Buy this stock market pullback!

This market pullback is most likely due to end-of-month budget adjustments. It has been the pattern for many months. Typically, there is a large debt sale in the last few days of the month to bring down the deficit so as not to show too large a shortfall when it is reported by the Treasury. These selloffs have been excellent buying opportunities and I suspect this will be no different.

What has changed:

The economy is growing again, at a 3.5 percent to 4.0 percent clip, which is decent.

What remains the same:

Employment tax receipts suggest that the job picture has stopped deteriorating, however, it is not improving. This almost guarantees more fiscal and monetary measures to support or encourage job growth and general economic growth.

That is why you must look at this from a bullish perspective.

Gov't spending and its effect on income

As I have said (and shown by accounting identities) for years, government spending generally adds to the income and savings of the non-governmental sector.

Take a look at what happened in the year covering Q3 2008 to Q3 2009:

Over this period private wages and salaries declined $382 billion, from $5,419.2 to $5,037.8.

Yet, transfer payments (Social Security, Unemployment benefits, Medicare, Medicaid, etc) raised incomes by $257 billion.

Interest income, which is an important part of income paid by the government to holders of Government debt, actually fell. It went from $1,327.8 billion to $1,233.9 billion.

The more government spends, the greater the positive impact on non-governmental income and savings.

The drop in interest income also shows why, if the Fed were to raise interest rates, it would be INFLATIONARY, not deflationary.

Since the government is a net payer of interest, if rates were to rise, that would equate to an income boost to savers who hold gov't securities, but who might not be contributing all that much to the total output of goods and services.

That's why a rise in interest rates would likely be very bullish for stocks and the economy, at least for a while, or until rates hit a point where the yield on fixed income investments beat that of equities.

Gov't spending/stimulus works. You gotta be blind not to see that.

Pre-stimulus
Q1 GDP -6.5%

Stimulus enacted
Q2 GDP -0.7%
Q3 GDP +3.5%

If we had a bigger stimulus/more gov't spending, we could have grown at 9.0 percent, just like China.

What's so hard to understand?

Anyone who can't see this has got to be blind.

CNBC Report on Today's Treasury Auction

Follow this link to a report by the CNBC reporter Rick Santelli on today's 2-year note auction.

Viewers can see he is quite exercised (and perhaps displays disbelief and speechlessness) over the strength of demand for Treasury Securities at today's auction.

Readers of this blog should not have been as surprised at this outcome as Mike's post below identified the recent rise in reserve balances that is probably behind this strong demand.

Reserves soar to a new high! Buy Treasuries!!

The "Treasury bears" like Jim Rogers and others who don't understand that the money to buy Treasuries comes from gov't spending itself, have been constantly calling for a top in the Treasury market. Just last week there was more of the same.

Do yourself a favor and take their money--it'll be easy pickin's--because the recent rise in gov't spending and securities purchases by the Fed have caused reserves in the banking system to shoot past the $1 trillion mark!

There is NO WAY bonds are putting in a top with this humongous new reserve addition.

Fade the Treasury bears!

"Federal Reserve Bank of Philadelphia President Charles Plosser said he will be more aggressive in pressing for higher interest rates than other central bank policy makers."

Plosser and some of his other "hawkish" colleagues on the FOMC put some fear into the bond market last week, however, it is not likely that the Fed will raise rates anytime soon.

In fact in the last week the Fed's balance sheet grew by $65 billion, pushing it to a new high for the year. This suggests you should be buying bonds while everyone else is selling.

Jim Rogers needs to get out of the 15th century!

In a recent conference Jim Rogers said the following:

"How can the solution for debt and consumption be more debt and more consumption? How can that be the solution to our problems?"

The problem is not consumption, it's a lack of consumption. What is Jim Rogers looking at? GDP has fallen because consumption has fallen. Falling GDP equates to falling household income and job losses. The way to restore growth is to restore aggregate demand, which the government can do by spending (adding that demand).

