May - 2009 Economic Brief (2)

(Part two of two)

Is the US Government “for the people”?

Is the economy based on the irrational assumption that the economy won’t get as bad as it already is?

 The Financial Accounting Standards Board, under intense political pressure, will ease mark-to-market accounting rules, to “mark-to-make believe” allowing banks more leeway on valuing their assets and the ability to mark down the debts on their books and still stay in business.

- Accounting change makes Goldman's December losses vanish and Goldman Sachs’ advice to direct a $13 billion counterparty windfall to itself.

- The closer Citi gets to bankruptcy the more money it would “make” on its derivitives, not to mention the 2.5 billion “credit value adjustment” it received, so it too could report a positive income.

- It let Wells Fargo, for example, claim a Q 1 profit when it’s drowning in losses.

 Fed looks to revive real estate by changing TALF terms U.S. government uses tax-funded TARP allocations to purchase equity interests (toxic assets) in financial institutions at current market value (15 -30 cents on the dollar).

- “The toxic assets weighing down bank balance sheets aren’t going anywhere anytime soon, despite the Obama administration’s plan to purge them”, Soros says. “And that will be a continuing negative factor for the global economy”, he points out.

- “It is a win-win-lose proposal: the banks win, investors win — and taxpayers lose,” economist Joseph Stiglitz told The New York Times.

 The U.S. Treasury is expected soon to announce that it will expand the Troubled Asset Relief Program to help struggling life-insurance companies.

 The U.S. Securities and Exchange Commission is considering the possibility of creating an entirely new business model for credit rating agencies, including doing away with requirements that debt issuers use them. Relying less on rating agencies is the point.

 Eliot Spitzer, questioned the disproportionately high number of high-interest mortgages made by national banks to Hispanic and black borrowers.

- Court to rule on case that could shift bank regulation
Supreme Court justices to rule on shift of oversight of banks from federal to state regulators.

- Six banks failed the stress tests
And they're all appealing...

 A bankruptcy filing by Chrysler after the government's negotiations with some of the automaker's creditors broke down and U.S. President Barack Obama hopes there would be a quick restructuring and what he calls, a "new lease on life". When did you last hear bankruptcy being referred to as a "new lease on life"?

 The Federal Reserve made a surprise move three weeks ago by saying it would buy almost $1.2 trillion in long-term government bonds and mortgage-related securities to prop up the economy.

 Consumer credit in U.S. plunges nearly $7.5 billion
The Federal Reserve reported that U.S. consumer borrowing dropped much more steeply in February than analysts expected. Consumer credit was down $7.48 billion during the month, while analysts surveyed by Reuters had expected a $1 billion fall. It is the largest monthly decline since the Fed started keeping track in 1968. Reuters (07 Apr.) , The Dallas Morning News/The Associated Press (07 Apr.)

 Another Day, Another Scheme The latest one lets ordinary people participate in Geithner’s Public-Private Partnership Program (PPIP), PPIP violates FDIC rules. FDIC’s role in insuring depositors has been expanded to a much greater one guaranteeing over $1 trillion in junk assets, way over its charter $30 billion limit by twisting the rules to arrange it.

 Chrysler turned down a $750 million federal loan to avoid limits on executive pay. Chrysler Financial said in a statement that it declined the offer because it does not need the money. The Washington Post (21 Apr.)

 More banks might be allowed to skip interest payments
The deal obtained by Citigroup last month allowing it to suspend interest payments on $25 billion in federal loans might be expanded by the Obama administration to include other big, distressed banks. The idea is to give the banks more help without going back to Congress, which is unlikely to authorize more money because of public anger over government bailouts. The Washington Post (21 Apr.)

 Circumstances of B of A's acquisition of Merrill spark uproar
Testimony by Bank of America CEO Kenneth Lewis regarding the circumstances under which the bank acquired Merrill Lynch has triggered a furor. Lewis, who is under tremendous pressure regardless, testified in February that former U.S. Treasury Secretary Henry Paulson raised the possibility of having him and his board removed if they did not complete the deal. CNBC (23 Apr.) , Financial Times (24 Apr.) , The Washington Post (24 Apr.)

