Addison Wiggin – June 2, 2011
- “It’s like you’re living in a different country”… Scenes from America’s immediate future
- Moody’s hits the trifecta: on Greek and U.S. debt and the big 3 U.S. banks
- The chart that reveals what must happen before the Fed announces QE3
- 32 years of Israeli-Egyptian peace fraying, and an obvious investment implication
- The app that predicts the future! The 5 checks out a highly touted finance tool
Somewhere in the sad tale of Raymond Zack lies a warning about the future — the new financial crisis, the catalysts for which we were searching yesterday and the day before.
Zack, depressed and on disability, walked into San Francisco Bay on Monday… and allowed the tide to wash him away to his death. He was 52.
The windsurfers and joggers at Crown Memorial State Beach stood and watched. One called 911. Alameda police and firefighters showed up. They too stood and watched.
And that’s all they did.
Funding for the fire department’s water-rescue training program dried up in 2009. That meant firefighters had to use overtime hours to train… and OT has been cut back recently. So no one had the proper certification. “Without it, the city would be open to liability,” reports KGO-TV.
Two hours later, an off-duty nurse swam out 50 yards to retrieve Zack’s body. Liability was no longer an issue.
“It’s like you are living in a different country,” a witness told the San Jose Mercury News.
Indeed, it is. The country is broke. And the impact of its bankruptcy are beginning to show from the bottom up. Libraries are closing in Charlotte, N.C. Garbage pickup is being cut back in Columbus, Ga. Camden, N.J.’s police force has been cut in half.
As early as Jan. 21, 2010 The Atlanta Journal–Constitution was beginning to report on the seeds of the new crisis: “About 80% of stimulus money has gone directly to state governments,” the paper observed. “Instead of being used to create new jobs, the bulk of the money has been used to save existing state government jobs — teachers, law enforcement and others — and for shoring up sagging state budgets.”
In a new documentary, which we’ve tentatively titled Risk!, we’ve been chronicling the challenge of entrepreneurs in the post-Panic environment to create and sustain new jobs. The policy mix that has come along with the effort to save government budgets has been anathema, in our opinion, to an environment that encourages entrepreneurship.
Unless the politics change and people begin to realize that government, even at the local level, cannot be the guarantor of American prosperity, the economy will continue to be hollowed out from the inside. Capital, in large quantities, is being misallocated to saving unproductive government assets… and crowding out investment in job-creating entrepreneurial efforts.
Worst of all, it’s not like the government is using its savings to fund its spending sprees. As you know, the U.S. government has no savings. Instead policymakers have chosen to swipe Uncle Sam’s credit card and… poof, everything has been magically “paid” for.
We can’t help but sit back and wonder what the world will look like when that credit card is eventually cut off. Or when it becomes much more expensive for the federal government to borrow money.
As we pointed out in our first film, I.O.U.S.A., the states can’t print money. They have to cut spending. They have to cut services like police, firefighters and trash collection. For most Americans, those cuts won’t be popular. As we’ve seen all across the country, people get angry the things they’ve been “promised” are cut.
But unlike the states, when the federal government’s credit card is cut off, it doesn’t have to cut back. It can continue to spend. Continue to promise. And continue to run the printing presses day and night to pay for political whims. But for how long?
We’ve dedicated substantial resources to describing the anatomy of this next crisis in our Apogee project. We’ll be releasing our findings and, before the end of June, including a blue print for avoiding the fallout from the new crisis when it manifests itself. Watch these pages for details…
Moody’s sure knows how to crash a party. We’ve been wondering how the rating agencies would respond to new impending calamity, given their track record from 2007-2008… now we know.
Late in the trading day yesterday, it downgraded Greek government debt further into junk status.
This came a shock to stock traders who ran up the market 120 Dow points on Tuesday because they believed a second Greek bailout was a lead-pipe cinch. Heck, they read it in The Wall Street Journal.
