Economic Data to Ponder

Our economic conditions are not improving.  Ponder some of the following data released today: 

1. Just 58% of working-age Americans has jobs, lowest since July 1983!  
2. Food stamp use rises to record 45.8 million individuals, or about one in every six Americans.
3. Average length of unemployment reached a new all time high of 40.4 weeks in July, up from the previous record of 39.9 in June.  
4. Fannie Mae needs another $5.1 billion in aid from the Treasury.  So far, it has received $103.8 billion.

Market Update

Market-Wide Circuit Breakers

In the event of a 30% decline in the DJIA, regardless of time during trading hours, the market closes for the day.

Pressured by White House, Treasury Secretary Is Expected to Stay at Post

The New York Times reports that Geithner will be staying on as Treasury Secretary.  This is not good news, because it simply means more of the failed economic policies (Read as more spending!) of the past three years.  Then, what economic polices?  Read "The Forgotten Depression of 1920."  

Kick-the-Can Down the Road, Part II

The proposed spending cuts are not true reductions in the federal budget.  These cuts simply slow down the pace of future spending increases.  What does that mean?  Specifically, the federal government had planned to incur $10 trillion in additional debt over the next decade.  Now, the spending increase will just be $7 trillion.  Therefore, instead of the current $14.3 trillion federal debt growing to $24 trillion, the debt will only be approximately $21 trillion. 

Kick-the-Can

Well, the "debt ceiling" has been passed by the House of Representatives.  Now, just the formality of the Senate doing its job tomorrow.  Therefore, we have once again "kicked-the-can down the street."  No debt default this week.  That will come later!

Ok, what does this mean for the next fiscal year by way of increase/cutting federal spending?  In very simple language,  federal spending will go up by at least $256 billion (minimum of an 8% increase) while discretionary spending, which has just been approved, will decrease by $23 billion.  Therefore, total federal spending will increase next year by a "net" of least $233 billion.

EMA Algorithms

A very interesting pattern is unfolding between the relationship of the 2007 EMAs and 2011 EMAs.  Take a look at the following chart.  Very interesting, indeed.  Definitely, I will be tracking this relationship.

Apple Now Has More Cash Than The U.S. Government

According to the latest daily statement from the U.S. Treasury, the government had an operating cash balance of $73.8 billion at the end of the day yesterday.  Apple's last earnings report showed that the company had $76.2 billion in cash and marketable securities at the end of June.

Hiatus: Gone Fishing

The Unabated Bull!

Obama's Own Words

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”  (Source:  Senator Barack Hussein Obama, March 2006)

Egan-Jones Rating Service

Egan-Jones is the one true "independent" rating service that analyzes the credit worthiness of country debts.  Over the weekend, it down-graded the rating of our Treasury securities.  

For those of you who continue to be believe that our country will not only survive but prosper, take a look at the nine-minute video. 

A Short History of U.S. Credit Defaults

Has the U.S. ever defaulted on its obligations?  Yes.  I am always amazed that individuals not only refuse to learn from history but study it.  Today, the so-called pundits out there are using every type of scare tactics imaginable to get a debt ceiling increase.  Let's look at the facts as recorded by history and what will probably happen if the debt ceiling is not raised by reading the "Short History of U.S. Credit Defaults."   

President Obama: 80% of Americans Want Higher Taxes

Now, I am really confused, because according to the most recent Rasmussen Report just 34% think a tax hike should be included in any legislation to raise the debt ceiling and 55% disagree and say it should not be included. 

I would like to know where the President got the 80% figure.  Of course, during his news conference, no reporters (lemmings) asked the question about where he got his 80% figure.   Since I am against higher taxes, my inquiring mind would like to know.

California Pays Doctor With No Patients Big Bucks for Mail Room Duty

A California surgeon at a state prison who has not seen a patient in six years, because the state is concerned about his medical skills, rakes in a salary that is four times that of the state’s governor.  (Once again, I am not that creative to make stuff up like this.)  Dr. Jeffery Rohlfing is on mail room duty and making $770,000 payout.  No, that is not a misprint.  By the way, according to the Los Angeles Times, the newspaper reports that dozens of other doctors have been assigned similar tasks at prisons when the state is concerned about their skills.  What is the moral of this story?  It is California. Enough said!

Elitist Mindset vs American Public Mindset

I, for one, believe that the American public is a whole lot smarter than what the so-called elitist gives us credit for, especially when it comes to the national debt level.  Sometimes the truth, one's true belief, comes forth when one doesn't realize he or she is saying it.

Option ARMs Explained

Let's say that you were one of the unfortunate ones that took out such an financial instrument back in 2006 during the frenzy of the real estate bubble. Today, you are wondering how your P&I monthly payment just went from $833 to $4,027.  Wonder no more, just read on.

