FedUpUSA

Archive for February 2nd, 2010

Obama’s Two-Faced Poisonous Plan Sure To Please No One

Talk coming from the White House is rather amazing. On one hand Obama chastises Congress for not being fiscally prudent, on the other hand he wants Congress to approve still more funding for his pet ideas. Such talks is bound to win few fans on either side of the aisle.

Please consider the Obama Budget: Record Spending, Record Deficit

Spelling out painful priorities, President Barack Obama urged Congress on Monday to quickly approve a huge new shot of spending for recession relief and job creation, part of a record $3.8 trillion budget that would boost the deficit beyond any in the nation’s history while only slowly beginning to put Americans back to work.

The spending blueprint for next year calls for tax cuts for workers and business and more aid for cash-starved state governments as well as the unemployed. The jobs initiative largely mirrors last year’s stimulus bill, but is about one-third its size. The president is asking for nearly $300 billion for recession relief and job stimulus.

While proposing increases for immediate needs, he urged lawmakers to follow his lead and make cuts, even painful ones in programs dear to them. “I’m asking Republicans and Democrats alike to take a fresh look at programs they’ve supported in the past to see what’s working and what’s not, and trim back accordingly,” he said.

“They’re not willing to do big ideas. They’re doing ideas that create perception but don’t do anything big,” said New Hampshire Sen. Judd Gregg, senior Republican on the Budget Committee. “The spending freeze for example. You’re talking what, $10 billion on a $1.6 trillion deficit?”

Democrats, facing the prospect of major losses in November, are likely to join Republicans in balking at many of Obama’s proposals. Moderate Democrats already are wary of another debt-financed economic stimulus program and may also choke on many of the recommended tax increases and spending cuts.

Obama’s proposal to cut payments to wealthier farmers, for example is probably dead on arrival and his renewed push to end purchases of new C-17 cargo planes for the military is sure to incite a battle with lawmakers from California, where the planes are assembled.

Proposing a partial spending freeze, tax increases for wealthier people and a new fee on banks, the president’s proposal still amounts to just tinkering at the edges of the larger budget problem.

While White House Press Secretary Robert Gibbs spoke Sunday of a $100 billion jobs initiative, these “temporary recovery measures” in fact total $282 billion through the autumn of 2012, according to budget documents.

At the same time, Obama wants to hand off to a commission decisions on the tough steps needed to reduce deficits and slow the growth in the federal debt to levels economists deem prudent. The panel’s recommendations wouldn’t be due until after the midterm election.

Obama’s proposal lays out a path to reduce annual deficits to about $700 billion in four years, but ideas for tax increases or cuts in popular benefit programs like Medicare or Social Security to reduce them an additional $200 billion would have to come from the commission.

“We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money, as if we can ignore this challenge for another generation,” Obama said.

Obama dropped his plan into a poisonous election-year atmosphere. Republicans in Congress immediately labeled it as a toxic mix of higher taxes, big spending and debt, saying it would still produce deficits totaling $8.5 trillion over the coming decade.

Is Anyone Happy?

A quick look at the above article is all it takes to answer the question. Moreover, I am struggling to believe Obama does not comprehend how ridiculous he looks chastising both parties for spending while adding new proposals seemingly every day.

And what’s with freezing 1/8 of the budget at best while adding something to every piece of the remaining pie?

Economist Paul Krugman is sure to complain the President is not spending enough, right along with House Majority Whip James Clyburn (D-S.C.) who says “We’re not going to save our way out of this recession. We’ve got to spend our way out of this recession, and I think most economists know that.” (See In Defense of Drunken Sailors for details).

Balance that with every economist in their right mind (although admittedly there are very few), who think it is impossible to spend one’s way out of a debt bubble.

Meanwhile healthcare is dead, yet war spending, the one thing nearly everyone in the country thinks is a bad idea is going up.

Indeed, Obama’s budget seems carefully crafted to offend as many people as possible.

As anger mounts, look for the mid-term elections to be a slaughter. Any weak incumbent is going to have a very tough time retaining his seat. Republicans now have a genuine shot at retaking the House, although many of them deserve to be booted as well.

