Martin Hutchinson (Money Morning):

U.S. Federal Reserve Chairman Ben Bernanke’s latest thesis is that the home mortgage bubble had little to do with record low interest rates, and was actually much more a problem of regulation.

It sounds plausible – until you give it some real thought. After all, I believe that humanity has already tried a system with tight, vigorously enforced regulations, and no price mechanism.

It was called the Soviet Union.

Okay, that was a bit of a cheap shot – to some extent. Bernanke stated that “borrowers chose and were extended mortgages that they could not be expected to service over the longer term.” That appears to make the problem one of regulation: The types of mortgages that banks should be permitted to offer should be limited to ones that borrowers have a reasonable chance of servicing.

In theory this makes sense. However, it is a prime example of what I in the past have referred to as the “Keynesian Bureaucrat Fallacy,” or KBF.

Under the KBF, wise bureaucrats – who, like economist John Maynard Keynes, were presumably educated at Cambridge and steeped in the traditions of the Bloomsbury Group – will decide the appropriate regulations for every sphere of the economy.

They will then enforce them with draconian rigor, forcing the economy to behave in a way that optimizes economic welfare, measured by whatever means the bureaucrats devise. Irrational market-based signals – such as the price mechanism, will be ignored – unless the bureaucrats decide it is safe to take account of them.  . .

Click here for the rest of Mr. Hutchinson’s commentary on Money Morning.

Alexander Green (Investment U):

We all know why the dollar is in the cellar right now. We also know why it’s expected to continue right through to the basement floor:

• Massive budget and trade deficits.
• Ultra-low interest rates. (Zero on the short end.)
• $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid.
• Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U.S. economy.

There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Here’s why…

Two Reasons for a Dollar Rebound

There are two main forces that could drive the dollar higher:

• All the problems mentioned above are already well recognized and priced into the greenback.

• Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldn’t imagine Internet stocks doing anything but soaring higher. Five years ago, they couldn’t imagine real estate doing anything but barreling down the same one-way street. Record lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down.

When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point – and an opportunity. This is no exception.

Commentators seem to forget that all currency values are contingent. You can’t just look at fundamentals in the United States. You have to look at them abroad, too.

And there isn’t much out there right now that’s terribly positive…

Click here for the rest of Mr. Green’s analysis at Investment U.

Earlier today, the Treasury auctioned off yet another chunk of American debt. This time it offered seven-year bonds to the tune of $32 billion. In all, the nation will go in hock for yet another $118 billion this week.

It may sound like a lot, but it’s just another busy week of financing Washington for Geithner and his crew.

While so many of us in the financial punditry business are worried about a lack of foreign borrowers, it is far from the case today. Yesterday’s $42 billion five-year auction came with a bid-to-cover ratio of 2.81 (alarmingly high) and today’s auction boasted a ratio of 2.76, proving there are still plenty of buyers willing to “enable” Uncle Sam’s spending addiction.

If you are a bullish investor, this is not good news.

Let me repeat… this is not good news!

Here’s the deal, plain and simple. When hundreds of billions of dollars are flowing to Washington, they are not flowing to Wall Street. When Geithner passes his hat, there is that much less money to boost up share prices.

Fine, you say. I invested in gold. With low interest rates and a weak dollar, my gold position will soar.

Wrong!

Why are most gold speculators buying? Because they think countries like China and India are dumping the dollar and pouring into gold.

Well, according to the folks that walked out of the Treasury empty handed this afternoon, their precious metal buying may be less robust than many thought. That certainly is not good news for gold bugs. Gold is a purely speculative bet right now.

If you own any, sell it.

I know that is a sore subject with many readers, so we’ll deal with the topic on Friday.

Just about the only thing Washington’s ever-increasing debt is good for is propping up the housing market. As mortgage rates drop to all-time lows once again (thanks to dwindling bond yields), potential buyers still have a significant incentive on their side.

While Uncle Sam may stash $6,500 in a buyer’s pocket, a 30-year fixed rate of 4.99% will ultimately put much, much more cash in their accounts.