When an Option ARM reaches (typically) some term of years, usually five years, or principal balance (125%) it is forcibly recast to a fully amortizing loan on the original terms. 

Let's say the "Option ARM" is to make a 2% interest payment on a $500,000 loan.  The normal interest rate is 6% and the "full term" is 30 years.  A full P&I payment is $2,953.48.   But a 2% Option Arm, interest payment is $833.33; the rest is "capitalized,” or approximately $2,120/month.

When the loan hits the hard recast limit, whether on principal balance or time, you must then make a fully amortizing payment on the balance over the remaining original term. 

So let's assume you have a 125% negative amortization cap.  At roughly $25,000 ($2,120 x 12) in negative amortization per year, you can make minimum payments for about five years.

Now, you have 25 years to amortize $625,000 @ 6%.  Your home is worth half of the original balance, or $250,000.  And you have a big problem, because the fully amortizing payment on that $625,000 is $4,026.88 or 483% - nearly five times - your "option" payment!

The real problem is that many of the people who received these $500,000 loans had gross family incomes under $100,000.  The fully amortizing recast payment is now nearly $50,000 annually!  Now, how many of these individuals, who took out these Option Arms that I just explained and illustrated, do you believe understand the concept and the ramifications that I just went through?  I know the question is rhetorical.  Therefore, I will give you the answer, which is ZERO. 

Birth/Death Adjustment was Responsible for Over 60% of the Payroll Gains in the Past Year!

Quite remarkable, isn't it?  This "Birth Death" adjustment on actual non farm payroll (NFP) numbers confirms that of the 1 million "job gains" in the past year, well over 60% of these have come from a statistical factor.  (These are not real jobs, folks, just a STATISTIC!)  Do you wonder when anyone in this administration or media will mention that of the 1 million jobs "created" in the past year, 606,000 have been purely the product of statistical models?  Well, I already know the answer to that rhetorical question.

Seven Measures for Economic Growth

From the Heritage Foundation: "Congress and the White House must take immediate action to get America's economic house in order and to foster an environment that encourages job creation. Those measures include the following: (1) repealing Obamacare, (2) its employer mandates and tax increases, (3) preventing the Environmental Protection Agency from regulating carbon dioxide, (4) passing tort reform to reduce the cost of meritless lawsuits, (5) expanding trade agreements, (6) permitting more domestic energy production, and (7) cutting spending to avert massive tax increases. "

Unabridged Disaster

The U.S. economy barely added jobs for the second month in a row in June, and the unemployment rate rose to 9.2%, which is the highest level this year, adding to concerns the labor market will take years to recover.  Total jobs added per the NFP survey: +18,000 on expectations of 105,000.  Also, the Labor Force Participation rate of 64.1% just dropped to a fresh 25 year low.  (Only 64% of the those eligible to work are actually working.  Not a good sign for the economy going into the second half of 2011.)

This is the second complete forecasting disaster for Wall Street's economists in the last two months.  And, these pundits are getting paid the mega-bucks to get it right.  The problem is that the majority of these pundits have been schooled in Keynesian economics, which has finally demonstrated that you can not borrow and spend your way out of recession/depression.  Or, government deficit spending does not create lasting economic recovery, instead it creates asset bubbles (stock market) and a false sense of security.   In other words, I am looking for a few good Austrian economists, like Mises and Hayak. 

Obama Administration to Extend Mortgage-Free Living for America's Unemployed to One Year

The Obama Administration today will announce two programs providing unemployed homeowners twelve months' forbearance on their mortgages.  Isn't America a great "socialist" country?  Why would anyone that has a mortgage be foolish enough to make their monthly P&I payments?  When you can receive twelve months free rent.  Just look at all the things you can buy.  Thank you, President Obama.  There truly is a Santa Claus.

Government Spending ≠ Investment

This whole talk of government investment in infrastructure and whatever is not “INVESTMENT” at all.  Our Federal Government would like you to believe that is the case, because it sounds a whole lot better than government spending.  Therefore, government does not invest; it only “SPENDS.”  And what it spends, it must extract from the private sector through taxation, which by the way is that segment of the economy that actually does indeed create jobs and wealth, or rely on the Federal Reserve System to monetarize our federal deficits, which of course it has through the infamous QE 1 & 2.

God Bless the U.S.A.

Get Your Food Stamps Here!

The clearest indication of just how ineffective the recovery and QE2 has been comes courtesy of the USDA.  The latest update for April participation in Supplemental Nutrition Assistance Program (SNAP), better known as "Food Stamps," shows yet another record, 44.647 million people, an increase from May's 44.587 million.  (That is 1 out of every 7 individuals!)

