A Debt Monger's Worst Nightmare or a Slap on the Wrist

Today's news of S&P downgrading the US debt stung the markets... kinda 

Can you really doubt S&P's logic on this one?

Hey America-- Get your Sh*t together

In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.

By only downgrading the US debt from stable to negative, was this move a debt monger's worst nightmare or just a slap on the wrist?

“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” Mr. Swann said. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.”

I say it is a slap on the wrist and also a creative response to Obama's recent debt plan to reduce debt by $4 trillion over 12 years.

Things I 'may' do over the next 12 years

• Buy a boat
• Have more kids
• Run a marathon
• Eat less red meat
• Meet an alien for coffee
• Win the $400 billion lottery
• Learn how to talk with my butt

I hope we are able to reduce the budget by $4 trillion in 12 years-- that would be great, however, who will be calling Obama up on year 11 with a report card?  If Obama wins again, all bets are off.  If he loses, all bets are off.  This is just political dodge ball at this point and should be taken like most Poly-tic talk and FED speak-- in one ear and out the other. 

As for actual cuts to the budget, they will need to be VERY creative.  Health Care and Social Security are creeping closer and closer to 50% of the budget.  These costs will only expand.  Where will the cuts come from?  Transportation and Education?  Been there, done that.  Click on the link below and scroll down for an interactive image for a breakdown of the 2012 budget

white house.gov 2012 budget

I think we will have to do one of 2 things to reach a budget that is achievable and sustainable.  (1) Raise taxes, or (2) Kill 40 million baby boomers.  We could also ask for massive pay cuts for higher levels of government.  Funny how I see a sea of dead boomers before I see that happening.   

S&P rating cuts are NOT about QEII

According to S&P, QEII has nothing to do with this decision, but FNMA and FHLMC are big contributors to the kinda downgrade.  dirty mortgage GSE's are killing everything.

One of the pressures on the credit is analysts' estimate that it could cost the U.S. government up to "3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac" in addition to the 1% of GDP already invested.

... and in other, yet related news, Home builders sentiment sucked bottom yet again.

The National Association of Home Builders/Wells Fargo sentiment index declined to 16 this month from 17 in March, data from the Washington-based group showed today. A measure of sales expectations for the next six months dropped to the lowest level since October, and a gauge of current purchases also fell. Readings below 50 mean more respondents said conditions were poor.

This is on a gauge of 50+ being good.  A 17 to a 16 is the equivalent of going from 'losing the family dog to bone cancer,' to 'finding spouse in bed with business partner.'  We are still a long way from the bottom in housing and the declines will start to wipe away equity at the rate of light speed at the pace we are going if we dump Fannie and Freddie (ie. mortgage financing as we know it).  No private investment will lend money for 5% for 30 years-- not without 50% down and about 20% upfront in fees.  Many buyers in this imaginary home-buyer pool of unicorns and talking marshmallow men.

Stocks fall and bonds... rise?

In a classic move, equity indexes shrugged off a sure sign of a drop in the market and ended up the day only down about 1%, while bonds... rallied?

You would think this would be bond negative, but if this slap on the wrist becomes a debt monger's worst nightmare, raising short term rates would mean lower equity prices and strength in long bonds.  It's a long shot, but it could happen. 

QEII is ending soon as well, which makes EVERYONE question what will happen next-- the S&P was up 26% since QEII and there are many forces that say these gains are all fluff and once the feds go away from the market, the gains will follow. 

Time to go long TLT?

TLT looks to have bottomed at around 88 in early Feb and has had strong support at 90 other than this one incident.  With QEII ending in about a month and a half, investors look to be dipping back into bonds, and today despite a debt kinda downgrade. 

Of course, wizards can always ruin what should be a 'sure thing.' 

Expect QEIII (it will have a fancy name, but if it sounds like a stimulated duck...) to follow as soon as the S&P retracts 10 percent, maybe less. 

All in all, a busy day, but nothing more than a slap on the wrist with a kinda downgrade. 

