Saturday, January 30, 2010

A Republican Response to the 'Republican Response'

President Obama of course gave his State of the Union Speech this past week and it has received alot of attention here at this blog and in the financial media in general.

Right after the SOTU speech the opposition party gives a "response". This year it was given by the newly elected Governor of Virginia, Bob McDonnell. Here is a link to a transcript of that speech.

I'm a registered Republican, and consider myself a Conservative. However, fortunately, through Mike's various media, and those of his professional associates, I have come to what I consider to be a true understanding of modern money, fiscal policy, monetary policy and the role of Treasury Securities. I have to say: None of these operational facts or public accounting identities have anything to do with Conservatism. So with that said, please indulge me here with the following replay of the Republican response, and my 'inner monologue" as I listened to it:

Good evening. I'm Bob McDonnell. Eleven days ago I was honored to be sworn in as the 71st governor of Virginia. (...Great, seems like the GOP picked up a Governorship, heh heh, heh...)

I'm standing in the historic House Chamber of Virginia's Capitol, a building designed by Virginia's second governor, Thomas Jefferson. ( learn something new every day!..)

It’s not easy to follow the President of the United States. And my twin 18-year old boys have added to the pressure, by giving me exactly ten minutes to finish before they leave to go watch SportsCenter. (...nice, a family man, so was Mark Sanford...let's get to it Bob...)

I'm joined by fellow Virginians to share a Republican perspective on how to best address the challenges facing our nation today. We were encouraged to hear President Obama speak this evening about the need to create jobs. (...Jobs! Yes! that's it!..)

All Americans should have the opportunity to find and keep meaningful work, and the dignity that comes with it. Many of us here, and many of you watching, have family or friends who have lost their jobs. 1 in 10 American workers is unemployed. That is unacceptable. (...Yes! get 'em Bobby! it's output and employment we need to focus on!...)

Here in Virginia we have faced our highest unemployment rate in more than 25 years, and bringing new jobs and more opportunities to our citizens is the top priority of my administration. (..yeah but you can't do it alone, Bob, State's aren't currency issuers, you're gonna need help from Federal fiscal policy...)

Good government policy should spur economic growth, and strengthen the private sector’s ability to create new jobs. We must enact policies that promote entrepreneurship and innovation, so America can better compete with the world. ( ...Well I'm not sure where you're going wth the "competition" remark, but yeah, innovation is good! keep going Bobby boy!...)

What government should not do is pile on more taxation, regulation, and litigation that kill jobs and hurt the middle class. (...Yes!, any tax increase now would be economic suicide!....)

It was Thomas Jefferson who called for "A wise and frugal (...Uh-oh...) Government which shall leave men free to regulate their own pursuits of industry ….and shall not take from the mouth of labor the bread it has earned…" He was right. (...OK! "bread from the mouth of labor"! I see a huge Payroll Tax holiday proposal coming!...)

Today, the federal government is simply trying to do too much. Last year, we were told that massive new federal spending would create more jobs 'immediately' and hold unemployment below 8%. (...Yes! The fiscal transfer via the stimulus is not broad enough and is taking too long to implement! ...This is gonna be grrrreat when he makes a specific proposal for an across the board payroll tax cut!...)

In the past year, over three million Americans have lost their jobs (...terrible!...), yet the Democratic Congress continues deficit spending (Oh-no... not...), adding to the bureaucracy, and increasing the national debt (OH-NO! not....) on our children and grandchildren. (...NNNNNOOOOOOOOOOOOOOO!!!!!!).....


Obama: Cutting deficit as important as job growth

"A sign of progress," Obama said in his weekly radio and Internet address. "But as we work to create jobs, it is critical that we rein in the budget deficits we've been accumulating for far too long."

"Reinstating this law [pay-go] will help get us back on track, ensuring that every time we spend, we find somewhere else to cut," Obama said.

He's got it totally wrong.

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Friday, January 29, 2010

Japan’s finance minister pressures BOJ, deflation deepens

"Japan’s finance minister urged the Bank of Japan on Friday to align policy with the deeply indebted government’s efforts to fight deflation, maintaining pressure for possible monetary easing or even government bond purchases."

Looks like, policy-wise, Japan is as clueless as we are here in America. After engaging in quantitative easing for the better part of 15 years without any results, Japan's new Finance Minister is demanding that the Bank of Japan engage in...quantitative easing!

(If it weren't so serious to the world economy and the millions, perhaps billions, who are currently struggling right now it'd be funny.)

The only thing that worked in Japan over the past 20 years had been fiscal policy, but Japan's deficit terrorists (yes, they live there too) killed that off with tax hikes back in 1997 as the market and economy were on the road to recovery.

Sound familiar? It should that's the same script we are following here thanks to the deficit terrorists.

