DJ30 – 12,820   down 34
US Treasury 10 Year Bond – 1.84%    down 0.04%
USDEUR  -  1.2921
Gold – $1584  down $12
Oil – $96.13  down  $0.95

Stocks were under pressure to go down based on the bad news coming out of Europe.  Treasuries remained strong on the same news.  The Euro fell slowly, but surely, on the supposition that the ECB will be printing a lot more money in the near future.  Oil went sideways.  Gold fell as major technical barriers were broken to the downside.  (I personally believe this is a great buying point for gold.  It could go lower, but the price is great at today’s price.)

JP Morgan…….

The major news of the week was the JP Morgan lost $2B on derivative trading on its own account by its “Risk Department” which is located in London and lead by their best trader.  Jamie Dimon, CEO of JP Morgan, did his mea culpa and said that the trading department had violated JP Morgan’s own rules.  He also said that an additional $1B could be lost in the next quarter.

How many times do these type of announcements result in significantly greater losses?  Most of them, in my opinion.

The good news is that Jamie Dimon came right out and made this bad news public – rather than waiting for the end of the reporting quarter.  That is the only good news coming out of this mess.

The bad news is that JP Morgan lost $2B in six weeks on its bet of about $70TRILLION worth of derivatives.  In this case, the derivative was a Credit Default Swap on interest rates.  They simply bet the wrong way – using highly complex to understand trades.  They had been betting that the US Market was improving and US interest rates would be rising – but in response to the European growing catastrophe, the US Treasury interest rates fell – the opposite of how they bet.

The really bad news is that if they lost a lot more money, and they had to be bailed out (they are too big to fail – and they are the biggest US bank) – the US Taxpayer would be on the hook for the bill again.

Didn’t anyone learn anything from the last time we bailed out these scum bag banks?

Most of you know that I don’t have anything good to say about JP Morgan.  They are the second worst villain (in my opinion) after Goldman Sachs.  JP Morgan would not have been able to make those “bets” on its own account if the Volcker Rule had been implemented  - as specified in the Dodd-Frank bill.  Jamie Dimon has been very vocal in not having the Volcker Rule ever implemented.  He feels that banks should be able to make whatever bets they want – and they should face the consequences.

The problem is that we still have “Too Big to Fail” banks in our system.  As long as they exist, the government cannot morally allow them to make these trades.  What is taking them all this time to stop this trading?  Politics, of course.  Democrats want the Dodd-Frank bill implemented, and Republicans want to repeal it.

Here is what I think:

1. Companies and individuals should be able to make whatever “bets” they want on the market – without restriction.
2. These same companies and individuals should be responsible for any and ALL losses that they accordingly incur.
3. If a bank is getting bailout funds from the US Taxpayer – they must be BARRED from making these trades.
4. The Dodd-Frank Bill should be repealed – and the pieces that make sense (like a modified Volcker Rule) should be passed through Congress again.
5. The next President (as the current President has proven he can’t get his SEC and CFTC and FDIC organizations to do their jobs) should have a major shakeup of the SEC, CFTC and FDIC so that market participants are truly protected from the scumbag banks who are breaking as many rules as they can think of.  (For example, JP Morgan is the major manipulator of the gold market.)
6. In addition, the next President should proceed with criminal charges against the CEOs of the major Wall St banks who created the 2008 market incident through the use of the Mortgage Backed Securities.  I can’t believe there were no laws broken during that period.
7. All these recommendations are made so that the average man on the street can start to have faith in the US markets again.

1. The party which got the most votes in last weekend’s Greek Parliamentary elections was given 3 days to form a new government – and they gave up trying to form one after just 8 hours.  This party was one of the old parties which agreed to the austerity measures for Greece.
2. The party which got the second most votes (a new far left socialist party) is now given 3 days to form a new government.  This new party promoted throwing out the austerity measures – and consequently tapped into the anger of the Greek citizens – and won more votes than they ever dreamed of.
3. The EU and IMF and ECB have all come out and told the Greeks that they must continue their austerity program if they want to continue receiving the agreed 130B Euro bailout funds.
4. The bailout funds come in dribs and drabs – and the next payment is next month.  Without it, the Greek government will not be able to meet its bills – payments to Greek citizens.  The Greek government’s income (tax receipts) is less than its expenditures every month – ergo, this is why they had to have a bailout.
5. If the second attempt to form a Greek government fails, there will be another election next month.  The winner of the next election will receive a “bonus” of 50 seats in the Greek Parliament – and probably have the power to form a government.  Isn’t Greek election law funny?
6. Assuming there is an election next month (i.e. failure to form a government in the next 2 days), the election will probably be fought over the issue of “austerity”.
7. Given the results of last weekend’s election (overwhelming defeat of the austerity program – promoted by existing parties), the results of the next election could easily be predicted to be anti-austerity.
8. The EU/ECB/IMF will give a grace period of their loans to the Greeks as long as there is no government in place.
9. However, the EU/ECB/IMF will also make it clear to the Greek people that rejection of the austerity program will mean NO MONEY.
10. No money will equate to Greece leaving the Euro – and this is something that neither Greeks, nor the EU/ECB/IMF want to happen – as the ramifications of Greece leaving the Euro are not fully understood – in other words, the risks are great.
11. So, the next election could easily turn into an election of “the Euro versus the Drachma.”
    

But, where is the fire?  You would think that with all the risk involved in Greece potentially leaving the Euro this summer that there would be market ramifications:

1. Stock markets crashing?  But, there is only mild downward pressure on stocks around the world – as you must ignore that the Greek stock market crashed by 10% in a single day.
2. The Euro tanking?  A very small move downward by the Euro.
3. A fleeing to “safe assets”? – but gold is going down.  The 10 year US Treasury bonds are hitting record lows (1.80%) today, but this doesn’t look like a panic to me.
4. Contagion taking place across southern Europe? – but 10 year Spanish bond yields are only just above 6% today.
5. There just doesn’t appear to be major “fear” coming into the markets from the Greek election.
   

Perhaps there is just a smoldering mass of “lack of European leadership” that will erupt into fire at some unsuspecting time.  If the next election votes Greece out of the Euro – what would really happen?