A young friend asked me this morning, “I’ve got sixty grand in a savings account. Should I max out my IRA or buy a house?”
Buy the house!

The markets are setting a trap. And it’s a darn good one. Most investors have no clue it’s there. But if you pay attention, the trip wire is obvious. We’ve got stagnant, if not falling, interest rates, soaring national debt, all the workings of a gold bubble and, guess what, your taxes are going up.

If you think the Dow will hit 14,000 anytime soon, you had better think again. Somebody is about to hit the reset button and it’s not Hillary.

*** Before I go any further, let me tell you that my wife has one of those cushy union jobs. She pays about half a nickel in monthly insurance premiums, she gets a raise in January and her job is as secure as it gets these days.

With that off my chest, let me tell you this.

I hate unions!

They are the reason I have to call India to fix my laptop and why I drive past empty factor after empty factor on my 55-mile commute to work.

But like anything well played, even a union can make a savvy investor money.

Here’s a bit of what I wrote for the TFN site this morning:

“For Harley Davidson, unions have been an unreachable thorn in its side. The problems are almost mirror images of the woes in Detroit: not enough flexibility, high wages, top-notch benefits and a constant threat of a strike.

“This economic downturn is just what the motorcycle maker was prayer for. It gave the company all the leverage to say shut up or get out. More specifically, Harley told the union shut up or we’ll get out.

“The company’s largest manufacturing facility is located in York, Pennsylvania. The union’s current labor contract is set to expire early next year. Knowing the company had a major battle brewing, executives went proactive.

“They started a search for a replacement factory, one with better technology and, more importantly, a cheaper workforce.

“It’s basically a reverse strike. Sign the contract or the factory walks.

“While nothing has been signed just yet, there is a very good chance York’s union will vote in favor of ratification on December 2. When it does, Harley shareholders will be in a good spot.

“I got a peak at the contract last week. It gives the company just what it needs… flexibility.

“While pay is an issue, Harley has no problem paying top dollar if it means high-quality workers. But Harley can’t afford to pay some gray-bearded grump to sit in the break room. That’s why the new contract cuts the labor groups to a mere fraction of previous levels.

“No longer can a worker claim, “I’m a welder. I don’t touch a wrench.” Now, if he’s working, he’s doing what the boss says. It will allow Harley to cut the factory’s headcount nearly in half, saving massive annual labor expenses.

“The new contract also calls for Harley to put about $90 million into modernizing the current facility. While it will be an added line on the expense sheet, you can bet executives are counting on a quick payback.

“I wish I could claim to be the only investor watching the action unfold, but I’m not. Over the last few days, shares of Harley have climbed steadily, sending shares to new 52-week highs.

“Over at TFN Strategic Trader, we took full advantage of the action. Last Friday, we entered a set of the company’s December call options. And yesterday, we sold them for quick-and-easy gains of 60%.

“For once, I have a reason to be thankful for unions. They made us money.”

Can’t complain about that. Keep reading here.

*** Before I go, let me remind you to take time to give thanks for what you’ve got. It’s more important to count our blessing now than ever before. We may not have them tomorrow.

Here’s just a glimpse of what I’m thankful for…

A lovely wife, a baby on the way, a roof over my head, a freezer stuffed with food, friends that would kill their prized pig for me, a steady job, family, the freedom to say I don’t like our government, anything with peanut butter in it and of course, a loyal group of readers that are not afraid to let me know their thoughts.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely –but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode.

Finish reading the complete article at The Daily Reckoning.

After predicting a 0.1% economic contraction for its 30 member nations in March, the OECD said growth would reach 0.7% in 2010. The OECD also said this year’s economic contraction would be 4.1% compared to its earlier forecast of a 4.3% decline.

“The good news is that economic activity in OECD countries is reaching bottom, following the deepest decline since the Second World War. In fact, this is the first Economic Outlook in two years to revise up previous projections for OECD economic growth compared with the previous Outlook.” said OECD Secretary General Angel Gurria. “But we should not get carried away. The upward revision is fairly modest and we foresee a recovery that will be rather slow and fragile for some time.”

