Saturday, June 27, 2009

China Gold and Brokedown Budgets

While gold has fallen off of its recent high of almost $1K, it did rebound almost $30 in the last few trading days of the week. Perhaps it had something to do with this:

"Li Lianzhong, who is head of economics at the party's policy research office, said the U.S. dollar is poised for a fall, making gold and land better investments for China's $1.95 trillion in foreign exchange reserves, the report said. It quoted Li as saying Beijing should also focus on buying up energy and natural resources."

While the report was made by Marketwatch, The Economic Populist adds, "Now Mr. Liangzhong isn't just your average aparatchik in the Communist Party apparatus. He's the head of the party's economic think tank, and according to many like Jim Rogers, he has a lot of clout."

Foreign fears over our impending inflation and currency devaluation are certainly growing. The hard part is figuring out how and when a treasury dump will occur, spurring even more inflation.

Continuing on a theme from the most recent blog, most state budgets are up for vote next week for the impending fiscal year. Problem. Most states have a serious shortfall. Bigger problem. States can't run budget deficits. Huge problem. California already played its one-trick pony of no income tax refunds. CNN Money reports:

"In some states, the leaders aren't even talking. Pennsylvania's governor and Senate Republicans, who have to close a $3.2 billion gap for the current year, are not negotiating on their budgets. The governor's $28.4 billion budget seeks to raise the personal income tax rate by half-a-percentage point and draining the commonwealth's $750 million rainy day fund. Senate Republicans' $27.3 billion plan looks to cut spending on areas such as education and community revitalization."

So what does a state do when it's out of money? The choices aren't great. "Sometimes, however, the government faces a shutdown. When Tennessee officials failed to pass a budget on time in 2002, classes stopped at public universities, drivers licenses were not issued and road construction ceased. Pennsylvania's Rendell has already said state workers would have to stay on the job without being paid if the budget isn't approved. Services will start to be affected if the budget standoff continues beyond its typical week's delay."

And California? Ugggh. "Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said. "The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."

Here in Florida, we have a unique summertime opportunity for the entire state to crash. As my Dad was kind enough to point out, the CAT, or catastrophe fund, is underfunded by $19 billion. Let's all hope for a mild hurricane season.

Wednesday, June 24, 2009

Philadelphia Freedom

"At the moment he could not see clearly enough ahead to know one way or the other. Something to save us, he thought; something to doom us. It-the equation of everything-could go either way."

Philip K. Dick, A Maze of Death

Sorry for the prolonged absence, just got back from a much needed mini-vacation to the City of Brotherly Love where my brothers and in-laws live. A quick trip to Atlantic City revealed the slowly dying carcass of a town that will lose doubly bad as it ramped up at the worst time in an effort to compete with Vegas. Soon to be passed (slots are already in place in Philly) legislation in both Pennsylvania and Delaware legalizing gambling is going to spell continued doom for AC. Free room comps during the week are common and even the Borgata (that buffet was good!) is offering $99 rooms during the summer. I entered my first Hold Em' tournament with my older brother and we both did reasonably well, finishing in the top 25 out of 104 players.

The quote above from Dick kind of sums up where we are. Treading in much murkier water than the government would have you believe, the markets are kind of floundering. Despite a 200-point plunge on Monday, the market is shooting up today even though continuing jobless claims are a grim reminder of how bad the real economy is (Sorry, Markman, have no idea why you thought they'd decrease by 40K and if the June number comes in at only 275K losses, than you must actually be working for the government).

Moody's says credit card charge-offs are now officially over 10%. In case you haven't seen the news lately, California is bankrupt. And I can't imagine that they're the only state bleeding money (I know Florida is, we have no revenue, no tourism, and no construction). It should be interesting to see what the government is forced to do when California is unable to cut spending any further...... says 30-year mortgages are now up to 5.8%. New home sales slipped and shockingly, builders like Lennar continue to lose money. But don't take my word for it. "While there are buyers in the market, they lack confidence, and they're worried about their own jobs and the economy in general," said Douglas Yearley, regional president at luxury builder Toll Brothers Inc. "We're also in a vicious cycle when it comes to capital," Yearley said. "Banks have tightened their lending standards, which is limiting the number of buyers that are eligible for financing. This decreases the demand for homes, which causes home prices to further plummet."

