Category Archives: economy

What Comes After Trillion?

In recent weeks and in an effort to curb growing outrage and voter disaffection, President Obama has shown up everywhere, save  the guest judge chair on ‘American Idol’. From town halls to prayer breakfasts, on prompter and off, the President has been seen pimping his budget and defending his prescription for the U.S. economy, which is predictably focused on government, not business, creating jobs.

He’s also appeared a bit touchy in recent days. In his State of the Union, he denied that his healthcare plan is a result of some ‘Bolshevik plot,’ and sought to blunt nasty ‘communist’ or ‘socialist’ aspersions cast by those evil tea-partiers.  It’s easy to see why he’d want to avoid such labels, however true they might be. Forget economic output comparisons between old Europe and the United States over the last thirty years and just examine last week’s market reaction to Spain and Portugal’s budgetary crises. Spending and raising debt ceilings hasn’t helped their respective economies. Add Greece to that mix as they are trying to get spending under control. 

Obama has repeatedly pledged to restore fiscal discipline to Washington, yet his budget would more than double the current debt, increasing it to $26 trillion over the next decade. Forty cents on every dollar spent in the budget is borrowed. And while it would be nice if maybe our loan shark was Canada or Britain, China continues to invest in our debt. With each security sold or Wall St investment made, Beijing wields more influence and hinders further criticism of their monetary, trade, or human-rights policies.

What can Americans expect from these borrowed Chinese dollars? How will the President use this debt to catapult the U.S. economy into prosperity? 

His budget spells it out.

Under the ‘Reviving job creation and laying a foundation for economic growth’ section Obama outlines his recipe to grow jobs. ‘Investments’, spending, are programmed for education, clean energy and infrastructure to lay a foundation for long term job growth. He provides high-speed rail with $5 billion over five years, $1 billion in this year’s budget. Just how will hi-speed rail create jobs and sharpen America’s competitive edge?  

Adopting this particular European idea is folly on so many levels. European cities are much closer together and their highways are radically inferior; there just isn’t enough room for road expansion. Another reason for a viable European railway—weather. Many businessmen from Milan take the train to Turin or Venice to avoid fog which, in the winter, can create hours of delays. In addition, gas is more expensive. Choosing between spending 80€ to fill up your tank or 20$ to take a train, is a no-brainer. And when Europeans visit America, they rent cars; they don’t purchase Amtrak tickets.

In addition to the ‘I wanna be like Europe’ nonsense, the President fails to understand that multi-nationals aren’t flocking to China and India for their infrastructure; it’s their cheap labor and lower taxes. Cutting-edge is not a herd of cows meandering about the roadway unimpeded, it’s I-95 from Miami to New York.  

Another bedrock of the new Obamaconomy is clean energy. Not only does the new budget allow for $54.5 billion in ‘green’ loans, it encourages “new nuclear facilities and a range of renewable energy projects that reduce greenhouse gases and pollutants, while simultaneously creating jobs and contributing to long-term economic growth.” Energy efficiency is a critical component, but perhaps it would be better to fund those programs when the economy is on solid footing.

Another baffling mention in a growing economy subsection is the $1 billion Michelle Obama childhood obesity project. It would be altogether different if this $1 billion were to feed starving American children, but as it stands, we are going to be borrowing from the Chinese to better nourish overweight children. 

The budget also lays out plans to bring grocery stores and other ‘healthy’ food retailers to ‘food desert’ communities.

Where to start…Shouldn’t Publix or Whole Foods decide where to put their stores? And what exactly is a ‘food desert’ community? Inner cities? Maybe if bag boys weren’t scared to push Grandma Edith’s cart to her car, Whole Foods might consider the idea. Government doesn’t need to help businesses decide how to expand profits. That job falls to management and their expertise.

 As Americans watch their friends and family lose jobs with no end in sight, they see a President more interested in remaking the nation than strengthening the economy. Since their own wealth hasn’t been enhanced through second mortgages and house flippers, they aren’t apt to believe that borrowing from China will result in an economic renaissance.