1. Greeks would move all their Euros out of Greek banks, and into German (or equivalent) banks.
2. All Greek banks would fail.
3. There would be a big unknown on how existing and new contracts got paid in Euros or Drachmas – this is a real risk.  New contract would not occur as long as payment conditions were unknown – or risky.
4. European sovereign nations and the ECB would take losses on their existing Greek debt.
5. Bond investors around the world would see added risk to “other” European nations – think Spain, Italy, Portugal and Ireland.  Interest rates would start to rise in Europe.
6. The scene would be set for “other” nations to leave the Euro.
   

However, let’s not underestimate the political will to keep the Euro together.  The risks of Greece leaving the Euro are real, and force the other European national leaders to look over that cliff into the abyss.  They don’t like what they see.  They see Europe in a recession today – and a depression tomorrow down in that abyss.  They see much higher unemployment.  They see themselves losing their jobs (which they will lose anyway – but they have high hope today.)

European leaders are experts at “kicking the can down the road.”  They do have a significant amount of ammunition left to fire – but it will take a significant change in mindset by the Germans to fire it off.  The real establishment which holds that ammunition is the European Central Bank.  They can loan money (print money) until the cows come home – and no one has seen the cows for quite awhile.  That means they can loan money forever.

The question for EconomyGuy reader is:

1. Is the Greek Tragedy the event that changes everything?
2. Or, is the Greek Tragedy just another event along the road to the world’s debt crisis?
   

Only time will tell.

1. The French threw out Sarkozy and elected the Socialist candidate, Hollande.
2. The Greeks humiliated the two ruling parties in a Parliamentary general election and gave their votes to “new” parties.
3. The Germans defeated the Merkel coalition in Northern German elections, and this portends the future of German elections.
   

Remember that Europe is in a recession – so there is high unemployment everywhere (except Germany) and the social costs of each government is creating great strain on their budgets.

All remaining politicians are saying they must create “growth” in Europe.  This reminds me that when a politician sees a parade coming, they get in front of the parade so they look like they are leading it.  The idea of fiscal austerity and meeting fiscal guidelines and placing those guidelines in each nation’s constitution appears to be losing momentum.

In addition, the old rules appear to be in place as Germany rejected Spain’s request to allow Spanish banks to tap the EU Bailout Fund.  The Spanish must hate the Germans, and certainly the Greeks hate the Germans.  It is truly a good thing that Europe has united behind the EU as the friction between European nations today appears similar to the WWI era.  Europe could be going to war with itself if there weren’t such binding agreements in place today.

Spain is the biggest problem in Europe today as its banking system is threatened by their housing boom and bust.  Spain is investigating the creation of a new institution that can hold and sell off those housing assets as they crush the Spanish banks.

France

Hollande beat Sarkozy – 52% to 48%.  That is a major swing, and France now has the first Socialist President since Mitterand.    Here is what the new French President has promised to do:

1. Hollande wants to create a “growth” environment and fund jobs throughout Europe – and particularly in France where unemployment is 10%
2. He wants to raise taxes on the rich to 75% for earnings over 1M Euros (sound familiar?)
3. He wants to create a path to immigration for the Islamic immigrants in France (rather than limit immigration as Sarkozy wanted)
   

The very wealthy are worried about the onerous taxation policy of 75% taxes, and some of them are looking to move out of France where they can protect their earnings.  Some are looking in London where they can continue to earn – as London is the major market for stocks, etc in Europe – and they can save the added taxes coming in France.

Greece

The Greeks have voted the bums out.  The two leading parties only got 33% of the vote – compared to 77% in the last election.  These two leading parties are the ones who have agreed to continue the “austerity” that Greece is suffering through.

It was a big surprise that the “other” parties did so well.  (It wasn’t a surprise to me, as I told you long before that people hate austerity and the politicians are the ones who pay the price by losing their job).  The “other” parties are united in the sense they want to re-negotiate the deal with the EU and IMF – but they are not united in their political leanings as they are far right and far left.  Should be interesting to see how the next Greek coalition government comes out.

Conclusions

1. The people of Europe are tired and afraid of “austerity.”
2. Seated politicians are being thrown out of office – independent of whether they are right wing or left wing.
3. Merkel’s coalition with Sarkozy (Merkozy) is dead.  Merkel will cooperate with Hollande as they both can benefit from cooperation.
4. Merkel’s austerity ideas agreed by all (except the UK) EU countries – is dead
5. The near future holds “talks” (a lot of hot air in my opinion as the fundamental economics of Europe will impose its reality) on creating “growth” in Europe and allowing EU nations to “miss” their austerity targets
6. Merkel’s days in office are numbered (elections in 2013)
7. Great uncertainty will remain in Greece as a coalition government is sought.  The chances of Greece leaving the Euro has significantly increased.  European leaders will “bully” Greece to maintain its austerity program as the new Greek government is formed.
8. The right wing of European politics is starting to build.  France’s Le Pen party consciously did not vote for Sarkozy and allowed Hollande to win (and they did this so in 5 years, they can become much more powerful).  Greece’s extreme right wing party won enough votes to have Parliamentary seats for the first time.
   

What all this means to you is that Europe is unraveling in a very predictable way.  Whatever the amateur politicians come up with to “plug the economic dyke” will create a public backlash that will result in their being removed from office.  For example,

1. If the politicians impose austerity – the people will revolt (riot) and will vote the bums out
2. If the politicians impose “growth” – the economy will not grow at a robust GDP, but will impose further hardships as unemployment and high taxes squeeze the economy.  This will result in the politicians being removed too.
3. If the politicians decide to leave the Euro, the people will be hit hard by the economic hardship of such a move, and the politicians will be removed from office.
4. If politicians “soak the rich” with taxes, the “rich” will simply move their money (and themselves?) offshore to protect their wealth – and the country will suffer accordingly
   

The lesson for American politicians is straightforward and simple – as the lessons of Europe will be imposed on US politicians too.

1. If US politicians impose austerity to reduce the debt and deficit – they will be voted out of office
2. If US politicians allow “growth” through quantitative easing – they will be voted out as inflation eats into the public’s buying power (Are you better off today? Is the key question.)
3. If US politicians soak the rich through higher taxation – the rich will simply move their money out of the US, or make it unavailable to the government.
   

You see, there are no good solutions to our problem of excessive debt and deficit spending.  All solutions will be hurtful to Americans.  We are seeing that hurt in Europe in many forms today.  America is walking down the same road as Europe – and will face the same problems/solutions – and they will hurt everyone (rich and poor) as the solutions bite.