The Dow, which had already given up all of Tuesday’s gains before that news hit the tape, doubled the loss, and then some.
Today Moody’s turned its attention to the major U.S. banks. It didn’t downgrade any of them. It didn’t even put them on negative watch. It merely said it would review the ratings of Citigroup, Bank of America and Wells Fargo.
As you may recall, those are three of the four banks that Chris Whalen of Institutional Risk Analytics said yesterday might finally be forced to write down their bad mortgage debt, rendering them insolvent.
With a couple hours remaining in the trading day, Moody’s hit the trifecta — warning “very small, but rising risk” of a “short-lived default” by the United States if Congress doesn’t raise the debt ceiling this summer.
If Moody’s doesn’t see progress by mid-July, Uncle Sam will be put on review for a possible downgrade of its AAA rating.
Remarkably, traders have sloughed this off. At last check, the major indexes are now flat compared to yesterday’s close.
At a time like this, you might wonder how readily the Federal Reserve will step in with QE3. The answer, based on past performance is… not yet.
In the first place, QE2 doesn’t formally wind down for another 28 days. But from a market-psychology standpoint, it effectively ended with Ben Bernanke’s April 27 press conference. The S&P 500 reached a post-2008 peak two days later.
Here’s an update to a chart we’ve run showing the fate of the S&P with and without quantitative easing:
After QE1 ended, Bernanke held off on signaling QE2 until the S&P had fallen 13%. And the volatility index had spiked 48%. This morning, the VIX is up only 26% from the low it set on April 28.
Remember: It’s all about the stock market for the Fed.
“Higher stock prices will boost consumer wealth and help increase confidence,” Bernanke wrote last year in The Washington Post. Assuming the theory is balderdash, stock prices haven’t fallen nearly enough for Bernanke to break a sweat. Yet.
In what’s starting to sound like a broken record, first-time unemployment claims fell last week… but the drop was less than the “expert” estimate of economists polled by MarketWatch… and the previous week’s figures were revised higher.
All last month, the number was above 400,000. If the U.S. economy were enjoying anything resembling a jobful recovery, the number would be closer to 300,000… a low not seen in nearly four years.
Coupled with yesterday’s ADP number for new private-sector jobs, tomorrow’s monthly unemployment report from the Labor Department could be… well, interesting. We’ll let you know what we find out when it’s released.
A commodity sell-off that ordinarily would have come with yesterday’s lousy economic numbers was delayed a day. Oil sold off $2 and is back below $99 a barrel. Gold drooped $9… back to $1,528.
As we’re not in full crisis mode yet, the greenback has not been a beneficiary. The dollar index is at 74.4, right where it was 24 hours ago.
Treasuries, on the other hand, have been signaling their willingness to serve the global financial system with “flight to safety” status a little while longer. The yield on a 10-year note is down to 2.99%. Those willing to lend to Uncle Sam for 30 years will get 4.21% for their trouble today.
To the list of endless tensions in the Middle East, we add a new one: a standoff over the Egyptian pipeline that supplies 40% of Israel’s natural gas.
Saboteurs blew it up on April 27. It’s been repaired… but the gas still isn’t flowing. Israel’s electric utility is warning of an imminent 15% rate increase.
So what’s the deal? In part, there’s a widespread perception in Egypt that Israel got a sweet deal on the gas under the Mubarak regime… and the new post-Mubarak military junta running Egypt is still trying to build its street cred.
“Nobody in the government wants to be responsible for a decision that is so unpopular,” says the senior VP of an Israeli company that co-owns the pipeline. The New York Times claims Prime Minister Benjamin Netanyahu huddled with a parliamentary committee on Monday, telling ministers that Egypt is having trouble maintaining security.
What the Times did not report is that Israel is going all out to develop its own natural gas resource — an offshore field so massive, it’s been given the name Leviathan. At 16 trillion cubic feet, it’s one of the biggest discoveries of the last quarter-century.
