In a report posted on the Web site of Pacific Investment Management Co. (PIMCO) – which runs the world’s biggest bond fund – Chris Caltagirone and Bob Greer said inflation will return as soon as 2010 and will remain a factor for some time to come after that- a scenario that makes commodities and TIPS (Treasury Inflation-Protected Securities) “two [investment choices] that can provide investors diversification as well as exposure to sectors that may benefit from future economic developments.”

In the near term, however, Caltagirone and Greer expect excess capacity and high unemployment – among the key catalysts of supply and demand – to extend deflation for several more months or quarters.

However, they believe that “the policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years,” Caltagirone and Greer wrote.  “Although we expect growth to contract in 2009, [the] government stimulus [outlays] may reflate the economy as soon as 2010 and beyond that.”

Caltagirone and Greer join a growing chorus of prominent inflation hawks that includes Warren Buffett, Marc Faber and Jim Rogers.

On Monday, Buffett said in a CNBC interview that inflation levels could reach as high as those in the 1970s as a result of the government’s attempts to resuscitate the economy.

That same day, Faber – publisher of the Gloom, Boom and Doom Report – agreed.

“The massive money printing we have and the massive deficits we have now will make it difficult when there are some price pressures for the Federal Reserve to actually increase interest rates,” Faber said in a Bloomberg Television interview.

Likewise this week, Rogers – a longtime commodities bull – said that conventional U.S. Treasuries that aren’t inflation-protected are going to take a beating from U.S. policies.

Inflation’s Catalyst: Uncle Sam’s Wallet

President Obama’s 2010 budget plan is already forecasting a $1.8 trillion deficit for the current budget year

In addition to the $789 billion stimulus bill passed in mid-February, U.S. Treasury Secretary Timothy F. Geithner has said he is ready to commit up to $1 trillion to strengthen the nation’s banks and jumpstart lending.

The basic logic – which Money Morning’s Martin Hutchinson outlined as far back as November – is that with the government pumping so much money into the economy, it’s bound to have an inflationary impact.

The high inflation Buffett referred to peaked in March 1980, when the consumer price index (CPI) gained 14.8% from the year before.

And though it seemed excruciating, the highest the CPI moved last year was 5.6% in July, followed closely by a 5.3% increase in August, according to the Bureau of Labor statistics.

Recently, consumer prices fell 0.8% in December and increased 0.3% in January. February inflation statistics are due for release next Wednesday (March 18).

How Protect and Profit from Rampant Inflation

In their PIMCO report, Caltagirone and Greer recommend investors consider TIPS.

“The decline in TIPS prices makes them attractive now on both an absolute basis and relative to nominal Treasuries,” they wrote. “In addition, although we expect inflation to remain low in the near term, we believe that inflation will rise in the medium term, which means TIPS may be a more strategic, as well as tactical, investment opportunity.”

Starting as soon as next year, they expect government stimulus measures to kick in and reflate the economy.

And with commodities projected to rise in step with inflation, Caltagirone and Greer recommend investing in PIMCO’s (naturally) CommodityRealReturn strategy, which “gains exposure to commodities through derivatives that track the Dow Jones AIG Commodity Total Return Index, and the derivatives are collateralized with an actively managed TIPS portfolio.”

Money Morning’s Investment Director Keith Fitz-Gerald wrote a how-to guide for TIPS investing, in which he suggested a pair of TIPS funds, one by PIMCO, to help investors hedge.

Another way to hedge is with gold.

Investors panicked when the yellow metal dived along with the economy. But Money Morning’s Hutchinson – an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets – understood perfectly what other investors did not.

“Gold is not a safe haven against recession,” Hutchinson said. “It’s a safe haven against inflation.”

But with commodities and inflation on the rise, gold could reach as high as $1,500 an ounce by the end of the year, Hutchinson said.

“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”

Money Morning recently outlined five ways investors can play gold – from safe to speculative.

Source:  Two Ways to Protect Yourself When the Inflation Alarms Return

Take a look at its chart below…

By making new lows, XLV should get down to its next support level at $20.72, possibly as low as $19.87 before a sustainable rally can get underway.

A rally back up to the trendline – currently around $24 – before the $20.72 area is reached, is probably a good selling opportunity.

Source: Ticker Of The Week: Healthcare SPDR (XLV)

I’m happy to report that it wasn’t an oversight: The reality is that Fifth Third – with $120 billion in assets – didn’t quite make the cut, since it’s actually not one of the Top 12 U.S. banks. But given the high level of reader interest in our report (which ran Wednesday), I thought it was worth a look.

Alas, while it isn’t one of the Top 12 banks, Fifth Third is another “Zombie,” lurking in the undergrowth, seeking new victims (investors).

A regional bank based in Cincinnati, Fifth Third has operations in the Midwest, most notably in Ohio and Michigan. It also has some operations in Florida. At first glance, it looks like SunTrust Banks Inc. (STI) or Regions Financial Corp. (RF), both of which I classified as “Walking Wounded,” one of the four ratings I created to classify the banks’ health, and the rating that’s a notch higher than the dreaded “zombie” label, which was affixed to the worst banks in the group (is the worst of the group.

(The ratings, from worst to first, are: Zombie, Walking Wounded, Risky but Proud, and Hidden Gems.)