Geithner Weighs Leaving Treasury Post

Treasury Secretary Timothy Geithner is considering stepping down from his post once policy makers agree to raise the government's borrowing limit, which is an excellent move.  I agree wholeheartedly.  As a matter fact, I, here and now, volunteer to assist him in packing and moving his personal articles from his office.

Mint to Start Selling 2011 American Eagle Silver Coins at 75% Premium to Paper Dollar

That is what our government thinks of the dollar.  Tomorrow, the U.S. Mint will release the much anticipated 2011 American Eagle edition, with a strict limit of 100 coins per household at the low, low price of just $59.95!  As stated, the price is just a 75% premium to the DOLLAR.  This is just like the "Captain and Crew" jumping ship and the leaving the passengers to defend for themselves. 

What am I Missing Here?

President Obama rips Congress for taking vacations during the debt level crisis; however, he makes plans for Martha's Vineyard vacation.  Then, he is bewildered when people say he should be involved in debt level discussions.  Mr. President, it is all about perception; and the perception is that you are totally aloof to this entire process.  Please show some leadership during this financial crisis.

Stupidity Reins Once Again: This Time with the U.S. Navy

"Last year, the U.S. Navy bought 59,000 microchips for use in everything from missiles to transponders and all of them turned out to be counterfeits from China."  (First, what are we doing, especially our military, buying chips from China?)  Now, it gets even more stupid.  Wired reports the chips weren't only low-quality fakes, they had been made with a "back-door" and could have been remotely shut down at any time.  If left undiscovered, the results could have rendered useless U.S. missiles and killed the signal from aircraft that tells everyone whether it's friend or foe.  (Second, where is the uproar from the media? This is something that should be one of the top stories of the day!  However, I doubt that anyone will be discussing this on the evening news.)

Money-Market Mayhem, or Stupidity Reins

In today's Wall Street Journal's "Review & Outlook," the Journal writes: "U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt."  In other words, we have learned absolutely nothing from the debacle of 2008.  To serve your memory correctly, that was the year the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper.  The Reserve Primary Fund broke the $1 net-asset value, and in the following days, some $400 billion fled prime money funds. 

Yet now, we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper.  (Read as Greece paper!)  Half the assets of all U.S. prime money market funds were invested in European banks as of the end of May 2011, according to Fitch Ratings.  (Yes, that is 50% of all money market funds are invested in paper that just maybe worthless!!)  Apparently, our regulators were too busy writing 2,300 pages of Dodd-Frank law and thousands of new rules to notice the systemic risk that is right before their eyes. 

The "systemic risk" problem, according to the Wall Street Journal, is that money funds are perceived as being bank savings accounts by investors, because they seem to be all but guaranteed against loss, even though they aren't.  Investors have come to expect that money funds will never "break the buck," never decline in value. 

We all know that stocks and bonds rise and fall without our government having to guarantee against losses, and if investors understood that money funds could decline like the securities that they are, investors would be more likely to accept that these investments are not a risk-free investment.

In 2010, the SEC, realizing the potential for disaster and wanting the money market funds to be more transparent, issued a rule requiring that funds publish the actual market value of their assets, but only on a 60-day delay.  Sixty days, by the then, all money market funds could be deeply underwater. 

What should investors in "money market funds" do?  You may want to move all such funds to a money fund, such as American Century's Capital Preservation Fund, that invests exclusively in short-term money market securities issued by the U.S. Treasury.  

Who Says White Collar Crime Does not Pay?

Geithner: Taxes on Small Businesses Must Rise So Government Doesn’t Shrink

Treasury Secretary Timothy Geithner told the House Small Business Committee on Wednesday that the Obama administration believes taxes on small business must increase so the administration does not have to “shrink the overall size of government programs.”  Now, small businesses create something like 64% of all new jobs in the US. Yet, he supports a tax policy that kills the "golden calve," which is the engine for overall economic growth in this country. In addition, our government has a spending problem that it must get under control, which I just don't see happening as long as you have someone like Geithner at the Treasury.

S&P 500 Update for June 23, 2011

College Statistic: Median Starting Salary

"The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.

Of course, these are the lucky ones — the graduates who found a job. Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007. (Some have gone for further education or opted out of the labor force, while many are still pounding the pavement.)"

Wow, from the report, 44% of college graduates do not have a job.  However, I would bet to say that they have debt.  Ok, let's assume that you do have a job at the median salary of $27,000. (Remember that the median is the middle value.  That is, 50% will have a salary above the $27,000 and 50% will have a salary below the $27,000.)  But, you have $60,000 in student loans, which is very realistic. 

