Financial Review

Death by a Thousand Cuts

Sinclair Noe — July 18, 2017

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DOW – 54 = 21,574
SPX + 1 = 2460 (record)
NAS + 29 = 6344 (record)
RUT – 3 = 1427
10 Y – .05 = 2.26%
OIL + .30 = 46.32
GOLD + 8.30 = 1243.00
BITCOIN + 0.45% = 2338.41 USD
ETHEREUM – 9.33% = 225.56

The S&P 500 and the Nasdaq closed at records.

Last night, two Republican senators, Mike Lee of Utah and Jerry Moran of Kansas, issued statements declaring that they would not vote for the revamped BCRA health care bill. The two senators timed the release of their statements and made clear that modest tinkering around the edges of the legislation drafted by Senate majority leader Mitch McConnell would not be enough to meet their demands.

They joined a pair of GOP colleagues in calling for a complete redrawing of the legislation that would take many months, short-circuiting McConnell’s wish to end the debate this month. So, the plan to repeal and replace Obamacare is dead, at least for the foreseeable future. Trump tweeted: “Republicans should just REPEAL failing ObamaCare now & work on a new Healthcare Plan that will start from a clean slate.”

And so, this morning, McConnell started to push for a repeal only bill; an idea that would immediately push insurers out of the marketplace. The repeal plan never got off the ground. Three senators said they would not support a motion to proceed on the efforts to repeal without a ready-made replacement. So, repeal and replace is dead, and repeal-only is dead.

What next? Insurance companies are asking the same question and they are facing an uncertain future. Obamacare’s insurance markets still have problems, with insurers pulling out of some areas and raising premiums in others. Trump has many powers at his command to undermine them further, and has threatened to do so.

And there’s no map and no timeline by which lawmakers might find a resolution. Individual markets continue to spiral downward partly because of the inherent issues in Obamacare’s market architecture and partly because of Republican efforts to make things even worse. In some states, Obamacare is doing relatively well, but in others it’s struggling and even starting to fail.

Many insurers have stopped bleeding money from sicker-than-expected enrollees, but they remain wary about continuing to play on the exchanges. The number of insurers filing initial applications on the federal marketplace dropped 38% for 2018. That figure could grow if more insurers get spooked by Washington’s indecisiveness. Insurers aren’t locked into participating in 2018 until late September. Open enrollment begins November 1.

The next deadline comes this week, when the Trump administration must decide whether to keep paying what are known as cost-sharing subsidies. The subsidies help low-income people afford co-payments and cost-sharing on medical services, and their legitimacy is the subject of a legal dispute. The Trump administration has threatened to stop making them.

Obamacare might not implode but it could still die a death of a thousand cuts.

Meanwhile, Congress still need to find agreement on next year’s budget, an increase to the government debt ceiling, as well as promised tax reform. A hard fight over the budget resolution process would portend hurdles to moving forward on reconciliation and tax legislation.

The health-care bill is only one piece of the tax puzzle. Congressional Republicans want to use reconciliation rules to pass a tax bill since it appears unlikely that there will be enough Democratic votes in the Senate to reach the 60-vote hurdle. However, using reconciliation is predicated on Congress passing a budget resolution — no budget resolution means no reconciliation, which means no tax bill.

The National Association of Realtors released a report that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009. The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.

Canadian real estate investors nearly doubled their purchases of American homes over the period because of the relative affordability of properties in the States. Many Canadians have been squeezed out of property markets in cities like Toronto and Vancouver that have experienced rapid price gains. Canadians were the second biggest foreign purchasers of homes after the Chinese.

Buyers from China shelled out nearly $32 billion over the period, while Canadians spent $19 billion. Nearly half of all foreign sales were in three states: Florida, California and Texas. Canadians gravitated to Florida. Chinese buyers focused on California. And Texas was the preferred state for Mexican buyers. New Jersey and Arizona were the fourth and fifth most popular states.