Coming next-- government to S&P:  Raise that debt ceiling!  And by the way, S&P, shove your 'rating' system. 

Getting uglier by the day!  

Killing The Dollar Soflty with QE

Kudos to Congress-- If I acted that way at my job I would have been fired. 

Make sure you read between the lines over the next few weeks to notice the consumer trends that are changing fast in the economy.  I have been saying since January that rising costs will cripple this fragile recovery, but at this point I do not believe the Feds have an exit plan-- and I am not only talking about QEII.   

Consumers are spending less and less each month as they are forced to pay more for beer, smokes, gas and diapers.  The biggest problem-- The dollar getting punished like a sex offender in a Peruvian prison.

Consumers are 70% of the economy.

2010 was a great year to be a consumer.  Things were cheap.  That was before the Master Wizard Ben Wizzie decided to pimp the S&P and begin his assault on the dollar..  Killing the Dollar Softly with QE

"Strumming My Pain With His Fingers..."

ENERGY:

200 GALLONS OF GAS A MONTH

Before QEII:  $580 @ $2.90/ GALLON

Today:  $744 @ $3.72/ GALLON

Increase to consumer:  23% increase in 5 months

MORTGAGE RATES

30 year fixed payment on a $250,000 loan

Before QEII:  $1208 @ 4.1%

Today:  $1326 @ 4.9%

Increase to Consumer:  9% increase in 5 months

IS 2011 a 'BACK TO THE FUTURE' EPISODE TO 2008?

Will 2008 and 2011 be looked at in the same light-- rising costs, falling dollar and eventually a recession to follow?

Dollar Crashes through trend line... Wizards winning the battle?

The Green Back has crashed through an important trend line that has held since 2008.  Wizards seem to be winning the battle of killing the dollar softly with QE.  Unless a 9.0 quake hits So Cal in the next 45 days the green back looks to fall further and fast as other countries scramble to tighten monetary policy.

"Killing Me Softly With His Song" 

Is this really ...Duh... WINNING...?

All the Bad Things that happen from the weak dollar... 

The combination of the Fed’s recent round of credit creation and the very public, political wrangling over the budget and debt ceiling will continue to impact the value of the dollar. Here’s how it will impact you:

† Higher interest rates. The world will demand higher interest rates on U.S. debt to offset the risk of dollar devaluation. That means higher interest rates ahead could impact the cost of mortgages, the financing for businesses and the value of bonds in your portfolio (when interest rates rise, bond prices fall). Of course, it could also mean better returns for savers.

† Higher energy prices.You’ve already seen the impact at the gas pump, but that was from supply fears during the Libyan crisis. The next round of higher oil prices will come as a result of the falling dollar. And rising oil prices will impact not only your commute to work but the airline fares you pay. As well, it will impact the price of stuff you buy, since every product has a transportation cost component.

† A slowing economy. All of those added costs will be a drag on the economic recovery. People who have to pay more to drive to work won’t be able to shop for other goods and services. That leads to bleak prospects for job creation.

Of course these are not all bad things (minus the last point of course) if there is any ACTUAL economic growth.  Consumers in 2011 are in a far worse position that in 2007/2008.  Unemployment is much higher, savings have been destroyed over the past few years and home values are crashing at unchecked speeds.  There is no money to support the economy as disposable income becomes used up for $4+ gas and $7 tomatoes.  To top it off, Baby Boomers start to retire this year-- this social shift, along with the lack of job growth and wage growth will make this round of 'inflation' 100X worse than the 2008 round. 

In Back to the Future, Micheal J Fox was able to fix (or create) problems by going back in time. 

There is no time machine for the Feds... there is no way to undo the easing at this point without terrible consequences...

This all ends with either uncontrollable inflation that leads to a recession or interest rate hikes to avoid inflation that leads to a... recession?  That's right.  Both roads lead to the same outcome-- even if you take the Delorian. 

Killing the Dollar Softly...  With QE...