Senate passes pay-go rule on party-line vote

Pay-go forces any new spending to be offset with taxes or spending cuts. Limits the ability of gov't to reduce fiscal drag from here.

What huge increase in gov't spending??

There's an uproar across the nation about a huge expansion of government and how we are becoming a Socialist nation. Yet, when you look at the facts--the numbers--you see that the level of gov't spending relative to GDP is only where it was back in 2002-2003. (See chart below.)

Spending as a percent of GDP has increased by a meager 1.0% in
the past nine years and about 1.4% since 2007!!
Source: Bureau of Economic Analysis

There was no outcry about becoming a Socialist state back then. Now, however, when we have 10% unemployment (17% when you count people who have stopped looking) we're freezing spending and embracing fiscal conservatism. This is going to be disastrous and it will be brought on by nothing more than propaganda and misinformation--a deliberate campaign by deficit terrorists who will be responsible for more hardship and suffering than anything brought about by our enemies abroad.

The stimulus didn't work?

Just reported that the economy grew 5.7% last year, which was the fastest growth since 2003. Most of this came as a result of higher government spending that included programs like Cash for Clunkers, first time homebuyer tax credits etc.

There will be those in the media and conservatives on the right who will continue to say the stimulus didn't work, but that would be revisionism greater than anything ever attempted by a communist state.

True, jobs have not been create on balance, however, that is likely to come very soon.

What does it all mean for the stock market? Probably not that much help at all. The market looks ahead and what it sees, is Obama embracing the fiscal conservative approach, even as the evidence is clear that more of the same--stimulus--would have improved both the economy's fortunes and his own political clout as well.

Thursday, January 28, 2010

Volker: Financial innovation adds nothing to the real economy

"...I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs." -Paul Volker

He's right! In the 1970s we built 2.6 million homes in the United States. Mortgages were issued from plain vanilla commercial banks that held those loans on their books and serviced them. Bankers made little more than a civil servant's salary.

In 2006 at the height of the real estate boom we built 2.6 million homes, same thing, but there was so much intermediation, exotic mortgage products, etc. It didn't add anything to the nation's housing capital stock. It only added risk.

The financial sector garners 40% of the nation's corporate profits, whereas in the 1970s it comprised about 2% of all corporate profits. All that money, for what? Shuffling paper around. Obscene!!

Read all of Volker's comments here.

Senate Approves Increase in Debt Ceiling

Washington Post reports that the Senate has just approved a $1.9T increase in the Federal Debt Ceiling.
The Democratic-controlled Senate has muscled through a plan to allow the government to go a whopping $1.9 trillion deeper in debt. The party-line 60-40 vote was successful only because Republican Sen.-elect Scott Brown has yet to be seated. Sixty votes were required to approve the increase. The measure would lift the debt ceiling to $14.3 trillion. That's about $45,000 for every American.

This last sentence is interesting. The Post has done the math for us and is perhaps implying that somehow each of us "owes" $45k to present and future holders of Treasury Securities, which is far from the truth.

The debt demagoguery continues unabated in the MSM, but the increase in the ceiling may take some short term constraints off of the rate of Federal spending.

George Soros warns gold is now the 'ultimate bubble'

He must be reading this blog!!

Read Soros' comments here.

My comments on some of the main points of his speech

"To recover the rest, I have proposed a fee on the biggest banks. I know Wall Street isn't keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need."

Who does this hurt? The little guy, of course. Big banks will raise fees to recoup what Obama is taking from them. If you don't like the big banks, Mr. Obama, break them up, like Teddy Roosevelt did with Standard Oil or the railroads or as the government did with ATT. All this does is highlight, once again, that you think the government is out of money, which means you fundamentally don't understand our monetary system.

"Let me repeat: we cut taxes. We cut taxes for 95% of working families."

This was his tax cut for 95% of working families that he promised on the campaign?? What a joke. It equated to about $8 per week, on average, for workers.

"A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes."

Profits at the biggest financial institutions have been surging and they have a $trillion in excess reserves, yet it has done nothing to help businesses and individuals access credit. The fact is, you have it backward, Mr. President. A strong economy, that is operating at full output and employment, ensures a strong and healthy financial market.

"But that can only happen if we guard against the same recklessness that nearly brought down our entire economy."

So, are you against financial speculation that is driving up the cost of food and fuel? Will you close the loopholes contained in the current bill that allows big banks to continue to engage in this sort of stuff? No. More empty rhetoric here.

"...we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security."

What an idea! Let's ship large amounts of our national product to other countries so that foreigners have the benefit of these goods and services. Then American workers can use their newfound earnings to live at subsistence levels in a nation of relative scarcity, where prices are high and growth remains subdued. And just how do you double U.S. exports so quickly, Mr. President? Weaken the dollar? Erect trade barriers? These are the only means to do this, which translates into a decline in the real terms of trade for Americans. This is a gold-standard approach to solving problems that exist in the era of modern money. Totally stupid and harmful to workers.