Rogers does not understand the monetary system. The issuance of Treasuries by the government is not borrowing, but used to sustain an interest rate. The Government spends by crediting bank accounts electronically and there is no constraint to the amount of this spending that it can do.

When a nation's resources and capital (both physical and human) are idle or under-utilized, as is the case now, then that nation is said to be living below its means and the longer this situation persists, it raises the risk that the residents of that nation become poorer relative to citizens of other countries.

Finally, Treasuries are assets to people who hold them and, therefore, comprise part of the wealth of the non-governmental sector. The only way for government to reduce this "debt" is to take back some portion of that private sector wealth. Is this what Jim Rogers really believes to be the path to prosperity? He must get out of the 15th century.

Abe Lincoln's monetary policy

Please read this terrific post from a reader of Warren Mosler's blog. It is the words of Abraham Lincoln, from a Senate speech in 1865.

From a message By Abraham Lincoln to the Senate, 1865: Money is the creature of law, and the creation of the original issue of money should be maintained as the exclusive monopoly of national government. Money possesses no value to the state other than that given to it by circulation. Capital has its proper place and is entitled to every protection. The wages of men should be recognized in the structure of and in the social order as more important than the wages of money. No duty is more imperative for the government than the duty it owes the people to furnish them with a sound and uniform currency, and of regulating the circulation of the medium of exchange so that labour will be protected from a vicious currency, and commerce will be facilitated by cheap and safe exchanges. The available supply of gold and silver being wholly inadequate to permit the issuance of coins of intrinsic value or paper currency convertible into coin in the volume required to serve the needs of the People, some other basis for the issue of currency must be developed, and some means other than that of convertibility into coin must be developed to prevent undue fluctuation in the value of paper currency or any other substitute for money of intrinsic value that may come into use. The monetary needs of increasing numbers of people advancing towards higher standards of living can and should be met by the government. Such needs can be met by the issue of national currency and credit through the operation of a national banking system. The circulation of a medium of exchange issued and backed by the government can be properly regulated and redundancy of issue avoided by withdrawing from circulation such amounts as may be necessary by taxation, re-deposit and otherwise. Government has the power to regulate the currency and credit of the nation. Government should stand behind its currency and credit and the bank deposits of the nation. No individual should suffer a loss of money through depreciation or inflated currency or Bank bankruptcy. Government, possessing the power to create and issue currency and credit as money and enjoying the right to withdraw both currency and credit from circulation by taxation and otherwise, need not and should not borrow capital at interest as a means of financing government work and public enterprise. The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts, and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power. Abraham Lincoln, Senate document 23, Page 91. 1865.

Great stuff!

Obama Said to Offer Banks Capital to Lend to Small Businesses

Obama and his advisers don't even understand the banking system. The reason why banks are not lending is not because they are suffering from inadequate capital or because they don't have sufficient reserves (anyway, loans create reserves). Rather, it is because the economy is weak, businesses are suffereing and workers have lost their jobs.

What is a loan?

A loan is simply a promise to pay.

If people or businesses can't pay because they don't have jobs or because profits are weak or nonexistent in a sluggish economy, then banks won't make loans, which by the way, are created by a mere accounting entry on banks' books.

This is basic, "Banking 101," yet our own president and the highest policymakers surrounding him are at a loss to understand this.

My 9 year old son understands this.

If Obama wants banks to lend he should focus more on policies that boost total demand and put people back to work. That would create the environment where lending becomes attractive.

When all you do is distribute rather than create

Interesting article about "creative" versus, "distributive" societies and how it is applicable to the current paradigm in the U.S. which I believe, rewards distribution versus creativity.

