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Congress Punts On Deficit Decisions… Again

Jun 23rd, 2010
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Congress has hit on the perfect way to avoid the problem of a yawning deficit: Hand off the problem to a blue-ribbon panel.

“It isn’t possible to debate and pass a realistic, long-term budget,” says House Majority Leader Steny Hoyer, “until we’ve considered the bipartisan commission’s deficit-reduction plan, which is expected in December. I believe that Congress must take up and vote on that plan.” Conveniently, after the election.

Congress’ refusal to carry out its constitutional duties is one of a number of odd and ominous doings we’re seeing with the budget this week…

  • Treasury Secretary Geithner estimates that taxpayer losses from TARP will total 5 billion. Of course, at one time, he said it would be a moneymaker for taxpayers
  • White House budget chief Peter Orszag is leaving before the summer’s out. We don’t know if he was ever serious about his stated desire to put Fannie and Freddie’s .3 trillion in liabilities on the government’s balance sheet. But with him gone, no one will be left to speak up for this notion of honest accounting
  • Back to Steny Hoyer: He says it may not be possible to extend the Bush-era tax cuts for the middle class, not permanently anyway. They expire at the end of this year.

We warned about this last item in the April issue of Apogee Advisory: “Yes, the president is committed to allowing the cuts to expire for households earning 0,000 a year or more. But they go away for everyone else unless Congress passes a new tax law. The lowest bracket of taxpayers would see its rates go up from 10% to 15% – an effective 50% increase. That’s not gonna happen.

“So yes, there will be income tax legislation this year. But will it only hit households above the magic 0,000 threshold? Or will the scramble for revenue hit other people as well? And how soon?”

Evidently, we won’t know until just weeks or even days before the tax cuts expire. The sound you hear is payroll managers everywhere tearing their hair out.

Addison Wiggin
for The Daily Reckoning

Congress Punts On Deficit Decisions… Again originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Alan Greenspan Talks Deficit Financing

Jun 18th, 2010
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We’ve had a day where the currencies gained versus the dollar, and then held their ground, for the most part… No profit taking, no debt crisis fears trading, just held their ground versus the dollar. Now, some would say… “That’s a sign that they’ve hit resistance and can’t overtake it, which is not good for a rising asset”… But, me? Well, I would say, and will say… “I find this to be refreshing. The last thing you want to see is an asset, which in this case is a currency like the euro, run up too much, too fast, for that WILL give the markets reason to sell. I prefer the slow gradual, stealth-like moves in currencies, so that they don’t gain any attention, until the rally is well established.”

The euro (EUR) did stall out at 1.24 yesterday… But the ground given up after failing to go beyond 1.24 was small… Either way… It looks like the euro will enjoy its best weekly performance versus the dollar in a year!

So… Choose your sword… For there will be some saber rattling going on regarding the euro’s climb… Is the euro out of the woods? Hardly! (I hope the guy that told me that I was wrong to say “not hardly” noticed!) In fact, now the rumors are spreading that the pensions in Europe are under-funded… Heck! That’s no big deal! They’ve been under-funded here in the US for at least the last seven years! I remember writing about this back in 2003!

OK… So I said the currencies had held their ground for the most part… One currency that has given back some gains is the Canadian dollar/loonie (CAD)… Oil prices dropped about a buck overnight, and gold has not been able to add to yesterday’s very nice gain… So… There’s no wind for the loonie’s sails, right now… But the currency is hanging on to 97-cents, so it’s not all bad!

The Swiss franc (CHF) continues to run free and to higher ground since the Swiss National Bank (SNB) left the words out of their statement regarding the need to stem currency appreciation. The franc, which was trading just below 86-cents 11 days ago, is now at 90-cents… And rising with a bullet… Really, I liked the beat, but the words were mumbled.

So… Back to gold… I saw a great chart yesterday, which I shared with everyone on the desk… I’ll explain what it showed… Gold versus Japanese yen (JPY), going back to gold’s wild days of 1982. Right now, gold is trading versus yen at about the same place it was in 1982… The data points on the chart make a great big smile! Now, I’m not a “chartist,” but that’s not ever stopped me before… So… To me, it looks like gold is either going to start the next downward slope of another smile, or… That it’s about to take off… I’m thinking that it’s the latter, because something has to give, here.