• Bottom line: When faced with the choice of saving his own job or saving his shareholders, Lewis decided to keep his mouth shut, go ahead with the merger and save his job. Additionally, in January, Washington gave Bank of America $20 billion of your money to offset losses it suffered because of its shotgun marriage with Merrill.

• And as of Friday's close, the decision made by Paulson, Bernanke and Lewis has cost shareholders as much as 43 percent of their money in just over four months, even AFTER a vigorous rally.

 Analysis: FDIC bends its own rules to insure debt
Columnist Andrew Ross Sorkin explains how mission creep prompted the Federal Deposit Insurance Corp. to go from insuring bank deposits to becoming "an enabler of enormous leverage" at the center of the financial crisis. U.S. Treasury Secretary Timothy Geithner's plan to help private investors buy banks' troubled assets includes details of how the FDIC is working to stabilize the financial system by adding risk rather than reducing it and how the agency is reinterpreting its own rules to do so. The New York Times (06 Apr.)

 The Federal Reserve is clearly worried about the ability of foreign central banks to keep buying America's debt. So now, the Fed is buying U.S. Treasury securities. As far as I'm concerned, a government buying its own bonds is like a snake eating its own tail or it is doing something that no other entity can do legally, that is simply print the money. If you do that, it's called counterfeiting. When the Fed does it, it's called monetary policy.

 The U.S. “domestic monetary base” consists of coins and paper money in circulation and in bank vaults, plus commercial bank deposits held by the Federal Reserve. In September of 2008, this figure was $262 billion. However, the Federal Reserve recently indicated that this number will swell to $3.8 trillion by September of this year!

That is a 15-fold increase in the domestic money supply in just one year!

Has Washington and Wall Street gone CRAZY?

The International Monetary Fund (IMF), not driven by domestic politics, says the economic decline is gaining momentum.
The U.S. Treasury says the credit crisis is easing.

The IMF says credit crisis is spreading.

The Fed says most banks have capital far in excess of needs.

The IMF says U.S. banks will suffer ANOTHER $1 trillion in losses beyond what they’ve already written down.

In The Great Depression of the 1930s, there were no fewer than NINE sucker rallies just like this one!

Credit was the drug and, like crack, it was sold around the world at a price so cheap that few could resist. In the U.S., the drug was sold to subprime borrowers; in Europe it was sold to emerging states; in South American and Asia it fueled export development in relatively poor economies. We all know that addiction is not sustainable; we just couldn't see the phenomenon objectively, because we were hooked, as well. Through the eyes of an addict, the world of addiction makes sense.

When the drug supply was suddenly withheld in the fall of 2008, the global economy entered a state of forced withdrawal, cold turkey. This isn't Armageddon, it's withdrawal. After a time, fiscal sobriety will feel normal and healthy. A much slower, but more sustainable pace of global growth will be the eventual result.

Meanwhile and in short, the Obama administration, rather than chart a new course to fiscal sanity, is intent on re-inflating the unsustainable bubble, even as the cost of protecting against default recently surged to new highs, indicating the highest risk yet of bankruptcies since the crisis began! If we don't address the core problems of the financial crisis — companies that got "too big to fail" while at the same time stretching their treacherous tentacles throughout the halls of power in Washington — this problem will NEVER go away.

Kevin Phillips, author and former Republican strategist said, today’s crisis represents “the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the US economy by a rabid financial sector…” manipulating both Republican and Democratic administrations through the largest lobby group on the Hill.

Study finds lobbying in Washington extremely profitable
Data prepared by University of Kansas professors show that hundreds of millions of dollars spent by major corporations lobbying for a 2004 change in tax law generated a return on investment of 22,000%. The study focused on 93 companies that spent as much as $282.7 million in 2003 and 2004 to persuade lawmakers to enact a one-year tax holiday on overseas profit. In return, the companies got about $62.5 billion in tax savings, the study found. The New York Times/The Associated Press (09 Apr.)

