The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
economic news has turned decidedly negative globally and a sense of
‘quiet before the storm’ permeates the financial headlines. Arcane
subjects such as a Hindenburg Omen now make mainline news. The retail
investor continues to flee the equity markets and in concert with the
institutional players relentlessly pile into the perceived safety of
yield instruments, though they are outrageously expensive by any
proven measure. Like trying to buy a pump during a storm flood, people
are apparently willing to pay any price. As a sailor it feels
like the ominous period where the crew is fastening down the hatches
and preparing for the squall that is clearly on the horizon. Few crew
mates are talking as everyone is checking preparations for any
eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane?
Unlike sailors the financial markets do not have the forecasting
technology to protect it from such a possibility. Good sailors before
today’s technology advancements avoided this possibility through the use
of almanacs, shrewd observation of the climate and common sense. It
appears to this old salt that all three are missing in today’s financial
Looking through the misty haze though, I can see the following clearly
looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971 the
increase in global fiat currency has been nothing short of breath taking.
It has grown unchecked and inevitably became unhinged from world
industrial production and the historical creators of real tangible wealth.
China offered on Saturday to buy Greek government bonds
when Athens resumes issuing, in a show of support for the
country whose debt burden pushed the euro zone into crisis
and required an international bailout.
Premier Wen Jiabao made the offer at the start of a
two-day visit to Greece, his first stop on a tour of
Europe, and also said he wanted to boost shipping and
trade ties with Athens, underscoring Beijing's use of
economic strength to win friends.
"With its foreign exchange reserve, China has already
bought and is holding Greek bonds and will keep a positive
stance in participating and buying bonds that Greece will
issue," Wen said, speaking through an interpreter.
"China will undertake a great effort to support euro
zone countries and Greece to overcome the crisis."
Retail investors poured over $375 billion into bond mutual
funds last year and another $230 billion thus far in 2010—even as
interest rates have shriveled toward zero and the risk of future
losses has risen. Households also have yanked roughly $70 billion
out of U.S. equity funds this year, though the stock market has
Retail investors certainly don't have a good
track record when it comes to buying bond funds en masse. They
pumped tens of billions of dollars into them in early 1987, right
before rates shot up and bonds got pounded; the same thing
happened in 1994.
On Sept. 10, 2008, before the collapse of
Lehman Brothers, the Federal Reserve held $480 billion in U.S.
Treasury securities. By the end of 2009, the Fed held $1.84
trillion—including $1.2 trillion in mortgage-related securities
that the central bank bought up to keep the financial system from
Since spring, the Fed has essentially stopped
buying, but it still holds $2.04 trillion in bonds, up $1.5
trillion from the end of 2008. This massive buying, nearly triple
the amount that retail investors added to bond funds over the same
period, has helped drive interest rates to near-record lows
Meanwhile, foreign investors have bought $373 billion of Treasury
debt so far this year, or nearly 60% more than U.S. households
have put into all bond funds combined. If anybody is to blame for
a bond bubble, it isn't Joe Schmo; it's Uncle Sam, with some help
"The Fed has effectively been taxing money-market funds [by
cutting short-term interest rates] to recapitalize the financial
system and to make things easier on borrowers," says Dan Dektar,
chief investment officer at Smith Breeden Associates. What they
(retail) have been doing is responding rationally by moving out of
money-market funds. Nearly $500 billion has come out of money
funds so far in 2010. Thus, it seems, most people aren't selling
off their stock funds to buy long-term bond funds. They are
getting out of money markets and inching into short-term and
intermediate bond funds.
20% of all mutual-fund assets were in bond funds as of the end
of last year; as of the end of August, that had risen to 24%.
Harrisburg, Pa., warning that it "stands on the precipice of a
full-blown financial crisis," asked Friday for state help in
repairing its finances. Mayor Linda Thompson said she has asked state officials to declare the capital
city a distressed municipality under a 1987 state law that offers state help to
financially ailing municipalities.
The program, known colloquially as Act 47, offers guidance
on recovery plans, grants, loans and other forms of assistance.
Nineteen cities and other local governments, the largest of which
is Pittsburgh, are currently in the program.
