Monday, February 14, 2011

Morning Update/ Market Thread 2/14 – Valentine Debt Edition

Good Morning,

Equities are lower this morning with the dollar higher, bonds slightly lower, oil and gold up, and most food commodities higher – corn is setting another new high, as is rubber.

There are no significant economic releases in the U.S. today, Tuesday through Thursday are fairly busy with PPI, CPI, housing and industrial data. Friday has no data, but is Options Expiration.

The Transports zoomed over the course of two days to make it to a new closing high on Friday, thus erasing the major non-confirmation that had developed. That action was not generic in my opinion from watching the markets over many years. Of course not much of the current market action is, and I think the correlation between POMO activity and the markets is the overriding fundamental situation at the current time. That behavior is sick, it is already ending in tears for many people who live on the margins, and it will end in tears for the United States as well.

Not to worry, President Obama has it all under control:

Painful cuts in Obama's $3.7 trillion budget

WASHINGTON (CNNMoney) -- President Obama on Monday will unveil a $3.7 trillion budget request for 2012 that proposes painful cuts in many government programs but fails to address the largest drivers of the country's long-term debt: Medicare, Medicaid and Social Security.

The budget takes a big bite out of domestic spending and would slash deficits by $1.1 trillion over the next decade, according to White House estimates.

Two-thirds of those deficit cuts would result from spending reductions, while a third would come from an increase in tax revenue, according to senior administration officials.

The cuts include slashing the funding for the low income heating assistance program.

"It's a tough decision and we didn't make it lightly," White House budget director Jacob Lew told CNN's "American Morning" on Monday. "The program was never designed to meet all needs."

But even as it trims deficits, the president's budget would add $7.2 trillion to the debt held by the public between 2012 and 2021.

Obama's 2012 budget, which will be released in its entirety at 10:30 a.m., is sure to stoke the debate over how to get the government's fiscal house in order.

Notice how the biggies can’t be touched and that the deficit would continue to grow regardless. And I guarantee you that the deficit projections in his budget stand no chance of coming in at those levels. The math is simply too far gone, our budget can never be balanced within the framework currently in place. Our deficits will simply continue to grow.

And if you think that the economy is really improving (it’s not) then you better think twice about whether that’s a good thing in the end – it’s not. The reason being that rising interest rates mean that our nation's interest expense rises to consume a much greater percentage of the budget. Again, I contend that 100% of our nation’s income is currently being spent on interest expense – that is the cost of our interest plus the cost to artificially buy down rates. Stop buying down rates, and it is game over for our budget. Little Timmy Geithner knows this of course and just warned our math/ reality challenged President:

Geithner Tells Obama Debt Expense to Rise to Record

Feb. 14 (Bloomberg) -- Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.

Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.

While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.

“It’s a slow train wreck coming and we all know it’s going to happen,” said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”

The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.

Budget Proposal
That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.

Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, is scheduled to release his proposed fiscal 2012 budget today as his administration and Congress negotiate boosting the $14.3 trillion debt ceiling.

“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”

Ahhh shucks… Look at Little Timmy hanging his head in shame. Darn it, that hits a banker hard right in the heart on Valentine’s Day, doesn’t it? I mean the amount of interest paid by Americans to use their own money system is shooting higher and thus the transfer of productive effort by the people into the hands of the bankers is going to increase. Ahhh, life is good… if you’re a banker.

Worse than Portugal by 2016?

Note that they always express these figures as a percent of GDP. This is a Red-Herring presentation designed to daze and confuse. How about comparing interest expense to our income? No, no, that would have too much meaning and would place it in the proper perspective. Instead we’re left to calculate a jump from 1.3% of GDP to 3.1%, which we know is a 138% increase from 2010 to 2016. Again, I say that these figures are drastically understated when you consider the trillions used to buy down interest rates.

And on the same day Little Timmy is warning the President, it is learned that Bill Gross nearly cut Pimco’s holdings of Government debt by half in the month of January alone:

Gross Cuts Government Holdings to Lowest Since 2009

Feb. 14 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced its holdings of government related debt to the lowest level since January 2009 while saying low yields cheat investors.

