Monday, December 27, 2010

notes & comments, week ending Dec 25th

as was apparent last week, there was no agreement on a budget for the federal government, so a "continuing resolution" to keep the show running was passed by the senate...what that does is fund all ongoing programs at the same level as they were funded for the fiscal year beginning Oct 09, until Mar 4 2011... that means no funds for any of the new programs passed this year, such as health care reform, or the Dodd-Frank financial regulation...the SEC has interviewed and needs to hire 800 new investigators to carry out their new duties under dodd-frank, but the money aint there, and one can surmise that other regulatory agencies are feeling a similar pinch...however, the senate was able to pass with "unanimous consent" the $725 billion bill to fund the pentagon for fiscal 2011, which included nearly $160 billion for war-funding...

there has been serious talk about the possibility that as part and parcel of the tax cuts for the rich package just passed, obama has agreed to include many of the budget cutting measures outlined by the simpson-bowles catfood commission in next years budget...robert kuttner, the editor of American Prospect & one of the co-founders of the Economic Policy Institute, wrote that cuts to social security would be included, and introduced in the state of the union address in january...according to economist brad delong, who has apparently talked to someone in the white house, the proposed social security package would be 2/3 cuts and 1/3 tax increases, and a Q & A on twitter with white house press secretary robert gibbs seemed to confirm that is the case...there is speculation that medicare is also on the table...

both consumers reports and huffington post had articles out quantifying how many taxpayers would actually do worse under the tax cut package passed last week; approximately 51 million workers make so little that they will actually see an increase in their taxes as of the result of the loss of the $400 making work pay tax credit, and another 20 million state and local workers, who dont pay into social security as they have separate pension plans, will lose that $400 credit and not gain anything in their pay from the payroll tax cut...this means approximately 1 in 3 workers, who are among the lowest paid, will see less take home pay resulting from these "tax cuts"...coincidentally, 1 in 3 working families were also found to be near poverty despite working full time by the working families project; this number included 22 million children...(a chart, with income by family size, is here)...a NYT story revealed that more than a quarter of the new private sector jobs added this year were temporary, compared to 10.9% and & 7.1% in the previous recessions...another study showed that 1.6 million americans at retirement age have put off retiring, and that 1.3 million were still working at 75...this was attributed to better health as we age, but i wonder if all those old walmart greeters are really working cause they want to, or if they see the connection between continuing to work and continuing to put food on the table...

you might have noted that i've been somewhat ambiguous as to how that 13 month extension to unemployment rations would play out in different situations and states; that's because, despite my searching, i couldnt lay my hands on an article that broke it down by all the categories...quite serendipitously, such an article was published this week by the WSJ; here it is: How Long Is Each State’s Unemployment Extension?; you'll see there’s a wide variance in how long an unemployed person can receive rations depending on state contributions & the unemployment rate in their state...

quite a bit of blog commentary followed the CBS 60 minutes segment on state budget problems that aired last weekend, (which i posted on MW666 as another crisis, coming soon to a state near you…); most of it was pushback against the segment, some was in defense of the muni-bond market (which had already been under pressure) after meredith whitney forecast 50 to 100 cities would go belly up next year, and some was just kneejerk reactions from the usual suspects who jump in to rant everytime any government spending is challenged; no one is served by that kind of uninformed commentary...i cant speak to problems facing the munibond market other than to observe the rising costs of borrowing, but i've been on the state/local budget case for almost a year (see here and here), and ive linked to at least two dozen articles each week on state or city budget problems, school district shortfalls, state difficulties with medicaid funding, or pension funding shortfalls on GGO almost every week this year...to be sure, the lion's share of those articles deal with the known problems of california, illinois, new jersey, new york or michigan cities, especially detroit, but i'd venture to say that ive seen at least 30 states mentioned in local papers as facing some kind of funding trouble over the past year...much is made of the california $28 billion deficit, but not too many realize that texas is also facing a $20 billion shortfall over the next two years...absent a return to exuberant growth, in the coming year states will have to find a way to make up for the expiring federal stimulus money which has sustained them for the duration of the recession, and cities and school districts will be facing declining revenue sharing and at least a few more years of declining property tax base, which typically lags the fall in housing prices by three years...at the very least, we can expect to see more "user fees" for city services going forward...

