Another Quasi-Nationalization, House Debuts Obama Stimulus, Russian Resource War Approaches, Prices Fall and More!

by Addison Wiggin & Ian Mathias

  • Congress unleashes remainder of TARP… another $350 billion into the void
  • Treasury wastes no time… Bank of America quasi-nationalized
  • Dan Denning on the real issue plaguing American financials
  • Obama’s fiscal tenure off to terrific start… $825 billion stimulus bill, most expensive Inauguration ever
  • Russia-Ukraine conflict far from over… EU gets testy, starts issuing ultimatums
  • Plus, the bright side of the data: inflation at historic low, consumer sentiment improves

  Let’s see, yesterday a mob of 10,000 gathered at the capital.  

They came to protest their corrupt and incompetent government: Growth was once robust, but is now stagnant at best. Salaries are falling, unemployment rising. Poverty is commonplace, the education system is worthless, and the divide between rich and poor is overwhelming. 

The central bank is doing nothing but squandering the people’s money, which is rapidly losing value. The mob turned angry… the government turned its military against its own people.

Latvia yesterday.  

  In Washington today… since the first half worked so well… Congress agreed late yesterday to release the remaining $350 billion of TARP funds. For all the hemming and hawing on how “It’ll be different this time,” the rest of the bailout went straight to the Treasury, with no new stipulations or guidelines.

Barney Frank drafted a bill to add all sorts of new rules to TARP spending. But before the bill could even be debated, Hank Paulson had already signed a $20 billion check:

  Bank of America received another $20 billion government stimulus last night , the latest chapter of a book that’s so sad, it’s almost funny.

When BoA acquired Merrill Lynch back in September, the world marveled at CEO Ken Lewis — what a smart man, to be able to assess the value of a company like Merrill in a weekend. And what a brave fellow, too… buying Countrywide and Merrill in less than 12 months.

Today we learned Lewis has been pleading with Uncle Sam all week. How could they know that Merrill would be taking a $15 billion fourth-quarter write-down? Sure, BoA has $393 billion in deposits alone, and has already received $25 billion in bailout bucks… but it’s not enough. Who could have foreseen that?

  In exchange for the bailout, the government will acquire $4 billion in preferred stock, making it the largest BoA shareholder, at 6% ownership. The other $16 billion? Shhhh… just lie down and relax. You’ll forget about it in no time. Uncle Sam will also provide an additional $98 billion backstop for the bank… essentially nationalizing any further losses.

  Bank of America stock justly plunged 18% on the news. Shares go for $8.32 today, the lowest since 1991.

“The main issue,” says Dan Denning, “is the one Ben Bernanke brought up earlier this week in London. The TARP money disappeared onto bank balance sheets and did not reappear as consumer or business lending. Nor could it. The money merely papered over the losses taken by banks and brokers and allowed them (for a time) to maintain adequate capital against the falling value of their assets.

“Those assets, however, are still falling. Remember what Bernanke said… the number of hard-to-value assets on bank balance sheets, ‘significantly increases uncertainty about the underlying value of these institutions.’ But about the only way to increase certainty is to find a real value — which is likely (at least according to market prices) to be so low that it would either wipe out existing equity capital at major institutions or require wholesale bailouts or nationalization of key firms.

“Exactly which assets have increased in value this year on bank loan books? Residential real estate, commercial real estate and virtually any kind of securitized or collateralized loan book is probably worth less now than it was this time last year. You begin to wonder how much, er, ‘capital’ it will take from the government to make up for the loan losses faced by the financial industry this year, if it is even possible.”

  Not moments after Bank of America’s quasi-nationalization, the Irish government announced a total takeover of Anglo Irish Bank. Ireland’s government has now seized its three largest lenders.

  And Citigroup will complete our trifecta of wretched banking news this morning… the mega bank revealed a $8 billion fourth-quarter net loss today, which the bank says will force it to split in two. Citigroup will now become Citicorp and Citi Holdings — Corp the stable bank and lender, Holdings the bastard son… brokerage, asset management and “special assets.”

If you’re keeping score at home, that’s Citi’s the fifth consecutive quarterly loss. For all of 2008, the “bank” lost $18.7 billion.

  “The issue posed by the present crisis is crystal clear,” opined former Federal Reserve chairman Paul Volcker yesterday. "We [must] restore strong, competitive, innovative financial markets to support global economic growth without once again risking a breakdown in market functioning so severe as to put the world economies at risk."

Volcker, who now leads Obama’s economic recovery board — The Group of 30 — called for a new regulatory system — one free from politics that pays particular attention to nonbank financials and new or unsupervised financial instruments.

  Economic growth around the world will likely grind to a halt in 2009, the United Nations forecast today. The U.N. revised its 2009 outlook yesterday, saying global growth won’t be above 1%, and likely closer to 0%.

“For the world as a whole, the outcome could be zero or even slightly below zero (growth)," said Heiner Flassbeck, a U.N. official. “This is not an overly pessimistic view on the world economy.”

The group expects the U.S. to contract as much as 1.9%, Europe by 1.5% and Japan by 0.6%.

  Right on time this morning Speaker Pelosi unveiled a $825 billion package, complete with new spending plans for schools, highways, energy development, health care, tax relief, unemployment benefits and more.

“We can’t just spend our way out of the problem,” Barack Obama declared recently. But why should that stop them from trying?

  Obama’s track record on fiscal responsibility as president will begin on an appropriate note Tuesday. The 44th presidential Inauguration ceremony will cost at least $50 million and go down as the most expensive Inauguration in history. Perfect. Love it.

Oh… and unless you were worried, the red carpets will be made out of recycled fabric, and the city of Washington plans to recycle the paper and horse manure left on the parade route.