However, while the pattern of Fifth Third’s 2008 operations was similar to SunTrust and Regions, the Ohio bank’s results were significantly worse. Both Regions and Fifth Third reported losses for 2008 ($5.6 billion and $2.2 billion, respectively) after substantial goodwill write-offs. But Fifth Third also notched a $1.2 billion loss for 2008 – before goodwill write-offs, while Regions Financial made a $300 million profit. Fifth Third has slashed its quarterly dividend to a nominal 1 cent per share.

Though there are some positive aspects to note. For instance, much of Fifth Third’s fourth-quarter loss was due to its transferring $1.3 billion of troubled loans to “held-for-sale” status, causing an immediate write-off that worsened published results, compared to its peers.

On balance, however, Fifth Third’s situation is worse enough than Regions’ – its closest Big-12 analogue – that I concluded it belonged in the “Zombie” category, as opposed to the “Walking Wounded.”

Having said that, however, let me say that I have considerable sympathy for the bank and its management team. Citigroup Inc.’s (C) zombification came from unintelligent aggression over a period of 30 years, inventing many of the current financial crisis’ most-toxic products (such as auction rate preferred stock). And Bank of America Corp.’s (BAC) zombification came from – not one, but two – catastrophically foolish acquisitions within a year: Countrywide Financial Corp. and Merrill Lynch & Co. Inc.

In Fifth Third’s case, there was no malice – Fifth Third did not invent any of the unsound idiocies that have caused global financial markets to collapse, nor did it go on an aggressive acquisition binge. Fifth Third was simply concentrated in two of the most economically troubled states – Ohio and Michigan.

In early 2008, Ohio had the highest rate of mortgage defaults in the United States – not because of its speculative frenzy in 2005-06, but because it had an exceptionally high proportion of borrowers whose ability to afford a mortgage was marginal.

U.S. President Barack Obama’s stimulus plan, targeted towards lower-income households and hard-hit areas, may help Fifth Third’s business more than it will help other banks, in which case Fifth Third could edge back towards recovery.

But as it stands now, the bank has one foot in the grave, qualifying it for “Zombie” status

Source: Fifth Third (FITB), a Medium-Sized “Zombie” Bank

Sales at U.S. retailers rose 1% in January, the largest monthly increase since November 2007, and followed a 3% drop in December, the U.S. Commerce Department said today (Thursday).

But even with last month’s gain, the picture remains grim: Compared to January 2008, retail sales plunged 9.7%.

Analysts still expect that retail sales will experience their first annual decline in 14 years, but tried to take solace in the fact that sales climbed, or at least slowed their descent. “It is the sort of tonic that can sooth the market to an extent,” Brian Dolan, chief currency strategist at Forex.com told USA Today. “We’ve been keying on things not necessarily getting better but at least deteriorating at a slower rate. And this builds that case.”

Another bit of silver lining could be found in last week’s jobless claims. First-time claims fell by 8,000 to a seasonally adjusted 623,000 for the week ended Feb. 7. The overall job market still looks bleak, however, as the total number of jobless claims rose for the fourth consecutive week to 4.81 million.

The four-week moving average of claims, a less volatile measure, rose by 24,000 to 607,500.

“The labor market still looks pretty bad,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) told Bloomberg News. “There’s still a lot of job destruction going on.”

The U.S. economy shed 598,000 workers last month, and has lost 3.57 million jobs since the recession began in December 2007.

The nation’s unemployment rate rose to 7.6% in January, its highest level since 1992, and an increase from 7.2% in December.

The government hopes to stem the rising tide of unemployment through the implementation of President Barack Obama’s stimulus plan, which awaits congressional approval. The $789 billion plan aspires to create as many as 4 million jobs over the next two years.

Source: Retail Sales Rise but Unemployment Dampens Outlook

But my distress is because of the same thing that has been haunting me for years: inflation in the money supply always portends inflation in the price of something, and then inflation in the prices of some things, and then inflation in the prices of all things as all that new money and credit is injected in to the economy, going round and round, bidding up the prices of a fixed-in-the-short run supply of goods and services, higher and higher until people cannot afford to buy food, which is such a Bad, Bad Thing (BBT) that all I can do is hole up in the Big Beautiful Mogambo Bunker (BBMB) and whimper in fear, tapping out “SOS” on my Mogambo Interstellar Emergency Transmitter (MIET) so that intelligent beings passing through this quadrant of the galaxy will come and please, please, please rescue me from this godforsaken planet of morons, governed as it is by the worst of the worst, who have predictably produced the worst of the worst results by allowing cancerous growth of government and government debt, made worse by a cancerous growth in suffocating debt in every sector of the economy, by the simpleminded expedient of monstrous deficit-spending, bought and paid for by the loathsome Federal Reserve creating the requisite money and credit to finance it all! SOS! SOS!

The Really Bad News (RBN) is that this is not working anymore – a fact made manifest by Howard Silverblatt, a senior index analyst at Standard & Poor’s, who says that in the last quarter of 2008, the earnings of the S&P 500 index were a NEGATIVE $7.56 a share! Wowsy wow wow! We’re freaking doomed!

So I run to my messy desk and, after a short search, manage to turn up both an unread issue of Hot Shameless Naked Babes magazine and the chart of the earnings of the S&P 500, where I see that Miss January says that she has “done it all and loved every depraved moment” meaning that she is now on the decline, which I notice is surprisingly reflected in the fact that the earnings of the S&P 500 are similarly in decline.

