It’s the economy stupid!
Obama is too busy attacking talk show hosts and dreaming up schemes to spend money we don’t have to actually bother with the job of fixing the economy and saving/creating a financial system that works.
This is not an economics website but lately we are forced to devote ourselves almost exclusively to the economy. We have to write about the economy because Obama clearly is too busy serving whine and $100 steaks from skinny cows to a parade of guests.
We have to write about the economy because PINO Big Blogs are praising Obama’s Bush-like looting of the economy and rubbing their hands in anticipation of Santa wish lists coming down the chimney along with now hidden deficit credit card bills.
But the boat is sinking.
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The country spiraled deeper into recession to start 2009, forcing widespread cutbacks and layoffs among everyone from blue-collar workers who once churned out construction equipment to white-collar professionals like business consultants and accountants.
The Federal Reserve’s new snapshot of business activity nationwide, released Wednesday, showed the economic picture darkening over the last two months and revealed little hope for a quick turnaround.
In ten of the twelve Federal Reserve regions economic activity dropped further “National economic conditions deteriorated further,” the Fed’s survey concluded. “The deterioration was broadbased, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions.”
This Boat is Sinking. Nouriel Roubini is tolling the bells. Obama’s “budget overview” is a lie. Dr. Kervorkian now has an economic equivalent on board the sinking boat captained by “HMS Pinafore” Obama. This Boat is B.O. stinking:
For those who argue that the rate of growth of economic activity is turning positive–that economies are contracting but at a slower rate than in the fourth quarter of 2008–the latest data don’t confirm this relative optimism. In 2008’s fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here’s why:
Roubini gives Obama the “L” (All You Need Is L-U-V) facts. They are not pretty. Economic activity is negative in Europe and Japan and unemployment continues to climb. China is not investing and steel is falling there. Japan, Taiwan, Korea, and China are a mess with falling exports.
The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Is there any even fake hope? According to Roubini, no. Roubine says: But such stimulus is unlikely to lead to a sustained economic recovery. The fake Obama “stimulus” in this age of fake will not help:
Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year’s $100 billion tax cut, only 30% was spent and the rest saved.)
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
Roubini says the fall will continue into 2010, if not longer (a rising risk of an L-shaped near-depression). Hopium addled addicts will scream in triumph at this: Of course, you cannot rule out another bear market suckers’ rally in 2009…. However, after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter….
Roubini notes that the U.S. government (in guarantees, investments, recapitalization and liquidty provisions) has committed about $9 trillion to the financial system and has already spent $2 trillion.
At this point we will not get into several incendiary charges that Roubini makes about a potential scandal involving Goldman Sachs’ CEO Lloyd Blankfein. Suffice to say that investigation of the charges will be needed.
As the economic ship of state sinks, the Hopium addled are still walking into walls, but some are finally waking up to the mess which is “HMS Pinafore” Obama.
Don’t blame us – we voted for Hillary:
The Dow closed today at its lowest mark in 12 years, and now it’s becoming clear even to Obama supporters on Wall Street that his reckless agenda will make a bad situation worse.
If you want to understand why, despite his popularity with the general public, Barack Obama is losing the confidence of Wall Street, all you really have to do is speak to his supporters on the Street. There are many, contradicting the long-held myth that the bankers, investors, and hedge-fund traders who inordinately profited during the past two-plus decades of unfettered capitalism don’t always vote as unfettered capitalists. They were a vital part of Bill Clinton’s coalition, were cozying up to Hillary, but bolted for Obama the minute they heard him speak about social justice, the need to reform the nation’s energy policy, the necessity to end the war in Iraq, and most of all, how the past eight years of George W. Bush elevated mediocrity to new heights.
Obama was anything but mediocre, they told me time and again, as the financial crisis devastated the markets and ushered in one nasty recession. And these days they are a sorry lot because they now admit they really didn’t listen to Obama.
But for all of that they can’t believe what they are witnessing: an economic agenda that is contradictory at best, and possibly reckless in its extreme. Policies that will certainly make a very bad situation even worse, and when things do get better, they will certainly not be better enough to compensate for the pain we are experiencing.
The prominent “friends” in this account are unhappy with Obama for many reasons. But the fault is theirs – they did not listen to Big Pink, they believed the razzle dazzle from Chicago.
Only now that it is too late, they are aware of the Obama boobery. They echo our critique of the absolute need for a financial plan:
Part of the reason Treasury Secretary Geithner has received such low marks so far is that he hasn’t produced a plan to save the banks that are still holding more than $1 trillion in bad mortgage and real-estate debt. It’s the reason the banks still aren’t lending money; if they sell these securities at market prices, they have to write down massive losses and become insolvent, barring a massive government bailout.
These former Hopium addicts receive no sympathy from us, nor do we necessarily agree with their complaints. Frankly they disgust us. After fleecing ordinary Americans now they pretend to care about “Main Street”.
The above assessment is buttressed today in a Business Week article:
At least on Wall Street, the honeymoon is over for President Barack Obama.
Polls still show the President has strong popularity among the general U.S. population, and Obama continues to command power in Congress. But among investors, fairly or unfairly, there is griping that the new Obama Administration is at least partly to blame for the recent slide in stocks. Since Nov. 4, Election Day, the broad Standard & Poor’s 500-stock index is off about 25%, and since Jan. 20, when Obama took office, the “500” is down 15%. [snip]
But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.
