It's Austerity, not a Cliff

America cannot avoid the so-called Fiscal Cliff.

There is no cliff. It’s austerity. It’s the same austerity that is causing the Greek people to riot on the streets and set themselves on fire in defiance of the government’s policy of cutbacks in order to pay bondholders.

The Federal Reserve has one more quiver in its arsenal than Greece. It’s the dollar. Greece is unable on its own to cheapen the euro to help bail itself out of the debt spiral it and other southern European countries, ie: Spain, Italy and Portugal are presently going through. The fact that the euro is trading near $1.30 to the dollar is the proof that the fed’s unannounced policy is a cheap dollar. No one will say it but the market’s actions speak volumes.

While US price inflation is rising much more than any core CPI report states, wages, however,  are stagnant as 25 percent of the workforce struggles to find meaningful employment. So as prices climb and wages remain flat as they have for three years you have an increase of deflation, which the Federal Reserve is battling to combat. The central bank has few tools to fight deflation except creating another bubble to inflate the economy.

Meaningful employment equates to a full-time job with decent salary with health benefits.

I have requested from the Bureau of Labor Statistics numerous times what percentage of the US labor force falls into the category of having a meaningful job regardless of salary. They cannot provide that breakdown.

My hunch is that number may be astonishing low for new hires since 2007. Look how the hours worked for the week number has moved into the mid-30s since 2008 and has barely moved.

More workers are taking part-time positions without benefits in a struggle to make ends meet.

Back to the deflation aspect of the economy. The Fed’s one tool to combat deflation is asset bubbles. You can see that in their bond market manipulation otherwise known as Quantative Easing. Ben Bernanke is punishing savers with his ultra-low bond yields. Retirees and soon-to-be retirees are getting near zero interest on bond returns and saving accounts. The Fed wants to chase them into riskier investments such as stocks. This is the bubble aspects, equities.

As equities tick up on seemingly no news or better yet bad economic news, the bubble gets larger and thinner.

So while Congress and the Obama administration debate the tax rate on the upper 2 percent aas being the be all and end all of our economic problems, be aware the cliff for the middle class is coming.

There is no way taxes, social security contributions are not going to rise and rise significantly. We have a $16 trillion hole with more being requested by Washington as the debt ceiling will rise in the first quarter of next year.

There is little that can be done if we continue on the path of enriching entitlements.

More to come on this as I will be far more active on this blog in the near future.

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Sovereign Debt Spiral

By MICHAEL GRAY

The Greek debt tragedy currently unfolding may be the canary in the coalmine to the ultimate unraveling of the European Union.
The weapon of mass destruction is public-private partnerships. The special entities where private industry takes loans out for government projects and the sovereign entity become guarantors of the loan. As the European countries struggle with their budgets the PIIGS (Portugal, Italy, Ireland, Greece and Spain) are seeing an explosion in monetary exposure to these public private guarantee of notes.

Gordon Long, founder of a private venture capital fund, in an investor note says there is over $600 trillion in notational value in the global derivative market with $437 trillion of these tied to interest rate swaps. “Any credit event could trigger a cascading event. It does not have to be default; it could be a downgrade in swap contracts that would do the trick for a collateral call. Something is going to cause it to topple, whether it’s a situation in Dubai, Greece or New Jersey.”
With this as a backdrop, is it any wonder why the US dollar has been on strong run since last November against the euro and the British pound. Also gold versus the euro has risen16 percent in the same timeframe.
Major investors also have a record number of future bets that the euro will continue to depreciate against the dollar over the short term.
“The next 12 months could be very dramatic for the Eurozone,” said Robert Chapman, publisher of “The International Forecaster.”
“ I am seeing many sovereign defaults for the PIIGS as well as in eastern Europe and the former Soviet satellite countries running into 2011,” Chapman added
Industry newsletter estimates have Dubai’s sovereign debt load exploding to nearly 4 times its originally reported $80 billion, as other government-back projects have gone bad after Dubai World’s default in late November.
The scenario went something like this:
¡ In 2005 a government like Greece wished to develop a Mediterranean beachfront location for tourists.
¡ The Greek government did not want to float infrastructure bonds to pay for the development because it debt load was over the ceiling threshold set by the EU.
¡ The Greek government brings in a Wall Street bank like Goldman Sachs, which suggests it establish a Special Purpose Vehicle.
¡ This SPV in essence allows the public development company to finance the infrastructure project with the Spanish government guarantying the debt.
¡ The project moves forward with not credit impact on Greece’s credit rating.
¡ When the housing economy goes south the developer declares bankrupt and the Greek government must add this debt onto its books.
So when this scenario is played out a thousand times across the Eurozone the bond ratings of the sovereign countries are lowered thereby increasing its borrowing costs and could eventually lead to a default.
This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union.
Iceland and Dubai are the test studies for how the Europeans may deal with the idea of socializing private debt through public funding.
Dubai World’s default, which had government backing, put the world on notice that sovereign credit worthiness was a concern.

And just yesterday Icelanders overwhelmingly voting “no“ in a referendum on a $5.3 billion deal to compensate Britain and the Netherlands for deposits lost in a collapsed Icelandic bank and daily riots in Greece over government tax policy changes, this may end poorly.
For more on Wall and Washington and the economy see: http://mgray12.wordpress.com

The EU Must Feed the PIGS

European Union regulators are facing a huge problem with Portugal, Italy, Greece and Spain (PIGS). The Mediterranean countries have a huge debt load that has existed since these sun-drenched areas joining up with the EU.