To prove it, in September 2007, the companies in the S&P 500 index earned a cumulative $85 a share. Earnings are now at $46 a share (back to where they were in 2004!) and still heading down with a vengeance.

As are the dividends (if you really want something to worry about!) which did not top out until the end of 2008 when they hit $28 a share, and which are still amazingly paying a big, juicy dividend of $25 a share, which seems high when one is looking at outright losses of $7.56 a share in the last quarter of last year! Hahaha!

I had a feeling that this was somehow significant, as in the old “the stock market is doomed because it is so freaking overpriced” kind of way, but I did not know HOW significant until Mr. Silverblatt went on to say, “There has never been an as-reported index level in the red.” Never! In history!

Now you know part of the reason that Congress has officially gone into Panic Mode, which was unofficially announced by Bloomberg.com reporting that “The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion.”

Now, I think you will agree that that is a lot of money, and Bloomberg notes that “the $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world,” and is “enough to pay off more than 90 percent of the nation’s home mortgages.”

The reality is that only about $200 billion is actually slated to be spent before September, and the other $9.5 trillion of future “stimulus spending” is in the form of commitments that are “lending programs and guarantees, almost all under the authority of the Fed and the FDIC”, which I take to mean, “When our scumbag friends need to be saved from taking a loss on their stupid bets, we will print up the money they need, up to an estimated $9.5 trillion”! Hahahaha!

Bloomberg.com adds, as if we had to be reminded what a bunch of lying, thieving scumbags these people are, “The recipients’ names have not been disclosed.”

And speaking of lying, thieving scumbags… For some reason, the NYSE Member’s Report – showing what the stock market insiders and specialists are selling and buying and shorting – is no longer available in Barron’s because, as online.barrons.com phrases it, “The NYSE is no longer compiling this data for us on a weekly basis.”

It’s all too, too weird, leading me to summarize, with trembling voice, that if this is not the perfect time to be buying gold, silver and oil to protect yourself, then when is? Hahaha! Whee! This investing stuff is easy!

Source: SOS: Suffocating On Spending

Front and Center this morning, we have some data that could potentially move the currencies today. I’m talking about the Trade Deficit for December. The “experts” have forecast a narrowing of the December Trade Deficit from $40.4 Billion in November, to $35.7 Billion. Now, that all sounds wonderful, as this is one of the twin deficits that I have banged on for years now. But the resolution is completely different than what I wanted to see. I wanted to see U.S. exports bring the Trade Deficit down… Instead we have a complete collapse of demand for imports… And with the dollar stronger than it was 7 months ago, exports are falling like a house of cards.

Now, here’s the potential market moving piece of this data… Last month (January) when the November $40.4 Billion Deficit printed, it was more narrow than forecast, and sparked the dollar to a 1.5% gain in one day. But that’s not all, the rest of that week the dollar gained 2.5% (in the dollar index)… So… While this isn’t the path I would have liked to see the Trade Deficit narrow, it is narrowing…

Unfortunately, for the Twin Deficits, the other Deficit, that resides in the Budget, is taking up the slack… I now figure that the Budget Deficit could very well hit $3 Trillion this year… We already have $1.2 Trillion from the Congressional Budget Office, $838 Billion in the “new and improved” stimulus package the Senate passed yesterday, and don’t forget the $350 Billion in TARP money that was carried over from last year, that will be spent this year… And you know, there will be “another” spending package coming in the future, because people like you and me are calling out this “new and improved” stimulus package…

A recent poll by Pew Research Center found that a narrow majority of Americans, just 51%, support the stimulus. And that’s down from 57% in January. Even worse for the administration, support seems to be dropping among people who say they’ve learned more about the stimulus:
Notably, support for the proposal is now much lower than it was in January among those who have heard a lot about the economic stimulus. By 49% to 41%…

And here’s something in the plan that I bet you didn’t know was a part of it. I thank a dear reader for bringing this to my attention. He’s a doctor, so I believe he knows what he’s talking about here folks…

“This past weekend and Monday I took the time to read “The Obama Stimulus Plan.” I will leave politics to the side and will leave my interpretation from an Economic perspective aside ( I double majored at Bucknell in Chemistry and Economics ). What I will NOT leave to the side is what is buried in “The Bill” from a health care standpoint. YOU NEED TO KNOW…..the “stimulus bill” is a Trojan Horse…..hidden in “this horse” is the legislation to NATIONALIZE HEALTH CARE.”

So… Do I have your attention now? Here’s a link to the story by Betsy McCaughey on Bloomberg…

OK… I won’t carry on about that… I’ve given you the information to do with as you please.

Back to the task at hand… The Geithner Plan was a bust according to the markets… Here’s what the Wall Street Journal had to say about the stock sell off… “Financial stocks led a broad move down in the market on the heels of Geithner’s unveiling of the Treasury’s bank-rescue plan and Senate passage of the stimulus measure. The Dow Jones Industrial Average dropped by roughly 350 points, or 4.2%, reaching its worst levels of the day in mid-afternoon trading. Bank of America and Citigroup experienced double-digit percentage losses.”