"But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year."

That's because families do not issue currency, Mr. President. The Federal Government does. You've been brainwashed by the hard right, fiscally conservative, Austrian economics coterie. Too bad for all of us. With households and now the government pulling back on spending, this won't be a "belt tightening," it'll be a tight noose around the neck.

"Starting in 2011, we are prepared to freeze government spending for three years."

Goes against every principal a first-year college student would learn in "Macro 101."

"I will issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason why we had record surpluses in the 1990s."

"Pay-go," a deficit reduction commission...why don't you put us on a gold standard while you are at it?

Wednesday, January 27, 2010

Wondering if Obama wants the dollar to drop significantly

"...we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security..."

Does this mean a death knell for the dollar? How else does he expect to double exports so quickly?

Very sad for Americans.

So much for stimulus. This speech is a disaster from how I see it.

Some points he made:

"the Senate should convene tomorrow and pass pay-go"

Great! Let's go back on the gold standard while we're at it too!

"American families are tightening their belts. We (the government) must do the same."

That's because American families are not curreny issuers, Mr. President. The Federal Gov't is.

"We need to produce more goods and sell them abroad. This is how we will create jobs."

No, this is how we will send more and more of our product to foreigners so they have the benefit, while Americans use their newfound earnings to live meager, subsistence lives. That's what export economies look like.

Obama will prod Congress to enact a second stimulus package and to provide new financial relief for the middle class

Breaking news and very unexpected!

Obama will prod Congress to enact a second stimulus package and to provide new financial relief for the middle class.

This could trigger a market rally depending on how big a package (if he chooses to say anything about the size of the package at all) and how much will be offset by deficit reduction/spending cuts.

If you are short stocks sit tight for now.

More on this later.

Geithner should be fired, investigated. Goldman should be closed, immediately!

Information from the investigation being conducted by the House Oversight and Government Reform Committee reveals that:

The Federal Reserve Bank of New York, then led by now-Treasury Secretary Tim Geithner, purchased a slew of souring assets from the world's biggest banks for 100 cents on the dollar in November 2008. A scathing report by a government watchdog held Geithner responsible for the overpayments.


"The way the AIG bailout was engineered was to specifically benefit Goldman Sachs and its trading partners," said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance..."

"The $182 billion bailout overall kept AIG alive, and its trading partners, including Goldman Sachs, benefited from the funds made available to the securities lending transactions and other subsequent trading transactions."

We need to put an end to this crony capitalism. Wall Street is corrupt and a parasite on the nation's economy!

Keynes vs. Hayek set to rap. You gotta check this out!

On second thought...

This is funny, but it distorts the Keynesian approach. (Read below.)

In this video Keynes is depicted as healthy, vibrant and full of energy. He parties, gets drunk and then suffers from a hangover. The metaphor being that, government spending is like booze: You feel good for a while, but then suffer the consequences.

A more realistic depiction would have been Keynes on a hospital bed, hooked up to intravenous. Lifesaving medicine was flowing into his body, not booze.

Keynes never advocated government spending and increased aggregate demand for economies that were strong, healthy and running at levels of full output and employment. He argued for those remedies when demand collapses.

Once again another distortion subtly designed to support Friedrich Hayek's out of touch, Austrian school thinking.

Government supported demand is just as "real" as private sector demand

You often hear people say that because the government was providing stimulus to the economy or supporting output then somehow the economic activity related to that is "phony."

Oh really?

Ask those people, then, if the cars produced and sold as a result of "Cash for Clunkers" were phony? Were they really just inflatable copies of cars that you couldn't actually drive?

Of course not.

How about the houses built and sold as a result of government subsidies to the housing market? Were the houses really cardboard cutouts or simple facades with nothing behind them?

Once again the answer is no.

If the goods and services produced as a result of government supported demand are in fact real, then there is no way you can say the economic activity is phony. It's simply not true and it's just a crazy statement that makes no sense at all.

The true wealth of a nation is defined by the total quantity of real assets produced and available for use by its citizens. It makes no difference if they were produced by government or the private sector.

True, government and the private sector might allocate capital differently and the economy could end up looking a little different (less consumer goods, leisure, more infrastructure, education, etc), but government support of output and income is no less real than that of the private sector.

Tuesday, January 26, 2010

A nice email...

I got a very nice email today. Read below.

"Hello Mr. Norman. I know you’re a busy man but I just felt compelled to let you know that even though your investment services are geared to provide customers with positive returns on investment, for myself, your blog has helped educate a young eager mind about monetary and fiscal policy. I am a 25 yr old treasury repo interdealer broker and your blog has taught me, as well as motivated me, to learn all of the intricacies of the Fed and Treasury than 4 years at Pace University ever did..."