Here’s my rule for the upcoming election “If In Doubt, Vote Them Out”.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Stock Market Casino Royale – S&P 500 is Overvalued by 100 Percent – Earnings do not Justify Current S&P 500 Levels. Financial Markets Setting up for Another Correction.

Posted by mybudget360

When I look at the S&P 500 like most people do, you would expect that this wide cross-section of companies in the U.S. would reflect an accurate measure of the true health of industries in our economy.  Yet the S&P 500 is fully disconnected from any historical measures of valuations.  It is startling to see people talk about the wild swings in the stock market as if this were somehow standard in a regular market.  The S&P 500 fell by a stunning 58 percent from the peak in summer of 2007 to the low in March of 2009.  But from March of 2009 to February of 2010 the market has rocketed back up by 63 percent.  This kind of massive market volatility is not indicative of a healthy stock market.  This is a symptom of a system that is having a really hard time valuing assets since much of the toxic financial assets are still lurking in the murky black box of many financial institutions.

Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):

Source:  Robert Shiller, www.multpl.com

130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range.  This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations.  And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression.  Yet in this crisis, valuations never made it down to a more realistic level.  This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.

Take a look at inflation adjusted earnings:

Earnings have collapsed during this market turmoil yet the market is up some 63 percent.  What is the rally based on?  A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems.  And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:

Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less?  Of course.  The above chart merely reflects what average Americans are dealing with.  They are adjusting their household budgets to reflect stagnant wages or lost jobs.  They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble.  Yet the stock market has rallied as if we are back to the heyday of 2007.

This rally is really something to behold:

The only other time we saw such a sharp drop and rally was during the Great Depression.  Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings?  It just doesn’t make any financial sense.  We are back to seeing bubble like behavior.

Middle class Americans are largely not participating in this rally.  Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans.  The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame.  If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:

While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period.  Have the banks really gotten that much better?  Is credit really flowing from their doors?  Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino.  The structure is setup for quick profits even if it means long-term destruction for our economy.  Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin?  That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.

The current stock market valuation tells us that the stock market will hit another correction.  Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth.  Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy.  Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case.  We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.

Equal Protection (From the Zombie Banks)

“…the AIG bailout, a hideous political contrivance that ranks with the great acts of political corruption and thievery in the history of the United States.”

Remarkable that in light of the massive failure of the Executive and Legislative Branches of the United States Corporatocracy to protect and defend the public from the outrages being committed by the FIRE sector, the Judicial Branch is providing a haven for the rights of the people under the Constitution.

Can this be due to the fact that federal judges do not require huge campaign contributions, which Wall Street doles out like a foreign power to the craven denizens of Foggy Bottom?

Indeed. The clauses that designate the Credit Default Swaps as super senior to nearly everything else (Some animals are more equal than others clauses) are being struck down by bankruptcy courts. The banks do not take precedent in the hearts and minds of everyone, despite assertions by Timmy and Hank to the contrary.

This is an old financiers trick in the equity world of venture capital, the Sand Hill Road clause, long used to strip the holders of common shares of their slice of the pie in the evolution of startups. The CDS and CDO variation took the gambit a step too far, stepping on the rights of the bond holders, and the courts are nullifying it. Good for them.

Wall Street does not always come first, when honest public servants uphold their oaths to protect and defend the Constitution against those confiscating the wealth of the people.

Do what thou wilt shall be the whole of the Law is the guide of those doing their darker god’s work. In the short term it makes them strong, because they deny themselves nothing: no trick or falsehood, no claim or deceit, no act of betrayal or sympathetic ploy. They simply have no shame.

But there is also no honour among thieves, only greed and fear. The best part of honour is the love of something greater than ourselves. And so the bonds of their coalition are weak. Greed and self-interest will be unable to sustain the partnership of government and the Banks when the tide turns– in the end only the fear remains.

And will Timmy whimper when the zombies turn on him?

20 Reasons Global Debt Time Bomb Explodes Soon: Which Trigger Will Ignite The Great Depression II

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) — Retire? You can fuggetaboutit if the new Global Debt Time Bomb is detonated by any one of 20 made-in-America trigger mechanisms.

