Government Mega Budget, Big GDP Revision, Gold Advice, Water Crisis, and More!

by Addison Wiggin & Ian Mathias

  • Latest government budget shocks the Street… Health care, student loan companies get crushed
  • Citi grabs the headlines today… Bill Gross on why nationalization just won’t work in I.O.U.S.A.
  • Commerce Dept. unveils huge GDP revision… John Williams asks are we in depression?
  • Byron King on buying gold… is it too late?
  • Plus, a troublesome trend getting worse by the day… the commodity destined to be “more important that oil”

  $3.5 trillion… seriously?

Yesterday, we hit the high notes of President Obama’s 2009 fiscal plan. Today, we look to the future, namely $3.5 trillion federal budget for 2010. Second only to his $3.9 trillion spending plan this fiscal year, the current budget is a rather clear statement that super-sized government spending is here to stay… at least until 2012.

  “I just bought 800 acres of land in Washington on the Potomac River,” declared master debt financier Donald Trump today. “It’s a club, with golf courses and other tremendous things… the reason I did it is I see Washington as the only growing place in the United States. They’re going to own the banks… they’re going to own the car companies… it’s a very scary scenario.”

  The nuances of Obama’s 140-page budget proposal caused a stir in the stock market. Health care companies, particularly managed care businesses, felt it the worst. The $635 billion in proposed government health care spending plus Obama’s declared desire to renegotiate Medicare agreements bumped the HMO (an index of health care suppliers) down 10%.

Humana is down 42% this week. UnitedHealth off 28%. Big Pharma is under pressure, too. Health care, once the pocket of stability in this tumultuous market, now has a target on its back.

(We know more than one character who’s keeping their IRA alive by shorting stocks just like these. “Keeping the powder dry for another day,” as it were.)

Sallie Mae shareholders didn’t think much of the new budget either:

The fine print in the latest budget proposes to strip the $85 billion student loan market out of (quasi) private hands and give it to the Dept. of Education. Assuming the government can run such a complex lending program better than the private sector, Obama says the move will save $4 billion a year.

  Traders were already in a foul mood after the barrage of lousy morning data , and as the day wore on, their collective dispositions soured even further. The Dow and S&P 500 ended down 1.2% and 1.5%, respectively.

  Before the market opened today, Citi announced an agreement with the U.S. government that will give Uncle Sam a 36% ownership of the once-mighty bank.

The deal will convert the government’s $25 billion in preferred shares to lowly common stock. That 8% coupon that would have yielded $2 billion in dividends, the rights to convert down the road — really, the entire advantage the American public had in owning this toxic stock… poof, gone… like it never happened. Did we miss the proxy vote?

The deal won’t give Citi any more taxpayer dollars, just a boatload of fresh tangible equity. The bank will also essentially wipe out all its preferred shareholders… they’ve has decided to simply stop distributing dividends to preferred holders. Bet the Singapore government and ol’ Prince al-Waleed — two of Citi’s biggest suck… er, investors — LOVE that deal.

  “The U.S. isn’t Sweden,” said Bill Gross of coming bank nationalizations, “and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks, but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Bros. was a mistake, just stand by and see what nationalizing Citi or BofA would do.

“Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which, unfortunately, dilute shareholders’ interests. To go further, however, and ‘haircut’ senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions.

“The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.”

  To cap off such a proud day in American banking history, Citi announced a $9.6 billion pretax write-down. It’s a ‘goodwill’ charge, the bank assured us, related to the value of some of Citi’s business units. Citi has now officially lost $27.7 billion for all of 2008.

Shares of Citigroup fell almost 50% pre-market this morning, to a pathetic $1.50 a share.

  The whole market was reeling from the Citi announcement at the opening bell. The Dow and S&P opened down about 2%, led by financials.

  The FDIC’s “problem list” now contains 252 banks, the most since 1994. The regulators announced yesterday that their infamous list grew 47% in the last three months of 2008. As usual, the FDIC doesn’t name the banks… that would actually be useful. Just know your role: Remain fearful and compliant. (How long until the FDIC gets its own color-coded “threat level” system?)

  Making matters worse, the U.S. economy shrank more than initially reported in the last quarter of 2008, the Commerce Dept. announced today. GDP fell at an annual rate of 6.2% in the fourth quarter, just a shade off of the guv’ment’s estimate last month of a 3.8% contraction.

(Just an aside here… amazing the chorus of Americans calling for Wall Street firings and arrests for such gross overcommitment of assets and underestimates of losses. Yet when disgusting revisions like this come out… not a peep?)

With the revised 6.2% crash, the fourth quarter was the worst in America since early 1982. The Commerce Dept. says the economy expanded 1.1% for all of last year, a number which we’re sure it’ll revise one day as well. Even if they don’t, that’s the worst rate of growth since 2001.

  “My definition of a depression,” says John Williams, “is a recession where the peak-to-trough contraction in economic activity exceeds 10%. Numbers suggestive of that threshold continue to surface, with industrial production down 10% year to year, with inflation-adjusted retail sales rounding to a 10% annual contraction and with housing and new orders for durable goods numbers showing much steeper declines.

