November, Monday 07,2011

US Poverty, Supercommittee, Euromess, Transparency

DOW +85 = 12068
SPX + 7 = 1261
NAS + 9 = 2695
10 YR YLD -=1.99%
OIL + 1.70 = 95.96
GOLD + 41.60 = 1796.60
SILV + .85 = 35.08
PLAT +23.00 = 1663.00

Over the past four years, what single thing has increased the net worth of the average American more than any other financial move? Defaulting on an underwater mortgage.

Households have reduced debt by $549 billion since 2007, mostly by cutting mortgages through defaults and paying down credit cards. Households have cut mortgage debt by 10.6% since the mid-2008 peak, after adjusting for inflation. Credit card balances and auto loans outstanding are down 9.6%. During that time, the federal government has added more than $4 trillion in debt, pushing the country's total borrowing to a record $36.5 trillion, excluding the financial industry, according to the Federal Reserve.

Private borrowers reduce debt quickly, government borrows more, a period of government austerity follows 

Have no fear – Congress is looking into fixing the debt problem.

Just as 55 million Social Security recipients are about to get their first benefit increase in three years, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families -- the biggest impact will hit low income families.

If adopted across the government, the inflation measure would have widespread ramifications. Future increases in veterans' benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance than under the current measure.

Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.

The proposal is gaining momentum in part because it would let policymakers gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. Changes at first would be small -- the Social Security increase would be cut by just a few dollars in the first year.

But the impact, as well as savings to the government, would grow over time, generating about $200 billion in the first decade and much more after that.

It is one of the few options supported by both Democratic and Republican members of a joint supercommittee in Congress working to reduce government borrowing.

The committee of six Democrats and six Republicans is struggling to come up with a plan to reduce government red ink by at least $1.2 trillion over the next decade. Changing the inflation index alone would put them a sixth of the way there. Have no fear, Congress is working on the debt problem. Just a little basic math; $1.2 trillion over 10 years is $120 billion per year. So at this pace we’ll get back to a budget surplus approximately, let me do the math here…, approximately…,

Never.

The number of poor Americans hit a record 49 million in 2010, or 16 percent – this according to new figures released today by the Census Bureau, and this compares to a report released in September showing 46.2 million Americans are considered poor. Among the hardest hit are the elderly, Asians, and Hispanics.

Now let’s turn our attention to the situation in Europe: Paul Krugman described today’s Euro fantasy best:
”What we need now is really bold leadership from European politicians and the ECB. Also peace, love, brotherhood, and a pony for everyone, which seem about equally likely.”

Greece is trying to form a new government. George Papandreou is out. Lucas Papademos, the former executive at the ECB looks to be the successor. The political landscape in Greece almost makes you feel good about the politicians here in the USSA. Almost. Just because Greece has a new government does not mean they will correct the problems. And for the Greek people, the reality is that the beatings will continue until morale improves.
 

The G-20 Finance ministers are meeting again, and things are complicated. One Euro zone leader was quoted as saying: "We exhausted our scope for concern with Greece. The main concern of the ministers now is Italy and the leveraging of the EFSF." Meanwhile France announced new austerity measures to try to shore up its Triple-A rating.

How will they pay for all these proposed bailouts? One idea is to use actual money.

Germany has rejected proposals by France, Britain and the US to have German gold reserves used as collateral for the euro-zone bailout fund.

Germany Economy Minister Philipp Roesler said the German people's gold reserves cannot be touched and “must remain off limits."  

The Irish Times reports that today’s finance ministers’ discussion is part of a wider strategy by the ECB to sound out the possibility of gaining control over the gold reserves of the euro zone’s central banks. And today, the World Gold Council reports that as of the end of October, Italy had 2,451 tonnes of gold, or right about $61 billion dollars worth. Gold’s value as money and as a strategically important monetary asset is being slowly realized again. Today the value of Italian bonds was being recognized, as the yield hit 6.66%. Yep 6-6-6; these are new Euro-era records for Italian bonds and near the levels that forced rescue efforts for Ireland, Greece, and Portugal. Italian bond yields later fell back slightly, apparently as rumors spread through the markets that Mr. Berlusconi was intending to step down.

Mr. Berlusconi denied the speculation. Yet the markets seem to be saying that they would be happier about Italy’s future if he were to relinquish power.

When push comes to shove, what asset holds value; those devilish Italian bonds or gold? And so we are starting to see the extortion attempts. The next question is whether liquidation of gold reserves would push gold prices down? The answer comes from China.

The Financial Times reports that Chinese gold imports jumped to a record high in September, as monthly purchases matched almost half that for all of 2010.You may remember that gold prices moved from $1920 to $1534 in September – This indicates the Chinese were buying the dip, and I think this also gives us a very strong level of support, or a floor under the price of gold.

And European debt? Who holds it? Apparently not Jeffries, which is a small to mid-sized investment bank, which is trying to stop speculation that it wandered down the same path as MF Global. Today, Jeffries was putting out multiple press releases showing how they were dumping European sovereign debt, and detailing the trading activity in those bonds, and the lunch orders of the traders trading those bonds, and the idea was that they have almost no exposure to Europe, and the PR campaign seems to be working. What we didn’t learn is the greater fool they offloaded the bonds to. Still, thanks to Jeffries for being transparent.

Meanwhile, do you remember a few years back when Warren Buffett called derivativatives “Weapons of Mass Destruction”. Turns out The Oracle of Omaha is not afraid to play with fire.

Berkshire had $29.7 billion in credit-default swaps linked to its debt as of Oct. 28. Interesting figure - $29.7 billion - just under a $30 billion threshold proposed last month by the Financial Stability Oversight Council. Anything over $30 billion qualifies as too big to fail and is therefore subject to extra scrutiny from regulators. So we won’t be getting the details from Uncle Warren.

Meanwhile, the Bank of International Settlements estimates that U.S. banks now have exposure to PIIGS debt in the neighborhood of $80 billion to $518 billion, or maybe its $767 billion depending on how you measure exposure. Would you buy a house without looking at it? Would you buy a car without a test drive? And that’s the problem – we really don’t know the exposure.