Saturday, November 14, 2009

What Could Possibly Go Wrong With the Recovery?

Just one month into the 2010 fiscal year, the U.S. government is on track for a record $2 trillion annual budget deficit.  That’s the word from the Treasury Department, which quietly announced a $176.4 billion October budget deficit yesterday.

The U.S. government finished its historic streak of debt sales today with a record $16 billion offering of 30-year bonds, auction results on the weak side. This was on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question. 

If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast.

The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

The U.S. is not Japan, We are Worse
the US economy is not exactly like the Japanese economy. Japan had high savings…and a positive trade balance. It could run up huge government debts and “owe it to itself.” It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds…or selling them suddenly.

America’s government debt is different. The US doesn’t save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America’s ability or willingness to repay its debts, they’ll drop the dollar like an annoying girlfriend. 

FHA Cash Reserves At All Time Low
The Federal Housing Administration said Thursday morning that its cash reserves had dwindled significantly in the last year after a record drop in home prices.

The results of the F.H.A.’s annual audit showed the agency’s capital reserves to be 0.53 percent, far under the 2 percent minimum mandated by Congress. A year ago, the capital reserves were 3 percent.

It is tightening loan standards in hopes it will not become another drain on the United States Treasury, but is reluctant to clamp down so much that it snuffs out the tentative recovery in housing.

During the news conference, Secretary Donovan and the agency’s commissioner, David H. Stevens, said that the cash reserve, the figure that has fallen to 0.53 percent of loans outstanding, was merely a supplement to a much larger fund that the F.H.A. was holding against expected losses. Between the two accounts, the agency has $31 billion to cover losses over the next 30 years.
Barofsky Says TARP ‘Almost Certainly’ Will Bring Loss to U.S.

New Mortgage Applications Plummet
Housing demand is not sustainable. Applications for new mortgages, announced Thursday morning, dropped sharply in the previous week to levels not seen in almost a decade. This decline was consistent with Toll Brothers' (TOL Quote) conference call on Wednesday, in which the company's Chairman described demand since Labor Day as uneven.

I don't see what replaces housing as a driver to growth -- the sector was responsible for over 40% of job growth in the 2001-2007 period.

IEA Says Rising Oil Price Risks Derailing Economic Recovery
The International Energy Agency Thursday revised it 2010 world oil demand forecast slightly higher, but warned that rising crude prices, if sustained, risk smothering the fragile economic recovery underway.

Dollar Dying
We have a Federal Reserve and Treasury which have agreed to double team the ailing dollar as they print money to no end and effectively punish the prudent while rewarding the speculators (the same bastards that helped create this mess to begin with).  Our tax issues have not yet reared their ugly head, but trust me, they are coming.

Massive Govt Revenue Shortfalls
What we haven’t quite dealt with is how the government is going to overcome their massive revenue shortfalls and ever expanding debt.  As Jim Jubak recently described, they are going to come back to the consumer for another blow to the knees.  No, the bailouts weren’t enough.  Destroying the dollars in your pockets isn’t enough. Because of their fiscal irresponsibility they are going to raise your taxes in 2010.  And don’t be fooled.  The income tax may not spike, but they will get you in every other way they can. Sales tax, real estate taxes, etc etc. You are paying for their mistakes. Whether you were prudent or not.

Municipalities are in financial disarray and won't provide their normal anchor to growth - 10 states face financial peril
Dropping tax revenue, rising unemployment and yawning budget gaps are wreaking havoc in states from Arizona to Wisconsin, a new report shows. The 10 most troubled states are: Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.

Already, less than five months into fiscal 2010, several states are looking at additional budget cuts.

And in California, Gov. Arnold Schwarzenegger said Tuesday that his state is facing a budget gap of up to $7 billion.  Budget projections show that states could face deficits as large as $260 billion in 2011 and 2012 after stimulus funding is exhausted. State economies usually take up to two years longer to recover after the nation's fiscal health begins to improve.

Yet More Bubbles & A Warning from Donald Tsang

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

A sampling of recent inflationary developments
* A 15 percent increase in health insurance premiums for small businesses

* A 50 percent increase in car rental costs

* A 15 – 25 percent increase in long-term care insurance rates for California retirees

What Could Possibly Go Wrong? S&P 1200 here we come

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