A guy over at Standard Bank Plc, Bruce Ikemizu, agrees that it’s the latter thought, as he gave an interview yesterday, and said, “Gold may climb to a record ,300 an ounce this year.” He believes that investors are going to move away from the fiat, debt-ridden currencies to gold… Can’t say I disagree…

Here’s the thing that Ikemizu says that makes a ton of sense… “Gold is drawing attention as it will take a long time for the dollar to be replaced by another currency in trade and investment.”

That’s right! Recall that about a month ago, I wrote how I believed the euro was going to lose its title of “offset currency to the dollar”… And long before that, I had written about how the dollar was going to lose its title of “reserve currency”… But that it would take China about 20-25 years to be ready to take over the reserve currency title, so what steps in to help fill the gap? Gold!

I saw a screen yesterday that charted gold for the last 10 years versus the major currencies of the world… Gold hasn’t just been gaining versus the dollar… Gold has gained 77% versus the dollar in the last 10 years… The euro? It has lost 70%… The winner was a surprise to me… It was the New Zealand dollar (NZD) at 66%, with the Swiss franc coming in second. And the Big Losers were a surprise to me too… South African rand (ZAR) and Mexican pesos (MXN)… Hmmm…

OK… Enough of that! Russian President, Dmitry Medvedev, isn’t going to be invited to any euro Christmas parties this year… Medvedev offered up his thoughts on the euro yesterday saying that he, “cannot rule out a collapse of the euro.” Hmmm… Didn’t know that “currency specialist” was on his résumé!

Tearing a page out the US’s book on making the public feel good… Japan’s Cabinet upgraded its assessment of the economy and now sees a self-sustaining recovery as being underway. Yeah, right… And my first wife was a…. Young Elizabeth Taylor, yeah, that’s right…

Yesterday, I totally forgot to talk about the Big New from the previous day, regarding the delisting of Fannie and Freddie stocks… Talk about a slap in the face! Those are two entities owned by the government… Makes you wonder, right? I mean, come on, noodle it…

My old nemesis, the former Fed Chairman, Big Al Greenspan, was in the news yesterday… Big Al wrote an article for The Wall Street Journal on the US debt… I think “he’s seen the light” for the things we wrote about sounded like he’s been reading the Pfennig!

Here are a couple of snippets…

“An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large US borrowing capacity are misleading.

“Despite the surge in federal debt to the public during the past 18 months – to .6 trillion from .5 trillion – inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

“Beneath the calm, there are market signals that do not bode well for the future. How much borrowing leeway at current interest rates remains for US Treasury financing is highly uncertain.

“The US government can create dollars at will to meet any obligation, and it will doubtless continue to do so. US Treasuries are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.”

Thanks Big Al… I’ve been pretty tough on the former Fed Chairman, and rightly so, but at least he’s talking sense now…

Yesterday, the stupid CPI printed and said that inflation had fallen 0.2% last month, and that inflation year on year was only 2%… Stupid! The Initial Jobless Claims were not good, folks… The weekly jobless claims added 12,000 claims from last week, to total 472,000, and something that I watch – as I’ve explained before – is the Continuing Claims, which continues to grow in numbers… Last week it was 4,483,000… This week it’s 4,571,000… Not good, folks…

Then there was this… This is going to make you want to go yell at the walls, or go outside and yell at the trees… Are you ready? A dire report circulating in the Kremlin today that was prepared for Prime Minister Putin by Anatoly Sagalevich of Russia’s Shirshov Institute of Oceanology warns that the Gulf of Mexico sea floor has been fractured “beyond all repair” and our World should begin preparing for an ecological disaster “beyond comprehension” unless “extraordinary measures” are undertaken to stop the massive flow of oil into our Planet’s eleventh largest body of water.

Interesting to note in this report is Sagalevich stating that he and the other Russian scientists were required by the United States to sign documents forbidding them to report their findings to either the American public or media, and which they had to do in order to legally operate in US territorial waters.

