Monday, November 21, 2011

November, Monday 21, 2011

DOW – 248 = 11547
SPX –22 = 1192
NAS –49 = 2523
10 YR YLD -.05 = 1.96%
OIL+.13 = 97.80
GOLD –47.50 = 1678.30
SILV - .77 = 31.74
PLAT – 46.00 = 1556.00

The Super Committee is dead. The committee suffered from a deficit of common sense and patriotism combined with an excess of partisanship and dogma; the combination proved fatal. Of course, whenever there is a monumental failure in Washington DC, the politicians deny culpability and the taxpayers will be forced to pay.

Any member of Congress facing a close race can breathe a sigh of relief now that the supercommittee has kicked the bucket. For Republican incumbents they don’t have to face the prospect of voting for tax increases; for Democratic incumbents they don’t have to explain cuts to social programs. That said, new candidates for office have also been given a gift. Congress’s approval rating is at record lows and the supercommittee’s failure only serves to underline the fact that those in office right now probably aren’t the ones who are going to fix the budget. The bottom line – they’re all a bunch of pathetic losers.

 November 23rd is the official deadline for a deal, but today is the effective deadline since the Congressional Budget Office would need time to evaluate a proposed solution. Failure to reach a deal on deficit reduction would trigger $1.2 trillion in cuts over the next decade, beginning in 2013. Of course that leaves plenty of time to kill off parts that the politicians find onerous. If nothing gets done in the next couple of days, the budget probably won’t be addressed until 2013, because 2012 is an election year and the politicians are going to focus on the election rather than actually doing their jobs.

Several temporary tax breaks are set to expire at year-end. And without a budget deal they might vanish, that includes the Obama payroll tax cut, also a patch to prevent the alternative minimum tax from hitting middle class taxpayers, also business credits for research and development, and extended unemployment insurance is scheduled to expire at the end of the year; it’s expected that by mid-February more than 2.1 million people will get kicked form the unemployment benefit rolls. The loss of unemployment benefits, combined with an expiring payroll tax cut, would shave 0.75 percentage point from GDP growth.

The National Association of Business Economics, or (NABE),is  a professional association of forecasters. The NABE says the U.S. will avoid slipping into another recession but growth will remain so anemic that the high rate of unemployment will barely budge at least through the end of next year. They predict Gross Domestic Product, or GDP, will grow 2.4 percent for all of 2012. Although that's better than the 1.8 percent GDP growth predicted for 2011, it's still too slow to make much of a dent in the unemployment rate, which has been stuck at 9 percent or higher since March. These economists are truly amazing. The economy fell into a hole in 2008, we never climbed out of that hole, so according to the economists, we’re not in a hole – it’s the new normal.  The NABE prediction probably doesn’t include the effects of the failure of the supercommittee.

Today’s failure shouldn’t be a surprise to anybody. There is too much debt. The truth is that we can’t and most likely won’t repay the debt. The supercommittee deal was a joke from the beginning; it was supposed to reduce the deficit by $1.2 trillion over 10 years, or $120 billion a year, and that’s not enough to get us back to a surplus. There will be consequences.

Interest rates will likely rise – not today because the situation is Europe is so bad that money is still moving into dollars, but over time, interest rates will rise, and that means mortgage defaults could climb and more people will lose their homes; small business loans will be even tougher to get and fewer small businesses will survive. In Washington DC today, the lawmakers are trading blame – nobody is willing to accept responsibility. Both sides are at fault – both sides deserve blame.

When S&P downgraded US credit in August, the Dow plunged 600 points in a single day and 2,000 points over two weeks. The failure of the supercommittee probably won’t result in a further credit downgrade. The ratings agencies already know the politicians are dysfunctional.

Meanwhile, Moody’s rating agency said that a worsening in the French bond market – higher bond yields coupled with weak economic growth, and the spreading of the Euro debt crisis -- posed a threat to France’s credit outlook, though not at this stage to its actual Triple-A rating. Moody’s says: "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications."

