by Addison Wiggin & Ian Mathias
- Stress test finally over… The 5 selects the juicy bits from the government’s latest dish
- Another half a million jobs lost… and the market celebrates?
- Bill Gross’ “prescribed strategy” during these tough times
- Eric Fry sounds off on the latest Obama budget cut… or lack thereof
- Dan Denning shares “most important development in financial markets all week”
Nothing like peeling a Band-Aid off slowly… The Treasury concluded its painstaking six-week stress tests late yesterday and announced (gasp) the 19 American banks under stress need to raise $75 billion if they plan to stay in business.
Ten of the 19 banks under TARP “protection” will be REQUIRED by the U.S. government to raise capital. They include: Bank of America, Citi, PNC, Fifth Third, GMAC, Wells Fargo and others. Notably absent are JP Morgan and Goldman Sachs.
The best part: Under the government’s “worst case” stress test, the 19 banks stand to lose another $600 billion… an amount large enough to require at least a few bankruptcies and or nationalizations.
What’s the “worst case” according to Timothy Geithner? 10.3% unemployment, a GDP contraction of 3.3% for the year and another 22% fall in housing prices.
Heh, that’s it? That’s not far off our best-case scenario. In fact, with a modicum of imagination, it’s not hard to envision much worse.
As if their car business wasn’t in bad enough shape, GMAC is also the most offensive bank of the lot. GMAC will have to raise $11.5 billion — over 6% of its total assets. No other lender has been ordered to raise more than 2.1%.
The Bureau of (be)Labor(ed) Statistics says 539,000 Americans lost their jobs in April. That’s a horrendous number, but still below the 600,000 forecast earlier in the week. And it’s actually the best jobs number since October.
The official unemployment rate still fell in line with Wall Street estimates. At 8.9%, it’s a 25-year high and just a hair below the 1975 peak of 9%.
Since the beginning of 2008, 5.7 million Americans have lost their jobs. A record 6.3 million people are currently filing for unemployment benefits.
The market reversed its normal course… traders sold the rumor of stress test results and bought the news. The Dow and S&P 500 shrank about 1.2% yesterday, fearing the worst, and then swelled by an equal amount this morning.
Traders, and Pimco’s Bill Gross, were mysteriously empowered by the government’s test.
“As wealth is redistributed,” notes Gross trying to put the Treasury’s strategy in perspective, “and the invisible private hand of Adam Smith begins to resemble more and more the public fist of government, then asset values should be negatively affected.
“First comes the haircutting and burden sharing, most recently evidenced by Chrysler and soon to be played out via the stress testing and equity dilution of government ownership of ailing banks. In those footsteps, however, will follow a slower rate of economic growth, not just in the U.S., but worldwide as heretofore libertarian capitalism is bridled, saddled and taught to trot, instead of gallop, over the investment plains.
Gross doesn’t “bemoan this transition”; rather, he simple “recognizes it.”
“Slower growth can be a public good,” the bond king writes, taking a big sip of the Kool-Aid sitting next to his keyboard, “if it avoids the cataclysmic effects of double-digit unemployment, escalating foreclosures and fear of financial insecurity. But the Obama cannon shot will have financial consequences. Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for new bull markets in a multitude of asset classes.
“Stable and secure income is still the order of the day. Shaking hands with the new government is still the prescribed strategy, although it should be done at a senior level of the balance sheet. If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned. Risk will not likely be rewarded until the global economy stabilizes and the Obama rules of order are more clearly defined.”
Of course, Gross is talking his book… for our take on secure income, be sure to check out Lifetime Income Report.
The Obama administration proudly unveiled a $17 billion budget cut yesterday. The president’s team reduced or eliminated 121 government programs, and the resultant savings “even by Washington standards,” President Obama suggested, “should be considered real money.”
“Here’s a news flash folks,” comments our Eric Fry, “Money you do NOT borrow does not constitute ‘savings.’ But this elementary fact does not prevent politicians, professional investors or journalists from utilizing the vernacular of thrift to describe one of the most reckless credit binges in the history of mankind.”
“And let’s not forget,” Fry continues “that real-world estimates of the federal deficit would add several hundred billion dollars to the government’s optimistic $1.17 trillion forecast. Nor should we forget that during the last few months, the government has added trillions — literally trillions — of dollars of direct and implied guarantees to the liability side of its balance sheet.
“In this context, $17 billion of savings doesn’t look like savings at all; it simply looks like a tiny dollop of credit that the government has not yet inhaled.”
The dollar’s down today, mostly because stocks are up. The euro goes for $1.35, the pound $1.51 and the yen 98. That translates to a dollar index score of 83.2, almost a point lower than yesterday. We suspect the dollar would be in even worse shape today, if not for this:
“The European Central Bank joined the quantitative easing (QE) club yesterday,” notes our man down under, Dan Denning, “and it did so in style. First, Europe’s central bank cut short-term interest rates to just 1%. This was expected. The bank has cut rates by 325 basis points since last October.
“The inflation hawks at the ECB seem to have been outflanked by the counterfeiters (money printers). Now the world’s major central banks are in ideological agreement that the response to falling asset prices is to support them directly through money printing.
“This is probably the most important development in financial markets all week. It means you can expect an even larger expansion of the global monetary base, the precondition for a big surge in inflation when banks begin lending again.”
Dan will once again be bringing his unique style of analysis to our Investment Symposium in Vancouver this summer. Last year, he was the only speaker in the lineup to sport a pink bikini top during his presentation. If you’d like to know why… you’ll have to join us again this year.
Commodities are following stocks up today, with gold being one of very few exceptions. After a small sell-off yesterday, light sweet crude is back up to $57 bucks, a dollar below its 2009 high. Copper — a classic gauge of economic sentiment in the commodity market — is up another 2% today, to about $2.17.
All told, the CRB index of commodities is up about 15 points this week, to its highest level since the new year.
Gold, however, seems to be waiting for a better deal. It’s holding steady at yesterday’s spot price of around $910 an ounce.
You may have heard about this last bit already, but we just learned of it this morning: In April, in New York, in a feat our Patrick Cox would surely find illustrative of the times, an Australian performance artist named Stelarc starred in a surgical video in which a prosthesis of an ear — to which stem cells were added — was attached to his forearm.
The new forearm ear will house an Internet-accessed, Bluetooth-capable microphone. "Post-evolutionary strategies" are required, Stelarc tried to explain to the NYTimes, because “the current state of the body is obsolete.”
In a previous experiment, Stelarc wired some of his muscles to computers in Paris, Helsinki and Amsterdam, “to understand a semicontrollable split-body experience."
More power to ya, buddy.
“This unbroken upward movement in stocks seems a bit much,” writes a reader, “even for a fabled bear market rally. Makes me wonder… does the invisible hand behind this upward movement belong to Uncle Sam, rather than market forces? After all, rising stocks make us all happier and more likely to spend and go into debt. Could stimulus dollars, either directly from the feds or through their subservient proxies, the banks, be the cause of this rally? Personally, I’m taking profits as certain levels are reached, and no one else I know of is jumping into new positions. It’s all just a little too suspicious.”
“I do not think that you give silver its fair coverage,” a reader opines. “With the coming destruction of the paper dollar in the U.S. and with a very decided tilt toward gold in almost every area of the economy, silver still has a large spread between the price of gold and its price. So how about a well-researched report on Ag for those of us who have both?
“Keep in mind that a Franklin half dollar is easy to identify and is small enough to not cause a merchant to fail to understand its value, if it comes to the trillion-dollar notes that are circulating in some places here in the bad old USA. My prognostication is 20% inflation by the end of 2010 and rising from there in fits and starts.”
The 5: Fair enough….
“Congratulations,” our last reader says, “on showing via YouTube some of the dumbest actions taken by your duly elected government and by the private sector — the banks. Why did your government take all the loss and none of the upside on the bank bailout? As a Canadian, I worry that some of the U.S. actions may be copied by our side.”
The 5: Yeah, it’s a fetid cesspool. Steve Friedman, chair of the New York Fed, resigned today because the rest of the world somehow missed the fact that he has been sitting on Goldman’s board and has been loading up on shares in the bank since December.
But we wonder if anyone really cares. Ron Paul tried to legislate some oversight and transparency of the Federal Reserve back in February, but the bill got stuck and is still in committee.
That video, BTW, jumped up over 50,000 views since yesterday.
Enjoy your weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. We have to warn you about our latest special report… this one is only for true-blue fortune seekers. The title says it all: How to Become “Miserable Rich”