March - 2010 - Economic Brief

REVIEW:

Weak jobs data, soft housing prices, shaken consumer confidence and more bad news from Greece sets the tone, now see Obama’s milking cow.



Take the bucket, for example, AIG. “AIG’s” debt to taxpayers is evident. Yet what is not evident is the truth and the truth is that AIG owes taxpayers absolutely nothing. To understand my point, suppose AIG actually pays back the bailout money down to the last dime. Will you receive a check in the mail and a letter of apology? Of course not! Actual taxpayers will never see this money again. The U.S. government will see it – you won’t. Neither will the government do something indirectly beneficial to taxpayers, like repaying the debt. Once government gets money, it spends money. Social Security has been doing this for years. Each surplus has been wasted on other expenditures rather than paying down the debt or preparing for the inevitable retirement shortfall.

Take another bucket, for example, banks, and in particular, Goldman Sachs. In the spring of 2009 it was revealed that Goldman had insured all of its subprime exposure via AIG to the tune of $20 billion, and received roughly $14 billion of money the federal government used to bail out AIG. This allowed it to book huge profits on its subprime investments long before they were actually paid off because the bonds were insured. Of course, it was all a sham – AIG didn't have nearly enough money to pay off any of the insurance. But that’s only half of this disgrace.

Consider the truth, not only did Goldman profit from being insured by AIG but Goldman didn't merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Connecting the dots, Goldman bought insurance on these CDOs because it knew they’d collapse.
These facts all came to light because of research done by the office of Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform. These new documents will certainly lead to a full investigation of the Goldman-AIG dealings and the subsequent $180 billion bailout led by the New York Federal Reserve. If you own Goldman Sachs, you’d better sell.

How does that make you feel?

How about another “head fake”, the Fed announced it would raise the discount rate by half, to 0.75 percent and the markets reacted as though the announcement had been momentous, the dollar soared and gold fell. In fact, nothing of significance had changed. That’s because banks that face short-term stresses no longer have to borrow directly from the Fed; instead, they borrow “excess reserves” from each other at the federal funds rate – the rate the Fed conspicuously left unchanged last week at 0.25 percent.

The truth is, Wall Street fund managers aren’t paid to make you money (and, in fact, 99% of them lost money for their investors in 2008). With a 50% loss in 2008 and a 50% gain in 2009, do you end up even? Nope. It doesn’t work that way. Just to get even, you’d need a 100% gain in 2009. How did you do?

Avoiding big losses should be your number one investing priority.

It’s true stocks have fallen off somewhat recently. The S&P 500 is down about 6% from where it was a month ago. But stocks are still quite expensive in historical terms. Birinyi Associates reports the current S&P 500 P/E ratio (based on trailing twelve month as-reported earnings) to be 25.96, more than 60% above the long-term 15.98 average P/E ratio I calculated using Standard & Poor’s quarterly data.

These are challenging times. And being a smart investor is as important as ever.
Take note that the game’s table is skewed; a perspective shared by a fellow trader who observes the individual investor’s disadvantage at the gate, “banks that have high-speed computers co-located at the exchange (for the speediest nano-second execution) where they can read your orders in less than microseconds, take them from you and sell them to another bidder with the best spread before your broker can give you a read-back of your execution. They can read your stops, and when there are enough to justify a move, they will quickly buy up to them at millisecond speed in 100-share lots to spring your stops selling their accumulated inventory into them to make the fastest money you’ve ever seen. The SEC justifies all of this as ‘adding liquidity.’ Feeling ripped off yet?”

And what ever your pinstripe, Democrats and Republicans alike – we have spent the country into bankruptcy. That bankruptcy, which will affect the ability of Americans to build wealth for themselves, personally and for generations into the future, is of next to no concern to today’s politicians.



What’s important to them is getting through the next election.

One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt. Just in the last 12 months it has nationalized 30% of our economy, so much for capitalism, and now this:

With the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.

$13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%. The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).


DEBT:

Meanwhile, there's no accurate tally of the government's debt. Supposedly, we owe around $12 trillion. This number is so large that it is meaningless. What does it really mean?