Gross cut the proportion of U.S. government and related securities in Pimco’s $239 billion Total Return Fund to 12 percent of assets in January from 22 percent in December, according to the Newport Beach, California-based company’s website. He increased the percentage of cash equivalent holdings to 5 percent, the highest since April.

Policy makers are robbing savers by driving down real interest rates as they keep borrowing costs at record lows in a “devil’s bargain,” Gross said in his monthly investment commentary on Feb. 2. He advised investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations.

“Old-fashioned gilts and Treasury bonds may need to be ’exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote two weeks ago.

Gross is certainly one to talk about the Devil. Here’s a guy who buys worthless debt to pass off to the taxpayer while encouraging our government to "stimulate" and buy his worthless junk – his actions are one reason our interest rates and expense are going to zoom. And that makes him a two faced huckster – beware. But that doesn’t mean he’s wrong about rates – he sees the impossible math that he’s helped to create.

But that elephant in the room is not so invisible to most people as it was just a few short years ago. Recognition is spreading, but yet as Obama’s budget will show, real solutions are still nowhere to be found while we live inside of the Central Banker debt money box. A box that the bankers of the world are building at this very moment for the people of Egypt:

Egypt Plans Stimulus to Revive ‘Sudden Stop’ Economy

Feb. 14 (Bloomberg) -- Ashraf Abdel-Wanis had plenty of reasons to join tens of thousands of fellow Egyptians in their successful push to oust President Hosni Mubarak. At 39, he last worked five years ago in a sugar factory and now gets by mainly on his wife’s $50 monthly salary and his mother’s pension.

“The Egyptian family’s nutrition consists of beans, lentils and beans,” he said in an interview in Cairo’s Tahrir Square, the plaza at the heart of almost three weeks of protests. “If they’re lucky, they cook vegetables once a week.”

Now with Mubarak gone, the plight of Abdel-Wanis and the 40 percent of his countrymen near the poverty line is prompting Finance Minister Samir Radwan to develop a stimulus plan aimed at creating the jobs needed to avoid further social unrest. His plan also will need to compensate for domestic and foreign businesses that shy away from investing until the military council’s transitional rule ends.

“There’s a need for a stimulus package that’s very closely related to employment,” Radwan, a former senior economist at the Geneva-based International Labor Organization, said in a Feb. 12 telephone interview. “There are at least three sectors that can do the trick: industry and manufacturing, tourism and agriculture,” he told Bloomberg Television in a separate interview aired today.

Wider Deficit
The spending will probably widen Egypt’s budget deficit from last year’s 8.1 percent of gross domestic product and raise the government’s borrowing costs, according to Alia Moubayed, an economist at London-based Barclays Capital, and Mona Mansour, a research director at investment bank CI Capital in Cairo. The yield on the government bond maturing in April 2020 jumped to a record 7.2 percent last month. Policy makers may see these as acceptable trade-offs to bring down unemployment of about 9 percent, one of the sparks for the uprising.

“It’s critical that once the political process is clearer, that the economy recovers in order to deliver growth and jobs,” said Mohamed El-Erian, the son of an Egyptian diplomat and chief executive officer at Newport Beach, California-based Pacific Investment Management Co. “We should not be obsessed just with the politics,” even though that’s “crucial,” he said.

“We should also be thinking about what it takes to restart an economy that has been subjected to a dramatic sudden stop,” El-Erian said.

Fifty dollars a month salary. Think about the doubling of price in food commodities in the past four months, and the effect that has on families like theirs. Of course narcissists don't think about things like that, and thus the daily billions in POMO continues.

Egyptians should RUN from words such as deficit spending and stimulus! This is nothing but banker language designed to condition the people to get ready to accept DEBT as their savior. There is absolutely no need to incur debt when you are a truly sovereign nation, the people of Egypt must be sure to tell the bankers to pound sand! The worst thing for them would be to jump from despotism into perpetual debt servitude.