Welcome to the Fantasyland issue of The 5…
“Shouldn’t worry about the deficit,” assures Barack Obama… “yes we can” keep spending
Can’t balance the budget of your dreams? Call the Treasury… Atlanta’s doing it
Gold still suffering… Ed Bugos’ future fantasies for precious metals stocks
Plus, no one immune to the great housing illusion… the infamous Neverland Ranch shuts its doors
“We shouldn’t worry about the deficit next year or even the year after,” the U.S. president-elect Barack Obama said on 60 Minutes over the weekend.
We were afraid that Barack’s message of “change you can believe in” was going to make it harder to take issue with politics as usual in Washington. But now we see he already drank the Kool-Aid and we had nothing to fear but fear itself.
“The consensus is this, that we have to do whatever it takes to get this economy moving again. We’re going to have to spend money now to stimulate the economy.”
“During recessions,” our Rob Parenteau says, explaining the prevailing mentality among economists, policy wonks and Treasury Secretaries in Washington, “the private sector pulls back and tries to move into a net saving position to weather the storm.
“Households and businesses can only save if some other sector is willing to deficit spend. An improvement in the trade deficit would help the private sector, but we are not getting the necessary results on trade yet.
“That leaves the adjustment all on the back of the fiscal deficit, which has regained 2004 lows in a very sharp fashion this year. Without a sufficient turn in the trade deficit, the attempt by the private sector to save will endanger income growth, and thereby worsen the debt default situation.
In other words, the worst thing that can happen right now is that consumers come to their senses and stop spending more than they earn.
“It’s a vicious cycle,” Parenteau concludes. “One a highly leveraged economy can’t afford without severe consequences. Given these pressures, a trillion-dollar fiscal deficit in 2009 is not out of the question.”
“Barack Obama will restore fiscal discipline to Washington,” his website says.
If that were true, he’d step out of the way, let the consumer economy go bankrupt, put tax incentives in place to encourage savings and investment in local productive assets. Unfortunately, “the consensus” doesn’t want to see that happen.
And thus, with the federal checkbook wide open, everyone has their hand out: The mayors of Philadelphia, Phoenix and Atlanta each sent letters to the Treasury Department asking for $50 billion of the $700 billion Troubled Assets Relief Program (TARP).
Just like Bear Stearns, Fannie, Freddie, AIG, all the banks and now even the big three automakers – the mayors claim that their city’s fiscal standing is dire. Barring federal intervention, they claim, layoffs and taxes will increase rapidly while important infrastructure projects will be canceled.
Between the three cities, annual budget shortfalls exceed $410 million. All claim they are unable to balance the books without Federal aid.
We have to “prove that we have our fiscal house in order,” before asking for federal handouts, said Arnold Schwarzenegger. The Governator’s state faces an $11 billion budget shortfall, which he plans to remedy by – heaven forbid – cutting wasteful programs and scaling back spending.
“Anyone that wants to go and think that they don’t have to shift down and make changes — if it is states; if it is local government; if it is the auto industry, or any other industry, as far as that goes – they’re living in a dream world or in a fantasy world.”
When this guy says you’re living in a “dream world”…
The original purpose of the TARP “is to stabilize financial institutions and strengthen the financial system, promote lending and so on,” reiterated Treasury Secretary Paulson Friday.
While Paulson’s latest TARP adjustment proves the methodology of the program is hardly set in stone, he’s been going out of his way to hint that unless you’re one of this old banking buddies, you aren’t getting a slice of the pie.
“The secretary essentially took some scissors, cut it out and threw it away,” complained Rep. Dennis Kucinich of the Treasury’s TARP switcharoo. “All of a sudden, the Treasury sent a signal to the banks: `Forget about it. We’re going to give you the money you want and you do what you want with it.’”
We try to pay as little attention to House Oversight hearings as possible, but Friday’s grilling of TARP chief Neel Kashkari was particularly funny… in a pathetic way. If you are a senior Congressman in the mood for whining, Friday was your day.
“Every decision that you make,” Rep. Elijah Cummings told Kashkari, “you think about those folks who are losing their jobs and who are in pain and who are not going to have a decent Christmas… They’re going to probably be sitting under the Christmas tree with no presents.”
Soon after, Cummings called Kashkari a “chump.”
Against this backdrop of politics and plunder, personal bankruptcy filings in the U.S. jumped 8% from September to October. Filings exceeded 108,000 in the month, the highest number since 2005, when the government enacted laws that made filing more difficult and expensive.
Personal bankruptcies are up 37% from this time last year.
And consumer confidence remains as low as any time since voters sent Jimmy Carter packing back to his peanut farm. The latest reading of the Reuters/U of Michigan consumer sentiment index scored a 57.9 for the current month – a bit higher than October’s 57.6… and better still than June’s 28-year low of 56.4.
