The Dollar and gold moved sideways.

Oil and gasoline continue to slowly make new lows – great news for gasoline prices (they’re coming down folks).

In the news today…..

Budget Deficit – is now officially over $1 TRILLION.  This is a record, and it will be broken many times over as President Obama spends us into the poor house.  From a protection viewpoint, get ready for inflation in 2011 (best guess for a date out there) and benefit from this overspending.

Financial Sector – is gaining from the great earnings at Goldman Sachs (probably an exceptional company, compared to other junk banks).  That’s what caused stocks to jump today.

Here are the last numbers for yesterday:
Dow Jones 30 Industrial – 8332 (up 185 points)
10 Year Treasury Bond – 3.35% (up 0.05%)
Euro – $1.3998
Gold – $923 (up $10)
Oil – $59.69 (down $0.20)
Gasoline $1.64 (down $0.01)

Oil and gasoline gained on this latest news as speculators are gambling that this major Treasury step will lead to a recovery in the economy.

Gold held steady, only losing $4 on the news.  The steady gold price shows the battle between the “economic recovery proponents” which would bet on lower gold prices, and “inflation hawks” who would bet on higher gold prices.  I believe in the latter.
 
In the news today…..

Treasury Secretary Geithner today announced his not too hidden plans on solving the toxic mortgage securities problem that our big banks have.  Here it is in a nutshell:

1. He plans that $1TRILLION of this “toxic waste” will be purchased
2. It will be purchased by 3 groups
   1. 7% by Private individuals  
   2. 7% by the Government  
   3. The remainder (86%) by the government – probably the FDIC – as a “loan”.
3. The “toxic waste” will be valued by the private sector.
4. Not much detail in this plan, but a lot more than the “hope and a prayer” stated before.  The devil is in the detail!!!

Here is my observation and opinions on this plan:

1. Geithner thinks that the problem with the economy is that banks aren’t lending,
2. and they aren’t lending because they have these “toxic securities” on their books, and they are worried the future value of these securities will be going down making them insolvent.
3. So, let’s question this basic assumption.
4. Is that banks aren’t lending, or people aren’t borrowing?  I think it’s the latter, and my opinion is backed by the decreased public spending and increased public savings.  Remember that at least 2/3 of the economy is driven by the general public consumption.
5. Banks are lending because they don’t want to lend to deadbeats anymore. Remember that the government forced them to lend to people who couldn’t possibly pay back their mortgages.  They fully understand the ramifications of that line of action in spite of the fact that they make a ton of money doing it, and loved it.
6. Banks believe that house prices will continue to decline, and therefore, the value of their toxic securities will continue to decline.  A future decrease in their value if taken onto their balance sheet would force the FDIC to take them over – probably today.
7. The value of these assets are worth less than the banks state they are worth.
8. Geithner’s belief that our economic recovery will be lead by the banks if false.  It will be lead by consumers.
9. Geithner must believe there is no alternative.  Naturally, this is false.  The tried and true FDIC takeover of banks has a proven track record.
10. Only 7% of this “deal” will be offered to the private enterprises, like pensions and insurance companies and rich individuals??  WHY ONLY 7%?????  If this is such a great plan, don’t you think that private investment would want more than 7% of it?  Or, is this the maximum amount of money that the government thought they could get out of private investment?  Just the 7% figure raises a big RED FLAG for me.
11. If the value of this great investment actually goes down in the future, who bears the loss?  Do the 3 classes of investors share in the loss proportionately, or will one class (and I’m thinking the taxpayer) bear the entire loss?   Another way of addressing this question is “Are there any guarantees for the private investors?”  Details, details, details.

What is wrong with this plan???

1. The debt remains. It isn’t going to be written off.  
2. The taxpayer is holding the bag, and the banks get off scot free – well, that hasn’t been truly determined yet because the banks should have to sell this junk at less than they think it’s worth.  We’ll have to wait and see.  I wonder how “transparent” the valuing process will be???   For sure, the banks won’t have to worry about their future as they do every minute of every day today.
3. A major portion of this toxic waste will never be paid back – and no one – neither the banks, nor the government – has addressed this issue head on.  You and I will be stuck with the loss.
4. Oh, by the way, when this additional cash comes home to roost, there will be more inflation created.