The monthly confidence gauge from the National Association of Home Builders fell two points to a reading of 64. The index now stands at the lowest level since before the election. Any reading over 50 signals improvement. The traffic component of the index broke above the neutral 50 line after the election for the first time since the housing bubble, but has since moderated.

Home-builders are increasingly concerned over rising material prices, particularly lumber. The price of lumber is soaring. Lumber in June cost 17% more than it did just a year earlier, and it’s even more expensive than during the building boom last decade.

Strong demand is one reason for rising lumber prices. Housing starts are up 3% this year compared with the same period last year, according to the Census Bureau. And building permits are up twice as much. The Trump administration has also proposed a tariff of up to 24% on Canadian lumber.

The administration says the Canadian government creates an unfair advantage by subsidizing the lumber industry. A tariff could drive up the price of an average home by $3,000. The tariff has not been imposed, but the threat alone has driven up the price of lumber.

Also, more than 375 fires have swept across British Columbia, burning forests and forcing sawmills to shut down or evacuate. While the impact on supplies is minimal so far, there are concerns that the blazes will continue to spread amid hot, dry conditions.

An even bigger problem is a growing labor shortage. Government statistics show fewer unemployed construction workers were available to be hired last year than at the height of the housing boom. Many workers left the field after the housing bust or just retired.

Americans say they love U.S.-made goods. They are less enthusiastic, however, about paying a premium for them. A Reuters/Ipsos poll finds 70 percent of Americans think it is “very important” or “somewhat important” to buy U.S.-made products. Despite that sentiment, 37 percent said they would refuse to pay more for U.S.-made goods versus imports. Twenty six percent said they would only pay up to 5 percent more to buy American, and 21 percent capped the premium at 10 percent.

California legislators have voted to extend the cap-and-trade emissions system a further 10 years until 2030. The emissions-lowering system, the second-largest of its kind in the world, aims to help the state reach its target of cutting planet-warming gases 40% by 2030, compared to 1990 levels.

The cap-and-trade program, established in 2006 under then governor Arnold Schwarzenegger, sets a limit on emissions and requires polluters to either reduce their output or purchase permits from those who have. As the limit steadily becomes stricter, it nudges businesses to take the more financially attractive option of cutting their pollution.

California’s pioneering attitude to climate change action was underlined by separate court action launched on Monday, aimed at holding fossil fuel companies accountable for global warming. Marin and San Mateo counties, along with the City of Imperial Beach, filed a lawsuit in the California superior court to complain that 37 oil, gas and coal companies knew burning their products would increase carbon pollution and cause sea levels rise.

The municipalities are claiming damages from the fossil fuel firms, echoing a strategy used against the tobacco industry in the 1990s that resulted in multi-billion dollar payouts. The companies targeted in the lawsuit include Shell, Exxon Mobile, Chevron and BP. According to the municipalities, these businesses have caused around 20% of all industrial carbon dioxide and methane pollution since the 1960s.

Bank of America and Goldman Sachs posted better than expected earnings today, one had record income from lending while the other had better-than-expected trading. The surprise is which was which. Goldman reported revenue from institutional clients was down 17% compared with a year ago, led by a whopping 40% decline in trading in fixed income, currencies, and commodities.

Investment banking fees were also down, by a more modest 3%. In a strange twist of events, Bank of America reaped more revenue from trading — $3.4 billion—than Goldman Sachs, which earned $3.1 billion. The banks haven’t totally swapped identities. Goldman’s interest income won’t be confused with Bank of America’s $11 billion anytime soon. And trading accounts for 16 percent of revenue at BofA, compared with 40 percent at Goldman.

Bank of America dropped 0.5% today, while Goldman was down 2.3%.

While Goldman was a drag on the Dow Industrials, Netflix helped to lift the Nasdaq Composite. After the close on Monday, Netflix reported a surprise jump in international subscriber numbers. Today the shares jumped 13% to a record high of $183.60, which puts the company’s price to earnings ratio at 197, which some people might consider a bit high, while other people might get a nosebleed at those heights.