DJ30 – 13,038   down 168
US Treasury 10 Year Bond – 1.88%    down 0.04%
USDEUR  -  1.3084
Gold – $1643  up $8
Oil – $98.59  down  $3.95

An interesting week, with most indicators moving sideways.  The stock market is becoming more volatile (bigger ups and downs).  Bonds continue to push their lows – that can’t really become too much lower.  Oil got a big slump down on Friday – as the speculators took hold of the market.

The Unemployment Rate……

Before I start with the statistics, let’s look at a much more interesting thing we can learn a lesson from.  Let’s look at what some markets did JUST BEFORE the news of the unemployment rate was released.  Don’t forget that the statistics are closely guarded secrets – and no one (except maybe the President and the FED Chairman) really knows what is coming out.

Two markets reacted very suspiciously.  The Dollar/Yen exchange rate, and the S&P 500 index, both had strange happenings.

The rumor on the Dollar/Yen futures exchange was that “someone” knew what the unemployment data was going to be “bad” for the economy – and was betting accordingly – immediately upon the release of the data.   The S&P 500 market was even more strange – as even before the announcement – someone sold off the S&P 500 index with large volume on the futures market.  In both cases, the bet was for “bad” data.

The bets were for “bad” data coming out, but this is a 50/50 guess if you didn’t know, so it looks very suspicious to me – and it looks like there was a leak in the release of the data.  This is just another corruption in our system.  The system is set for the Wall St gang to be able to get a jump on the market and beat out the “small guy” in timing the market.  This is just what happened.

Will it be investigated by the “authorities” like the CFTC or SEC?  I doubt it.  Those organizations have shown to be very ineffective in chasing the insiders when those insiders cheat.

This is the end of this lesson for today.

The Data from the Unemployment Rate……

Depending on the political bent of the news release organization, the unemployment data was either good or bad.

Good – The unemployment rate fell to 8.1% from 8.3% the previous month.  (What wrong with a lower unemployment rate – I ask you?)
Bad – There was only 115,000 new non-farm jobs created last month.
Bad – 522,000 people were dropped off the roles of people actively looking for a job.

Here is my interpretation of the data.

The unemployment rate of 8.1% is just a calculation of the number of people actively looking for a job divided by the total people working plus those actively looking.  The numerator (top number) got much smaller – less people looking for work now, and the denominator (bottom number) stayed about the same – therefore, the calculation (numerator divided by the denominator) got smaller.  If people hadn’t left the employment pool (aka the participation rate), the unemployment figure would have remained 8.3%.

The real story is in the number of people who are working and who got new jobs (115,000) in April.

115,000 new jobs only keeps the employment situation bumping along the bottom – as there is about 125,000 new jobs “required” just to keep up with new people entering the employment pool each month.

The participation rate (the percentage of people in the population who are working, or are actively looking for work) fell again in April, and this is a catastrophe for the US economy.  What is this so bad?

1. These are people who have stopped looking employment.
2. These are people who are discouraged
3. These are people who are taking social welfare (costing the government – and YOU – more money), and will continue to take social welfare money.
4. This is a downward spiral in our economic situation – in GDP in particular.
5. Many people who would like to work, but are no longer counted in the participation rate, are no longer counted in the unemployment rate calculation – so they have been lost from the system.
6. So far this year, 1,000,000 people have signed up for “disability” benefits from the Social Security program – and these were previous workers (contributors) to our economy.  That’s a total of 5,000,000 people signed up for “disability” benefits since President Obama took office.
7. Once people enroll in “disability” – they almost never return to employment!!!!!!!!!
   

If the participation rate had stayed where it was in 2009 (when our market melted down), the unemployment rate would be 11% today – so “liars can sure figure” in spite of the fact that figures don’t lie.  Here is a graph of the Participation Rate.

Here is a graph of the people who are no longer counted in the labor force.  These are people who have stopped looking for work – but they still exist and could contribute to the economy if we could get them a job (and they would probably require some training to get qualified.)

These are very ugly looking graphs, and I commend them to your self study.

I have one more chart for you to consider – and I consider it one of those “dirty little secrets” that the government doesn’t want you to know.  It is the median income for US households – looked at historically – and it is falling (and has been falling for a long time.)

The government doesn’t want you to know that the US economy are getting kick in the teeth by having people earn LESS each year.  How does this happen?

Well, this isn’t a problem for someone who has a job, and keeps that job.  People with a job generally keep their same salary (or wage) and even gets increases over time – so their income goes up.

But, if you lose your job – that’s an entirely different story.  Then, you get a new job (if you are lucky) and that job PAYS LESS – as people are desperate to get any job to support themselves and their family.  I have repeated said that people are taking jobs paying less money, and I have also said that new jobs are frequently “minimum paying jobs.”  This is because the new jobs are in the service industry – such as the food industry or hotel industry – and these are minimum wage jobs.

The graph shows clearly that the median income in America is falling – with no solution to this falling in sight.

If anyone wants to argue that we aren’t destroying the American middle class – just pull out this graph – and you can graphically argue the point.

The US Economy at the End of 2012……..

The US economy faces a “cliff” at the end of 2012.  There are two things currently planned that will knock the US economy (the US GDP) off the rails.  They are:

1. The automatic repeal of the “Bush Tax Cuts.”
2. The tax increases agreed by last year’s Super Committee – as part of the US Debt Limit increase deal in Congress.
   

These two things combined would be a major shock to the US economy – and that’s not just me talking.  It is two FED chairmen of two FED districts.

These are both a big challenge for the upcoming Congress.

Another thing that I would add to this list is the fact that the Debt Limit will have to be increased again before the end of this year.  In fact, it will probably have to be increased before the next election – in November – for the Presidency.  This will be tough for anyone in Congress to agree on as the election will take precedence.

Shocks – they are a-coming.  (I think I could make this into a song.)

The European Elections…….

The Europeans are going to vote for new leadership (?) this weekend, and rather than speculate on the outcome, I will wait for the results, and then give you my interpretation of the results.  Should be very interesting.

DJ30 – 13,228   up 24
US Treasury 10 Year Bond – 1.93%    down 0.03%
USDEUR  -  1.3251
Gold – $1663  up $2
Oil – $104.81  up  $0.26

All markets went sideways – another boring week.  When there is a breakout of any of these 5 indicators, I will highlight them.  In the meantime, you can just go asleep and wait for the chaos to start.