My conclusion:

This should help the big banks take a deep breath, and allow them to go back to business as usual.  I don’t like business as usual, as the banks were one of the major factors in getting us into this mess.  Where’s all the needed regulation by the government that was missing the last time around????

Without knowing the details, it is impossible to determine exactly how badly the taxpayers will get screwed, but you can count on it.

Without a complete destruction of this toxic waste, it will linger and be an albatross around the President’s neck.  The press will try to hide the truth of the demise of the money going down this rat hole.  

I think this is just another nail in the inflationary coffin that will hit the US in the future.  The only way this won’t be a major inflationary force is IF the housing prices of the US stabilize immediately and start back up.  I don’t see that happening soon.

 
Here are the last numbers for today:
Dow Jones 30 Industrial – 7775 (up 497 points)
10 Year Treasury Bond – 2.66% (up 0.04%)
Euro – $1.3655
Gold – $953 (down $4)
Oil – $53.80 (up $1.73)
Gasoline – $1.49 (up $0.03)  

Bonds, the Dollar and Gold went sideways.

Oil and gasoline fell slightly.

In the news today…..

The Unemployment Rate hit 7.6% in January from the December level of 7.2%.  There were 598,000 jobs loss last month.

Let’s look at this number and ask the question “How bad is this?”  We’re told by the government that we MUST stimulate the economy or we will have a catastrophe.  Well, the unemployment rate under Carter was greater than 10% – much worse.  We’re probably on our way to 10% ourselves this time.  

However, the economy is much worse today than then.  We have zero interest rates from the FED.  Carter had high inflation – well over 10%/year – and high interest rates – the 30 Year Treasury Bond was over 14%.  Carter had the tool that he could stop the inflation by allowing the markets to stop the inflation by just allowing a major recession to occur.  Kind of a “do nothing” tool.  What about us?  We’ve decided that we must interfere with the market economy by “printing money” aka a stimulus package.  (BTW – one of my favorite items in the package is buying “insurance” for some of the animal raising industries.  Buying insurance wouldn’t stimulate anything.)

Printing money has a very nasty by-product.  It’s called inflation.

Another difference between the Carter era and ours is that today the people of the US are significantly reducing their spending and increasing their savings (currently as good as 6 years ago.) This means that 2/3’s of our economy (of the GDP calculation) is slowing way down.  In Carter’s era, people just didn’t have jobs; but, when they got a job they spent just like they did before they lost their job – in other words, it was the good old paycheck to paycheck spending pattern.  Today, we not only have less working people, and Americans are spending less/saving more; we also have stopped the pattern of pulling money out of our homes (REFI’s) to pay for our excess spending patterns.  

Question for you today…..

“What would happen if we didn’t have any stimulus package spending by the government?”

The theory behind the stimulus package is that the government must pick up the spending that has been lost.  Americans aren’t spending at least $1Trillion/year that they were before this mess began.  So, the $830B (?) Stimulus Package is a more-or-less direct substitute for that loss.  (BTW – has anyone else ever talked about the Stimulus Package this way to you??  I’ve never seen this type of logic anywhere else.  Welcome to economyguy.)

If we didn’t have any stimulus package, we wouldn’t have that $830B go into the economy (over 4 or 5 years – not immediately as you are expected to believe), so the recession we are in would deepen.  More people would lose their job.  The housing market would plunge deeper in value.  More businesses would go bankrupt.  More banks would go bankrupt.  Prices would continue to decline – as would wages – which is normal in a recession (or depression if it gets much worse.)  

So, that’s about it.  How bad is that picture?  Pretty bad in my opinion.  

So, you’re thinking that the Stimulus Package is a good thing.  It could avoid some of that pain.  Is that right????

An Alternative Future…..

Maybe not so “alternative.”

Here is the other side of that story.  As in physics, every action has an equal and opposite reaction.  The stimulus package action would have a reaction.  What reaction you ask???

