The Economy Guy

All the markets went sideways today, except gold which moved up well today.

In the news today…..

New Home Sales – dropped to the lowest level EVER.  That is the number of homes sold in July was less than in 1963.  Imagine that.  After yesterday’s existing home sales disaster, today’s new home sales disaster just emphasizes the reality of our lousy economy – recession or depression ? – have you decided for yourself.

Gold Price Manipulation ?? - yes, probably according to Ron Paul.  In addition, he wants to have an audit of Fort Knox to count our gold.  I wonder why he is worried?  The European Central Bank was selling gold like a drunken sailor for the past few years (they stopped this year) as they look like fools as the price of gold continues to climb.  What has the FED done?  Of course, this is a fight, as the FED doesn’t allow anyone to audit its books or gold.

Illinois Teacher’s Pension Association – plans to sell $3B worth of its assets, or about 10% of its assets, in order to be able to pay out pensions.  Think about that for a minute.  The state contribution is in question as Illinois is in trouble financially.  How long can that pension fund last?  This is a train coming down the track that will crash into all state, local pension funds.  Ugly.

Tomorrow’s economy – what do you think is coming?

Tonight’s Dinner Conversation….

How safe our those government bonds.  I am reproducing in its entirety a Bloomberg article written by Morgan Stanley in the UK.  It is thought provoking at the very least, and a must read for economyguy  readers.  Did you get the meaning of how bad the US obligation and ability to repay in this article?  This is well written with lots of numbers to back up the claim of inevitable defaults.  While he is talking about nations everywhere, and Europe specifically, he singles out the US too.

Also, as you read this article, know that Ireland’s debt rating was lowered today.

Morgan Stanley Says Government Defaults Inevitable

By Matthew Brown – Aug 25, 2010 8:44 AM MT

Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.

Double Dip

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009.

Credit-Default Swaps

A report from the Commerce Department today showed U.S. durable goods orders increased 0.3 percent, compared with the 3 percent median estimate of 75 economists surveyed by Bloomberg News, figures showed today in Washington. The number of unemployment claims unexpectedly shot up by 12,000 to 500,000 in the week ended Aug 14, Labor Department figures showed Aug. 19.

Yields on German and U.S. benchmark securities sank today as investors sought the safest assets. U.S. two-year Treasury yields, at a four-month high 1.18 percent on April 5, fell to a record low 0.4542 percent yesterday.

The yield on Greek debt rose to more than 900 basis points above that of Germany today, the most since the European Union and International Monetary Fund created a 750 billion-euro ($948 billion) bailout package in May. Greece’s so-called yield spread over German debt was at 932 basis points as of 2:18 p.m. in London, short of the 973 basis point record set on May 7. The Irish-German yield spread rose to a record 347 basis points, from 318 points yesterday.

Credit-default swaps that insure Irish government bonds against non-payment for five years rose 21 basis points to 331 today, the most since March 2009, according to data provider CMA. Greek swaps jumped to 921.5, the most since June, from 896.

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.

Here are the closing numbers for today:
Dow Jones 30 Industrial – 10.060 (up 20)
10 Year Treasury Bond – 2.54% (up 0.04%)
Euro – $1.2654
Gold – $1240 (up $8)
Oil – $72.71 (up $1.08)
Gasoline – $1.86  (up $0.01)

In the news today…..

Existing Home Sales FALL 27% in July – from the previous month and this is a 15 year low in sales of existing homes.  This is far worse than anyone expected, and shows how many homes were purchased because of the government’s tax credit incentive that is now over.  Why are the number of sales dropping?  It is because buyers think that prices will be coming down (and they are right), and they are waiting for them to decline before jumping in again.  This is a self-fulfilling promise, as when buyers wait, prices drop. Prices are also falling because of the high foreclosure rate across the US – as foreclosure sales (REOs and Short Sales) are always less than the non-foreclosure prices in any neighborhood.  As long as foreclosures continue at HIGH rates (it’s now 10 times higher than before the bust), prices will continue going down.  Naturally, there is a bottom – it is zero.  But, more realistically, prices start to slow down in their fall when a buyer (an investor in this case) can rent the property and make a good profit.  Naturally, the government is doing as much as possible to make any investor think twice before buying – as new taxes and new costs of buying are hitting the market all the time.  So, don’t believe the government is trying to make things better – they aren’t.  Mortgage rates are at very low rates right now – making it better for buyers and investors – but people are waiting longer anyway.

The supply of existing homes on the market represents 12.5 months worth of inventory at the current rate of sales.  This is a disaster.

Today’s home sales figures dominate today’s news.  This news drove stock prices down, gold up, oil down (expect lower gas soon), bond prices way up and the dollar went sideways.

Let’s review the US economy right now.

1. The housing market has not recovered, and in fact, is tanking further right now.  The housing market must stop falling for the US to pull out of our doledrums – or would you call it a recession – or depression as some are now calling it.
2. The jobs market is getting worse as the number of people claiming unemployment benefits is starting to go back up.  Remember when the President said we are creating jobs, and everything would be okay – well he doesn’t have a clue.  The President and his policies are creating an environment of unknowns for small businesses (who create the majority of new jobs), so he isn’t helping at all.
3. As housing and commercial property prices fall, debt obligations become more precarious, and deflation is real.
4. Inflation is also part of our lives, but no one wants to talk about it.  Food prices are rising, and food packaging is getting smaller at the same prices (have you seen this in your grocery store?) The anomaly of some prices rising and others falling is baffling to politicians and unfortunately to most economists too.
5. We are in a “stagflation” pattern right now, and it will change in the future.
6. Did we ever come out of the last recession?  Many say “NO.”  They would contend that this is not a double dip recession, but a continuation of the past recession.  Congressional stimulus brought the stock market back, but not the jobs market and not the housing market.
   

So, where are the markets heading in this mess?

