Karl Marx speaks from the grave on credit crisis… or are we all just talking to ourselves?
House passes $819 billion bill, despite warnings from CBO, Davos, Cato Institute
Stocks soar on “bad bank” rumor… Dan Amoss on how this toxic aggregator will likely behave
Data disappoint… jobless claims, new home sales suffer record falls
Credit crisis causes brain drain… global patent filing growth grinds to halt
Plus, readers respond to stem cell investing… and our tech adviser fires back
“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology,” reads an e-mail being passed around the Internet, “pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”
These words were supposedly written by Karl Marx in his 1867 diatribe Das Kapital. But a quick stroll around the web reveals it to be a fake… either convincing scheming from Marxist sympathizers or satire taken seriously. Either way, the fact it’s made its way around the world (we got ours by way of Addison’s sister-in-law, who got hers from a friend in Spain) shows how badly we want it to be true… how badly people are starving for understanding… how badly people are striving to be mislead.
In Davos, Switzerland, today the world’s leading technocrats are gathering to drum up a global stimulus plan. Ironically, the U.S. is looking in relatively good shape compared to the economies of many countries in Europe and Asia.
"We cannot underestimate the challenges and dangers that the world economy faces in 2009," warned Stephen Roach, chairman of Morgan Stanley Asia, at the meeting yesterday. "It will most likely be the first year since World War II when GDP actually contracts."
And since we are in “a global recession the likes of which we have never seen,” Roach insisted there will be “no quick fix."
"We can’t delude ourselves that [economic stimulus] is going to jump-start the U.S. economy… The concept of a vigorous ‘V’-shaped recovery is for business cycles of the past, but not for this post-bubble, post-crisis business cycle. It is going to be a long slog in 2010, and 2011.”
And yet another $819 billion will be dumped into the money hole … at least.
The House passed an $819 billion stimulus bill last night. We skimmed though the 647-page bill this morning… if “change” has arrived in Washington, we couldn’t find it.
We’re not surprised to see that not a single House Republican voted “yes” on the bill. But ask us what ideology they’re following… and we can’t tell you. “They” don’t stand for anything consistent that we can discern.
So what is in the bill? Umm… what isn’t?
$275 billion in tax reductions, much of which would be dolled out in the form of tax credits. $140 billion to the Education Dept.
$87 billion to Medicaid.
$43 billion to increase unemployment benefits.
Another $43 billion will head over to the Dept. of Energy
$40 billion for states to do as they please
$20 billion to food stamp programs
$30 billion for highway construction. Tens of billions more to water infrastructure, parks, housing projects and “military construction.”
And billions more for sexually transmitted disease prevention, broadband Internet access in rural areas, community-oriented policing services and VA cemetery repair.
True, we haven’t yet arrived at the “toy wooden arrows” level, but the Senate has yet to lay its greasy hands on this bill. Look for them to vote on the matter as early as next week.
Even before the Senate mucks with it, the bill passed by the House yesterday will already cost American taxpayers more than $1.2 trillion, the Congressional Budget Office estimates. Why? Because the government doesn’t have any money!
They’ll have to borrow to fund the plan, and interest payments alone will likely exceed $347 billion by the time it’s paid back.
If you read the headlines, you would believe that every working economist agrees this massive government program is necessary. Not true.
“Notwithstanding reports that all economists are now Keynesians,” reads a manifesto published by the Cato Institute, “and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s ‘lost decade’ in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”
The Cato preamble is signed by 200 economists…
Still, we’re not at all surprised to hear the Fed is eager to start purchasing U.S. Treasuries. The FOMC chose to keep their main lending rate in a range between 0-0.25% yesterday, and said in their release that they are prepared to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.”
We wonder… wouldn’t it also be “particularly effective” at financing government spending? Obama spends, Treasury issues notes, Fed buys them with freshly printed money, which goes right back into the government coffers. The only byproduct is that pesky inflation, which the Fed’s assured us all yesterday “will remain subdued in coming quarters.”
All the above news added fuel to an already hot market yesterday. The Dow jumped up 1.8%, actually the worst performing major index of the day. The Nasdaq and S&P 500 rose near or above 3%. Traders got a boost from the FOMC statement and the buzz surrounding the stimulus bill, but the real buying momentum came from the “bad bank” rumors we mentioned yesterday . The KBW, an index of the nation’s 24 biggest banks, shot up 12%.
“The unofficial word,” recaps Dan Amoss, “is that Sheila Bair of the FDIC is chomping at the bit to move this initiative forward. I expect it to play out as follows:
1) The FDIC accesses TARP money to capitalize the bad bank (say $100 billion).
2) The Fed provides something in the range of 5-to-1 to 10-to-1 leverage (say, $500 billion-1 trillion), making total bad bank buying power (asset side of its balance sheet) in the range of $500-1 trillion, adjusted as high as necessary by the Fed.
3) The bad bank pays ABOVE fire-sale prices for toxic MBSs, CDOs, etc. The above market price is key, because, otherwise, it would impair bank capital even further. The bad bank will buy the toxic assets for a mark-to-model price. The bad bank could justify the higher price by announcing its intention to hold the assets to maturity with no need for mark-to-market accounting.
4) Here is where the ‘mortgage modification’ part comes in. The bad bank hires laid-off mortgage brokers to refinance each homeowner with a mortgage that’s been sliced and diced into exotic securities now sitting on the bad bank balance sheet. This is not feasible without owning a huge chunk of toxic assets, because claims on sliced-and-diced mortgages are spread all around the global banking system. Appraisals will be waived in situations of negative equity, and principal will be written down. This may include the homeowner granting the lender some sort of future ‘property appreciation right’ in exchange for a principal write-down.