Currencies followed along with stocks, like they have for a couple of weeks now. The euro, which had traded up to near 1.31, fell back to yesterday morning’s figure of 1.2975, as if nothing had happened. The high yielders like Aussie, kiwi, and Brazil, had all been trading higher this week on hopes that the Geithner Plan would bring the risk takers back to the markets. But that didn’t happen, as Geithner really disappointed the markets with his plan…

It was reported yesterday that economic advisors for Obama were in a tug-o-war with Geithner on this Plan, and that Geithner had won… Given the reaction by the markets, I think I would like to see what the Advisors had planned, to make a choice between the two! Maybe Geithner is swayed by the old regime at the Treasury, given he had his hands in there helping the old Treasury Sec. Paulson, with his bailouts and TARP last year… Hmmmm… Makes you wonder…

I read the text of the Geithner Plan… And was very disappointed… I will say that the Treasury’s plan to make this all transparent is good… In fact you can follow the money trail at this website: www.finacialstability.gov But, the rest of it was the same old, spending taxpayer funds on shoring up financial institutions… Could go up to $1 Trillion!

You all know where I stand on this spending that we can’t afford, and placing the burden of paying it off on our grandchildren… It’s downright immoral! Let the financial institutions that can’t cut the mustard sell themselves to someone who can, or close, and when all the dust settles, we’ll be left with the financial institutions that are strong and ready to grow! But that won’t happen, as my friend Bill Bonner (www.dailyreckoning.com) says about the Fed and Treasury propping up these institutions… He calls them “the meddlers”… Great term!

So… As I said above, the Geithner Plan rubbed the markets the wrong way, and stocks and currencies hit the skids… Bonds had a banner day… Of course you knew they would after I talked about how they had started the year off with the worst performance since 1980! UGH! And… As always, well for the past 6 months… As the risk takers took their high yielders rally and went home… Japanese yen, rallied… There was another currency that rallied along side yen yesterday… Swiss francs… But that didn’t last through the night…

One of the biggest losers (to use the name of the TV show my beautiful bride can’t miss each week), was the Swedish Krone, as the Swedish Central Bank, the Riksbank, made a larger than expected rate cut of 100 BPS (50 BPS was forecast). The Riksbank also basically outlined their plan to cut rates further in future meetings.

British pound sterling lost ground too, when the Bank of England’s (BOE) Gov. Mervyn King made some statements about the U.K. being in a “deep recession” and that it will “probably require lower interest rates and an increase of money supply”….

Now, the lower interest rates aren’t what put the kyboshes on the pound’s recent strength… It was the comment about increasing money supply… Which in my book of how to value a currency is one of the top valuation indicators. You see, inflation in the U.K. has fallen to .05%, 1.5% below the ceiling target for inflation, and lowering the interest rate is one thing, but increasing money supply? I truly believe that increasing money supply places the velocity of money rule in place, and inflation can spiral when that happens… It’s akin to “playing with fire”… Somebody is going to get burned!

And here’s a sign that a country’s currency is on the downward slope… Mexico’s Central Bank said that it will “continue to intervene to support the peso”… UH-OH! Let’s see what this intervention has gotten the Central Bank so far this year… The peso is down 4.7% this year, and lost 2.3% of that yesterday! The Central Bank bought $1.1 Billion worth of pesos last week to prop up the currency… Their foreign reserves now stand at $82 Billion worth, so they could play this game for some time… But, in the end, the markets have deeper pockets, and if they smell blood in the water, like I think they do now with pesos, they will test the Central Bank’s willingness to spend those foreign reserves!

The folks over at Citigroup (NYSE:C), issued a report on China yesterday, and they are bucking the trend to downplay China in 2009… Citigroup believes China will surprise on the upside, and their currency, the renminbi, will continue to gain VS the dollar in 2009 to 6.6, from current levels of 6.83… So… This is one of the few reports that follow along with my general feeling of China…

The Geithner Plan was good for Gold, as the shiny metal gained $20 yesterday, and is up another $10 this morning, and is trading at $924.69… I gave a long interview yesterday regarding deflation and inflation. I tried to explain how the deflation we are seeing right now is asset deflation, not your ordinary monetary deflation, for that would require a contraction of money supply… I was asked what assets perform well in a deflationary cycle… Cash… And while Gold is the same as cash… Gold! I have a new term that I came up with for Gold… An “uncertainty hedge”… How do you like that one? Everyone is uncertain as to what’s going on and what will happen with all this spending going on, and what performs well? The “uncertainty hedge”!

And on that note… I think I’ll head to the Big Finish! And don’t look now but the price of Oil is falling again….

Currencies today 2/11/09: A$ .6530, kiwi .5230, C$ .8025, euro 1.2950, sterling 1.4360, Swiss .8655, rand 9.8980, krone 6.7175, SEK 8.2430, forint 227.50, zloty 3.5140, koruna 22.0850, yen 89.90, sing 1.5060, HKD 7.7510, INR 48.69, China 6.8330, pesos 14.60, BRL 2.2890, dollar index 85.60, Oil $37.84, Silver $13.39, and Gold… $924.69

That’s it for today… I tried and tried to get “something” out of the Geithner Plan last night, but it totally lacked specifics, and I understand why the markets began to circle the bowl.

Source: Geithner’s Plan Disappoints

The arrogance reminds me of George Bush after 9-11, who similarly believed that history owed him a gargantuan war in the tradition of FDR. And look how that arrogance led to disgrace and loss, as he unwittingly presided over the destruction of American prosperity while searching for bugbears abroad.

It just goes to show you that the presidency is something like a drug. It makes people lose all connection to reality. Part of the reality that Obama needs to recognize is that the New Deal was a calamity far worse than the initial market downturn that began it. He needs to stop basing his policies on dumbed-down civics texts versions of events and consider the economic logic.