Ms. Thompson, whose city is wrangling with $288 million in incinerator debt,
said seeking state help is only one step toward resolving Harrisburg's problems,
and that "there are many difficult steps to come." A city news release announcing the request was blunt in its description of how
deep a hole Ms. Thompson and other officials face, stating that a "looming cash
shortfall" threatens its ability to meet payroll and pay vendors.
In a statement, Pennsylvania Governor Ed Rendell said: "The mayor has taken a
responsible action in pursuing this course." He added the city of Harrisburg
faces a "difficult challenge" and " everyone has to leave their agenda at the
door and work out something that makes sense to restore the city's credibility."To qualify for state aid under Act 47, a local government has to first be
designated as distressed, meeting at least one of a number of criteria, like
skipping a bond payment or missing payroll for 30 days. Ms. Thompson noted that the city has skipped some payments on its incinerator
bond. Harrisburg faces a lawsuit over the missed payments, and is grappling as
well with a $4.5 million budget deficit this year. The decision to seek state aid comes after months of political squabbling over
how to deal with the city's crisis. The city council voted Tuesday to hire a
bankruptcy adviser and rejected state grants to pay for a different adviser
selected by the mayor to develop ways to fix its finances.
Harrisburg's mayor opposes bankruptcy, as does Mr. Rendell. He
urged the city against it when he announced state aid last month
that narrowly averted a general obligation bond default by the
city. As part of that aid, Mr. Rendell provided $850,000 in loans
and grants to pay for a financial consulting firm, Scott Balice
Strategies, that Ms. Thompson had selected in August. In rejecting
that aid, the council said the firm wasn't properly vetted.
Political sparring has complicated matters for the city, where
nearly one-third of 47,000 residents live below the poverty level.
Earlier this week, the city's 577 workers nearly missed
receiving their paychecks because of a standoff between the mayor
and the elected city controller, Dan Miller. Alan Schankel,
managing director at the financial firm Janney Montgomery Scott in
Philadelphia, said bond-market participants should see the
decision to seek out Act 47 assistance as a positive development.
"It's not bankruptcy, which in theory is a bondholder's
nightmare," he said. "It is an in-place process to address
distressed situations." Matt Fabian, managing director at
Municipal Market Advisors in Westport, Conn., said the fact that
so many other Pennsylvania cities are operating under Act
47—including Scranton and Reading as well as Pittsburgh—means
there's less of a stigma to it than a municipal bankruptcy.
"It requires outside experts, grants to pay those experts, and
gives better revenue and spending options to the city management,"
Mr. Fabian said. "The weak point is that city management remains
largely in control, and this, as we've seen, has been the crux of
Is Mish right and the unions control state and local government?
vetoed: 1- A measure barring municipal employment contracts
with automatic pay raises and 2- Legislation that would cap
In vetoing the Bell-inspired bill restricting pay
raises in employment contracts, Schwarzenegger wrote: "I share the
public outrage expressed over the abuses attributed to the city of
Bell's management of employee contracts. Assembly Bill 827
presents good public policy in that it provides transparency with
regards to some municipal personnel contracts, but it should be
applied to all public employees, including labor union members and
The bill to cap the amount of pay that
can be used for calculating pensions was not real pension reform,
the governor wrote in his veto message. "I am still hopeful that
the Legislature will pass an acceptable bill that addresses the
real cost issues that have driven up the liability in public
pension systems. For these reasons, I am unable to sign this
bill," he wrote.
Robert Rizzo - City Manager, Bell -- Salary
with 12% annual escalators and 70% pension guarantee: $787,637
This mugshot was taken after Rizzo's DUI arrest last spring.
At the root of all three announcements are "robo-signers,"
middle managers who sign affidavits that allow banks to repossess
homes that are in default, without properly reviewing the loan
documents. One GMAC employee, Jeffrey Stephan, admitted in
depositions that he authorized up to 10,000 foreclosures a month
without seeing the files associated with them. At Chase, Beth Ann
Cottrell, a robo-signer in Ohio, told a lawyer in a sworn
deposition that she signed off on about 18,000 foreclosure
affidavits and other documents a month without reviewing all the
McDonald's, in a memo to federal officials, said "it would be
economically prohibitive for our carrier to continue offering" the
mini-med plan unless it got an exemption from the requirement to
spend 80% to 85% of premiums on benefits. Officials said
McDonald's would probably have to hit the 85% figure, which
applies to larger group plans. Its insurer, BCS Insurance Group of
Oak Brook Terrace, Ill., declined to comment.