The recovery in the United States is expected to outpace that of both Europe and Japan, according to OECD estimates. Gross domestic product (GDP) in the United States will contract 2.8% this year before rebounding to 0.9% growth in 2010. In March, the OECD predicted the U.S. economy would contract by 4% this year and stagnate in 2010.

Euro area GDP is expected to contract 4.8% this year and to be flat in 2010, the OECD said. That’s actually worse than the organization predicted in March when it said the euro area economy would decline 4.1% this year and increase 0.3% in 2010.

“Signs of impending recovery in the euro area are not yet as clearly visible, reflecting country-specific combinations of bursting housing bubbles, export set-backs and damage to financial sectors,” the OECD said. “The eventual recovery may also be slow in this region, including because rising unemployment makes consumers more reluctant to spend.”

Analysts have said that the European Central Bank (ECB) erred by not cutting its lending rates as quickly and dramatically as the U.S. Federal Reserve, which could explain the difference between the rates of recovery for each region.

Other central banks “have their own responsibility and decisions and I have already said that as far as we are concerned, we would be very, very keen to avoid to be put in a situation which for us would not be appropriate, namely a liquidity trap,” ECB President Jean-Claude Trichet said following the Fed’s decision to cut its benchmark rate to a range of 0%-0.25%.

But it is precisely the aggressive monetary actions taken by the Fed and other central banks that the OECD credits with stifling the global recession.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said the OECD. “Such a recovery would reflect tremendous policy effort.”

However, the group also warned that as fiscal stimulus fades and the need for balance-sheet repairs escalates, any U.S. recovery could be “uncharacteristically weak and insufficient to bear down on unemployment at around 10% of the labor force.“

For that reason, the OECD recommends the U.S. Federal Reserve not raise rates until 2011. With regard as to whether or not keeping rates so low for such a long period of time will lead to inflation, the OECD doesn’t see that as being the case.

“The projection that we have is one where the U.S. is emerging from the recession a little earlier than the euro area, which does not really support that argument,” OECD chief economiest Jorgen Elmeskov toldReuters.

As far as Europe is concerned, the ECB – which has cut its benchmark rate to 1% –should exhaust “the remaining scope for cutting the rate on the main refinancing operations sooner rather than later.”

“The bleak growth outlook argues for using additional room, where it still exists, for interest rates cuts and warrants keeping exceptionally low policy rates for a substantial period of time,” the group said.

While policymakers at the ECB have recently expressed a willingness to push the key rate down below the 1% floor, there is still a measure of hesitancy on the continent.

The ECB yesterday (Tuesday) pumped a record 442.2 billion euros into the Eurozone banking system in its first-ever offer of unlimited one-year funds. The demand for the funds highlighted expectations in Europe that liquidity will not be available again on such favorable terms.

The ECB itself reserved the right in future one-year operations to charge an interest rate above its main policy rate.

“Let’s wait and see how the latest measures work,” Jose Manuel Gonzalez-Paramo, an ECB executive board member told the Financial Times. “We did not decide that 1% was the lowest level imaginable in any scenario, but we do think that it is the appropriate level given the information that we have currently available.”

The preliminary Markit purchasing managers index (PMI), a closely watched survey released Tuesday, showed that Eurozone output fell for the thirteenth consecutive month in June.

The PMI rose to 44.4 in June, up from 44.0 in May. A reading of less than 50 indicates a contraction in activity, while a figure of more than 50 signals expansion. Economists had forecast a rise to 45.5, according to MarketWatch.com.

Dominic Bryant at BNP Paribas told The FT that Europe’s economy won’t be gaining traction “anytime soon,” and he expects the economy to be “more or less flat for the next four quarters.”

Europe’s underperformance when compared with the United States and United Kingdom will reflect “the less aggressive action of policy makers in the Eurozone in the areas of monetary policy, fiscal policy and banking sector support,” Bryant said.