Financial Review

Knee Jerk Trading

Sinclair Noe — September 28, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 110 = 18,339
SPX + 11 = 2171
NAS + 12 = 5318
10 Y + .01 = 1.57%
OIL + 2.34 = 47.01
GOLD – 5.60 = 1322.40

Today started as a regular day: stocks were trading just a bit lower but no big moves. Fed chair Yellen was speaking on Capitol Hill, an economic report on durable goods – kind of a quiet day really. Then came word from Algiers; remember the big oil summit? Reuters reported that two sources in the Organization of the Petroleum Exporting Countries said the group would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd.

How much each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia. The price of oil popped by about 5%. That was the knee-jerk response, but let’s dig in. First, we know that OPEC members are notorious for violating production limits.

Next, there is no agreement with non-OPEC oil producers (specifically Russia and the US). And there is a seasonal tendency to cut back production in the winter months anyway. So OPEC will produce less, as is their seasonal tendency. Oil demand will drop in the winter and there will still be an oil glut at the end of the year. Still, it was trade first, ask questions later.

Heading into the Energy Forum in Algiers, there was a real concern that prices could dip to sub $20 a barrel levels if no decision was made, and that would leave many producers pumping at below market rate, so with every barrel they would be making a loss (if they aren’t already). The Saudis are running a budget deficit. Venezuela, Nigeria, and Algeria are in desperate need of oil revenues. So, OPEC announced a production limit, which is really no limit at all.

Congress has overwhelmingly rejected President Obama’s veto of legislation allowing relatives of the victims of the Sept. 11 attacks to sue Saudi Arabia, the first veto override of his presidency. The House of Representatives voted 348-76 against the veto, just hours after the Senate rejected it 97-1, meaning the “Justice Against Sponsors of Terrorism Act” will become law.

Obama had argued that the bill could expose US companies, troops and officials to lawsuits, and alienate important allies at a time of global unrest. Major US corporations including General Electric and Dow Chemical also opposed it, as did the European Union and other US allies. Let the lawsuits begin.

The Senate approved a stop-gap funding bill to avert a looming federal government shutdown. Republicans and Democrats agreed to help Flint, Michigan, resolve its drinking water crisis. The bill also includes $1.1 billion to combat the Zika virus and $500 million for flood relief in Louisiana and other states. Lawmakers voted 72-26 to adopt the short-term continuing resolution, or CR, that would keep federal agencies operating from Saturday to Dec. 9.

The vote sends the measure on to the House of Representatives, which also was expected to approve it. Without an extension, many government agencies would run out of money when the federal fiscal year ends at midnight on Friday.

Fed Chair Janet Yellen delivered semi-annual testimony this morning before the House Financial Services Committee. Since the Fed left interest rates steady at its meeting last week, expectations for the next hike have shifted toward the central bank’s December meeting. At the meeting, Yellen hinted that a hike would likely follow before the end of the year, saying that the case for an increase has strengthened but the committee wanted to wait for more economic evidence before raising rates.

Today, Yellen said the financial condition of the top US banks has “strengthened considerably” since the financial crisis as she outlined steps the central bank is considering to make bigger banks have larger cushions and have smaller banks face less stringent requirements. Lawmakers pressed Yellen over the Wells Fargo mess and Yellen said the Fed has started a review of the “disturbing compliance failures.

Wells Fargo Chairman and Chief Executive John Stumpf will forfeit $41 million in unvested equity awards. The bank’s board moved to rescind pay for Stumpf and former community- banking head Carrie Tolstedt ahead of a hearing of the House Financial Services Committee Thursday. Wells Fargo’s board said Tolstedt, who oversaw retail banking during bad behavior there, will forfeit unvested equity awards valued at $19 million.