Some options for low-wage workers if they don't get health
insurance on the job
Under current system:
May be eligible for Medicaid, the federal-state
program for the poor, especially families with children
Can purchase private insurance on individual market,
but premiums are likely to be too costly n Hospital emergency
rooms must treat all comers without regard to ability to pay.
Some 1,200 federally funded community health centers
offer low-cost basic care.
Starting in 2014 under health overhaul:
Everyone with income up to 133% of federal poverty
level will be eligible for Medicaid. (Poverty level for
individual is $10,830 in 2010.)
People with income between 133% and 400% of poverty
level will be eligible for subsidized health insurance.
Premiums are capped at 2% of income for those at the lowest
end of that scale and 9.5% of income at the highest end.
Additional $11 billion spent on community health
The news about Obama's health care reform just keeps getting
worse -- and we only find these things long after the bill has
passed, of course. The newest revelation concerns a 3.8% tax on
income from home sales and home rentals which will go into
effect in 2013. (Note: This story has been updated to clarify
who the 3.8% tax impacts, see below.)
Depending on your
income level, this could end up costing you thousands of dollars
from the sale of a home (even if you're a middle-class income
earner). It would also place a tax burden on all rental income
from any home you might rent out to others.
How could this
be? Because the new health care bill imposes a 3.8% tax on
"unearned income" above a certain threshold (see below), which
includes income from any source that you aren't directly working
for. This includes interest you receive on a savings account,
dividends from stocks, rental income from a property you own,
social security income, unemployment checks, child support and of
course income from home sales.
While this tax is supposed
to be targeted to "the rich" with a threshold of $250,000 in
unearned income, it can very easily hit middle-class income
families who sell a house with a gain, forcing them to pay the
3.8% on a portion of their gain.
There is a lot of debate
on the 'net about who this affects and exactly how this is
calculated. That's actually part of the problem: Sorting out what
the law actually says is a bit of an accounting nightmare. As
Nancy Pelosi said, "We have to pass the bill so that you can find
out what is in it..."
As an article on Spokesman.com
explains: "Middle-income people must pay the full tax even if they
are 'rich' for only one day -- the day they sell their house and
buy a new one."
For further clarification, see
http://www.spokesman.com/stories/20... which states,
"ObamaCare imposes a 3.8 percent annual tax on investment income
of individuals making $200,000 or more and on families making
$250,000 or more. The new tax is not indexed to inflation, so more
people will fall under it each year. Seniors on fixed incomes and
people with IRAs and 401(k) plans will be hit particularly hard."
President Barack Obama on Friday officially announced the
departure of Rahm Emanuel as chief of staff, calling him a
selfless public leader and friend. Mr. Emanuel, who is exploring a
bid for Chicago mayor, said he intended to leave the White House
with the same spirit of public service he had observed in the
president. As he addressed the audience, Mr. Emanuel was near
tears at one point.
Goldman observed today that QE is priced into the bond
market, and well, duh! Your grandmother knows QE is
coming, and that more and more of every currency is being
manufactured right now.That doesn't mean it can't go on
for awhile, but it does mean that there's nobody not aware
of this trade.When well it end? Not clear, but come
November 2-3, if people are still long the QE trade, and
the Fed actually does deliver, we could be due for a huge
sell-the news event. Combine that with whatever happens
during the election, and it certainly seems like a heck of
a lot is building up to that day.
The economic recovery is largely stuck in neutral,
reports on manufacturing, construction and spending show,
and the president of the Federal Reserve Bank of New York
gave the clearest signal yet that the Fed was preparing
new actions aimed at boosting growth.
In a speech
Friday before the Society of American Business Editors and
Writers, New York Fed President William Dudley indicated
that the Fed, confronted with "unacceptable" conditions of
high unemployment and low inflation, is likely to take new
action to support the economy.