OECD Boosts Outlook but Urges Developed Countries to Keep Lending Costs Low

Given that more than $800 billion of federal money has been earmarked for U.S. “stimulus” projects, one would actually expect that the frightening job losses of the past six months would quickly reverse, and that the U.S. economy would soon start creating the 3 million jobs that U.S. President Barack Obama has promised.

Unfortunately, that has not been the case.

That’s not to say that the outlook is for a Great Depression, an economic reversal in which a country’s output plummets by 25% or more from its peak level. While the current U.S. recession may well be the “worst since the Great Depression,” it’s becoming clear that the peak-to-trough output decline will be something like 5% – worse than the recessions of 1973-75 and 1980-82, both of which saw output declines of about 3.5%, but not all that much worse.

After all, the money supply has not been allowed to collapse as it did during the 1930s and there has been no repetition of the infamous Smoot-Hawley Tariff Act, though the “Buy America” provisions in the original stimulus outline and the corresponding “Buy China” provisions inChina’s corresponding package indicate that “Smoot-Hawleyism” still lurks just beneath the surface.

However, the following four factors make it almost certain that the U.S. economy will be slow:

• Record-low interest rates make it impossible for the U.S. central bank to use rate cuts to jump-start growth.
• The huge U.S. budget deficit will force the federal government to continue its heavy borrowing – potentially “crowding out” private-sector players seeking loans to finance their own growth.
• The growing size and influence of the U.S. public sector.
• And an over-growth of government regulation.

Let’s consider each one.

First and foremost, the U.S. Federal Reserve has loosened money supply inordinately over the last year, with short-term interest rates at 0.00% and money supply growth at 15% per annum. Thus, there is no Fed loosening available to spur employment.

Interest-rate-sensitive sectors – especially housing and construction – are likely to remain depressed for years. These sectors are major employers of low-skilled and semi-skilled labor, which will not be picking up their normal slack.

A second adverse factor is the exceptionally large federal budget deficit - expected to reach $1.85 trillion, or 13% of the U.S. economy, in this year alone, according to the nonpartisan Congressional Budget Office(CBO). That deficit will stretch several years into the future, thanks to the stimulus package and various bailouts initiatives.

In the short term, these rescue-oriented provisions have helped U.S. employment, not the least by allowing federal and state governments to do some hiring. But in the longer term, the federal borrowing they have caused will restrict the private sector’s access to the capital markets. That will hinder small businesses in particular. Indeed, the private sector will find it difficult to fund capital expansion, and again the result is likely to be a dearth of hiring.

A third adverse factor is the expansion of the public sector itself. To some extent, it does not matter how budget deficits are financed; the important consideration is the transfer of resources from the private sector – allocated by the automatic optimization of the so-called “price mechanism” – into the public sector, where no such considerations apply.

It’s not just a question of government itself; it’s now clear, for example, that Chrysler LLC and General Motors Corp. (OTC: GMGMQ) are to be controlled by the government – with subsidies – at our expense.

When General Motors announces, as the company did Wednesday, that it will build automobiles on the basis of an assumed oil price of $100-$120 per barrel, one sees at once a politically motivated strategy; GM will cease making the large cars that in the past have been its principal source of profit. If oil prices average $50 or less, as is perfectly possible in a long period of sluggish global growth, General Motors will be a mess – and will need to be bailed out by us again.

The late William F. Buckley Jr. once claimed that 500 names chosen at random from the Boston telephone book could do a better job of running the country than Congress; I wouldn’t mind betting that such a random selection would also make a better job of running General Motors than the government.

Related to the growth in government is the growth in regulation. For example, President Obama’s “cap-and-trade” plan to address global warming will impose a new tranche of costs on the U.S. economy, without any great offsetting spurs to employment. In areas such as energy production and heavy industry, employment will be depressed by the additional cost burdens those areas bring, as well as by the simple difficulty of complying with the new regulations.