The stimulus package is paid by borrowing money (selling Treasury Bonds to people, organizations and nations.)  Treasury Bonds are backed by the full faith of the American Government, and the American Government’s ability to pay these bonds is backed by YOU – YOUR ability to pay taxes.

By printing money (and by that I mean the selling of Treasury Bonds), we are flooding the world with additional dollar denominated assets.  The natural market says that the increased supply of these assets will result in a decrease in their value.  The decrease in value of US Treasury Bonds means an increase in US Treasury Bond INTEREST RATES.  US Treasury interest rates are used as a baseline for all other US interest rates (and strongly influence world interest rates).  Mortgage rates would rise, corporate bond rates would rise, corporate earning would fall as higher debt payments would reduce earnings, etc.

Maybe we are seeing the beginning of this right now.  We’ve seen the 10 Year Treasury Bond go from 2% to 2.95% over the past 6 weeks.  This is a major move in interest rates.

Where does this thought pattern lead?  Very simple.  At some point, buyers of US Treasuries would question the ability of the US Government to pay back all that interest – in other words, they would start to believe the economic solvency of the USA.  When (and not if) that begins, the US Dollar will collapse.  People will stop buying US Treasuries and interest rates will soar to levels NEVER seen before in the US.  Inflation begins for real.  Not HIGH inflation, but HYPERinflation – as the US government has MORE stimulus packages and more FED/Treasury bailouts.  Remember reading about buying a loaf of bread with a wheel barrel of Deutschmarks during 1920’s?  Yes, it could get that bad.  

And here is the rub, “What happens to the average American during this meltdown?”

Do you remember the scenario I painted (above) about how bad the recession would be without a stimulus package??  Well, it would be WORSE under this scenario.  There would be higher unemployment.  Housing prices would go even lower.  MORE banks and companies would go bankrupt.  But, here is the really bad part – everyone’s Dollars would become worthless (or at least significantly devalued).  You would truly be lighting your cigars with $10 bills. (Or, if you don’t smoke, you would be using paper money for toilet paper.)  Yes, this would be MUCH WORSE for Americans.

Is this scaremongering?????

That’s up to you to decide.  I believe this is the road we are moving down right now.

I’m putting my money where my mouth is.  I believe that the best way to protect yourself in this terrible scenario is to buy gold, have foreign currencies, and own “things.”  Money will be come devalued (worthless?).  “Things” will become valuable.  This is the world of inflation.  I feel sorry for the younger generation who hasn’t lived through inflationary times (thank you President Carter.)

The one thing I can promise you is that I will be watching this possibility closely as the US economy evolves.
 

Here are the last numbers:
Dow Jones 30 Industrial – 8281 (up 218 points)
10 Year Treasury Bond – 2.98% (up 0.08%)
Euro – $1.2942
Gold – $914 (no change)
Oil – $40.17 (down $1.00)
Gasoline – $1.25 (down $0.02)                                        

In the news today….

The US Government is thinking about creating an entity like the Resolution Trust Corp (the RTC was created during the savings and loan meltdown) that would take all the bad bank debt and deal with it.  Think about this a little.  If this entity takes over bad housing loans, they can just sell off those houses at fire sale prices  - just like the RTC did.  That will continue to suppress housing prices and make our economic meltdown worse.  But, there is much more wrong with banks than just bad mortgages.  There are just plain debts owed.  Where does the money come for paying these – it comes from you.  Where does the government get all its money?  It just creates fiat money – makes it look real by selling bonds to cover the new money – and increases the interest we owe on our debt – which is HUGE and growing.  Where does the interest come from to pay the debt?  From you, in the form of taxes.  YOU just bailed out the banks.

Here are Today’s numbers:
Dow Jones 30 Industrial – 11,019 (up 410 points)
10 Year Treasury Bond – 3.44% (up 0.03%)
Euro – $1.4350
Gold – $897 (up $47) – near $900, I think gold could be overpriced in the near term.  This was an amazing run up.
Oil – $97.88 (up $0.72)
Gasoline – $2.48 (up $0.02)

In the news today……

The Producer Price Index (PPI) which represent prices of goods “into” the factory door – jumped a massive 1.2% in July.  This was way more than any one of the leading economics predicted; so it really scared the market with the implication of inflation feeding through into the CPI number.