1. Stocks are heading down.  The “small guy” is pulling money out of stock mutual funds are an amazing rate as they are just scared.  All the technicals are pointing to lower stock prices – and the big boys are preparing for that eventuality too.
2. Bonds are heading up (interest rates down) as those stock mutual fund withdrawals are also going into bond funds.  Bonds are going up because the FED is buying bonds actively as a “mini-Quantitative Easing” policy.  Ultimately, the FED easing will turn into inflation.  Are you prepared for that possibility, or eventuality?
3. Oil and gasoline are tanking as a poor economy says less energy consumption, and larger oil/gasoline reserves.
4. The dollar is going sideways.  It is falling against the Yen.  It is gaining against the Euro.  Europe is having its own problems, and will probably announce more debt problems later this fall – this will be a bombshell when it explodes on the news corps.
5. Gold continues its move up.  Russia is buying more gold – each and every month.  India is about to make it jewelry buy next month.  Any bad news will create a condition for a New High for gold.  At $1230 right now, it is within striking distance of that new high.  
   

Here are the closing numbers for today:
Dow Jones 30 Industrial – 10.040 (down 134)
10 Year Treasury Bond – 2.50% (down 0.11%)
Euro – $1.2674
Gold – $1231 (up $4)
Oil – $71.58 (down $1.52)
Gasoline – $1.85  (down $0.03)

Stocks are confused, and looking for direction.  You see some big days up, and some big days down.  See article below for where I think stocks are heading.

Bonds, on the other hand, are definitely heading up in value (down in interest rates).  The FED is buying US Treasuries, and that is driving the price down.  It increases the thought of “deflation” in the economy.  The economy appears to be heading into some “rough” waters, so markets are reacting accordingly.

Oil/gasoline are declining as the economy appears to be slowing.  Also, supplies of oil are at an all time high – driving prices lower.  All good news for drivers.

The Dollar and the Euro are both inflated currencies and play off each other for which one will fall or rise.  The Yen is stronger, and is only rising – but it too will suffer sometime in the future.

Gold is trending upward, and continues to have all the fundamentals in place for higher, and all time high, prices.

In the news today…..

Unemployment Claims – hit 500,000 (surprisingly??), and is the highest number in the last 9 months.  Sort of starting to look like those halcyon days when the US economy melted down, and companies fired people right and left.  Remember that unemployment is one of those ugly problems that is holding the US economy back from any type of recovery.  Other problems include declining housing values, and residual losses held by banks and the FED.  Plus, of course, the excessive current spending of this out of control Congress.

US Budget Deficit – was reported today as 9.1% of GDP by the CBO.  I want to use this report as a lesson in how either stupid or manipulative the US press really is.  My question to you is “Who cares what percentage of GDP that the deficit is?”  Does anyone really use that number for anything?  Isn’t is much more important what the percentage of GDP that the TOTAL deficit is – not just a single year’s deficit?  Naturally, it is interesting to know how fast the % deficit is growing, but the total deficit is what really matters as this determines how much interest the US must pay each year to US Treasury holders.

Mortgages Rates – continue to sink as the 10 year US Treasury bond interest rate continues to fall.  The fixed 30 year mortgage is now 4.42%, and the fixed 15 year mortgage is 3.90%.  I follow the mortgage market, and there is a very ugly trend starting right now as about 80% of all mortgages are “refi’s”, rather than a new home buyer’s mortgage.  Naturally, you would expect refi’s to jump as people snap up lower interest mortgages.  The US government continues to FAIL in its efforts to encourage lenders (banks) to “forgive” some of the money in an “underwater” mortgage.  I ask you, What bank would voluntarily “forgive” any principal amount?  With the FED announcing that it will be purchasing more longer term US Treasuries, it is predicted that interest rates will continue to fall, and the 30 year fixed mortgage rate may go as low as 4.00% sometime in the future.  Oh, one more thought.  What are the “unintended consequences” of lower mortgage rates?  You know, the ones that the government has never even thought of.  Well, one will be an increase in mid-size banks across America either going out of business as they can’t compete with these lower interest rates, or merging with other banks to survive.  Either way, the US will have a weaker banking system.

GM to have $15B IPO –and should you buy it?  I say “stay away.”  I say that because I don’t like stocks in any circumstance, and GM in particular because it is run the the government.  Do you think the government has the best interest of an investor in GM in its heart?  Is the President going to buy some GM stock?  There are just too many unanswered questions, like how is the underfunded GM pension fund going to be made up?  How much money is coming back to the US Treasury? How many shares will the US Treasury sell (which would hurt any buyer of the shares.)  We just don’t know if this new GM is a viable company – it’s just too eaerly to know.

Financial Reform Bill – will allow Hedge Funds to be regulated by states, rather than the SEC, if they manage less than $100M in funds.  This number used to be $25M, but was increased in the new bill.  About 1000 hedge funds are considering moving to state oversight.  The problem? – states don’t have anyone to oversee the hedge fund operations.  You just can’t make these things up.  Who’s running the asylum?

US Stock Market – On Monday, Richard Russell had this to say about the Dow… “The Dow appears to be in a huge head-and-shoulders top. Note that this top has formed almost three years after the Dow hit its high back in October 2007. The fact that we now have declining tops, meaning a lower distribution pattern [below the primary top of October 2007] is bearish. In the most recent pattern, the Dow seems to be working on an expanded “right shoulder” of its H&S top.  The breakdown of the whole formation would come with a Dow close of 9600 or lower.  The RSI has turned down decisively… and the on-balance-volume is in an ominous downtrend.”  “As I see it, the top we are witnessing began forming in October 2007… and is still in the process of formation. This makes it the greatest top, in duration, in history. Fantastic.”  Here is a chart to see it:

Tonight’s Dinner Conversation…..