Fed Speak... Gotta Know The Enemy

I you are like me you wish they would release a QE ETF. 

That would be a sure thing in the market today...

Instead, the Feds just announce QEII and make EVERYTHING a sure thing!

The S&P is up 10.5% since QEII.  QEII is about as awesome to the S&P as crack cocaine is to the ghetto! 

The real question about QEII is:  Will there be QEIII?

That is a question for the wizards of the FOMC:

Below are a list of wizards, some of whom believe in magic and others that just wear a funny hat for the paycheck.  By listening closely to the wizard speak we can determine weather or not there will be another round of QE:

NY FED CHIEF DUDLEY:

Fed Wizard Speak consistent:  'Dual Mandate' of maximum sustainable employment and low stable inflation.
Stance on Stimulus post QEII:  Keep the presses running mang, but be ready to turn them off... maybe (not really.... just don't make me look bad on your blog)!
Dudley's views 

He (Dudley) predicted "job growth will increase considerably more rapidly in the coming months," but he said that is something to be welcomed, not feared.
"A substantial pickup is sorely needed," he said. "Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012."
Echoing Fed Chairman Ben Bernanke, Dudley said "the economic outlook has improved considerably in the past six months," but added "we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability."
"Faster progress toward these objectives would be very welcome," Dudley said.

Dudley is a wild card-- he goes with the flow, but he has consistently been in favor of more stimulus.  Trying to achieve low employment with low inflation is asinine when you are devaluing your currency as part of your agenda and your currency dictates the price of everything in the world.  Consumers are freaking out after the recent rise in prices-- what do the Feds expect when they reach 2.0% inflation? 

CHICAGO FED EVANS:

Fed Wizard Speak consistent: I am unsatisfied with everything! 
Stance on Stimulus post QEII:  QEIII, QEIV, QEV, QEVI... ect.
Evans Views

Despite clear signs of progress, I am not yet satisfied with the pace of improvement,” Evans said in his speech. “Unemployment will remain uncomfortably high for too long relative to our employment objective. So accommodative monetary policy continues to be warranted to address this part” of the Fed’s congressional mandate, he said 

Evans is hooked on the QE--He may be more gone than Ben Wizzie, but I am certain he is not ready to pull the punch bowl.  Count Evans in for QEIII... and QEIV for that matter. 

PHILLY FED PLOSSER:

Fed Wizard Speak consistent: Raise Rates! 
Stance on Stimulus post QEII:  Should have never happened.
PLOSSERS PLAN (see PDF of Speach titled EXIT)

If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy. Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future. To avoid this outcome, the Fed must confront at least two challenges. The first is selecting the appropriate time to begin unwinding the accommodation. The second is how to use the available tools to move monetary policy toward a more neutral stance over time

I like Plosser.  Guy is consistently against any more easing.  The problem is that Plosser is the diamond in the rough of voting FOMC members... so really, he is the rough in the diamond.  While he is one voice, that is really all he has.

Other Fed members tend to be pretty high on the QE right now-- Kocherlakota, Yellen, and of course the Master Wizard Ben Wizze.  Kevin Warsh was a Hawk, but he stepped down in Feb:  Warsh is OUT.

Why step down? Maybe he didn't like the QE peer pressure from the rest of the wizards.  Maybe he knows someting we don't know-- Like Cypress Hill said, "When the Shit Goes Down, You Better be Ready."  I would guess that a young dude like Warsh didn't want to be tied to the unravelling that will follow the departure of QEWHATERVER. 

KNOW YOUR ENEMY

Consumer reports are hitting and they are painting a grim picture.

• Michigan Consumer Sentiment Fell to 67.5 in March from 74.2 in January
• Consumer Confidence fell to 63.4 in March from 72 in February.