With his rhetoric and policies, he has decided to demonize private enterprise, just as FDR did, as a way to present government as the great savior. Now, think about this. If there is a way out of the recession, it will have to be provided by private enterprise. It will come by new businesses, business expansions, entrepreneurship, new technology, and this will be the source of lasting jobs and prosperity.

You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools! These activities amount to capital consumption. They are not sources of investment. You can say that they are stupid tasks or wonderful tasks, but it is not a matter of ideology as to whether such public projects will make us all wealthier. They will not. They drain the sources of wealth from society. They represent a cost, not a blessing.

That was also true of Bush’s dumb stimulus program. He was only bailing out his friends at our expense. The effect was to give a little longer life to institutions that were failing anyway. It’s pathetic that the Republicans ever went along with it. You will notice that the scheme didn’t actually work.

Well, Obama is doing the same thing, though rewarding a different set of friends. This is not wealth production. This is wealth consumption. Do enough of this nonsense and you can destroy the livelihoods of an entire generation.

Americans are proud of their system of government, but consider what it has given us this time around. We had an outgoing president who thought it was his right to grab as much as he could while leaving. Now we have a new president who thinks that the election entitled him to grab as much as he can, right from the beginning. We get looted by the state coming and going. It all amounts to one massive war on prosperity and freedom.

Particularly culpable here are the official historians who have for generations heralded FDR as the great savior. It is a case study in how a civic lie can appear and fester for decades. The fact is that the New Deal did not work. It prolonged what might have been a troubling two-year downturn into a horrifying blow to world prosperity that ended up in a war that killed countless millions. It was one of the greatest acts of wreckage in world history.

And Obama is inspired by this? He wants to repeat it?

I’m not so cynical about human affairs that I believe that errors must be endlessly repeated. Obama can put a stop to his madness. He needs to know – someone must tell him frankly and openly – that his current path is going to lead not to recovery, but to an extension of suffering, and untold amounts of it.

The biggest threat facing the American economy right now is rarely even discussed. It is the massive buildup of paper bank reserves in the last quarter of 2008. This was Bush’s doing. He ordered the Fed to print like mad. Fortunately for us, the banks are still holding on to these reserves. When they start lending again, the result could be hyperinflation of Confederate-dollar proportions.

Hence the priority of the Obama administration should be to first do no evil, and second to find some means for withdrawing those reserves from the banking system before they wash through the economic structure and destroy the dollar. There is still time. He must act. Yes, that will lead to bank failures. That’s good! It will lead to business failures. That’s good and essential too.

There simply is no choice. If he acts now, he could find that recovery will come before his second term. This is precisely what happened with Reagan. He was fortunate to have advisers who insisted that he let the liquidation happen rather than attempt to fix the recession of 1981-82 with huge new government spending programs.

In any case, the hardest work to do here is intellectual. Obama’s head is filled with myths and lies, not only about FDR and the New Deal but also about the government’s power to repair the existing economic problems. With this model in his head, he can only do evil. This must change.

Nothing is inevitable. He can turn on a dime. The main message: do not repeat the actions of FDR, lest you destroy what is left of American liberty and prosperity.

Source: Obama’s Wealth Destruction

Geithner painted the picture of the latest U.S. recovery attempt in broad strokes, outlining the “key elements” of his proposal:

• Promoting greater transparency and stricter oversight of both established and new financial stability programs.
• Providing capital to institutions in desperate need of a cash infusion.
• Committing up to $1 trillion to support consumer and business lending.
• Addressing the housing crisis and reducing foreclosures.

Geithner was critical of the previous administration’s handling of the crisis, saying previous attempts to support the economy were “not comprehensive or quick enough,” and that “the spectacle of huge amounts of taxpayer assistance provided to the same institutions that helped caused the crisis added to public distrust.”

Hoping to rectify this, the first step of Geithner’s plan calls for stricter oversight of taxpayer funds.

“The American people will be able to see where their tax dollars are going and the return on their government’s investment,” the Treasury Secretary said. “They will be able to see whether the conditions placed on banks are being met and enforced. They will be able to see whether boards of directors are being responsible with the taxpayer dollars and how they are compensating their executives. And they will be able to see how these actions are affecting the overall flow of lending and the cost of borrowing.”

This information will be made available on a new Web site: FinancialStability.gov.

As far as addressing the crux of the current financial crisis, Geithner described three new programs aimed at strengthening the nation’s banks and jumpstart lending.

First, banks that seek financial assistance will undergo a “carefully designed comprehensive stress test” that will determine which institutions are most in need of capital. Those institutions will then be given access to funds from the Treasury, but only if they agree to specific terms named by the government.

In crafting his plan, Geithner reportedly rebuffed calls from some of President Obama’s top advisors to implement more austere restrictions of executive compensation and dictate to banks how to spend the rescue money.

Geithner instead opted for economic incentives to encourage lending, arguing that stark, interventionist measures would be more expensive in the long-run and ultimately undermine the government’s credibility, The New York Times reported.

Geithner also announced the creation of a Public-Private Investment Fund, which will buy up many of the toxic assets that have bogged down banks’ balance sheets. This fund, which has also been referred to as a “bad bank,” will be jointly managed by the Treasury and the U.S. Federal Reserve and bolstered by financing from private investors.

“By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis,” Geithner said. “Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets.”

The fund is expected to spend about $500 billion initially, and could easily expand beyond that.