Greece, and you don’t get good news.  I know you are aware that the US news services stink.  Those of you who have had the opportunity of seeing almost any overseas news reports know that you aren’t getting anything approaching good news reporting in the US.  So, I thought it would be good to bring you a German news report from “Der Spiegel” that is reporting on what is going on in Greece.  This story is telling the truth of what happens when a government messes around with an economy.  And, more importantly, all governments must mess around with their own economies over the next few years.  So, this microcosm of Greek news actually applies to the US, and your neighborhood.  This is what you can expect to see coming down the pike.

The austerity measures that were supposed to fix Greece’s problems are dragging down the country’s economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back.

The feast of the Assumption of Mary on Aug. 15 is the high point of summer in the Greek Orthodox world. Here in one of the country’s many churches, believers pray to the Virgin for mercy, with many of them falling to their knees.

The newspaper Ta Nea has recommended that the Greek government adopt the very same approach — the country’s leaders have to hope that Mary comes up with a miracle to save Greece from a serious crisis, the paper writes. Without divine intervention, the newspaper suggested, it will be a difficult autumn for the Mediterranean state.
This dire prognosis comes even despite Athens’ massive efforts to sort out the country’s finances. The government’s draconian austerity measures have managed to reduce the country’s budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.

The problem is that the austerity measures have in the meantime affected every aspect of the country’s economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country’s gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society.

Unemployment Rates of up to 70 Percent

Nikos Meletis is neatly dressed, and his mid-range car is clean and tidy. Meletis used to earn a good living at a shipbuilding company in Perama, a port opposite the island of Salamis. “At the moment, I’m living off my savings,” the 54-year-old welder says, standing in front of a silent harbor full of moored ships.

Meletis is a day laborer who used to work up to 300 days a year; this year he has only managed to scrape together 25 days’ work so far. That gives him 25 health insurance stamps, when he needs 100 in order to insure himself and his family — including his wife, who has cancer. “How am I supposed to pay for the hospital?” Meletis asks. Unemployment benefits of at most €460 ($590) per month are available for a maximum of one year — and only if he can produce at least 150 stamps from the past 15 months.

There’s hardly a worker in the shipbuilding district of Perama who could still manage that. Unemployment in the city hovers between 60 and 70 percent, according to a study conducted by the University of Piraeus. While 77 percent of Greek shipping companies indicate they are satisfied with the quality of work done in Perama, nearly 50 percent still send their ships to be repaired in Turkey, Korea or China. Costs are too high in Greece, they say. The country, they argue, has too much bureaucracy and too many strikes, with labor disputes often delaying delivery times.

Perama is certainly an unusually extreme case. But the shipyards’ decline provides a telling example of the Greek economy’s increasing inability to compete. Barely any of the country’s industries can keep up with international competition in terms of productivity, and experts expect the country’s gross domestic product to fall by 4 percent over the course of the entire year. Germany, by way of comparison, is hoping for growth of up to 3 percent.

Sales Figures Dropping Everywhere

Prime Minister George Papandreou’s austerity package has seriously shaken the Greek economy. The package included reducing civil servants’ salaries by up to 20 percent and slashing retirement benefits, while raising numerous taxes. The result is that Greeks have less and less money to spend and sales figures everywhere are dropping, spelling catastrophe for a country where 70 percent of economic output is based on private consumption.

A short jaunt through Athens’ shopping streets reveals the scale of the decline. Fully a quarter of the store windows on Stadiou Street bear red signs reading “Enoikiazetai” — for rent. The National Confederation of Hellenic Commerce (ESEE) calculates that 17 percent of all shops in Athens have had to file for bankruptcy.

Things aren’t any better in the smaller towns. Chalkidona was, until just a few years ago, a hub for trucking traffic in the area around Thessaloniki. Two main streets, lined with fast food restaurants and stores catering to truckers, intersect in the small, dismal town. Maria Lialiambidou’s house sits directly on the main trucking route. Rent from a pastry shop on the ground floor of the building used to provide her with €350 per month, an amount that helped considerably in supplementing her widow’s pension of €320.

These days, though, Kostas, the man who ran the pastry shop, who people used to call a “penny-pincher,” can no longer afford the rent. Here too, a huge “Enoikiazetai” banner stretches across the shopfront. No one wants to rent the store. Neither are there any takers for an empty butcher’s shop a few meters further on.

A sign on the other side of the street advertises “Sakis’ Restaurant.” The owner, Sakis, is still hanging on, with customers filling one or two of the restaurant’s tables now and then. “There’s really no work for me here anymore,” says one Albanian employee, who goes by the name Eleni in Greece. “Many others have already gone back to Albania, where it’s not any worse than here. We’ll see when I have to go too.”

No Way Out

The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

The country’s unemployment rate makes this trend particularly clear. In 2009, it was 9.5 percent. This year it may rise to 12.1 percent and economists expect it to reach 14.3 percent in 2011. Those, though, are only the official numbers, which were provided by Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development (OECD). The Greek trade union association GSEE considers those numbers far too optimistic. It considers 20 percent to be a more likely figure for 2011. This would put the unemployment rate as high as it was in 1960, when hundreds of thousands of Greeks were forced to emigrate. Meanwhile, purchasing power has fallen to its 1984 level, according to the GSEE.

‘Things Are Starting to Simmer’

Menelaos Givalos, a professor of political science at Athens University, has appeared on television, warning viewers that the worst times are still to come. He predicts a large wave of layoffs starting in September, with “extreme social consequences.”

“Everything is getting more expensive, I’m hardly earning any money, and then I’m supposed to pay more taxes to help save the country? How is that supposed to work?” asks Nikos Meletis, the shipbuilder. His friends, gathered in a small cafeteria on the pier in Perama, are gradually growing more vocal. They are all unemployed, desperate and angry at the politicians who got them into this mess. There is no sympathy here for any of the political parties and no longer any for the unions either.