Thursday, June 18, 2009

Fed Overhaul

"Hey, Timmy, Benji here."
"BB, what can I do for ya!"
"Timmy, I officially need your approval to write blank checks for the big boys in emergency situations. So what do ya say to half a tril' in ABC money?"
"No problem, Benny boy, I've got a big pile of rubber stamped permission slips right here."

So the charade continues. With promises about limits on leverage and new oversight on too big too fail companies, Obama intends to appease us, unemployed and 40% less wealthy. Notice the CEOS and managers responsible for these huge debacles will not be replaced and that there was no mention of caps on pay. Ultimately, Obama's plan would leave even more power in the hands of the Fed, enabling the oligarchs to consolidate power even further.

The day after my last post, we did see 2 consecutive markets with greater than 1% moves, fortunately to the downside. As new data rolls in, the persistent optimism over the slightest economic improvements seems to have waned as the reality of slightly better than horrible still isn't that good.

S&P downgraded 23 banks yesterday on a reality check and GS' chief economist thinks we're due for a pullback. Really? Wonder if GS has already placed their bets?

Martin Weiss pointed out in his article this week that the economy is in horrific shape, even with govt. stimulus which will only delay the death throes:

"The first quarter brought the greatest credit collapse of all time. Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year!"

So where exactly will the spending and new business come from? Combine this with steep YOY declines in container data shipping into our largest port at Long Beach, and watch the green shoots wither come Q3.

Sunday, June 14, 2009


In case you hadn't noticed, this market is going nowhere, literally. We've had over a week's worth of trading in which the Dow moved less than 1%, the longest streak in quite some time. During those days, the market had been up or down more than 100 points several times, only to see the last 15 minutes of the day sap or improve gains dramatically (electronic trading/hedge funds? yep.). Even with futures pointing to triple-digit moves, by the end of the day, we've been left with no answers. Here are some things from the past week that I think still need answers.

1. 30-year treasuries keep rising and mortgages hit 5.59% this week (without points, much higher). What happens when we go above 6% and the current and shadow inventory crush home prices again?
2. Is TARP a scam to build reserves in banks so they can buy treasuries at discounted rates (can they buy $1.5 trillion though)?
3. Lewis vs. Bernanke in battle of perjury. Ohio Rep. Dennis Kucinich already stated he thought Lewis perjured himself this week before Congress. But how will Bernanke and Paulson refute the email evidence when it's their turn to testify?
4. Will the G-8 minions succumb to more U.S. pressure to ignore huge holes in their banks' balance sheets, or will they heed Germany's hyper-inflation warning stemming from the U.S. printing press?
5. And, on an unrelated note, can someone explain to me why Boston's Dustin Pedroia and David Ortiz have combined to hit 5 HR this year in almost half a season? Oh wait, I think I got it....

Wednesday, June 10, 2009

Blood In, Blood Out

Also known as "Bound By Honor," this is a fantastic epic depicting the struggles of a Chicano family in East L.A. torn apart by violence, drugs, and prison/gang ties. The movie stars a young Benjamin Bratt, but features a star cast who mostly play serious criminals like Delroy Lindo, Ving Rhames, and even Billy Bob. Of course, you can't have a prison movie without the ever present Danny Trejo (a real ex-con) there to shiv somebody if needed.

In reference to our current economic catastrophe, the "bloodmoney" we've pumped in has temporarily functioned as life support for our banks, but may be quickly pumped out due to the massive debt/GDP ratio we're establishing.

First, oil cracked $71 today and with summer driving season here, don't expect a collapse yet. Second, and maybe a much more ominous sign, Russia declared that they will dump U.S. treasuries for IMF bonds, a mere $10 billion worth. A drop in the bucket for now, but if China and Japan follow suit, we will be left holding an even larger toxic bag. Finally, mortgage applications continue to plummet at an accelerated pace. With 30-year rates rising to the mid 5% range, and let's be honest, nobody is actually getting a mortgage at that rate without paying points, and let's be honest, nobody can afford to pay points, so the average is actually sitting closer to 6%.

So again I ask, rising mortgage rates despite massive government intervention, a sharp rise in commodity prices, specifically oil, and fears over our inability to sell more debt to foreign countries being realized, doesn't this seem like last year?

