The Stimulus Backfire

Posted by Eric LeRiche | August 19, 2010 .

stimulus backfire

The

Stimulus Backfire !

* The Fed can print it, but can’t manage it: States hoard cash intended to save teacher careers

* Sign from the times: Top-performing worldwide indexes belong to socialist nations

* Rich Lee on the sudden resurgence from the eurozone crisis

* Plus, Alan Knuckman about the current stock selloff… beginning of the downtrend or an isolated event?

You need to be particularly heartless to lay off a teacher, says the political will off the moment. That was the sentiment behind the $26 billion state stimulus bill passed last week, $10 billion of which was supposed to conserve 160,000 teaching careers at danger of elimination due to spending budget shortfalls.

Do it for the children, correct? Perhaps not…

“We’re a little wary about hiring people if we only have money for any yr,” Clark County Las Vegas CFO Jeff Weiler told The New York Occasions this morning. Heh, what do you imply, Jeff? It goes against your fiduciary instincts to invest “free” cash these days knowing you will require much more of it tomorrow?

“You’ve obtained this herculean job to deal with next year’s deficit,” said Lydia L. Ramos from the Los Angeles Unified School District, which may just take its “stimulus” cash right towards the bank in hopes of getting an early start about the college district’s $280 million 2011 spending budget gap. “So if there’s a way that you could lessen the blow for subsequent year, we feel like it would be accountable to try to do that.”

The Times is covering this story as you’d expect, tugging on heartstrings with first-hand profiles of teachers on the brink and a common air of resentment… “Some of the nation’s greatest college districts are balking at using their share from the cash to employ instructors correct away,” they report.

stimulus backfireBut haven’t we been through this already? Recall 2008, when a $160 billion stimulus gave each and every middle-class American a verify for $300… and what did they do with it? Several months later, banks get $700 billion… and didn’t lend a penny of it. GM got $57 billion, then went bankrupt. AIG… we don’t even keep track anymore.

We really feel for instructors and their students as a lot as the next guy. But can they be “saved” with more easy money?

The stimulus debate du jour is how the federal government will conserve Fannie Mae and Freddie Mac. Much more federal government assistance is essential, said Treasury Secretary Timothy Geithner, the maestro of yesterday’s White Home housing summit, “to make certain that Americans can borrow at sensible interest rates to buy a house even inside a downturn.” It’s, after all, your God-given right.

To be clear, the Treasury “will make sure the GSEs possess the resources to meet their financial commitments,” Geithner added. Whatever the fate of Fannie and Freddie, it will be financed with tax dollars and controlled by federal government. Both businesses, in spite of being in the really heart from the monetary crisis, had been left out from the current Monetary Reform Bill.

stimulus backfire“Government is component of our future,” Expenses Gross responded. “We need a federal government balance sheet. To suggest that the private marketplace come back in is merely impractical. It will not operate.”

Scary stuff, eh?

As menacing as this all ought to sound, here’s an interesting twist: A few of the best-performing stock markets on the planet this yr are in socialist-leaning nations. Denmark’s OMX 20 (like our Dow) is up 22% so far this year, the best-performing index in the created globe. Extremely, Hugo Chavez’s IBVC index of Venezuelan’s stocks is close behind.

In comparison towards the S&P 500, it’s no contest… 2010 is the year of the socialist investor.

There’s much more going on here than just form of government. Denmark, for example, is in the catbird seat of the euro crisis — part of the EU but not a euro nation, very low debt along with a conservative banking system.

But still, it’s worth noting… inside a world that’s terrified of excess federal government involvement, two countries with massive state presences are giving investors top-rate returns.

For investment advice on this matter, you should listen to Jim Nelson’s latest online presentation. Our fixed-income man has found a nifty way to tap into this trend.

“Market sentiment has turned about the rest of Europe,” The Richebacher Society’s Rich Lee wrote to subscribers late final week. “Worries are growing that current strategies and aid packages will not be enough to curtail further regional economic losses.

“Problems that have always been there are getting noticed once again. This time they are centered on Ireland and Spain. Of course, these two countries have been in the mix all along, but their negative contributions had been mainly overshadowed by Greece’s problems. Now the two are casting shadows of their own. Fears are mounting over the two rising bailout aid and sovereign debt costs. This has sparked fear that further external obstacles lie ahead in bringing the EU monetary crisis to a halt — slowing down the possibility of the quick recovery.

“It’s not like Spain and Ireland aren’t trying. Ireland’s federal government has cut spending, raised taxes and made drastic public worker wage cuts, yet budget deficit problems remain relatively the same. The country’s deficit is still approximately 14% of gross domestic product. The only real economic change within the final couple of months has been unwelcomed — unemployment has risen to about 14%. But what is most disconcerting is the fact the current austerity plan is set to cost more than originally planned.