Mike Fers

Hopefully, this kid will be making policy one day.

Breaking news: Federal budget deficit will fall to $1.35T

Yes, I had been predicting this in my daily report, Fiscal Trend Digest, for quite some time.

What is a shame, however, is that they do not realize that the deficit shrunk because of GROWTH and if they were to enact more aggressive growth policies (like tax cuts/more spending) the deficit would disappear and we would have prosperity and jobs for everyone.

Instead they're going in the other direction: spending cuts/higher taxes, which means this improvement in the deficit will disappear quickly.

Watch gold collapse now!

Warren Mosler makes and excellent observation today in his blog.

He notes that there has been, for quite some time, the notion that quantitative easing was "hyperinflationary" and markets had been following that script with the dollar weakening, gold moving higher, oil rebounding, stocks advancing and bond yields rising.

Now, however, the reverse is happening: stocks are falling, the dollar is rising, bond yields are heading lower and gold and oil are selling off.

Mosler sums it up...

"Should market psychology turn to the notion that the Fed has no tools to inflate, and we have a Congress dead set against larger deficits, it can all get very ugly very quickly in the race to the exit from the inflation plays (including steepeners) currently on the books."

It will be very ugly indeed, especially for gold, which, more than any other market, is representative of the "hyperinflation trade."

Get yourself some short Gold ETF. (You can find which ones I recommend in my Outlook 2010 report, on sale for $39.95.)

Is Evan Bayh our real president?

White House economic advisor Austan Goolsbee said yesterday, "Now is not the time to tighten the belt!"

Yet, the president announced that he was going to do just that.

A few days ago Evan Bayh (D-IN) said that the president should enact a spending freeze "right now."

Watch the video:

Has Obama ceded economic policy over to Evan Bayh and a handful of deficit terrorists? It appears so!

Barack Hussein Herbert-Hoover Obama

Cut spending in the middle of the worst recession since the Great Depression? The return of Herbert Hoover and the "liquidationists."

By the way, Obama opposed the idea of a spending freeze during the campaign, when it was proposed by McCain and McCain lost the presidency. Now Obama supports it???


Amazingly stupid!!!

Monday, January 25, 2010

Futures beginning to dive on Obama's proposed spending freeze

It's 10:40pm ET and S&P futures are off 5 points. This comes on the heels of an announcement earlier that Obama plans to propose a spending freeze. In my previous post (and in earlier posts from days and weeks ago) I said that this announcement would crush stocks. It's already starting to happen.

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Obama to propose spending freeze!

Obama Spending Freeze: The President Will Propose Discretionary Three-Year Freeze

I told you it was coming. Here it comes!! We will definitely have a double dip recession and the second leg down could be far more severe than the first with unemployment rising to 15%. Watch stocks get crushed now...absolutely crushed.

Sunday, January 24, 2010

Obama endorses deficit task force

Obama is endorsing a deficit task force that will be charged with the job of coming up with suggestions on how to reduce the deficit.

Rather than focus on deficit reduction, which will, without question, mean lower output and higher unemployment for years to come, the president could have simply shown the public and his entourage of deficit hawks this simple chart below, which shows that the deficit is still tiny compared to the 1940s.

Then he could ask his deficit hawk friends why that deficit didn't "bankrupt" the United States? And if they're really up to the challenge he could follow that question with, why did we experience an enormous surge of prosperity following that deficit?

Finally, he could show the public--many of whom are without jobs--a very graphic explanation of why it is necessary to increase the deficit to get us back on the road to prosperity. Duh!!

Axelrod refuses to rule out tax increases to deal with deficit

Washington (CNN) - President Barack Obama's senior adviser on Sunday refused to rule out tax increases as part of a solution to the nation's growing deficit.

Speaking on CNN's "State of the Union," David Axelrod said Obama supported having Congress set up a bipartisan commission that would come up with a plan to reduce the deficit.

"We want to sit down in a constructive way and approach this problem," Axelrod said.

He wouldn't speculate about possible solutions, saying, "Let's see what a bipartisan effort to deal with these deficits will produce."

"Whatever the appropriate approach is, the president will be straight up with the nation," Axelrod said.

Asked about the possibility of tax increases, Axelrod said: "If anybody has a plan to do this without raising any taxes on anybody, upper income or below, they should come forward with it because nobody wants to raise taxes."

During the 2008 election campaign, Obama repeatedly promised he would not raise taxes on those making less than $250,000 a year.

If Obama has any chance at all for a second term, Axelrod must go along with Geithner and Summers. That is clear.

And, by the way, I HAVE A PLAN FOR CUTTING THE DEFICIT WITHOUT RAISING TAXES! Yes, me...I have a plan. It's called GROWTH!