Here are some excerpts:

"The whole of economic life is a mixture of creative and distributive activities. Some of what we “earn” derives from what is created out of nothing and adds to the total available for all to enjoy. But some of it merely takes what would otherwise be available to others and therefore comes at their expense. Successful societies maximise the creative and minimise the distributive. Societies where everyone can achieve gains only at the expense of others are by definition impoverished. They are also usually intensely violent." "...do the financial markets do too much of the distributive?” This is in the context of the huge pay cheques the banking industry provides to their executives under the cover of the “they are creating wealth..." "The reality...is that most of the day-to-day activity in financial markets is not about directing funds to productive investment – that is, building factories, developing new processes, funding research and development etc. Most of the activity is about what I call nominal wealth shuffling – or in less abstract language – common to all – gambling. You construct a bet – find a counterparty to bet with – place the bet – take the gain or loss. Outcome for society – nil. Outcome for players – one wins, the other loses. It is a bit more complicated than that but not much more so." "It has always amazed me how we extol the virtues of the so-called “wealth creators” (the hedge fund magnates and the big bankers etc) yet we look askance at low-income workers who gamble their meagre family incomes away in their obsessions with a few horses running around a track." "Much of what goes on in financial markets belongs at the distributive end. The gains to one party reflect the losses to another, and the fees and charges racked up are paid by Joe Public, since even if he is not directly involved in the deals, he is indirectly through costs and charges for goods and services. The genius of the great speculative investors is to see what others do not, or to see it earlier. This is a skill. But so is the ability to stand on tip toe, balancing on one leg, while holding a pot of tea above your head, without spillage. But I am not convinced of the social worth of such a skill." "It has always amazed me how we extol the virtues of the so-called “wealth creators” (the hedge fund magnates and the big bankers etc) yet we look askance at low-income workers who gamble their meagre family incomes away in their obsessions with a few horses running around a track. This duality in the way we construct events extends to other aspects of life. A hopeless alcoholic lying in the street is reviled by mainstream society yet the wealthy drunken lawyer or banker at the “dinner party” with his hands all over the women (they are usually men) is seen as the epitome of success and just letting off a bit of steam. Of-course, both end up spewing in some corner of their respecitive worlds after their alcohol excess."

Read full article here.

Ex-Tarp, deficit in 2009 was about 7% of GDP, like Reagan deficit of 1983

When you exclude the $364 billion that was spent on Tarp, the deficit for FY 2009 was about $1 trillion, which equates to about 7% of GDP. Reagan ran a deficit of 6.8% of GDP in 1983, so what's the big deal? And why all the Republican outrage?

Tarp should rightfully be excluded because it did not constitute any "real" spending; it was merely an asset swap and did absolutely nothing to sustain or bolster aggregate demand. What a waste! (Thanks, Hank Paulson!!)

In contrast, a payroll tax holiday or new spending or tax rebates in the amount spent on Tarp, would have been far more effective in sustaining demand.

And Tarp money never should have been given to non-bank financial intermediaries at all. If they were unable to operate as going concerns they should have been allowed to fail, with the Fed providing unlimited lending to commercial banks without the requirement of posting collateral.

Gold at $2,000 Becomes Inflation-Adjusted Bullseye for ‘80 High

Yes that's right...investors who bought gold in the last bull market (nearly 30 years ago) are still waiting to get their money back! On an inflation adjusted basis gold will have to reach $2300 per ounce in order for those folks to just break even, yet gold is touted as this incredible investment and inflation hedge.

In contrast, stocks have gained in the thousands of percent and even during the past 10 years, or during the period of the 1970s when stock indices didn't do very much, had you bought good, quality, dividend paying stocks and invested those dividends, you would have achieved a very nice, positive return!

U.S. Said to Target Wave of Insider-Trading Cases After Galleon

Much of the financial sector adds nothing of value to the real economy except for rampant speculation and heightened risk. What's even worse is that so much of it is corrupt: witness this Galleon insider trading case and recently, Bernie Madoff. There have been a long list of others.

It's funny how people attack the government for being inefficient and/or corrupt, while at the same time they laud the private sector, which is probably far more inefficient and corrupt. The incessant insider trading activity is a clear example. The fraud that occurred in the mortgage industry and even the way large corporations control policy with billions of dollars spent on lobbying to safeguard or further their interests. The little guy hasn't a chance, yet the little guy rails at government support for the economy even though it is really the only thing that can help him. The little guy's been brainwashed. It's a mass brainwashing of America.

