Wednesday, July 22, 2009

US financial market bailout tab hits $4.7 trillion

WASHINGTON – The federal government has devoted $4.7 trillion to help the financial sector through its crisis, a level of assistance equal to about one-third of the overall U.S. economy, a watchdog report said Monday.

Under the worst of circumstances, the report said, the government's maximum exposure could total nearly $24 trillion, or $80,000 for every American.

The figures are part of a tough new quarterly report to Congress from special inspector general Neil Barofsky, who accuses the Treasury Department of repeatedly failing to adopt recommendations aimed at making one component of the government financial rescue effort more accountable and transparent. (more)

Rep. Grayson VS. Bernanke

Global Exposure in Financial Derivatives Surpasses One Quadrillion Dollars (Update)

When I posted the lowest responsibly sourced figure for global exposure in financial derivatives, $592 trillion, published May 19, 2009 by the Bank of International Settlements, all sorts of hoodoo apologists for Obama, Geithner, Summers, and Goldman Sachs crawled out the woodwork to claim that this figure is ridiculously exaggerated, there's really nothing to worry about, it's just a few bucks, and so on.

All the same hoodoos unfailingly claimed that it's stupid to consider worst-case scenarios when you calculate risk, because...

They have learned absolutely nothing from the ongoing financial meltdown which annihilated some of the oldest and largest investment banks in the world, and plunged the global economy into an almost vertical downturn. (more)

Are Banks Really on the Mend?

You can rest easy today… the financial crisis is over.

CIT Group, the new epicenter of systemic financial risk, got thrown a lifeline this week from its bondholders. As we reported Friday (link), the company needed $3 billion — fast — in order to stay afloat. It was rightfully denied a government bailout, but was able to strike a last-minute deal with holders of its debt. Of course, the market rejoiced… the S&P 500 rose 1.1% yesterday largely on the news.

But again, we’re calling the market’s bluff. Anybody read the fine print of this deal? The loan was secured by “substantially all unencumbered assets.” That lawyer talk means CIT will have no collateral left over for a similar deal in the future. What’s more, the company will have to pay 13% annually on the $3 billion loan… no small order. (more)

What's the Biggest Bargain In Commodities?

Biggest Bargain... is natural gas says Sean Brodrick...natural gas prices have been driven lower by over-supply & weak demand recently, also US liquid natural gas imports have more than doubled from Nov through April, & huge initial production rates in shale have added to supplies... but longer-term "I think that more U.S. buses, trucks and cars will run on natural gas. So it could be a very good play for the long-term"... (more)

Unlimited Debt is Likely to Lead to Unlimited Consequences

The world today seems to be spinning faster on its axis than ever as humanity scrambles to stay afloat in a world drowning in debt. It all seemed like such a good idea back in the day, as the credit-based US economy seemed to create prosperity out of thin air for decades. The economic alchemists explained that the more we consume, the more the economy will prosper. And because of easy and abundant credit, we didn’t have to pay until later!

Unfortunately, later has arrived. Growth built on the sandy foundation of debt-based consumption (instead of saving and investment) was fun while it lasted. But now the economic party glass has been filled to overflowing with debt, and we are all getting wet. The great global debt party must now be wound down and cleaned up, but no one seems willing to face the inevitable hangover. The US has more than doubled its debt burden, relative to GDP, since the 1980’s and the consequences are beginning to crash the party. (more)

The coming government debt default

We have always assumed that governments would surreptitiously default on their debt via inflation, but recently we've come to the conclusion that a direct default is a distinct possibility. Here's why.

Under the current monetary system there is no limit to how much debt a government can take on, provided that the debt is denominated in its own currency. The reason is that the central bank stands ready, willing and able to be the bond-buyer of last resort, and the central bank's pockets are infinitely deep (there is no limit to the amount of new money that the central bank can create). As a result, if it chose to do so the government could continue to issue new bonds until the currency became worthless. At the point where the currency had lost almost all of its purchasing power the surreptitious default would essentially be complete because any debt denominated in this currency would be almost worthless. (more)

Americans Repaying Debt Most Since ‘52 Spurs Savings

For the first time since Harry S. Truman was in the White House, Americans are paying back their debts, a phenomenon that just might help keep interest rates low as the Treasury sells a record $2 trillion of bonds and rising unemployment increases U.S. savings.

While the proportion of consumers without jobs rose to 9.5 percent last month, household borrowing fell to 128 percent of the average family’s after-tax income in the first quarter from a record 133 percent a year earlier, according to data compiled by Bloomberg. The total debt of individuals, nonfinancial companies and federal, state and local governments grew at a 4.3 percent pace at the start of the year, down from a peak of 9.9 percent in the fourth quarter of 2005, Goldman Sachs Group Inc. estimated. (more)

Oil's year-to-date rally defies declining demand

Declining demand in the U.S., the world's biggest oil consumer, has pushed up total inventories of crude oil, gasoline, and other petroleum products to the highest level in 19 years, an analysis of energy data showed. U.S. demand in the first half of 2009 was the weakest in a decade, while global consumption fell in the second quarter to the lowest level in four years.

The increasingly bearish fundamentals are raising concerns over the rally in oil prices. While some analysts say oil's gain was helped by hopes for an economic recovery, others believe it's speculation that has pushed oil higher, and a major correction could pull prices back to around $50 a barrel.(more)

The friendly trend Commentary: The 50-day moving average is well above the 200-day

And it sure became friendly earlier this month, following a correction that had many analysts wondering if the rally that began last March was over for good.
But on July 2, overlooked by us mere mortals but to great fanfare among trend followers, the Dow's 50-day moving average rose above its 200-day moving average. And, sure enough, within a couple of trading days the market dutifully reversed course. And it is now at a new rally high -- rising another 104 points on Monday alone. (more)

Treasury Trend Bearish Despite Bernanke Bounce

Treasury prices have seen some rallies in June and July and are up in the wake of Federal Reserve Chairman Ben Bernanke's July 21 testimony to Congress, but overall, I see the longer-term trend as bearish. Look to sell Treasury bond futures as investors gain confidence in riskier assets.

Stocks and commodities have been on the rise this year, and it seems clear investors and traders have recently been seeking out riskier assets as confidence in the economy’s prospects improves. Treasury bonds, which investors turn to as a safe haven during uncertain times, are being put on the backburner. Given the magnitude of government spending, people are also getting worried about the prospect of inflation, which is bearish for Treasury bonds. Treasury prices trade inversely to their yield. If inflation is rising, your real returns (reflected in your bond’s coupon payment) will decline. (more)