US GDP……..

The big news this week was the 1st Quarter US GDP coming out at 2.2%.  Lots of buzz and articles and interviews – all signifying nothing.  You can understand this GDP number yourself using those “llittle grey cells” as Hercule Poirot would say.  Let’s do it together.

Okay, the annualized GDP growth for the 1st Q was 2.2% – so let’s assume the government’s number was correct – but we know it can’t be correct as the government comes out with two subsequent updates in the future.  But, for today’s exercise, let’s assume it’s absolutely right.

Now, what is the US inflation?  It’s 2.65% – as reported by the government.  What does inflation rate mean?  It means that “the average basket of goods” costs 2.65% more today than they cost one year ago.

So, is the “basket of goods” for CPI, the same basket being measured for GDP?  Absolutely not.  But, let’s assume they are close enough for “government work” (and this is something I used to say a lot many years ago – meaning that it isn’t perfect, but who cares – the government doesn’t care – it’s close enough.)

Let’s use those little grey cells.

The US produced 2.2% more goods than one year ago?  (This is what some folks would like you to think.)  NO!!!!!!!  The measure is in US Dollars.  The GDP measure means that the US produced/spent 2.2% more Dollars worth than it did one year ago.

But, the value of that same Dollar has fallen 2.65% in that same year.  What does that mean?  Good question – in fact, it is the right question to ask someone in Congress to see if they have any clue what that means.

Here is a great way to look at it.  If a bunch of stuff is made (or money spent) one year ago, and the cost of that stuff increases by 2.65% this year, and the same stuff is made (or money spent) this year – wouldn’t LESS stuff be made this year than was made last year – because the inflation rate was greater than the GDP growth rate?  YES, YES,  YES, YES!!!!!!!!!!!!!!!!!!!!

So, you come to the inexorable conclusion that – even though we are growing (GDP up 2.2%) – we are making/spending LESS stuff.

What does this mean for the economy – the one that you and I live in?  It means we are a shrinking economy.
Making LESS things means:

1. less jobs
2. lower paying jobs
3. higher unemployment if the difference between CPI rate and GDP rate widens far enough.
   

I guess there is no reason to bang your head with this drum too much – you get the picture.  Remember that just because GDP goes up, that everything is getting better.

Geithner says US can withstand European Crisis………

I love statements like this one that Treasury Secretary Geithner made this week.  Why did he make this statement?

Well, here are the reasons that I can think of:

1. He wants to calm the markets that think that if European banks crash, then US banks will fail too.
2. He is worried about Europe.
3. He acknowledges that Europe could “mismanage” its affairs such that Europe fails – a very damning statement.
   

Isn’t it very telling that our Treasury Secretary must say anything?

Europe this Week……..

1. German manufacturing FELL this last quarter – much to the dismay of the European politicians and markets who thought Germany could pull Europe out of its shallow recession.
2. European manufacturing FELL this quarter too – meaning that European manufacturing is falling into a third quarter of “negative” growth – or as the Europeans call it – Europe is going into a double dip recession.
3. The Dutch Prime Minister resigned – and therefore The Netherlands will be having another election in a couple of months – one that will pit a pro-European party against a pro-Dutch (keep the money for OUR people, not those folks in Greece and Spain) party.  A very interesting turn of events in Europe – as the Dutch have been ardent supporters of Merkel’s German leadership to date.
4. The caretaker Dutch government approved the Dutch austerity program – and you can bet this will be debated as part of the upcoming election.  This should preserve the Dutch AAA credit rating – otherwise, it is bound to fall.
5. Spain’s economy is faltering faster than anyone expected.  It’s GDP is down 0.4% (quarter on quarter) from last quarter, but only down 0.5% year on year.  This is creating panic and pandemonium in Spain – and probably Brussels at the EU.
6. Spain’s unemployment rate went up to 24.4% from 22.%.  (Ugly.)
7. Sarkozy may be elected out of office by Hollande – and this would mean a turnaround in support for Merkel by France.  We’ll know the truth in May.
8. German economists have uncovered that Germany is “on the hook” for 2.1 TRILLION Euros worth of obligations to Europe – and most of these promises were down by the “back door” – which is enraging the German politicians.  My interpretation – Merkel has a leash around her neck, and it is tightening.
9. The Greek head of the Trade Union Confederation asked Merkel if it was right that Greece bought so many German arms – but also had austerity – wasn’t this hypocracy in action?  Merkel said that the purchase of arms was a Greek decision – and asked where the payment for German submarines was – as it is only 11 years late.  (All is not happiness and light in Greek/German relations.)
10. Remember that Spain opened said it was going to MISS its budget deficit target?  Well, Italy said it would miss its target too.  Looks like that “target system” is falling apart.
11. The UK is falling into a double dip recession too – much to the surprise of the experts.
12. Spain’s credit rating was cut from A to BBB+ (two notches down) with a negative bias.  (This just means that Spanish interest rates will be going up.)
13. European leaders have come out together in agreement for Europe to have a “growth pact.”  This is so vague that it covers up all the huge differences of opinion within Europe – and future arguments will be entertaining to follow.  Politicians are the same all around the world.
    

Quote of the Day…….

The study of money, above all other fields in economics, is one in which complexity is used to disguise or to evade truth, not to reveal it. – John Kenneth Galbraith

While I don’t agree with everything that Galbraith says, he is absolutely correct here.

I thought it would be interesting to get into the weeds and talk about this important subject – so economyguy readers more fully understand what is coming with these two massive programs – the majority of the US fiscal budget.

How does the money for these programs work?

Well, there is a payroll tax that is paid into the Social Security and Medicare funds, and that money goes into those funds.  When there is more money going into the fund, than being paid out of the fund, there is a positive balance for that particular fund.  Okay, it’s good to save, I hear you say.

But, the government (in its infinite wisdom) takes that surplus money and spends it on its day to day expenses – the federal budget expenditures.  It replaces the money taken out of those funds with US Treasury bonds – so it looks like the fund has real money in it – right?  Wrong!!!!!!!  Our politicians say that the Social Security and Medicare funds are “fully funded” – because the “trust funds” are holding all those US Treasury bonds.  Confused yet?  It is the purpose of these politicians to confuse you – otherwise, you might just get mad and vote those bums out of office.