However, Sagalevich says that he and the other scientists gave nearly hourly updates to both US government and BP officials about what they were seeing on the sea floor.

Why did we have to hear about this from the Russians?

To recap… The currency rally yesterday didn’t dissolve overnight like recent rallies, as most currencies held on to gained ground versus the dollar. Oil prices fell and that caused some slippage in the Canadian dollar/loonie. Data was not good for the US economy yesterday as the Weekly Jobless Claims gained to 472,000… And Big Al Greenspan talks US deficit and financing for us today.

Chuck Butler
for The Daily Reckoning

Alan Greenspan Talks Deficit Financing originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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US Budget Deficit: Another Government-Sponsored Ponzi Scheme

Jun 8th, 2010
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Front and center today… Gold has reached a new all-time high this morning. Yesterday I kept watching the shiny metal tick higher and higher, and I would yell out across the desk each rise in gold… Gold was ,250 when I turned on the screens this morning. It has given back since, as I did some reading and research… But shoot… The move yesterday was something to admire!

Now… Remember how I always tell you that a star shines the brightest right before it burns out… Well… I’ve been reading some research/stories that claim that gold has reached its top level. I’m not buying any of that at this time… Period! But I thought I would tell you that there are some people out there that believe gold is at the top…

They think that because they believe that deflation is the call to order… And while I don’t argue that deflation has settled into our economy right now, I will argue that gold will suffer during deflation. Portfolio theorists have always said that the best asset to hold in a deflationary period is cash… Well, to me, gold is cash… And it doesn’t have to fight for shelf space with investors right now, because deposits of cash aren’t earning interest, (except here at EverBank!) and neither does gold.

OK… Enough on gold… You get the picture…

Risk aversion has set in big time, folks… The risk assets (except gold!) are getting sent down the river without a paddle! The euro (EUR) is in danger of losing the 1.19 handle this morning, and even the higher yielding commodity currencies are losing ground versus the dollar. Stocks are in shambles, and commodities are slipping again…

You would have thought the euro would have gotten some love from a strong factory orders print yesterday in Germany… But no! This morning, Germany printed a strong trade balance report… It wasn’t as strong as forecast, but still… A nice surplus balance of 13.4 billion euros! That puts the trade surplus in Germany for 2009 at 50 billion euros, which rounds out to a nice 10 billion per month! Well, that is, if the data wasn’t two months behind!

Industrial production in Germany also printed strong this morning for April… So… The economic recovery of Germany remains in place, even with all this debt debacle of the Eurozone going on.

Well… I guess the pain is Spain is mostly on the plain, eh? Now Spanish citizens are realizing the budget cuts that the government has proposed are probably going to cut into their way of life… Hey! Suck it up! Germany is going to cut their deficit too, just to show everyone that what’s good for the goose is good for the gander!

This morning, the ECOFIN (Eurozone Finance Ministers) Conference is going on, and there has been some news already from the Conference. Let’s listen in…  But first, I want to remind everyone that three months ago, I offered this solution to some of the problems in the Eurozone, right here in the Pfennig…

Finance ministers from across Europe agreed to establish the European Financial Stability Facility to curtail the sovereign-debt crisis that began in Greece. The facility will sell bonds backed by national guarantees, then use proceeds to lend to needy euro-area nations.

Yes, internalize the problems, and forget the IMF!

Last week I spent quite a bit of time talking about the US deficit, and where it was heading… I was reading my friend, David Galland’s, letter yesterday, and he addressed this whole thing in a way that only David could do… So, let me set this up for you… David discusses the forecast that the deficit will reach 100% of GDP in 2012… So, here you go… My friend, David Galland…

“Thus, in order to reverse the steady rise in its debt, the government will need to collect more revenue from the citizenry trapped under its boot heel. Err, I mean, ‘under its warm and protective wing.’

“Ironically, on the order of 65% of all US government debt is owed to the American people. Thus, in order to pay them their modest yields, the government must first lift them out of their pockets.

“It is the very definition of a Ponzi scheme, with the exception that this one is legal.

