Posted by Michael A. Kamperman on November 11, 2010
Well, it’s looking like 60% of the American population is wrong. Those that believe cuts in government spending will lead to more private sector jobs have to take a good look at Cisco. The giant networking company warned that sales will miss forecasts because of a dramtic drop in orders from austerity crazed European governments and U.S. states forced to balance revenue starved budgets. Simply put, when governments order technology products they are creating private sector jobs. When governments build roads, bridges, and buildings they are creating private sector jobs. When they increase healthcare spending they are creating private sector jobs. We have yet to see the real impact of the cuts in private sector jobs in the U.S. because we still have enhanced federal spending from the stimulus bill. The rubber will meet the road when that stops in 2011. In my own state of Texas the two year budget looks to be $25 billion short of revenue. Since Governor Perry dreams of a Presidential run tax increases are off the table. Yesterday, local school districts were told to brace for multi-million dollar cuts per district in state spending for K-12 education starting with the 2011-2012 school year. There are over 1,100 school districts in Texas. Everything is going to get cut. These cuts will fall hardest on capital expenditures like technology and construction projects.
Thankfully the Federal Reserve has the foresight to realize we are up the creek without a fiscal paddle and they plan to print money to help shore-up the gap. They need to print 10 times more than the $600 billion they started with. My thinking is this is just the ante and the Fed will push all in before this is over. The unknown question is will liquidity trump falling demand in regards to asset prices. While the initial reaction was to bump assets prices up, the Cisco news clearly thumped it back.
Meanwhile, the inept Obama economic team continues to push mumbo jumbo proposals to restore the economy. The President’s new head of the Council of Economic Advisors Dr. Goolsbee believes the U.S. can grow exports from $1.5 billion to $3 billion by 2014. By 2014, is he out of his mind! Does he not see European austerity mania and Asian protectionism as insurmountable obstacles? Did he not see the Dream Liner fire from the Whitehouse cocoon plaguing our largest exporter Boeing? The President is in Asia telling everyone they cannot count on U.S. consumers borrowing money to spend. This means he believes in the same liquidationsist Austerian School of economics practiced by Herbert Hoover and others that led to abject failure in the past. Those that fail to learn from history are doomed to repeat the same mistakes. Sadly, a confused American populace believes the same thing because the case for Keynsean spending is being defended by an inept Whitehouse that doesn’t even believe it themselves. Somewhere in America a champion needs to rise up and preach a different economic gospel than the one the Whitehouse is force-feeding us.
Posted by Michael A. Kamperman on November 4, 2010
Honeymoon’s are meant to be fun, so enjoy this one. It won’t last and reality will bite in a few months. The Fed made the right call to print $600 billion more between now and next summer. Importantly, they left the door wide open to keep right on printing if circumstances warrant. Additionally, the President and the Republicans are playing nice in the same sand box for the time being with talk of extending the Bush tax cuts for all. But euphoria will soon give way to reality. Despite all the talk about giving everyone a tax cut, the truth is everyone’s tax rates will stay the same as they have been since 2003. And, the Making Work Pay payroll tax cuts under the stimulus plan will end in 2010 unless extended. There is an extension in the President’s proposed 2011 budget, but the House of Representatives failed to pass a budget and we are currently working under a continuing resolution. If the budget doesn’t clear the Lame Duck session, then the President will be negotiating the 2011 budget with the Republicans despite having huge majorities in both houses of Congress prior to the election. The Republicans want to roll non-defense discretionary spending back to 2008 levels. The true extent of the state and municipal budget holes will be on full display in early 2011, no longer masked by the stimulus aid to the states. The reality of austerity is about to bite hard.
Take Texas for example. The state is now projected to have a $21 billion two year budget deficit when the legislature meets in January. By law they must pass a balanced budget. Governor Rick Perry has Presidential aspirations and ran for re-election vowing not to raise taxes, so savage spending cuts are about to hit the state. Not exactly good for job creation. And you can forget about the mess in Illinois, California, Nevada, Arizona, Florida, etc., etc., etc.
