Your Vote and the Economy, $1 Trillion Deficit, When Will Credit Crisis End? And More!

by Addison Wiggin & Ian Mathias

  • Who is historically better for the economy? Democrats, Republicans… none of the above?
  • Bush goes out with a bang… Treasury moves for $1 trillion 2009 deficit
  • Chuck Butler with the likely currency “trading theme” for 2009
  • Ed Bugos’ latest gold forecasts
  • Credit freeze still unthawing… how to tell when the crisis is over
  • Plus, your last chance for I.O.U.S.A. on DVD

  Lest you feel like your vote mattered today, let’s take a look.

Data since 1959 suggests Democratic presidents have seen an average 1.2% higher GDP growth rate than their Republican counterparts. Democrats have run smaller deficits year over year, on average, too.

But on the whole, the numbers are pretty close. Neither one is particularly beneficial to the economy. Nor particularly damaging…. especially if you agree with them that “Deficits don’t matter.”

  In the bowel of the beast today, the U.S. Treasury announced it will borrow over half a trillion dollars — $550 billion — this quarter alone … and at least another $368 billion in the first three months of 2009.

In one of its last budget projections, the most expensive federal government in history laid out the granddaddy of ’em all: what will likely be world’s first $1 trillion budget deficit.

The Bush administration last guesstimated a $482 billion 2009 deficit back in July… before Fannie and Freddie, before AIG, before the market crash. Then there was the little matter of the $810 billion gift for Wall Street bankers….

Aren’t you going to miss him?

  “How absurd is it that the country is living that far above its means,” asks Dan Denning, “yet the issue of deficits was never really brought up in the campaign? The great national denial goes on.”
“Who is going to lend America a trillion dollars? The Chinese? The Japanese? The Gulf states? With so many other national governments busy ‘stimulating’ their own economies, you’d think America is at least going to have to pay a higher interest rate on its borrowings. Good luck with that, next president.”

Happy E-Day .

  The dollar index managed decent gains on election eve, but gave ’em all back this morning . The index scores about 85.4 as we write.

“I told you in this summer,” Chuck Butler reminds us from the EverBank trading desk, “that this dollar strength could very well last through the elections and through to year-end. That was before the rot on the vine was exposed in September and October.

“Now I fear that this will be the trading theme for most of 2009 too as the credit squeeze continues to hang over the markets like the Sword of Damocles. And… in six out of the last seven elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the six months following the election. That takes us into 2009, with the trading theme and credit market squeeze… it all adds up.”

  Gold, nature’s dollar antidote, is up about $25 from yesterday’s low, now at $745 an ounce.

  “Nobody cares about gold right now,” laments Ed Bugos. “The deflation argument continues to be convincing many market participants, and the dollar rally has become partly linked to that. Inflation expectations have receded as markedly as the bullish sentiment in gold.
“The markets have decided that the inflation threat from oil prices or the CPI are moot now. They may be right for a few months… be ready for it.
“Meanwhile, the Fed and Treasury are pouring liquidity into the banking system. I see a situation already evolving where the winners will be the banks that take the free money and lend it out most aggressively, many of them the same ones that have lost the most in recent times. I’m watching the money and credit numbers closely for any sign that I may be wrong, but the inflationary apparatus appears to be gearing up for another cycle. Investors may be numb to this story, but as I keep trying to point out, gold itself has not failed as a safe-haven investment, despite it being down in dollars and yen.

“We are actually just witnessing a transition that will manifest in gold, ultimately, as the market falls in love with it in a way that lies in stark contrast with its current contempt. The surprises will be on the bullish side.
“In hindsight, we will see that the current correction in gold will be as insignificant as the oil correction of 2006.”

  Oil soaring, up $7, to over $70 a barrel. More on this breakout, tomorrow.

Retail gas prices have still not bottomed… the national average fell another 2 cents overnight, to $2.39 a gallon.

  And stock indexes are up today. The Dow opened up over 150 points, led by our favorite sectors — energy and basic materials.