Yes, 20. And yes, any one can destroy your retirement because all 20 are inexorably linked, a house-of-cards, a circular firing squad destined to self-destruct, triggering the third great Wall Street meltdown of the 21st century, igniting the Great Depression II that George W. Bush, Ben Bernanke, Henry Paulson and now President Obama have simply delayed with their endless knee-jerk, debt-laden wars, stimulus bonanzas and bailouts.

Unemployment Rises In Most Metro Areas

By Christopher S. Rugaber

WASHINGTON (AP) — Unemployment rose in most cities and counties in December, signaling that companies remain reluctant to hire even as the economy recovers.

The unemployment rate rose in 306 of 372 metro areas, the Labor Department said Tuesday. The rate fell in 41 and was unchanged in 25. That’s worse than November, when the rate fell in 170 areas, rose in only 154 and was unchanged in 48.

The metro employment numbers aren’t seasonally adjusted and can be volatile. Many of the increases were due to seasonal factors.

For example, Ocean City, N.J., which bills itself as “America’s Greatest Family Resort,” saw its unemployment rate jump to 16.4 percent in December from 14.8 percent the previous month.

That’s double the 8 percent it reported in July, even though the nation’s economy was in worse shape then.

Ocean City is one of the 19 metro areas that reported unemployment rates of at least 15 percent. Twelve of those are in California and three are in Michigan, the department said.

Joblessness topped 10 percent in 138 metro areas, up from 125 in November but below last year’s peak of 144 areas in June.

Improvement in the auto industry, meanwhile, saw unemployment rates drop in the metro areas around Detroit and Warren, Mich. Automakers and auto parts companies have recalled workers in recent months as they seek to replenish inventories depleted by the “Cash for Clunkers” program, which caused a jump in car sales in August.

The Detroit area saw unemployment fall to 15.7 percent from 16.4 percent, while the Warren area reported a drop to 14.3 percent from 14.8 percent. While still high, the rates are down about 2 percentage points from last fall.

Steve Cochrane, a regional economist at Moody’s Economy.com, said it isn’t clear if the gains are sustainable once the auto companies have rebuilt their inventories.

“There are no guarantees the unemployment rates won’t go up again,” he said.

The U.S. economy benefited heavily in the fourth quarter from inventory changes. Companies ramped up production and reduced inventories less in the October to December period, which accounted for about two-thirds of the 5.7 percent growth in the economy during that period.

Nationwide, the unemployment rate was 10 percent in December, unchanged from the previous month, as employers shed 85,000 jobs. The Labor Department will report January figures on Friday, and economists expect a gain of 5,000 jobs and a slight increase in the unemployment rate to 10.1 percent.

In the past year, unemployment rose in almost all of the 372 metro areas tracked by the report, except one: Troubled Elkhart, Ind., saw its jobless rate fall to 14.8 percent in December 2009 from 16 percent a year earlier.

Unemployment in Elkhart and the surrounding region in northern Indiana soared during the recession after many recreational vehicle manufacturers laid off workers and in some cases closed their doors. President Barack Obama visited Elkhart twice last year.

Recently, the area has attracted several electric car manufacturers, including Think North America, a subsidiary of Norwegian-based Think Global. The company plans to sell electric cars in the United States later this year.

Think North America said last month it will open a factory in Elkhart in a former RV plant, potentially creating 415 full-time jobs by 2013.

The lowest unemployment rates are in the upper plains states, with Fargo, N.D. reporting the nation’s lowest rate, at 4 percent, followed by Grand Forks, N.D., and Lincoln, Neb., at 4.1 percent each.

The highest rate is in El Centro, Calif., with 27.7 percent, followed by Merced, Calif., at 19.8 percent. El Centro is heavily agricultural and has many seasonal farm workers that are frequently unemployed. Its jobless rate is down from 33.1 percent in August.

Where Did They Get The Money? (BlackRock)

Posted by Karl Denninger

What Took You So Long? (Put-Backs and Blow-Ups)

Posted by Karl Denninger

IRA put forward a nasty report on the “putback and blowup” risk issue related to the banks and fraudulent mortgages:

The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE’s are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).

