Riding Herd on the Financial Range - # 9
Just follow the money
6.16.2009
Howdy Folks,
Over the weekend, I was thinking and working in our Victory Garden. I do not know why it is called a Victory Garden, we haven't anything to cheer about, but it gives us comfort to know we have a plan B when prices start to rise. Besides it is therapeutic; helps calm me down when I read things like this.
News from FBI director Robert Mueller warning the nation to brace for a potential crime wave involving fraud and corruption related to the economic stimulus package. He said, "These funds are inherently vulnerable to bribery, fraud, conflicts of interest, and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey." So much for Ol' Joe's oversight of our money. Just to keep this in perspective, of the $787 billion in stimulus, there is an "expectation" of losses up to $50 billion not considering the waste and pork in the other $737 billion.
Mr. Green Shoots himself: Federal Reserve Chairman Ben Bernanke bank released its monthly Beige Book report last Wednesday on economic activity, saying that five of its 12 district banks around the country reported that the downturn was moderating. Boy that is comforting.
In case you missed Inspector General Gate, Obama himself has taken time from his busy schedule to fire the Inspector General of Americorp, the domestic peace corp. It seems Mr. Walpin is guilty of a "loss of confidence." Wonder why? Well, it appears Mr. Walpin was doing his job, but happened to come down on Kevin Johnson, the all star NBA player and prominent supporter of the “One”, and now mayor of Sacramento. He did so for fraud surrounding a grant of $850,000 from Americorp to his St. Hope nonprofit. Unlike Ol' Joe, Walpin took his job seriously and started an investigation last year on how the group spent the money. He found that it was used for political activities, personal use by Mr. Johnson, etc. While the US attorney in California would not prosecute, Johnson entered into a plea deal to repay more than $400,000. Too bad that the nonprofit is now insolvent with no obligation on the part of Mr. Johnson to repay, so the taxpayer will never see a dime.
You might find it also a bit odd that the manner in which the gentleman was fired is also the subject of some controversy, since it goes against the IG Reform Act, which was to provide independence with a dual role reporting to Congress. None the less, the White House sicced the dogs on him and the guy got the call while in his car giving him one hour to resign. He didn't. You would think the President would have remembered how all this worked since he was the co sponsor of the bill, but then again he is also supposed to be a constitutional law scholar as well.
Some good news came out last Friday with a mild rise over the previous month in Consumer Sentiment. The index rose to 69 from 68.7. Keep in mind we were at 55.3 in November of last year, even if the forecast was for 71. Consumers' views on current conditions rose in June to 74.5 from 67.7 in May. Meanwhile, their expectations for continuing improvement fell to 65.4 from 69.4. Consumers' expectations for one-year inflation rose to 3.1% from 2.8%. Like I said, I think we are good through the summer, but then I have a bad feeling supported by these little snippets:
"It is as if everyone is waiting to see what happens next. Let's see...”
"We've seen one of the biggest stock crashes in history...
"..the biggest property crash in history...”
"..the biggest deficits in history (four times the previous record!)...
"..the biggest bailouts in history (we can't even count that high)...
"..the biggest bankruptcies in history...
"..the auto industry and the finance industry have been largely nationalized...
"..the president of the United States of America is now making financial decisions for formerly private industries...
"What's left to see? Oh yes...the depression...and hyperinflation.”
"But don't worry about inflation”, adds Harvard professor Gregory Mankiw; also in the Wall Street Journal, inflation is just what we need.
“In the current environment, the goal could be to produce enough inflation to ensure that the real interest rate is sufficiently negative...' to force people to get rid of their money as fast as possible.”
It is already more than sufficiently negative, but no one is consuming, but then again maybe we are broke.
Over in the bond market, investors are finding out what a little bit of inflation - or even hints of inflation - can do. People bought U.S. Treasuries during the panic of '08 for safety purposes. Now, they're getting what we predicted. I would like to point out again that prices of 10-year Treasuries have come down from $110 as recently as 5 months ago to just $94 this week. How's a 15% loss for safety!
I must say that the 30 year auction on Friday went better than expected, so I bought TBT the Ultra Treasury short because I’m suspicious when only Central Banks show up at a party.
Real investors are looking for more definitive signals of improving health, but the wished for green shoots are dying. Some disappointing economic data, led by a worse-than expected fall in the Empire Manufacturing Index, and an unexpected drop in homebuilder confidence, sparked the recent sell-off. Also, there has been a pretty good run of late so a pullback would not be unusual; the catalyst on top of bad news was merely aided by Barry's hitting the road with the must pass by summer recess show stopper; his 1.2 Trillion dollar national health care program. What’s the hurry this time? Are they afraid someone might actually read the bill?