Clawbacks, or their absence, became a big focus of a Senate Banking Committee hearing last week into the bank’s sales tactics, which earlier resulted in a $185 million fine and regulatory action. During his appearance before that panel, Stumpf and the bank were roundly criticized for firing 5,300 employees over five years, yet taking no action against top executives.

No violins for Stumpf and Tolstedt; Steumpf already holds nearly 5.5 million shares of Wells Fargo worth north of $240 million. Tolstedt is retiring with a $125 million golden parachute, more or less. You have to admit, that’s a hefty pay package for destroying the reputation of a 164-year-old bank.

The Labor Department had just announced it has opened a “top-to-bottom review” of how Wells treated workers tasked to meet unrealistic sales targets. That includes firing workers who reported misdeeds. It also includes failing to pay overtime to workers who toiled extra hours to reach impossible sales quotas.  The agency has set up a special website for current and former Wells Fargo employees to instruct them how to file complaints about labor law violations.

The state of California will no longer use Wells Fargo as an underwriter for the issuance of state municipal bonds, and the bank will have no involvement in the state’s banking or investment activities for the next 12 months. California currently has $2.3 billion invested in Wells Fargo “fixed income and equity and is the largest issuer of municipal bonds and the home state of Wells Fargo.

California state Treasurer John Chiang issued a statement saying: “Wells Fargo’s fleecing of its customers by opening fraudulent accounts for the purpose of extracting millions in illegal fees demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed.”

The Arizona Republic has never endorsed a Democrat for president — until now. The newspaper’s editorial board writes: “The challenges the United States faces domestically and internationally demand a steady hand, a cool head and the ability to think carefully before acting. Hillary Clinton understands this. Donald Trump does not.” The newspaper said Trump, “is not conservative and he is not qualified.”

Orders for durable or long-lasting goods were unchanged in August after a sizable gain in the prior month; still, it was better than estimates which called for a decline. Demand declined for aircraft, heavy machinery, computers and electrical equipment.  Orders for core capital goods rose 0.6% and posted the third increase in a row. The last time that happened was at the end of 2014 and early 2015. Core orders are viewed as a proxy for business investment.

Anheuser-Busch InBev clinched its $103 billion takeover of SABMiller Plc after the British brewer’s investors approved a deal that unites the world’s two biggest beer-makers about a year after it was proposed. AB InBev will dominate the combined entity, which will account for one of every three beers sold worldwide. The Budweiser maker will keep its name, ditching any vestiges of SABMiller, and only one SABMiller executive will be on the new company’s senior leadership team.

Germany denies reports of a possible Deutsche Bank bailout. Germany’s finance ministry says it’s not working on a rescue plan for Deutsche Bank, contrary to an earlier report from the German newspaper Die Zeit. Deutsche Bank told employees not to worry.  In a memo sent to employees, the German investment bank said it had no intention to settle with the US Department of Justice at a price “anywhere near the opening position of $14 billion” and that is had no plans to raise capital.

RBS has agreed to a “toxic” mortgage settlement. The bank has agreed to pay $1.1 billion to settle claims it mis-sold toxic mortgage security products to the US Central Federal Credit Union and Western Corporate Federal Credit Union in the run-up to the 2008 financial crisis.

It may have been the world’s largest IPO in two years, but shares of Postal Savings Bank of China failed to generate much enthusiasm in the Hong Kong market. The lender raised $7.4 billion but priced the deal near the bottom of its marketing range; shares gained 02%. The lukewarm start comes as investors remain cautious on the outlook for the Chinese banking industry, battling bad debts and a slowing economy.

Tyson Foods is recalling 60 tons of fully cooked chicken nuggets that may be contaminated with hard plastic. The problem may have come from a rod used in the manufacturing process, but there are no confirmed reports of adverse reactions to the products. Tyson said the nuggets were supplied to Costco stores and a Pennsylvania wholesaler.