To see where a larger state sector and more regulation can lead, one need only look at the European Union (EU). Whereas U.S. unemployment was below 5% for much of the last decade, the lowest rate reached since 2000 was 8.8% in the EU. What’s more is that certain areas of the EU have much worse records than this.

In Spain, for example, unemployment was close to 20% for much of the 1980s and 1990s, and has now soared once again to no less than 18.2%.  The EU is not ensconced in a Great Depression and Spain remains a relatively wealthy country; nevertheless, the rigidities in the European system are such that unemployment remains persistently high, with adverse social effect, such as the rioting in the Paris banlieus.

The European Commission (EC) recognized this problem as early as the 1980s, and has been gradually pushing Europe towards the more open U.S. labor market, with only moderate success.

Because of over-loose money, excessive budget deficits, growing government and impending regulation, it is thus unlikely that the U.S. economy and its job market will bounce back as quickly as it has in the past.

The investment “takeaway” from this is obvious, I fear: A substantial part of one’s money should be invested in the free-market economies of East Asia, where regulation and taxation are lower, so even though a recession has also hit, recovery is likely to be much more robust.

Source:  The Four Key Reasons the U.S. Economy is Facing a ‘Jobless Recovery’

There are bigger fish being fried. The entire American nation is in the crosshairs and will be severely tested like never before.

Very few people comprehend the scope of the problems that continue to unfold. The Dow is up a couple of thousand points so everything must be normalizing, no?

No! Look deeper.

The US Hits the Treadmill

The core of our problems lies deep in the roots of the overall system.

• The US economic model has been extremely flawed for more than an entire generation. Our “money” holds no intrinsic value. We follow the consumption mantra instead of the production model. The good times come only when credit expands in bubblical proportions (don’t look that one up in Webster’s). Credit contractions, like the historical one we’re now in, threaten to implode the entire edifice. The Fed is the master of the boom and bust cycle and they have really overdone it this time.
• Low interest rates are damaging to the key individuals that can rescue us … savers. Save the savers!
• There are consequences to failed economics. Our central planners are a scant few decades following in the footsteps of the Ruskies. It is definitely not free market capitalism that is crumbling. Ignorance, greed and fraud are simply meeting their inevitable demise.

Results- The patient literally fell off the treadmill.

The Telling Electrocardiogram (ECG)

There are some really weird heart rhythms on this now intensive care patient.

• This decade has been one of depression only disguised by official lies and distortions (altered statistics). A sustained recession is, in fact, a depression. The sustained recession started in 2001, with a brief interlude in 2004 and I’m sticking with that opinion regardless of how few see it. Check out the GDP chart at www.shadowstats.com for yourself. Any analysis is only as good as the documentation used.
• The collateral foundation is crumbling out from under all American banks. Real estate continues to deflate and this directly impacts the viability of banks. Their ability to lend disappears with foreclosed homes and non-performing shopping centers. Home prices were down 14% during the first quarter of this year compared to the first quarter of 2008. At least 30% of US households owe more on their homes than they’re worth. Real estate has not bottomed.
• Joblessness goes hand in hand with real estate failures. The Labor Department just fessed up to a 9% unemployment rate. The rule of thumb is to roughly double the propaganda figures that come out of DC/NY. We’re heading next for 20% unemployment and all but the most gullible know it. More reliable reporting, again, comes out of the Shadow Stats website.
• American debts are way, way past the point of ever being repaid. They will be defaulted on. I won’t bore you with excessive numbers here because eyes tend to glaze over. Our economic leaders are throwing down multiple trillions of dollars in between shots of tequila. Practically none of this funding is aimed at Main Street. Recent “stimulus” spending and desperate promises come to $29 trillion per Bill Buckler of the esteemed Privateer.
• Tax receipts for fiscal 2008-2009 are down 31% for individuals and 58% for corporations. Meanwhile, government is vastly expanding its spending and a collision is inevitable.
• Foreigners are balking at purchasing more American debt and the Fed, in an end game strategy, has stepped into the gap. Don’t try this at home.