“Oh, I suppose that if the government actually had even the scintilla of a chance of getting ahead of its debts, it wouldn’t technically be a Ponzi scheme. However, when you add the total future obligations of the government of these United States to the nominal debt, the sum becomes an order of magnitude greater than trillion – trillion? trillion? – so a Ponzi scheme remains the accurate description.”

Oh… I also read an interview yesterday with an economist that claims that the deficits don’t matter, for if they did, buyers of the debt would be demanding higher interest rates/yields… And with yields at historical lows, he believes this is the sign that deficits don’t matter…

I would ask him just what he knows about buying Treasuries through the back door, in order to keep yields low? For that’s what the Fed has been doing for over a year now… Again, I’ll say this any time I hear that deficits don’t matter stuff… It reminds me of a man standing on top of the Empire State building, and decides to jump off, as he passes the 56th floor, he says… “So far, so good”!

And you just wait… Once the Fed does one tiny rate hike, the markets are going to smell blood, and begin to demand higher and higher rates to compensate them… There will be the higher yields this “economist” says are missing from his “deficits don’t matter” thesis.

I read an article yesterday about a rumor that the government would impose a new tax on gold holdings… WOW! I guess they figure they have to raise revenue somehow, and with everyone and their brothers owning gold these days… Well…

Right now this is just a rumor… And one that needs to get silenced before it becomes a whispering campaign!

Then there was this… I read this morning that, in Australia, two iron-ore companies,  BHP and Rio, have notified Japanese steelmakers that iron ore prices for the July-September period will be raised 23% despite the recent slide in commodity prices overall. Brazil’s Iron-ore maker, Vale, is also likely to raise their prices to keep up with the Joneses. This is the second consecutive quarterly hike and will put iron ore at 140% higher than the 2009 contract prices.

That certainly doesn’t look like deflation to me… But it is just one sector…

Chuck Butler
for The Daily Reckoning

US Budget Deficit: Another Government-Sponsored Ponzi Scheme originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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US Deficit to Reach 100 Percent of GDP?

Jun 3rd, 2010
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The Japanese have a new Prime Minister (Kan), and the currency markets don’t like it! The once so-called “safe haven” of yen (JPY), is getting sand kicked in its face, and rightly so, as the new PM has previously stated his goal of a weaker yen.

The euro (EUR) has moved up slightly overnight, nothing to write home about. However, the Aussie dollar (AUD) is the star performer overnight, alongside its kissin’ cousin across the Tasman, New Zealand dollars (kiwi)… The April trade balance printed better than expected, registering a surplus of A4 million… After getting socked in the gut earlier in the week, because the Reserve Bank of Australia (RBA) had left rates unchanged, the Aussie dollar has come back with purpose!

Joining the Aussie dollar is kiwi (NZD)… I’ve told you for some time now that the Reserve Bank of New Zealand (RBNZ) will hike rates at their next meeting in June, and guess what? June is here! The RBNZ meets next week, and finally the markets are seeing what I’ve seen for a couple of months now, that the RBNZ will indeed hike rates, and that, my friends, has kiwi rising this morning!

The price of oil is rising again, but gold isn’t… Hmmm…

So… That means the Canadian dollar/loonie (CAD) is reacting somewhat positively… But the loonie is back above 96-cents and looking strong today.

Yesterday, I was sitting here thinking about things, mostly deficit things, and had these thoughts (which for once, I wrote down!):

So… Here I am on a Wonderful Wednesday, and I just finished my “day job” which means it’s now time for me to begin reading, researching, and thinking about what to write about in Thursday’s Pfennig!

On this day, we had some monstrous black clouds move in from the west… And I couldn’t help thinking that one day those same monstrous black clouds are going to move in and take over the US economy. There’s nothing new here, folks… It’s just another rant on deficit spending… If you don’t care to participate, skip ahead to the Big Finish…

This time I’m going to quote some facts from the IMF… Not that I’ve made stuff up before, it’s just that my economics professor for continuing education, is in love with the IMF, so, this is really to appease her!

You know, that the US deficit spending has been going on for about a decade now, and that it has taken huge strides to increase the total deficit in the past two years. I’ve gone through all that with you before, right? OK… Here’s the first blurb from the IMF…

“IMF’s analysis of the US economy, that ‘under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100% of GDP by 2015 – a far steeper increase than almost any other country.’