Let's analyze the numbers.  If you make $27,000, your monthly gross income is $2,250.  If we amortize the $60,000 in student loans over a ten-year period at 5%, your payment is $636/month.  In other words, close to 30% of your gross income is consumed by your student loan payment.

Your imputed pretax income (that is, the effective purchasing power of your "degree" when you subtract out the debt service) is $19,368, which is $9.31/hour.  (Minimum wage is $7.25/hour.)  Worse, your debt cannot be discharged in a bankruptcy.  (By the way, I don't advocate bankruptcy.)  A high school graduate who takes on debt like this and gets in trouble can file a Chapter 7 and eliminate it.  You, as a college graduate, no such luck.  You are saddled with the $60,000 debt; and if you lose your job, you are immediately in more trouble, as that $60,000 will have penalties and interest immediately added to it.

Now, I still believe that a college education is usually a good investment; however, not if you have to indenture yourself for life.

First Presidential Forecast

In making any kind of forecast is definitely a risky business, but to forecast the 2012 Presidential election is insane.  However, I feel that I maybe on to something, insane or not.  Now, if the stock market is higher in 2012, President Obama is more than likely to win.  (So far, Bennie has been Obama's best friend, and I would expect Bennie to do whatever he can to make Obama the winner.)  If the market is declining in 2012, he will lose by a significant margin. 

The strategy that I will be using is simply my S&P 500 EMA Strategy of the 15-week EMA to 40-week EMA.  If the 15-week EMA is above the 40-week EMA, Obama wins.  On the other hand, if the 15-EMA is less than the 40-week EMA, he loses.  Currently, President Obama wins, because the 15-week EMA > 40-week EMA.  However, the key is what will the EMA strategy be saying in 2012.  Stay tuned.

Further, it is interesting to note that in 2012 major stock market cycles turn decisively lower, which should be confirmed if the the 15-week EMA is lower than the 40-week EMA.  What does this mean?  A powerful bear market should ensue that takes all major stock market indexes to lows below March 2009.  In other words, whomever is elected under this scenario will end up being one of the most despised Presidents ever and lose in a landslide in 2016. 

Illinnoyed by Higher Taxes?

The line of businesses looking for tax relief in Illinois keeps growing, with the latest plea coming from the owner of the iconic Chicago Mercantile Exchange and Chicago Board of Trade (CME).   CME Group Executive Chairman Terrence Duffy told a shareholders meeting last week that Illinois Governor Pat Quinn's 30% hike in the corporate tax rate enacted in January 2011 will cost the company $50 million this year.   Dozens of major Illinois firms—from Caterpillar to Motorola to Sears—are in open rebellion in the wake of Springfield's $6 billion revenue short fall.  Oh, Indiana and Wisconsin would welcome all the aforementioned companies.  My advise, which is still the same as yesterday, is "MOVE" out of Illinois before it is too late.

Is Higher Education Worth It?

According to the National Bureau of Statistics, there is only one job for every five applicants in America today. And with most jobs in the U.S. being off-shored to the Far East and Latin America, it’s a safe bet that this statistic is not changing anytime soon.

The outlook going forward is very bleak for college graduates.  The typical seventeen year old seems dying (literally) to sign their life away to JP Morgan, Citi Bank, and Wells Fargo in exchange for $80,000+ in student loans.  Now, don't get me wrong, I consider education is extremely important.  Everyone needs to have a skill-set.  What I am saying is that I don't see a positive ROI (Return-on-Investment) when one has to assume such a mega-debt loan.  Therefore, students and families should find ways to finance education without taking on such a tremendous debt loan that will take a lifetime to repay.  Just don't do it!

Illionis is Broke!

Illinois is so hard up for money that it's studying the possibility of selling ads on state license plates.
The idea is to offer special corporate-sponsored plates. Drivers would get a discount on the price, and businesses would put their logos on the plates.  State Senator John Mulroe of Chicago says he hopes the corporate plates will bring Illinois more money without raising taxes.  Good luck on that one.  My advice to Illinois residence, MOVE!

2012 Chevy Volt Gets Price Cut

Would-be Volt buyers who decided to wait for a bit are about to be rewarded. The 2012 Chevy Volt will start at “just” $39,995. That’s down just over $1,000 from $41,000 for the 2011.

Sure, when I am talking about forty thousand dollar car, which a grand isn’t that significant but a start. However, it does show that Chevy is serious about making this thing affordable. A twenty more years of price drops and Volts could potentially sell for the low-mid $20k rang.  By then, Government Motors (GM) will have decided to cease it production.  For me, I will stick with a Honda Fit (fossil fuel), which gets approximately 40 MPG and has a price differential of approximately $25,000.  With that $25,000, I can purchase a lot of "GASOLINE."