Only two companies are working this field. One is Noble, a big player with a lot of properties worldwide. But the other is darn near a “pure play” on Leviathan’s potential. It’s the most recent recommendation in Byron King’s premium advisory, Energy & Scarcity Investor. Access here.
Another item from Israel caught our eye yesterday, too: The “Deep Blue Chess Application? It Now Exists in the Financial Market” read the subject line of a press release that hit our inbox.
“There’s now an app which can predict the stock market — outperform Goldman Sachs, Merrill Lynch and others,” it continued breathlessly. “The app is the first available to gauge news, traditional analysts and social media to predict stock trends.”
Um, OK, we’ll bite.
It’s called “Wall Street Scanner.” Its developers claim the app scans 7,166,791 web pages daily, from 14,936 sources, including Twitter and Facebook. “It then uses sophisticated text analysis and proprietary algorithms to analyze and encapsulate online sentiment or mood of publicly traded companies and market data to predict the potential direction of a stock.”
Before downloading the app, we checked out the home page of the developer, an Israeli outfit called Sentigo. It appears to be another in a multitude of “content farm” sites that aggregate news and analysis from other sources.
Then we checked the copyright at the bottom of the Sentigo site. It took us to a page in Hebrew that, run through Google Translate, appears to be selling tile roofs.
In any event, we downloaded Wall Street Scanner and it appears to do exactly what it promises — tapping into the online “mood” for the top 2,000 U.S. stocks based on margin cap, running it through some sort of algorithm and then representing that on something that looks like an old analog gauge.
It’s a fun little diversion. But Deep Blue applied to the market? Frankly, we’re not sure it has any more predictive capability than, umn, our own feeble attempts. Heh.
“There has been an obvious shift in the winds,” a reader writes, “which seems to indicate you are ’right on’ about a looming crises and double-dip recession.” This reader previously gave us an early heads-up on a manufacturing rebound before it showed up in the numbers. “As I explained before, our industry (industrial construction) has always been the first to come out of a recession and the first to plunge into one.”
At present, “we still have scheduled work, but the pipeline has dried up. We are not being asked to quote significant new jobs. Our customers (the manufacturing industry) seem to be ’hunkering down again’!
“I’m wondering if they ever actually thought the country was improving, OR they had a TAX reason to spend. Maybe they accumulated so much net income (leaner work force) they had to ’pump up expenses’ to reduce their tax bite, so they spent money on improving their machinery and manufacturing lines.”
“I call this taxation without representation,” writes a correspondent from Colorado with a frontline report from the war on small business, “and I’m ready to throw the tea overboard.
“Two years ago, one of my two employees was at a customer’s location and the stairs collapsed under him, hurting his knee. My workman’s comp gave him a large settlement and closed the case. Then the employee filed for unemployment benefits, which I fought. The arbitrator sided with the employee.
“At the end of first quarter 2011, I got ready to pay my quarterly unemployment insurance assessment, and to my horror, my rate had increased BY A FACTOR OF SEVEN! I called both current employees in and told them I was immediately removing them from payroll, and would, for a while, simply pay them in cash currency until I could figure out a way around this.
“Then yesterday, more bad news! The state of Colorado is in the hole by millions of dollars due to the feds promising every unemployed worker at least 99 weeks of unemployment benefits. They are going to charge each Colorado employer a surcharge based on their first-quarter unemployment insurance liability.
“And these folks expect ME to be the engine of employment growth for the future.
“Don’t get me wrong: We could use more help. I already work at least six days a week and many times also have to come in on Sundays.
“What will be the effect on employment and GDP when a lot of mid-50-year-old small employers decide to toss in the towel and shut down businesses that are no longer profitable due to lower revenues and significantly higher employee costs?
“Your comment on the Grateful Dead reminded me of a joke. What did the Deadhead say when he quit smoking pot? ‘Man, this music really sucks!’”
The 5: Oh man, don’t diss the boys.
Cheers,
Addison Wiggin
The 5 Min. Forecast
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