Backfired Stimulus

by Addison Wiggin & Ian Mathias

  • The Fed can print it, but can’t control it: States hoard money intended to save teacher jobs

  • Sign of the times: Top-performing global indexes belong to socialist nations

  • Rich Lee on the sudden resurgence of the eurozone crisis

  • Plus, Alan Knuckman on the recent stock selloff… beginning of a downtrend or an isolated event?

 

  You have to be especially heartless to lay off a teacher, says the political will off the moment. That was the sentiment behind the $26 billion state stimulus bill passed last week, $10 billion of which was supposed to save 160,000 teaching jobs at risk of elimination due to budget shortfalls.

Do it for the children, right? Maybe not…

  “We’re a little wary about hiring people if we only have money for a year,” Clark County Las Vegas CFO Jeff Weiler told The New York Times this morning. Heh, what do you mean, Jeff? It goes against your fiduciary instincts to spend “free” money today knowing you will need more of it tomorrow?

“You’ve got this herculean task to deal with next year’s deficit,” said Lydia L. Ramos of the Los Angeles Unified School District, which might just take its “stimulus” money right to the bank in hopes of getting an early start on the school district’s $280 million 2011 budget gap. “So if there’s a way that you can lessen the blow for next year, we feel like it would be responsible to try to do that.”

The Times is covering this story as you’d expect, tugging on heartstrings with first-hand profiles of teachers on the brink and a general air of resentment… “[S]ome of the nation’s biggest school districts are balking at using their share of the money to hire teachers right away,” they report.

But haven’t we been through this already? Recall 2008, when a $160 billion stimulus gave every middle-class American a check for $300… and what did they do with it? A few months later, banks get $700 billion… and didn’t lend a penny of it. GM got $57 billion, then went bankrupt. AIG… we don’t even keep track anymore.

We feel for teachers and their students as much as the next guy. But can they be “saved” with more easy money?

  The stimulus debate du jour is how the government will save Fannie Mae and Freddie Mac. More government support is vital, said Treasury Secretary Timothy Geithner, the maestro of yesterday’s White House housing summit, “to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn.” It is, after all, your God-given right.

To be clear, the Treasury “will make sure the GSEs have the resources to meet their financial commitments,” Geithner added. Whatever the fate of Fannie and Freddie, it will be financed with tax dollars and controlled by government. Both companies, despite being at the very heart of the financial crisis, were left out of the recent Financial Reform Bill.

“Government is part of our future,” Bill Gross responded. “We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Scary stuff, eh?

  As menacing as this all ought to sound, here’s an interesting twist: Some of the best-performing stock markets in the world this year are in socialist-leaning nations. Denmark’s OMX 20 (like our Dow) is up 22% so far this year, the best-performing index in the developed world. Incredibly, Hugo Chavez’s IBVC index of Venezuelan’s stocks is close behind.

Compared to the S&P 500, it’s no contest… 2010 is the year of the socialist investor.

There’s more going on here than just form of government. Denmark, for example, is in the catbird seat of the euro crisis — part of the EU but not a euro nation, very low debt and a conservative banking system.

But still, it’s worth noting… in a world that’s terrified of excess government involvement, two countries with massive state presences are giving investors top-rate returns.

For investment advice on this matter, you should listen to Jim Nelson’s latest online presentation. Our fixed-income man has found a nifty way to tap into this trend.

  “Market sentiment has turned on the rest of Europe,” The Richebacher Society’s Rich Lee wrote to subscribers late last week. “Worries are growing that current strategies and aid packages will not be enough to curtail further regional economic losses.

“Problems that have always been there are getting noticed once again. This time they are centered on Ireland and Spain. Of course, these two countries have been in the mix all along, but their negative contributions were mainly overshadowed by Greece's problems. Now the two are casting shadows of their own. Fears are mounting over both rising bailout aid and sovereign debt costs. This has sparked fear that further external obstacles lie ahead in bringing the EU financial crisis to a halt — slowing down the possibility of a quick recovery.

“It's not like Spain and Ireland aren't trying. Ireland's government has cut spending, raised taxes and made drastic public worker wage cuts, yet budget deficit problems remain relatively the same. The country's deficit is still approximately 14% of gross domestic product. The only real economic change in the last couple of months has been unwelcomed — unemployment has risen to about 14%. But what is most disconcerting is the fact the current austerity plan is set to cost more than originally planned.

“Anglo Irish Bank, one of Ireland's major banks that almost failed, is in need of an additional 10 billion euros. That's on top of the already pledged aid of 14.3 billion euros issued by the European Central Bank to keep the bank afloat. The number is staggering. It's even worse considering the fact that the full bailout of 24.3 billion euros would constitute almost 12% of Ireland's overall gross domestic product.