“They only organize strikes to serve their own interests!” shouts one man, whose name is Panayiotis Peretridis. “The only thing that interests me anymore is my daily wage. A loaf of bread is my political party. I want to help my country — give me work and I’ll pay taxes! But our honor as first-class skilled workers, as heads of families, as Greeks, is being dragged through the dirt!”
“If you take away my family’s bread, I’ll take you down — the government needs to know that,” Meletis says. “And don’t call us anarchists if that happens! We’re heads of our families and we’re desperate.”

He predicts the situation will only become more heated. “Things are starting to simmer here,” he says. “And at some point they’re going to explode.”
Here are the closing numbers for today:
Dow Jones 30 Industrial – 10.277 (down 144)
10 Year Treasury Bond – 2.58% (down 0.06%)
Euro – $1.2820
Gold – $1234 (up $4)
Oil – $74.40 (down $1.03)
Gasoline – $1.93  (down $0.03)

Stocks fell a little more after yesterday’s massacre against stocks.  All this caused by a worsening economy.  Bond interest rates fell again.
The Euro fell significantly today after yesterday fall.
Oil/gasoline fell back into a better area, so we can now cancel any projected gasoline price hikes.  If the price continues to fall (based on the prediction of the double dip recession coming) then we can look forward to another price reduction.
Gold continued its rally in this climate.

In the news today…..

US Economy – isn’t looking as good as it did last week.  Why?  Because FED Chairman Bernanke said so.  He said that the economy wasn’t as robust as he wanted, and the growth was slowing down.  (Oh, by the way, the GDP numbers were revised downward BIG TIME – and the FED knew this too.)  So, what is Bernanke doing about it?  He is going to create a mini-Quantitative Easing (PE) by the FED.  This isn’t QE2, as I’ve talked about before, but it IS a precursor to it.  Quantitative Easying is when the government (or FED) decides to print money and spent it on “things.”   In this case, the FED is going to take the payments being received on those “toxic mortgage securities” that it bought from the BIG BANKS, and use the money to buy US Treasuries.  This is RATHER than paying down the debt owned by the FED.  Buying US Treasuries keeps interest rates low (in the longer term bonds), and helps the mortgage market – and this is all altruistically good.  However, it keeps the debt we owe, the same.  And, the FED is going to try to buy down its own QE1 ($2TRILLION) debt with other money.

Jobless Claims – jumped to 484,000 last week.  This is the highest number since last February.  This means the jobs picture is getting WORSE, not better as politicians would have you believe.

US Fiscal Deficit – rose $165B in July alone.  This is an enormous number, and just adds to the massive debt that YOU will have to pay.

Home Foreclosures – were up 6% from last year.  This means that the housing situation is getting worse, and there is downward pressure on home prices.  I heard a cute solution to this problem.  The suggestion was that the US Air Force should bring back its B-52s and carpet bomb all the excess houses that we have in the US – as the inventory of homes for sale was just too great.  Home values across the US fell 0.5%, or $30B.  Wow.

TARP Money – the results are now in.  $70B of the $700B TARP money went to foreign banks through AIG.  Aren’t you happy that your representatives paniced and passed this bill without knowing where the money would go???

Trade Balance ??? – last month the Trade Deficit widened as we imported more, and sold less.  The difference was $49.9B, a large number.  What does this mean?  To me, it means that the Dollar is not low enough to spur exports, and it also says that Chinese goods (our main trading partner) are too cheap (in other words the Chinese are manipulating their currency to keep their money cheap for exporting to us).  It doesn’t mean that Americans are buying again, and consumer spending is up.  Consumers didn’t buy these goods; companies did.  The companies will be selling them to consumers sometime in the future.

GM CEO to go – GM’s Chairman Whitaker will be departing GM next month.  Wonder Why???  Well, GM just posted a great profit and is going to have an IPO to get more cash to pay off the government.   You don’t get rid of your Chairman when you are going to be doing an IPO, or when the company is creating good profits.  I wonder if it could have been the comment he made that GM has to get out from being ObamaMotors, as this is negative to its image???  You just can’t say those type of things when Obama’s cohorts are running the company. I think Whitaker’s departure is all politics!!!!!!  That’s why I won’t ever buy another GM car.

Tonight’s Dinner Conversation……

The US is BROKE!!!!!!!!!!!!

Here is a Bloomberg article that says it the way it is.  It is written by Professor Kotlikoff of Boston University.

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)
Here are the closing numbers for today:
Dow Jones 30 Industrial – 10,320 (down 59)
10 Year Treasury Bond – 2.74% (down 0.05%)
Euro – $1.2823
Gold – $1215 (up $18)
Oil – $75.88 (down $2.17)
Gasoline – $1.95  (down $0.04)

All markets moved sideways today – nothing to move markets today….

In the news today……

Food Stamps – are being used by 40.8M Americans.  This number is projected to rise to 43.3M next year.  Now let’s think about this number for just a minute.  The number of people using food stamps is over 13% of all Americans, and it is rising.  What about the unemployment rate?  It sits at 9.7% and is flat.  That doesn’t seem right, does it?  You would think that unemployment and food stamp use would go up and down together – but it doesn’t.  What conclusions can we reach?

1. The use of Food Stamps is related to a defined income level, and the number of people using food stamps is going up as Unemployment is level.
2. Poverty must be creeping into American life FASTER than unemployment. (Food Stamp use is up while unemployment is level).
3. The Quality of Life is slipping away in America
4.  Government has failed us.

Jobless Claims – jumped 19,000 last week when all the pundits thought there would be a drop.  The experts continue to be too optimistic.  Greater joblessness will ultimately turn into greater unemployment – even with the numbers “manipulated” by the Commerce Department.

Mortgage Rates – hit recent low at 4.49% for a 30-year fixed mortgage and 3.95% for a 15-year fixed mortgage.  This is in line with a decreasing 10 Year Treasury interest rate.  In other words, the deflation in our economy is “showing” in the mortgage rates right now.  The last time mortgages rates were this low was in the 50’s when an average mortgage duration was 20 or 25 years.