In Stewart Dougherty words, “One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt”.

My point? Our government is bankrupt - right now, today. Sure, it might still have access to the credit markets. And yes, since it owes dollars, it can always simply print more. I realize the government can't go bankrupt they way GM did.

It's not a good idea for the world's largest debtor and the world's strongest military power to go broke. Bad things happen in democracies when the government goes broke. At the very least, our creditors will demand much higher interest rates and abandon the use of our currency. That's going to devastate our standard of living.

The U.S. government suffers from the same, or worse, underlying disease as Greece, Portugal, or any other victim of the debt sickness — massive, out-of-control federal deficits. America's burden was $1.4 trillion last year and ANOTHER $1.4 trillion this year. But in the context of back-to-back $1.4 trillion deficits and in the face of a looming bond market collapse, team Obama’s plan represents to little to late.

Money and Markets' Mike Larson explains the situation this way:

"Imagine what would happen if Uncle Sam's borrowing costs shot up like they have in Greece — by 60 percent! Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about."

And guess who is at the party?

Goldman's Greek swap wasn't disclosed in subsequent bond sales: Goldman Sachs participated in $15 billion in bond sales for the Greek government after arranging a currency swap that allowed the country to keep its budget deficit a secret from the EU and bond investors, according to a Bloomberg review of documents. In at least six of the 10 bond offerings, there was no mention of the currency swap, according to the review. Not disclosing the swap -- and the deficit it concealed -- might have helped Goldman get better pricing for the bonds, said Bill Blain, co-head of fixed income at Matrix Corporate Capital. Bloomberg (16 Feb.)

Sovereign-debt sales in eurozone reach record high
Borrowing by eurozone governments has hit an all-time high, adding pressure on the weakest economies by driving up the interest rates they must pay on their bonds. This year, sales of eurozone government debt have reached about $153 billion. "The problem of sovereign risk is just beginning," said Theodora Zemek, global head of fixed income at Axa Investment Managers. "Countries with high debt levels will have to pay higher and higher yields to issue new bonds." Financial Times (tiered subscription model) (02 Feb.)

"Should Germany bail out Club Med or leave the euro altogether?"

Germany faces a terrible dilemma. Either Europe's paymaster agrees to underwrite a Greek bail-out and drops its vehement opposition to a de facto EU economic government, treasury, and debt union... or the euro will start to unravel, and with it, Germany's strategic investment in the post-war order.



Remember, back in December you could buy 1 euro for about US$1.52? Now you can buy that same euro for only about US$1.37. That means euros are almost 10% cheaper these days in terms of U.S. dollars than they were just two months ago.

So, what’s going on?

Lenders are afraid. They’re worried that Greece (and perhaps even Portugal, Ireland and Spain... and even France and did I say, England? It’s the Pound that’s really most vulnerable. In real terms, the Pound’s already devalued against virtually every currency and it’s especially exposed over the weeks running up to the UK election). might be forced to default on their debt. Apparently, the investment world thinks that the huge deficits (relative to GDP) in these countries are not sustainable, so it wants compensation in the form of higher interest rates, which just pushes things closer to default.

Greece didn't count most of its defense spending in its annual budgets because such amounts were state secrets; so almost 30% of its spending didn't officially "count."

Why on Earth would anyone loan to any entity (much less a government) that can't produce accurate financial statements? (By the way, the U.S. can't either. The government's own auditor won't certify the government's budgets.) And why does anyone believe a currency backed by a handful of insolvent governments will survive?

Portugal is latest flash point as fear of default in eurozone grows: The cost of insuring Portugal's sovereign debt reached an all-time high as investors became more concerned about a high level of public-sector debt in the eurozone. Yields on Portugal's 10-year bonds rose to their highest level in almost a year. Last week, the government announced that the budget deficit for 2009 amounted to 9.3% of GDP, much higher than it had expected. Financial Times (tiered subscription model) (04 Feb.) , Telegraph (London) (04 Feb.) , EUObserver (Brussels) (05 Feb.)

Are you unknowingly bailing out Greece?

