Truth Behind Obama Stimulus, CBO Forecasts, Pound in Trouble, Mining Outlook and More!

  The pomp and circumstance is over… time to quell expectations.

Almost half of Obama’s proposed $825 billion stimulus package won’t get injected into the economy for at least two years, the Congressional Budget Office forecast today. In its Economic Outlook, the CBO took a gander at the “discretionary” portion of the proposed stimulus — spending on infrastructure, renewable energy and other “job creating” initiatives — and suggested it would be late 2010 before those projects got off the ground.

Heck, it took the Bush administration five months (check) to print, sign, and mail $600 checks to baffled taxpayers last spring. Did all those people on the Mall on Tuesday really think “Barack the Builder” would be breaking ground on highways and solar plants this week?

  The CBO report was chock-full of economic forecasts. Here’s the highlight reel:

• The U.S. economy will contract in 2009 by 2.2%
• GDP will grow again in 2010, but by just 1.5%
• Unemployment will peak at 9% in early 2010
• Consumer inflation will be a nonissue in 2009, increasing only 0.1% for the whole year
• Home prices will fall another 14% between the third quarter of 2008 and the middle of 2010
• Government deficit will exceed $1.2 trillion this year, 8.3% of GDP
• The American recession will end sometime in the second half of this year.

We’ll be lucky if the U.S. economy turns out as well as the CBO projects.

  One change in policy has happened more quickly than we expected, however. “I knew the Obama administration’s change in stem cell policy would lead to new products and therapies,” writes our technology analyst Patrick Cox, “but I truly didn’t expect it to happen so instantaneously.

“As President Obama was inaugurated, the White House Web site was being transformed. In the Agenda section, the new administration set forth a range of ambitious technological goals. Most were stated in general, if not vague, terms. One goal, however, was blunt and straightforward.

“It says, simply, the administration will ‘Advance Stem Cell Research: Support increased stem cell research. Allow greater federal government funding on a wider array of stem cell lines.’ This can be done by executive order, so there is little uncertainty that it will come to pass.”

(If you took advantage of our Inaugural discount on Patrick’s Breakthrough Technology Alert through last Tuesday… congratulations! Looks like our forecast is off to a good start.)

  Housing starts crashed 15% in December, nearly four times worse than Wall Street expected, the Commerce Dept. says today. Homes are how being constructed at an annual rate of “just” 550,000 units, the lowest on record. Permit issuance for starts fell to a record low in December as well.

Compared  to the same period in 2007, housing starts in December plummeted 45%. Permits fell 50%. Both are the biggest annual drops since 1991.

  No surprise, then, to see homebuilder sentiment at a new record low. The National Association of Homebuilders gauge of sentiment fell to a score of 8 … 0, of course, being the absolute lowest possible sentiment.

  Initial claims for unemployment benefits leaped 62,000, to 589,000, last week, the Labor Dept. also reports today. Continuing jobless claims now exceed 4.6 million. Both measures are at the highest levels since 1982.

  “Credit losses could peak at a level of $3.6 trillion for U.S. institutions,” famous forecaster of doom and gloom Nouriel Roubini said this week, “half of them by banks and broker dealers. If that’s true, it means the U.S. banking system is effectively insolvent, because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Total financial write-downs and losses have now surpassed $1 trillion since the start of this crisis in mid-2007. That’s puts us barely a third of the way though this mess, if you follow Roubini’s logic.

  China’s economy is growing at its slowest pace in seven years, the Chinese government said today. GDP expanded at an annual rate of 6.8% in the fourth quarter, still robust, but slight compared to the 9% growth China enjoyed in the first three quarters of 2008 and a pittance of China’s 13% growth rate in 2007.

  In Japan, where growth is already nonexistent, exports plummeted a record 35% annually in December. Japan’s finance ministry announced today that their export economy suffered its worst month since at least 1980, when they started keeping track.

  But despite it all, the stock market managed a defiant rally yesterday. The Dow climbed 3.5% while the S&P 500 and Nasdaq leapt over 4.5%, ironically lead by the very shares that plagued these indexes on Tuesday.

Banks, namely, were the toast of the town. Tuesday’s flood of lousy banking news was washed aside on word that PNC and Bank of New York Mellon both managed to make money in 2008. Bank of America and JP Morgan Chase shot through the roof too, when both of their CEOs reported bigger-than-usual stock purchases.

It looked like the rally might continue today when Apple surprised the street with solid earnings last night. But today, Microsoft reported a worse-than-expected 11% drop in income, 5,000 job cuts and a timid 2009 outlook. The Dow opened down over 150 points this morning.

  In the currency world, all eyes are still on the pound and euro. The dollar index, at 85.8, is still largely the same. But across the Atlantic, some interesting scenarios are developing:
 
“Sell any sterling you might have,” last year’s Vancouver keynote Jim Rogers told Bloomberg yesterday. “It’s finished. I hate to say it, but I would not put any money in the U.K.” Rogers is one voice in a chorus of naysayers, all of whom seem to think the U.K. is going the way of Iceland… another overextend island nation doomed by financials and spiraling toward default.