Why would you get mad?  Well, that “excess” money that is sitting in the trust funds are really just IOUs – called US Treasury bonds.  There is really nothing behind those bonds – other than YOUR taxes.  In other words, if you (magically) were able to force the trust funds to hold real money – YOU would be taxed to pay back those bonds.  This sounds like a scam to me – but as it is legal, it must be impolite to call it a scam.  It’s illegal is Mr Ponzi or Mr Madoff does it, but not if the government does it.

How much money are we talking about?

It is fairly easy to calculate the size of the trust funds.  The total US government debt is $15.6 TRILLION, and the publicly held debt (i.e. Not held by the government) is $10.9 TRILLION.  The difference (or $4.7 TRILLION) is the total size of the trust funds.  In other words, the trust funds are holding $4.7 TRILLION worth of US Treasury bonds.

How could we be running out of money in the future?

It is fairly easy to estimate how much money will be paid out of the Social Security and Medicare funds each year in the future – you simply make the simplifying assumptions that Social Security program remains unchanged (payout rules) and Medicare also remains a well defined program (a questionable assumption given the changes dictated, but unknown today, as brought into law under Obamacare).  Then, you project the number of people retiring and applying to Medicare as based on their ages in future years – and you drop off the actuarially calculated number of people dying each year.

You then subtract the money being paid out from the money projected to be collected each year, and voila – when it becomes negative – you have run out of money.

In more detail, the Social Security program is really divided into two programs – the retirement program and the disability program.  Each of these programs has its own “trust fund”.

The first program predicted to run out of money is the Social Security Disability Program – and this is predicted to run out in 2016 – a short four years from now.

What happens then?

A little known fact is that when one of the two social security funds spends more money than it has, but the other one is still solvent – the law says that all “benefits” will continue to be paid.

So, in effect, nothing much should happen in 2016 – right?  Wrong!!!!

Here is what will happen:

1. This will become a very big political football – hopefully long before we get there, but certainly in 2016 if Congress remains deadlocked in its ability to provide practical solutions to our fiscal problems.
2. The negative amount of Social Security Disability Program payouts will increase the US Budget Deficit – dollar for dollar.  This means the US Fiscal Debt will increase – dollar for dollar.
   

The Social Security Retirement fund is expected to run out of money (more being paid out than being collected) much later in the 2030’s.

But, shouldn’t the “Trust Funds” kick in and fund these expenditures?

Theoretically, yes.  Practically, no.

Remember that the Trust Funds are just a pile of US Treasury bonds – and to turn these bonds into cash, the money must come from somewhere.   The US government gets its money from two sources:

1. Taxation
2. Sales of US Treasury bonds.
   

So, the government would have to either raise taxes, or borrow the money.  My guess is that neither would be possible.  We should be in such a big quagmire by 2016 that we have already raised taxes to a “hurtful” level – one that degrades economic growth.  And, interest rates should be much higher – meaning there will be greater doubt (risk) in lending the US government money.  Pressure to sale more bonds would result in higher interest rates – across the board in the US economy.

How big is this problem?

You can estimate the size of the Social Security and Medicare program “promises”, and these “unfunded mandates” come in around $75 TRILLION.

However, I am not concerned with the size of the “unfunded mandate”.  Why?  Simple, when we get to the point where we must pay out the money, and we continue down the same road we are moving, there will NOT be any money to pay out those benefits – so the benefits won’t be paid.  In other words, the $75 TRILLION unfunded mandate is just a promise made by the government that will NOT be kept.

Conclusion:

1. The US demographics are slowly, but surely, pushing the US into economic chaos.
2. Politicians must come to grips with the size and expenditures of the Social Security and Medicare programs.
3. The US Government will not be able to keep its promise to pay out the Social Security and Medicare programs as currently defined.
4. From a practical point of view, and given some optimistic thinking, Congress will get its hands around this problem and change these programs into something that can provide benefits to all the citizens who were promised those benefits when they contributed in the first place.
5. Remember that this problem is YOUR problem – its your contributions, its your benefits, and its your “unfunded mandates”.
6. Remember to vote soon and vote often to throw the bums out of office – the ones who got us in this mess in the first place through their insincere platitudes and promises – promises that are based on “unreality.”  Either by ignorance or intention.

Let’s look at France first.

Sarkozy lost the vote – he came in second in a field of five.  The French system is a two stage system where, if no candidate gets over 50% of the vote, then there is a second election between the top two candidates.  This weekend, Sarkozy came in second, and Hollande (a socialist leaning liberal) came in first.

Does this mean Sarkozy will lose in the second round of voting in May?  No, but Sarkozy’s strategy must come into play, and it is in question right now. His strategy is to get the far right (Le Pen) party members – who came in third in the voting – to swing over to Sarkozy in the May election.  During the 2007 election when Sarkozy was first voted into office – this was exactly the strategy that won him the Presidency.

However, the leader of the Le Pen party did not endorse Sarkozy when she lost by coming in third.  This means that these French right wing voters may just stay home in May and not vote – and that would swing the election to Hollande.  I consider this a distinct possibility for France.

What would this mean for France?  What would this mean for Europe?  What does Hollande stand for, and how is he different from Sarkozy?  (Remember that Sarkozy was Merkel’s right hand man in the Europe crisis talks throughout the past three years, and Merkel actually came to France to campaign for Sarkozy this time.)

Here is what a Hollande lead France would mean to Europe (and YOU eventually):

1. He would introduce a “jobs program” into France – and this would mean spending more money.
2. He would introduce a “jobs program” into Europe – and this would mean spending more money.
3. He would support the “southern” nations of Greece, Italy, Spain and Portugal in NOT having such draconian austerity programs – but spending more to keep people at work, and their economies moving forward.
4. He would move away from Germany’s (Merkel’s) program of saving Europe through austerity.
5. He would lessen the crackdown and rules being used against French Muslims.
6. He may provide only luke warm support for the latest European agreement to “balance each nation’s budget by introducing legislation in each nation’s constitution.”
   

Naturally, being a good Keynesian socialist, he is all for spending his way out of debt (an oxymoron).   The results of his plans would be greater debt all over Europe, and the eventual breakup of Europe and the Euro.

