The Economy Guy

Stocks closed over 11,000, and this is bullish for stocks.  Bonds move sideways, with a downward intereest rate bias.  The dollar moved sideways, as did oil/gasoline.

Gold has been the active commodity.  Gold did not close above $1170, and so has fallen (especially today), but continues to rally on these falls.  There is a support level at $1140, and another one at $1100.  I would love to see gold hit either of these levels, as I think I would buy in again.  But, I would be watching the technical action as it hit these levels.  Gold above $1170 is bullish.  Gold closing below $1100 is bearish.  Anywhere in between is a trader’s paradise.  On the derivatives market in gold, there are a lot of “short” positions where about 100 times the amount of gold that physically exists is traded.  Since there are many more derivates than physical gold, a short squeeze is always possible. If this ever happened (and conspiracy theorists would say this would b e coming from outside the US) then the price of gold would go into power overdrive on the upside.  The problem is that you can’t predict these events unless you are an insider.

Here is the historic price of gold in Dollars if the price has been inflation adjusted.  Interesting, isn’t it?

 

In the news today…..

Healthcare – is in the news as we are being warned that there will not be enough doctors in the next 10 years to handle our medical needs.  I am sure you will haer about this topic on the news, so I thought this would be an instructive moment.  Take this problem from the “let’s look around us” point of view.  Is there a doctor shortage today?  Do you have any problem seeing your GP?  Do you need to wait too long to see a specialist?  In general, I believe the answer to these questions is “no.”  Our current healthcare is far from perfect as too many people do not have medical insurance today – but, is this problem making the current number of doctors out there look to rosy?  I don’t think so.  If someone has a true emergency, they go to the emergency room and get treated.  So, my conclusions is that someone is blowing a lot of smoke on this issue.  I wonder why.

Lehman’s secret alter-ego. – for years before its collapse, Lehman Brothers used a small company to shift investments off its books. The alter ego, a firm called Hudson Castle, appeared to be independent but was 25% owned by Lehman, which also controlled its board. Many former Lehman employees worked at Hudson Castle, and Lehman even had several transactions of over $1B with Hudson vehicles, yet none of this was ever disclosed. This sort of shadowy relationship with an alter ego company is still rampant on Wall Street, allowing banks to swap investments for cash and make their finances look stronger than they are, and doing so largely outside the reach of banking regulators.

Merchant Banks – have been hiding their liabilities by offloading their debts in shell companies.  This was reported as a contribution to the opacity of Lehman Bros when it went down.  Now we hear that all the major merchant banks (Goldman Sachs, Morgan Stanley, etc) are doing the same thing every quarter when they report their financials.  Seems to me that (while this is legal) investors are being purposely deceived by merchant banks.  Why is it necessary for them to offload and reload these debts each quarter?

FDIC likely to extend deposit insurance - The FDIC is expected to vote today in favor of at least a six month extension for unlimited deposit insurance on business accounts. The program was set to expire June 30. An extension would reflect continued concerns about the health of hundreds of community banks; officials worry ending the insurance coverage could cause more bank failures as businesses pull their accounts from banks they feel are in trouble.  Did you know that “business accounts” had unlimited deposit insurance?  I guessed I missed this one.

Tonight’s Dinner conversation…..

The Deficit – how can it be handled from the numbers point of view?  I tend to look at the deficit as an economic problem to solve, and try to have an understanding of what it means to us financially as citizens.  Economically, we have a several Trillion Dollar deficit with about 25% of our income (taxes to the US Government) going to paying the debt from that deficit.  As you know, we pay for our deficit by writing US Treasury Bonds, and we must pay interest on those bonds each year.

So, is 25% a bad thing?  Will it bring down the US Government?  Will we go bankrupt because of it?  To answer those questions, we must look a little out into the future:

1. President Obama plans to add about a TRILLION Dollar per year to our deficit each year for the next 10 years.  These are his numbers, not my guesses.
2. All government estimates of the future are way too optimistic.  Economists have predicted that Obama’s predictions are significantly too low.
3. An increasing deficit each year will result in increasing debt payments.  In other words, the percentage of our income to pay for debt will increase over time.
4. The income side of the equation (taxes) will rise slightly according to President Obama, but unemployment will remain at 10% as the new norm.  Here is the history of unemployment.

 

That means that the main source of taxes – income taxes – will remain flat with a slight upward bias.  So there is no help in reducing the percentage of debt payments by increasing tax receipts.

5.   It is projected that at the end of 10 years with Trillion Dollar increases in the deficit each year, that the percentage will rise from 25% to 60%.  This is unsustainable, and would bring down the government economically.  This would happen way before the 10 years were up.

The income side of the equation (taxes) will rise slightly according to President Obama, but unemployment will remain at 10% as the new norm.  Here is the history of unemployment.

1. That means that the main source of taxes – income taxes – will remain flat with a slight upward bias.  So, there is no help in reducing the percentage of debt payments by increasing tax receipts.
2. It is projected that at the end of 10 years with Trillion Dollar increases in the deficit each year, that the percentage will rise from 25% to 60%.  This is unsustainable, and would bring down the government economically.  This would happen way before the 10 years were up.