It’s not out of the question, thinks Ron Paul. He says:
“Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia, Turkey) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs, and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.”

So the link between Goldman Sachs and Greece is well established. And everyone knows of the revolving door between Goldman and the Federal Reserve. Paul’s concern probably seems more plausible now, doesn’t it? And he’s right, unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we will never know if this is occurring or not.

MIT’s Johnson said of Goldman Sachs - “From what we know, this is an egregious example of a conflict of interest... Even if the deal had been authorized, it doesn’t let them off the hook.”

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchanges and bond investors bought something sellers knew not to be the case.”

Report: Biggest names on Wall Street helped Greece, Italy hide debt: Greece and Italy were able to conceal their excessive borrowing with the help of some of the most prominent firms on Wall Street, including Goldman Sachs and JPMorgan Chase, The New York Times reported. Other European countries might have relied on similar derivatives deals to hide their budget deficit from the EU. In many cases, deals put together by the banks were similar to those that triggered the collapse of the U.S. subprime-housing market and the Great Recession, according to the Times. The New York Times (13 Feb.) , Bloomberg (14 Feb.)

Moody's follows S&P with warning on Greek debt's rating
Greek government bonds declined after Moody's Investors Service followed Standard & Poor's in warning that the nation's long-term debt could be downgraded "in a few months." Moody's is the only major credit rating agency that gives Greece's debt an A rating. That rating is important because it allows Greece to offer its bonds as collateral for loans from the European Central Bank. Financial Times (tiered subscription model) (25 Feb.)

Meanwhile, the US deficit has just up-ticked another 100 billion, the bailouts continue, oh, did I say anything yet about the inevitability of higher taxes? Runaway government spending is the way and now this year’s federal deficit is $1.5 trillion, in less time than I could write the words. And have you looked at the Federal Reserve’s balance sheet lately? Since the beginning of the financial market turmoil in August 2007, the Fed’s balance sheet has ballooned. It’s total assets have increased from $869 billion on August 8, 2007 to well over $2.2 trillion. And foreign central banks’ holdings (money we owe to foreigners) amount to $2.9 trillion. No, it’s not a pretty picture.



Obama’s new budget calls for a nearly 9% increase in spending over the 2009 level. Thus, the only way we won’t have another record deficit in fiscal 2011 will be if tax revenues grow by almost 15%. I highly doubt that, given the state of the economy and unemployment levels. What’s much more likely is for tax revenues to ring in at similar levels to today, which would suggest a 2011 budget deficit of around $1.7 trillion (nearly 75% higher than the CBO’s forecast of $980 billion). Even if tax revenues somehow climbed back to the levels of 2006 – 2008, we’d still be locked into a $1.3 trillion-plus deficit, more than 30% above the CBO’s ridiculous forecast.

So, while Greece is being singled out for having a 13% deficit-to-GDP ratio, the U.S. now sports a 10.5% deficit-to- GDP ratio, but if you count the $2.2 trillion that lies off the balance sheet at the Fed, we are right up there with Greece. The U.S. will need to borrow a record $2.5 trillion this year. Within five years, servicing U.S. government debt will account for over half the budget deficit.

There’s only one way out of this mess. We’ve got to pay our debts back with cheaper dollars. And that means inflation.

And higher interest rates follow inflation like summer follows spring. Interest rates right now are at mind-boggling lows. The three-month T-bill pays 0.06%! Want to go out five years? How does 2.39% sound? And the 10-year pays a whopping 3.66%.

This isn’t normal. The average yield for a 10-year Treasury over the last 30 years has been 7.5%. And, historically, three-month T-bills have approximated the CPI – which, over the last 12 months, came in at 2.7%. The Fed’s zero interest rate policy (ZIRP) has artificially depressed interest rates. But the ZIRP can’t go on forever. And it won’t. Rates will rise. It’s not a question of if. It’s simply a question of when. This is a long-term trend. And taking advantage of long-term trends is what makes you money.

Bottom Line: For the first time since just after World War I, we have serious sovereign debt problems in all of the major currencies. And for the first time in the history of man... we have a global monetary base that's not anchored to any real asset.