It wasn’t always so. On Nov. 21, word arrived that Timothy Geithner would be tapped as Obama’s Treasury Secretary and markets rallied immediately. The S&P 500 rocketed 15% higher that day and the following trading session.
Stocks continued to climb into January, and even rallied in the week after the inauguration. “Hopes were too high,” says independent market strategist Doug Peta. Too many were hoping the new Administration would have “this magic potion to solve our problems,” he says. “That was unrealistic.”
How many times have we written the highlighted sentence below? What fools these mortals be!
Many investors hoped Obama could start to solve the stock market’s—and the economy’s—biggest problem: the credit crisis. “It was a false hope,” says Brian Reynolds, chief market strategist at WJB Capital Group, who believes there is “nothing the government can do to stop the crisis.”
Others are more hopeful the government can ease credit conditions, but say the Obama Administration has bungled the operation so far.
The Business Week article is composed of many on the record quotes from prominent business leaders. These business leaders are taking risks telling the truth about the Obama Chicago thugs. The truth telling is not partisan nor ideological – these business leaders know the boat is sinking and “HMS Pinafore” Obama is flapping his arms on deck.
Obama tried to bamboozle Americans into throwing away money on stocks “Profits and earning ratios are starting to get to the point where buying stocks is a potentially good idea,” Obama said, adding “if you’ve got a long-term perspective on it.” These investors disagree with Obama. The problem for investors is the long-term outlook has never looked so fuzzy. Readers of this Big Pink website will find this sentence familiar: It may be quite some time before investors find a change they can believe in.
The New York Times meanwhile is suggesting American taxpayers throw away more money trying to save others when we cannot even help ourselves. Perhaps the New York Times editorial page has missed the story in its own “news” pages that GM is going under, and that CitiMorgue stock is selling for a dollar.
So much for the upbeat news. The worse is yet to come:
The Biggest Story of the Week. Or the year. Frightening.
I’ve been wondering why the impact of the financial crisis on the overall retirement “system” hasn’t gotten more attention in the media. We already knew the system was in bad shape before September 2008. According to the Fed’s Survey of Consumer Finances, in 2007, only 60.9% of households where the head of household was age 55-64 had retirement accounts . . . and their median retirement balance was $98,000. Given that the stock market has fallen by over 50% from its October 2007 peak – and that, for decades, the standard investment advice has been that stocks do better than any other asset class in the long term – we would be lucky if that median balance were more than $70,000 today.
The above is commentary based on an article in Bloomberg News. The news is not pretty:
The second, and the focus of the article, is the perverse behavior that is caused by accounting rules governing pension funds. The key question for a pension fund is whether the assets it has today will be enough to pay off its future liabilities. The assets are relatively easy to value, at least most of the time; the future liabilities are relatively easy to predict actuarially (although unanticipated developments, such as a sudden change in life expectancy, could mess up that calculation); but the hard part is estimating the rate of return on the assets. So . . . public pension funds are allowed to assess their long-term solvency using assumed annual rates of return, generally around 8% per year. Of course, as we know, things don’t always work out that way: the Vanguard Balanced Index Fund (which indexes virtually all U.S. stocks and bonds) has an average annual rate of return of 0.9% over the last 10 years, and even since its inception 1992 its annual return is only 6.0%.
These optimistic assumptions are bad enough, because they allow underfunding of pensions. But what’s even more bizarre is the behavior this causes. As the Bloomberg article explains, local governments issue pension obligation bonds to raise cash for their pension funds. These bonds usually pay fixed interest rates, say 6%, and the proceeds are then invested in risky assets. But the magical thing is that because you are allowed to assume an 8% return, for pension accounting purposes, the difference between 8% and 6% is free money! Well, it’s free money as far as this year’s assessment of the pension is concerned. In the long term, of course, it’s a crazy investment strategy (and a mistake many people make – comparing a risk-free interest rate you borrow money at with a risky expected rate you hope to earn). And the results in the future are predictable: either higher taxes, or yet more value-destroying pension obligation bonds. Sometimes people get caught saying stupid things, like Christine Whitman saying, “You’d be crazy not to have done this. It’s not a gimmick. This is an ongoing benefit to taxpayers,” but it’s really a systemic problem.
Our retirement “system” has four main legs: Medicare, Social Security, corporate or government defined-benefit pensions, and private saving (IRAs, 401(k)s, etc.). Right now it looks like Medicare and Social Security are the stronger legs.
The Bloomberg News article is more ominous than we dare explore. Some very brief samples (first one from Chicago).
The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent. [snip]
Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy. [snip]
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years — more than half of them since 1997 — public records show.
The quick fix for pension funds becomes a future albatross for taxpayers.[snip]
The Teacher Retirement System of Texas, the seventh-largest public pension fund in the U.S., reports each year that its expected rate of return is 8 percent. Public records show the fund has had an average return of 2.6 percent during the past 10 years.
The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley.
Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.
Did we mention the boat is sinking? Sinking fast?
Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.
Did we mention the boat is sinking?
The boat is sinking and “HMS Pinafore” Obama is flapping his arms on deck.