We can only describe yesterday’s session as spectacularly boring. On little news and pre-election ambivalence, the Dow traded in a 155 point range Monday — its lowest volatility since Sept. 3. The average range in October was an incredible 594 points.

Even more drab, the Dow ended down 5.1 points, its smallest daily move since June. The other indexes were so much more boring we’re not even going to mention them today.

  The rate at which banks lend to each other (Libor) has fallen 17 days in a row now. Today, the three-month dollar rate is 2.8%, a far cry from its recent high of 5.1%.

But when can we call “all clear” for the bank lending crisis? Watch the Libor-OIS spread, Alan Greenspan suggests. That’s the difference between three-month Libor and overnight index swaps.

A complicated affair, no doubt, but here’s the important part: It was at its highest on Oct. 10, at 364 basis points. Today, it’s about 225. Before Lehman Bros. imploded, on Sept. 12, the last day of quasi-normal bank lending, the spread was at 87.

If you want to watch minute by minute (seek therapy), subtract this from that .

  Still, the credit crisis crushed auto manufacturers in October. Auto sales plummeted 32% year over year in October. According to a Commerce Dept. report yesterday, October sales shrank to the slowest annual rate in 25 years.

In other words, Americans bought at an annual rate of “only” 10.5 million vehicles in October. That’s the same clip they were buying autos back in 1983… when there were 70 million fewer Americans.

As you’d expect, GM led the way, with October sales crashing 45%. The rest of the “Big Three” were close behind, but really, no automaker thrived during the height of the credit crisis. BMW had the best data we could find… its sales fell only 10% in October.

U.S. auto sales have now declined for 12 straight months.

  In contrast, October auto sales improved 1.5% in Canada. In fact, Toyota has recorded 10 consecutive months of record sales there, and has already topped all of 2007’s numbers.

  Australia and India have both cut their main lending rates this week. India, a major commodity consumer and emerging market, cut rates 50 bps, to 7.5%. Australia, a commodity-producing country, slashed rates yesterday by 75 bps, to 5.25%, a five-year low.

  Shame on us… Yesterday was Monday and we forgot to look for another weekend bank failure. Freedom Bank of Florida is no longer “free.” The FDIC shut its doors late Friday and sold its assets to Fifth Third Bank. That’s the 17th failure this year.

  And we must highlight UBS earnings announcement today… they actually made money in the third quarter. Granted, the mega-bank made only $252 million in the quarter, but that’s better than most U.S. financials can claim. In fact, it was significantly improved from third-quarter earnings of 2007, when UBS lost over $800 million.

But that was the end of the good news… UBS wrote down another $4 billion in credit losses. They also waved all sorts of fourth-quarter warning flags, saying that the “difficult” conditions would “affect our clients’ assets, and therefore our fee-earning businesses.” Yeah… probably.

UBS, long considered one of the world’s more conservative super-sized banks, has now written down over $49 billion since the start of the credit crisis.

  “Always vote,” says a reader in response to yesterday’s 5 . “There were 13 people on the ballot in the great state of Louisiana, so for some of us, there was actually a choice. Imagine my surprise when I saw that Ron Paul was a write-in candidate. I want to make a bumper sticker for my gas-guzzling SUV that says: ‘Don’t blame me, I voted for Ron Paul.’”

  “There are two simple facts,” writes another. “The first is that you cannot get elected by the utterly self-serving public with their extremely narrow self-interest-alone perspectives if you actually tell the bare-bones truth while running. So forget about a rational expectation of truth in packaging from any candidate.

“The second rule is as you previously reported — America does nothing at all about a problem until you-know-what actually hits the fan, and the blades physically are not turning. So the bottom line is you elect someone (by definition, who has scammed you to get elected) who you hope will guide the country toward a better-than-a-worse set of solutions when the country (and Congress) is finally forced to do something. The prior president used the ‘opportunity’ of Sept. 11 to encourage shopping and pursuing foreign wars of ‘liberation.’ So it turned out to be a bad choice to bet on him. This time, we get one more crack at it while the ship has, meanwhile, taken on an enormous amount of water.”

The 5: What a cheery Election Day, eh?


Addison Wiggin
The 5 Min. Forecast

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