ways that mimic market transactions.
Ideally, we would like to levy these taxes in ways that mimic market transactions. In other words, we hope that these taxes will, to the extent that human institutions can make it happen, provide each person with benefits that he or she values more than the taxes paid to fund them. Indeed, the distinctive feature of classical liberalism is that it defends this generalized use of state coercion only when this condition is satisfied. It is the set of return benefits to the parties who are taxed that prevents taxation from becoming a massive taking from A to B through state intervention.
Obama neither mentions nor rejects these limitations on the public good arguments. Instead, he skillfully turns this classical liberal argument to deeply collectivist ends. The president’s broad conception of public goods quickly gives way to the wholly different image of all Americans as part of one giant family—with the attendant obligations of reciprocal support. "Part of this American belief that we are all connected also expresses itself in a conviction that each one of us deserves some basic measure of security."
At this point, ambiguity in the idea of "security" turns the social contract theory of John Locke and David Hume on its head. By Locke and Hume’s conception, every person was required to renounce force in order to increase his own security from the aggression of other individuals. It is hard to think that anyone, no matter how powerful, is left worse off by this one trade-off.
Under Obama’s more aggressive agenda, however, security includes "Social Security" so that each person has to undertake to support his fellow citizens who are not able to support themselves, even if unthreatened by others. Put otherwise, no longer is a successful individual just under a duty not to take advantage of the less fortunate by use of force and fraud; now that duty extends to supplying financial support to all individuals against the vicissitudes of life—without offering any explanation as to why they are unable to undertake that task for themselves.
By this point in the speech, the opening riff on free markets is a distant and shadowy object in the rearview mirror. Later in his speech, all of Obama’s focus is on the exceptions to free markets, rather than its benefits.
On the matter of taxes, the president said: "As a country that values fairness, wealthier individuals have traditionally born a greater share of this burden than the middle class or those less fortunate." That statement is, of course, as true of a flat tax on income as it is of a progressive tax. But at no point does Obama point out the difference between them or explain why a progressive tax is the better way to handle the inequities that arise as he perceives them.
So now we have a new villain, which is the undeserved tax cuts "that went to every millionaire and billionaire in the country" and which drive the current deficits. On his cramped view of economics, these revenues were well spent on "a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pockets."
If income redistribution is the be-all and end-all of all politics, why not simply adopt a policy of equal incomes? That's a question Obama left unanswered.
It is here that Obama’s argument runs into fatal complications. The first is his untested assertion that his emergency steps and stimulus programs actually kept the economic ship afloat in stormy seas. But the more accurate account is that the high tax levels reduced the type of initiatives that only private investments of capital can yield. The government expenditures on what Obama formerly (and falsely) referred to as "shovel-ready" projects only produce short-term bubbles that do more to block growth than to create it. Unemployment rates remain high, growth rates remain low, and budget deficits double because the president now thinks that income redistribution is the be-all and end-all of all politics.
Here is what he said on this matter:

The top 1% saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a two hundred thousand dollar tax cut that’s paid for by asking thirty three seniors to each pay six thousand dollars more in health costs? That’s not right, and it’s not going to happen as long as I’m President.
At this point, the implicit assumption is that all government intervention is a zero-sum game, where the losses in dollars on the one side (taxes) are precisely offset by the gains in dollars on the other (social services). Since—and this is a true assumption—the utility of money is, in general, higher in the hands of the poor than the rich, 30 individuals should have their health care benefits extended and the rich should be denied their tax cuts.
Yet, this is a game that can be played countless times no matter how steep the current tax rate structure is. Indeed, it could be played even if the rich pay a larger fraction of the overall tax bill when taxes fall, which could well happen if their incomes increase in response to any new tax cuts. Under the president’s vision, however, no matter how high the marginal taxes on the rich, they could always be raised. After all, if we squeeze the lemon a bit drier, we can fund health care benefits for even more people. President Obama is incapable of asking candidly whether high taxation can ever reduce the level of output. In his world, the efforts of the rich and of the poor remain constant, regardless of the return guaranteed to labor.
Hence, no matter what the current marginal tax rates, it is perfectly all right to push them higher. There is never a case where productive losses exceed distributive gains. In the end, the president offers no good reason why this nation should not adopt a tax structure that drives it to a policy of equal incomes.
But really, can this be so? The president never bothers to mention that as of today, the top 1 percent earns about 20 percent of the wealth but pays close to 40 percent of the taxes. Does he really believe that there would be no wealth distribution from rich to poor under a flat tax, given that a huge fraction of public revenues goes to a range of transfer programs from which the rich derive little or no benefit? Nor does he ever contemplate the possibility that lower tax rates could generate additional revenues for the entire system.
And why does the president take this view taxation and income policy? Because, at root, the president is an egalitarian, not a marketeer. He has no theory of what a system of optimal taxation would look like. To lawyers and economists in the classical liberal tradition, it is a good thing, not a bad thing, if the richest person in society gets richer—so long as no one else is made poorer. But to the committed egalitarian, that supposed social improvement in fact poses a real threat because it increases the amount of inequality of wealth in society.
So the president blissfully advocates programs that reduce overall social wealth in order to soften these wealth differences. But it’s a mug’s game. In the end, it is growth, and only growth, that can cure the national malaise. And that means letting the rich get richer so that they can bring the rest of us along with them. But just as King Canute could not stop the tides, so it is that President Obama cannot draw blood out of a stone. What the president thinks are zero-sum policies are in fact no such thing. Given how they distort market incentives and increase political strife, Obama’s progressive policies translate into a profoundly negative-sum game, which, when replicated over time, will strip this nation of the entrepreneurial spirit that accounted for its past greatness.