JOBS:

U.S. had 6.1 jobless workers for every opening in December
In December, the number of unemployed workers for every available position reached 6.1, up from 3.4 during the same month in 2008, the U.S. Labor Department said. The agency's Job Openings and Labor Turnover survey found that there were 2.5 million job openings at the end of December. Los Angeles Times/The Associated Press (09 Feb.)

U.S. consumer confidence is at lowest level in 10 months
The Conference Board said its consumer-confidence index dropped to 46 this month, compared with a revised 56.5 in January. "More than six months after the recovery started, consumer confidence is still close to a record low," said Paul Ashworth, senior U.S. economist at Capital Economics. "Without a sustained acceleration in consumption growth, this recovery will eventually fade." USA TODAY/The Associated Press (23 Feb.)


Chart via Bianco Research

Note: Stock market performance following these drops is usually poor. Just in time for the second “Green Shoots” campaign.

Initial jobless claims in U.S. increase 3 weeks straightFirst-time claims for unemployment benefits increased to 480,000 last week, compared with the previous week's 472,000, the U.S. Labor Department said. Most economists had forecast a decline in initial claims. Last week was the third consecutive week of increase. Forbes (04 Feb.)

Initial claims for unemployment benefits rose 22,000 to 496,000 at the end of February.

So, one survey shows a decline in jobs and the other shows an increase in the unemployment rate; it’s the same difference, but if you are a little skeptical, you should be, as these numbers are also subject to big revisions, and one month shouldn’t be taken too seriously.

Which gets to the special problems of seasonal adjustment and annual revisions: This month the BLS revised its estimate of how many jobs there were by looking at unemployment insurance data for March 2009. The total nonfarm employment level for March 2009 was revised downward by a whopping 930,000, and the previously published level for December 2009 was revised downward 1,363,000, both on a seasonally adjusted basis. The best I can say is that they haven’t learned how to count.

Employment firm Challenger, Gray & Christmas reported that U.S. companies announced layoffs for 71,000 workers, the highest pace of job cuts in five months and up almost 60% from December levels.

U.S. sees steep drop in construction spending for December
Construction spending in December plummeted to its lowest figure since 2003, the U.S. Commerce Department said. Expenditure for construction work totaled $902.5 billion, a 1.2% decline. The drop more than doubled the 0.5% decrease anticipated by economists polled by Reuters. Reuters (01 Feb.)

As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. ProPublica estimates that another 8 states will be insolvent within 6 months, representing 68% of the United States. Did you know that 60% of the new jobs created last year, were created in Texas?















BONDS:

Already, total issuance of government debt already hit a stunning $922 billion in 2008. It then surged even higher to $2.1 trillion in 2009, and it's on track to top $2.5 trillion this year. The size of just ONE WEEK's debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

So, just make sure you avoid all longer term notes and bonds — whether government-issued or not. When the market price of bonds declines, so does your principal value. And because of that loss in principal, any extra interest they might pay you could be wiped out in a heartbeat.

And U.S. Treasury bills (always shorter than one year) would suffer virtually no price declines, even in the midst of a bond market collapse. Currency risk, yes. Yes, I know. Their yield is miserably low. But they still provide the world's best safety and liquidity.

State, federal debt puts additional pressure on credit market
The U.S. government is engaged in its largest series of Treasury auctions ever, and states are issuing bonds to support spending. These moves are putting additional pressure on the credit market while credit availability remains at a premium. "Clearly the government is not the 800-pound gorilla -- it's the 8,000-pound gorilla in the credit markets nowadays," said Mike Larson, an analyst at Weiss Research. "These numbers are just so mind-boggling. Really, what's going on is you have intractable debt and deficit problems in the country that neither side wants to tackle in a meaningful way, so the market is doing it for them." CNBC (22 Feb.)

This month, China, the single largest holder of U.S. debt, dumped more Treasuries than in ANY month since the government started tracking the data in 2000. Prices slumped. Yields surged. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy. The 25-basis-point increase was the FIRST hike in the discount rate since early 2006.