If the deficit grows by $1 trillion as the government spent more on consumption, investment and employing people, we'd get at least $2 trillion in additional GDP (conventionally accepted ratio) and that would mean the deficit FELL as a percentage of GDP!

Friday, January 22, 2010

Don't blame Volker, blame Scott Brown

The media has been blaming the "Volker proposals" as the reason behind the market selloff. However, the market began selling off on Wednesday, which was a day before the news broke that Obama intended to go with Volker's restrictions on the banks.

So what happened Wednesday that made it a game changer?

Simple. It was the day after the Massachusetts special election, in which Republican challenger Scott Brown emerged victorious.

Brown's victory changed the balance of power in Congress in an instant. It anointed those who see deficit deficit reduction as being second only in importance to national security, in a position to make it happen.

In his victory speech Tuesday night, Brown even threw in the now-obligatory yet completely idiotic and inapplicable comment, "We can't keep leaving all this debt to our kids and grand kids," line.

The very next day the Dow tumbled 122 points and has been heading south ever since.

And if you don't believe me that the market is worried about deficit reduction, then pay close attention to the direction of stocks following President Obama's State of the Union speech next Wednesday (Jan 27). In that speech he is expected to propose some very austere deficit cutting measures, which will absolutely crush stocks.

If I were you and if you have money in the market, or are disposed to making some, I would aggressively be short stocks at the close of business Wednesday.

We are about to repeat the terrible mistakes of 1937, when FDR was conned into balancing the budget, sending the nation back into a mini depression. It took a world war to finally boost spending sufficiently to get us out.

Obama will follow Clinton's playbook after his '94 defeat

An article in today's Wall Street Journal talked about Clinton's comeback after the Democrats were trounced in the 1994 elections. I believe, without doubt, that this will become Obama's playbook for the rest of his term. That's bad for the economy, here's why:

"...Famously, of course, he [Clinton] left behind efforts to overhaul health care. Then, in 1995, Mr. Clinton went against his party's orthodoxy by embracing a plan to balance the federal budget. And in 1996, he moved against Democratic orthodoxy again, by embracing a plan for wholesale changes to the welfare system."

A technology boom at the time masked the real destructiveness of the budget balancing, which ultimately led to a collapse in private savings. (By definition, if the gov't runs a surplus, the private sector must run a fiscal deficit.) However, Obama has no technology boom. In fact, he has nothing supporting this economy with the EXCEPTION of gov't spending and he's about to cut that!

Bernanke vote shakier as more Democrats defect

If Bernanke fails to win confirmation for a second term it would probably signal the end of the policy of Quantitative Easing, which Bernanke has championed. Mny lawmakers feel he has contributed to the "debasement" of the currency and is sowing the seeds for future hyperinflation. (All nonsense, but they see it through the prism of their beliefs.) Hence, Bernake's departure would almost certainly be very bullish for the dollar.

Wall Street Bonuses exceed the GDP of 13 states!

The $64 billion in Wall Street bonuses that will be paid out this year exceeds the gross state product of 13 states that have a combined population of 13.5 million people!

Source: Bureau of Economic Analysis

Where are our priorities!!

Thursday, January 21, 2010

Volcker Steps to the Fore

The Washington Post has an article this evening highlighting the increasing influence of Paul Volcker, former Fed Chairman, on the Obama Administration's economic policy.
Senior administration officials say there is now broad consensus within the
White House and the Treasury for the plan advanced by Volcker, who leads an
outside economic advisory group for the president....Volcker had been arguing
that banks, which are sheltered by the government because lending is important
to the economy, should be prevented from taking advantage of that safety net to
make speculative investments....

Much of today's announcement by The President and Volcker focused on potential new regulations on commercial bank activities. But what is Volcker's view on fiscal policy?
This is from an interview Volcker did in December with a German magazine, that was found referenced at another blog:

SPIEGEL: To get the recovery to the point where it is right now has cost a lot
of money. National debt will probably reach $12 trillion in 2019. Just serving
the debt costs $17 billion a year — at least according to this year’s forecast.
That’s difficult to sustain.
Volcker: You’ve got to deal with the deficit and
you’ve got to deal with it in a timely way. Right now, with the unemployment
rate still very high, excess capacity is still evident, and the economy is
dependent on government money as we said. We are not going to successfully
attack the deficit right now but we have got to prepare for attacking
SPIEGEL: Should Americans prepare themselves for a tax
Volcker: Not at the moment, but I think we would have to think
about it. The present tax system historically has transferred about 18 to 19
percent of the GNP to the government. And we are going to come out of all this
with an expenditure relationship to GNP very substantially above that. We either
have to cut expenditures and that means reducing entitlements and certainly
defense expenditures by an amount that may not be possible. If you can do it,
fine. If we can’t do it, then we have to think about taxes.