As I wrote last year, these countries will take down the euro, because the PIGS cannot service its debt. Ireland and Iceland to a somewhat lesser extent have the capacity to hurt the euro as well, but appear to be moving to reduce its long-term obligations.

Historically the PIGS have had no manufacturing base to rely on. Excluding northern Italians, which if you speak to them, say their economy to more closely tied to Germany, Switzerland and France than southern Italy.

Prior to the EU the PIGS were always running on budgetary deficits and that only accelerated when the PIGS needed to get their economic house in order to fall under the rubric of the EU. There is a very small manufacturing base in the PIGS and the area relies heavily on tourism as its economic growth industry.

What happens when the rest of Europe catches an economic  cold and stays home the PIGS have to wallow in the muck.

So you have the PIGS, which historically been the soft underbelly of the continent wanting to join the EU.

So in the late ’80s you have Northern European countries trying to unify the area under one currency and economic system for trade, although they know their southern cousins don’t warrant  inclusion, how would it look if Europe was not united to compete against the United States..

In steps Wall Street and Goldman Sachs to goose the books and slap a new coat of paint on the PIGS so Goldman can flip the debt and bring these companies inline with debt restrictions of the EU.

With easy credit during the last ten years in the EU the PIGS used that credit like a revolving line of credit to pay last year’s debt with this year’s revenues. and it worked til it didn’t.

Now the Northern European countries — Germany, England and France — need to bail them out or see the euro go away.

Germany can survive quite nicely going back to the Deutsche Mark. Not sure if the English and French economies can say the same.

I see a declining euro versus the dollar this spring. The euro breaking lower than $1.30 by April 1 with gold rising against the strengthening greenback.

For more on Wall and Washington and the economy see: http://mgray12.wordpress.com

January: Looking Ahead, Looking Behind

By MICHAEL GRAY

Looking back January saw the Dow index loose 3.5 percent. Other equity markets were down about the same.Commodities including gold were up slightly, thereby being a good hedge for capital preservation.

January also has a correlation for year-long market trends. I believe 3.5 percent decline for 2010 will be a rosy number by the time we get December.

January also marked the end of the global central banks doing currency swaps, which shows why the markets are moving higher this week on dollar weakness. This dollar/stock correlation will disconnect as the European Union begins to shudder over PIIGS debt load.

January’s unemployment number will be -150,000 if the Bureau of Labor Stats takes it normal tact of using the death side of its Birth/Death model for new businesses. Despite what the pundits say, January is one of two months of the year where the BLS deducts some of the phantom jobs it has guessed were created by small businesses but cannot find.

The unemployment rate will probably stay static at about 10.1 percent, because this number uses the household survey number, which shows further joblessness but we just move other people further down the reporting pipeline to keep that rate number flat since that is the headline. This is why the U6 number is closer to 23 percent because it holds all people who are on extended claims, have taken a part-time job or have left the job market.

WHAT’S WITH 11

This week we had Irani President Imalatefordinner or whatever his name is state that the world will take notice on 2/11/10.

Now we had 9/11 and we had the 7/11 London bombing, the 4/11 Madrid bombing, the 7/11 Bombay train bombing and the 10/11 Bali bombing. Not quite sure if there is a connection, but it certainly is a trend. Anyone have any ideas?

For more on Wall and Washington and the economy see: http://mgray12.wordpress.com

2010: A Continuation of the Naughts

By MICHAEL GRAY

Many economists are looking at 2010 and seeing the glass is half full. The data they use to forecast how the US economy is improving has been corrupted to such an extent that the time-honored formulas used to determine future growth are fraudulent.

The disconnect occurs when government statistics are skewed with assumptions that can only be described as lies if you and I stated them. The major culprit in this regard is the Bureau of Labor Statistics’ weekly and monthly employment numbers.

Between seasonally adjusting the jobs numbers using the birth/death model as well as looking historically for the assumption of how many jobs were created is more voodoo than sound economics.

Inflation numbers also seem to be devoid from reality even when you take out food and energy. This number has been so politically charged for so long that to look at it as a true barometer of economic activity is moot. My best guess would say that inflation is probably running at 8 percent right now and will climb much higher by the second half of this year as the dollar index slides into the low 70s.

Equity markets are skewed to the upside since becoming awash with cheap cash last spring. The high-frequency trading employed by Goldman Sachs and other government proxies do not create wealth or growth for companies but rather a quick profit for the firm’s prop desk.

This is the main driver for the indices to be closing almost flat. The lack of conviction to buy or sell are the hallmarks of HFT. If you are in and out of a stock after a two-cent gain, you will not see 100-point moves on the Dow very much.

I am also very suspicious of pre-market activity. I have seen at least 10 days in the last two months were there have been 100-point swings in the futures market on very little news. Perhaps the Plunge Protection Team is in the market or one of its proxies propping up equities before the markets open in the west.

The take away on all this is that economists — even if they had good data — are guessing on the direction of the economy. So if you give them flawed data they will never see a collapse until it hits — perhaps.

My biggest concern is to get past the first quarter. I believe with a very disappointing jobs number for January — because the BLS typically does not add bogus jobs into that month’s number — it will usher in a wave of sell offs in equities, bonds and the dollar. Commodities may sell off, except gold and silver which will benefit as another flight to hard currency will ignite.

For more on Wall and Washington and the economy see: http://mgray12.wordpress.com