 If fiscal conservatives don’t win in November and get a handle on these trillion dollar deficits, Americans better familiarize themselves with a new term—quadrillion.

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Stimulating the G20

 

BRITAIN G20 DINNERHe had them at bonjour. Anarchists and mainstream Europeans lauded the arrival of the ‘anti-Bush’ in London yesterday, as G20 leaders met to coordinate their cure for a crisis whose origins some would prefer to ignore. But not French President Sarkozy who noted Wednesday evening: “The crisis didn’t spontaneously erupt in Europe.”

 

Aside from the American President’s second questionable diplomatic gift, an iPod presented to the Queen, it’s the diverging opinion on how to solve the crisis making non-English headlines. The French and Germans are strongly opposed to Obama’s push for stimulus. Already overloaded with entitlement spending, they differ philosophically from a President whose budget wouldn’t qualify his country for EU membership.

 

The nonpartisan CBO contends that President Obama’s budget would incur a debt-to-GDP ration of 5.3 percent for the fiscal years 2010 to 2019. The President’s advisors have argued that his healthcare, education and energy initiatives would increase revenue, thus reducing the unsustainable deficits. But how will going green help spur corporate growth among factories and businesses whose taxes are bound to soar even higher than the tax rates which are some of the highest in the world?

 

Italian Prime Minister Berlusconi supports the French and German focus on tougher regulation, as opposed to unproven deficit-creating stimulus. In today’s column, La Repubblica’s Federico Rampini openly questions Obama’s leadership qualities by likening his ability to dictate the international agenda to former President Jimmy Carter. He called it a “historic low for America.”

 

France’s Sarkozy summed up the European opposition best—“We want a capitalism of entrepreneurs, not a capitalism of speculators.” The biggest crisis in a century wasn’t their fault, and although Obama is reticent to place blame, it’s clear and understandable why other leaders are eager to identify the cause. Because without acknowledging what went wrong, why and who is responsible, solving and preventing future disasters become impossible. Unregulated hedge funds and derivatives must be tackled.

 

According to France’s L’Express, the IMF was a big winner at the G20—its capacity went from $250 billion to $750 billion. In an attempt to demonstrate his concern for the third world, Obama additionally wants the IMF to sell off $20 billion of its gold reserves to help the poor in third world countries. Beyond making a compassionate impression, another motive might have been at play, as his budget calls for taking away charitable deductions from Americans making over $250k. Someone has to pick up the slack for Feed the Children. 

 

Bush bashers were eager to move beyond the cringe-inducing international summits of the past and into an era of change. While non-English speaking Europeans who aren’t keyed into U.S. political minutia continue to be wowed by his smile, presence and remarkable story, foreign leaders and dedicated observers are getting a clearer  picture.

Ditch the Dollar?

dollar_chart1For years, economists, journalists and pundits have been predicting an end to the U.S. dollar as the reserve global currency. And for years, mainstream Americans and politicians have ignored the warning, presuming that the wolf-criers are simply anti-capitalist or anti-American.

But with the Fed’s most recent round of printing $1.2 trillion in ‘quantitative easing’, the only easing going on is the value of the dollar. To battle deflation, low housing prices and a crippled credit market, the Federal Reserve’s bold action will perhaps prove effective, but in the long-term might also prove the impetus to cede America’s leading superpower status.

America’s sugar daddy has already cautioned against the mind numbing spending spree taking place on Capitol Hill and the White House. They’ve slipped the hint—there are limits to their generosity. As long as their investments prove profitable, China will remain our loan sharks, but the minute the spending and printing begin bringing down their balance sheets, they will walk away. And so will the world.

Not only China has voiced concern, next week another ally plans to recommend ditching the green-back—the UN. Russia has been on the ‘ditch to dollar’ bandwagon for years and has kept up the rhetoric this week by calling for a global supercurrency.