Jim Rogers: "Bernanke Is A Disaster"

Rogers: "Since the first day Mr Benanke went to Washington I knew he was going to be a disaster. He has never been right about anything in the 7 or 8 years he has been there. I hope he doesn't come back with QE3 but that's all he knows. The only thing he knows to do is to print money. He doesn't understand finance, he doesn't understand currencies, he doesn't understand economics. He understands printing money. It's the wrong thing to do but that's what he'll do."  

I will say amen to that. 

DJIA Update for June 7, 2011

Sole Catalyst of GDP Growth: Deficit Spending (Sad But True)

American is so dependent on "DEFICIT SPENDING" that it has been the sole factor in GDP growth since 2007.  See the following graph.

Buy A GM Car? You Might be Voting for $6/Gallon Gas

GM CEO Dan Akerson wants the federal gas tax boosted as much as $1 a gallon to nudge consumers toward more fuel-efficient cars.  That is, so he can get rid of all those Chevy Volts that no one wants at $40,000. 

The Treasury's Plunder Of Retirement Accounts

The Treasury has been dipping into the G-Fund and the Civil Service Retirement and Disability Fund (CSRDF).  Tim Geithner has replaced one IOU (that of the Fed) with another (that of the Treasury) in the G-Fund to the tune of $57 billion and in the CSRDF of about $22 billion.  I thought you retirees should be aware of what Mr. Timmy is up to.  But, of course, don't worry, Timmy promises it shall all be well.

The Scariest Jobs Chart Ever Looks HORRIBLE

Take away the “Birth/Death Adjustment” of 206,000, and the NFP is a negative 150,000 jobs for May 2011, which is probably closer to the real number.  Why?  The "Birth/Death Adjustment" is a statistical number that at best is nothing more than a guess.  For the US to return to its December 2007 unemployment, when factoring in the natural growth of the labor force of 90,000 people a month, the economy will need to add 250,000 jobs a month for the next 66 months.  What are the odds of that happening?  I would say one big fat ZERO.

China Has Divested 97% of Its Holdings in U.S. Treasury Bills

China has dropped 97% of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

White House: Poor Jobs Numbers Are Just Bumps on the Road to Recovery

Boy, I am so very glad that I have that reassurance from the White House! Now, I really feel a whole lot better.  Don't you?  Thank you, Mr. President.

$5,000,000,000,000 Failure

So this is what we get, America, after $1.7 trillion in deficit spending for this year, $600 billion in QE2, and over $4.5 trillion in deficit spending in aggregate over three years – A Big Fat Nothing!  Massive collapse just occurred in the May American employment situation.  A quick overview of the data is as follows:

1. May Non-Farm Payroll (NFP) at 54,000 down from 244,000, and not only below consensus of 165,000, but also below the lowest economist prediction of 65,000.  So much for those high-priced economists!!   
2. Take away the “Birth/Death Adjustment” of 206,000, and the NFP is a negative 150,000.  
3. The unemployment rate was 9.1%.  (The absolute number of unemployed increased from 13.747 million to 13.914 million.) 
4. For the third month in a row the Labor Force Participation rate remained flat at 64.2%. 

H.R. 1489: Return to Prudent Banking Act of 2011

What does this bill do?  Put Glass-Steagall back in force.  The bill is sponsored by Representative Marcy Kaptur (D-Ohio).  America needs this bill to pass.

"To repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called Glass-Steagall Act."

The bill is succinct, which is a novelty in itself coming from Congress.  But, where are the Republicans? Only two have Republicans have signed on to it, not Ron Paul nor Bachmann.   Sorry Paul and Bachmann, you have just lost my vote in regard to your Presidential aspirations!!!

For the full text of the bill, see H.R. 1489.

S&P 500 Update

Oh, To Be a Federal Employee!

More than 77,000 federal government employees throughout the country — including computer operators, more than 5,000 air traffic controllers, 22 librarians and one interior designer — earned more than the governors of the states in which they work.  These are the  findings from the Congressional Research Service.

Food Stamp Usage Hits Fresh Record

As you can see, QE2 has really "helped, not."  Wake-up America.  Our current fiscal and monetary polices are not working.  Please do yourself a favor and read "The Forgotten Depression of 1920" for the fiscal and monetary polices that we should be implementing.

Are You Ready?

Mark Mobius , executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved. 

I believe it is coming sooner, not later, than most investors expect.  That is why it is referred to as a crisis or "Black Swan." 

Thank You, U.S. Armed Forces!

