by Addison Wiggin & Ian Mathias
- President admits to “unsustainable’ spending, “mortgaging our children’s future”… then signs another bailout
- Automakers do the deed… 3,400 U.S. dealerships to be closed, 391,000 employees out of work
- Rob Parenteau says U.S. GDP overstated, has a chart to prove it
- Cracks in the euro’s frail amour… eurozone economy shrinks at record rate
- Dan Amoss on why bank recovery could still be a long way away
Could this be… an epiphany?
“We can’t keep on just borrowing from China,” President Obama declared at a town hall meeting in New Mexico yesterday. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”
Bravo, Mr. President.
Obama continued on the matter, calling our current deficit spending “unsustainable” and suggesting that sooner or later the routine buyers of U.S. debt will “get tired” of tossing their reserves in our money hole.
So what will result from this fiscal catharsis? Budget reform? A national effort to pay off our debts? The end of borrowing, bailouts and trade deficits — the beginning of a sustainable existence?
“What is driving us into debt is health care, so we have to drive down costs.”
Bummer… all just a pitch for health care reform. Well, it’s a start, sort of.
And as Mr. Obama preached fiscal conservatism, his administration wrote the U.S. insurance industry a $22 billion check. Allstate, Prudential, Ameriprise, Hartford Financial, Lincoln National and Principal Financial will now all have access to TARP funding, the Treasury announced today.
In exchange for the bailout, the government will get a boatload of warrants and preferred shares, further complicating Uncle Sam’s quasi-ownership of the financial sector.
“The Obama administration changed accounting rules in order to reduce the reported deficit level,” reports Shadowstats’ John Williams. “Under mounting global criticism for its fiscal excesses, the Obama administration has taken some ‘corrective’ action, by changing the accounting rules for the reporting of federal deficit… The ‘highlight’ of Tuesday’s Monthly Treasury Statement was:
"‘The administration has reclassified prior-month expenditures related to the Emergency Economic Stabilization Act (EESA — also known as TARP). Consistent with statutory requirements of the Federal Credit Reform Act and EESA, TARP purchases are now being accounted for on a net present value basis, taking into account market risk. Accordingly, budget outlays have been reduced and direct loan financing activity correspondingly increased by $175 billion.’
“While such gimmicking,” continues John, “would be lucky to skirt along the boundaries of generally accepted accounting principles- (GAAP-)based accounting — given the inability of the government to assess ‘market risk’ within the bounds of reality — such has not been the nature of the monthly deficit reporting. On this basis, other questions arise too, as to the monthly accounting tied to the handling of Fannie Mae and Freddie Mac.”
An estimated 3,400 car dealerships will be closed over the next year or so. Yesterday, Chrysler sent 789 “Dear John” letters to dealers around the country, cutting about 25% of its sales centers. GM is expected to do one better… America’s “biggest” automaker plans to cut 42% of its dealer network over the next year, or about 2,600 dealerships.
That won’t be good news for the employment scene, eh? GM estimates its cuts will annex roughly 300,000 jobs. Some back-of-the-envelope math would then put the Chrysler cuts around 91,000 lost jobs… that’s quite a tally.
And all those gigantic, empty dealer lots will do wonders for commercial real estate values too… ouch.
“Real GDP growth in the U.S., while already horrible, is overstated,” reports Rob Parenteau in his latest Richebacher Society dispatch.
“If we compare consumer spending on services with hours worked in the service sector employment report, we find a huge surge in implied service sector productivity.
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“We suspect the service sector consumer spending series is overstated, which means real GDP growth, while already horrible, is also overstated. As we’ve mentioned before, government surveys of service sector activity are not as timely or as complete as those available for the manufacturing sector, so a lot of trend extrapolation goes on in the Washington, D.C., data mills, at least on the initial estimates of service sector activity.
“Since productivity growth is used to estimate unit labor cost growth, costs also must be understated for the service sector as well, which further implies service sector profits are overstated. This should all come out in the wash in future revisions, but for the meantime, it is very likely that the GDP, consumer spending and profit realities are worse than currently reported.”
Rob’s been going a fine job carrying out one of Dr. Richebacher’s famous traditions: digging out the inconsistencies — and sometimes the absurdities — in government-reported economic results. If it’s high-end economic analysis and forecasting you seek, we can think of no better destination… check out the newly formed Richebacher Society, here.
Speaking of rough GDP numbers, the eurozone unveiled some nasty economic news early this morning. For starters, Germany dropped its first-quarter 2009 GDP number… a 3.8% contraction, worse than anticipated, and the worst since ze Germans starting keeping track in 1970. On an annual basis, that’s a whopping 6.7% contraction, another German record.
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Over the last three quarters, the German economy has erased all GDP gains made since 2005.
Soon after, the EU statistics agency revealed a 2.5% quarterly GDP contraction. For the whole year, that’s a 4.6% plunge… both numbers are EU records, too.
These ugly numbers are putting pressure on the euro today, and helping keep the dollar afloat. The euro fell over a cent on the news and now trades at $1.35. And since the euro is the most heavily weighted currency in the dollar index, the greenback measure is up a few tenths of a point, to 82.5
American investors shook off recent pessimism yesterday and scooped up “bargain” retail and financial stocks. The S&P 500 snapped a three-day losing streak by inching up 1%.
Major indexes opened flat this morning… traders still can’t decide if the bull market is for real or just a sucker’s rally.
“We have probably not seen the end of the stress test process,” forecasts our short side analyst Dan Amoss.
“The market’s reaction to the stress test — in the form of soaring bank stocks — tells me that the consensus is treating this stress test as if it has the ability to magically predict year-end 2010 capital levels with pinpoint accuracy.
“In my judgment, the stress test was not stressful enough. For instance, it is not really accounting for borrower behavior in a scenario where they are underwater on their mortgage and under- or unemployed.
“The stress test’s estimated losses on second-lien mortgages in particular seem very low. In foreclosure, these are often total losses. With another big wave of Alt-A resets and foreclosures in the pipeline, the performance data on second-lien mortgages should worsen. Several state- and bank-imposed foreclosure moratoriums are ending. The bulk of housing activity right now consists in foreclosure auctions and short sales. How much are second-mortgage liens worth under this scenario? Not much.
“I think the risk of the zombie bank scenario is much higher. We’ll probably see this manifested in continued tight credit conditions. The banks under the most intense scrutiny will tend to reinvest cash flows into less-risky assets like Treasuries and agency mortgage-back securities (another form of government-guaranteed debt) — rather than write new commercial or consumer loans.”
Consumer prices, so the government says, just experienced their biggest annual decline since 1955. The CPI printed flat today, in line with expectations, bringing the annual inflation level to –0.7%, the lowest in 54 years.
Commodities are lying low today. Oil is down just a few cents from yesterday’s close, at $58 a barrel, after yet another International Energy Agency global demand revision.
Gold broke out of its recent trading range, but only by a little. After treading water at $925 an ounce the last few days, the spot price climbed to $933 this morning.
Last today, an opportunity: The credit crisis could be the best thing that ever happened to entrepreneurial builders. Take Amr Abdullah al-Dabbagh, for example.
That tongue twister of a name is the head of Saudi’s sovereign wealth fund. Despite oil revenues crashing over the last year, he’s accelerating the construction of King Abdullah City, an $80 billion project meant to bring nonoil prosperity to the region. It’ll be about as subtle as you’d expect:
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A projection of the “financial island” within Abdullah City
Saudis are pushing forward because costs of construction are plummeting. Between the fall of material and labor costs, al-Dabbagh estimates the project is 30-40% cheaper.
“The Saudis’ goal of using their oil riches to diversify their economy is smart on several levels,” says Frank Holmes. “Saudi Arabia stands to gain new and reliable revenue streams by refining oil into chemicals, plastics and other products, and by developing a range of industrial and light manufacturing capabilities.
“Perhaps even more importantly, these cities would create well-paying jobs — the estimate for King Abdullah City alone is 1 million new jobs. More than half of the Saudi population is under age 25, and the government recognizes that employment opportunities are crucial to avoid social unrest.”
Frank is always armed with the latest and greatest global investing perspective. You can count on him delivering the best of his analysis at our annual Investment Symposium in Vancouver, B.C., this July. If you haven’t made reservations yet, it’s time to pull the trigger. Get all the details you’ll need, here.
“Some of my fellow whining readers,” writes a reader, “need to get their heads out from ‘where the sun don’t shine,’ as my pappy used to say. Yes, Social Security (SS) is, in fact, a tax-based redistribution of the wealth system. So?
“Just as some churches have fixed and required membership fees so that the church can take from the richer and give to the poorer, the government is acting within the same Judeo-Christian ethical scheme. It’s nonoptional charitable giving. Once you understand this, fixing SS is trivial. You eliminate all benefits for everyone whose adjusted gross income exceeds $250,000 (the richer) — you tax all income at any level (equity in "giving") — and you set retirement at age 69-plus (the new 65).
“Presto — SS is fixed for the next 100 years at least. Truth in packaging would only require that we relabel it the National Senior Citizens’ Retirement Charity Fund.”
The 5: Ugh… well at least we wouldn’t be kidding ourselves anymore.
Have a great weekend,
Ian Mathias
The 5 Min. Forecast
P.S. If you want to be in the first wave of investors, tonight is your last chance. The news our tech analyst Patrick Cox was anticipating broke late last night, and if you want to capitalize on its investment potential, this is your last opportunity. This train to transformational wealth is leaving town… will you be on board? Details here.