PAYGO, A Currency Play, Trading Advice, Bailout Mania and More!

by Addison Wiggin & Ian Mathias

  • Obama reveals first real budget idea… will “PAYGO” do more harm than good?
  • Tin cups rush to Washington… plots thicken for financial, automaker, housing bailouts
  • Home prices take another fall… did your city escape the year-end bust?
  • Stocks fall back to 1997… Wayne Burritt with some technical trading advice
  • Chuck Butler says you should take a look at this currency

  Larry Summers fell asleep at the podium yesterday during the president’s Fiscal Responsibility Summit. That about sums it up, doesn’t it? The president’s chief economic adviser… asleep at the wheel. We only wish the Financial Times had the cajones to publish a picture.

  One potentially productive policy posture the president pretended to propose: PAYGO.

“The PAYGO approach is based on a very simple concept,” explained President Obama at yesterday’s Fiscal Reponciblity Summit. “You don’t spend what you don’t have. So if we want to spend, we’ll need to find somewhere else to cut.”

Amen and hallelujah!

A similuar policy enacted from 1991-2002 helped cut the federal deficit from 4.5% of GDP to a surplus of up to 2.4% of GDP… depending, of course, on whose numbers you choose to believe. A Republican Congress let the PAYGO rules lapse in 2002 during the run up to “shock and awe” in Iraq.

You can’t fight a war with PAYGO in place, because you don’t know how much the carnage is going to cost. PAYGO also has a terrific record of stiffling growth and raising taxes. But it forces Congress to balance its annual budget and address the national debt.

(If they’d simultaneously promise to roll back the 1969 “unified budget” rules and not allow anyone to borrow from Social Security… then we’d be getting somewhere.)

  Obama might actually be serious, too. His Web site claims that the junior senator “voted in 2005, 2006, and 2007 to reinstate pay-as-you-go (PAYGO) federal budget rules.” Of course, he waited until AFTER he signed the biggest spending progam in American history to champion the issue again. Huh.

  Alas, even if the man with the bully pulpit is serious, there are some stiff winds blowing…

  • Despite a $150 billion government backstop, AIG likely lost $60 billion in the fourth quarter of 2008. AIG execs marched to Washington yesterday, tin cups in hand. They told lawmakers that the company faces the biggest quarterly loss in American history… unless more money is pumped into the AIG coffer. Aside from additional funding, AIG is rumored to be asking the government to convert its preferred holdings to common shares. That would, in effect, completely nullify any “advantage” taxpayers had in this quasi-nationalization. AIG will report its official fourth-quarter earnings Monday.
  • Almost simultaneously, the Obama administration confirmed rumors yesterday that the government is in talks to accrue a 40% stake in Citigroup. Part of that deal would convert preferred shares to common, again making the taxpayer the likely loser.
  • And last, the Treasury announced needs to appoint a special adviser to handle the GM and Chrysler debacle. Those two companies recently came knocking for an additional, but not unexpected, $22 billion.

Heh,… A pay-as-you-go government? Not anytime soon…

  With home price charts like this, you can bet on more government housing bailouts, too.

The S&P/Case Shiller Home Price Indexes set more record lows in December, the group reports today. The 10-city index suffered an annual plunge of 19.2% in the month. The 20-city compilation was close behind, with a record 18.5% plunge.

“There are very few, if any, pockets of turnaround that one can see in the data,” said David Blitzer of S&P. “Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and eight of those MSAs now with negative rates exceeding 20%.“

Too bad mortgage borrowers didn’t adopt a PAYGO attitude between 2002-2006.

  And while we’re at it… here’s a quick quote you can file under “Yeah Right”: a joint statement yesterday by the FDIC, U.S. Comptroller, Treasury and Fed:

“Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.”

We’ll even take bets on this one. 3-to-1 says you won’t be able to repeat that quote in three months without laughing… or shaking your head with dismay.

  Considering all of the above, can you blame traders for selling stocks yesterday?

Aside from looming government interventions, investors grappled with downgrades in seemingly every sector. Morgan Stanley poo-poohed tech shares. UBS issued a warning about the American steel industry. Deutsche Bank took a hefty shot at GE, still a bellwether for Dow components. In the end, it was, ironically, only financial stocks that rose yesterday… but only because most are so beaten down they can hardly fall any further.

In the end, The Dow and S&P 500 fell about 3.5%, both to their lowest levels since 1997. The S&P is currently battling a six-day losing streak, its worst since October 2008.

  “The recent technical action is shaping up much like the market’s recovery after the dot-com fiasco,” notes Wayne Burritt. “Back then, the S&P tested the 769-789 level three times in the eight-month period between July 2002-March 2003. Each time the levels held and after the third was over, the market commenced a spectacular bull run.

“In fact, from its jump-off point of 783 in March 2003, the market didn’t stop until it reached 1,576 in October 2007. That’s a staggering 101% gain in just over four years.

“Today, the markets are wrestling with similar lows in the 741 area. It made its first test in November and succeeded. It’s now in the midst of a second test. If my thinking is right, it will test that low, recover and then test it once again. After the third, a new bull run could be in the cards.

“That said, I don’t have to tell you how much worse the fundamental pressures are now than they were in the post dot-com era. And that means the market bias going forward — regardless of what happened from a technical perspective a few years ago — is certainly to the downside.”

