Thursday, January 28, 2010

Road to Morocco

If trouble comes looking for me I'll be awfully hard to find.

Monday, January 18, 2010

Illinois is flat broke busted

From the Crain's Chicago Business article:

"The crisis will come when you see state institutions shutting down because they can't pay their employees," says David Merriman, head of the economics department at the University of Illinois at Chicago.
A record $5.1 billion in state bills was past due at year end, almost doubling to 92 days from 48 days a year earlier the average amount of time it takes the state to pay vendors such as doctors, hospitals, non-profit service providers and other contractors.
State tax receipts from July through December last year were running more than $1 billion behind 2008, including a $460-million plunge in sales taxes and a $349-million drop in personal income taxes.
While California has an even bigger budget hole to fill, Illinois ranks dead last among the states in terms of negative net worth compared with total expenditures.
The sharp rise in pension payments is the biggest factor pushing Illinois toward what a legislative task force last November (2009) called a 'tipping point' beyond which it will be impossible to reverse the fiscal slide into bankruptcy.

And if you're wondering, while there is no legal provision for states to file bankruptcy, they can and have defaulted on debts. Arkansas did during the Great Depression. In the 1840s nine states defaulted on debts. Four completely or in part repudiated their debts. Two, Maryland and Pennsylvania, were able to pay back debt & interest after enacting property taxes. (New taxes - sounds familiar.) The other states already had property taxes which had been raised "(also sounds familiar) and thus resorted to walking away.

Sunday, January 10, 2010

Pending changes to money markets, 401k, and IRAs

With an eye to the lengthy post, I'm presenting the summary first: the Federal Government, in a joint effort by the Treasury Dept & Labor Dept, is proposing to permit freezing redemptions of money markets, 401ks, and IRA accounts - the latter two by converting them to annuities.

What this means to you:
A) no option to redeem your IRA/401k account (I believe the current penalty is 10% plus income tax paid)
B) forced conversion to Treasury bonds - which are at historically low yields (the 30yr is 4.375%)
C) the US Treasury issued $1.2 trillion in bonds in 2009 - of which the Chinese only bought $200 billion and other foreign buying was less than that. This means nobody is buying our crap paper but we have to issue even more than $1.2 trillion in 2010 - somebody's got to buy that stuff. Oh, and in December 2009 Moody's put the US on a watch list for possible downgrades. When an issuer gets downgraded, they have to raise rates to attract buyers - unless they have a captive audience.

Bloomberg: Retiree Annuities May Be Promoted by Obama Aides
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams[.]

[Ed. note: It's also a very handy way to drum up demand for the flagging US Treasury market. And the ensuing equity market crash (which will happen when all those 401k & IRA income streams get diverted from the equity market to the bond market) will drive even more investors to Treasuries.]

Zero Hedge - This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied

Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund[.]

And Zero Hedge's conclusion:

What we will know, is that now i) the government is all too aware that the market has become one huge ponzi, and that all investment vehicles, even the safest ones, are subject to bank runs, and ii) that said bank runs, will occur. It is only a matter of time. And just as the president told everyone directly to buy the market on March 3, so the SEC, the Group of 30, and Barney Frank are telling us all, much less directly, to get the hell out of Dodge.

Jesse's Cafe Americain: Obama Adminstration Wants To Annuitize 401k's and IRA's - Mandatory "R Bonds"
My model for thinking about this annuitization is that the government wishes to appropriate your savings for a 2.0% return, ex fees and mispriced risk and inflation, as a source of funding for the bailouts of an oversized and insolvent FIRE* sector (like AIG) and the imploding pretensions of a global financial elite.

Good luck.

*FIRE: Finance, Insurance, Real Estate

Wednesday, January 06, 2010

More Good News

You'll see news outlets furiously try to persuade us that consumer spending was up for Xmas '09 over Xmas '08, but you can't argue with sales tax receipts.

And they were down 7.7% Dec '09 from Dec '08.

"Month to date tax receipts are now in for the entire month of December. They’re down 7.7% from December 2008, which is exactly the same rate of decline as November’s. We know that the TBAC and Treasury officials were not anticipating that in their debt sales forecast for the first quarter. They had assumed that a recovery was taking root and would continue to do so. That spells trouble for both bonds and stocks."

Contrast that with the Pollyanna NY Times:

"Despite a weak start to the holiday shopping season and snowstorms on historically big spending days, the nation’s retailers managed to have a better Christmas than in 2008, according to the latest data.

Mr. McNamara*, however, estimated that the retailing industry turned in a 1.7 percent sales increase in November and December compared with the period a year earlier."

Economists who actually saw the real estate bubble and coming crash have worse news for us:

"The recession is not over," said Michael Intriligator, professor of economics at the University of California, Los Angeles. He predicted economic output would not return to pre-crisis levels until 2013, while the job market would not fully recover until 2016.

[Joseph] Stiglitz^ said, what has so far emerged in terms of regulatory reform proposals is far too meek to have any effects. "The regulatory reforms on the table are totally inadequate," he said.

*Vice president for research and analysis at SpendingPulse, an information service of MasterCard Advisors.
^Joe Stiglitz was an economic advisor to Pres. Obama during his presidential campaign.