Results- There is a dangerous cardiac arrest in progress. One more test to go.

The Dreaded Proctologist

This test is the most revealing one of all. You will need more than a Valium just to review these results. The creatures that have brought us to this fateful moment show no signs of seeing daylight anytime soon.

• Failed entities should be purged from the system. Fraud requires punishment. Instead, incestuous entities like Freddie Mac, Fannie Mae, AIG, Goldman Sachs, JP Morgan and others were and are deemed too well connected to fail. A financial coup d’etat has transpired as Goldman Sachs refugees have overtly grabbed the ring of power. The banking elite continue to clutch their power.
• The shadow banking system that directly caused this American catastrophe continues to bring forth more and more derivatives. The BIS, the bankers’ bank in Switzerland, reports $684 trillion in these hidden, unregulated and dangerous instruments. Other sources report them as high as one quadrillion dollars. There’s a Zimbabwean number if there ever was one. There can be little doubt derivatives are continuing to fail behind the scenes, further compounding all these issues.
• The printing press is also found with this scoping exam and it’s obviously turned to malignant mode. How do you cure a problem caused by extreme amounts of credit and debt with unfathomable amounts of the same?
• No observed green objects resembled “shoots”.

Results- A massive surgical resection is mandated. Today.

Test Results and Prognosis

Grievously, this patient has abused its heart and lost its soul. It is unrecognizable from its original Constitutional form and very unlikely to revert back to it. It exhibits no free markets, no honest money and few brave and rational leaders. Short of a miracle, you’re looking at a terminal case.

The banks passed their stress test but you dare not rest easy. Al Capone would have given himself a glowing report card if given the opportunity. The times remain extremely precarious. Protect yourself by staying away from the Kool-Aid and heading for the precious metals.

Source: A National “Stress Test”

]]> http://www.contrarianprofits.com/articles/a-national-%e2%80%9cstress-test%e2%80%9d/17040/feed 0 http://www.contrarianprofits.com/articles/the-fed%e2%80%99s-march-to-madness/15382 http://www.contrarianprofits.com/articles/the-fed%e2%80%99s-march-to-madness/15382#comments Mon, 30 Mar 2009 16:00:14 +0000 Russell McDougal http://www.contrarianprofits.com/?p=15382 The Fed pulled out its “nuclear” option last week when it announced coming purchases of $300 billion in long term Treasuries (and other similar extravaganzas). This is an act of total desperation.

More specifically, “The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.”

Since I was dreaming, I figured that I would somehow involve some of the cuter employees in some erotic fantasies, which I quickly discovered did not turn out as I had planned and made me question the whole “I must be dreaming” thing, even though according to Stephen Meyerhardt, “a spokesman for the Bureau of Public Debt in Washington”, he “wasn’t aware of the three-month bill ever trading at a negative rate before”, indicating that this MUST be a dream!

In fact, I thought those bad old days were all gone, all the demons exorcized, and that I had come to grips with insanely low interest rates and scumbag Wall Street and governmental sharpies, when suddenly I am again waking up in the middle of the night, bathed in sweat and screaming my guts out in fear, and again instinctively grabbing for some kind of weapon to unleash a maelstrom of hot, flying lead against unseen attackers and miscellaneous bric-a-brac.

Imagine my further disorientation when I suddenly find out that I cannot move, and am restrained to the bed by a profusion of straps and belts, and all I can do is struggle heroically against my shackles while I listen to my wife laughing and saying, “Try to get out of THAT, you Homicidal Mogambo Moron (HMM)!”

The reason for my relapse in symptoms is that Bloomberg.com reported that Treasury Assistant Secretary Karthik Ramanathan, “the department’s chief debt manager,” said that the United States faces “as much as $2 trillion in borrowing needs this year,” and warns us that they “may introduce new financing methods to sell a record amount of government debt”, requiring them to use “novel approaches to debt management.” Yikes!