Senator Judd Gregg needs a schooling on our monetary system

Senator Judd Gregg's (R-NH) comments on news programs over the weekend shows he is completely out of touch with macroeconomic reality.

Gregg said the latest deficit figures are evidence of "growing the government too much."

Government spending and investment was one of only two positive contributors to GDP (the other was net exports). Does Gregg think the economy would have been better off if Gov't had spent less? Does he seriously think that we would have had a lower unemployment rate?

"This deficit is driven by us. I mean, you talk about systemic risk. The systemic risk today is the Congress of the United States," he said. "We're creating these massive debts which we're passing on to our children. We're going to undermine fundamentally the quality of life for our children by doing this."

The debt represents an asset to investor around the world who hold it. (Double entry accounting, Senator.) Witness the record, $3.45 trillion of U.S. debt holdings by foreigners. The only way for the U.S. to reduce this is to take those assets away from investors who hold them. Would that be good for them?

We are going to undermine the quality of life of our children by allowing our output to remain far below its potential. By definition, we are slowly impoverishing our kids and grandkids. This is the true heritage we are leaving, not the debt, which is an asset to those who hold it.

Senator Gregg makes comments that are flat out ignorant.

China growth more than 7 pct in January-September

Yes, that's what happens when you enact stimulus and spending in sufficient size, without the constraint of, "Taxpayer on the hook" mentality.

Treasuries Show No Lost Appetite With Dollar Declines

They still don't get it. The media is baffled as are many analysts and economists as to why Treasury demand remains so robust. They don't understand that the money to buy Treasuries comes from Government spending itself. There is no "lending" per se. As long as the Gov't is deficit spending and the Fed is maintaining zero-percent rates, there is going to be plenty of money to buy Treasuries.

They have it all wrong, but refuse to even try to understand the true dynamic of what is happening. And if you try to explain it to them, they will argue vociferously as to how you are wrong.

Here are some of the mainstream's "explanations"...

“The economic news, while mixed, still portrays an economy which could fall short of people’s expectations,” “There is a lot of cash on the sidelines that needs to be put to work with over $3 trillion sitting in money market funds,” “The same yield is more attractive” to foreigners because of the weaker greenback, said Todd White, who oversees government debt trading in Minneapolis at RiverSource Investments, which manages $90 billion of bonds.

Savings and Investment: the real relationship under the current monetary system

If you have time, please read Scott Fullwiler's exceptional post on savings and investment under the current system of floating FX/non-convertible currency. It's incredibly detailed, but well worth the time to read.

Read here.

Abundant skepticism is a sign that stocks will go a lot higher

I was looking around at some of the news stories today following yesterday's breach of Dow 10,000 and here's a smattering of what I saw:

Dow Breaks 10,000: Don't Get Caught Up in "Euphoria"... An Equity Bubble in the Making? Concerns About the Tone of the Market's Current Advance Does the Good News Point to a Market Top? U.S. Stock Markets Are Disconnected from Reality Dow Theory: Party While It Lasts Dow 10k: The Higher They Rise, The Harder They Fall

And here's some more good news...

From the Daily Treasury Statement the total take for employment taxes, as of the 8th statement day of the month (most recent data) is:

Oct: $53,392
Sep: $50,405
Aug: $54,188
Jul: $48,991

(All figures in millions $)

So, there appears to be an improving trend in employment tax deposits over the past three months. This coincides with weekly unemployment claims down in 5 of the last 6 weeks.

What the stock market/economy skeptics fail to realize, or seem to be ignoring, is that any improvement in the job picture, if and when that happens (and I think we will see it soon) has not been priced into this rally yet. So far the rally has been based on earnings from higher productivity (cost cutting) and not job growth.

This likely means there's another, whole entire leg up still to come. Dow 12,000?