So this looks like Volcker is apparently not in support of a radical departure from the immediate fiscal policy, but as Mike has recently posted here, current fiscal policy is not robust; maybe the best you can say is that Volcker is not advocating making it worse.

How to make the switch to honest (banking)

Check this out. It's hilarious, but true!

Stock market skids lower, as predicted by this blog

Readers of this blog should not be surprised at the stock market's recent about face. I have been saying for weeks now that a renewed focus on deficit reduction by Obama will not only abort the rally and economic recovery, but send the market sharply lower--perhaps even to the March '09 lows--depending on how serious and austere the deficit reduction measures are.

I have been staunchly bullish over the past year and rode this rally up despite widespread cries of gloom and doom. Now I am bearish.

I did what I did and do what I do because I understand that the most important driver of the economy are the fiscal policies of the central government.

When you know that, that's pretty much all you need to know.

Government spending adds to GDP and the net worth (wealth) of the private sector. When the cental gov't runs deficits the private sector runs surpluses and when the central gov't reduces deficits or runs surpluses, the private sector's surpluses diminish or turn to deficits. That's the way it works. It's that simple.

It's not my fault that nearly everything you hear about economics is wrong. I've been doing what I can to try to educate and inform.

For more on my outlook and what 2010 has in store and how you can make money on the policies and trends that are shaping up, please purchase my Outlook 2010 report. It's only $39.95.

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Wednesday, January 20, 2010

My 2010 Investment Outlook is now available!

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Foreign markets

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And of course, all of my recommended stocks and ETF's to buy RIGHT NOW to make you big money in these emerging themes.

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Illinois Careens Towards Bankruptcy; Governmental Collapse Coming

"The crisis will come when you see state institutions shutting down because they can't pay their employees," David Merriman, head of the economics department at the University of Illinois at Chicago told the publication.

A massive domino effect of states going bust is now in the cards as Obama prepares to begin on deficit reduction.

Tuesday, January 19, 2010

White House Preparing Fiscal Task Force

"The White House is laying the groundwork for a task force that could make it easier for lawmakers to approve tax hikes, spending cuts or other unpleasant measures to bring down budget deficits, lawmakers and aides said Tuesday."

Barack Obama has effectively destroyed his party's chances of retaining control of Congress and now he is setting himself up to be a one-term president and I say this with certainty.

His failures to confront Wall Street and the timidity he showed when it came to restructuring the financial sector, will now be followed by a new policy thrust that will focus on deficit reduction.

At at time when 30 million people in this country are either unemployed or underemployed and when our industry is barely using two-thirds of its productive capacity, the draconian levels of new fiscal drag that will be added will absolutely tank the economy. Say goodbye to the past year's stock market gains and I would not be surprised to see the downtrend get underway in earnest the day after Obama gives his State of the Union speech outlining his deficit reduction plans.

Quite possibly, no president in history has been so confused and ill-informed as Barack Obama.

ECB prepares legal ground for euro rupture as Greek crisis escalates

"Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union." Read full article here.

It's coming!

The cracks in the euro monetary system are starting to break wide open and the euro may be headed for a monumental bust. This collapse will make Britain's exit from the ERM back in 1993 look like kiddie stuff. (Remember, that made George Soros a billionaire!)

Short the euro now!!

Monday, January 18, 2010

'Lending Reserves': NY Fed Report Disputes Remarks by Chairman

A recent paper published by a research division of the NY Fed is titled: Why Are Banks Holding So Many Excess Reserves?

From the Report Summary:
The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the flow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of
reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system reflects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly.

Many in the financial media and policy makers have been lamenting that the banks are "sitting on their reserves" and not lending them out; and others predict that when they finally do lend them out there will be large inflationary effects . But here we have the research arm of the policy implementing Federal Reserve Bank of NY more than just implying that reserve balances are not loaned out, and that reserve balances are just a necessary accounting record of the scale of Fed operations and should not be looked at in judgement of future economic outcomes.

This revelation by the NY Fed should not be a surprise to readers of this blog. But perhaps it is to Chairman Bernanke, who stated in a speech as recently as October 2009:

The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets..... banks could find it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures and,
ultimately, lead to inflation pressures...

So which side is correct? I think it is time for some of the researchers at the NY Fed to "man up" and give a presentation to the Chairman and the FOMC.

Thursday, January 14, 2010

Obama tells banks: `We want our money back'

How confused Obama utterly confused. This Administration goes from one bad policy to the next.

First let me go on the record as saying I am not in support of these "too big to fail" banks and I am outraged at the bonuses being handed out while millions of Americans suffer. This has got to stop.

But Obama's statement--"We want our money back"--is so ignorant that it's embarrassing.