It’s the end of an era. BlackBerry, the Canadian company that invented the smartphone and addicted legions of road warriors to the “crackberry,” has stopped making its iconic handsets. Finally conceding defeat in a battle it had long ago lost to Apple and Samsung, BlackBerry is handing over production of the phones to overseas partners while it turns its full attention to the more profitable and growing software business. BlackBerry said it struck a licensing agreement with an Indonesian company to make and distribute BlackBerry-branded devices. More deals are in the works with Chinese and Indian manufacturers.

Financial Review

Thirst for Innovation

Sinclair Noe — March 24, 2015

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 104 = 18,011
SPX – 12 = 2091
NAS – 16 = 4994
10 YR YLD – .03 = 1.88%
OIL + .06 = 47.51
GOLD + 3.90 = 1194.20
SILV – .04 = 17.04

The Labor Department reports the consumer price index climbed by a seasonally adjusted 0.2% last month. Gasoline prices rebounded in February. Higher costs for food, housing and new cars also contributed to the increase. Still, there’s been zero overall inflation in the last 12 months, mainly because of the big drop in gas prices. If food and energy are excluded, so-called core consumer inflation has risen at a 1.7% rate over the past 12 months.

In February energy prices rose 1%. Gasoline price are still down almost 33% in the past year. Food prices moved up 0.2% last month, bringing the increase over the past 12 months to 3%. Shelter costs also rose 3% in the past year. The cost of medical care fell in February for the first time since 1975, although overall health-care costs were unchanged.

Now, the reason the CPI number is important is because the Federal Reserve last week shifted from being patient about raising interest rates to being data dependent about hiking rates, and the data they are focusing on is inflation and jobs. Although the Fed uses a different index as its preferred price gauge, the central bank views 2% inflation as healthier for the economy. The key to the inflation data is that much of the disinflation is the result of lower oil prices, and the Fed thinks this is temporary; prices will move higher, probably later in the year.

San Francisco Fed president John Williams says the Fed should hike rates mid-year. Speaking in Sydney, Williams suggested economic conditions in the US were “downright good.” He added he believed, “We will be starting to raise interest rates this year and we will be moving them gradually over the next couple of years to more normal levels.” Meanwhile, St. Louis Federal Reserve President James Bullard speaking in London today said he is concerned about the mismatch between the markets and the central bank’s expectations for the first interest-rate increase, warning it could end with a “violent” reaction in the financial market. And by violent reaction he means something like the taper tantrum of 2013.

Sales of new single family homes rose 7.8% in February to a seasonally adjusted annual rate of 539,000 units, the highest level since February 2008. The regional results were unusual, to say the least; and likely influenced by bad winter weather. Sales last month soared 152.9 percent in the Northeast, but fell 12.9 percent in the Midwest. Sales in the South jumped 10.1 Sales fell 6.0 percent in the West.

Meanwhile, the S&P/Case-Shiller report on existing home sales finds prices were up 4.5% in December compared to a year ago. The report said average home prices in the 10 and 20 cities covered are back to levels last seen in autumn 2004, but are still down between 16% and 17% from their peaks set in mid-2006. All 20 cities on the index saw prices rise in December, with the fastest pace of increase reported in Denver and the slowest in Las Vegas. All cities also saw prices accelerate year-over-year, led by a 9.3 percent price jump in San Francisco and an 8.4 percent increase in Miami.

US troops will remain in Afghanistan. Today president Obama granted Afghanistan’s request to slow the drawdown of troops; that means 9,800 troops will stay through the end of the year; then troop size will be re-assessed for 2016; then the plan is to be out by 2017. Under a previous plan U.S. forces were to have been cut to about half of the current level of just under 10,000 by the end of 2015. But U.S. officials said improved relations with Afghan leaders contributed to a revision of the plan. The thinking is that the new government in Kabul needs to get a little stronger. And there is also the prospect of peace, which sounds farfetched, but Pakistan is putting pressure on the Taliban to negotiate with the government in Kabul or else lose the havens they enjoy on the Pakistan side of the border. Of course policy can reverse quickly in that corner of the world, but after 13 years, it isn’t just America that is war weary.