a top bush economic advisor, greg mankiw, took the census results to show that people are migrating to the states where the taxation is lowest, and sited a study on his blog backing this up; he doesnt allow comments on his blog, but if you check the census website http://2010.census.gov/2010census/data/index.php you will see that the state & regional growth mankiw ascribes to escaping from high taxes is no more than a continuation of the same migration trends that have been in effect since 1940 (click bottom bar on the interactive map)

it shouldnt surprise anyone who's read my takes on the effect that QE2 and the tax package have had on interest rates that mortgage applications were down 18.6% for the week, and re-financings were down nearly 25%...reported existing & new home sales for november were up slightly from october but were still dismal, even though the full brunt of the increase in borrowing costs have yet to hit...in light of the robo-signing scandal, foreclosures continue to decline, but since foreclosure sales are also declining, home inventories are still higher than last year at this time (housing is seasonal); declines are concentrated in states where specific action against robo-signing has been taken; in new york, for instance, where an attorney's signature on the paperwork is now required, foreclosures have declined from an 800 per week rate to 100 per week...

several cases having to do with foreclosures were also adjudicated this week, including a fraud ruling against wells fargo on MBS sales in minnesota, a ruling that a statistical sample could be used in a fraud suit by MBIA against BofA in new york, and a jersey supreme court's order that six major lenders show why their foreclosures in that state not be suspended...florida canceled all foreclosures for the rest of the year, and arizona and nevada joined in a suit against BofA alleging the bank misled homeowners regards loan modifications...

after a couple months of erosion in bond market prices, it finally started occurring to retail investors that they were rapidly losing money; as a result, mutual bond fund investors pulled the most money out of bond funds since the height of the crisis two years ago; the previously mentioned muni bond warnings didnt help...international bond markets were under pressure as well, as it became apparent that the european council meeting last week produced no concrete results; costs to insure spanish & portuguese debt were up 50 basis points, the irish ten year bond neared 9%, the highest since the "bailout", and greek ten year costs went over 12% for the first time since the may crisis, although the PIIGS borrowing costs fell back after the chinese vice-premier implied china would step in to assure european stability...russia pulled a sale of six year bonds for a second time this month after its rates rose to 7.78%; mention of a french downgrade raised the cost to insure french debt to more than that of the czech republic & twice that of germany...apparently the irish have learned nothing after 3 bank bailouts drove them to insolvency, as this week they nationalized a fourth, Allied Irish...& a lending freeze in britain is expected to lower mortgage debt issuance from a £110bn-a-year peak down to just £6bn next year, according to the Council of Mortgage Lenders ....

oil prices rose above $90 dollars a barrel this week for the first time since 2008, and continued to rise in london after domestic markets were closed for the holiday, briefly reaching $94.74 for brent crude before falling back below $94; OPEC ministers meeting in Cairo judged that prices had been temporarily inflated by cold weather in Europe, and saw no need to increase output; a couple moderate OPEC members switched previous positions, feeling that $100 oil was possible without adversely impacting consuming economies...other commodities also rallied, with coffee, soybeans, wheat and corn all near highs not seen in 2 to 20 years, and raw sugar hitting a 30 year high...several large food processors, including kraft, general mills, kelloggs, unilever, and nestle all either announced price increases, or signaled that increases are coming to some of their product lines; mcdonalds also indicated price increases were forthcoming....we are advised not to worry, though, because the core inflation rate omits food & energy because those prices are too volatile...we can be concerned, though, that cotton futures are at an all time high, up limit three days in a row this week, with the likelihood that another $1 increase will be seen in a pair of jeans; dont plan to switch to wool clothes, either, as wool prices are up about 50% over last year...rubber futures in tokyo hit a series of all time highs on bad weather in producing countries, & industrial metals were also at or near new highs; last week i mentioned that one trader controlled 90% of the copper in the warehouses of the london exchange; this week that trader was identified by zero hedge & barrons to be JP Morgan, as copper hit a new high when a major chilean mine declared it could not meet its contracts...according to the WSJ & barrons, one trader also holds as much as 90% of the LME aluminum, and over 50% of the tin, nickel & zinc as well...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

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