Richard Epstein is the Peter and Kirsten Bedford Senior Fellow at Hoover. He is also the Laurence A. Tisch Professor of Law at New York University. His areas of expertise include constitutional law, intellectual property, and property rights. His most recent books are The Case Against the Employee Free Choice Act (Hoover Press, 2009) and Supreme Neglect: How to Revive the Constitutional Protection for Private Property (Oxford Press, 2008).

Dollar Being Lead to the Slaughter

from Yahoo Finance:

NEW YORK (AP) -- The dollar fell against most major currencies Wednesday, hitting a 15-month low against the euro, after solid earnings from major U.S. companies and a healthier reading on the housing market fueled investors' appetite for currencies linked to higher benchmark interest rates.
Higher interest rates tend to support investor demand for a currency, since it can generate a bigger return on investments denominated in that currency. The Federal Reserve has kept its key rate near zero since December 2008, while most of the world's other central banks are raising interest rates.
The euro jumped to $1.4514 in afternoon trading Wednesday from $1.4340 late Tuesday. Earlier, the euro hit $1.4547, its highest point since January 2010.
The dollar had advanced against the euro earlier in the week as speculation mounted that Greece would need to restructure its debt, but that fear wasn't weighing on the euro Wednesday as investors turned to assets of countries where interest rates are higher.

Crude Oil Surges to $111.65

Dollar Dismissal!

Silver Triples Since August 2010

$45 Silver

Everything Going Skyward!

Gold $1505
Silver $45.00
Crude oil $109.70
Stocks (see chart)
Grains - up 10% in two days

Tuesday, April 19, 2011

$44 Silver! Inflation Reigns!

Dollar Decimation

It's not wonder crude oil is back to $109.

Crude Oil Rebounds Too, Back Above $109!

$1500 Gold! Done Deal!

Stocks Erase Overnight Losses, Go Positive

I suspected that yesterday's S&P downgrade would be short-lived. It turns out that I was right!

More Dollar Destruction

Gold: Just Pennies Shy of $1500

We hit $1499.10 moments ago.

Treasuries to Rise Counterintuitively

This seems counter-intuitive, but he may be spot on! As equities sink into the end of QE, there is a reflexive run for bonds and treasuries as a measure of safety. I think gold is a better bet than fiat currencies or sovereign debt.

(Reuters) - U.S. Treasuries will perform well following a downgrade by Standard & Poor's on Monday of the rating agency's credit outlook for the United States, DoubleLine Chief Executive Officer Jeffrey Gundlach said on Monday.
Gundlach said Treasuries, whose major holders include foreign investors, will be in high demand as the U.S. economy will "soften subtantially" with no monetary stimulus in the pipeline.
The S&P warning, which cited a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit, is "good for Treasuries and bad for the economy and stocks," Gundlach, who oversees $9.8 billion at the Los Angeles-based firm, told Reuters.
Last week on an investor conference call, he said: "By now it's getting relatively close to June 30 and it's about time for the markets to start discounting the end of QE2 and a weaker economy."
Gundlach is referring to the Federal Reserve's end of its purchases of $600 billion in long-term Treasuries until June 30, as part of a second round of quantitative easing.