The third and final measure intended to revitalize credit markets involves a vast expansion of the Federal Reserve program for consumer and business loans.

“Working jointly with the Federal Reserve, we are prepared to commit up to $1 trillion to support a Consumer and Business Lending Initiative,” Geithner said. “This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again.”

In the U.S. financial system, 40% of consumer lending has historically been available because people buy loans, according to Geithner.

In addition to these measures, the Fed and the Treasury will commit $50 billion to reduce mortgage payments for homeowners facing foreclosure. A legislative proposal giving bankruptcy judges more authority to modify mortgages on terms more favorable to borrowers will also be renewed.

“As house prices fall, demand for housing will increase, and conditions will ultimately find a new balance,” Geithner said. “But now, we risk an intensifying spiral in which lenders foreclose, pushing house prices lower and reducing the value of household savings, and making it harder for all families to refinance.”

“The President has asked his economic team to come together with a comprehensive plan to address the housing crisis,” the Treasury Secretary added. “We will announce the details of this plan in the next few weeks.”

Source:  Geithner Unveils TARP Overhaul

“We have tried spending money,” begins our mystery politician today. “We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started…

“And an enormous debt to boot!”

The mystery man? Henry Morgenthau Jr., Treasury secretary to then-President Franklin Delano Roosevelt.

Morgenthau uttered these words in May 1939 before the House Ways and Means Committee. Despite being a chief architect of the New Deal, Morgenthau came to the House to repent… six years after the New Deal’s inception, the unemployment rate had climbed back to 20%. The New Deal failed.

Check this out, from the Heritage Foundation:

The passing of Barack Obama’s New New Deal seems all but inevitable now. “I can tell you with complete confidence,” he hammered on the tube last night, “that a failure to act will only deepen this crisis.” How deep? “Catastrophe,” he insisted again.

It’s truly amazing. The greatest economic debate of our lifetimes has been solved with “complete confidence” by a former community organizer and civil rights attorney… a student of economics for about a year or two. He is very gifted, this man.

“It just goes to show you,” writes Lew Rockwell in today’s Mises Institute feature article, “that the presidency is something like a drug. It makes people lose all connection to reality. Part of the reality that Obama needs to recognize is that the New Deal was a calamity far worse than the initial market downturn that began it. He needs to stop basing his policies on dumbed-down civics texts versions of events and consider the economic logic.

“With his rhetoric and policies, he has decided to demonize private enterprise, just as FDR did, as a way to present government as the great savior…

“You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools. These activities amount to capital consumption. They are not sources of investment. You can say that they are stupid tasks or wonderful tasks, but it is not a matter of ideology as to whether such public projects will make us all wealthier. They will not. They drain the sources of wealth from society. They represent a cost, not a blessing.

“That was also true of Bush’s dumb stimulus program. He was only bailing out his friends at our expense. The effect was to give a little longer life to institutions that were failing anyway. It’s pathetic that the Republicans ever went along with it. You will notice that the scheme didn’t actually work.

“Well, Obama is doing the same thing, though rewarding a different set of friends. This is not wealth production. This is wealth consumption. Do enough of this nonsense and you can destroy the livelihoods of an entire generation.”

Regardless, the Senate successfully voted to close debate on the stimulus bill yesterday, one of the last hurdles needed to bring this bill to fruition. In a tear-jerking display of bipartisan support, the vote passed 61-36. Three Republicans voted yes.

“Senators from both parties,” beamed Harry Reid, “met the seriousness of the economic crisis with an earnest approach to solving this emergency.”

Now, if they’d only crack a history book together, we might get somewhere.

The stimulus bill also magically gained $53 billion since you read The 5 yesterday. The tab now stands at $838 billion.

“Bad bets don’t get better,” Bill Bonner reminds us, “when you lend the bettor more money. They just become more expensive.”

God forbid the government throws money at this crisis from only one department… Treasury Secretary Tim Geithner unveiled the second half of the TARP today, creatively dubbed TARP 2.0.

The New New plan has three main parts… here they are, quick and dirty:

1) The Treasury, in partnership with the FDIC and the Federal Reserve, will encourage the private sector to buy up the fabled “toxic assets.” The Treasury will make introductions and leave the price discovery to the private sector. The Fed will blow up its balance sheet and provide ultra cheap loans for these asset purchases. And the FDIC will provide some kind of backstop for investors who buy the stuff… making the FDIC a sort of secondhand “bad bank.”

The first phase program has an “initial” price tag of $250-500 billion.

2) The Fed’s existing $200 billion program to buy distressed commercial, student, auto and credit card loans will be expanded to $1 trillion.

3) The second half of the original TARP plan — $350 billion — will still be wasted on major banks.

Sounds like most of the new money will be coming from the Fed; thus, the Obama administration can side step this whole tricky process of congressional vetting and approval. And they get to use the swanky new title, too, proving how hip and down they really are.

It’s so far off the rails we don’t have much to say about this “TARP 2.0,” but this reader found a nugget: “I think this survey is telling,” he writes, bringing our attention to a survey conducted by American Banker. “I guess Congress must ‘do something’ anyway.” Telling, indeed…

“What are your expectations for TARP 2.0?