The breakup of Europe has already started by “serious” discussions among the Schengen group of European nations holding talks which would allow the re-introduction of border controls at the national borders.  This is in response to the huge immigration of North Africans into Europe – coming mainly through Italy, and then migrating freely into any other European nation.

In The Netherlands, over the weekend, the two leading parties broke off discussions (which were going on for the past 6 weeks) to NOT meet the austerity program mandated for The Netherlands to meet.  You see, The Netherlands is going to be in a recession during 2012, and they just can’t meet their austerity budget plan with the upcoming Dutch economy.  That reality makes all decisions in The Netherlands much harder.  And we are seeing the results of the strains in the Dutch economy spilling over into politics.

The real argument going on in The Netherlands is:

1. Should the Dutch people be exposed to the “mandated” austerity budget, or
2. Should the Dutch people be allowed some slack (meaning a little less austerity) given the upcoming recession?
   

The European Finance Ministers were holding discussions on their new and enlarged “war chest” of money.  They just don’t have any rules on how to disperse the money – but spending money has never been a problem for a politician before – so I’m not worried they will not find a way.

The real issue is that the “war chest” is just a fig leaf.  It is meant to hide the rude reality just behind it.  If (and when) Spain goes bust, the war chest will be shown to be insufficient.  That is the elephant in the room.  The dinosaur in the room is Italy – but Spain will come first.

Conclusions:

The problems caused by debt are never easy to solve – unless its a very small amount of debt.  In today’s Europe, the debt is a “record breaking” amount of debt – so I guarantee there are no easy solutions.

Remember, there are only 3 ways for a nation to reduce (or eliminate) its debt:

1. Pay it back.
2. Default (aka go bankrupt).
3. Pay it back with inflated money.
   

The United States is in the same position as Europe – but just a small amount of time behind it.  The US also has the FED which allows solution #3 as a real possibility – one that is actively being pursued today.

Learn from the European lessons.  Know that these poor souls were lead down the spend, spend, spend (with massive debt) path by good intended people – but people who were ignorant of the cost they were building into their future.  The struggles and elections and discussions happening across Europe are real – and applicable to the US.

DJ30 – 13,029   up 65
US Treasury 10 Year Bond – 1.97%    up 0.02%
USDEUR  -  1.3220
Gold – $1643  up $2
Oil – $103.32  up  $1.05

Isn’t it nice looking at these 5 market indicators just once a week?  They all 5 went sideways – so it would have been a waste of time looking at each day.  There was some volatility in stocks as the DOW went up and down over 100 in single days — but it all evened out.

The IMF…….

The head of the IMF, Christine Lagarde, is giving advice to the United States.  She is saying:

1. The Congress is really messing up things by not attacking the debt issue.
2. The US Housing market needs to be solved, and Fannie/Freddie need to be part of the solution by taking selected loan reductions on people who are underwater and/or defaulting.
3. The US should send more money to the IMF – as the IMF needs more money to give out around the globe.
   

Here is my reaction to the IMF statements.  In spite of the fact, I am sympathetic with some of the IMF statements, here is what I really think.

“Who do you think you are telling the United States what to do?  Don’t you realize that we established the IMF?  We are YOUR boss, not the other way around.”

The IMF is a dangerous organization because many of the world’s elite want the IMF to be the lending of last resort – after the FED goes bankrupt – and wants the IMF to provide the “future” currency of the world – the Special Drawing Rights, or SDR’s.

Spain……

The world’s newpapers declared this last Tuesday that Spain had a “successful” bond auction.  I will give you the facts, and let you decide for yourself.  Spain was selling six month and one year bonds, and all the bonds offered were purchased.  The interest rate established by this auction was more than twice the interest rate paid during the last auction of the same bonds – about two months ago.

On Thursday Spain auctioned 2 year and 10 year bonds.  These too were entirely subscribed, and they too had higher interest rates to be paid than the last auction.

How can anyone call this successful?  Was the press expecting that the bonds wouldn’t be sold?  The increase in the interest rate is a disaster for the plans made by the EU and ECB for Spain.  This auction can only be called a disaster.  But, for those who only read the headlines, you would think everything was just wonderful.

One more news item – bad loans for Spanish banks have hit an 18 year high.  It is now 8.9% of all loans are at least 3 months in arrears.  The normal rate, in a healthy market, is more like 1%.  This is just one of those things that will get much worse as time goes on, and will drag down the Spanish banks.

The World’s Reserve Currency…….

The US Dollar is the world’s reserve currency.  It was established at the Bretton Woods agreement that happened just before the end of WWII.  It was signed by all free nations at that time.  It said that international trade would be done in US Dollars.

President Nixon made a special side deal with King Faisal of Saudi Arabia that said that if Saudi had ALL oil trading done in US Dollars, and Saudi Arabia invested those Dollars in US Treasuries – then the US would protect Saudi Arabis (militarily) against all outside aggressors.  Not everyone is aware of this deal, but it is still alive and well today.

But, a large part of the world is moving away from international trade in US Dollars, and is using their own currencies instead.  This is a retreat for US power, and can only be viewed accordingly.  It is happening, and accelerating over the past 2 or 3 years.

What is the US doing about this?  Nothing, in my opinion.

Why isn’t the US calling those who are breaking the Bretton Woods agreement, and stating they must continue to according to that agreement?  I really can’t answer this question, but it might be just embarrassment, or it might be a new “policy” of the current administration, or it might be that “sticking you head in the sand” is expected to make the problem go away.

What do you think?

What is the cost to Americans of this action?  Or, lack of action?  You see, there are TRILLIONS of US Dollars spread all over the world, as every nation had to hold US Dollars and US Treasuries as part of their reserves.  That’s the role of a reserve currency.

What will happen to that money if it no longer is needed?  It will be SOLD, of course.  That will reduce the value of the US Dollar, and make all imports more expensive – and I can say, quite authoritatively, that you will not like that outcome.

What about the Iranian oil embargo?  This is front and center in the US Dollar fight for survival.  Iran has been “hit between the eyes” in its oil sale by prohibiting Iran’s use of the European SWIFT (money exchange) system, and European insurers stopping the insurance for Iranian oil tankers.  But, is this true?  Of course not.  Iran has stepped quietly around these problems by two clever techniques.  First, it is shipping oil on Iranian ships which are ordered to TURN OFF their satellite tracking system – so no one knows where they are really going.  Second, they are paying much higher insurance premiums on those shipments – to willing third party insurance companies.  Third, they are taking anything (other currencies, or bartered goods) in payment for their oil.  And, they are giving longer term payments on those purchases.  China, India, Turkey, Syria are among the nations buying Iranian oil today – and skipping the embargo orders from the US.