Just a few days ago, Treasury tried to auction off $25 billion in 10-year notes and $16 billion in 30-year bonds. Investors failed to step up to the plate in either auction — a bright red warning sign for bonds if I've ever seen one!


BANKS:

According to Morgan Stanley, European banks will have to roll over more than $1 trillion in debt over the next two years. U.S. banks have an even larger debt load. If our economic forecast is correct, that will put upward pressure on borrowing rates without a commensurate uptick in the economy.

Fed aims to calm markets after surprise increase in lending rateBen Bernanke, chairman of the U.S. Federal Reserve, indicated last week that the central bank might increase its emergency lending rate to widen the spread between that and the main policy rate. Still, markets were caught off guard when the Fed raised the discount rate, prompting officials to say borrowing costs will remain low. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said. CNBC/Reuters (19 Feb.) , The Wall Street Journal (19 Feb.) , Bloomberg (18 Feb.)

The number of troubled banks has soared to 702. The FDIC says that 2010 will be the peak year for bank failures.

Bank lending in U.S. sees biggest annual decrease since 1940s
U.S. bank lending fell 7.5% last year, the Federal Deposit Insurance Corp. said. The $587 billion drop marked the biggest yearly decline since the 1940s. Most of the decrease can be attributed to cutbacks by the biggest banks, said FDIC Chairwoman Sheila Bair. The Washington Post (24 Feb.)


REAL ESTATE:

New Home Sales for the month of January declined 11.2% to 309K.

U.S. Economy: Sales of Previously Owned Homes Fall "Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market." – Bloomberg

RealtyTrac has reported that, in January, the number of U.S. families facing foreclosure surged a shocking 15% higher compared to the same month last year!

Banks repossessed more than 87,000 homes last month alone — that’s a whopping 31% increase over January 2009. While an all-time record 2.8 million households were threatened with foreclosure last year, RealtyTrac expects that number to surge to 3.5 million this year — an appalling 40% increase!

Yet, during the past year in which the program has been in effect, sales of existing homes have climbed by 15%, while new home sales have actually dropped by 5% last year. But after being extended once already by the Obama Administration, the 1st time buyer tax credit will expire at the end of April—putting downward pressure on demand for existing home sales.

There are close to two million mortgages that are more than 90 days delinquent, and nearly all of these will end up in foreclosure. Add to that the 2.3 million properties that are in foreclosure or already seized by banks. At current sales rates, that adds up to a record high 16 months of supply. However, just as significant is the roughly 10 million households in a negative home equity position of worse than -20%, for whom strategic default - failing to pay when one could - is a very real option. Last year 25% of the 2.3 foreclosed were strategic.

Although we don’t expect policymakers to raise the fed funds rate until 2011, mortgage rates have already started to head higher and certainly will continue just as assuredly as quantitative easing continues. Thus the end of tax support, oversupply and increased borrowing costs will keep the market suppressed.
This isn’t the overall picture painted by the media that seems to imply that the housing market has at least hit a bottom and is starting to claw its way back from the abyss. Or has it?

First, we must consider the homebuyer tax credit mentioned above as a big contributor to the improved sales and price figures at the end of 2009. (There will likely be another surge in the spring, as homebuyers take advantage of the extended and expanded tax credit.)

Second, The Supply of Homes on the Market Is Likely to Grow
An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand. An estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009.



Now let’s not forget about the other market, there is growing concern in Congress that the shaky $6.7 trillion commercial real estate market could implode, delivering a major blow to the economic recovery. A bipartisan group of 79 House members led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, and Representative Ken Calvert, Republican of California, sent a letter to the Treasury Department and the Federal Reserve on Monday urging them to take a more active role in keeping the commercial real estate market from turning into a disaster.

“The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery,” Mr. Kanjorski said in a statement.

Analysts warn of foreclosure crisis in commercial real estate
Analysts said a wave of foreclosure on commercial properties in the U.S. likely will hit community banks especially hard. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "There will be significant bankruptcies among developers and significant failures among community banks." The Washington Post (19 Feb.)