The problems in Europe have sent money into the perceived safety of the dollar and US treasuries. The 10-year note is yielding just 1.96% and the dollar index is up to 78.46.

Yields on Italian and Spanish debt continue to rest near 7% — levels never before seen in the history of the euro zone; levels that are considered unsustainable— while worries over a breakdown in interbank lending remain a serious concern.

Spain's Socialists became the fifth government in the 17-nation single currency area to be toppled by the debt crisis this year. Portugal, Ireland, Italy and Greece went before.

To stave off increasing yields, last week the European Central Bank increased its purchases of sovereign bonds to 7.99 billion euros up from 4.48 billion the week before. Two newspapers said the ECB's governing council had imposed a weekly limit of 20 billion euros on purchases of euro zone government bonds. But to date, the ECB says it will not do more — that is, the ECB will not guarantee the sovereign debt of any one country.

The debt problems in Greece and Italy and the rest of Europe are just part of the problem. The big debt problem is right here in the USSA. To understand the US financial position, just remove 8 zeroes and pretend it’s a household budget: (The analogy was originally suggested at

Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
The US is trying to bring their budget under control. This year they implemented total budget cuts of $385. Assuming they don’t spend more than they raise in taxes, it will take them 370 years to pay back this debt. The bi-partisan US Super Committee is currently discussing proposals to cut spending by $12,000 over 10 years. At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.
That should clarify the position.

In 2001, the Congressional Budget Office (“CBO”) forecast average annual surpluses of approximately $850 billion from 2009–2012. With the budget balanced and forecasts of ever-larger annual surpluses indefinitely, the CBO estimated that Washington would have enough money by the end of the decade to pay off everything it owed. The surpluses never emerged.
Instead, the US government has run large budget deficits of approximately $1 trillion per annum in recent years. The major drivers of this turnaround include: tax revenue declines due to recessions (28%); tax cuts (21%); increased defence spending (15%); non-defence spending (12%) higher interest costs (11%); and the 2009 stimulus package (6%). The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.
Between 1981 and 1989, under President Reagan, tax cuts and peacetime defense spending contributed to an increase in the debt of $1.9 trillion.
Under President George Bush Senior, the national debt increased a further $1.5 trillion, driven by the costs of the first Gulf War and fall in tax revenues from a recession.
Under President Bill Clinton, national debt increased $1.4 trillion. There were large budget surpluses in some years, but increased spending added to the debt.
Between 2001 and 2009, President George Bush Junior added $6.1 trillion in debt, driven by the wars in Afghanistan and Iraq, tax cuts and revenue losses of the economic downturn that started in 2007.
President Barrack Obama added a further $2.4 trillion in debt. The major contribution came from stimulus spending to counter the effects of recession, tax revenue losses due to the downturn, extension of the Bush tax cuts and the continued cost of two military actions.
The US budget deficits and debt problems are apolitical, with bipartisan contribution to the accumulated mess. The debt problems resemble a prison full of convicts awaiting an appeal - everybody did it but no one is responsible.

MF Global filed for Chapter 11 bankruptcy on October 31st. Since the filing, customers’ accounts have been frozen. The problem was that MF Global had allegedly commingled customers’ accounts with the company’s own trading accounts. MF made a $6.3 billion dollar bet on European sovereign debt – they lost that bet, and it looks like they lost about $600 million out of the customers’ accounts, which should have been segregated  – at least that was the initial estimate. Now the bankruptcy trustee says it might be double that amount - $1.2 billion
The trustee hopes to free up about 60% of customers’ accounts by early December. Merry Christmas. If this doesn’t shake your confidence in financial institutions, I don’t know what will. This has been a monumental failure on the part of FINRA, the CFTC, the CME, and SIPC – but don’t worry – there’s an investigation under way. If I went to the grocery store and stole a gallon of milk, they would throw my butt in the hoosegow, however when $1.2 billion goes missing they will investigate.
So, there’s a shortfall of $600 million or $1.2 billion. What we have here is a failure in basic mathematics.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.