It’ll take the bailout in a bold new direction: 14%
It’ll be vague and light on specifics: 21%
It’ll be a retread of Bush administration ideas: 14%
What does it matter? The government can’t fix this: 51%”

Remember Fannie Mae and Freddie Mac? We don’t hear much from the giant mortgage enablers anymore, since they’ve taken to lumping all their losses onto Uncle Sam’s ledger. The government promised back in September to provide a $100 billion backstop for the two… surprise, surprise, today they say they need more.

Fannie Mae and Freddie Mac may need an additional $200 billion to stay afloat, Federal Housing Finance Agency Director James Lockhart said yesterday.

“When we sized the amount in September, we, obviously, looked at stress tests and what was happening in the marketplace,” Lockhart said. “There’s been some significant events since then that weren’t in our forecast.”

Gasp! You don’t say?

Sign of the times… MBA recruitment activity is likely at a record low: 56% of U.S. business schools are reporting a “significant decrease” in recruiting this winter, says a survey from the MBA Career Services Council. At least 70% of respondents say recruitment is down 10% or more.

“People have been lulled into thinking you deserve to get a job in September or October and spend the rest of the year playing racquetball,” a future master of the universe told The New York Times. But nowadays, “the economy chooses where you go for you.”

While the market for high-end bankers is circling the bowl, the world of high-end art is still doing pirouettes.

Degas’ “Petite Danseuse de Quatorze Ans” fetched over $19 million at Sotheby’s recently — a record for any Degas statue.

The art world sighed collectively after the sale. At least billionaires are still willing to shell out ridiculous sums for stylized lumps of bronze. Still, the latest Sotheby’s auction was a bust. Despite the record-setting Degas, 10 of the 29 lots at the auction sold below their estimates. Four did not sell at all. Wahh.

In the markets, stock indexes held their breath yesterday in anticipation of today’s announcement from Secretary Geithner. Most major indexes finished flat. Geithner didn’t actually announce his plan until 11 a.m. today, but his prepared statement was leaked early this morning and the Dow sank about 100 points after digesting it. Buy the rumor, sell the news, the saying goes… we don’t see how he could please the market today.

Gold, on the other hand, took off this morning when details of Geithner’s plan began to emerge. It popped about $20 right at the New York open, and goes for $910 an ounce as we write.

The dollar and oil together have been treading water this week — the dollar index at around 85 and oil in $39-41 a barrel range.

“The reason why this current U.S. administration,” writes a reader, “is going all out with the fear mongering is simple: they are supplying the political cover needed for the U.S. fed and all of its member banks to inflate, inflate and inflate some more.

“If the U.S. Fed/Treasury/presidential nexus wishes to tighten the monetary spigots, you hear every poli on the Hill talking about how strong the economy is, and when this nexus wishes to loosen those same spigots, you hear the same folks use words that you have quoted above.

“Federal Reserve figures are already pointing to inflation.”

The 5: Hey, you don’t think Ben Bernanke can pull in the reigns when it’s time, as he promised Congress? C’mon, where is your faith in your appointed officials?

“Vince Cable,” writes another, “the U.K. Liberal Democrat Shadow Chancellor of the Exchequer, raised eyebrows yesterday. When talking about bankers’ bonuses, he said bankers ‘are lucky the British have no guillotines in stock.’

“Coincidence, or is The 5 the reason Mr. Cable is widely credited for being one of the few U.K. politicians who understands what’s going down with the debt crunch? Way to go!”

The 5: Heh.

“Any way to get a list,” asks another, “of all those Dems that went on this ‘retreat’ on the taxpayers’ dime?

“Nothing ever changes. These morons don’t care what’s happening in this country as long as they can do whatever they want and it doesn’t come out of their pockets.

“If a list were published, everyone who is incensed by this should send an e-mail, a letter, whatever, to these clowns and tell them how we feel. Maybe if they got a few million responses, they’d know what we think about them spending all these tax dollars. If they want to go on ‘retreats,’ let it come out of their own pockets. Unbelievable!”

The 5: Ummm… as far as we know, all House Democrats attended. Why not just inundate Nancy Pelosi’s inbox? Try it: AmericanVoices@mail.house.gov . (Geez, if that’s not an arrogant e-mail address.) Oy.

Source: Know Your History, Stimulus Bill Closer to Fruition, MBAs in Trouble, TARP 2.0, Art Still Hot and More!

Good day… And a Wonderful Wednesday to you! Well… I’m here! The Orlando Money Show… And guess what? Looks like I brought that artic cold front that had hit St. Louis, all the way down to Orlando! It’s cold here! UGH! Well, not “cold” like at home, but “cold” for here!

OK… Front and center this morning, we had a stock rally yesterday after the Pending Home Sales data printed a surprise number. And since stocks and currencies have been trading together the past few days, (we talked at length about this yesterday) that meant a currency rally as well! But! Neither stocks or currencies could break on through to the other side, break on through, yeah! So… That left them vulnerable to profit taking, and that’s exactly what we’ve seen with the currencies overnight. We’ll have to wait a couple of hours to see how stocks open up…

So… I guess a review of the Pending Home Sales data is in order, eh? U.S. December pending home sales rose 6.3%, which as far better than the forecast (0%)! Let’s look further into the data release to get an overall feeling of what’s up here…

According to the report, Pending Home Sales are now up 2.1% year-on-year, but down by a cumulative 31% since the peak in April 2005. Hmmm… Does this mean we’ve turned the corner with housing? Well… I’m from Missouri, and I’m going to have to be shown more than just this one report. Pending Home Sales has been barely keeping its head above water for 1 1/2 years now… So, I’ll hold out judgment until I see some follow up data… But… Maybe, just maybe, you never know… This could be good…

Another item weighing on the euro this morning is the printing of Eurozone Retail Sales for December, which fell more than forecast. Sales in the Eurozone fell -1.6% in December (-1.4% forecast), and shows that Consumers are saving… This fall in domestic demand, has helped with the inflation front in the Eurozone. But that’s about the only good thing going on in the Eurozone’s economy. Consumer Confidence, Investor Confidence, and high unemployment are making things difficult for the euro to rise.