Who, exactly, is Obama referring to when he says, "WE" want our money back? It certainly won't be taxpayers. They'll lose, because many taxpayers are shareholders of these banks and imposing some windfall tax on these companies will end up lowering the value of their investments, which means their wealth is reduced.

And customers won't get their money back either, because they'll be paying higher fees. Jamie Dimon pretty much stated that outright. Once again, millions of small depositors who may already be struggling financially will have to pay more in fees, leaving them with less.

What do they teach at Harvard? Obama, Larry Summers, Robert Rubin and the supporting cast of Harvard grads in this Administration all have one thing in common: a long legacy of bankrupting everything they touch as they exert their power and influence over all other Americans as if we were their own private little serfdom.

In order for America to move on we must break the vice-grip of power that the Harvard/Goldman Sachs coterie exerts over the rest of us! Until that happens we are their slaves.

New futures regulations = pablum

Another lost opportunity for real financial reform.

CFTC's trading proposals might not be too tough

Futures market speculation has grown exponentially in the last few years, especially with the emergence of massive, "long-only" funds that have contributed to price increases in everything from gasoline to basic food staples like bread, cereal and sugar.

Congress had a chance to pass real reform and clamp down on this sort of destructive speculation, but what's about to come out of this looks to be nothing more than watered down pablum.

"Limits" on the size of futures positions will be imposed, but according to some market participants those limits will be set so high that they'll likely have little effect on actual current positions.

Large speculators and investment banks will continue to have free rein to drive up the price of food and fuel, making it harder for ordinary folks who are already suffering because of job loss.

Another example of Obama's timid leadership and how this is causing a massive flow of wealth to the top. Working people and families are getting destroyed while speculators are rewarded.

Wednesday, January 13, 2010

Deficit in first three months of fiscal year up $50 bln over last year

The Treasury just released the budget statement for December and it shows that for the first three months of the current fiscal year (2010) the deficit was $388.5 bln compared to $332.5 bln for FY 2009. Increased deficit spending has been supporting output and that's why the economic data and the stock market have been moving higher.

It's doubtful that this will continue, however, as Obama has promised to cut the deficit this year and the deficit has become a major political issue.

Analyst who said to "short all banks" last April is asked to give "expert" testimony before Congress

Maybe the reason why the government does so many things wrong is because it often relies on the advice of people who don't have a clue.

Top-rated Wall Street banking analyst Mike Mayo of Calyon Securities testified before the Financial Crisis Inquiry Commission today. Mayo's observations to the Commission were the following: Banks were "on steroids." (Read here.)

Perhaps that's how he rationalizes his disastrous call to "short all the banks" that he issued back on April 6, 2009. I wrote about that call in one of my blog posts.

He's like these people who say the recovery is "phony" because government spending has been providing the demand. In their minds since it's not the private sector doing that, then somehow the output of goods and services are not real? What are they, then? Are they an illusion? Will they disappear? Is the car that somebody bought with cash from the government not really a car?


Anyway, you get much better advice here. In my post last April I told you to buy the banks when Mayo and Whitney and Whalen were all saying go short. The S&P Banking Index (BIX) has nearly doubled since then.

Fed survey fails to state the obvious

"A new Federal Reserve survey, released Wednesday, underscores the duality of the economic turnaround: even as the economy grows and the recovery extends its reach geographically, more than 15 million people remain unemployed."

The obvious being, that the economy is growing yet fewer people are participating in the wealth. Call it Obama's "wealth flow to the top." This is a recipe for social disaster if left unchecked.

The Fed also noted:

"...although "economic activity remains at a low level, conditions have improved modestly further." However, the Fed also noted that "labor market conditions remained soft" in most of the Fed's 12 regions as the new year started."

Could it be that Bernanke doesn't understand that there is no direct link between monetary policy and aggregate demand? Only fiscal policy can address this, yet Bernanke has publicly spoken out against deficit spending, so neither he nor any other Fed members be should surprised that economic activity remains at a low level.

Tuesday, January 12, 2010

Suspension of mark-to-market would have saved taxpayers billions $$

It's official...we can put an absolute concrete value on the minimum that would have been saved by taxpayers last year had the SEC suspended "mark-to-market" accounting rules during the crisis.

That number is $45 billion.

Where do I come up with that?'s the profit that the Fed earned in 2009. That profit came mostly from owning the supposed "toxic" assets of financial institutions. It's money that could have went to taxpayers (shareholders) had the government allowed a suspension of mark-to-market asset pricing.

Instead, the profit goes to the black hole of the government. Sad, because it's a sum that the private sector could have used in this awful economy.

This is an example of why the whole concept of "taxpayer on the hook" is backward. The taxpayer is on the hook or worse--loses--when the government is instructed to make money on the absurd notion that that somehow helps the taxpayer. When the government makes money, the taxpayer loses by definition.