  A European resource war should help stimulate growth this year, no? Despite being “resolved” early this week, by all practical measures, the Russian gas dispute with Ukraine is still in full swing. The pipes remain empty — thus, much of the EU has no gas.

“The gas must flow,” insisted a testy European Commission spokesman Johannes Laitenberger today. The EU has arranged for a meeting between the two nations this weekend, “the last and best chance for Russia and Ukraine to demonstrate they are serious about resolving this dispute,” Laitenberger continued, “a test case for judging whether or not they are credible partners."

Hmmm… sounds like patience is wearing thin. Archdukes everywhere should be keeping a low profile.

  Despite the boiling tempers abroad, oil and other sources of energy are still awfully cheap. Light crude goes for just $36 a barrel today.

  “Cheap oil might even be worse for the world over the long term,” says Byron King. “At $35 per barrel of oil, the incentive for energy efficiency and conservation is not high. Heck, people are back to buying SUVs, if they can get a car loan.

“And low oil prices are a major stumbling block to building out the next generation of energy systems, like advanced windmills, solar, geothermal, tidal power and advanced biofuels. Really, the world needs these items sooner or later.

“Also, the traditional energy industries need prices about $75 or so to keep up levels of investment in new projects that require several years to build out. That’s just to try and maintain current levels of fossil fuel output, which are declining, in any event.

“That is, world oil production has already peaked at about 86 million barrels per day. We were probably never going to change that overall fact of energy life back with oil at $147. But we sure aren’t going to change it now that oil is selling at $37.”

For more from Byron on this matter, be sure to check out your morning Rude Awakening.

  And some good news today… consumer prices inflated in 2008 at the slowest pace in 54 years. The Labor Dept.’s measure of consumer inflation (CPI) eeked out a mere 0.1% gain for all of last year. Today’s report shows prices fell 0.7% in December, slightly smaller than anticipated, but still the third consecutive monthly decline.

We suspect this report will land right in Ben Bernanke’s sweet spot: Inflation is presently a nonissue, deflation has yet to really make an impact… should keep those printing presses rolling all through the night.

  The dollar index finally took a breather from its steady rise yesterday. Word of the Bank of America nationalization, the second half of the TARP and the Obama stimulus bill coming to fruition — a total of almost $1.3 trillion in potential government spending — was enough to knock the dollar right off its throne. The dollar index has sold off about a point and a half since yesterday, now down to 83.5.

  Lower inflation rates (read: cheap gas) helped consumer sentiment improve this month. The University of Michigan consumer sentiment survey inched up almost 2 points, to 61.9, the group said today. That’s the second consecutive monthly gain, and better than the fall to 59 Wall Street anticipated.

  The U.S. stock market broke its six-day losing streak yesterday. After the longest stint of losses since October, the Dow bounced off resistance around 8,000 and ended just above break-even, along with other major indexes. Despite the markets’ last-minute push into the black, we see fear has re-entered the market in force… the volatility index (VIX) climbed back above 50 yesterday, its highest level in a month.

  Since fear is back en vogue, so is gold. The shiny metal broke its losing streak too, and popped $15 this morning, to $835 an ounce.

  “So,” writes a reader, “Bank of America invested $7 billion in China Construction Bank stock, and then had to sell $2.8 billion back to raise cash — and is now asking for another, what … $25 billion from the TARP.

“Gee, how can we get some free taxpayer investment money to invest in China? I had heard that the banks were not cooperating with how they were using their TARP money, but this is ridiculous.

“By the way, try to get a fixed rate on a portion of a B of A line of credit and you will likely pay 9%, including favored discounts!”

  “I have been a reader of yours,” writes another, “for a few years and I respect the wisdom of many of your words.” (Heh, this is what they all say, right before they lay into us.)

“However (here we go…), I have been a bit puzzled by this mounting debt problem that you dwell on so often. In all your wisdom, you should know that if the lender is less powerful than the loanee, then it is lender’s problem to get their loan back. (OK, not bad… so far, so good.)

“If there is cumulative deficit, then government will inflate away some and pay back the rest. (True.) High inflation will penalize the savers (darn right), but then who is to say that savers are entitled to their money (uh-oh). Savers should be thankful if they can keep half the real value of their money. (Savers should be ‘thankful’ to get half their money back? Whoa…)
“It is a myth of modern times that saver’s purchasing power increases with time. Saving is an implicit social contract with the rest of the population. (Uhh… ) In the interim, the rest of the population does not prevent you from saving; it can’t. However, in the long term, through negative real interest rates (inflation), the society tells the savers what that social contract is going to be.

“Is saving a social right or a social privilege? I would say that it is a privilege granted by the rest of the society. It is not a right. (Wow… so is it also a privilege to live, work? Or have children? Who decides?)

“But then your readers are so set in their ways that I doubt they can see this simple truth.”

The 5: Hmmmn… are you saying readers should just give up trying to plan for their own future and let “society” — whatever that is — do it for them? A central bank with “inflation targets” does create the disincentive to save, we’ll grant you that. But how that’s a positive… well, you lost us there.

You appear to be asking readers to enjoy the privilege while taking one up the keister.

If so, well done. You’ve mastered the fuzzy-headed claptrap that makes people think economics is complicated. With all the money being printed in Washington, there are bound to be new positions opening up at the Fed and Treasury. You’ve got the skills… go for it. And thank you in advance for the many choices you will make on our behalf.

(Heh. That ought to make him happy. Now, the rest of us simple folk who are set in our ways can continue trying to avoid them as if our lives depended on it.)

Keep in touch,

Addison Wiggin
The 5 Min. Forecast

P.S. Is your portfolio prepared for the 44th president? We’ve put together a special pre-Inauguration report, one best served before the president-elect is sworn in next week. Read it, here.   


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