The combination of fiscal and monetary stimulus now comes to about one-quarter of the size of the U.S. economy (as measured by GDP). And that does not take into account all of the guarantees – of bank deposits, money market accounts, bank bonds, and other liabilities.

Michel Chossudovsky calls current policies amounting to “the most drastic curtailment in public spending in American history” - directing most of it for militarism and foreign wars, Wall Street bailouts, and half a trillion for public debt service. From the very beginning of this crisis in 2006, instead of liquidating the bad debts — the toxic assets — the authorities have shuffled them up the food chain, like DDT. First, the DDT was mostly in the failed mortgage lenders. Then it was moved to the big banks. And now, it's being shifted to the federal government itself. So it should come as no surprise that the government's most volatile securities — bonds — will be the next victim of the market's revenge.

If the Fed is successful at turning the U.S. economy and credit crisis around, it will only be because it flooded the system with trillions of paper dollars, sowing the seeds for eventual wild inflation. All the bailouts — all the sandbags the government has placed here and there — are wiped away by the new flood waters of rising interest rates.

A projected deficit of $1.8 trillion this year and a current national debt of over $11 trillion could lead to a big spike in inflation, therefore make sure you protect your wealth and purchasing power.

Of course, the media would argue that when the economy turns back up, the Fed will jump in with both feet to head off inflation by aggressively raising interest rates, or so the story is foretold. We shall see.

It's not hard to understand the relationship of the dollar with human emotions like greed and fear. And that relationship is rarely more visible than it is today...

When investors are willing to take on more risk, stocks, emerging market currencies and commodities all bounce. On the other hand, when fear is prevalent, the dollar soars, Treasuries take off, and gold starts sniffing towards $1,000 an ounce.
This relationship between greed (risk) and fear (safety) is the driving force of financial markets right now.

Out of the blue:

A new bull market is opening up for oil… A barrel of oil cost only $50 and you have an excellent opportunity to make some superb gains by investing in the oil sector at these low levels.

Personally, I hate the fact that burning fossil fuels leads to global warming. I think we should all use nuclear power and drive electric cars, but this technology is still a long way off, and our society is going to be dependent on oil for another 10 to 20 years minimum. Oil is not a permanent solution and it will eventually run out, but the world is addicted to oil and it can’t kick the habit anytime soon, like credit!

However, there is new evidence from Earth’s history and ongoing climate changes that reveal that the dangerous level of atmospheric carbon dioxide is much less than once believed. The safe level is no higher than 350 parts per million, probably less, and we just passed 385 ppm.

Oil and gas companies are spending almost nothing on alternative energy development.

 Royal Dutch Shell said last month that it will freeze its investments in wind, solar, and hydrogen power.

 Exxon says that by 2050, hydrocarbons — including oil, gas, and coal — will account for 80 percent of the world’s energy supplies, about the same as today.

 Shell, for example, said it spent $1.7 billion since 2004 on alternative projects. That amount is dwarfed by the $87 billion it spent over the same period on its oil and gas projects around the world.

Climate change threatens everyone, especially our children and grandchildren, the young and the unborn, who will bear the full brunt through no fault of their own. It is clear that we cannot burn all fossil fuels, releasing the waste products into the air, without handing our children a situation in which amplifying feedbacks begin to run out of their control, with severe consequences for nature and humanity.

Do you think the environment is more important than the economy? What would it be like if you never heard much about the environment, only the economy, would you care? Did you know the word “economy” comes from the Greek word that means to manage and pass on your farm or household to your sons in better shape than you received it. The key point being, sustainable.

Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, Dan Demming, The Daily Reckoning, The Daily Wealth, Money and Markets, Christian Hill Investors Daily Edge, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, Reuters, The Washington Post, The Wall Street Journal, Martin Weiss Money and Markets, Financial Post, Larry Edelson, Google.com, Mike Larson, Chris Mayer Capital & Crisis, The Dallas Morning News, Bryan Rich, Ted Peroulakis, Brain Hunt, Sean Brodrick, Nilus Mattive, Mike Larson and The Times (London).