Broadband internet service providers hate net neutrality; they fought it tooth and nail, but more than 4 million people wrote to the FCC in favor of neutrality and the FCC ruled to regulate ISPs like a utility. No surprise then that the broadband providers are now challenging net neutrality in the courts. The first challenge was just filed by USTelecom, a trade group; more legal challenges will follow, but the FCC hasn’t even published the new rules in the Federal Register.

On the USTelecom website they claim that broadband is critical for the US economy; they compare the investment in broadband to the great government investments in the interstate highway system and the Apollo moon shot; and they don’t seem to deny that 75% of the nation consumers have only one choice for high speed internet service – essentially a monopoly. So, they think of their industry as a utility; they just want to be the utility that gets to self-police, decide their own rules, and decide their own punishment if they break their own rules. The big argument is that they have spent a lot of money on broadband; and they think the service is pretty good. But it isn’t.

Downloading a high-definition movie takes about 7 seconds in Seoul, Hong Kong, Tokyo, Zurich, Bucharest and Paris, and people pay as little as $30 a month for that connection. In Los Angeles, New York and Washington, downloading the same movie takes 1.4 minutes for people with the fastest Internet available, and they pay $300 a month for the privilege. The divide is not just with the fastest plans. At nearly every speed, Internet access costs more in the United States than in Europe. American Internet users are also much more likely than those in other countries to pay an additional fee, about $100 a year in many cities, to rent a modem that costs less than $100 in a store. And if you would like to download that movie in 7 seconds at one-tenth the cost, forget about it. The cable companies have the technology, but they have no reason to upgrade their systems because they have no competition. It’s not like most people have an option of a different carrier. Let the lawsuits begin.

The UN has issued a report claiming that the world could suffer a 40 percent shortfall in water in just 15 years unless countries dramatically change their use of the resource.

Many underground water reserves are already running low, while rainfall patterns are predicted to become more erratic with climate change. As the world’s population grows to an expected 9 billion by 2050, more groundwater will be needed for farming, industry and personal consumption. The report predicts global water demand will increase 55 percent by 2050, while reserves dwindle. If current usage trends don’t change, the world will have only 60 percent of the water it needs in 2030.

Water shortages could lead to problems in so many ways: crops could fail, ecosystems could break down, industries could collapse, disease and poverty could worsen, and violent conflicts over access to water could become more frequent. The report calls on policymakers and communities to rethink water policies, urging more conservation, recycling of wastewater, and finding ways to make water-intensive sectors more efficient and less polluting. One of the more controversial ideas is to raise the price for water. Factors driving up demand for water include increased meat consumption, larger homes, transportation, and basically most of the perks we associate with a middle-class life.

Population growth and increased urbanization also contribute to the problem. Water demand tends to grow at double the rate of population growth. The global population is expected to grow to 9.1 billion people by 2050, up from the current 7.2 billion. More people living in cities also put strain on water supplies. The report estimates that 6.3 billion people, or about 69% of the world’s population, will be living in urban areas by 2050, up from the current 50%. Currently, about 748 million people worldwide have poor access to clean drinking water.

And the problem is right in our own backyard, or more specifically next door. California is in its fourth drought. Despite occasional rainfall this winter, water-supply conditions in California have grown more dire. Reservoirs are woefully low, and the snowpack in the Sierra and groundwater levels are at or near historic lows. The senior water scientist at NASA’s Jet Propulsion Laboratory in Pasadena wrote in the Los Angeles Times this month that the state has only about one year of water left in its reservoirs. One year. And groundwater is being pumped so rapidly for agriculture in the Central Valley that the land in some areas is literally sinking at the rate of a foot or more per year. This summer many fields will be left fallow.