So let me rummage around in the trash for the news that might be trying to sneak through while the people are focused on the wrongful firing of the IG of Americorp, the Uighers yucking it up in Bermuda, Sarah Palin ripping Letterman a new one, and Ol’ Joe missing the boat on the $103 million fraud using stimulus pork to remodel the school in NY that actually only cost $3.2 million.
I suppose you heard that China bought $80 billion in gold bullion today. That is 4 times their current holdings. You have read about their exodus from the dollar, so we assume this is just that. However, I am a little concerned about all this buying by China as it’s not really to meet current demand, but rather appears to me to be hoarding of commodities. Therefore, when the storerooms are full the buying will stop and commodity price might take a hit. We’ll be watching to see if there may be a good entry into commodities when it happens, so stay tuned.
The group of eight global finance ministers met over the weekend and broached the subject of reversing some of the global stimulus efforts in the most efficient manner. The group said they discussed the need to prepare appropriate strategies for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured. However, they said it is too early to begin reining in the more than $2 trillion in global stimulus, and U.S. Treasury Secretary Tiny Timothy Geithner said, "Growth should remain the principal focus of policy."
Market Watch Headline: the Chinese are still laughing, along with the rest of us. Apparently there is no shame in lying, but he must feel like a stooge when he goes on to say that if inflation starts he will get the debt to GDP ratio back to 3%. Three percent used to be the Treasury’s go to war level.
On a more personal note: Retiree With $60K of Income Too Wealthy for Benefits
Stunned by the latest report on looming shortfalls in the Social Security and Medicare trust funds, members of Congress are considering cutting benefits for wealthy Americans. Here’s the rub: Who is wealthy? Congress believes anyone making more than $60,000 a year. Meanwhile with the Bush Death Tax dead, last week the U.S. Senate voted 51 to 48 to permanently cut the death tax to 35% and exempt all estates of less than $10 million per couple.
Majority leader Harry Reid is furious with "just" a 35% tax. He'd like to punish anyone smart and hard working enough to become rich with a 45% tax rate. Of course the only sensible tax rate on someone's estate is zero. And this battle for lower death taxes isn't over. It goes to House-Senate conference next. Just think and try to realize that your elected leaders believe you should give up almost half your life's work just for dying!
Albert Hunt recently wrote an article that everyone should read; http://www.bloomberg.com/apps/news?pid=20601070&Sid=avCBPceUnoDE .
Here are a few of the highlights.
If a major overhaul of the U.S. health-care system, now President Obama’s top priority, doesn’t clear the House or Senate by the early August congressional recess, prospects of anything happening are dim. (Guess that answers the question, Why the rush?)
On Wednesday, a bipartisan study group headed by former Senate leaders Tom Daschle, a Democrat, and Republicans Bob Dole and Howard Baker will release recommendations. These will displease interest groups on all sides, and may also form a realistic basis for any final compromise. The committee will call for universal coverage and a radical change in the system of reimbursements, while offering only a minimal, perhaps fallback, plan for a public insurance entity, and spelling out ways to pay for it. These would include taxing employer-provided health benefits that exceed the generous federal health plan. That would raise more than $400 billion over the next decade, or one-third of the cost. The group will espouse other tax increases, such as those on sugary drinks, and savings of about $350 billion. That would achieve about two-thirds of the cost of the health-care reform. The panel will simply lay out options to consider for the difficult, final $400 billion.
There are reasons to be pessimistic: A six-decade-long history of failure; a sharp partisan divide; the need to enact tax and cost-control measures that will force some pain before any gain; the inevitable peeling-off of various interest groups that have been part of private deliberations, and the inherent difficulty of changing something that is 17 percent of the American economy and of personal concern to most citizens.
If nothing else, it is going to knock everything else off the news when the campaign really heats up. The Obamanation has geared it up to a “must win.” They can ill afford it bogging down. If they can't get it passed by August, the shine would definitely be off the rose as they say.
Your humble editor, Russ
About Russ Magarity
Jackson, Wyoming Distressed Patriot Russell Magarity and Chris Janelli, Chief Distressed Patriot, have been business associates and close friends since working together at Chase Manhattan Asia in Hong Kong. Russ grew up in Cuba and Panama and graduated from High School in Peru. He received a BA in International Relations from the University of Oklahoma (Norman), an M.B.A. from the Universidad Autonoma de Guadalajara (Mexico), and a Masters in International Management (with Distinction) from the American Graduate School of International Management (Thunderbird).
Russ spent his career with Chase running countries and managing corporate finance businesses in Brazil, Mexico, Hong Kong and throughout SE Asia. Prior to joining Chase, he served in the US Navy for 9 years first as a Midshipman and Naval Aviator. As a carrier pilot, he served 3 tours in Vietnam and flew over 250 missions.
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