The Derivative Markets – are pretty big.  Ever wonder how big they are?  Well, just the “interest rate derivatives market” which is the biggest derivates market, is $450 TRILLION.  Now, that’s big.  Should this scare you?  In a perfect marketplace – no.  But, we have demonstrated that we are not in a perfect marketplace.  If there was a major default in the derivatives market, it would make the last financial crisis seem like childs play.  That is worth knowing about.

Gold Related Stories – Professor Yu of the Chinese Social Sciences Academy (one of the government’s mouth pieces) said that US Treasuries were “risky” in the mid to long term, as was all Dollar denominated instruments.  This is another shot across the US bow that we are spending ourselves into oblivion with no plan to pay off our debts, so it must end badly for the Dollar – and all those (like the Chinese) who hold Dollars denominated instruments (stocks, bonds, etc.)  Also, Russia and China are both eagerly increasing their gold holdings each and every month.  They are totally aware that if the gold price starts to soar, then JPMorgan will be in the position where it must cover all its “shorts” in the gold and silver market – thereby pushing the gold and silver prices much higher.  Here is the question for the readers?  Are the Russians and Chinese seeing something in the US economy that most Americans don’t, or can’t see? 

But, you are probably saying that we are going into another deflationary period (as the Great Depression was deflationary), so it is worth asking what happened to gold prices, historically, during the Great Depression?  Here is the answer:

Here are the closing numbers for today:
Dow Jones 30 Industrial – 10,675 (down 5)
10 Year Treasury Bond – 2.92% (down 0.03%)
Euro – $1.3188
Gold – $1196 (up $2)
Oil – $82.02 (down $0.45)
Gasoline – $2.16  (down $0.01)

After yesterday’s dramatic uptick in stocks, they went sideways today.  Interest rates continue to trend downward.  Gold is trending upward.

The Euro is gaining against the Dollar as it has risen 14 cents from the recent Euro low.

Oil and gasoline have broken out of their trading range to the upside, and this can be interpreted that oil will be more expensive, and gasoline prices will be going up in the near future.  Only another recession will bring them back down.

In the news today…..

Geither says unemployment to up, then down – and this is to be anticipated as the economy gets stronger.  The Secretary of the Treasury actually thinks our economy is getting stronger.  Anyway, his rationale says that as the economy gets stronger, and jobs are created; more people will come back onto the ranks of the unemployed, and that will push the unemployment rate higher (“for a couple of months.”)

Mexican American War – and the telegraph tax was started in 1848 to pay for this war.  It was supposed to stop after the war.  But, if you look at your telephone bill each month, you will find this same tax – naturally, it has changed its name.  Conclusion – a tax hangs on forever.

Arizona SP 1070 – is more than just a law to get the federal government to stand up to its duty to enforce existing laws.  It is actually a major threat between the US and Mexico.  A little history first:

The capital of North America was in question when the US was founded – as it could be in the US, or it could have been Mexico City.
Thomas Jefferson understood this and ordered the US to make the Louisiana Purchase which expanded the US all the way to New Orleans.
The Mexican border was only 200 miles away from New Orleans at that time, and was the major threat to the US.
Mexico had a much bigger army than the US.
However, the major problem that Mexico had was that there were few Mexicans living in Texas, and not much Mexican population south of the Rio Grande (Rio Bravo in Mexico) – only desert and mountains – the major population centers being much further south.
Texas Independence (with the battles of the Alamo and San Jacinto) gave the US breathing room from the Mexican threat.
President Polk started the Mexican-American War that resulted in the Gadsten Purchase which gave today’s border with Mexico.
That settled the issue in the mid-1800s with Mexico, but not the problem now faced in the Southwest – desolate land and little population.
Mexico and the US encouraged Mexicans to move north into that territory to populate the land – it was in both their interests.
That created the situation we have today.
Mexicans living in remote areas of the US – like Chicago – are isolated and really don’t count in the big scheme of things.
Mexicans living in borderlands which was previously Mexico have deeper roots, and therefore much greater emotional ties to the land and to their “rights.”
One unspoken fear is that today’s situation will result in the era of 1830 – 1840 and the desire to move this Southwest back into Mexico.
Today’s situation in the Southwest is no different that the Scots moving to Northern Ireland – the problems it created were never really settled.
Another example, is the mass migration of Jews into Israel – as the existing Palestinians felt their culture was destabilized.
Today’s mass migration from Mexico into the Southwest and California is not a natural migration.  It is destabilizing and changes the cultural character of the area, and it causes massive tensions.
The Arizona initiative is being treated as an internal US problem when in reality it is a dialogue between the US and Mexico – and this aspect is being ignored by our politicians.
Bank Failures – are predicted to hit 1000 before we get to the end of the “recession” according to the FDIC.  We have had only 280 bank failures since 2008 so far, so we have a long way to go.  The best way to understand the problem is to see the FDICs idea of how many banks are in trouble.  That number is growing, and hasn’t stopped growing as the economy gets worse.  This is just another window into the US economy, and it isn’t a very pretty picture.

FED Rumors – are saying the FED may start next week with new quantitative easing by buying US Treasury bonds.  The result if they do this action will be lower interest rates in the longer dates bonds (10 year and 30 year).  It will sure be interesting to see if this happens as it will be a sure sign that the FED thinks we are headed to a double dip recession.  Tune in to see what really happens.

Tonight’s Dinner Conversation……

Energy – and not just simple known solutions (solar, wind, wave, etc.) to our energy problems – BUT THE solution to the entire world’s energy problems.  What’s that?  FUSION – using the method of producing energy that the sun uses – a hydrogen bomb, in other words.  This has been the holy grail of energy seekers for the past 50 years, but has been out of the grasp of humanity as of today.  Yes, some experiments have produced fusion, but it lasted only a very short time – less than a nano-second.  We need to have continuous fusion that can produce energy that is usable to produce electricity.