Is Reality Beginning to Set In?

Not based upon stock market futures this morning.

From Peter Tchir oF TF Market Advisors
Budget Deficits, Rating Agencies And IBGYBG
Never have so many, said so much, that's so wrong.  It seems like a combination of deficits and rating agency action have sparked a myriad of comments, many of which are just plain wrong.

First, on the deficit.  NEITHER party is reducing the existing cumulative deficit nor amount of debt outstanding.  They are NOT creating surpluses anytime in the next few years (decades)!  They are cutting the projected deficit.  Yes, we will run annual deficits, just less than the currently projected annual deficits.  The fact that S&P could figure this out, makes it clear how easy it is to see through the semantics and games politicians are playing.  Yet, most of the popular press is treating the government plans as though they were creating surpluses.  We have to stop hiding behind words.  The reality is we have a large amount of debt.  Over the next few years we have big projected deficits that will add to that debt burden.  So far, no one has proposed a plan that gives up surpluses, just less additional debt.  Lets stop fooling ourselves and address the real issue.  No more celebrations over just making the future problem less bad.

Secondly, after getting wrong what the deficit reduction really is, they get wrong the likelihood.  Talks about 2030 being balanced.  Excuse me???? In November the talking heads thought we might see tax cuts expire.  They didn't see new spending.  In December, we got both!   So within a month of mid-term elections the pundits and government couldn't get anything right.  Why do we assume things will be better 15 years from now when we can't predict a few months out very well?  Probably, the obvious reason.  IBGYBG.  I'll Be Gone, You'll Be Gone.  That is the only way to explain why we want to argue about details 10 years from now and basically ignore the immediate problem.

After being forced to read and listen to so much just plain wrong about the deficit, we are subject to the same thing on the rating agencies.  Is AAA versus AAA on negative watch materially different? NO!  From a 'probability' of default perspective it means nothing.  Is the outlook change surprising?  Not to anyone who has been watching the deficit grow, stimulus and spending being applied at every opportunity, with minimal results.  So it shoudn't be shocking, its not stating anything near term about likelihood of default.  Watching people turning red in the face arguing that we are not close to default is mildly humorous as the rating change does not imply anything that bad.

Then why is the rating action causing the market to go down?  The simplistic, and likely wrong answer, is that some entities cannot hold anything less that AAA.  That is too far away.  One question that we should be asking ourselves for about the 1000th time, is why do regulators based risk capital on the rating agencies?  They have a track record that is not particularly impressive (to say the least).  They get blamed by congress for their ratings, and then are guaranteed future existence by being made an integral part of future regulations.  Insane, yes, but not the real problem here.

Stocks have rallied from 900's to 1,300 as the smart money bet on unwavering and unlimited government support.  Tepper was spot on.  He called it for what is was.  Now, smart money may be realizing that game is over.  There was already concern about the ability to continue the QE franchise, but this adds another obstacle to including it.  There was always the hope of another round of stimulus on any economic weakness, this also just took a little hit.  Today's market reaction is a direct result of a growing realization that the fed/government put may not be there, or may be struck lower than we realized.  The pundits can continue to be wrong about their budget commentary, can scream til they are blue in the face that the rating agencies don't get it, but we have moved one more step towards that slippery slope where government support for stock prices is getting more difficult to implement.

The realization is probably helped by the timely realization that Greece is basically done.  Greece has realized its time to haircut the existing lenders, and move on with a manageable debt load and a budget that makes sense without creating too much pain for its citizens.                        

Monday, April 18, 2011

Fannie, Freddie Weigh Down U.S. Credit Solvency

from HousingWire:

The United States' quantitative easing policy did not impact Standard & Poor's decision to place the sovereign rating on negative outlook, but its conservatorship of Fannie Mae and Freddie Mac certainly did.
One of the pressures on the credit is analysts' estimate that it could cost the U.S. government up to "3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac" in addition to the 1% of GDP already invested.
S&P analysts said the government may have to inject as much as $280 billion into the government-sponsored enterprises, which includes $148 billion already spent, to cover losses at the housing finance companies that were put into conservatorship in September 2008.
"By our estimates, that $280 billion could swell to $685 billion if the government capitalizes Fannie and Freddie on a commercial basis," S&P said.
S&P's $280 billion projections for Treasury GSE support is primarily based on losses from the guarantee business, writes Margaret Kerins, a GSE credit strategist at the Royal Bank of Scotland (RBS: 13.69 -2.28%) in a quick reaction note to clients Monday. The $685 billion is based on the government replacing Fannie Mae and Freddie Mac and proving the capital for the successor entities.
"We think that this outcome is highly unlikely as it implies a government-owned entity with the taxpayers bearing the cost of capitalization," she wrote. "The majority of the housing finance proposals seek to limit government support and the cost to the taxpayers."
S&P added that it does not expect the United States to default on any debt obligations.
Furthermore, other economic activities of the federal government during the downturn, such as the implementation of quantitative easing, is to the country's credit, S&P stated.
"We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered," the report states. "Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."

What the Too-Big-To-Fails Think

Is it any wonder that the beneficiaries of Fed monetary mayhem would shrug off the news of the day? It puts their livelihoods at risk, so shrug away, imbeciles!

The commentary keeps coming, with every market watcher and their aunt Sally offering their two thoughts on what S&P surprise cut of its outlook for the U.S. debt rating from “stable” to “negative.” (The credit rater left Uncle Sam’s AAA rating intact.)
  • Barclays Capital: It is important to be clear on this. If the U.S. government were to default on its obligations, a very large financial panic is what we’d get. But as the saying goes, once they’ve exhausted all the other alternatives, US politicians can usually be relied on to do the right thing – and S&P’s move might actually serve as a reminder of what that right thing is. Just as it took two attempts for the US legislature to pass the TARP and save the world, so now we may need to be braced for a prolonged period of brinkmanship before a budget deal gets done.
  • George Goncalves, Nomura Securities: We believe that although this news does bring to the forefront the longer-term profligacy of the US, this is something we’ve highlighted several times as a concern and is widely acknowledged by the market. To that extent, aside from the knee jerk reaction, this downgrade contains little new info. The most salient issue for Treasuries currently is the extension of the debt ceiling in the next few months and that is likely to have a greater impact in the near-term than 2012-2013 budget discussions. We had mentioned in the past that fiscal austerity measures needed to be passed, but that these weren’t pressing concerns, given the reserve currency status of the USD. We believe it will be a slow and drawn out process before foreign central banks can start investing their trade surplus reserves in any other currency. Until we reach that point (which is many years away, even by conservative estimates), sponsorship for USTs will continue to be strong from this demand segment.
  • Lena Komileva, Brown Brothers Harriman: The S&P move to revise the U.S.’s AAA outlook from stable to negative has been a shot across the bow of market complacency about the U.S.’s medium-term debt outlook. The U.S. will have no problem in financing its deficit, but the role of U.S. government securities as the primary reserve asset in global public sector balance sheets and as the primary liquidity and capital risk hedge in financial balance sheets, means that a fallout from a potential U.S. debt re-rating would reach far outside U.S. borders. It is a low-probability event with high impact. If the AAA backbone of the global financial system is at risk of being lost, what happens to the rest of the credit structure?
  • Societe Generale Cross Asset Research: While a credit warning for the U.S. was somewhat expected by the market, it was not anticipated to be so soon. The early threat of a downgrade may help U.S. policy leaders to make progress on agreeing to substantial budget cuts. The Washington Post reports that a deal on Medicare is at hand. It also provides the doves at the Fed further reasons to maintain accommodative monetary policy and hence reinforces the inflation/EM trade.
  • Paul Ashworth, Capital Economics: S&P’s biggest concern seems to be that the Democrats and Republicans will struggle to agree on a comprehensive plan to address the medium-term fiscal problems before the Presidential election in late 2012. S&P now puts the odds of a downgrade within the next two years as high as one-in-three. With the Republicans controlling the House and the Democrats controlling the Senate, and both sides proposing radically different plans to cut the deficit, this is a concern we would share. Things could get even messier after the election, if Obama is re-elected but the Republicans capture control of the Senate.
  • Goldman Sachs Economics: A rating outlook change has no immediate implications—in particular, it does not make a difference in terms of current bond mandates. It does flag the possibility of an outright ratings downgrade within the next few years, which would have material market implications for investors required to invest a specific portion of their holdings in AAA securities. According to S&P, the negative outlook “signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years.” (Historically, the frequency of ratings downgrades for AAA sovereigns on negative watch is actually much lower than 1 in 3 over this horizon, although there is of course no guarantee that will remain true in the future.)

