September - 2009 Economic Brief

As goes the economy, so goes dentistry, but how about the unease that many now feel as they observe the disconnect between what their own eyes see and what the government tells them they should be seeing?

Case in point:

ADA 4th economic confidence survey available
According to the 4th ADA Survey of Economic Confidence, 2nd quarter results were more negative than those of the 1st quarter of 2009, but more positive than those for the 4th quarter of 2009.

“...50 percent report that key dental metrics are still trending in a negative direction.…”

Yet, we are being told:
U.S. consumers become more optimistic than expected
The Conference Board Consumer Confidence Index surged to 54.1 this month, up from July's adjusted 47.4. Economists polled by Thomson Reuters had anticipated an uptick to 47.5. The index remains far from a mark of 90, which suggests the economy is in good shape. The New York Times/The Associated Press (25 Aug.)
In a period where less bad is the new good...

Good News:Unemployment rate “fell slightly” from 9.5% to 9.4% earlier this month.
BAD NEWS:
These people were removed from the official count, because they have given up their active job search. More than two-thirds of U.S. economic activity relies on consumer spending. American’s are just not spending like they once did for one big reason: Over 6.5 million Americans have lost their jobs since the Great Recession began; last quarter we saw a 1.2% decline in consumer spending.

Rising unemployment claims in U.S. catch experts off guard
A second consecutive week of increase to initial jobless claims in the U.S. came as a surprise to analysts, who had expected a decline. Initial claims for benefits rose to 576,000 last week, a 15,000 increase from the previous week, the Labor Department said. Most analysts' forecasts called for first-time claims to drop to 550,000. Yahoo!/Agence France-Presse (20 Aug.)

U.S. retail sales post surprise 0.1% drop
Breaking a three-month trend of increasing consumer spending, retail sales dropped 0.1% in July, the U.S. Commerce Department said. The boost triggered by the government's "Cash for Clunkers" program was not enough to make up for plummeting sales at department stores. Bloomberg (13 Aug.)


Bad News:
U.S. housing starts unexpectedly fell in July. Already, nearly 10% of U.S. home mortgages are in some stage of delinquency or default.
Delinquent home mortgages in U.S. reach record high.

The percentage of U.S. home mortgages either going through foreclosure or being classified as delinquent has reached the highest level since records began in 1972, the Mortgage Bankers Association said. Prime loans, made to the most desirable borrowers and considered the least risky by lenders, accounted for more than half of the mortgages in foreclosure. Rising unemployment and the recession are driving forces behind the housing crisis, said Jay Brinkmann, chief economist for the Mortgage Bankers Association. The Washington Post (21 Aug.) , The Wall Street Journal (21 Aug.)
GOOD NEWS:
The blow was somewhat blocked by a slight increase in single-family home starts


Bad News:
A New Debt Load
The Office of Management and Budget (OMB) is projecting a federal deficit of $1.5 trillion for the current fiscal year, due to a 24% increase in spending (to save Wall Street and stimulate the economy) and a 17% decline in tax revenues. The revenue drop is the largest since the Great Depression. The deficit this year will reach 11% of GDP, a level not seen since the end of WWII. But that's not all.
BAD NEWS:
According to the White House, the deficit is expected to average nearly $1 trillion annually for the next decade. Beyond 2013, deficits are anticipated to remain high largely due to demographic trends that will inevitably increase spending on Medicare, Medicaid and Social Security. Over the next decade, economists project that the national debt will rise to 75% of GDP as the boomers age. That would be a typical war time level, but it does not bode well for a peacetime economy.

GOOD NEWS:Governments around the world are injecting huge amounts of money and credit into the struggling patient known as the global economy. All this Monopoly money is driving rallies in stocks and bonds.
“GOOD NEWS”:
Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)


MORE BAD NEWS:
At the peak of the credit crisis last October, the Baltic Dry index fell 90%. Then it staged a recovery, hitting new highs on June 3 but in just 10 days of August, the Baltic Dry Index, a good proxy for global demand, had tumbled 25 percent. The worst week for the index since October. The Baltic Dry Index is down 35% in the last two months.

Our country's debt load at the end of July totaled $11,669,251,349,504.65. That's $11.7 trillion, or roughly about $520,000 per individual taxpayers, your household is on the hook for $771,000 when we include medical and social security obligations. Oh, and just this month Washington casually announced that another $9 trillion (a 27% increase from the previous forecast of $7.1 trillion) will be layered onto the federal government deficit over the next 10 years or roughly another $77,100 per household. Hello?



So, how big is a trillion again?
A trillion seconds is 30,000 years ago. And if you laid a trillion dollar bills end-to-end, it would stretch to the moon and back… 400 TIMES.

