Federal Deficit Balloons, Financial Warning Signs, Small Cap Breakout, and More!

by Addison Wiggin & Ian Mathias

  • Federal spending on track for annual record… just how big is $3 trillion?
  • Financial CEOs sound warnings… predictions from leaders of JPM and AIG
  • Market rallies… Greg Guenthner on the sector looking ready to break out
  • Oil hits new high, but suddenly retreats… why the world might be using less crude over the next few months
  • Retail sales sink in U.S… the one glimmer of hope in the latest retail roundup

The federal government has spent over $1.7 trillion in the last seven months. The Treasury Department quietly unveiled its midyear budget report yesterday… I.O.U.S.A. is still on track to have the first $3 trillion budget in the history.

How big is $3 trillion?

Let’s see… try combining the market caps of Exxon, GE, Microsoft, AT&T and Wal-Mart… and then throw in the entire annual GDP of Canada. That’s $3 trillion.

But here’s the travesty. Following its usual modus operandi, the federal government is far outspending its income. The U.S. federal deficit expanded by $152 billion in the first half of the fiscal year — nearly double the $80 billion deficit accrued during the same period in 2007.

Like the record-setting budget, this president and this Congress are on track to top the all-time-pathetic $413 billion deficit in 2004.

And it’s only going to get worse. The Treasury waited an extra month to release budget data so that government tax revenues could be included. But somehow, when calculating the federal deficit, they conveniently left out the $110-150 billion stimulus spending.

The government isn’t the only institution teetering on the brink. Here are a few more. (Notice how their leaders admit there might be a problem, though.)

“The recession just started,” Jamie Dimon, CEO at J.P. Morgan announced yesterday, speaking at The UBS Financial Services Conference. “We’re thinking there’s a third of a chance that it’s going to be pretty bad… closer to the 1982 recession than the very mild recessions we had in 2001 and 1990… Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession.”

Dimon also suggested that J.P. Morgan is still in danger of getting sucked down by the credit crisis: “I want to make it perfectly clear,” he said “mission not accomplished.” He added that “an awful lot of risk,” remains in their acquisition of Bear Stearns.

“AIG is in a crisis,” Maurice Greenberg chimed in yesterday. Greenberg is the firm’s former CEO and its biggest shareholder.

In a letter to AIG’s current board, Greenberg begged to postpone the annual AIG meeting. AIG has already announced a $7.8 billion loss for the first quarter and has revealed plans to raise $12 billion in emergency funding. According to Greenberg, that’s just the beginning.

“The company’s problems are more than financial,” he wrote, “and extend far beyond its subprime credit exposure or approach to capital management. Core businesses are also deteriorating. Shareholders deserve to know how this decision was reached and what other alternatives were considered and evaluated.”

MBIA unveiled a dreadful quarter of its own yesterday.

The bond insurer lost over $2 billion. That’s a quarterly loss of $13 a share… 40% more than the $9 MBIA currently trades for. The insurer lost over $3.5 billion on derivatives bets, and admitted that nearly a quarter of its assets are the same type of “level three” assets likely to be realized as losses in the future.

Sounds like a AAA-rated organization to us. Doh.

So… here’s a question: Add together a dismal report on government spending from the Treasury… big losses from three key financial institutions… and a few gloomy forecasts from banking insiders… and what do you get?

A big rally on Wall Street! (Ha, trick question.)

“Investors” were expecting an even more catastrophic quarter from MBIA, and thus bought the bad news. MBI rose 7%. Financials in general led the broad market to gains. The Dow and S&P perked up about 1%, while the Nasdaq gained 1.6%.

“Since March 10,” notes our small-cap adviser Greg Guenthner, “the Nasdaq is up more than 11%. The Russell 2000, our small-cap benchmark index, has, essentially, mirrored this performance. Technical indicators suggest we are very close to a breakout.”

Check out this long-term look at the Russell 2000 doing what chartists call “testing resistance.”

“We’re not ready to cry victory just yet,” Gunner says “but it’s a move in the right direction.” For more, including the buy signal Gunner’s waiting for, check out Bulletin Board Elite.

Retail sales declined in April. Consumer purchases, says the Commerce Department, dropped 0.2% during the month. People bought fewer cars than in the month before… but other people who count things like that expected it, so it didn’t come as a surprise to anyone. And as you might expect with gas prices these days, consumers bought less of the stuff than they did in March.

Rising gas prices helped boost the cost of imports coming into the U.S., too. Import prices rose by nearly 2% last month. But even if you strip out energy costs… imports still rose by 1.1%, reflecting rising inflation in export countries like China.

And wouldn’t you know it, as consumers pull back here in the U.S., retail sales in China are growing at their fastest pace in nearly a decade. Retail sales there rose 22% in April, after March’s measly 21.5% rise. At the current clip, the Chinese retail sector is growing at its fastest rate since 1999.

In all of 2007, China’s retail sales rose 16.8%. The U.S. retail sector grew 4%.