I remember when I tried this “novel approach to debt management” scam one time early in my career when my natural incompetence and general lack of interest in a career started to manifest themselves, which predictably ended badly, although it looked so good on paper.

My “novel approach to debt management” was to loan the employee pension fund to me as my “seed money” for a big run at the Vegas casinos using some stupid new gambling “system” I developed back when I believed in the bell curve over the long-term, and which has, thanks to the phenomenon of catastrophic Black Swan events, now been shown to be a Big, Big Mistake (BBM), as if my subsequent experience in Vegas was not enough proof! Hahaha!

But apparently nobody wants to hear about how I lost so much of the employee’s money, or how a “novel approach to debt management” did not work out, or how I was personally embarrassed to have lost all their money while risking none of my own.

But perhaps people will be interested to know that the federal government is going to make sure that we are all losers, as inflation in consumer prices destroys us, which I cleverly deduce when Bloomberg said, “Ramanathan cited private analysts’ estimates of borrowing needs that may reach $1.5 trillion to $2 trillion in the financial year that ends in September 2009.”

What? A $2 trillion federal budget deficit? In a $13 trillion national economy? Gaaahhhh! When the trade deficit is running at almost $900 billion a year? Double gaaahhhhh!

If you disregard my loud, terrified screaming as just a pathetic “cry for help”, you will realize that my underlying message is sound, and that it’s too, too weird, it’s too, too unprecedented, it’s too, too everything-bad-from-an-economic-perspective, and it is so all-around terrifying that even holding gold in one hand, and laying down some suppressive fire with a 0.45 caliber semiautomatic in the other to send a little “message” to the neighbors, provides but little solace.

A hell of a lot of noise, yes, but little solace! Hahaha! On the other hand, without the safety of gold, absolutely none of the latter!

Source: A Novel Approach to Debt Management

That doesn’t leave members of the central bank’s policymaking Federal Open Market Committee (FOMC) much room to maneuver. Still, the policymakers may have more ammunition in their arsenal and the statement that accompanies the rate decision at the end of the two-day session could shed some insight on the “creative” actions the Fed could consider in addition to rate cuts (For instance, the central bank could extend the new investment firm discount window, offer additional loan guarantees, or utilize any number of other tools).

And the Fed may well have to use those other tools. As Japan’s “Lost Decade” demonstrated, “zero” interest rates won’t necessarily jump-start an economy – especially when interest rates weren’t really the problem. And as several Money Morning investigative pieces have demonstrated, the low interest rates aren’t necessarily inducing banks to lend. Indeed, many banks are using the federal bailout money to finance buyout deals.

The ministers of the Organization of the Petroleum Exporting Countries (OPEC) will meet in Algeria on Wednesday and President Chakib Khelil implied that a surprisingly sizable production cut is in the cards.  While OPEC controls about 40% of the world’s oil supplies, energy analysts hold more stock in actions rather than words. Said one of those analysts: “You can announce all the cuts you want. Compliance is the key.”

Market Matters

In a major story last week, Bank of America Corp. (BAC) may be eliminating 35,000 jobs as it adds Merrill Lynch & Co. Inc. (MER) to its ever-growing list of subsidiary companies.

But in an even bigger story, Wall Street powerbroker, Bernard Madoff stole the headlines (and about $50 billion from investors in the process).  This former chairman of the Nasdaq Stock Market Inc. (NDAQ) ASDAQ was arrested for committing perhaps the largest investor fraud in history (Enron may be off the hook) as Bernard L Madoff Investment Securities LLC appears to have been “basically a giant Ponzi scheme” (his own words).  Though the client list seemed relatively small, at first, the implications will be quite widespread, as some of the largest hedge funds of funds participated in Madoff’s investments; their clients include some of the world’s (formerly) wealthiest folks.  Additionally, regulators will have quite a few questions to answer as lax oversight failed to uncover this massive fraud that may have been perpetrated for years.  Stay tuned – this one isn’t going away any time soon.