From Reuters:

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.

“There is a moment that can be grasped for change,” he said.

“Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances.”

What would the United States economy look like without the supremacy of the dollar? Hopefully, we will never know…

The Forgotten Ones

foreclosuresForeclosures were up 30% in February, but an important group of Americans remains sidelined in the current tug-of-war between the bailout cheerleaders and those fiscal conservatives ready for a new tea party. They aren’t the whiners standing on their homes refusing to leave after borrowing more than they could afford, and yet, they aren’t a part of the justifiably angry American mob forced to strap on a load for their shortsighted house-flipping neighbor.

 

They are the forgotten ones.

 

They are the lower deck passengers on the Titanic, who by no fault of their own, bought a ticket, er, a house, when destiny had set an iceberg in the name of Fannie, Freddie and Barney Frank in their road.

Homebuyers who purchased a house in 2002 or 2003, who’ve had to relocate for work or personal reasons, qualify. Perhaps they have been forced to default on their homes and blacken their credit for the very first time. And no journalist, action group or even the President has mentioned what will happen to them.

 

As the statistics continue to shock, regular Americans with good credit are facing an inescapable reality—ditch the house or keep the 763 credit score. At the end of last year, 12% of all mortgage holders were at least a month late on their house payments or in foreclosure. Just how many of those 5.4 million homeowners were formerly upstanding borrowers but simply caught in an impossible situation? They didn’t buy too much house and they didn’t do a $60,000 bathroom remodel with a sauna, Jacuzzi and a flat-screen overhead. They simply bought at the wrong time and were forced to move at the wrong time.

 

While Citi and Bank of America are considered to big to fail, everyday Americans who were unlucky enough to get caught in the crisis will be forced to pay for a very long time. Their credit score qualifies for used car lenders who scream ‘bad credit ok’ and little else, while Citi and BoA’s reckless decision making has garnered not a single negative consequence, apart from Uncle Sam approving which five star resort will hold their conferences. Maybe they’ll have to endure a four and a half star hotel without the private Sheryl Crow concert and forgo the private golf clinic with David Leadbetter. Poor things…

 

But what will become of those ’02, ’03 Titanic lower-deckers? Will their credit remain ruined, and if so, won’t these same irresponsible banks miss out on a large opportunity for profit?

 

 

Wall St Invasion?

The distress over the global financial meltdown encompasses more than just frightening 401k statements and doomsday newscasts. We’ve now another impetus for headaches and acid stomachs. This week, Libya’s Qaddafi became a major shareholder in Unicredit, Italy’s largest bank, which might have prompted the Italian Prime Minister Berlusconi’s warning. “I have news that oil producing countries with large funds are buying heavily into our markets.”

So beyond China helping the United States with its perpetually unbalanced budget, we’ve got Arabs trolling for bargains. Berlusconi elaborated: “Now there are great opportunities for those who have capital, and I think that certain sovereign funds, and ones you would oppose, are hostile.”

I take it that it isn’t just moderate Saudi Prince Al-Waleed bin Talal bargain hunting in the major indices. I use the term ‘moderate’ because apart from his support for CAIR and his comments after 9/11 which elicited a rejection of his $10 million check, he’s been a revolutionary among his fellow Bedouins. He has supported women’s rights and hired the first female pilot in Saudi Arabia.

As gas prices have ballooned and the economy has slowed, “drill baby drill,” has become an increasingly popular refrain repeated at McCain rallies. More than just cheap gas, it’s our sovereignty at stake.

According to Rand, U.S. oil shale reserves represent three times that of Saudi Arabia. Yet, we would rather buy the oil from the Saudis, making them wealthy enough to buy large chunks of our corporations.

Only in America

Barclay’s Stock Plummets 13%: Party Time

Outrageous.