Who’s doing it?  The rest of the world – and headed by Europe and the EU (who give 45% of the money required for the project) in particular.  And here is the problem:

Is this a noble pursuit – yes, definitely.
Where is it located – in the South of France (as France beat out Japan for its location as the EU gave most of the money – politics as usual)
How much will it cost? – great question.
Initial estimate – 10B Euros was the first estimate – 5B for the building construction, and 5B for the machinery.
Current estimate – 15B Euros just for the building.
CHOKE – but the Europeans will probably agree with all other members to put up the extra cash.  And, it will be agreed this week.
But, if the building hasn’t been completed, how close could the experiment be to producing fusion?  As the top scientists of the world agree, fusion is always 30 years away.  (I hope you got the hopelessness of that statement.)

So, why are these nations spending so much money, that could be spend on current “green” technology?  Here is what I think:

It’s an honorable endeavor
From the EU perspective, it produces real jobs in Europe,
All the money stays in Europe
If it is successful, it will solve the biggest problem that Europe has today – paying for its imported energy.
How much is that bill?  400B Euros each year – and most of it going to Russia.
So, in the end, it becomes a decision to try to work Europe out of its energy dependency.
Where is the US in the this project and where is the US in trying to get out of its energy dependency?  No Where – that’s where.  Remember that the US position starts in Congress – and it’s time to throw all the scumbags out.  This is just one other reason.

Here are the closing numbers for today:
Dow Jones 30 Industrial – 10,636 (down 38)
10 Year Treasury Bond – 2.91% (down 0.05%)
Euro – $1.3232
Gold – $1185 (up $2)
Oil – $82.41 (up $1.07)
Gasoline – $2.19  (up $0.03)

Stocks moved sideways along with the Euro, oil/gasoline.
Bonds moved up quite a bit today, as interest rates for the 10 Year Treasury Bond fell 0.1%
Gold had a technical rebound from recent lows.

In the news today…..

Real Estate Tax in Healthcare Bill – yes, there is a new real estate tax in the new Obamacare law.  It is a 3.8% Medicare payment for the sale of real estate of your home or investment property.  But, don’t worry, it’s only for RICH people.  It is a very complex calculation, but basically it says if you make over $250,000 (married, joint return) and sell your home you still get your $500,000 exclusion, but any profit over that has this tax, but could be reduced based on your actual earned income.  Ugh.  Naturally, it was important to pass the bill so we knew what was in the bill!!!!!!!!

SEC not transparent – which is part of the Financial Reform Bill.  Inside this bill, it states that the SEC will NOT respond to any Freedom of Information Act request.  In other words, everything that the SEC does from this day forward is “secret.”  Only the President and Congress will know.  I guess we had to pass this bill in order to know what was in the bill!!!!!!!!!!!

2nd Q GDP – is 2.4%.  So what, you say?  Well, the revised (downward) 1st Q was 3.7%.  So, what’s the trend?  DOWN, of course.  This does not say much for all the rhetoric from DC and Wall St about how well the economy is actually ”growing.”  The conclusions I draw is that the economy is worse than our “best of the best” economists think, and we are headed to that dreaded double dip recession; and that means the FED will be buying US Treasuries to bolster the market.  I also conclude that you can’t believe anything coming out of Washington regarding the economy as they couldn’t walk and chew gum at the same time – let alone understand the US economy.

Tonight’s Dinner Conversation……

Manufacturing – where is it going in the US?  While manufacturing is only a small part of the GDP calculation (as we have shipped lots of manufacturing jobs overseas), it does have a dramatic affect on the unemployment rate.

So, what’s happening in the US today with regards to manufacturing?  Take a look at the Richmond FED’s report on manufacturing:

The trend is dramatic and traumatic and at the same time.

This follows this week’s horrendous fall in the Texas business activity index from the Dallas FED, which fell from -4 in June to -21 in July. “Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June,” said the FED.

And…

This follows the fall in the Economic Cycle Research Institute (ECRI) leading indicator for last week to -10.5, a level that has ALWAYS been followed by recession in the post-war era. The ECRI is careful not to jump the gun, waiting for further confirming data before issuing a formal recession call that would hurt its credibility if proved wrong by events.

So, these numbers should give you impression that the future is NOT BRIGHT.  These are what the FED looks at, and they are drawing the same conclusions as all the discussion about future “quantitative easing” says.

And, here is a neat graph from the Wall St. Journal comparing what’s going on in our stock market today as compared to 1938 when the government’s actions drove our country deeper into the GREAT DEPRESSION:

The primary theme of the WSJ article is that the stimulus may have averted a depression, but that “toxic, anti-business rhetoric and policy errors like the Dodd-Frank bill are hurting the still-fragile recovery.”

The policy errors the WSJ refers to include raising taxes and tightening by the Fed – which is exactly what happened in the depths of the depression, triggering the second long leg down shown in the chart above.

This is just food for thought, as 1938 is different from today (because our year starts with 20..)  Otherwise, there are a lot of similarities.  Don’t panic, just think about what happens if this WSJ prediction is correct…….

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,466 (down 1)
10 Year Treasury Bond – 2.19% (down 0.10%)
Euro – $1.3038
Gold – $1181 (up $13)
Oil – $78.87 (up $0.51)
Gasoline – $2.11  (up $0.01)

 Stocks, the Euro, oil/gasoline all moved sideways today.

Bonds fell with an increase in interest rates.

Gold fell and hit $1180 for the third time in the last two weeks, and is now a cautious buy for those of you who are thinking of buying some more gold.

In the news today……

Consumer Sentiment – fell to one of its lowest levels in a long time.  This is just bad news for the economy in general.  Take this indicator with some scepticism, as it is fickle, and can change radically month to month.