This simply results in the US position being eroded, and the US military might being laughed at by the rest of the world. The US Dollar is being further diminished by the Iranian problem.  It is possible that the US is actually hurting itself more than it is hurting Iran with its embargo.  (Something to think about.)

Europe and especially Spain…..

Spain’s industrial output fell 5.1% (year on year) and this is a major blow to economy of this precariously positioned nation.  And, this decline is accelerating.  Unemployment is 23.6%, and is expected to rise (of course.)  And the Spanish government is using the same tricks as the US government – becausae if you used the method defined in 1990 to determine unemployment – the number would be 32% based on a Bank of Spain study.

The big problem, naturally, is the interest rate that the “market” imposes on Spanish debt.  To mitigate this problem, the ECB (European Central Bank) has said it will be buying more Spanish debt – thereby pushing interest rates down – and are using the well tested “jaw-boning” method of reducing interest rates.

Here is the real problem in Spain (and Italy).  When the ECB loaned out its 1% money for 3 years (the LTRO loans), Spanish and Italian banks took over 250B Euros worth (or over 22% of all the 1 TRILLION Euro loaned).  What did they do with this borrowed money?  They purchased Spanish (and Italian) sovereign debt.  Let’s look at the details.  There were two tranches of loans.  Spanish banks bought 4.5% (paying) Spanish bonds in December and 3.5% paying bonds in February – and those same bonds are paying 4.77% today.  That means all those bonds the Spanish banks bought are “underwater” – or worth less than they paid – if they were forced to “mark to market.”  The same thing happened in Italy.

So, what we are really seeing is that the ECB LTRO loans are making things worse in Europe.  The “market” is demanding higher interest rates to compensate for the risk of lending to these bankrupt (or soon to be bankrupt) nations.  Spanish banks’ borrowings from the ECB jumped nearly 50% in March to •227.6B, as they took up 29% of the central bank’s late-February LTRO. “A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe.” That’s not some EMU permabear speaking; that’s Spain’s Economy Minister Luis de Guindos.

This should make everyone nervous as a cat on a hot tin roof.  And, it did to the world’s stock markets last week.

Last Tuesday, the Bank of Spain had to pay almost 6% on its 10 year bonds that it sold that day.  This is a major retreat from the “everything is fixed” announcement made about 2 months ago by the EU and ECB.

Besides the markets demanding higher interest rates, what else is going on in Spain?

1. The housing market is a disaster.  And the housing prices haven’t crashed – yet.  When it does, the banks will be in much worse shape – and the Spanish government, in an attempt to bolster the banks, will be much worse off too.  This housing disaster is much worse than the US housing mess.
2. Spanish districts and towns are bankrupt too – they are spending more than they take in taxes.  Any solution to this problem will make Spain a worse risk to bond investors.  This too, is a major problem for Spain.
3. All Europe is sicker with Spain
   
   1. Italian bonds jumped 1% in one day
   2. A German bond auction was not fully subscribed – meaning there were less buyers than bonds being sold – a very bad sign.
      

The real problem is the “size” of the Spanish debt problem.  One politician, the Spanish Prime Minister, told the truth about this – by saying that the Spanish problem is “too big” for Europe to solve.  Therein, is the problem for Europe – and the world – and you too as far as that goes.

Conclusion:

It appears that the solution to the European problems is unraveling faster than anyone would expect.  This is being driven by the bond market – as I said it would have happened about 3 months ago.

It makes you wonder what is happening in those “smoke filled rooms” around the European capitals right now.  They must be talking about a break-up of the Euro and how to make it happen with the least pain.  That’s what I think.

DJ30 – 12,850   down 137
US Treasury 10 Year Bond – 2.00%    down 0.05%
USDEUR  -  1.3077
Gold – $1658  down $21
Oil – $102.84  down  $0.81

Stocks have started a decline based on two major factors – being overbought and troubles brewing in Europe again.  Earnings are not predicted to be that good this quarter either – so fundamentals are raising their ugly head.  The FED has not started or hinted at any QE, so that is not an impetus for higher prices.

Bonds, the Dollar and oil are all going sideways right now.

Gold had a major advance last week, and was beat down at the last minutes on Friday.  The fundamentals for gold look positive with lower short positions existing now.  When it goes above $1700, I will declare gold back in its bull phase advance.

Europe and especially Spain…..

Spain’s industrial output fell 5.1% (year on year) and this is a major blow to economy of this precariously positioned nation.  And, this decline is accelerating.  Unemployment is 23.6%, and is expected to rise (of course.)  And the Spanish government is using the same tricks as the US government – becausae if you used the method defined in 1990 to determine unemployment – the number would be 32% based on a Bank of Spain study.

The big problem, naturally, is the interest rate that the “market” imposes on Spanish debt.  To mitigate this problem, the ECB (European Central Bank) has said it will be buying more Spanish debt – thereby pushing interest rates down – and are using the well tested “jaw-boning” method of reducing interest rates.

Here is the real problem in Spain (and Italy).  When the ECB loaned out its 1% money for 3 years (the LTRO loans), Spanish and Italian banks took over 250B Euros worth (or over 22% of all the 1 TRILLION Euro loaned).  What did they do with this borrowed money?  They purchased Spanish (and Italian) sovereign debt.  Let’s look at the details.  There were two tranches of loans.  Spanish banks bought 4.5% (paying) Spanish bonds in December and 3.5% paying bonds in February – and those same bonds are paying 4.77% today.  That means all those bonds the Spanish banks bought are “underwater” – or worth less than they paid – if they were forced to “mark to market.”  The same thing happened in Italy.

So, what we are really seeing is that the ECB LTRO loans are making things worse in Europe.  The “market” is demanding higher interest rates to compensate for the risk of lending to these bankrupt (or soon to be bankrupt) nations.  Spanish banks’ borrowings from the ECB jumped nearly 50% in March to €227.6B, as they took up 29% of the central bank’s late-February LTRO. “A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe.” That’s not some EMU permabear speaking; that’s Spain’s Economy Minister Luis de Guindos.

This should make everyone nervous as a cat on a hot tin roof.  And, it did to the world’s stock markets last week.