Mr. Dudley said
$500 billion in additional asset purchases would provide
stimulus equivalent to a reduction of 0.5 to 0.75
percentage point in the federal funds rate, the Fed's
typical lever for stimulating the economy.
A top Federal Reserve official said
Friday the central bank is almost certain to have to offer
fresh support to ensure that already tepid economic growth
does not further falter, although he stopped short of
saying what type of stimulus he prefers.
“The current situation is wholly unsatisfactory” and
“both the current levels of unemployment and inflation and
the timeframe over which they are likely to return to
levels consistent with our mandate are unacceptable,”
Federal Reserve Bank of New York
President William Dudley said in
a prepared text.
“We have tools that can provide additional stimulus at
costs that do not appear to be prohibitive,” Dudley said.
“Further action is likely to be warranted unless the
economic outlook evolves in a way that makes me more
confident that we will see better outcomes for both
employment and inflation before too long,” he said.
Dudley’s words marked him as the central banker most
explicitly concerned about the economy’s current state,
given that he has gone farther than others and advocated
that the central bank do more to help the economy beyond
its current 0% interest rate stance and its effort to keep
the size of its balance sheet steady at over $2 trillion.
a breakdown of the Fed’s hawks and doves)
His remarks Friday capped a heavy week for central
Larry Kudlow just insisted on
a rumor we've heard several times:
Bloomberg is going to be treasury secretary.Kudlow says he heard from "deep insiders" that the pick has been made and it's
Bloomberg. Of course this also confirms rumors that Tim
currently the Treasury Secretary, is gone after November. It also sets up Bloomberg for a presidential run in 2012 or 2016,
another recent rumor.
Total assets under management for U.S. emerging markets funds
is now pretty close to the peak level it hit pre-crisis and what's
striking is how quickly money has come back. Americans' invested
assets in emerging markets funds rose by more than 700% over just
five years ($20 billion in 2003 to $170 billion in 2008). It then
halved during the crisis, but now it's all come back. Americans
have doubled their investment in emerging markets, just since the
crisis, and it's more money added into emerging markets than was
added during the 10 years from 1995 - 2005. Love for developing
markets stocks has emerged from the crisis completely unscathed:
Federal regulators investigating the causes of the May 6
"flash crash" concluded a large trader's use of a computer trading
system to sell futures contracts led to a rapid and sudden selling
in an already unstable market.
The SEC's and CFTC's
recently released report on what caused the flash crash just
got interesting! While
live-blogging our reading of the lengthy report, we found their definition
of high frequency traders. It's interesting because everyone has a different
Here's the SEC's:
HFTs are proprietary trading
firms that use high speed systems to monitor market data and
submit large numbers of orders to the markets.
HFTs utilize quantitative and
algorithmic methodologies to maximize the speed of their market
access and trading strategies.
Some HFTs are hybrids, acting as
both proprietary traders and as market makers. In addition, some
HFT strategies may take “delta-neutral” approaches to the market
(ending each trading day in a flat position), while others are not
delta-neutral and sometimes acquire net long and net short
We assume this is an amalgamation of the definition given to
the SEC by the 36+ HFT firms they interviewed for the report.
The collapse in the next few weeks will be similar to the
collapse from April to July, Griffith says, putting his target for
the S&P 500 at 940.
If you think that's low, wait till the Alt-A mortgage rate
reset in March. "The dip this year is modest. The dip that
occurs next year is the one that risks taking major indices right
back to where they were in March '09," Griffith says.
The Cazenove strategist has a bearish election prediction too.
The market-friendly Republicans will win, but the loss will be so
"catastrophic" for the Democrats, it will make Obama an immediate
lame duck, hurting the economy.
“. . .we shall urge the greatest of caution upon everyone,
everywhere regarding gold. It is not just over-extended to the
upside; it is hyper-extended. It is not just overbought; it is
hyper-overbought. We cannot strongly enough urge everyone to avoid
buying gold here and we shall go so far as to suggest that those
who are long begin the process of quietly heading for the exits
and to reduce their positions to the most minimal ‘insurance’
positions possible. Everyone should have perhaps 5% of their
liquid assets in gold, but at this point anything beyond that
level is excessive.”
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important