Fixing Social Security (Karl Denninger)

Social Security can be fixed, in part, by indexing or moving the retirement age upward.  If we move it to 70, for example, it makes a significance difference.  Currently, the full retirement age is 67 for someone born in 1960 or later.  Life expectancy in the U.S. is approximately 78 years, or 11 years post-retirement.  If we raise the age to 69, then we cut that to 9 years, which reduces cost by about 18%.  It's not enough, but it would help.  Un-capping wages would also help.  We could also means test Social Security, paying it only to people with a net worth of under $1 million.  This would not save a large amount of money as most "Baby Boomers" are pretty broke (in debt up to their eyeballs), but it would help.  Of course, Medicare is an even larger problem.  However, that is for a future post.

Auto Bailouts Left Behind Crash Victims

I will never buy a GM or Chrysler vehicle unless they make good on their legal liabilities.  It is shameful that this bankruptcy, unlike a "normal" bankruptcy, can purge legal liabilities amounting to $42.6 billion to some 31,598 claimants.  Oh, not all was lost, especially if you are the UAW.  You came out smelling like a rose!

Source: Wall Street Journal 

 

QE3: Inevitable

On Monday, the "Chicago Fed National Activity Index" fell to –0.45 in April from +0.32 in March.  It's three-month moving average is now below its "trend" line, negative values indicate below average economic growth.  (By the way, this is a weighted average index that uses 85 indicators to measure overall national economic activity.)  Today, durable goods were as follows: -3.6% on expectations of -2.5%.  Therefore, prepare for QE3!

How is That Progression on Deflation Doing?

Let me count the ways:

1. Real estate prices continue to find new nadirs.  (In other words, now is not the time to buy that house!)
2. Our government is flat broke, which of course does not come as a surprise to anyone who is still breathing.
3. Greece, Ireland, and Spain are probably only months away from declaring bankruptcy, which of course means the complete deleveraging or should I say complete repudiation of their debts.
4. EU is in complete disarray.  
5. There is almost no business lending by the banks, unless you consider that hedge funds are able to borrow all they want to make speculative purchases like LinkedIn. 
6. QE 2 is ending at the in of June, which should make things real interesting until we get QE 3, 4, 5, 6, and 7.  (Anything to try to support the price level of financial assets, which of course will end very badly.)

Credit Default Swap (CDS): Educational Refresher

A credit default swap (CDS) is often referred to as a form of insurance that protects a lender if a borrower of capital defaults on a loan.  When a lender purchases a CDS from an insurance company, the liability of the loan becomes a credit that may be swapped for cash upon the loan defaulting.  The difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who have no direct interest in the loan being repaid.  This type of investor is commonly referred to as a speculator.  If the borrower defaults on the loan, not only does the lender receive payment by the insurance company, the speculator receives money as well.  In contrast, the only way for a speculator to profit is if the borrower defaults.  Only then will the speculator receive credit that, in turn, can be swapped for a cash payment from the insurance company.  CDS purchased by a speculator is often referred to as a "bet to fail," because it is betting on a borrower to default on a loan. (Wikipedia)

You may check out the daily price changes (basis points) and spreads at S&P CDS Indices.

Follow-up on the Next QE

As indicated in my post of Tuesday, May 17, I firmly believe some form of additional quantitative easing is right around the quarter.  The only question is by how much?  I believe I have found the rationale that the Fed will use; and that is Japan.  The balance sheet of the Bank of Japan equals about 30% of Japanese GDP.  If the Fed would likewise, it could conduct an additional $1.8 trillion worth of quantitative easing.  Why?  There has been no economic recovery.  There has been no improvement in the unemployment rate.  Today, the Philly Fed, which was expected to rise from the April number of 18.5 to 20, instead collapsed to 3.9! This compares to the March level of over 43.  In other words, we have a foreshadowing of an economic depression.

Get Ready for QE3

Get ready for QE3, or whatever the Fed (Bernanke) is going to call it.  (I believe it will be referred to something other than QE3 because of the underlying negative connotation of QE1 and QE2.)  QE2 ends on June 30, and the equity and metal markets are already going through withdrawal symptoms induced by the upcoming lack of liquidity.

My sussing for the next QE is based on the following facts and statements:

1. On May 12, Alan Blinder, Princeton economist and former Fed Vice Chairman, stated, "more monetary easing is necessary.”
2. On May 13, Goldman's Sven Jari Stehn in a paper titled "Fiscal Adjustment without Fed Easing: A Tall Order" in which he states that the only thing that can prevent an economic contraction in the next two years will be more monetary easing.
3. Today, May 17, data for housing starts and permits were abysmal.  Starts came at 523,000 on expectations of 569,000, down from revised 585,000 previously. Permits were also ugly, missing expectations by a comparable account, printing at 551.000, with consensus of 590,000.  Probably the most interesting number was the number of houses under construction, which hit a fresh all time low on an annual, seasonally adjusted basis, or 418,000.

