PIMCO Exec Predicts "2nd Wave" in Crisis

From Bloomberg:

Pacific Investment Management Co., which runs the world’s biggest bond fund, said the global economy faces a “second wave” of turmoil unless governments adopt larger spending plans.

“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report published today on the company’s web site. “Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months.”

The entire story is here.

$16.3 Trillion Needed to Bail Out European Banks

From the Daily Telegraph (U.K.):

A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

To put this into perspective, the amount needed to bail out these banks, according the the article, is equivalent to 44% of the entire balance sheet value of the banks in Europe. Put another way, this amount ($16.3 trillion) is more than the entire GDP of the United States last year. If this is true, we are rapidly beginning to see an environment in which banks that were "too big to fail", when seen in aggregate, are quickly becoming "too big to rescue" -- even by governments!

I didn't post the information here (my internet connection has been poor), but earlier this week, a trade association of Russia's banks approached Europe's banks to demand renegotiation of repayment terms for $400 billion in loans that they couldn't repay. This, on top of all the toxic assets that European banks have created in non-performing loans to emerging market countries, is rapidly becoming a crisis of such gargantuan proportions that finding a solution may prove intractable, and perhaps impossible.

Read the entire article here.

One Safe Place -- GOLD!

With the Fed artificially driving interest rates lower by talking down long term bonds, and stocks in the tank, investors are fleeing to the one safe place they know today -- gold!

Dow -350: Stocks Begin Another Leg Down

What's Also Buried in the Spending Bill -- Seeds of Nationalized Healthcare!

From Bloomberg today:

"...No one from either party is objecting to the health provisions slipped in without discussion...

Senators should read these provisions and vote against them because they are dangerous to your health. (Page numbers refer to H.R. 1 EH, pdf version).

The bill’s health rules will affect “every individual in the United States” (445, 454, 479).
One new bureaucracy, the National Coordinator of Health Information Technology, will monitor treatments to make sure your doctor is doing what the federal government deems appropriate and cost effective. The goal is to reduce costs and “guide” your doctor’s decisions (442, 446). These provisions in the stimulus bill are virtually identical to what Daschle prescribed in his 2008 book... According to Daschle, doctors have to give up autonomy and “learn to operate less like solo practitioners.”

Keeping doctors informed of the newest medical findings is important, but enforcing uniformity goes too far.

Hospitals and doctors that are not “meaningful users” of the new system will face penalties. “Meaningful user” isn’t defined in the bill. That will be left to the HHS secretary, who will be empowered to impose “more stringent measures of meaningful use over time” (511, 518, 540-541)

Daschle says health-care reform “will not be pain free.” Seniors should be more accepting of the conditions that come with age instead of treating them. That means the elderly will bear the brunt.

The Federal Council is modeled after a U.K. board discussed in Daschle’s book. This board approves or rejects treatments using a formula that divides the cost of the treatment by the number of years the patient is likely to benefit. Treatments for younger patients are more often approved than treatments for diseases that affect the elderly, such as osteoporosis.

This article is a must read. It is all good, and nothing should be missed. Click this link to read it.

Is This Thumbs Down on Geithner's Rescue Plan?

Up to $2 trillion more in bailouts announced! The chart says it all. At the moment that Treasury Secretary Geithner began his press conference to unveil his new financial system repair plan, stock markets plunged and treasuries rocketed higher. This appears to offer an early assessment of what the financial markets think of this new plan. It's thumbs down!

Stock Markets

Treasuries -- buying is a sign of more fear!

Geithner + Bernanke + Treasury Funding = Volatility

Today should a great day for trading. Treasury Secretary Geithner will be unveiling his plan for financial system rescues, Ben Bernanke will be testifying before Congress, and the U.S. government will have a treasury auction at 1:00 pm EST. It should be a very exciting trading day!

Gold Explodes, Treasuries Surge

Gold and treasury futures have both surged powerfully higher this morning. This is usually a sign of fear and uncertainty, when both move higher together.

Gold

Treasuries

Keynesian Economics' Destructive Dirty Little Secret

Many people know Dick Armey as the former Congressman who was the Republican Leader in the U.S. House of Representatives from Texas. However, very few people know that Dr. Armey is an economist by profession, with a Phd. from the University of Oklahoma, and was a professor of economics at North Texas State University before serving in Congress.

Dr. Armey recently wrote a superb editorial in the Wall Street Journal that any business person should read and understand. He clearly elucidates the fatal flaws of Keynesian economic philosophy and why it is ultimately so incredibly destructive, undermining stable and lasting prosperity. Here are a few excerpts (bold type, italics, and bold headlines were added by me for emphasis):

President Barack Obama and congressional Democrats... have dug up the dead economist's convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?

According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes "was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods." Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.

Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that "aggregate demand" drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers...

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.