Default rate on U.S. commercial mortgages continues to rise
The default rate on commercial mortgages in the U.S. increased from 1.6% in the fourth quarter of 2008 to 3.8% in the same quarter last year. Real Capital Analytics said the rate could hit 5.4% at the end of 2011. "The level of distress continues to rise irrespective of improving economic trends," said Sam Chandan, global chief economist at Real Capital. Bloomberg (24 Feb.)


POLITICS and TAXES:

State of the Union Address

President Obama unveiled a $3.83 trillion budget for fiscal 2011
The president has proposed a freeze on some domestic spending, but the freeze will impact only a small portion of the budget, would not kick in until next year, and would include a mix of spending cuts and spending increases. It would have zero impact on the 2010 deficit and little impact on future deficits.

The president has promised to give TARP funds back to taxpayers, but has also proposed applying unspent TARP money to community bank lending — the President is not interested in reducing the deficit.

The president supports "pay as you go" rules for Congress — requiring new spending to be balanced against spending cuts or revenue increases. But the devil is in the details. If the rules have no truly sharp teeth, they will be ineffective.
USX DOLLARS:

U.S. credit rating could come under pressure, Moody's warns
Moody's Investors Service said the U.S. faces a debt-growth trajectory that is "clearly continuously upward" as the credit rating agency warned that the country's triple-A credit rating might come under pressure. "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating," according to a Moody's note. Financial Times (tiered subscription model) (03 Feb.)

Having said that, in fact, the dollar is operating in a win-win environment these days. Heads the dollar wins; tails practically every foreign currency loses. As euro investors stampede for the exits in the first half of this year, many will move their money into the “least ugly” currency available — the U.S. dollar. This inflow should help stabilize the dollar temporarily.

However, having said that, the value of the dollar is collapsing as the un-creditworthiness of the United States becomes evident. That means the price of hard assets – like gold – will keep rising and the value our government's long-term obligations will fall. Note the value of the U.S. long-bond market fell by more than 10% despite the government support. And the value of gold increased by more than 10% as investors fled the dollar.



Ultimately, despite obvious differences, the U.S. government suffers from the same disease as Greece, Portugal and other at-risk nations: Massive, out-of-control federal deficits. America’s red ink was $1.4 trillion last year and will be ANOTHER $1.6 trillion this year.

The safest thing to do right now is split your savings between short-term Treasuries and gold.

Why? Despite this “rush to safety” back into the U.S. dollar underway, and so the greenback continues to rally and the commodities continue to fall; for the moment. The the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.

But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money.


REGULATORY SUPERVISION:

The financials were kicked while they were down this month. New York Attorney General Andrew Cuomo filed civil securities fraud charges against former Bank of America CEO Kenneth Lewis and CFO Joseph Price over the Merrill Lynch acquisition. My bet, Goldman Sachs will be next.

Ben Bernanke got reaffirmed for another term at the Fed this month. I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.

What his virtues are I don’t know, but honesty, competence, and a track record of success are not among them. As this great YouTube compilation of Bernanke quotes shows, the chairman has a track record of being wrong on just about everything.
http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=related

SEC is poised to temporarily restrict short sales
The U.S. Securities and Exchange Commission is expected to approve a measure to restrict short sales on shares once they have fallen 10%, sources said. Charles Schwab, General Electric and thousands of people sent the SEC a petition urging the agency to adopt a permanent short-selling restriction. Meanwhile, Goldman Sachs, Citadel Investment Group and other hedge funds expressed opposition to such curbs. Bloomberg (23 Feb.)

It passed, oh, and good work SEC, you got Goldman Sachs pissed.

Thanks to Shapiro & Co's July 2009 amendment to NYSE Rule 452, that automatic broker vote is over. If shareholders don't send in their ballots, then their votes simply aren't counted. This means that each Proxy Season, corporations send their ballots out to shareholders; the problem is, only around 30% actually bother to cast a vote one way or the other. In other words, if you own 1000 shares of IBM and throw your proxy packet in the trash along with the LL Bean catalog and the Val-U-Pak, E*Trade or Merrill Lynch or whomever holds your stock in a brokerage account for you will do the voting in your name - and they will almost always just vote yes for the incumbent.