5) The wave of refinancing leads to prepayments, which restores liquidity and considerable value to the toxic assets and the bad bank resells them into the secondary market over a period of years for a taxpayer ‘profit.’
“Taxpayers won’t really have a profit, because it will be more than offset by a debased U.S. dollar lowering the standard of living. There will be higher pricing for anything in short supply under normal economic times (like oil and, potentially, agriculture products). Basically, this is using dollar debasement and intentionally creative accounting to clean up the banking system. But the authorities will note that desperate times call for desperate measures, quashing any opposition to this idea.”
All 50 states reported rising unemployment rates in December, the Labor Dept. reports this week.
That’s the first time all 50 reported increasing joblessness since the government started keeping track in 1976. Michigan and Rhode Island get the prize for the worst unemployment rates in the states, both at over 10%. If you seek a state of stable employment, maybe check out Wyoming and North Dakota, where unemployment is at a nationwide low of 3.4% and 3.5%, respectively.
The current national unemployment rate is 7.2%.
Next Friday, the Labor Dept. releases its next jobs report. Consider this bit and the mass layoffs we reported Tuesday… it’s going to be a doozy. We also hear the BLS will be adjusting the much discussed “birth-death model” in this coming jobs report, which is also expected to produce worse-than-anticipated results. The Street currently expects half a million lost jobs in January.
A record 4.7 million Americans are filing for unemployment benefits, the Labor Dept. updated today. Jobless claims increased for the third straight week, this time by 3,000, to 588,000 filings. In terms of unemployment claims, the credit crisis has now surpassed the worst of the recession in the early ’80s.
So no surprise… new home sales posted a massive 15% loss in December, to the lowest level on record. Purchases of new houses fell to an annual pace of 331,000 in the month, the weakest annual clip since the Commerce Dept. started keeping track in 1963. There is now an incredible 12.9-month supply of new homes on the market, a record glut. Gee… maybe we should stop building them?
Elsewhere in the data patch, orders for durable goods sank 2.6% in December, the Commerce Dept. says today. That’s the fifth straight month of decline. The government also quietly revised November orders down 3.7%, more than double the fall originally reported.
Thus, most of yesterday’s gains are lost. Thanks to all the data above, the Dow opened down over 100 points today.
After falling from its high of $48 a barrel Monday, crude oil’s been bouncing mostly between $41-42. Other commodities are in similar shape. Gold is at $890 an ounce, after soaring as high as $915 earlier this week.
Here’s an unfortunate byproduct of this mess we’re in: Growth in international patent filings slowed dramatically in 2008. According to an Economist report, 164,000 patents were filed during the year, a 2.4% increase from 2007. We’re actually impressed that patents increased at all, but according to the World Intellectual Property Organization, global patent filings had been growing at a 9% clip from 2004-2007.
And get this: A Chinese company sits atop the list of most frequent patent applicants for the first time. Huawei Technologies, a Chinese telecom giant, filed for over 1,700 patents, beating out household names here in the U.S. like Panasonic, Philips and Siemens. In case you’re wondering, Huawei is privately held.
“I just want to APPLAUD the two readers that you published,” writes a third, “regarding their objection to the embryonic stem cell research company that has recently been propagated in your advertisements and that the Obama administration has announced funding for. Those readers basically said what I too would have wanted to say although I did not have as much deep knowledge to do so.
“I basically deleted those ads whenever I saw them because although we all want to make money as traders and investors, nevertheless, I, for one (and I am glad to hear many other readers feel the same), do not want any blood money that is at the price of an INNOCENT LIFE. And no, I would not want a baby (embryo) to be destroyed so some infirmity of mine could be cured, either.
“While making money can be good, there are still many other things that come before it: like God, human life and a conscience. I got news over the Internet about that company’s research and funding, and though I thought it would be going up (which it did the following two days), I still did not put any of my money on it, simply for the above reasons. Some profits I am just not that desperate for and hopefully NEVER will be.”
“I agree with your readers,” adds another, “as to the moral impact of using embryonic stem cells. In fact, to answer Mr. Cox’s assertion about discarded embryos from fertility, most pro-life Americans, such as myself, once educated on this type of fertility treatments, are opposed to this use of embryos too! Just because the ‘jams are kicked out’ doesn’t mean it’s right.
“Once I sniffed that Mr. Cox’s insider news was reeking of embryonic stem cells, I pitched those e-mails. I’m not about to participate in that type of affair. God have mercy on a nation that destroys unborn and defenseless life, especially in the name of capitalism!”
The 5: Again, we’ll turn this over to our med tech adviser Patrick Cox:
“The Obama change is not going to lead to embryo farming,” Patrick wrote yesterday in a defense of his work. “We have to recognize the difference between an undifferentiated embryo and a fetus… those who don’t think that the use of embryonic cells is akin to an abortion or murder.
“I don’t buy that, but the overriding reality is that all future therapies will be based on iPS technologies — simply because companies want to avoid the kinds of complaints that are evident in the reader responses. Both President Bush and the Catholic Church have endorsed that iPS technology.
“The impact of the Obama administration policy change is not entirely rational and has as much to do with perception as science. Because of the Bush administration’s decision to consider some embryonic stem cell lines legitimate but not others, Big Pharma and investors were completely confused about the future of stem cell therapies. The Obama administration has made it clear that it will not oppose these therapies, and this acts to assure everybody involved that they will not be spending money on therapies that won’t be allowed to market.”
The 5 Min. Forecast
P.S. You can do what you like with the information. We happen to think the research is important. If you’d like to know more, read this quick Q&A with Patrick, conducted by our own John Wilkinson.
And obviously, this is a hot-button issue, but after today, you won’t hear much more from us about it. But if you want to invest alongside this trend in medical research, I recommend you read this report now.