According to a Bloomberg survey, this gauge of consumer sentiment will retest previous lows by the end of the year.
Despite the Fed’s best attempts to re-inflate the economy, U.S. GDP will “grow” a mere 0.2% in 2008, according to the National Association of Business Economics. 96% of all economists surveyed by the group say the U.S. economy is in recession now. Over 75% say the current contraction will stretch beyond the first quarter of 2009.
For all of 2009, NABE respondents slashed their GDP estimates. In the beginning of October they were calling for 2.2% growth next year. Now they predict 0.7%.
Japan is “officially” in recession, too. While we’ve declared it a few times in these pages, the Nipponese government finalized the third quarter GDP contraction of 0.1% today. Coupled with the second quarter’s 0.9% contraction, Japan is now in its first textbook recession since 2001.
Factor in the European Union’s admission of recession this month, and the world’s first and third and laregest economies are both “officially” shrinking.
Isn’t deleveraging fun?
Banks are still canning people in Lower Manhattan. Citigroup announced today it will be cutting up to 52,000 more jobs. That’s about 15% of its already trimmed down workforce.
And JP Morgan Chase is expected to cut another 3,000 jobs for its integration with Bank of America. That’s nearly 10%.
Still, despite all the trouble here in the U.S., the dollar booms. Investors were racing out of equities again this morning, and they wanted cash. Thus the dollar index remains at a lofty 87.
Oil has fallen, accordingly, to $57 a barrel. The sector seems particularly vulnerable today, as Japan’s declaration of recession implies reduced oil consumption from one of the world’s largest economies.
Gold is floundering too. It’s been stuck between $700 and $750 for the last three weeks. Today, an ounce goes for $735.
“I am excited about the values that I see out there,” says our gold stock advisor, Ed Bugos. “And even if gold makes another lower low, I think the gold share sector has bottomed.
“Historically, the market discounts the in-ground resource of an established and diversified producer by some 75-85%… the exact amount depends on a whole myriad of variables. However, the reason for the discount is simply economic: It costs money upfront to get it out of the ground and to the market in the future.
“In any case, if gold is worth $750 per ounce, the market would historically attribute a value in the range of $110–185 per ounce of gold in the ground for your average miner, or about $150 on average. That’s where we are right now.
“At $1,000, the range is $150–250 per ounce, or $200 on average. That’s part of the reason that gold stocks in general have fallen so much, and the reason they have performed so sluggishly relative to gold: They have been on the expensive side since 2004.
“At their heights, stocks like Kinross were fetching $270 per ounce, even Newmont was getting $240 per ounce, while Barrick and Goldcorp saw values closer to $400 per ounce. Such values suggest a gold price of $1,200–1,400 before taking the effects of cost inflation into account. That is, when gold hit $1,000, gold stock investors imputed a $1,200–1,400 price target.”
If and when gold rebounds, Ed tells us, a similar spike should occur again amid the miners.
As if we needed it, today we have further proof the U.S. housing fantasy has come to an end: even the freakishly eccentric Michael Jackson can’t afford to keep the lights on.
No more Neverland? Probably for the best…
Late last week, the King of Pop gave up the infamous Neverland Ranch. He owed about $24 million on the property. He apparently handed the debt, the deed, and the keys to the Ferris wheel over to some LLC with whom he shares a shady financial connection. The same company, Colony Capital, rescued him from foreclosure in May… now it seems he’s given up on the prospect on luring youth with petting zoo’s and carnival rides all together.
“As can be seen on this chart,” writes a reader, “the Dow closed Friday by coming to rest almost exactly on the 200 MONTH moving average – not to be confused with the 200 day moving average. The closing value of the Dow was 8497.31 and that of the 200 mma was 8500.31.
“The Dow is at a major ‘reckoning point’ and today and the next few days (especially through the end of November) will be crucial in determining which way it resolves. Right now the Dow is the "last soldier standing", as the S&P 500 and the NASDAQ Composite are already substantially below their respective 200 mma’s.”
The 5: The Dow tested that moving average today. It fell through, then bounced back. As we write, it’s right on the precipice. We’ll keep an eye on it for you.
The 5 Min. Forecast
P.S. This morning we did an hour-long interview with a gentleman in St. Louis who said he was born in 1922. He remembers the Great Depression like it was yesterday, he said, but doesn’t remember it being all that great. The government seems to be just as out to lunch now as it was then. And remember… the last Depression ended in a World War. We paraphrase, of course, but you understand, right?
“When you get to a point,” former Treasury Secretary Paul O’Neill says in I.O.U.S.A. “when you can no longer service your debt – you’re finished.”
You can still pick up your copy of the DVD and book, along with a subscription to Capital & Crisis, right here.