In the case of the U.S. government, our ever-increasing debt load means one of two things is going to have to happen. Either ...

1. Economic growth is going to surge, sending tax revenue through the roof and allowing us to pay off all these bills, notes, and bonds. That’s the American dream, dream on.

OR ...

2. Taxes are going to have to rise sharply to make good on our
debts

At the same time, we're counting on foreign creditors to finance that debt explosion. But those creditors ALREADY own about 53 percent of our marketable debt, the highest percentage share in history. And they're starting to rebel.

Case in point: Both Russia and China

They're talking about buying fewer dollar assets, and more assets denominated in other currencies.

Why would these guys want to move their money out of dollars? Simple.
As the dollar loses value on the global currency market, our foreign creditors lose money. That's because every dollar worth of bonds they own translates into fewer pounds, euros, yen, and so on.

The dollar's share of global reserves shrank to 64 percent at year-end 2008 from 73 percent in 2001, according to the International Monetary Fund. If that figure continues to decline, U.S. interest rates will simply have to rise.

That means Uncle Sam will pay more to sell Treasuries. Your mortgage rates will go up and so will corporate borrowing costs...

But here's the scary thing: even if the Chinese lent the U.S. all their $2 trillion of Foreign exchange, it would only cover this year's U.S. borrowing. Where is the U.S. going to get next year's?

According to the financial markets, the world has become a very calm and comfortable place again. The rally that began in March of 2009 is now 22 weeks long and has seen the S&P 500 rise 49.4 percent, but what have we done?

Maybe we are all in denial, replacing private debt with public debt, not dealing with our banking system by not holding it accountable, not changing structurally towards more sustainability, rewarding the fools who got us here, (Summers, Bernanke, Geithner) and the banksters are taking over again. Maybe you didn’t notice but almost 40% of the share volume on the NYSE was comprised of Citigroup, Bank of America, Fannie Mae, and Freddie Mac.

Is it working?

Geithner says White House to consider further stimulus
The Obama administration will look into extending subsidized bond programs and other efforts to spur the economy, said U.S. Treasury Secretary Timothy Geithner. "There's a range of things that we're going to look at as we get into the fall," Geithner said at the site of a school financed by qualified school construction bonds. "The important thing to note is that [the bonds] are really working, and people can see the difference. But we're not yet at the point where we need to make that judgment. We'll take a careful look at that as we get into the fall." Reuters (20 Aug.)

And,

U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit in August.

And,
Reuters reports that corporate insiders recently pulled $53 from the market for every $1 they put in.

And,
Tax receipts are set to plunge 18 percent this year, the biggest decline since 1932 during the Great Depression. Individual taxes are off 22 percent year-over-year, while corporate revenue has plunged 57 percent.

Buffett noted this month that our government is spending $1.85 for every $1 it takes in from taxes ... that ever-increasing purchases of Treasuries by foreign investors are "no sure thing" ... and that our deficit is on track to hit 13 percent of GDP, more than double the previous non-wartime record of 6 percent. Additionally, Warren Buffett has gone public this month in agreeing with our contention that the government’s proliferate spending will lead to a serious degradation in the value of the dollar.

And, what about earnings,
This chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.



Finally, as you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.

And so the situation today is comparable to changing the grading curve. Further to this fairy tale economic recovery... There is a battle being fought behind the scenes, a fight that could set the stage for a very, very big correction in stocks of banks and other financial services companies. During the first phase of economic crisis, the government leaned on the Financial Accounting Standards Board, or FASB as it is usually referred to, to suspend its mark-to-market valuation standards.

The consequence of this change was that, presto, much of the capital challenges the financial institutions were struggling with just disappeared, and banks could trot out their freshly smudged balance sheets with a satisfied smirk.

That smirk could soon be slapped away if new proposals by the FASB to return to mark-to-market, and even extend it, are again accepted as required practice. Why would the FASB reverse itself on this issue? Simply, if accountants are to have any credibility at all – or serve any real purpose – they need to be true to their profession. Otherwise, why would anyone believe in the work they do?

Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)

Even so,
Defaults on corporate debt soar to record high
This year, 201 issuers of corporate debt have defaulted on a total of $453.1 billion in debt, compared with 126 corporate defaults totaling $433 billion for all of 2008, Standard & Poor's said. The latest data also top figures for the comparable period in 2001, which had been the worst year for corporate-debt defaults. Financial Times (tiered subscription model) (19 Aug.)