“With the exception of industrial production, which dates back to 1919, most popularly followed economic series of today were started after World War II. While the war itself was highly disruptive to the economy, such was not a normal business cycle and rarely is considered in historical economic comparisons. So when an economic series starts showing its worst performance of the post-World War II period, describing same as the worst since the Great Depression is a reasonable assessment.

“On that basis, housing starts is the second major series (real retail sales was first) to hit its lowest annual percent growth of the post-World War II era, or since the Great Depression.”

  We’re glad to see the Obama administration, in the face of all this turgid economic data, is employing the same head-in-the-sand accounting as the nitwits who came before them. Here’s a chart of budget projections over the next 10 years.

In a trick worthy of Houdini’s envy, spending growth exceeds revenue, yet deficit magically retreats. And what’s going on in 2018?

Traders may not have liked the latest budget… but you might appreaciate this parody . If you’ve seen Zoolander, you’ll recognize these characters right away.

  “Faced with a prospect of downgrading its lifestyle,” writes Peter Schiff for Casey Research , “the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing.

”Our global creditors are now making the same mistakes made by subprime mortgage lenders. They are loaning us money that we will never be able to repay. In the process, they are enabling the largest expansion in the size of our government since the New Deal and crippling an economy already suffering from excess consumption.

”Although it may sound harsh, it would be far better for all involved if our foreign friends simply cut us off. Since their loans are merely fueling the growth of our government and artificially pumping up consumer spending, their savings will not only be lost, but their sacrifice will severely exacerbate our problems as well…

“If foreigners were to cut us off, there would be some immediate pain, but tough love is exactly what we need right now. Forcing Americans to live within their means, particularly the U.S. government, will be just as beneficial to the long-term health of our economy as similar restraint would have been had it been exercised by mortgage lenders. It’s too bad so few of us seem capable of making this connection, or learning anything from the mistakes of the past — even when the ink in the history books has barely dried.”

  Irrational dollar buying no longer surprises us. With all the news above, OF COURSE the dollar index has risen above 88.4. That’s the highest level since April 2006.

  The spot price for gold sank as low as $935 yesterday, but it’s back up to just below $960 an ounce as we write. Go, gold!.

  “I’ve never made a formal Outstanding Investments recommendation,” writes Byron King, “for buying a particular kind of gold or silver coin, or ingots from this mint or that or any such thing. Those kinds of gold purchases are too hard to track in a newsletter like ours. So I’ve recommended gold and silver miners and their shares. But over the past couple of years, I hope you’ve had the chance to acquire some real metal for your portfolio. Agora Financial has been banging the golden drum for at least 10 years. If you have never bought any gold, it’s still not too late. I think that the recent visit to $1,000 is just the beginning of another great wave of gold buying. I won’t be surprised to see $3,000 gold.

“Coins and ingots are the kinds of things you keep in your bank safe deposit box or in a well-hidden home safe. Some people keep them in their ‘second’ home safe. Why a second safe? Well, the first safe is the one with a few hundred bucks of cash and some good-looking costume jewelry in it. You would open the first safe if a robber broke into your house and held a gun to your head. (Sorry, I’m not kidding. We live in a tough world.)

“For all the talk in Washington about getting the national economy ‘back on track’ and spending under control, I think you still need to keep an eye on gold and silver. Get some. Own some. Hold some.”

Last today, a sign of the times we’re sure Chris Mayer’s legion will appreciate:

A corner of Lake Mead… looking just a little lower than normal

The water crisis in the American Southwest is getting serious.
According to Bloomberg, the Colorado River region is suffering its worst 10-year drought in recorded history. As a consequence, Lake Mead has been losing 1% of its water every year since 1999. Among other problems, by 2012, the water line will fall below the pipe that delivers 40% of Las Vegas’ water. There are various projects to install pipes lower in the lake’s basin, but still… how long can we keep putting Band-Aids on this blister?

“Water is going to be more important than oil in the next 20 years,” says Dipak Jain, dean of the Kellogg School of Management at Northwestern University.

  “It doesn’t do any good,” writes a reader responding to yesterday’s 5, “to say that letting the ‘too big to fail’ banks fail ‘wouldn’t be pretty,’ as you phrased it. The interconnectedness of the financial institutions would create a run on the banks, a national panic and a total abrupt halt of the credit economy. Then those without savings and cash — currently much of the entire American society — would not be going to the dry-cleaners, buying furniture or a replacement microwave or even getting their groceries at the store.

“The economy could easily halt — not ‘pretty,’ indeed. Now I for one would be tickled pink to prosecute all those who violated their fiduciary trust (in other words, drove their banks into the ground with wild-eyed greed). But as even former President Bush figured out and actually stated, it is all a house of cards, and we’re stuck with doing some propping. The least the better — but a total system collapse (a true flushing of the toilet) is not a viable alternative on any reasonable humanitarian grounds.”

The 5: Yep. That’s the argument that’s carrying the day.

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

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