Looking forward the key will be how the debate unfolds as the economy turns down. The unemployment report is already reflecting the heavy job losses in state and local governments. New homes sales set a multi-decade quarterly low in the third quarter and there is no reason to expect sales to turn-around soon with the foreclosure/mortgage mess. Will cutting spending be seen as a solution a year from now, or a tragic mistake? Here perception is what’s important, not reality. Because if reality were important the country wouldn’t be flirting with austerity in the first place. Hoover saw Republicans routed in mid-term elections in the early 1930′s taking severe heat for the depression. But by 1938 FDR saw Democrats routed taking blame for attemtpting to balance the budget too soon thereby sending the economy into another tail-spin. Most of the country is not with the Republicans, nor the Democrats, nor the Tea Party, nor Progressives. The election was about the most recent perceptions. What the country is with is turning around the economy and restoring jobs. They want to restore opportunities for the young and dignity for the retired. But most people simply don’t know how to get from here to there and don’t know whom to believe. Becasue the Democrats failed to deliver the populace assumes the Republican message of less spending must be right. Polls show over 60% believe cutting government spending increases private sector jobs. The economy will turn lower despite quantitative easing, because the boost Bernanke is providing is not large enough to offset the drag coming from austerity. How this is spun will go a long way in determining whether or not the country can get fiscal policy right to end the depression in 2012, or whether we will have to wait at least until 2016. The President has shown he is not up to the task of defending Keynesean stimulus, so others will have to step forward before the 2012 die is cast.
Posted by Michael A. Kamperman on May 19, 2010
Germany befuddled markets yesterday by acting unilaterally to ban naked short selling of all European Government Bonds and in the stocks and bonds of its 10 largest financial institutions. Angela Merkel has been behind the curve and wrong on most of the decisions she has made so far regarding the credit crisis. Finally, she shocked me and a lot of other people and did something right. Many hedge funds are screaming bloody murder this morning claiming banning naked short selling will solve nothing. They are only talking their book and their wallet. Banning naked short selling prevents people betting against something in quantities greater than the underlying asset itself. If their are 200 billion euros of Greek bonds, then the market can still short 200 billion euros of Greek debt. But it cannot short 500 billion euros of Greek debt creating an artificial market that overwhelms the long side of the traded and pressures it to the downside. Hedge funds will claim banning naked short selling hurts liquidity and increases risk. Then perhaps they should practice diversification and fundamental research if they want less risk in an asset. The bottom line is our societies need our governments to be able to access the bond markets on reasonable terms. Allowing speculators to raise champagne glasses in triumph while riots run wild in the streets is insanity. The German ban should become permanent and it should extend to all asset classes. And it should extend to all markets outside of Germany. The Germans acted unilaterally on their own for two reasons; the French refused to go along, and the Germans have the power to act without getting someone elses permission. This message will not be lost on the rest of Europe. Merkel has made the current crisis much worse than it should have been. It is about time she did something right.
Protecting the debts markets is one thing. Coming up with a strategy to repay the debts in a deflationary world is quite another. The April U.S. CPI just printed a negative .1% overall and a core rate of zero. Since the end of April oil prices have collapsed by 20%. The negative CPI was in spite of higher oil prices. Additionally, the mortgage purchase applications fell by 27% last week. The expiration of the first time home buyers tax credit will lead the housing market down once again. In other words, inflation was negative in April before the impact of these two very deflationary trends in May.
The ultimate solution to solving the sovereign solvency crisis and deflation is the same. The central banks of the world need to start printing money and start buying up their own government bonds in very large quantities. The deflationary environment is giving all of these governments a chance to hit the reset button. Yes, monetizing the debt is the solution to our credit problems and our deflation problem. To really defeat deflation we still may have to mail out money allowing the private sector to reduce its debt levels as well. While Germany has been right about naked short selling, they have been wrong that inflation is a near-term threat and that austerity is the solution to the crisis. As events over the last few weeks have shown the Euro is an ungovernable entity. Therefore, it is up to the Fed to step up in the midst of this new credit crisis and resume its quantitative easing program. Everyday they wait allows confidence to whither further away.