The government has a monopoly on the creation of money under the current monetary system. If it is allowed to do this to the degree that the nation's output is maximized, without interference, we become rich and prosperous.

However, when the government is instructed to "make money" by transacting in a commercial fashion with a private sector enterprise, then the government's money profit ALWAYS equates to the private sector's money loss.

Monday, January 11, 2010

Obama Said to Consider Fee on Banks to Trim Deficit

On the heels of an horrendous jobs report that showed that the economy is still cratering, this is what Obama comes up with: fees imposed on firms to reduce the deficit!

More fiscal drag when the economy is barely moving! It's insane!!

The focus on deficit reduction will almost surely put us back into recession.

Fire Geithner now!

Excellent piece by Professor Randy Wray. Read all of it here.


"...we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. He thinks government is nothing but a big household, which must balance its budget. He continues to believe that the Clinton boom was due to federal budget surpluses, not recognizing that it was actually due to an unsustainable boom of household borrowing. Indeed, as Clinton’s Treasury Secretary, he oversaw the creation of the conditions that led to this current crisis. The new team must have no connection to Rubin (or Pete Peterson) and his anti-deficit hysteria. The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25% of GDP. Our current situation is not yet that severe, and it is likely that a sustained recovery can be obtained long before the budget deficit reaches such a level. However, the longer that Geithner, Summers, Bernanke, and Rubin remain in charge, the greater the probability that this could still turn into another Great Depression."

FDR's Speech at Madison Square Garden (October 31, 1936)

"We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred."

We need a modern day FDR.

Read full speech here.

More wealth flowing to the top than ever before!

Rising GDP and rising unemployment means that fewer people are sharing in the wealth. This is a disaster in the making for the country and unless it is addressed--aggressively--it will lead to social disorder and some really scary times.

Obama had a chance to create real change; change that would have laid the foundation for long-term, sustained, growth and prosperity for all Americans to enjoy. Instead he chose to "muddle through" and keep the status quo. He is now presiding over the greatest wealth transfer to the top of any president.

We're looking at a terrible outcome to all of this.

Sunday, January 10, 2010

How the Russians deal with Muslim extremists

"...Russia's "policy of state terror," a shadow war against violent Muslim separatists in the North Caucasus, a strategic crossroads of Europe and Asia.

A central tactic in the war, activists say, is forced disappearances — the brazen snatching of young people from their homes or off the street, often by gangs of masked men who move freely, even in areas heavily patrolled by Russian military and police. The pace of forced disappearances has doubled in the past year, following a spike in militant attacks on police and authorities, including suicide bombings, ambushes and assassinations."

Something to think about as we give terrorists full legal protections under the Constitution here in America.

Read full article here.

Thursday, January 7, 2010

Kan jolts yen on first day as Japan finance chief

Japan still doesn't get it!

TOKYO (AP) -- Japan's new finance minister is wasting little time making waves, jolting the foreign exchange market Thursday by calling for a weaker yen as doubts surface about his ability to guide a recovery in the world's No. 2 economy.

In unusually explicit remarks for a Japanese finance minister, Naoto Kan vowed to work closely with the central bank to steer the currency toward an "appropriate" level around 95 yen to the dollar.

He welcomed the yen's recent retreat from the 14-year high of 84.83 to the dollar hit in November but indicated it hadn't fallen far enough. "I hope currency markets correct themselves further, weakening the yen," he said.

Trying to export your way to prosperity in a world that is no longer on a gold standard is dumb! All you do is lower the standard of living of your citizens.

Weakening the yen involves deficit spending. That spending would be used in a far better way, with greater results, if the Japanese government spent on goods and services and on policies that would increase domestic wages.

This is a dumb strategy, but you know what? I am a forex trader, so I don't care. I am short the yen. I advise you do the same!

Tuesday, January 5, 2010

Iceland May be Frozen Out of Eurozone

This is a fascinating article on the current economic situation in Iceland.

It seems the Icelandic President has in effect vetoed legislation that would hold the citizens of Iceland responsible to pay back billions of Euros to former Icelandic bank depositors in the U.K. and The Netherlands.

The Icesave deal is deeply unpopular with the Icelandic population and there is widespread feeling that taxpayers are being left to foot the bill for mistakes made by financial firms operating under the watch of other national regulators. Critics say the bill would lumber Icelanders with an extra debt burden equivalent to 40 percent of gross domestic product or $18,000 per citizen, including interest payments.

Britain and the Netherlands have veto power over Iceland's EU membership bid and could block the entry negotiations.

Since the Icelandic bank's deposit liabilities were priced in Euros, it looks like the Icelandic Government has committed the country to collectively pay almost 5 months worth of their annual output back to former foreign depositors, pending legislation. I'll bet the 250,000 voters in Iceland vote against the referendum.