SEC faces dilemma as it weighs various public interests
The Securities and Exchange Commission is facing a dilemma because the U.S. government has become a large stakeholder in many of the country's banks. Actions taken by the SEC could hurt financial institutions in which the government holds shares. The agency must decide whether to protect investors or the government's investments. "Normally, the SEC's focus is on the protection of investors -- that is, people who are trading securities in capital markets," said James Cox, a Duke University professor. "With the government being a substantial stockholder, you could well think the SEC's consideration could extend to matters that relate to the financial success of the firm itself." The Washington Post (04 Aug.)

Questions arise as Wall Street profits from trading with Fed
The Federal Reserve has become one of the largest customers of Wall Street banks as it strives to stabilize markets by purchasing securities. The result has been huge profits for the banks, raising questions about how the U.S. government deals with private-sector counterparties. "You can make big money trading with the government," said an executive at an investment-management firm. "The government is a huge buyer and seller, and Wall Street has all the pricing power." Financial Times (tiered subscription model) (02 Aug.)

Remember, the Fed has failed miserably at protecting the currency, purportedly its primary purpose.



The U.S. dollar has lost more than 90% of its value since 1913, when the Federal Reserve Bank was created. It has lost more than 50% of its value since 1987, when “Easy Money Al” Greenspan began his tenure at the bank.

Food for thought:
People often mistake inflation with its effects.
They think that inflation means “prices going up.” But it doesn’t. Let me explain…
Inflation is when the supply of money expands faster than the growth of goods and services in the economy. When there are too many dollars chasing too few goods and services, prices rise.

So, the rising price of beer, milk, eggs and gasoline is the result of inflation. But that part of the equation doesn’t usually happen right away. And that’s what makes it so dangerous. It is a huge mistake to believe there is no inflation, just because prices aren’t rising.

The inflation has already happened. And it continues. Take a look at the chart below. It represents the U.S. Monetary Base – currency in circulation, plus bank reserves held at the Fed.



Hmm. Looks like inflation to me.
So, by definition, massive inflation has already arrived. The question is: when will the wave of monetary inflation show up in the prices we pay?

Did I mention the security wild card?

According to the 2008 official Pentagon inventory of our military bases around the world, our empire consists of 865 facilities in more than 40 countries and overseas U.S. territories.

We deploy over 190,000 troops in 46 countries and territories.

According to Anita Dancs, an analyst for the website Foreign Policy in Focus, the United States spends approximately $250 billion each year...

This is all staggering expensive. In an era when the need for funds at home is self-evident, on purely practical grounds – and there are obviously others – the maintenance of our global imperial stance, not to speak of the wars, conflicts, and dangers that go with it, should be at the forefront of national discussion.

For example, The U.S. has spent $223 billion in Afghanistan since 2003… What's more, mainstream cost estimates never show the huge, "hidden" costs of wars… like the cost to replace tanks and jets… and the future costs to take care of injured soldiers. The actual costs of both Afghanistan and Iraq will run into the trillions.

Did I mention hidden costs?

In a recent article titled, The Expiring Economy, Roberts pointed out that during the “worst economy since the 1930s,” the administration has ”embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan.”
And who is going to pay for the $636 billion national “defense” budget the House just approved?

Did I mention the energy wild card?

Analysts: Rising energy costs threaten economic recovery
With the price of crude oil reaching $76 a barrel, experts are worried about the possible impact of energy costs on a still-fragile world economy. "Although the financial crisis had been addressed, the commodity crisis has not," Goldman Sachs said. Financial Times (tiered subscription model) (09 Aug.)

Did I mention the ethical issues?

Paulson's ties with Goldman continue to raises ethical questions
Seven months after Henry Paulson left his position as U.S. Treasury secretary, questions continue to be asked about his relationships with executives at Goldman Sachs, the investment bank he had previously run. "I operated very consistently within the ethic guidelines I had as secretary of the Treasury," Paulson said in response to a lawmaker's question about his dealings as Treasury secretary. He added that he obtained an ethics waiver for dealing with the firm "when it became clear that we had some very significant issues with Goldman Sachs." The New York Times (08 Aug.)

Did I mention China’s new gold policy?

2009– the FIRST year that the Chinese public is allowed to own physical gold or silver. Will the Chinese turn into goldbugs overnight? No. Over the next 5 years? Probably, yes.


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. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order: ADA, Bob Irish, Gregory Spear’s Market Commentary; Daily Wealth Reader; Doug Casey, The Daily Crux/Dr. Steve Sjuggerud & Tom Dyson, Money and Markets/Mike Larsen, Martin Weiss; The New York Times/The Associated Press; The Washington Post; The Wall Street Journal; Yahoo!/Agence France-Presse; and Bloomberg.