KEY POINTS: * The Conference Board, an industry group, said its index of consumer attitudes fell to 63.4 in March from a revised 72.0 in February. The median of forecasts from analysts polled by Reuters was for a reading of 65.0. Forecasts ranged from 55.0 to 72.0. * The expectations index slipped to 81.1 from 97.5, while consumers' expectations for inflation in the coming 12 months hit its highest level since October 2008. * The present situation index rose to 36.9 from 33.8. Consumers' labor market assessment worsened. The "jobs hard to get" index rose to 44.6 percent from 44.4 percent the month before, while the "jobs plentiful" index slipped to 4.4 percent from 4.9 percent.

It looks like high gas and food prices are not as awesome as one expected. 

Is this painting a picture of what the future holds for the consumer?  High prices and no jobs?

Do the Feds know the real enemy they are fighting? 

Their real enemy is the consumer, not gas prices or food prices and not deflation.  Spending picked up in Q4 2010 due to prices being rock bottom and consumers balance sheets finally looking a little better due to lower prices.  Now the tables have turned:  Prices are rising and the consumer is running out of sweet sweet fiat dollars.  Disposable income is falling and spending is slowing... Disposable income down

The consumer has the ability to screw up the whole QEFOREVER plan if they stop spending, and/or run out of money for ipads and plasma TVs.  While the wizards try to create inflation, they fail to see that they are not actually fighting deflation, but instead fighting the one they are trying to entice to spend-- you and I consumer.  Why would they try to raise prices when they know that they can not raise wages due to unemployment.  People can only spend money if they have money... without wage increases, higher prices mean no more money for discretionary spending at Build-A-Bear and Applebee's.

It is not different this time-- higher prices, whether CPI or not, will lead to a consumer spending halt.  It happened in 2008 and it will happen again.

To combat, Feds stimulize more-- on prime time press conferences this time around!   

I say that the Feds do not know their real enemy.

Well, Gotta know the enemy...

Will the next round of stimulus keep pushing the S&P higher? 

Not if it comes with $5 gas and $13 applesauce...

SPECULATION: China collapse allows Feds to unload QE bonds

Sometimes I connect something so crazy that it can’t be true… But still, it should be shared: 

My crazy idea about QEII and the connection to China:  Enjoy.

I think it is fair to say that China will be the big story for 2011.  It won’t be the Middle East or Europe (though Europe will either be a close 2^nd, and the euro’s demise number 1 in 2012). 

The top 2011 story will be on how China over heated via inflation due to silly relaxed monetary policies from their central bank on real estate speculation, and the US Federal Reserve’s quantitative easing (QEII) that sent money out of safe assets, crippled the US dollar and created a speculative commodity bubble around the world.  The inflation in China will force rates to rise and lending to stop, essentially stopping the velocity of money immediately.  With no more money in the system, China stops working, falls into civil unrest due to cost increases and loss of construction jobs from the housing collapse.  It will be a global panic that comes out of nowhere (don’t they all…)

The 3^rd story of the year will be how US Treasury bonds rallied to the lowest yields in history, allowing the Federal Reserve to sell their ENTIRE holding of bonds bought during the recession and QEII at a premium.

Does this sound too crazy to happen?  Maybe, but I don’t see why it couldn’t.  It may be what the Feds are looking to achieve.

...Stick with me on this one.

If the Feds are buying 70% of US Treasury bonds they know they will have to sell them some day.  If they sell them at a yield substantially higher than they purchased, they lose the farm—literally.

Maybe, just maybe, QEII was created to cause a panic (unknown what it would be at the time of conception) to drive buyers back to US Treasury bonds with massive demand at a VERY high price and low yield so the feds could sell their holdings.  What kind of panic would do that?  Simple—China collapsing.

Sheer speculation on a night with my 19 day old daughter who has restricted my sleep over the last few weeks…    

It could NEVER happen... right? 

Actual News:  Big deal tonight on China’s inflation—it is out of control and cannot be stopped unless they completely freeze the economy.  With that being said, China can either melt down in a bath of inflation or stop growth.  Both are crappy options, but at least they have options.. kinda. 

China's Inflation is RED HOT

Cheers and have a good weekend.