But… It’s not that it can’t rise given this scenario. It happened back about 5 years ago, when Germany (the Eurozone’s largest economy and key to overall Eurozone health) was trying to kick start their economy, and things look very similar to this overall outlook for the economy… And… We had the euro moving higher VS the dollar.

It was simply a case of traders and market participants focusing on fundamentals, and seeing the debt creation in the U.S. the dollar was sold… And… As luck would have it, the euro was the offset to the dollar, and voila… Dollar sold, means euro rally!

I can’t stress enough about the need for the traders and market participants to once again focus on the fundamentals of debt creation, and money supply… Unfortunately, this isn’t the case and hasn’t been for some months now, as the Credit Crisis has everyone’s focus.

Well, there’s some news this morning that’s interesting… Looks like there’s a chance that G-7 nations might be laying the lumber to China… A former Japanese Finance Ministry official said that the “Group of Seven nations may reinstate their call for China to increase the flexibility of its currency.” G-7 meets next week in Rome.

So… Let’s take a look at this lineup… First, “the cheater” Geithner, called out China… The IMF’s Strauss-Kahn, said the renminbi remained “undervalued”, and now, supposedly G-7 will take their best shot at China and the renminbi…

I have to repeat something I’ve said for years now… They are wasting their time! China will do what it wants to do, in the best interest of their economy… Now, having said that, I too believe the renminbi is undervalued, but me saying that isn’t the same as U.S. and IMF officials! I’m just a little old Pfennig writer from South St. Louis!

One of my fave countries, for their strong fiscal position, Norway, will see their Central Bank (Norges Bank) cut interest rates this morning… I’m looking for a 50 BPS rate cut to an internal rate of 2.5%…

So… When I turned on my laptop this morning, the euro was trading at 1.2955… The Retail Sales data is really pushing the euro further down, as it is now trading 1.2860!

Someone took exception with my problems with the new and improved Stimulus Package, saying I wasn’t giving the new President a chance… Hmmm… I was simply talking about how much “pork” there was in what to me is simply another “Spending Package”… For instance… There are tax cuts in the package… That’s fine, probably worthy… But… Do tax cuts put cash in Joe six-pack’s pocket today? Do they create jobs? And when do these get to the tax payer? Probably not for a year! Again… Worthy… But, I’m not seeing what benefit it does for the economy NOW!

The “Risk Takers” saw a reason to crawl behind the rock even further this morning, as Kazakhstan devalued their currency by 18% overnight. Now, this is not a big deal in the overall scheme of currencies, as Kazakhstan’s currency wasn’t even liquid… But it did put the kyboshes on the other “Emerging Markets” currencies and any rally attempts they might have up their sleeves.

With no Risk Takers, the Japanese yen is back on the rally tracks… I saw a report yesterday, before I left, that one Japanese bank is calling for yen to reach a level of 80 VS the dollar, according to their charts. That’s pretty aggressive, as most, including me, believe that at 85, the Bank of Japan comes in with both barrels smoking, intervening, and selling yen to keep it from getting stronger… I picked 85, because that’s where the line in the sand was drawn back in the late 90’s when yen was this strong…

We get the ADP Jobs data today… Recall that last month, I held out hope that the ADP report would be a good indicator to the Jobs Jamboree, as ADP had changed their methodology to be closer to the Bureau of Labor Statistics (BLS), without the Birth / Death Model! But that didn’t hold true the first month… We’ll have to wait-n-see if this month’s data does a better job of indicating what to expect in the Jobs Jamboree…

Yesterday, I told you about the rate cut and stimulus announcement in Australia… And the Aussie dollar (A$) really took off with the news… But as I said yesterday, I doubted that the rally would last long… And so, it did not… The A$ got as high as .6450 before I left yesterday, and was on an upward move… But this morning, it’s back to below 64-cents…

And then finally… Here’s what the Wall Street Journal had to say about the Vehicle Sales data that printed yesterday… “Auto makers posted sharply lower U.S. sales for January, putting more pressure on struggling Detroit companies. GM’s light-vehicle sales dropped 49%, while Ford was down 40%. Toyota fared slightly better, with light-vehicle sales down 32%.”

That’s a ton of pressure for the automakers, I just don’t see how they’re going to get past this… GM, Chrysler, and Ford…

Gold is on the rise again… As it’s stay below $900 didn’t last long!

Currencies today 2/4/09: A$ .64, kiwi .5055, C$ .8075, euro 1.2865, sterling 1.4380, Swiss .8625, rand 10.10, krone 6.9770, SEK 8.3245, forint 234.45, zloty 3.3620, koruna 22.20, yen 89, sing 1.5090, HKD 7.7540, INR 48.82, China 6.8340, pesos 14.57, BRL 2.3150, dollar index 85.73, Oil $41.44, Silver $12.37, and Gold… $900

Source: Talking Stimulus Deux