There you have it.  With economic and financial weaknesses across the board and statements by Goldman Sachs and ex-Fed personnel, I would say another form of QE is on the horizon.  And, when the announcement is made, that may just be the time to invest again in equities and precious metals.

S&P 500 "EMA Strategy" Update for May 13, 2011

Only in California can a "Lifegurard" Make in Excess of $100,000

High pay and benefits for lifeguards in Newport Beach, CA is the latest example of frustrating levels of compensation for public employees. More than half the city’s full-time lifeguards are paid a salary of over $100,000 and all but one of them collect more than $100,000 in total compensation including benefits. 

No, I am not kidding.  Once again, I am not that creative to make stuff like this up!  By the way, I am signing up for swimming lessons tomorrow.  Then, hopefully, I can get my lifeguard certificate; and then off to sunny California.

Source: Orange County Register

April Jobs and Unemployment

The BLS reported that the economy added 244,000 jobs.  Wow!  Great number until you do a little math.  Like, exclude the 62,000 from McDonalds and the Birth/Death Rate Adjustment of 175,000, which is totally a blue-sky number.  Thus, according to the math, we added, in real paying jobs, only 7,000, not 244,000!  Oh, the unemployment rate is back up to 9%.  Also, the Labor Participation Rate is at a 25-year low of 64.2% for the third straight month. 

Pick Your Poison

While the White House claims its budget plan will cut $4.2 trillion in spending, and the Republicans claim a $5.8 trillion reduction, neither proposal cuts anything from the national debt.  In fact, both plans increase it from $14.3 trillion to at least $23 trillion by 2021, some 10 years from now, or the national debt will grow at a 4.87% compounded growth rate.  With such a growth rate, the national debt will double from $14.3 trillion in 14 years!  This is not acceptable.  Both parties still do not get it. 

Commodities Take Out Support As Deflation, Economic Slowdown Fears Surge

The "deflationary wave" is taking hold.  Just what the Fed needs in order to get QE3 approval.  Will QE3 happen?  I am in the camp that says it will.  The Fed will do whatever it takes stop deflation, which is exactly what it should not do.  All markets must be cleansed in order for "REAL" economic growth to occur.  The only way that is going to happen is to allow all those toxic assets to be cleansed from the system!

One in Seven Individuals in U.S. Receive Food Stamps

A very interesting, or should I say disheartening, map depicts the status of individuals on food stamps by state.  By the way, Missouri has approximately one in six on food stamps.  Click-on map for the details.

Royal Kiss

Just call me a sentimental fool. (LOL)

Geithner Vows to Defend Strong U.S. Dollar Policy

What is this guy smoking, or does he just like to lie?  Today, Timmy made the following statement at a New York conference organized by the Council of Foreign Relations: "United States would never follow a strategy to weaken the US dollar.  Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country.  We will never embrace a strategy to weaken the dollar."

I find his statement completely detestable.  In the year to date, the dollar has lost 6.5% of its value compared with a basket of currencies held by our major trade partners.

When Will the Riots Start? Inquiring Minds Would Like to Know!

Shell Oil Company has announced it must scrap efforts to drill for oil this summer in the Arctic Ocean off the northern coast of Alaska. The decision comes following a ruling by the EPA's Environmental Appeals Board, which is under Executive Control of the President Obama, to withhold critical air permits that Shell needs.  Shell has spend five years and nearly $4 billion dollars on plans to explore for oil there.  The leases alone costs $2.2 billion.  In other words, our government has just stolen $2.2 billion from Shell.  This is how we will eventually pay at least $5/gallon for gasoline. 

The Real Common Sense Understanding of "Price Inflation"

First, food, fuels used at home and gasoline are  20% of the "average" consumer's household budget.  However, the government does not believe that those items are relevant.  Why?  Because its focus is on "core inflation," which eliminates food and energy.  From that perspective, price inflation is not a problem. I don't know about you, but I do use gasoline and eat food.  Now, let's look at what is happening to energy and food prices.   Three-month average change on Food is .87%, which is an 11% annualized price inflation rate.  Fuel oil and other fuels (household energy) have a three-month run rate of 4.7%, which is an annualized seventy-four percent (74%).  Gasoline has a three month run rate of 4.6%, which is an annualized seventy-two percent (72%) price inflation rate. 


How dumb does the government believe Americans are?  I guess pretty dumb because it seems to get away with it.

Why did the Federal Reserve Fork over $220 Million in Bailout Money to the Wives of Two Morgan Stanley (Wall Street) Bigwigs?