High End Housing – is being foreclosed on by banks, just like lower priced homes are being foreclosed on.  The difference is that banks are not putting the expensive houses back on the market.  The definition of “expensive” is above $300,000.  Take a look at the following table of homes that are being held by banks in various cities, and you will draw this DRAMATIC conclusion.

Why are banks holding back on selling their “expensive” homes?  Well, first of all, there are many, many more cheap homes being foreclosed on.  And, second, what would happen to the housing market if these expensive homes were dumped on the market?

Simple answer.  The price of expensive homes would be depressed (even more than they are today), and they would put a downward pressure on cheaper, lesser quality homes.  In other words, banks would lose money by selling their expensive homes today.

The only question I must ask is WHEN will the FDIC or FED require the banks to sell these non-performing loans?  

The conclusion that you can reach from this interesting story is that there will be a day of reckoning when housing prices will be going down further, and now you have one additional reason why they will be going DOWN.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,538 (up 12)
10 Year Treasury Bond – 3.05% (up 0.05%)
Euro – $1.2997
Gold – $1183 (down $12)
Oil – $77.50 (down $1.48)
Gasoline – $2.06  (down $0.06)

Stocks blasted forward by 2% on optimism in the stock market.  The Euro, gold, and bonds went sideways.

Oil and gasoline jumped up as traders decided that oil was just too cheap.

In the news today……

Mortgage Rates HIT RECORD LOW – according to Freddie.  A 30 year mortgage is now 4.56%, the lowest since 1971.  A 15 year mortgage is 4.01%.  These are average interest rates (some higher, and some lower.)

GM to buy AmeriaCredit – for $3.5B.  Why?  In order to make more risky auto loans and expand its sales?  Risky loans were one of the evils that got GM into trouble in the first place.  As YOU own GM (the US taxpayer is a 61% shareholder), were you asked if this was okay?  Are you “represented” in Congress in this action?  I doubt it.  Oh, by the way, where does this $3.5B come from?  More to follow…..

Unemployment Claims – jumped to 467,000.  This is a “seasonally adjusted” number – so it isn’t real, but it does give one important message.  Getting is job is VERY HARD, and people’s demoralization over employment opportunities is realistic.

Existing Home Sales – FELL 5.1% on a seasonally adjusted annual basis – some fairly meaningless words to obviscate the truth.  The truth is that home sales are falling, and will continue to fall.   The “inventory” (that’s a word for the number of homes on the market for sale) rose 2.5% last month to 2 million homes – and this is a 9 month supply of homes if they sell at the current rate – but, the rate is falling, so it will just take longer to work off this inventory.  The median price of homes sold was $183,700, up 1% from last year – this is the only bright spark on the picture, but don’t hold your breath.

Congressional Confidence – hit an all time low of 11% today.  Rather than just crow about how much everyone hates Congress, I would like to take this opportunity to talk about what this means.  First of all, it means that we don’t like what Congress is doing “to us.”  We have a representative democracy, called a Republic, and the folks we vote into office to represent us better do it, or we will vote them out the next opportunity.  At least that’s the theory.  But, there is something fundamentally wrong with Congress today and yesterday too.  You might ask what Congress has to do with the US economy; but I think the majority of you know the answer to that question as I continually point out their insane, dumb and stupid economic decisions.  But, more importantly, I want to talk about the fact that we have been trusting Congress less and less over the years as seen in the following Gallup Poll graph.

It doesn’t matter what power is controlling Congress.  Americans are disliking their Congress more and more.  There is something “fishy” in America, and it is time we cleaned house once and for all.  My continuing opine to “Throw the Scumbags Out” is not the ramblings of an insane loner living in a cave.  It would fundamentally change this graph, and if we didn’t like the results of our elected representatives, we would throw them out all over again.  Think about this seriously.

Economyguy ALERT

If you are holding municipal bonds in your portfolio, it is important that you read this alert.  The medium term risk for municipal bonds is increasing as states, cities, etc are moving toward default.  While the FED will probably come to the aid of the municipal market to prevent a meltdown, it probably won’t come to the aid of any given city or state, and certainly wouldn’t hold up bond prices to protect investors.  The FED will let your muni bond portfolio devalue.  Most municipal bonds are not insured – so don’t count on that.

There are Credit Default Swap insurance available for municipal bonds.  Illinois and California bonds must pay over 350 basis points, as compared to Spain where it is about 280 basis points.  In other words, the markets are saying that a California or Illinois default is more likely than a Spanish default.

Compre the return on the  muni bond to US Treasuries, and you will probably find the amount of added interest is not great.  It certainly isn’t worth the increased risk of a falling bond market.  Consider eliminating muni bonds from your portfolio and replacing them with equivalent US Treasuries.  Consult your financial advisor and get a second opinion.  The purpose of this alert is to get you to start thinking for yourself.

Tonight’s Dinner Conversation…..

The new Financial Regulatory Law, and what it means to you….  Well, as you know, I am against this new law.  There is probably a good provision or two hidden among the massive legislation, but it will be hard to find as you must pay more, and more, and more, and more…. to get the services you already use.  For example, the “unfair or deceptive” practices identified by the FED prior to the law’s enactment have disappeared.

Here are my main objections:

1. The bill doesn’t address the root causes of the financial meltdown.  The root causes were low FED rates and Fannie/Freddie/FHA.  Here are some details:
   
   1. Without the FED low interest rates (to solve the stock market bubble) there could not have been the “teaser mortgage rates” that enticed people to take out impossible mortgages.
   2. Fannie/Freddie/FHA gave loan guarantees to banks making the loans in the first place – so there wasn’t any risk for the banks making the loans.
   3. So, today Fannie and Freddie continue to make those guarantees, and almost all mortgages today go to Fannie and Freddie.  The one big difference today from before = YOU ARE THEIR OWNER, and of course, you pay all the bills when they come due, and they’re coming……
   4. FHA continues to guarantee loans too, but one big difference.  FHA also is taking SUBPRIME mortgages today, and YOU OWN IT TOO.
   5. Congress put political pressure on Fannie/Freddie to take bad loans (think of Barney Frank), and nothing has changed with Congress.  Even the same people are there to harass Fannie/Freddie, and as the US owns them, they have more “say” on the way Fannie/Freddie operates.
      