Here are Monday’s numbers:
Dow Jones 30 Industrial – 11,479 (down 181 points)
10 Year Treasury Bond – 3.82% (down 0.02%)
Euro – $1.4695
Gold – $806 (up $14)
Oil – $112.87 (down $0.90)
Gasoline – $2.82 (down $0.05)


Here are Today’s numbers:
Dow Jones 30 Industrial – 11,349 (down 131 points)
10 Year Treasury Bond – 3.84% (up 0.03%) – this was caused by the fear of inflation.
Euro – $1.4785
Gold – $817 (up $11)
Oil – $114.83 (up $1.66)
Gasoline – $2.86 (up $0.05)

In the news today….

CPI rose 0.8% in July.  This is big news.  Remember that CPI rose 1.1% in June.  This sets the two months in a row to be an increase of 5.6% over last year’s prices.  This is a huge jump over the 4% the FED was planning on earlier this year, and shows that inflation is a real threat to the US economy as well as the recession we find ourselves in.

Here are Today’s numbers:
Dow Jones 30 Industrial – 11,622 (up 89 points)
10 Year Treasury Bond – 3.89% (down 0.06%)
Euro – $1.4809
Gold – $815 (down $17)
Oil – $115.01 (down $0.99)
Gasoline – $2.91 (down $0.02)

Consumer Spending was DOWN 0.2% AFTER adjusting for inflation.  Before inflation adjustment, consumer spending was 0.6%.  So, the lesson for today is about INFLATION.  You see that prices are starting to increase at such a fast pace that it turns positive “consumer spending numbers” into negative numbers.  What does that mean to you?  It means Consumer Spending is falling “in real terms” – and that is bad news for the economy.  It means you are paying more for your goods.  It means that the new baseline for this year is the jumping off point for prices next year.   In other words, if prices go up 6% this year, and next year price increases are “officially announced via CPI” as 6% – you will then be paying over 12% more than last year.  It just adds, and adds, and adds.  This is very much like drip, drip, drip.  Herein lies one of the major lessons of inflation – it just keeps hurting.  It is just like compound interest – your friend normally when you’re saving – but your enemy when it’s inflation.

Here are today’s numbers:
Dow Jones 30 Industrial – 11,284 (down 42 points)
10 Year Treasury Bond – 3.97% (up $0.02)
Euro – $1.5580
Gold – $908 (down $10)
Oil – $121.41 (down $3.69)
Gasoline – $3.00 (down $0.08)

In the news today…..

Fannie/Freddie continues to shake the markets.  Lack of confidence in the US financial institutions is bleeding over into stocks.  Paulson testified before Congress today to support last Sunday’s ideas on saving Fannie/Freddie.  He has to get Congressional agreement to his ideas of a greater, unlimited line of credit (currently $2.25B) and the ability to purchase their stocks.  Paulson said there was no immediate need for these measure and if/when they are used, they would be used in a way to “protect” the taxpayers.  (Those are the words that scare me.)  Paulson did want to put the taxpayer in an “undue” risk.  What type of risk is “undue.”  My logic is that he wants to put the taxpayer in a “due” risk – meaning something wlll be due the taxpayer – probably a bill.

An interesting tidbit…..

Since last October $13 Trillion has been wiped off of the value of the world’s stock markets.  I guess the world is a lot poorer right now.  (On the surface, this looks a lot like “deflation”, not inflation.)

Let’s talk about inflation….

The Producer Price Index (wholesale inflation measure of the price of goods into the factory door) increased 1.8% in June – a 27 year high in the value of an increase.  The year over year PPI increase is 9.2%.  Industry has been able to avoid passing most of these cost increases onto the consumer by increased worker productivity.

Here are today’s numbers:
Dow Jones 30 Industrial – 10963 (down 93 points)
10 Year Treasury Bond – 3.84% (down 0.04%)
Euro – $1.5914
Gold – $979 (up $5)
Oil – $138.74 (down $6.44)
Gasoline – $3.38 (down $0.17)