Any chance Elizabeth Warren gets her way and we re-stress test the banks with the criteria on the table this time for all to see? Probably not, but would be nice. Also, should be interesting to see Obama's plan for corporate governance next week. Will this include further breach of current contract law as we've seen with the Chrysler sale where preferred bondholders just got screwed out of their turn? Any of the lawyers out there care to comment on this?

Sunday, June 7, 2009

Birth-Death Model

No, this isn't a recent summation of our capital markets, it's the antiquated method our government uses to calculate unemployment figures. The same formula that magically yielded 200K less job losses than ADP numbers, you know, the company that actually looks directly at payrolls. No, the BD is much better. It tries to estimate the number of new jobs created by LLCs and new filings against companies that go under. The truth is, most of these LLCs only superficially "create" 1 job, and most of these companies fail in the first six months. My wife for example, formed her own LLC for her marketing venture, Brand You. Fortunately, she is still up and running and she has actually created a job. Perhaps the BLS looks at Brand You and says, hey, there's a marketing company, 20 jobs created! Well done. Meanwhile, companies like AmEx and GM lay off a few thousand people, but somehow the numbers seem to add up. It was interesting to note that despite the initial jump in futures, the markets finished flat, perhaps finally in disbelief of the bogus numbers we've been fed for months now.

Consumer credit managed to fall by another $16 billion in April, just short of March's record. With unemployment very unofficially at 9.4%, it's quite unclear as to where the green shoots of spending are actually taking place. Retailer numbers for May were awful, much worse than expected. I've recently been inundated with Dunkin' Donuts coupons (something I've never received before) from corporate and local participants. I commented to my wife that I think they're trying to put the boots to Starbucks rotting carcass, but she wondered if they're just trying to make up for lost commuter business during the week. Well, for a grand total of $6 for 2 lattes, 2 sandwiches, and a few munchkins for my girls, I'll take it either way.

I'm curious to see why Timmy has requested a Congressional audience this month. Is it to inform us that China is going to play ball with our treasuries, or to pump up the markets after some impending bad news? Always a pleasure to watch him talk and say nothing.

Wednesday, June 3, 2009

Goldfinger and GM

In the 3rd installment of the Sean Connery era of Bond films, he matches wits against the title's antagonist, Auric Goldfinger. Along the way, we are confronted by some of the best character names in movie history, Pussy Galore and Oddjob. Goldfinger's master plan is to irradiate the gold supply at Fort Knox, thereby rendering it useless for decades and making his pile of gold worth a fortune.

While Goldfinger was thwarted by Bond, we are seeing market antagonists place their bets against Big Ben and his central banker oligarchy in the form of gold purchases. As I previously mentioned, John Paulson and David Einhorn have purchased hundreds of millions of GLD. This week, Northwestern Mutual (yes, the life insurance company), announced the purchase of $400 million of gold as a hedge against declining assets. Doesn't sound like these guys are betting on this rally lasting, more like betting against the success of the printing press.

Throwing his hat into the ring this week is Nassim Taleb. The hedge fund he advises is creating a "hyperinflation fund." "Universa’s bet on inflation means investing in commodities like crude oil, corn and copper, according to the WSJ, as well as options on stocks like oil drillers and gold miners. It also means, perhaps crucially, shorting US Treasuries at a time when the Fed is actively trying to boost their prices in a bid to stave off deflation."

Anybody else appalled that our country's markets celebrated the official demise of GM with a 220 point gain? Hey, I know this means tens if not hundreds of thousands of people just lost their jobs or had their pensions pissed down the drain, but our crystal ball is now clear for market gains. Well, maybe not so fast. The 30-year mortgage has risen .32% in the last 3 days, and actually getting a mortgage anywhere near that means paying points. Bernanke climbed out of his hidey-hole today to inform Congress that there's a lot more money out there all of a sudden, and maybe you should start thinking about how to reign it in eventually (has he tipped his hand on inflation?). The ADP jobs numbers were worse than expected, as if half a million people losing their jobs every month is good news anyway.

Banks raising capital on a daily basis, large insurers issuing profit warnings, airlines with diminished load factors, gas rising 20 cents every two weeks, stellar retailers like Williams- Sonoma having negative quarters, and Bernanke evading questions on Capitol Hill. Remind you of anything?