So, what are the real solutions when you totally remove politics from the equation.  (I understand it is impossible to remove politics because politicians are the ones who must make and implement these type of decisions.)

1. First we must stop increasing the deficit.
2. Second we must pay down the current deficit, by decreasing the current expenditures
3. Third we must pay down the current deficit, by increasing tax revenues.

How do we implement solutions to all 4 of these items?  We must do both of them to solve the problem.

1. FIRST – To stop increasing the deficit, we immediately stop spending money we don’t have.  Any new expenditures must be met by equal reductions somewhere else – in other words, new expenditures will be revenue neutral.  If we don’t stop spending unfunded money, we will just be increasing the deficit – and even for the most worthy causes.  Also, in this category are the unfunded mandates that exist out there today – social security, medicare/medical, and Obamacare.  Each must be solved separately – but must be solved, or each will add to the deficit problem.
   1. Social Security – must be solved by increasing income to Social Security and reducing benefits from Social Security.  For example, having social security payments on all income, rather than just some income is a possibility.  Or, increasing the rate of social security taxes.  Also, increasing the age where social security is paid will decrease expenditure.
   2. Medicare/Medical – must be solved by increasing revenue, and reducing costs for these services.  These will be a hard nut to crack, but the solutions are linked to reducing the cost of providing medical care and medicine.  Stopping fraud in Medicare, providing methods that will truly reduce the cost to doctors and hospitals and insurance companies.
   3. Obamacare – has been stated to reduce the deficit.  I will rely on the fact that no government program has ever come in on budget, and Obamacare will be no exception.  So, how does this expansion of the federal government get fixed from the budget deficit point of view?  The Republicans say they want to repeal Obamacare – and this would solve the budget problem, but not the ever increasing healthcare cost problems.  19 States are challenging the new law in the courts as they see the unfunded mandate of medical care increasing significantly and they can’t pay for it.  I won’t try to solve this problem from within as it will take people far smarter than me to tackle it – if Obamacare remains the law of the land.
2. SECOND – To pay down the current deficit by decreasing the current expenditures, we must reduce the expenditure of government.  This is one of the biggest problems facing us.  I mean that every department in the federal government needs to be cut.  It is fairly easy to cut a department’s budget – but this truly means laying federal employees off, and stopping programs.  This is something that hasn’t been done for about 100 years – but we did do it once before successfully.  It would traumatic and would require some careful thinking as to the overall impact on the economy.  Federal retirement plans would probably have to be reviewed and reduced too.  In a nutshell, this is advocating a smaller federal government – and this is the logical conclusion of reducing current expenditures.  Let’s look at every department – Defense, Homeland Security, Labor, Education, Health and Welfare, Treasury, etc.  There can be no sacred  cows in this reduction.
3. THIRD – To pay down the current deficit by increasing tax revenues.  Increased taxes are a very real solution to the problem of reducing the current deficit.  These can be in the area of higher income tax rates on all aspects of the current tax codes.  Discussion of a VAT or flat tax (two different solutions) have been on the news recently, and may need to be implemented.  I personally hate the idea of a VAT having lived in Europe for 23 years and paying it on every purchase.  Things cost more in Europe, and VAT is one of the reasons this is true.  The idea of a flat tax which means paying a fixed percentage on all income made over a fixed amount (like $30,000/year) could replace the entire income tax structure (and incidentally, would allow significant reductions in the government costs of running the IRS).   A hybrid idea of having a VAT to replace the income tax structure has also been discussed.  Again, these solutions would require a lot debate (healthy debate – not partisan debate) to come up with a representative (of the citizens) solution.  In any case, taxes would need to go up.

Now here are the negatives of all this.

1. Our current government can’t even talk about these topics without having a partisan fight.
2. Our current government is incapable of making these types of hard decisions.
3. If the current government continues as it is today, then the outcome will be a bankrupt nation, and that means:
   1. Much and ever higher interest rates to entice anyone to purchase US Treasury Bonds.
   2. Inflation as the government prints more money to keep the boat afloat.
   3. An ever decreasing standard of living for Americans
   4. Increasing unemployment
   5. A depression that will be called “The GREATEST Depression”

This alternative is simply unacceptable to me personally.  I don’t know about you, but I don’t want my children and grandchildren growing up in a country like that where the problems were caused by “the few” in Congress.  So, I continue to tell you to get out there and “Vote soon and vote often.”  Voting is probably the most important act you can take this year and in every election.  These problems and equivalent solutions exist in every state and county and city.  However, the state problems are less than the national problem because state and local governments must have a balance budget and are forced much faster to face the reality of large deficits.  The solutions are ugly, but the alternatives are more ugly.

Now that you have that entire problem in a nutshell.  When you hear those “talking heads” on the TV pontificating on this subject, or you hear the “politicians” suggesting solutions, you can sanely determine if they are looking at the entire problem, or just blowing smoke.  All aspects of the problem must be tackled, not just some small subset of the problem.

Here are the last numbers for today:
Dow Jones 30 Industrial – 11,019 (up 13)
10 Year Treasury Bond – 3.81% (down 0.04%)
Euro – $1.3594
Gold – $1151 (down $10)
Oil – $83.96 (down $0.38)
Gasoline – $2.31  (up $0.01)