Last night on Italy’s Lake of Como, eighty Barclay’s bankers and clients gathered together in the storied Villa Erba to celebrate with their fiddles as Rome continued burning around them.  And while the paparazzi wary bankers spent two days and 700,000 Euros, the British Prime Minister traveled across Britain to sell his rescue package to hardworking British voters.

The bankers banned the paparazzi, but not the Greco di Tufo wine, ricotta stuffed ravioli, fillet of Brunello, apple pastry and chocolate mousse. Their sacrifice of the evening was to forgo a planned trip to La Scala, ostensibly due to the 13 percent of company value lost that day, but in reality, they wanted to avoid the aggressive paparazzi that would have been free to snap away in front of the legendary opera house.

It wasn’t just a once a year broker-client excursion. Just last week the oblivious bankers enjoyed a week in one of the Cote d’Azur’s finest hotels priced at around three thousand Euros per night.

The fury over the trips has little to do with class envy and everything to do with discretion. Hopefully, these Neros will be awakened to the reality of the global economic inferno, ignited by financial institutions like Barclay’s.

Global Financial Meltdown

How many more black Mondays, Tuesdays or Wednesdays are in store for the world markets? The quickie summit convened by the EU leadership over the weekend apparently inspired the same sort of confidence garnered by Paulson’s plan passed last Friday.

The U.S mortgage crisis and its resulting effect on European banks, combined with skepticism over Paulson’s plan of recovery, sent European markets tumbling. Russia and Italy were even forced to halt trading. According to Le Figaro, traders worry whether the price tag of Paulson’s plan was big enough.

As for their own plan? Reminding everyone why there hasn’t been meaningful progress in the adoption of a European Constitution, EU leaders failed to agree on a solution to the economic crisis.

From the Telegraph:

France, Germany, Italy and the UK could not agree on a single course of action because – as Mr Sarkozy effectively admitted in a characteristically irritable press conference performance – they all have different economic circumstances and needs. He described this as having “different cultures”, but it adds up to the same thing: France and Germany do not have property-owning traditions that produce house-price booms and busts, the UK population has much greater credit liabilities than the French, etc, etc.

Late Monday, the German government provided an additional 15 billion Euros in liquidity to the 35 billion already pledged to help the German lender Hypo Real Estate.

Elsewhere….

Saudi Arabia’s market, the Gulf’s largest, was off 9 percent. Dubai’s Financial Market fell almost 7 percent, its lowest fall since ’06, and Abu Dhabi’s index lost 5 percent.

The head of Al Dhafra Brokerage Vyas Jayabhanu, via UAE’s Gulf News, argued: “Uncertainty prevails despite the U.S. government passing the package, and there is this lingering fear that the $700 billion may not be enough.”

Israel’s TA-25 down 4.63%

Japan:

The Nikkei stock average tumbled 4.3 percent to a four-and-a-half-year closing low on Monday.

The Korea Exchange in Seoul, South Korea finished the day off 4.3 percent.

Singapore’s Straits Times Index was down nearly 4.9 percent in late-day trading and the Shanghai Composite fell about 5.2 percent. The Taiwan Weighted shed 4.1 percent.

The Australian Securities Exchange plunged about 3.4 percent to 4,544.70, and Hong Kong’s Hang Seng was off 4.7 percent of its value, falling to 16,853.85.

Russia’s Micex Index plunged 18 percent before trading was halted for a second time today.

Europe:

Germany’s DAX: Down 7.07%

Italy’s MIBTEL: Down 8.58%

France’s CAC: Down 9.04%

Sweden’s OMX: Down 7.24%

UK’s FTSE 100: Down 7.85%

With the crisis infecting global stock markets, it’s baffling why neither American Presidential candidate appears willing to blame government officials who fostered this failure through their social engineering and their belief that home-ownership is one of the inalienable rights guaranteed in the U.S. Constitution.

Perhaps the shock of looking at the big board and seeing the Dow off some 800 points on Monday will shock the leaders into dialogue, although I suspect one party is a bit more reluctant to discuss their role in the current fiasco.