“But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it would have to issue a large chunk of new stuff each year as things are.”

You know… The UK Telegraph does a much better job of reporting on the US deficit than do US news organizations (except the Pfennig!)… Most of this stuff was from an article they printed. In addition though… Here’s the killer… “A country’s gross financing needs” represents how much debt it has to issue in the coming years to keep itself “functioning”… And here’s where the cheese begins to bind, folks…

The US’s gross financing needs today is 32.2% of GDP, which is far greater than most countries, including Greece! The only major country to “beat” the US on the road to ruins is Japan!

And to end this little discussion on the US deficit and forecast, the yield in a 2-year US Treasury is 0.80%… That’s not even 1% folks… By the time the broker takes his pound of flesh from the yield as his commission, the holder of this magnificent piece of junk gets about 0.25%… WOW! Where do I sign up for that? NOT! Think about this for a minute… Most of the US debt is financed through these shorter maturities, and they are paying less than 1%… How long will foreign investors continue to line up at the door for 1% yields?

A 2-year Australian Government Bond has a yield of about 3.75% (after the broker takes his pound of flesh). Now, I know that Australia’s bond market isn’t as large or as liquid as the Treasury market… But, if you get in before the rest of the crowd hits the exit door on Treasuries, then the later buyers will be doing nothing but making your bond more valuable!

Now… That wasn’t a solicitation to buy Australian Government Bonds; it was just an illustration of what might happen…

Well… Today’s data cupboard is chock-full-o-data prints… First we’ll get the ADP Employment report for May… Then the stupid “productivity” data for the first quarter. Factory Orders for April will print later this morning, along with the ISM non-manufacturing (service industry) Index. It’s also a Thunderin’ Thursday so that means the Weekly Initial Jobless Claims will print too!

Tomorrow is the Big Kahuna for data, with it being a Jobs Jamboree Friday… Right now, it looks like the BIG CHUNK of census workers were hired or rehired (from last week’s note about the census workers blowing the whistle) to the tune of over 500,000… I see where the BLS is going to split up the government workers from the private sector to make it easier for us… The private sector is forecast to have created 178,000 jobs in May… Which would be pretty darn good, eh? Of course we don’t get a forecast of how many “ghost jobs’ the BLS will add!

Speaking of private and public hiring… There’s a huge discrepancy going on these days folks… Government workers (public) are making a large chunk of payroll, that’s more than what’s getting shelled out in the private sector… According to a 2009 CATO Institute study the average federal civilian salary with benefits totals 9,982 compared to ,909 for the average private sector worker.

I thought that those people worked for us? Is that not right? It sure doesn’t look that way to me! And… Think about that for a minute… The deficit just keeps getting added on to, eh?

Then there was this… According to The Wall Street Journal… The UK’s Financial Services Authority said it has fined J.P. Morgan Chase £33.3 million (.8 million) for failing to separate client money from the firm’s money, in the largest fine in the market regulator’s history. Uh-Oh! That’s a big no-no, from my days running a brokerage company…

To recap… Aussie dollars, kiwis, and loonies are the top performers overnight, with the Aussie dollar getting bid up on thoughts that the sell off was overdone, kiwi getting bid up on thoughts the RBNZ will hike rates next week, and loonies getting bid up on oil prices rising again, and a delayed reaction to the rate hike this week by the Bank of Canada.

Chuck Butler
for The Daily Reckoning

US Deficit to Reach 100 Percent of GDP? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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US Budget Deficit Hits a New Record, Americans Respond

May 26th, 2010
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For a fresh look at how Americans feel about the budget deficit, you can check out the Onion’s satirical perspective below.

Here is one of the comments from the Onion’s American Voices section if the graphic is too hard to read…

“I’m not willing to give up any benefits, but they can go ahead and make my grandkids’ lives a living nightmare if that will help.”

Or, you can visit here to view the post on The Daily Bail, where it came to our attention.

US Budget Deficit Hits a New Record, Americans Respond originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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