  To add to Wayne’s cautionary disclaimer, take a look at the VIX :

The VIX, as we’ve mentioned before, is a measure of market uncertainty. Specifically, it relates to the prices of options on the S&P 500… if option sellers sense greater odds of market volatility, they will demand higher option prices. So a cursory glace above, we think, sets the scene for the current market environment.

The S&P 500 may have returned to credit crisis lows, and while the most popular index of investor fear is still very high, it’s nowhere near previous records. Calmer, steadier hands have been selling stocks this week, and we wouldn’t be surprised if they keep selling until their doubts are proven otherwise.

  Yet futures this morning indicated a bounce today. Major market indexes opened in the black.

  The dollar remains a doll during the downturn. The dollar index is up again today, about a point and a half from yesterday’s low, to 87.4.

“Take the time to look at Norwegian krone,” advises EverBank’s Chuck Butler. Chuck has had a long-term love affair with the surplus/positive balance of payment countries and their respective currencies. “Norway always drifts to the top of those discussions,” Mr. Butler says “Last night, HSBC graded the currencies. Their pick for best currency? Norway’s.”

“This is a fundamental choice,” cautions Chuck. “There are times the markets do NOT follow fundamentals and fundamental choices do NOT perform. And with a currency like Norway’s, it really needs the euro to be underpinned for the krone to outperform the single unit.

“All I’m really saying here is that the dollar isn’t the ‘best looker,’ in my opinion… that claim to fame would be Norwegian krone!”

  Gold is fighting to stay in the pageant today. After pushing past $1,000 briefly Friday, it shed about $15 yesterday and is holding steady around $985 today.

  Oil, too, rose up to $40 recently, but dollar strength and economic weakness has bumped crude back a couple bucks to $38 a barrel today.

  Here’s why trying to follow the policy debate is a waste of time:

This poster, affectionately titled “McCreep”, was made by some Obama supporter and used during the campaign to scare voters away from voting for John McCain. Apparently, they felt like McCreep was going keep borrowing and spending to pay for the war in Iraq.
Meanwhile, the Heritage Foundation refused to support the film because it was too harsh on George Bush, despite the fact that Heritage is one of the most active participants in the Fiscal Wake-Up Tour, which we followed for 18 months while making the film.
Now, beyond the critique by Dean Baker , The Washington Post is calling the president’s Fiscal Responsibility Summit dead on arrival, because its being attended by David Walker and Peter Peterson , the protagonist of the film and the guy who bought it from us. The Post is afraid “deficit hawks” will take away their entitlement programs.
Huh? So the clueless on the left and the wonks on the right all hate the film and the discussion… because we’re advocating fiscal responsibility. In the meantime, a caller to a radio show I was a guest on last week here in Baltimore began:
“Yeah, I wasted $19 bucks on I.O.U.S.A.…”
He was pissed because we didn’t make the entire film about Ron Paul and Bill Bonner and attack the Federal Reserve for 84 minutes.
What a mess. Better to not waste your time… and get the hell out of the way of this train wreck before it runs you and your family down.

  “The government needs,” a reader begins, “to have the CEOs of these banks certify the balance sheets they are submitting for ‘stress testing,’ or else the process is worthless. There will just be further deterioration of off-balance sheet assets and more CEOs coming to Washington hat in hand. They already certify the SEC filings, so it would not be a huge stretch to make them do it for this.
“They should also back it up with personal fines and/or prison sentences for those whose statement of assets and liabilities turn out to be incomplete. A prison sentence may seem excessive, but I would argue that it is not. There needs to be accountability for this process to work, and throwing some of the jerks in the clink might help, first, reform Wall Street culture and, next, restore some confidence in the system.
“Plus, I would just like to see it happen. I think we could all use a good laugh at this point.”
The 5 responds: Yep, during the bust phase of any boom, the lust for blood rises.

  “Help me figure this out,” another reader asks. “Let’s use AIG, for example. The numbers are estimates. I have no clue what the real numbers are. Let’s say AIG has $100 billion in cash and assets that it can ‘leverage’ 30-40-to-1 through various derivatives, loans, etc. That gives the company $3-4 trillion in ‘exposure,’ right?
“Now, someone is asleep at the wheel and the value of those derivatives, loans, drops by $1-2 trillion. AIG is effectively underwater $1-2 trillion, more than it had to begin with. Hence, the borrowing from the taxpayer, or the ‘beg, borrow and steal’ deal we see morphing before our eyes daily. This is like me selling a put and having forgotten about it for a month while I’m clubbing in Ibiza and then returning to my screen to find out I’m in the hole for $20,000 — when the original put was for $250. Hmmm… obviously, the controls that prevent ‘me’ from overleveraging my account into the negative do not apply to the big boys.
“This sounds ridiculous, I know — tell me it ain’t so.”
The 5: If we’re following you… once you get back from Ibiza, it’s so. The rules that apply to big banks are different than those for you and me.
“On a side note,” the reader continues, “have you guys ever thought of organizing more ‘vocal’ live events with giant puppets and such to get out the vote against the current fiasco creators?”
The 5: We did that once… the puppets sold us out and bit us in the ass.
Addison Wiggin
The 5 Min. Forecast

P.S. One guy on our team who’s trying to help keep you from falling in the train’s path is Jim Nelson. He recently polished off his “Retirement, Plan B” report, which divulges his strategies for obtaining hassle free sources of extra income – despite the horrid job market. We encourage you to read it, here.


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