Last week, California Governor Jerry Brown approved a $1 billion emergency drought package, but more than $700 million of that money will actually go toward flood control, food assistance and the protection of wildlife habitat. The State Water Resources Control Board will tighten water restrictions, which will limit lawn watering to twice a week, and restaurants should not serve water unless a customer asks for it and hotels should give guests the option to decline fresh towels and sheets every day. Even the water board’s chairwoman described the restrictions as “quite modest.” But modest policy could give way to desperate policy if the drought continues. And even if the drought were to end tomorrow, there will be extended droughts in California’s and the entire Southwest’s future. As it stands now, water policy won’t help much.

It is often said that necessity is the mother of innovation. For the past 20 years, some of the brightest minds in the world have converged on California, many have tried to answer the question of how to get more clicks for an online advertisement. I think their focus is going to change quickly.

It’s the Soil, Not the Green Shoots, that’s Bad

At the risk of being repetitive, if you look at the macro economic data and the upcoming political showdowns over taxing and spending, the markets are justified in listing with a negative bias, as we sail into the future.  Regrettably, this includes a shocking but probable casualty suffered by the U.S. debt obligation’s AAA credit rating, by 2012. 

The massive selloff seen in Wednesday’s Treasury bond market rested on disclosed information communicated throughout the trading day, as well as what was unspoken; that deep down inside, short-term investors and long-term money managers alike do not believe in green shoots sprouting across America. 

Let us review a few macro-economic facts that can poison US green shoots faster than eating the wrong part of a Blowfish in a Sushi bar: 

·         The IRs reported that tax revenues fell by $138 Billion or 34% in April versus a year ago.

·         Some municipalities are contemplating disincorporation in the face of budget shortfalls.

·         Forty-two states are facing at mid-year a $60 billion shortfall for FY 2009.

·         In April 21 states saw unemployment fall, 11 unchanged, 18 states are still experiencing rising unemployment.

·         TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3^rd qtr. of 2008 and the 1^st qtr. of 2009.

·         Consumer debt fell six out of eight months ending in March, which is up .1 per cent, the slowest growth in 17 years.

·         Germany, the world’s largest exporter, economy is growing worse.

·         The Federal Reserve Z1 statistical release shows household wealth fell $.5 trillion in 2007 and $11.8 trillion in 2008.

·         The US will not be able to sell 2 trillion dollars in obligation, for FY 2009, without significantly higher interest rates.

·         Higher interest rates will choke off any recovery and retard growth.

·         The rebound in real estate is an aberrational illusion, which will peter out later this year, when move-up buyers fail to show up this fall. 

I hate being the skunk at the summer picnic; however, to ignore these facts and promote the meme of “less bad is good” is a bit too Orwellian for my sensibilities.  Losses are not equal to profits.  Once you accept the premise that de-leveraging will continue for the next several years, it becomes easier to discern between green shoots and weeds, and what awaits future business trends.  Now is the time to exit most fixed rate debt in exchange for variable rate debt like TIPS. 

What’s more ominous, though, is the unhealthy political climate to correct problems that do require sagacious political solutions and strong political leadership.  The pervasive irrational mindset that the largest industrialize nation’s infrastructure can be had with niggardly taxation defies logic.  Maintenance of our transportation system, our communication system, as well as our public/private healthcare and pension schemes, for too many years was paid for by dubious credit, OPM (other people’s money), or ignored altogether. 

California is an exquisite example of bad politics.  In the name of fiscal discipline and conservatism, California may allow the eighth largest economy in the world to fail, aided perhaps by the Obama administration’s refusal to be involved.  California’s Legislative budget analyst projects a 2009-2010 budget deficit of $28 billion dollars.  Short-term, California is looking for a $15 Billion dollar backstop in guarantees by the feds.  That will help 38.2 million people, or 12.4% of the US population.  California generates 13% of the nation’s GDP.  How many green shoots will that strangle in its infancy? 

If you think that this assessment is too gloomy, 2010 holds its own surprise for doubters of stagflation and global political drama.