Currency traders have been putting the hurt on the pound sterling for six months, but since the beginning of the new year, the pummeling has picked up in intensity. The pound is at $1.36 as we write — the lowest since 1985.
 

 
Roger’s predicted the pound will fall below $1.05, its record low from 1985. “It’s simple. The U.K. has nothing to sell.”

Heh. Rogers also said he’d sell all his U.S. dollars last year…. right before the greenback rallied 22%.

  Public debt in Greece, Italy and Belgium is over 100% of each country’s GDP. As we mentioned yesterday, Greece and Spain have recently seen their credit ratings chopped, and S&P has put Ireland and Portugal on “negative watch,” whatever that means.

The spread between Greek bond yields and German bond yields is now over 325 bps, the biggest in the euro’s history. How can one currency represent all of these nations? If we were Germany, we’d be lobbying to excommunicate these countries from the EU before their defaults start grabbing headlines. But what do we know… we can’t even get people in the U.S. to discuss the public debt.

The euro is down to $1.28 today, a six-week low.

  Crude oil was back on the rise, too, until the Energy Dept.’s inventory report put the kibosh on it. The light sweet stuff was up to $44 this morning, but has since retreated to barely $40 a barrel. The Energy Dept. said inventories were once again growing at a faster clip than traders anticipated, and any interest in buying oil contracts went out the window.

  Gold popped Monday to $865 on word of all the financial malaise emanating from Europe. This morning, you can pick up an ounce for about $860.

  “Check out BHP,” urges our colleague down under, Dan Denning , referring to the world’s biggest mining business. “The company announced yesterday it was cutting 6,000 jobs globally. It will shut down the nickel operation at the Ravensthorpe mine indefinitely and reducing production at the Mount Keith nickel mine. What’s more, it will reduce coking coal production by 15% in Queensland and lay off 1,000 workers. BHP is the world’s largest producer of coking coal, so this tell you how much the global demand for steel has fallen off.

”If you had any doubt, this is clear evidence that an organic contraction is now firmly under way in the global mining sector. With the leverage gone from futures markets and the credit gone from lending markets, the mining industry is behaving more or less as it has in past cycles.

“It is hard to make an argument for base metals and industrial commodities when you have a full-blown recession in global industrial production. The saving grace for the resource sector is that market economics (cycles) are still in force. Production will contract and many firms will be swallowed up or disappear.

“Then, after the liquidation of nonproductive investment, and when demand begins to grow again, it will eclipse reduced supply. But that is not likely to happen this year. It’s hard to see a recovery in either earnings or final demand this year. Or perhaps even next year.”

  “I hope you realize,” writes a reader, referring to our coverage of the booming “career transition” industry, “we now have a euphemism — ‘career transition’ — for a euphemism ‘downsizing.’ Don’t you think it would be nice if we spoke English, instead of Orwellian Newspeak? How about ‘layoff’ — still a euphemism — or ‘firing’? I think ‘employment agency’ might be a little more traditional and understandable.

“We have managed to make the language into a hodgepodge of circumlocutions, polysyllabic trivia, politically correct euphemisms and pseudoscientific babble. A kind of verbal smoke and mirrors so we won’t inadvertently say something that someone might understand or be offended by. 

“I don’t doubt that fuzzy words and phrases have had something to do with creating the kind of fuzzy thinking that promotes debt as wealth creation and other silly ideas. I was born during the Depression and was raised with people who actually spoke in complete sentences and used words of few syllables that meant something. Hard times make people think clearly and speak to the point.

“I think the next few years are going to give people an appreciation of plain speaking, instead of the obfuscation or illiteracy that now passes for intelligent conversation. The folks that have been downsized are going to their transition consultants in order to find a position. It might be better for all of us if the people who have been fired went to employment agencies to get jobs.

“Debasing the language is as old or older than debasing the currency. Both lead to inflation, confusion and misery. But I do like your writing and appreciate your views, even when I don’t agree. I must since I’m a Reserve member.”

The 5: Orwell himself said it best when describing what makes good writing: “Why put a ‘constable in an automobile’ when a ‘cop in a car’ will do?”

   “Not to burst the bubble here,” writes another, “on having a Canadian market for I.O.U.S.A., but it shouldn’t be a be a huge surprise. Many Anglo-Canadians seem to have a serious inferiority complex about their southern neighbors and are constantly looking for ways to prove they are ‘different’ and ‘better.’ As such, they *love* material that legitimately trashes Americans and brings them down a notch.

“I say this as someone who has Anglo-Canadian relatives (I talked more about American politics in Montreal than I did at home growing up), has visited extensively and generally likes Canada as a whole. (French Canadians, from whom I am also descended, don’t worry about being different and better. They simply know they are superior and have no need to prove it. *grin*)

“In the end, it wouldn’t surprise me for you to get more Canadian I.O.U.S.A. viewers than Americans per capita — for all the wrong reasons.”

The 5: Amen.

Addison Wiggin
The 5 Min. Forecast

P.S. The nominees for the Best Documentary Oscar did not include I.O.U.S.A. If you’re interested in the category, however, you can check them out here. We suspect Man on Wire will win.