In “lighter” news, the U.S. House of Representative passed a “preliminary” auto bailout package that would provide $14 billion to the Big Three – Ford Motor Co. (F) may not need any for now – and create a new car czar to oversee an industry restructuring.  While Wall Street initially hailed the move as a positive step to a necessary overhaul, the Senate demanded greater concessions from auto unions and the bill became basically “dead on arrival.”  Since the U.S. Treasury Department appears to be growing more comfortable with the bailout concept with each passing day, Bush administration officials implied that aid via the $700 billion Troubled Assets Relief Program (TARP) would be forthcoming even without Senate approval. By the way, an oversight committee gave the financial bailout a rather poor initial report card, claiming a lack of transparency in terms of how dollars are being spent and whether recipients are complying with government intentions (no wonder the automakers want to participate as well).

Elsewhere, Merrill’s John A. Thain reversed an earlier position by “choosing” to forgo his 2008 bonus and Morgan Stanley’s (MS) John J. Mack quickly followed suit.  The Dow Chemical Co. (DOW), Sony Corp. (ADR: SNE), and 3M Corp. (MMM) joined BofA and others in announcing sizable job cuts.  FedEx Corp. (FDX) and The Procter & Gamble Co. (PG) reduced prior outlooks and sales projections.

Oil prices fluctuated greatly as traders weighed contrasting supply/demand reports:

• The Energy Information Administration expects weak demand to result in declining consumption through 2009 even as significant production cuts could be announced at the upcoming OPEC meeting.
• With oil trading below $47 a barrel, Goldman Sachs Group Inc. (GS) (of “we’re going to $200/barrel fame”) contradicted past forecasts by claiming prices could fall to $30 (and lost some credibility in the process).

Stocks reacted favorably to rumors of President-elect Barack Obama’s $500+ billion stimulus package (see below) and the apparent progress with automaker negotiations.  As the week moved on, reports of new job losses and more financial woes halted the brief optimism and the Senate’s inability to pass an auto bill brought more excessive volatility.  A “flight-to-quality” sentiment contributed to yields on 3-month T-bills dipping to 0.0% (that’s ZERO percent … talk about risk averse).

Economically Speaking

“I am absolutely confident that if we take the right steps over the coming months, that not only can we get the economy back on track, but we can emerge leaner, meaner and ultimately more competitive and more prosperous.”

Somehow an economic stimulus plan which directs $500+ billion into new FDR-like public works programs to increase employment does not necessarily imply “leaner and meaner.”  Still, many analysts believe the Obama plan (still in its infancy) may be just the tonic needed to jumpstart the economy.

Meanwhile, the European Union announced its own $200 billion package as the 27 member countries struggle with global recession.  Not to be outdone, Japan revealed some sizable stimulus measures of its own late in the week.  With the recession already pushing a year in duration, Duke University released results of its Global Business Outlook Survey which showed that 60% of domestic CFOs believe the downturn will last until the 4th quarter of next year – and perhaps longer. Similarly, a
Wall Street Journal forecasting survey predicted four straight quarters of negative growth as measured by gross domestic product, or GDP, the longest period of economic contraction since the Great Depression.

A light week on the economic calendar ended with a couple of major reports that gave the Fed a bit more anecdotal material to (over-)analyze prior to the FOMC meeting today and tomorrow. With claims for unemployment benefits soaring to their highest level since November 1982, Federal Reserve Chairman Ben S. Bernanke and friends must make job creation among their top priorities.  November retail sales fell by 1.8% as automakers reported their worst level of monthly activity in 26 years.

Still, the decline was less than Wall Street expected, leading Morgan Stanley’s analysts to speculate about future downward revisions.  Wholesale inflation (as measured by the producer price index, or PPI) declined by 2.2% as gasoline prices plummeted by 25% in November.  Normally, consumers would welcome such news and gladly spend those savings from the pumps at the malls during the holidays.  Instead economists continue to spread more “gloom and doom” by suggesting consumers may hoard their savings and resist spending amid these uncertain times.

Weekly Economic Calendar

Source: Fed May Cut Rates Again as Policymakers Meet