Three Ways to Pay -- All Destructive! (headline added by me)

What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

Taking money out of the private economy -- either through taxes or inflation -- and spending it in a way that doesn't offset the loss of money with real economic gains is worse than doing nothing... The idea... is that at some point the burden of government spending exceeds the private economy's ability to carry it.

Hayek, who famously debated Keynes in a series of articles after the release of "General Theory," gave what I believe to be the most devastating critique of government action to stimulate "aggregate demand." Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments' artificial inflation of money and credit.

Free Markets are Free People Acting on Their Own Interests (again, mine)

Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest...

The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it.

The bottom line is that Keynesian theory is not just bad economics. It's destructive too!

Please read Dr. Armey's entire editorial here.

"Buy The Rumor, Sell the News"

Stocks have sold off this evening, now that the U.S. Senate has passed a stimulus/spending bill. Now, the Senate and House must find a compromise in conference, which could be a difficult and arduous process. Passage is still not an absolute certainty.

The Dow is down approximately 100 points. Tomorrow, I am looking forward to the announcement of the latest iteration of the TARP and/or financial system rescue plan, as well as the treasury auction.

RBC Analyst Predicts 1,000 Bank Failures From Commercial Mortgage Losses

As many as 1,000 U.S. banks may fail in the next few years, almost double the one-year tally at the height of the savings-and-loan debacle, as losses climb on commercial real-estate loans, the RBC Capital Markets analyst said.

Most of the failures are likely to occur at smaller banks with less than $2 billion in assets as their commercial customers default, said Gerard Cassidy, an analyst at RBC, today. Somehow, I wonder if only small banks will fail. Is this because the big ones are "too big to fail"?

IMF Running Out of Cash for Bailouts

From the Washington Times:

/IMF head/ Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend...

Here is the full story.

Dow in the Doldrums

Stocks are barely holding above yesterday's close today. The new job claims were better than expected, but are highly suspect. It's ugly out there! Trading is awful!

More Like Tidal Waves... Than Ripples!

I am closely watching the treasury markets this week, beginning with the sales auctions tomorrow (Tuesday). The amount of U.S. debt borrowing is growing faster than a baby blue whale! If treasury sales aren't well bid, the ripple effect will be colossal! Congress and the officials at Treasury, the Fed, and the FDIC, are making huge assumptions that the demand will permanently remain strong for U.S government debt. If demand falters, it won't be a ripple -- it will be a tidal wave! Treasuries should see strong volatility this week, regardless of what happens!

Unbelievable! Fed, FDIC Pledge 2/3 of Last Year's GDP to Unknown Recipients -- With NO Oversight!

Fascinating and mind-boggling story in Bloomberg today. Here are small excerpts:

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages...

Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

Here is the full story.

Stocks Back to Flat in a Waiting Game

Stock futures have rallied somewhat, moving back to hover around the flat line, in anticipation of a Senate vote and more news from Treasury Secretary Geithner regarding the latest rescue package for the financial system.

Is Pres. Obama Becoming Dr. Doom?

From the Washington Times:

From crisis to catastrophe. Off a cliff. Dark, darker, darkest. Mortal danger of absolute collapse. Armageddon.
President Obama and top Democrats on Capitol Hill are deploying these and other stark predictions of doom and gloom to push through their economic-stimulus package. In terms not heard in Washington since the late 1970s under President Jimmy Carter's watch, the new president has sought to terrify Americans into supporting the $800 billion-plus bailout bill...
"Mr. Hope has to be careful not to become Dr. Doom," said Frank Luntz, a political consultant and author of the book "Words That Work: It's Not What You Say, It's What People Hear."

Here is the full story.

Is all this doom and gloom going to become a self-fulfilling prophecy?

Delays, Delays in Treasury Plan

Treasury Secretary Geithner has delayed plans to announce his new bank bailout. The financial markets aren't happy about it, according to the futures. I wonder if this is revealing an internal conflict in the Obama administration, since the article presents various unresolved questions regarding important items that will be in the plan. "Where do we go from here?"

From Bloomberg:

Some aspects of the plan, to be announced by Geithner tomorrow in Washington, have been settled. They include a new round of injections of taxpayer funds into banks, targeted at firms identified by regulators as most in need of new capital, people briefed on the matter said. A Federal Reserve program designed to spur consumer and small-business loans will be expanded, possibly to include real-estate assets, they said.
Still outstanding is the issue Geithner’s predecessor failed to address: the illiquid assets that have caused the credit freeze. Officials continue to consider a so-called bad bank to buy them, perhaps in cooperation with private investors, such as hedge funds and private equity. It’s unclear how big a role there’ll be for federal guarantees of securities that remain on banks’ balance sheets.

Here is the full story.

Bloomberg Unveils Internal Fed Conflict

From Bloomberg Sunday evening:

Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
Policy makers are instead focusing on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt, according to people familiar with the deliberations.

Find the complete story here.

Stock Futures Give Up 1/2 Friday's Gains in Sunday Evening Trading

Dow futures have lost about 1/2 of their Friday gains in Sunday evening trading.