"It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment."


Are you mad, yet?  I hope you are, because these types of transactions must stop.


Source: Matt Taibb

A look at the UK’s REAL GDP or Simply Substitute USA for UK

"The following chart is pretty simple to follow. First up the black line is the UK’s GDP going back all the way to 1970. The green line is the amount the government has borrowed as a percent of GDP and the red line is a simple subtraction of the government spending through borrowed money from GDP. So what does this tell us?

The government has no money, it only has what it can tax the people. When it wants to spend more than the revenue it generates it borrows this money. However, that borrowed money has to be repaid and the only way it can do this is by taxing in the future.

So when the government borrows money and pumps it into the economy, it can make the GDP numbers go up and make the economy appear stronger than it actually is. In essence the government is borrowing GDP from future years to make GDP in the here-and-now go up. However, this is all false because eventually that borrowed money has to be repaid through higher taxes (with interest) and all that ‘gained’ GDP will have to be given back."

You can read the full article at Gold News.

Government Motors' Crowning Achievement: Falling Steering Wheels

Who can forget the frenzied all out bashing of Toyota on all government propaganda stations after the brake pedal got stuck just at a time when Government Motors was emerging from bankruptcy, and before it was forced to engage in stuffing dealers with its bloated inventory.  Yet, very little if anything has been said about the curious case of the Chevy Cruze and the falling steering wheel.  (Curious minds would like to know!  Oh, it is Government Motors.  Now, I know why we have not heard about it.)

The WSJ writes: "Imagine turning your car’s steering wheel, or giving it a gentle tug, and having it break away from the steering column.  Now you’re speeding along holding the suddenly useless wheel.  It sounds like a vision from a cartoon, or every driver’s nightmare. And it happened to at least one driver of a 2011 Chevrolet Cruze compact car last month, and General Motors Corp. is recalling 2,100 of the cars as a result."

The $38 Billion Budget Cut FARCE!!!!!!

Folks, we are dealing with close to a $1.6 trillion federal deficit for fiscal 2011.  But, Congress did cut a whopping $38 billion from the budget, which amounts to $3.6 trillion, or slightly more than a 1% cut.  They just don't get it.  Shame on you Democrats and Republicans.  And, where is the outcry from the Tea Party?  Where is the outcry from anyone?

The following graph depicts and illustrates the sorry state of affairs:

Source: Market-Ticker

Seven Things That I Know That Really Make Me Upset

1. Five U.S. banks control over 50% of the entire banking industry.
2. The top 1% of U.S. families have a greater share of the nation’s wealth than any time since 1930.
3. Wall Street profits in 2009 and 2010 totaled approximately $80 billion.  Bonuses over this two-year period totaled $43 billion.  (It is amazing that an industry that had a near-death experience in 2008 has made such a spectacular return to profitability.  I guess it is simple when you not only control the organization, Fed, that prints the money but the accounting firms who do your books, FASB.)
4. The Fed’s balance sheet has increased to $2.2 trillion as it purchased $1.3 trillion of toxic assets that it purchased from Wall Street.  The Fed paid 100% on the dollar for assets worth 50%, more likely 30%.  (What a great business model.  Your assets are only worth thirty cents, but your Sugar Daddy gives you $1 for all those worthless assets.)
5. Auditors are not really independent when it comes to Wall Street firms.
6. Fannie and Freddie will end up costing taxpayers at least $400 billion.
7. The biggest borrowers from the Fed were foreign banks during the so-called financial crisis week in October 2008, accounting for at least 70 percent of the $110.7 billion borrowed.  (Where is the outrage?)

Jobs Report Signals Improving Economy

You have to be kidding me, right?  I can not believe that this was the headline in today's Wall Street Journal online edition.  Shame on you, WSJ.  Take a look at the following chart, and you decide if things are really getting better.

Government Motors (GM) Hits Record: 574,000 Cars In Dealer Inventory, Despite No Interest Loans, Highest Car Discounts

Government Motors is offering buyers interest-free financing on some 2011 models after the company increased discounts and incentives to lead all major automakers’ U.S. sales gains last month."  Isn't that great. Now, desperate car buyers who can't rub two dimes together, can drive to the local unemployment office in the luxury of their brand new Chevy, which are now offered at either 72 or 60 months of interest-free loans. And get this: GM raised discounts 12% from a year earlier to an estimated $3,732 per vehicle last month, the most among major automakers and 45% more than the average, according to researcher Autodata Corporation.  


You got to love our federal government for giving all your "hard-earned money" to GM so those that can not afford a car can now drive one to the unemployment office.  Bless you, my brother!