“Anglo Irish Bank, one of Ireland’s major banks that almost failed, is in need of an additional 10 billion euros. That’s on top of the currently pledged aid of 14.3 billion euros issued by the European Central Bank to maintain the bank afloat. The number is staggering. It’s even worse considering the fact that the full bailout of 24.3 billion euros would constitute almost 12% of Ireland’s overall gross domestic product.

stimulus backfire“The sky-high expenses for recapitalization has foreign investors worried and clamoring for higher rates of return when it comes to bonds. Although Spain conducted relatively successful bond issuances in the last couple of months, the interbank market still remains relatively closed towards the country — as well as Ireland. This means that the two countries are unable to obtain favorable market-level lending rates.”

Back in the States, traders are a tad more optimistic. BHP Billiton’s attempted takeover of Potash Corp. helped bump the S&P 500 up over 1% yesterday. You are able to spin this story into common market optimism in much more ways than one…

* The mere fact that BHP made a bid shows a huge, multinational company willing to make a big bet on at least one industry.

* BHP’s offer was all cash. In other words, it might think its own stock is too cheap to be offered as currency.

* Potash rejected, even though the offer priced the company 16% higher than marketplace value. They clearly think they are not only worth more now, but also will be worth much more down the road.

“As it stands, “ says our resource trader Alan Knuckman, “the bullish trend for stocks is still intact. Final week’s selloff was not a change in trend but rather a standard pullback to assistance levels. The 1,070/1,065 level for the S&P 500 held strong, and most importantly for a bullish strategic mindset, new lows had been not made after the gap Thursday. This can be interpreted as a positive. When the marketplace was on its heels, additional selling did not emerge and it was able to stabilize.

“Another positive indicator: The VIX, which measures investor fear, was also unable to reach above 28. It bounced about the selloff but did not rally with subdued concerns of more selling. Combined with the S&P assistance holding at that 50% retracement from the 1,130 high, this tells me that last week may have been an isolated event.

“All signs are positive if the stock market can get some catalyst to begin the climb again with the majority of earnings behind us. Remember, second quarter numbers are what drove the market on its final run.”

Perhaps that catalyst will be a BHP/POT offer. Even though Potash rejected the offer, BHP announced today it would continue making hostile bids in hopes of the shareholder mutiny.

stimulus backfire

Only one shred of data today, and it ain’t pretty: Bankruptcies within the U.S. rose 9% last quarter towards the highest level since 2005. According to the Administrative Office of the U.S. Courts, 422,061 parties filed for bankruptcy between April and June. That’s up 9% from the previous quarter and 11% yr over yr.

And that “most since 2005” statistic really doesn’t do the situation justice. Remember that’s the yr Congress overhauled American bankruptcy laws, making it notably harder for businesses and individuals to file.

Nevada has the worst rate (surprise, surprise).<br> Much more than 1 in 100 people living there have filed within the final year.

Following rallying through most of this month, gold is sticking to a tight range. The spot price has been bouncing between $1,215-$1,230 all week.

The dollar index, however, has been in steady decline this week as stocks move higher. Opening at a high of 83 Monday, the index dipped below 82 this morning.

“Getting our history a bit more accurate,” a reader writes, refining yesterday’s issue. “No, it was primarily Lenin and Trotsky who engineered the overthrow from the Tsar in 1917. Stalin did not rise significantly within the power struggle until Lenin’s illness began in 1922. Nor was the assassination of intellectuals the initial thing done [what with Lenin and Trotsky among the most prominent examples[[]|]|[]|]. It took the consolidation under Stalin to get this going. What seemed like common sense once the Bolsheviks were in power [with new Hope[[]|]|[]|] was to argue bitterly among themselves, breaking into numerous factions, squandering their gains, until totalitarian strong-man Stalin took over. Now does that seem to be obtaining a bit closer to home?”

stimulus backfire

“Do you think that possibly,” another reader speculates, “the whole reason for amnesty for 12 million illegals (20 million is more likely) may have some connection to the Social Security shortfall? Hmmm, 12-20 million (mostly young) illegals now with potential citizenship paying into Social Security, which I presume will be part of the offer. My self-employed gardener might not even apply under those terms when he sees a 15% self-employed tax facing him in addition to IRS tax filings. Just a thought.”

“I have been paying Social Security taxes since I graduated from high college in 1971,” our last reader writes. “Whether that cash went to pay my parents’ benefits or into the common revenue fund since the surplus was used to purchase Treasuries, makes no difference. That money has been spent. If I and everyone else in my generation [I'm almost 57[[]|]|[]|] are to collect any SS benefits, that cash will come out from the paychecks of our children, and has anyone else noticed that good careers for our young individuals are not real simple to find these days? I’m still hoping for them to become fully self-supporting. To ask them to assistance me as well seems a bit much. I have been promised SS benefits, along with all other wage-earning Americans, but I’m making plans to get along without them. I don’t like the idea, but yammering about how “they better not fail to pay up” is pointless. Whether people march on Washington, or begin a revolution, or what ever, that’s not going to bring back the cash they really feel they are owed. It does, however, waste time and energy that could be spent preparing to get along without it.”

The 5: There are exceptions to every rule, but we’re hard pressed to think of many situations where having a backup plan is a bad idea. Saving for retirement certainly doesn’t seem like one of ‘em. Good for you, and good luck surviving the stimulus backfire.

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