Carlyle exec: buyout firms contributed to downturn

Speaking at an investment conference in Dubai, David Rubenstein said private equity firms helped inflate the credit bubble by buying companies at high prices, relying on large amounts of cheap debt, and pursuing ever-larger buyout deals.

"Private equity contributed to the problem. ... I think we made some mistakes ourselves," he said. "We tended to invest near the bubble peak at very high multiples."

This is an amazing admission, but not something that should come as a surprise to anyone. The only thing "brilliant" about these guys (and many hedge funds) is their ability to raise money, not their investing or trading acumen.

But what is so disturbing about this is that the Obama Administration has not only bent over backwards to sustain the financial sector in its current form--with all these useless speculative intermediaries--but Tim Geithner's, Public-Private-Partnership is literally handing over assets that rightfully belong to the public (bank assets, regulated by the gov't and acquired with government-backed deposits) to some of the very people that either caused the problem or targeted financial institutions for demise!

This is beyond outrageous!!

A nation's power does not depend on a vast network of cowboy speculators that purport to be the "financial system." These entities add nothing but risk without contributing any real benefit to the economy. Moreover, from a socioeconomic point of view it is highly destabilizing to allow a small percentage of individuals to garner the lion's share of national income for activity that adds no real wealth building product.

The fact that Obama can't see this is a testament to what may end up to be a fatal character flaw: a flaw that causes him to seek validation from those who are in an elite circle (Goldman Sachs, others of the "Finance Capitalist class"), whose interests are solely their own and not those of the nation!

David Rubenstein, Carlyle's Managing Director, is literally screaming this. He's laughing in our faces. Do you think Obama will listen? Will this affect change from a policy level? Highly doubtful.

Rubenstein and his ilk are most likely beside themselves at how easy it is for them to come right out and admit that they either commited, contributed or were otherwise complicit in this economic debacle, yet they know, not a finger will be lifted by anyone in the Administration to take away their ability to abuse the system and walk away with the spoils at the expense of everyday working people.

And the looting rolls on, as commodity speculators now are given free reign to push up the price of food and fuel under the guise of the vaunted free market.

John D. Rockefeller was one of the greatest capitalists of all time, but he did not believe in allowing the free market to run free. He hated speculators. He became the wealthiest man in the world by subverting the market and crushing speculators. In essense, he acted as a state or any other entity with total authority to regulate, dominate and control. This didn't only benefit him; it also benefitted a nation of people who then had access to an abundant supply of cheap fuel. Moreover, Rockefeller's workers did not suffer in the Depression; their jobs were secure.

We have not learned this valuable lesson.

Germany Deficits vs. GDP

Here's a link to a short release in Forbes.com about Germany's recent fiscal policy and GDP growth. Excerpt:

Germany's public sector deficit was 17.3 billion euros in the first half of this year, equating to 1.5 percent of gross domestic product (GDP), the Federal Statistics Office said on Tuesday.
During the same period a year earlier, the country racked up a surplus of 7 billion euros, the Office said. Germany's economy shrank 7.1 percent on the year in the second quarter, official data showed, following a 6.4 percent drop in the first.

So if you follow the timeline, Germany's fiscal surpluses last year were followed by severe drops in GDP this year. I wonder if the editors at Forbes can follow the logical cause and effect?

A disgusting propaganda campaign that cynically manipulates children to push its misinformed message

This is why it is impossible to stop the debt terrorists.

Federal Gov't FY 2009 Increase in "Net Spending"

The table above identifies the Federal Government full year FY 2009 increase in what I've termed "net spending".

I've taken the total withdrawals out of the Treasury's Federal Reserve Account, and subtracted amounts for Treasury securities redemptions, and other purchases of "financial assets". This remainder amount should be more accurate in determining the true year over year increase in
Federal spending that could have an effect on aggregate demand in the US economy. I've compared the 2009 total to the 2008 total.

The $629B increase represents about 4.4% of the previous year US GDP.