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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Funny Money in the Social Security Trust Fund

On August 11, 2010, in Debt, by Tim

As if there weren’t enough other pressing issues to occupy the country’s collective mind, Allan Sloan of Fortune Magazine reminds us how “useless” the Social Security Trust Fund is in this story from the other day that included the rather disturbing image shown below.

There’s real money and then there’s funny money — stuff that looks real, but isn’t.

Today, let’s talk about one of the world’s biggest piles of funny money — the $2.54 trillion Social Security trust fund. The trust fund matters now, because Social Security revealed last week that it plans to tap it for $41 billion this year, and will begin tapping it on a regular basis in less than five years.

This year’s cash deficit, the first since the early 1980s and the biggest ever, means the Treasury will have to borrow money to redeem some of the trust fund’s Treasury securities. Even at a time when Uncle Sam is borrowing $1.5 trillion a year to keep his checks from bouncing, $41 billion is real money.

Sloan goes on to note how the money that was supposed to go into the trust fund was spent and how, when Social Security runs a deficit (like this year) it results in new government borrowing regardless of how big the trust fund is because there’s nothing there.

Yes, we’ve got much bigger things to worry about right now…

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Shiller Now Sees Double Double-Dip

On August 11, 2010, in Economy, by Tim

For months now, Robert Shiller, Yale University Economics Professor and co-creator of the Case-Shiller Home Price Index, has been calling for a double-dip for home prices. Now he’s doubled up on that forecast, citing 50-50 or better odds of  a double-dip recession for the U.S. economy as detailed in this report at Marketwatch.

The U.S. economy has a “significant likelihood” of entering a double-dip recession if the government doesn’t step in to help the unemployed, economist Robert Shiller told MarketWatch News Break on Wednesday.

The Yale University professor and author of the best-selling book “Irrational Exuberance” pinned the probability of a double-dip recession at more than a 50-50.

Shiller pointed to the nation’s stubbornly-high unemployment as a root cause of lingering economic woes. And with the Federal Reserve running out of bullets to fight a second recession, he urged Congress to join the battle and focus on putting people back to work.

“Beyond the Fed, I’d like to see the government take a renewed stimulus package focused on creating jobs [and] on activities that involve a lot of people,” Shiller said.
…
“The Fed’s latest statement shows they’re on this, but I’m not so sure Congress is on this,” said Shiller. “There is significant likelihood of [a second recession] if the government doesn’t do something. I’m worried [unemployment] is not going to self-correct.”

It will certainly be an interesting period ahead in the run-up to the November elections, now less than three months away. Recall that the entire nation appeared to be in limbo in late-2008 while markets tanked and economic indicators took a decided turn for the worse before and after the huddled masses went to the polls.

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Stocks, Bonds, Gold, Gold Stocks

On August 11, 2010, in Bonds, Commodities, Stocks, by Tim

Anyone wanting to see a demonstration of how a “bond-bullion barbell” portfolio moves on a day when nearly everything seems to be going down need look no further than a few representative indexes and ETFs as shown below, in which Treasuries and gold bullion are the only green in a sea of red.

Note that gold stocks are clearly siding with broad equity markets at the moment and, as is usually the case at a time like this, silver traders have parted company with those in the gold pits, the dearth of buyers sending the silver price sharply lower. By the way, don’t ask me to explain how PHYS moves – it seems to march to a completely different drummer.

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Fed Double-Dissenter Fears New Bubbles

On August 11, 2010, in Bonds, Economy, by Tim

Lost in all the hubbub about yesterday’s downgrading of the economy by the Federal Reserve and the announcement of what some call the beginning of QE II (i.e., quantitative easing, round two), in which the central bank will take $200+ billion in MBS paydowns over the next year or so and use that money to buy long-dated Treasuries, was news that the Fed now has a double-dissenter in Kansas City Federal Reserve President Thomas Hoenig.

In yesterday’s policy statement, Hoenig expressed his displeasure with both the Fed’s low rate guarantee and with the new plan to buy more U.S. debt with MBS proceeds:

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.

While some have applauded the stance that Hoenig has taken recently, the inflation  hawks are clearly in the minority at the Fed and, in the end, their efforts are likely to amount to only token resistance to gunning the printing presses as the economy weakens further, particularly since uber-dove Janet Yellen will soon hold the second in command spot at the Fed along with two brand new inflation doves.

(more…)

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Saving Teachers’ Jobs

On August 11, 2010, in Debt, Economy, by Tim

Both of my parents spent their entire working careers in education, so there is more than a little sympathy around here for the plight of teachers during these difficult times, but the states are clearly not on board with anything remotely resembling a “new normal” for the economy that includes reduced tax revenues. As detailed in this McClatchy story, the $26 billion “jobs bill” from Washington will help the U.S. education system “extend and pretend”.

This was the best graphic that could be located showing where those 161,000 saved teachers’ jobs are located in the U.S. Unfortunately, the way it was prepared, it simply reflects the relative size of state populations rather than what percentage of teacher positions are affected, which might be a more useful breakdown.

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Wednesday Morning Links

On August 11, 2010, in Uncategorized, by Tim

MUST READS
Bank of England cuts growth forecast – AP
Chinese industrial growth slows again – BBC
Dollar hits 15-year low vs yen after Fed move – Reuters
Fed can’t do much more to get credit flowing – MarketWatch
Fed Move on Debt Signals Concern About Economy – NY Times
House sends $26 billion in aid to states for teachers, Medicaid – McClatchy
U.S. Is Bankrupt and We Don’t Even Know: Laurence Kotlikoff – Bloomberg
US Federal Reserve starts ‘QE-lite’ to placate markets – Telegraph
Record Low Mortgage Rates Do Little for US Demand – CNBC
For G.M., a Subprime Solution – Sorkin, NY Times

MARKETS/INVESTING
Oil drops below $80 as IEA warns of risks – Economic Times
Gold falls below $1,200 an ounce as dollar strengthens – Reuters
Stocks Fall, Treasuries Rally as Fed Signals Slowdown – Bloomberg
Morgan Stanley: Massive Short Position In The Dollar – Business Insider
Goldman: Twofold Impact on Markets From The Fed’s Pragmatism – Zero Hedge
10-Year Treasury Yields Slide on Fed’s Decision to Buy Debt – NY Times
Two-year yields hit record low on Fed action – Reuters
Raksha Bandhan to unleash gold boom – Commodity Online

ECONOMY/WORLD/HOUSING/BANKING
Fed Can’t Do Much More to Boost Economy: El-Erian – CNBC
Worker Productivity in U.S. Unexpectedly Fell in 2nd Quarter – Bloomberg
Economists Cut U.S. Growth Forecasts as Companies Limit Hiring – Bloomberg
Chinese Economy Turning ‘From Boom To Bust’ And It Could Hurt The U.S. – HuffPost
Feds rethink policies that encourage home ownership – USA Today
“Slam Dunk Stimulus” – The Natural History of a Rumor – Housing Wire
Unemployment drives more home sellers to cut price – Reuters
Top Fed Official, Warns Fed Risks Repeating Past Mistakes – HuffPost
Fed Shuns Passive Tightening, No QE2 in Sight – Baum, Bloomberg
Fed to Market: Long-Term Rates Can Go Even Lower – CNBC

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