Last Tuesday, the Bank of Spain had to pay almost 6% on its 10 year bonds that it sold that day.  This is a major retreat from the “everything is fixed” announcement made about 2 months ago by the EU and ECB.

Besides the markets demanding higher interest rates, what else is going on in Spain?

1. The housing market is a disaster.  And the housing prices haven’t crashed – yet.  When it does, the banks will be in much worse shape – and the Spanish government, in an attempt to bolster the banks, will be much worse off too.  This housing disaster is much worse than the US housing mess.
2. Spanish districts and towns are bankrupt too – they are spending more than they take in taxes.  Any solution to this problem will make Spain a worse risk to bond investors.  This too, is a major problem for Spain.
3. All Europe is sicker with Spain
   
   1. Italian bonds jumped 1% in one day
   2. A German bond auction was not fully subscribed – meaning there were less buyers than bonds being sold – a very bad sign.
      

The real problem is the “size” of the Spanish debt problem.  One politician, the Spanish Prime Minister, told the truth about this – by saying that the Spanish problem is “too big” for Europe to solve.  Therein, is the problem for Europe – and the world – and you too as far as that goes.

Conclusion:

It appears that the solution to the European problems is unraveling faster than anyone would expect.  This is being driven by the bond market – as I said it would have happened about 3 months ago.

It makes you wonder what is happening in those “smoke filled rooms” around the European capitals right now.  They must be talking about a break-up of the Euro and how to make it happen with the least pain.  That’s what I think.

That problem – the debt, of course.

The US Debt is growing – and I think everyone has gone asleep as nothing seems to be happening as the debt grows – so “ho hum”.  What everyone  is missing is that a lot of things are happening all around them.  For example,

1. High unemployment
2. Slow job growth
3. Slow GDP growth
4. Growing inflation – food and gasoline
5. The FED continuing a “zero interest rate policy”.
6. Little to no interest being paid on bank saving accounts.
7. A non-recovering housing market
   

This American reality is tied directly to our DEBT.  The great debt is causing the slowdown in everything.  We can complain about each of these events, and we can try to “fix” each one of them – but, without fixing the root cause – the DEBT – we will never fix them.

What is worse in my own thinking is that the politicians – all of them – are ignorant, or afraid of tackling the DEBT problem.  Here is the track record:

1. The President submits a budget that continues “big spending” with high budget deficits
2. The Senate does not pass any budget at all
3. The House passes a budget (the Ryan Plan) that addresses the deficit – but never REDUCES the debt.
   

In the meantime – all the politicians point figures at all the other politicians – WHAT A WASTE OF TIME.

And TIME is our enemy.  Why do I say that?  Are you familiar with compound interest?  It works so magically because the interest continues to increase with TIME.  Well, in our dream world, we have a massive DEBT and that DEBT is growing with TIME, and that DEBT is incurring INTEREST with TIME.  As we incur interest, we don’t pay that interest, we just borrow more DEBT and pay off those current bond holders (suckers) with an IOU called a US Treasury Bond.

Why do I call them “suckers?”  Well, I just have to point to Greece – a proud nation that gave us our democratic foundations over 2500 years ago – and a nation who had too much DEBT and went bankrupt by defaulting on that debt – an impossible event according to the leaders of the EU just 2 years ago.  The US is in the same situation.  We do have a tool that Greece did not have – the printing press – so we will never default on our debt – but we will inflate our way out of it.

And inflation is that tool that Paul Ryan is counting on to “save” that nation with his budget.  Any budget has tons of assumptions regarding the future economic performance of the nation.  They can’t all be right.  (Not a comforting thought.)

So, where do we stand on our debt today?  It is about $15.7 TRILLION – and increasing at the rate of over $1.2 TRILLION per year.

The Paul Ryan plan is to reduce government spending and raise taxes (by revamping our tax system) so that we have a REDUCED DEFICIT (not a zero or negative deficit) – and that deficit growth is less than our GDP growth.  In other words, the deficit is growing at a rate less than the rate of GDP growth.

Well, what happens if we have another recession in the future?  (We have always had recessions, and we will continue to have them.)   Simple – the DEBT will continue to get bigger, and the problem will NOT be fixed.  I don’t like the Ryan plan – not one little bit.  I like the spunk he has shown in putting something out there and poking it in the eye of the Democrats who are too scared to even address the problem.  However, I don’t think it will work in the long run.

The Ryan plan has a DEBT that:

1. Continues to grow – forever.
2. Is manageable (we can pay for it) in the future if all of his assumptions are met.
3. Will continue to have a drag on the economy (forever) as a DEBT always has a drag on the economy.  (Where does the drag come from?  The interest on the debt is a non-productive obligation that can and does partially go overseas – thereby not having a positive effect in the US).
   

So, here are the options coming to America this November:

1. Re-elect the President and maintain the status quo in Congress – and bankrupt the nation through deficit spending for another 4 years.  This is easy to calculate as approximately $5 TRILLION additional debt.  Can we afford this?  I doubt it, and I doubt America will be the America we all know and love after the house of cards falls down.
2. Elect the Republican (Romney) to the Presidency and maintain the status quo in Congress – and this will continue to grow deficit, but slower.
3. Elect the Republican and take control of the House and Senate – and this will continue to grow the deficit, but even slower.
4. Obamacare is a wild card – but in any case it is just an additional DEBT producer.   What’s an additional TRILLION or two if the house of cards is going to fall down anyway?
   

Please note there is no option to pay off, or even pay down, the DEBT.  I lament this lack of critical thinking.

So, this leads us to the future for America.  With a massive DEBT – no matter what the future holds, the FED must step in and start another printing exercise – currently called quantitative easing.  So, we will pay off the debt with inflated Dollars, and run through fields of wild flowers (hopefully you don’t have an allergy) for all our days in the future.  Why run through the fields?  Well, you won’t have any money to buy food or clothes – so you might just as well enjoy the fields.

Sorry to be so pessimistic.  But, that’s just the way I see the future.  It’s not really different from the outcome of most (or all) great nations of the past.  One other problem with the downfall of a great nation is that the citizens also (always) give up their freedoms as the nation goes into decline – either through socialism or totalitarianism, and justified by a threat from the outside.  I haven’t talked about our freedom in this article – only our economy – but they are linked in a historic way.