2. “Too Big To Fail” is now a law.
   
   1. Do you remember as ALL politicians said that this new law would eliminate TOO BIG TO FAIL?  Well, they lied.  Now, the government MUST take over these banks if they are going bankrupt.  And guess who pays the bill AGAIN?  
   2. It also allows the government to take over any company that “in the mind of the government” could endanger the US economy.  That particular power is rather sweeping, qne therefore, dangerous.
      
3. It costs you more money.
   
   1. The new regulations touch every financial transaction you can think of, and many you can’t think of.
   2. Organizations must have “compliance officers” as employees of their organization to insure that they follow the new law.
   3. All this costs money.
   4. YOU WILL PAY – one way or another – either higher costs or lower services.
      

Are you happy yet?  Did you think it would be any different?  Remember who voted for it?  Who stood up against it?  I say (again), throw all the scumbags out at the next election.  They continue to do damage to YOUR pocketbook.  It’s more polite to say they are damaging the economy (fewer jobs, higher costs, bigger government) but in reality IT HITS YOUR WALLET/PURSE!!!!!!!!!!!!!!

And, as one small way of showing the results of this new law, the 3 rating agencies (S&P, Moody’s, Fitch) have STOPPED giving out their ratings as of yesterday so they can take legal advice on the new law.  You see, the new law makes their liable for their ratings, and they would have been sued out of existence when the economy blew up if this law had been around.  (Remember that they were putting AAA ratings on real JUNK, and were a big part of the problem.)  

The result of their actions are:

1. The bond market is frozen this morning.
2. No new bonds can be issued without a rating.
3. Maybe this is the beginning of a major revamp of the ratings system – top to bottom.
   

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,322 (up 202)
10 Year Treasury Bond – 2.93% (up 0.04%)
Euro – $1.2889
Gold – $1195 (up $4)
Oil – $79.08 (up $2.52)
Gasoline – $2.15  (up $0.08)

Stocks fell today on Ben Bernanke’s testimony to Congress – he wasn’t optimistic at all.  Interest rates fell in sympathy.  All other markets went sideways except the Euro which fell today.

In the news today…..

Taxpayers sink another $700B – of aid into financial system. Taxpayer support for the financial system increased by $700B over the past year, bringing the total to around $3.7TRILLION, said TARP inspector general Neil Barofsky in a quarterly report to Congress. Most of the increase was due to government pledges to supply capital to Fannie Mae and Freddie Mac and to guarantee more mortgages to support the housing market.

Barofsky also criticized the Treasury’s housing relief efforts, pointing to “anemic” participation numbers that have failed to “put an appreciable dent in foreclosure filings.”

Separately, the Treasury said it plans to end a long-delayed and never-used $30B TARP program designed to boost small-business lending.

What does all this mean???  It means that the governments own people are saying that we are spending too much.  It also means that Obama is spending more on TARP-like projects than TARP ever spent – and is doing it without the involvement of Congress.  Who is in charge?  Obama, of course.  Congress is irrelevent right now when it comes to spending.  Also, note that Barofsky had the audacity to criticize the efforts that Treasury was making to help homeowners.  He went on to say that because Treasury never set any targets, it was impossible to say whether or not the program was working.  As you can see, Treasury doesn’t have anyone inside it with an iota of real world experience, or common sense.

Remember to vote soon, and vote often.

FED Chairman Bernanke – in Congressional testimony today said that the future was “murky.” And, this did not do good things for the market – as markets like certainty, and not uncertainty.  He said that government spending would be less than before as would inventory replenishment.  He also said that consumer and business spending would offset those  losses, so growth would continue.  I am not sure what he smoked just before that statement.

Tonight’s Dinner Conversation……

Quantitative Easing – that is a great topic.  Why talk about it?  Well, the FED said that they think there is a 50/50 chance that the economy will falter (deflation), rather than rise.  So, how does the FED fight deflation?

1. Reduce interest rates – but they are zero now, so they can’t do any more.
2. Buy US Debt – that’s another name for Quantitative Easing.
   

The last quantitative easing took place in late 2008, and amounted to $2 TRILLION of money being created and given to our BIG banks to save them from going bust (Too Big To Fail).    But, I want you to better understand the insanity of quantitative easing.  I will do that with an analogy.

Let’s assume you run a small company, and you’re worried that the customers just aren’t buying enough, and your income doesn’t meet your outgoings (hope this sounds like the Federal Government.)  You have a lot of loans from the banks, and the interest is hurting – but you just want to ignore that side of the equation.  So, you decide that the best way to go forward is to “buy your own debt.”

You go to another bank, and convince them that you have some great investment to make (buying your own debt), and they loan you a bit bundle of money. The bank agrees (reluctantly) and makes a small condition that you put up 100% of the money you want to borrow. You go to the first banks, and buy back your debt (pay off your loan) using the new bank’s loan money.

Now where do you stand?

1. You have removed your old debt.
2. You have added a new equal debt.  We won’t get into the argument about a change in the interest rate.
3. You have put up (printed) an equal amount of money to the new debt, as the new bank is holding this money as “security” on the new loan.
   

As a small business owner, are you better off, or worse off?  This is not a trick question.  You are worse off, of course.  You no longer have the flexibility of using your own cash.  I hope you get the “insanity” of anyone doing this type of transaction.  The FED doesn’t get it, but they are just trying to survive – after all.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,121 (down 109)
10 Year Treasury Bond – 2.898% (down 0.04%)
Euro – $1.2769
Gold – $1192 (no change)
Oil – $77.44 (no change)
Gasoline – $2.07  (down $0.01)