U.S. Dollar Trend -- It's Ugly!

It concerns me greatly that we have broken through trendline support! No one knows where the bottom will be. Fortunately, the Dollar is rallying today because of turmoil in the sovereign debt realms of Euroland, but the downtrend is clear and the Dollar is collapsing!

S&P's U.S. Debt "Wake-Up Call" -- Eric Cantor

WASHINGTON (Reuters) – House of Representatives Republican leader Eric Cantor on Monday called the Standard & Poor's downgrade of U.S. credit outlook "a wake-up call" against those seeking to "blindly increase" the U.S. debt limit.

Cantor said the S&P action makes clear that any increase in the debt limit must be accompanied by "meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt."

Grain Prices Grow Skyward

After spending more of the past year rising rapidly, grain prices blasted even higher today across the board. This one is for wheat. Inflation is coming, and it is going to be serious!

Spooked Market

Dow off 250 points!

Dollar Collapses Following S&P Revision

After rising on Eurozone debt worries, the dollar gets crushed. Tremendous volatility today!

Selling Takes Hold Following Stock Market Open

Gold Rockets to Doorstep of $1500

Stocks Plunge Off a Cliff Following S&P Downward Economic Revision

The S&P said the move signals there's at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years. 

You read that right: S&P just revised its US outlook to negative. EURUSD surges on what can be seen as revolutionary news... from S&P:
We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.Unbelievable turmoil. Gold leaps, crude oil plunges, Euro skyrockets.

Quick Macro Assessment of Risks

I don't think Wall Street sees this yet. I wouldn't be surprised if we see another rally at the open of the trading day this morning. Risks of another calamity are rising. Risk abounds!

The World Bank just released a rather dire assessment, too. The President of the organization says that we're just "one shock away from a full-blown crisis" and that we risk "losing a generation" due to high food prices. Unrest assured!

excerpt from FT:
As the US moves into the second quarter of 2011, it is tempting to make comparisons with a year ago, just before the double-dip scare in the country pushed down global markets and interest rates. Now, US growth estimates are slipping, the Federal Reserve is talking about an exit strategy and external shocks – the Arab Spring and Japan’s earthquake – have boosted macro-economic risks. Furthermore, US fiscal policy is tightening instead of easing.
In contrast to 2010, which saw extra fiscal stimulus in December, forthcoming public spending cuts will lower growth in 2011. The battle over a possible US government shutdown has already cut $40bn from the 2011 budget, shaving about half a percentage point from midyear annualised growth rates. Momentum on reducing the deficit is building in Washington as Congress and the White House consider reform to benefit entitlements.

Worries Hit Crude Oil, Too!

Gold is also down modestly, about $6. Between the Saudis' statement that the market is oversupplied, and concern that Europe may tip back into the sovereign debt abyss, crude oil is taking a hit. It's down just over $1. These news events feel more and more contrived to me.

Euro, Stocks Decline on Fresh Sovereign Debt Worries

The Finns yesterday voted in a new parliament that is expected to refuse to back Portugal's plea for a bailout. New cracks in the foundation of EU unity. It always amazes me that what has the greatest impact on the news is often obscure stories in obscure places. I have learned to expect the unexpected! One of the rules of trading is that anything can happen!


Sunday, April 17, 2011

Saudis Attempt to Talk Down the Price of Crude

Apparently, the market isn't convinced. Crude oil is down only 55 cents tonight.

Saudi Arabia's oil minister said Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.
Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East.
Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June.
"The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.
Two Saudi-based industry sources told Reuters last week the kingdom had cut output due to poor demand, prompting selling by traders who saw it as a sign of a well-supplied market.

Dollar Explodes Back Above 75

 From Marketwatch:
Early results Sunday from Finland’s parliamentary elections suggest the anti-EU bailout True Finns party will hold the second-most number of seats and could even be part of a coalition government. Such an outcome may mean the EU’s planned bailout of Portugal is vetoed by Finland, a move that would roil the euro-zone markets. With half the votes counted the True Finns were on 19% support, and on course for 41 seats, tied with the Social Democrats and one seat less than National Coalition Party’s predicted 42-seat haul, the BBC reported. Finland is the only euro-zone country that requires bailouts to be approved by its parliament. Strong gains by the True Finns could derail a planned rescue for Portugal."

Euro -- the anti-Dollar

Silver Continues to Shine

Interestingly, gold hasn't budged.