But there is one ray of hope for U.S. retail. Wal-Mart, one of China’s biggest customers, unveiled its full quarterly earnings report after yesterday’s sales tease… and the discount mega-store didn’t disappoint. Net income increased 7% during the quarter, to over $3 billion.

Oil spiked to another record high of $126 yesterday and then backed off this morning.

The International Energy Agency cut its 2008 oil demand forecast yesterday afternoon. According to the group, the world will consume “only” 86.8 million barrels this year… each day. That’s down a mere 400,000 bpd from the IEA’s previous forecast.

Following the report, traders factored in the earthquake in China and the cyclone in Myanmar and bet on slightly reduced oil consumption over the next few months. Light sweet crude trades for the bargain rate price of $124 a barrel.

Gas in the U.S. hit its sixth consecutive record high today. The national average rings in at $3.73 this morning. Prices are up 11% over the past month and 70 cents from a year ago.

Gold had treaded water around $880 yesterday and overnight. But after the so-so retail sales number and some dollar stability this morning, gold’s dealing with some selling pressure. The yellow metal sells for $865 as we write.

The dollar is right where we left it yesterday. The index remains at 73. The euro trades for $1.54 this morning. The pound slid a bit, to $1.94. And the yen remains at 103.

“Isn’t it in just about every government’s interest,” asks a reader, “not to let a run on the dollar get out of hand? Otherwise, the whole world currency and trade system goes into complete chaos…

“The more likely alternative is an escalation of what is already happening: dollar sidelined, euro to the forefront. Two or three years of dislocation and readjustment, but those of us who don’t live in the U.S. (I live in Southern Europe, and I am moving to Southeast Asia as fast as I can) are going to carry on much as we did before.

“The real problem for the rest of us is the stark fact that at last it is becoming apparent that there really are too many human beings on this planet, and if we all want to eat and play, we are going to have to fight for that privilege. From where I’m sitting, the real problem is not the passing of the U.S. empire, but the coming world war for food and other commodities.”

The 5 responds: The last time we had a shift from one reserve currency to another… the British pound to the U.S. dollar… it took two world wars and a “great” depression to make it happen. So yeah, it’s not really in anyone’s interest to let it happen. But as George Soros points out, we’re likely at the end of a super-boom based on 25 years of easy credit and a dominant U.S. economy. And it’s possible these things are completely out of our control.

As for your suggestion that too many human beings have occupied the planet: Thomas Robert Malthus made dire predictions about population growth early in the 19th century. He suggested that it’s the ordinary condition of human beings to successfully outgrow their ability to produce enough food, thus subjugating a large portion of the population to starvation at any epoch in history. Wars have been fought over a lot less.

Heh. They don’t call this the dismal science for nothing.

“In my state,” writes another, “the best-kept secret is the unfunded pension liability for state government workers. The recent hated, confiscatory tax increase that our incompetent governor and legislature passed to balance the budget doesn’t even address that problem.

“At the same time, in my county, services to taxpaying residents have been cut back to erase a budget deficit caused by guess what? Public employee pensions. This fact has been noted in the press, but ignored elsewhere. It’s much easier to cut public services than to focus in on the systemic problem and reduce the largesse of public retirees across the board.

“In my city, a major political battle arose a few years ago between the mayor and the firemen over limiting pensions. Imagine retiring in your 50s at around 50 grand a year and living off hardworking taxpayers for another 30 years! Or how about a retiring police chief banking 80 grand a year? This scenario is unsustainable.

“The underlying problem arises from the fact that taxpayers who foot the bill have been left out of the negotiations between the state, county and local governments and their unions. Paying people twice over and more for doing a job cannot continue. It is not only madness, it is fiscal suicide.

“There surely must be a day of financial reckoning coming to every institution in America at the federal, state and local levels, and I think of it as near to how you have portrayed it in I.O.U.S.A. God help us all.”

The 5: You know, maybe it’s all in the way that you look at it. Maybe a bankrupt government is just what the country needs. We did a radio interview this morning with an interesting gentleman by the name of Dr. Alvin Augustus Jones in North Carolina. We were discussing the demise of the dollar. He was most interested in how, properly viewed, the declining dollar is an opportunity, not a crisis.

Off the air, he said to me, “Look, Mr. Addison, we live in a society of capitalist pigs. Whether that’s right or wrong is a question for the country’s collective soul. But if you live with pigs, you gotta learn how to be a pig. And a good one at that. You gotta take care of your own.”

We’re still mulling that one over, but suspect he’s got a good point.

Lastly, on the subject of government revenues, we note with a bit of irony:

Even “the righteous” have issues with “the man”

According to the IRS, the Rev. Al Sharpton owes the government $1.5 million in back taxes and associated penalties. This is not the first time he’s had issues with the federal tax authorities.

“Whatever retaliation they do on me,” Sharpton blurted out when asked by a reporter from AP, “we never stop.” We’re not sure, but we assume he means something other than he’ll never stop evading taxes.


Addison Wiggin
The 5 Min. Forecast


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