….

The action “arises out of the alleged fraudulent acts and breaches of contract of Countrywide in connection with fifteen securitizations of pools of residential second-lien mortgages” Take particular care to savor the fact that these are second lien pools and that, where defaults have occurred on the primary mortgage, loss severities on the seconds will tend to be 100%. Or the cost could be more than par if you count the cost of remediation and recovery efforts.

Sigh…. how long does it take folks?

On April 20th, 2007 I wrote the following:

Why? Because every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.

And by the way, this is not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and every other lender in the ALT-A space.

Let me restate that again so that everyone gets it – every single ALT-A lender is at risk of having every defaulted loan – no matter how long it has been since it was securitized and sold off – PUT back on them if there is any material misstatement in the paperwork!

To those of you who are claiming that this is a “Subprime” problem, that it is “contained”, that it is limited to “poor people who can’t pay their bills” or anything like that, let me point out that you are one hundred percent full of crap.

Emphasis in the original.

And on April 17th:

So while mortgage companies may maintain that they have “little” exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.

HALF of all stated-income loans?

This will BANKRUPT every single one of these companies if it happens.

Now go look at the big bank’s balance sheets for second line (HELOC, silent seconds, etc) exposure.  70% of the outstanding dollar volume was written in California, Florida, Nevada and Arizona – on bubble houses.  The clear majority of those have a first that is underwater and thus the recovery value on those HELOCs, if they default or are “put back” due to fraud, IS ZERO.

When you look at these large banks balance sheets and then take out of their capital the likely losses under this sort of analysis you find that every single one of them will be driven into regulatory capital trouble at best.

This is just one of the issues we have ducked instead of facing.  The other big one is commercial real estate securitizations – S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.”

We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman.  The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON.

But the underlying loss is still real, still present, and still out there.  Refusing to recognize it doesn’t make it go away.  It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.

If this was all “the government” that was stuck with these bad loans that were unmarketable (since they have a zero recovery value under legal collection methods they truly can’t be sold for more than a few pennies to one of those “shark” companies that cheats on the law when it comes to those rules) we might have a situation where the government could try to shift it onto the taxpayer through opaque bailouts of Fannie, Freddie and The Fed.

But a good part of this debt was in fact securitized and distributed.  Those holders, such as the FHLB that recently filed suit, aren’t the government and have no reason to sit there and absorb a loss that occurred as a consequence of allegedly-fraudulent underwriting.  For that matter neither does Fannie and Freddie, as despite their “conservatorship” they remain a publicly traded corporation and intentionally absorbing losses caused by other party’s frauds could open their directors and officers up to a derivative action (read: lawsuits a-plenty.)

No folks, these losses won’t be “buried and monetized.”  They will travel back up the chain to the last remaining standing organization that touched them, which just happens to be the zombie banks, since all the “independent brokers” that fed the bilge into these securitization factories are long gone, dead and buried.  Thus the ticking bomb will wind up exploding on the balance sheets of those “too big to fix” institutions we refused to resolve last year because we lacked the political will to go in a close one or more of these banks, and when it happens….. it will rock our world.

You’ve had nearly three years warning Washington – and investors.

When – not if – this goes off I don’t want to hear “nobody saw it coming” from The Halls of Congress and elsewhere in DC because I will be happy to run a campaign advertisement against anyone who so bleats with a copy of my TICKERS from 2007 documenting that in fact some people did see it coming – and were intentionally ignored.

(The Supreme Court recently made such speech legal…. and for that I must extend my heartfelt thanks!)

The Republicans Learned Nothing….

Posted by Karl Denninger

… from Massachusetts.

This will be their Waterloo:

Nine months after he penned a memo laying out the arguments for health care legislation’s destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.

In a 17-page memo titled, “The Language of Financial Reform,” Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.

“If there is one thing we can all agree on, it’s that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated,” Luntz wrote. “This is your critical advantage. Washington’s incompetence is the common ground on which you can build support.”

Uh huh.

So the bad decisions and harmful practices of Washington bureaucrats were all Democrats? 

I think not.