“The sky-high bill for recapitalization has foreign investors worried and clamoring for higher rates of return when it comes to bonds. Although Spain conducted relatively successful bond issuances in the last couple of months, the interbank market still remains relatively closed to the country — as well as Ireland. This means that both countries are unable to obtain favorable market-level lending rates.”

  Back in the States, traders are a tad more optimistic. BHP Billiton’s attempted takeover of Potash Corp. helped bump the S&P 500 up over 1% yesterday. You can spin this story into general market optimism in more ways than one…

  • The mere fact that BHP made a bid shows a huge, multinational company willing to make a big bet on at least one industry.

  • BHP’s offer was all cash. In other words, it might think its own stock is too cheap to be offered as currency.

  • Potash rejected, even though the offer priced the company 16% higher than market value. They clearly think they are not only worth more now, but also will be worth more down the road.

  “As it stands, “ says our resource trader Alan Knuckman, “the bullish trend for stocks is still intact. Last week’s selloff was not a change in trend but rather a standard pullback to support levels. The 1,070/1,065 level for the S&P 500 held strong, and most importantly for a bullish strategic mindset, new lows were not made after the gap Thursday. This can be interpreted as a positive. When the market was on its heels, additional selling did not emerge and it was able to stabilize.

“Another positive indicator: The VIX, which measures investor fear, was also unable to reach above 28. It bounced on the selloff but did not rally with subdued concerns of more selling. Combined with the S&P support holding at that 50% retracement of the 1,130 high, this tells me that last week may have been an isolated event.

“All signs are positive if the stock market can get some catalyst to start the climb again with the majority of earnings behind us. Remember, second quarter numbers are what drove the market on its last run.”

Perhaps that catalyst would be a BHP/POT deal. Even though Potash rejected the offer, BHP announced today it would continue making hostile bids in hopes of a shareholder mutiny.

  Only one shred of data today, and it ain’t pretty: Bankruptcies in the U.S. rose 9% last quarter to the highest level since 2005. According to the Administrative Office of the U.S. Courts, 422,061 parties filed for bankruptcy between April and June. That’s up 9% from the previous quarter and 11% year over year.

And that “most since 2005” statistic really doesn’t do the situation justice. Remember that’s the year Congress overhauled American bankruptcy laws, making it notably harder for businesses and individuals to file.

Nevada has the worst rate (surprise, surprise). More than 1 in 100 people living there have filed in the last year.

  After rallying through most of this month, gold is sticking to a tight range. The spot price has been bouncing between $1,215-$1,230 all week.

  The dollar index, however, has been in steady decline this week as stocks move higher. Opening at a high of 83 Monday, the index dipped below 82 this morning.

  “Getting our history a bit more accurate,” a reader writes, refining yesterday’s issue. “No, it was primarily Lenin and Trotsky who engineered the overthrow of the Tsar in 1917.  Stalin did not rise significantly within the power struggle until Lenin's illness began in 1922.  Nor was the assassination of intellectuals the first thing done [what with Lenin and Trotsky among the most prominent examples].  It took the consolidation under Stalin to get this going. What seemed like common sense once the Bolsheviks were in power [with new Hope] was to argue bitterly among themselves, breaking into numerous factions, squandering their gains, until totalitarian strong-man Stalin took over. Now does that seem to be getting a bit closer to home?”

  “Do you think that possibly,” another reader speculates, “the whole reason for amnesty for 12 million illegals (20 million is more likely) might have some connection to the Social Security shortfall? Hmmm, 12-20 million (mostly young) illegals now with potential citizenship paying into Social Security, which I presume would be part of the deal. My self-employed gardener might not even apply under those terms when he sees a 15% self-employed tax facing him in addition to IRS tax filings. Just a thought.”

  “I have been paying Social Security taxes since I graduated from high school in 1971,” our last reader writes. “Whether that money went to pay my parents' benefits or into the general revenue fund as the surplus was used to purchase Treasuries, makes no difference. That money has been spent. If I and everyone else in my generation [I'm almost 57] are to collect any SS benefits, that money will come out of the paychecks of our children, and has anyone else noticed that good jobs for our young people are not real easy to find these days? I'm still hoping for them to become fully self-supporting. To ask them to support me as well seems a bit much. I have been promised SS benefits, along with all other wage-earning Americans, but I'm making plans to get along without them. I don't like the idea, but yammering about how "they better not fail to pay up" is pointless. Whether people march on Washington, or start a revolution, or whatever, that's not going to bring back the money they feel they are owed. It does, however, waste time and energy that could be spent preparing to get along without it.”

The 5: There are exceptions to every rule, but we’re hard pressed to think of many situations where having a backup plan is a bad idea. Saving for retirement certainly doesn’t seem like one of ‘em. Good for you, and good luck.

If you need some help, you should really check out what our income analyst Jim Nelson’s been up to. His latest report deals especially with retirement investing and preparing for Social Security’s inevitable crisis… which could very well come sooner than most people think.

Cheers,

Ian Mathias

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