This sets the stage for the "No Vote" to mean more than it ever has before without that huge number of automatic "Yes Votes" coming in from the brokerage firms. There are many corporate board members who could find themselves voted out - even in an uncontested election!

To give you an idea of how powerful this rule change may be, in 2004, then-Disney Chairman Michael Eisner's vote count NOT INCLUDING the brokerage Yes's would have had him kicked out with the numbers against him 54 to 46. Instead, he won by that same margin because of the automatics. In other words, “No Votes” matter again and small investors who actually vote will have a proportionately louder voice in the absence of the brokerage firm’s “Yes” bloc vote. Enough said.


GOLD:

Overall investment in gold was 7% higher in 2009 than 2008.

Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of U.S. debt on concerns the dollar will decline. And this after their holdings were already lower in November than they were last July. Is it possible the Chinese (and the myriad other governments concerned about what U.S. leaders are doing to the dollar) and everyone else start buying gold for protection? Anything is possible, but it’s far more likely that they’re just getting started, considering that just 1.9% of Chinese foreign reserves are held in gold. I think most agree with the merits of diversification.



And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed bought physical gold for personal investment because they fear quantitative easing programs may lead to inflation. In other words, not only are they buying gold in their funds, they’re stashing some at home as one ounce coins.

Further, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world's wealthiest families are also switching to gold.

George Soros's Soros Fund Management charged into gold during the fourth quarter, doubling its stake in the world's largest gold ETF. The $25 billion New York-based firm became the fourth- largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the U.S. Securities and Exchange Commission yesterday. Taken together, these two investment positions are worth about $663 million and this doubling down represents the ETF fund’s largest single investment, as of Dec. 31.

Meanwhile, back at the Central Bank of Russia there was an update to their website for January. They increased their gold holdings by 100,000 ounces in January. That’s the first time they've added any gold in that month since January of 2007, hmm. It will be of great interest to see if they can improve on what they did during 2009... which was a record year.













QUOTES OF THE MONTH:

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." - Congressmen Paul Kanjorski and Ken Calvert

“…we are still driving on the same winding mountain road, but this time in a faster car.” - Special Investigator Neil Barofsky, whose job it is to oversee the Troubled Assets Relief Program (TARP)

“Certainty? In this world nothing is certain but death and taxes.” - Ben Franklin
Note: If Ben Franklin were alive today, he would undoubtedly add inflation to his list. The almighty dollar has lost 82% of its purchasing power over the last 40 or so years. Inflation is the unseen pickpocket of modern life. Another pickpocket – a very visible one – is the taxman. Both steal from you and your children. (50% income + Sales tax, 20% Capital Gains + 50% Inheritance tax)

“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe. It came to us from across the ocean.” - Russian Prime Minister Vladimir Putin, 16 February 2010

"It breaks my heart that 10 years ago we had a balanced budget, that we were on the way to paying down the debt of the United States of America," – Hilary Clinton, 2010

“I hope we can find a way of resurrecting the subprime market, because it was working well until those mortgages were widely securitized” - [Sir] Alan Greenspan, 2010

“There are no markets any more... only interventions.” – Ed Steers

“The point is, ladies and gentleman, that greed -- for lack of a better word -- is good...
Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit...
Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind. And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA.” - Gordon Gekko’s “Greed is good” speech http://www.youtube.com/watch?v=7upG01-XWbY


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, my colleagues, 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. It 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:

Martin Weiss, Mike Larsen, Bob Irish, Chris Wood, Ambrose Evans-Pritchard, Porter Stansberry, Andrew Gordon, Tyler Durden, Doug Casey, Greg Spear, David Galand, Bryan Rich, Rick Ackerman, Elisa Martinuzzi, and Jim Rogers

Telegraph.uk, Star Tribume, Bloomberg, Financial Times, Telegraph (London), EUObserver (Brussels), Los Angeles Times, Associated Press, USA Today, Forbes, Reuters, CMBC, THE Washington Post, and The Wall Street Journal.