Bankruptcy “reform”, that left the common man chained to his debts, while big banks and other corporations use the bankruptcy court as a “get out of debt free” pass issuance device?  That was a Republican bill.

Removal of the leverage limits from the investment banks, without which the housing bubble would have been stopped dead in 2004?  That was a Republican (Paulson) going to a Republican SEC.

A Department of Justice that sued states to prevent them from enforcing anti-predatory lending laws and those that curbed (or outright banned) stated income and other “liars” products?  That was a Republican Administration that did that, at the direction of George W. Bush.

Let’s not kid ourselves: The looting is bipartisan and so is the responsibility.

But “killing financial regulatory reform” is one of the dumbest things that The Republicans could ever do.

Let me remind The Republicans that I warned McCain’s campaign in 2008 that if they did not take the side of the common man in the TARP “bailout” debate, and instead endorsed it, he would lose.

He did.

Paulson’s memoirs essentially admit to threatening McCain to force him to come in line.  He knuckled under, thereby proving that he was unfit to hold the Office of President, since the first requirement of being President is that you must have a pair of rocks between your legs – and when the tough choices have to be made they better clank (literally or figuratively.)

But now The Republicans are threatening to completely misread the message of Massachusetts and wind up literally destroyed, where Massachusetts gave them the opportunity to take back The House and Senate, becoming the majority party for the next 20 or more years.

Sadly, The Republicans learned nothing from the message in these special elections, of which Massachusetts was just the last.  These folks seem to think that the people will tolerate the bankster bailouts, bankster bonuses and the raw theft and scams embedded through our so-called “financial system” – and that the system will both remain stable and not collapse anew if they do not fix it.

They’re wrong, and if they listen to Mr. Luntz they’re writing their own political obituary.

Backdoor Taxes to Hit Middle Class

By Terri Cullen Terri Cullen

NEW YORK (Reuters.com) –The Obama administration’s plan to cut more than $1 trillion from the deficit over the next decade relies heavily on so-called backdoor tax increases that will result in a bigger tax bill for middle-class families.

In the 2010 budget tabled by President Barack Obama on Monday, the White House wants to let billions of dollars in tax breaks expire by the end of the year — effectively a tax hike by stealth.

While the administration is focusing its proposal on eliminating tax breaks for individuals who earn $250,000 a year or more, middle-class families will face a slew of these backdoor increases.

The targeted tax provisions were enacted under the Bush administration’s Economic Growth and Tax Relief Reconciliation Act of 2001. Among other things, the law lowered individual tax rates, slashed taxes on capital gains and dividends, and steadily scaled back the estate tax to zero in 2010.

If the provisions are allowed to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent. The special 10 percent bracket is eliminated. The estate tax is eliminated this year, but it will return in 2011 — though there has been talk about reinstating the death tax sooner.

Investors will pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital-gains tax increasing to 20 percent from 15 percent.

Millions of middle-class households already may be facing higher taxes in 2010 because Congress has failed to extend tax breaks that expired on January 1, most notably a “patch” that limited the impact of the alternative minimum tax. The AMT, initially designed to prevent the very rich from avoiding income taxes, was never indexed for inflation. Now the tax is affecting millions of middle-income households, but lawmakers have been reluctant to repeal it because it has become a key source of revenue.

Without annual legislation to renew the patch this year, the AMT could affect an estimated 25 million taxpayers with incomes as low as $33,750 (or $45,000 for joint filers). Even if the patch is extended to last year’s levels, the tax will hit American families that can hardly be considered wealthy — the AMT exemption for 2009 was $46,700 for singles and $70,950 for married couples filing jointly.

Middle-class families also will find fewer tax breaks available to them in 2010 if other popular tax provisions are allowed to expire. Among them:

* Taxpayers who itemize will lose the option to deduct state sales-tax payments instead of state and local income taxes;

* The $250 teacher tax credit for classroom supplies;

* The tax deduction for up to $4,000 of college tuition and expenses;

* Individuals who don’t itemize will no longer be able to increase their standard deduction by up to $1,000 for property taxes paid;

* The first $2,400 of unemployment benefits are taxable, in 2009 that amount was tax-free.

And just two years ago almost to the day: