More Gold News...

The World Gold Council just released the newest Gold Investment Digest, and it contains a lot of great information about Gold, and the Gold market. Tim Iacono walks us through some of the main points, and adds his own insight, in his blog post below.

Always a sucker for a good chart, particularly when it involves precious metals, the one below in the most recent Gold Investment Digest from the World Gold Council is a doozy.
The trade group's first quarter report on gold has some rather interesting statistics related to the quickly changing supply and demand situation.

As shown above, inflows to the many gold ETFs around the world have been brisk:

Investors bought 469 tonnes of gold via this channel, dwarfing the previous record, of 145 tonnes, set in the third quarter of last year. SPDR®Gold Shares (“GLD”) enjoyed the bulk of the inflows. The total amount of London Good Delivery bars held by the Trust increased to 1127 tonnes at the end of Q1 09, from 780 tonnes at the end of last year. The two Swiss listed gold ETFs (the ZKB Gold ETF and the Julius Baer Physical Gold Fund) enjoyed the next strongest inflows, rising by 37 tonnes and 32 tonnes respectively. Inflows into the gold ETFs continued to grow throughout the quarter, despite the downward correction in the gold price, indicating that, as in past price corrections, ETF holdings tend to be “sticky”.

It's kind of ridiculous just how big the SPDR Gold Shares ETF (NYSEArca:GLD) has become when compared to the nine other funds and they have certainly characterized the inventory correctly in light of recently faltering prices - "sticky" is the right word.

As noted here yesterday, just 23.2 tonnes of the almost 350 tonnes added earlier in the year have exited the trust as the gold price declined from almost $1,000 an ounce in early February to current prices of just over $900.

They had this to say about the many and varied rumors about trading on the COMEX:

The quarter was beset with stories either urging investors to take delivery of, or claiming investors had taken delivery of, large amounts of gold from COMEX, driven by widespread shortages of gold in the spot market. Some claimed that the COMEX warehouses might therefore run out of gold.

The reality was quite different. While there were (at times severe) shortages of coins and small bars during the quarter, there was no shortage of London Good Delivery Bars, the main trading vehicle in the global over-the-counter market. And with respect to COMEX stocks, both registered stocks on COMEX (gold which meets the standards for delivery and for which a receipt from an exchange-approved depository or warehouse has been issued) and eligible stocks (gold which meets the delivery standard but for which no receipt from an exchange-approved warehouse has been issued) increased over the quarter, to 2.94 million ounces and 5.94 million ounces, from 2.83 million ounces and 5.71 million ounces respectively. This took total COMEX stocks as a percentage of long positions to 38%, which is high by historical standards, rather than indicative of stocks that have been depleted by a run on physical gold at COMEX.

Geez... The folks at the World Gold Council should really get a hold of some of the officials over at the National Association of Realtors (NAR) to see how an industry trade group is really supposed to operate.

Here's a perfect example where they could add to the fervor over rising gold prices by citing some shoddy statistics about how the supply of gold is limited and "it's a good time to buy" but, instead, they pour cold water on one of the biggest stories this year in the gold community about the goings-on at the CRIMEX.

Maybe former NAR chief economist David Lereah could be hired as a consultant to help out.

The Gold Investment Digest goes on to discuss such important topics as gold's correlation with other asset classes, jewelry demand, mine supply, and central bank sales.

If you've never thumbed through this quarterly report, it really is worth a look.

Registration is required at the World Gold Council website to get a copy, but it's free.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Recession Bottom Near, But Could Last For Awhile

There are a lot of signs pointing to the fact that the bottom of the recession is a least near — if not hear already. Before everyone gets excited, though, it is more than likely that the bottom will last for awhile. For more on this, read the following blog post from James Picerno.

The main point of optimism in yesterday's first reading of Q1 GDP is the jump in consumer spending. But as today's update on personal income and expenditures for March reminds, there's still quite a bit of uncertainty left as to whether consumption is truly on the mend.

Much of what registered as increased consumer spending in this year's first quarter came in January. A convincing follow-through still awaits. As our chart below shows, the bump just ahead of March 2009 was a first-of-the-year rise in both disposable income and personal consumption spending. It was a welcome reprieve from the crushing setback in late 2008. But the trend is fading and last month's consumption dropped relative to February. Disposable income, meanwhile, was flat in March.

The main question is whether the realities of the broader economic climate are finally weighing on American households as they ponder the toxic combination of falling housing values, fewer jobs, higher unemployment and burdensome debt levels built up over the years. The government's massive stimulus efforts over the past year have helped slow the tide, but the correction in consumption and consumer attitudes will roll on.

Adding to the challenge is the recent uptick in the 10-year yield. The Fed has been working overtime in trying to keep long rates low, which is to say below 3%. But now Mr. Market is rebelling. The 10-year closed above 3% for the third day running yesterday. That's the first time it's run above that level since the Fed announced on March 18 that it would buy long-dated Treasuries outright in order to keep rates low. Immediately following the news, the 10-year yield dropped by an extraordinarily steep 50 basis points to around 2.5%. Now the yield's above 3%. And the higher rates come at a time with little or no worries about inflation.

Of course, one could argue that the apparent topping out in new jobless claims suggests that the recession may be at or near a trough. We've suggested as much recently, including here, and our reasoning is here. And today's update on new filings for jobless benefits offers a fresh datapoint to argue that the business cycle may have bottomed.

But we must distinguish between a bottom to the recession and the renewal of economic growth. If we have an "L" recession, the bottom could last quite a bit longer than the crowd expects. All the more so given the depth and magnitude of the current downturn.

In short, there's reason for optimism and its counterpart. Deciding which one has the upper hand will still take more time.

This post can also be viewed on capitalspectator.com.

Are Real Estate Prices Stabilizing?

Real estate prices are still falling across the country, but for the first time in over a year the monthly declined failed to set a new record. This is leading some analysts to believe that the real estate market just might be stabilizing. This is potentially good news, but investors should remember that while prices might be stabilizing, it could still be awhile before prices stop dropping altogether. For more on this, read the following article from HousingWire.

Home prices in major metropolitan areas continued to fall in February; however, for the first time in 16 months, the annual decline did not set a new record, possibly suggesting early signs of market stabilization.

The S&P/Case-Shiller 10-City and 20-City Home Price Indices released Tuesday recorded nationwide, annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from the returns reported for January, which fell by 19.4% and 19.0%.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January.”

Still, the indices show an ongoing, broad-based decline in the prices of existing single family homes across the United States, with 10 of the 20 metro areas studied showing record rates of annual decline, and 15 posting declines in excess of 10%.

In terms of annual declines, the three worst performing cities as of February are once again, located in the Sunbelt, each reporting negative returns in excess of 30%. Phoenix was down 35.2%, Las Vegas declined 31.7% and San Francisco fell 31.0%. Dallas, Denver and Boston faired the best, down a significantly lesser 4.5%, 5.7% and 7.2%, respectively. Dallas also holds the distinction of being the best performer for the month, returning -0.3%, according to the report.

As of February 2009, average home prices across the United States are at levels similar to those seen in third-quarter 2003. And despite the deceleration in home price declines seen in February, from the peak in mid 2006, home prices are still down over 30%.

Standard & Poor’s Blitzer says, “we will certainly need a few more months of data before we can determine if home prices are finally turning around.”

This article can also be found on housingwire.com.

Q1 GDP Contracts At A Much Faster Than Expected Pace

Just when investors were starting to feel better about the economy, the GDP report came out — and the news was really bad. According to a Dow Jones Newswire poll of economists, it was expected that the economy would contract at a rate of 4.6 percent in Q1. Naturally the 6.1 percent came as a huge surprise, and one that shows us that we might be getting ahead of ourselves thinking this recession is wrapping up. For more on this, read the following post from Tim Iacono.

The Commerce Department reported that the U.S. economy contracted at a pace much faster than expected during the first quarter as business investment posted a record decline and exports of U.S. goods experienced their biggest drop in more than 40 years.
Following the fourth quarter's 6.3 percent pace of contraction, the U.S. economy shrank at a seasonally adjusted annualized rate of 6.1 percent last quarter, surpassing the consensus estimate of minus 5.0 percent. This was the worst back-to-back performance in 60 years.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

We Need A Root-And-Branch Reorganization Of The Financial System

Some people are open to the government handing over trillions of dollars to the banks, but no taxpayers want the money handed over without proper controls in place that will ensure it goes to good use. This has been one of the biggest issues the public has had with the bailout efforts thus far. For that reason Steve Waldman is calling for a root-and-branch reorganization of the financial system. For more on this, read the following blog post from Mark Thoma.

Steve Waldman says "we need a root-and-branch reorganization of the financial system":

Value for value, Steve Waldman: Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindsight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? ...

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator... He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. ...

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over. ... Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value. ...

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

This post can also be found on economistsview.typepad.com.

Gold And Silver Update

Last week we saw some big news come out of China regarding gold, and investors are paying close attention. China almost doubled their gold reserves, and after a stretch of falling prices, this news sent prices up. For more on this, read the following post from Tim Iacono.

Big news for the precious metals markets came from China last week when the Xinhua News Agency published comments made by Hu Xiaolian, head of the State Administration of Foreign Exchange, indicating that China's gold reserves had increased by 454 tonnes since 2003. Apparently, they were required to report the new total to the IMF and made a public disclosure at the same time, however, it is not at all clear why there were no previous updates in recent years.

This almost doubled their previous reserve total of 600 tonnes and vaulted China into sixth place on the World Gold Council's list of official gold holdings as noted in this item last week. With almost $2 trillion in foreign exchange reserves and an increasingly vocal dislike of the U.S. dollar in recent months, this big gain comes as no surprise to most analysts, however, the magnitude of the increase in dollar terms was mostly overlooked in media reports.

This addition amounts to only $13 billion - less than one percent of their foreign exchange reserves - and boosts their "percent of reserves held as gold" from 0.9 percent to just 1.6 percent. The "rule of thumb" for western central banks is a stockpile of 15 percent, about ten times the new total, and most analysts expect thousands more tonnes to be purchased.

Prices for both gold and silver were buoyed by the news late in the week but, after two months of mostly lower prices, the metals were due for a rebound. For the week, the price of gold rose five percent to end at $913 an ounce and spot silver surged nine percent to close at $12.89 an ounce.

As a result of this move back up above the $880 level, buy indicators for both gold positions in the model portfolio - Gold Bullion and the SPDR Gold Shares ETF (GLD) - have been changed from green back to yellow.

It will be important to keep an eye on the world's most popular gold ETF since, for the first time this year, metal recently exited their vaults as shown to the right. Inventory has declined by 23.2 tonnes since April 16th after an impressive addition of almost 350 tonnes since the first of the year.
Interestingly, mainstream financial media outlets such as Reuters and Bloomberg now routinely report changes in GLD inventory in their gold reports and also compare their stockpile to official country holdings around the world, something that I've been doing for years. In fact, I remember being disappointed early last year about not being mentioned in an article in the Wall Street Journal after a reporter called to follow up on one of my articles about the GLD inventory passing China's official holdings of 600 tonnes.

It's was ironic to see these two items in the news together last week.

Buying in India has supported the gold price in recent days as the world's most price-sensitive buyers have been on strike for most of the year, only appearing when sub-$900 an ounce prices were to be had as Monday's important Akshaya Tritiya festival neared. This is one of the four most important days of the year for Hindus and is considered an auspicious day for buying long-term assets such as gold, a legend stating that any venture begun on Akshaya Tritiya will bring prosperity.

The recent surge in enthusiasm for the gold price, while welcome, should be tempered by the knowledge that, according to GFMS, about 500 tonnes of scrap gold entered the market during the first quarter of 2009. This is the equivalent of an entire year's worth of scrap metal and exceeds the record 469 tonnes added to gold ETFs around the world over the same period. While I'm sure that prices for precious metals will go much higher at some point, making such a move in the near term will be difficult absent another flight to safety, something that is now looking more likely than it did a few weeks ago.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Stress Tests Reveal Three Banks In Need Of Additional Funding

The controversial stress tests commissioned by the government on the 19 largest financial institutions have revealed at least 3 in need of additional funding. These stress tests were meant to ensure that banks have enough capital reserves to last through the recession. For more on this, read the following article from Housing Wire.

At least three of the 19 financial institutions with assets in excess of $100bn may face pressure to build up capital reserves after failing to meet desired operational projections through the government-mandated stress tests, unnamed sources told the Wall Street Journal. The identities of the three firms remained confidential at the time this story went to press, but analysts told the Journal they likely include regional banks with commercial real estate exposure in the Midwest and Southeast.

The stress tests aimed to determine whether major US banks retain enough capital to weather even the more adverse economic projections. Federal officials offered three alternatives to banks that lack sufficient reserves: raise private investor funds, receive additional government aid or convert the government’s existing preferred shares into common shares, effectively placing part of the firm in government ownership.

The Federal Reserve, in reporting stress test methods late Friday, say most banks retain enough capital to weather a longer, more severe recession, although deteriorating economic conditions affect the reserve capital held among some banks.

This article can also be found on housingwire.com.

"Historically Low" Fails To Adequately Describe New Home Sales

New home sales were down again last month, but people are under appreciating just how bad these numbers are. Once you factor in population growth into the mix — new home sales have fallen off a cliff compared to past economic downturns. Tim Iacono looks closer at this latest report, and offers some insight, in his blog post below.

The Census Bureau reported that new home sales fell 0.6 percent last month, from a seasonally adjusted annual rate of 358,000 in February to 356,000 in March, still at a level that the phrase "historically low" fails to adequately describe.
Though the current sales level is up from the January low of 331,000, to put the March sales rate in its proper historical context, consider that the pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000.

The March total is still a full 23 percent below this pace!

While a bottom may indeed be forming after the relative stability of the last four months, these are the lowest levels of sales in the 46 years since this data series began and an improvement of some 29 percent from the current level is required just to equal the worst reading since JFK was sitting in the White House.

You can almost see the headlines later this year - New home sales surge 20 percent.

What will most likely be omitted from the story is that sales will have to increase by almost another ten percent just to better the level seen at the depths of the economic downturn in Ronal Reagan's first term.

Lower mortgage rates and tax credits for first time home buyers spurred sales in March helping to reduce builder inventory as the months of supply metric fell from 11.2 months to 10.7 months. This is down from a high of 12.5 months in January but still almost triple what would be considered normal.

Still highly distorted by sales incentives and other give-aways by increasingly desperate homebuilders, the median price fell from $208,700 in February to $201,400 in March, down 12.2 percent on a year-over-year basis, and is now at its lowest level since late-2003.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

How Long Will The Recession Last?

Answering that question is nearly impossible — especially given our current precarious economic situation. While no one is going to know for sure when this recession will end, we can look at the data we are provided with and make educated guesses as to when the end may be nearing. James Picerno analyzes the recent initial jobless claims report, and explains how the report has typically related to recession timing in the past, in his blog post below.

It's too soon to declare that the worst of the recession has passed, but it's also premature to dismiss the idea. We are, in short, in a never-never land of waiting and watching, and this game may roll on for many a moon.

To help pass the time, we're watching the data as it comes in, including initial jobless claims. As we've written, this is one of several metrics that may offer clues about when the business cycle reaches a trough. Like any one statistic, it can't be fully trusted, and so we must look to a range of data points. But history suggests that as single measures of broad economic trends go, this one's unusually useful in trying to peer into the future, or so it's been in the past.

With that in mind, we turn to yesterday's update on new filings for jobless benefits. As the chart below shows, the encouraging drop through the week of April 11 has since given way again to the forces of darkness via last week's seasonally adjusted rise of 27,000 new filings. But the hope that we've seen a top isn't lost yet.

History suggests that initial claims will top out concurrently or perhaps even slightly ahead of the recession's formal bottoming. Yes, we must look to other signals for context before we make any definitive conclusions. For the moment, the jury's still out, but the good news is that it's not yet clear that the recession's getting worse, or so the trend in initial jobless claims suggests.

The question is whether we're due for another surge in bad news for the labor market? The economy is still too precarious to rule out the possibility. On the positive side, despite the robust rise in claims last week, the trend in the chart above still doesn't preclude the possibility that we've seen a peak. Deciding if in fact that's true will take another month or two of data. Meanwhile, evidence that we're not peaking requires only one weekly surge skyward.

This post can also be viewed on capitalspectator.com.

Don't Fall For Housing Recovery Talk, More Pain Is On The Way

More and more people are jumping on the housing recovery bandwagon, but the excitement is a little premature. There are many signs pointing to the fact that the bottom is still far off in the distance. For more on this, read the following blog post from Tim Iacono.

This report by Ben Rooney at CNN/Money takes a few rather ambivalent comments by impartial analysts and combines them with more drivel from a National Association of Realtors shill, interpreting it all as a hopeful sign for the housing market.

Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.

"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.

Yes, and they flattened out last year too before falling off a cliff (see chart from previous post), back when distressed sales accounted for a much smaller portion of overall sales.

By the way, what's with the characterization of distressed sales accounting for "just over half of all transactions in March" in the latest report? In the past, the NAR has cited percentages or a range of percentages, last month putting that figure at between 40 and 45 percent.

The phrase "just over half" could be anywhere between 51 and 60 percent, perhaps higher....

Here's the comment from the realtors' trade group:

First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.

"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.

Between this sort of optimism and word of bidding wars on foreclosed properties (discussed here yesterday and reported again in the Wall Street Journal today), this is probably a very good indication that there is much more pain to come in the housing market.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Geithner's New PPIP Plan Looks Too Much Like Failed TALF Program

Hopefully Geithners new PPIP plan that was created to deal with toxic assets works out better than the TALF failure, but unfortunately it looks eerily familiar. For more on this, read the following blog post from Mark Thoma.

The TALF program intended to increase auto loans, student loans, and credit card lending has a lot in common with the Geithner public private investment plan to remove toxic assets from bank balance sheets, including the valuable non-recourse loan feature. The fact that the TALF program is not living up to expectations - not even close - leads to questions about whether the Geithner plan will encounter similar problems:

Federal Program to Boost Private Lending Struggles to Get Money to Consumers, by Neil Irwin, Washington Post: In its first two months, the government's signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending. ...

Under [the Term Asset-Backed Securities Loan Facility, or] TALF, private investors ... put up a relatively small amount of money to be matched with a larger loan from the Federal Reserve. The combined funds are then used to purchase newly created, highly rated securities, which in turn fund a wide range of consumer and business lending.

If the securities become more valuable, the private investors stand to repay their government loans and make a healthy profit; if the securities plummet in value, the investors can lose only what they put up originally...

Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.

Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. ... There are restrictions on the business activities of participants in the program. ... But perhaps more significant ... is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program. ...

Federal Reserve officials have privately urged President Obama and congressional leaders to publicly state that the government views investors in voluntary programs such as TALF differently than it does companies that need a federal bailout.

Investors are not the only ones who need comforting, though. The Fed relies on primary dealers, or brokerage houses, to play a key role as intermediaries in TALF...

But the primary dealers have been extremely cautious..., hobbling the program's progress... Lawyers at the New York Fed ... have been working to help the brokers and investors work through the issues, and government officials are hopeful about the program's future. ...

The Public-Private Investment Program, designed to buy loans and securities from banks, is structured similarly to TALF. ...

And the differences between the PPIP and TALF programs that I can think of, e.g. that the PPIP has toxic assets as part of the bargain, and some of the banks will need a bailout so the reassurances about executive pay, etc. can't be made in these cases, are additional factors working against the PPIP's success.

This post can also be viewed on economistsview.typepad.com.

U.K. Budget Met With Fierce Opposition

If we thought things were bad over here in the U.S., at least we might be able to take some comfort in the fact it is looking as bad or worse in the U.K. Alistair Darlings just released the 2009 budget for the U.K., and while it does not look pretty, the IMF thinks he is being way too optimistic in his projects. From the looks of things the U.K. is going to be adding an incredible amount of debt to their already enormous deficit, and growth is unlikely to come for a few more years. For more on this, read the following blog post from Tim Iacono.

The new U.K. budget announced a short time ago is being greeted with boos and catcalls as taxes are being raised and debts continue to mount - they sound a bit like the state of California with the important distinction that the Golden State doesn't own a printing press.

This report in the Telegraph provides the details:

Alistair Darling has pledged to hit Britain’s richest workers and savers with a smattering of new taxes to help support the UK through its worst recession since the 1930s.

In what is likely to go down in history as the most downbeat and depressed Budget in peacetime history, the Chancellor pledged to raise the income tax rate for those earning over £150,000 to 50pc, hearkening back to the high tax rates imposed by Governments in the 1960s and 1970s.

He also confirmed that the Government will be forced to borrow £175bn this year and £173bn the next, and would have to increase the size of the national debt from recent levels of below 40pc to almost 80pc within the next five years.

It seems that almost every developed nation in the world is now in the process of turning Japanese in that national debt relative to GDP is rapidly approaching parity. In the U.S., we'll reach that point before you know it.

There's a complete summary of the new U.K. budget here.

If this video clip is any indication, it's getting a bit testy across the pond.

Darling has already downgraded his economic forecasts from just a few months ago which, as is the case for nearly all government projections, were overly optimistic for 2009. He now pegs economic growth at minus 3.5 percent this year with a rosier outlook for 2010.

In something of an embarrassment for U.K. government economists, the IMF cast a bit of cold water on their updated forecast for next year, predicting another period of contraction according to this report in the Guardian.

Britain will be stuck in recession for another year as consumers reeling from the housing crash cut back their spending, the International Monetary Fund warns today – undermining Alistair Darling's budget claim that growth will resume at the end of the year.

In its twice-yearly World Economic Outlook, the IMF predicts that recession in the UK will be "quite severe", with the economy shrinking by 4.1% this year, and continuing to contract, by 0.4%, in 2010. In the budget, Darling forecast 1.25% growth in 2010.

Somehow, given the way things have deteriorated over the last six months, it wouldn't be surprising to see even the IMF forecast prove to be too optimistic.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Hong Kong Set To Take Off Thanks To Bernanke

Thanks to the chairman of the U.S. Federal Reserve — Ben Bernanke — Hong Kong is about to take off. It might seem a little weird that Bernanke could impact Hong Kong so drastically, but because Hong Kong's currency is so closely linked to the U.S. dollar they are forced to follow the Fed's every move. That — coupled with the fact Hong Kong's stocks are undervalued — is creating a perfect storm for Hong Kong's market. For more on this, read the following article from Dr. Steve Sjuggerud at Daily Wealth.

Ben Bernanke has cut short-term interest rates in the U.S. to essentially zero... the lowest rate we've ever seen.

He's doing this, of course, to "juice" the economy – to give it a jumpstart. He doesn't know (or care, actually) that this action will inadvertently (but undoubtedly) cause one particular stock market to go absolutely nuts.

This stock market I'm talking about is Hong Kong. Today, we have the ultimate recipe for stocks in Hong Kong to skyrocket. The Fed has cut interest rates to essentially zero (causing Hong Kong rates to be next to zero in its unique money system). And yet Hong Kong stocks are incredibly cheap. They bottomed a month ago at a single-digit price-to-earnings (P/E) ratio.

We've seen this before:

• In 1992-1993, the Hang Seng Index shot from 5,500 to 12,000. At that time, the Fed had cut interest rates below the rate of inflation. So "real" interest rates were below zero.
• The Fed did it again from 2003-2005. And in that time, the Hang Seng Index jumped nearly 7,000 points, from a low of 8,600 to 15,500. (It continued to rise... peaking over 30,000 in 2007. That's four times your money from 2003 to 2007.)

And it's happening again, right now... The Fed has cut interest rates to zero, and the uptrend in Hong Kong has arrived. It's time to get in.

While Ben Bernanke is trying to help the U.S., he's unwittingly creating havoc on the other side of the globe...

Hong Kong is quite an incredible place... With no natural resources, the standard of living has gone from subsistence wages to one of the highest in the world in just a few decades.

I believe two things contributed to Hong Kong's boom... 1) Hong Kong has been for decades one of the "freest" markets in the world, allowing entrepreneurs to succeed or fail. And 2) Hong Kong has had a stable currency, thanks to its unique currency system. For the last 25 years, the Hong Kong dollar has been worth about US$7.80, give or take a few pennies.

Hong Kong's unique currency system is called a currency board. A country that has a true currency board has one U.S. dollar in the bank for every dollar of its own currency that it prints. How does it keep the exchange rate equal? Through interest rates...

Interest rates in Hong Kong dollars are always higher than in the U.S. Depositors are willing to "take the risk" on the Hong Kong dollar for the slightly higher yield.

As a result, Bernanke essentially controls interest rates in Hong Kong. Whether Hong Kong is in a boom or a bust, he doesn't care. So Bernanke could be raising or cutting interest rates at precisely the wrong time in Hong Kong's business cycle.

Therefore, Hong Kong's stock market is subject to wild booms and busts, based on what the U.S. Fed is doing with interest rates.

As I said, today we have the ultimate recipe for stocks to skyrocket in Hong Kong. Interest rates are next to zero. And Hong Kong stocks are cheap, hitting single-digit P/E ratios a month ago.

I have two nearly guaranteed "rules" for making money in Hong Kong...

First is the "Hong Kong Can't Help It Rule." That's when the U.S. Fed cuts interest rates below the "market" rate. This means "real" interest rates are below zero. When this happens, buy Hong Kong... It can't help it. It soars.

The second rule is the "20/10 Rule." In short, you want to be a buyer of stocks in Hong Kong when the P/E ratio falls below 10. And you want to be a seller when the ratio rises above 20.

Hong Kong stocks often soar by hundreds of percent after they fall below a P/E of 10. And often they lose half their value soon after they rise above a P/E of 20.

Right now is an extraordinary moment... both rules are in play... AND we have an uptrend in Hong Kong stocks that started last month.

You should consider buying Hong Kong shares now... Triple-digit gains are possible... and you can limit your downside risk by using a trailing stop. Those are my kind of odds!

Dailywealth.com offers a free daily investment newsletter which focuses on contrarian investment opportunities.

Deflation Taking Hold In Europe

We have been hearing a lot about deflation here in the U.S., but so far we have been able to hold it off for the most part. It appears that Europe is not having as much luck though. Deflation can be an economic killer as we saw during the Great Depression and more recently with Japan's Lost Decade. For more on this, read the following blog post from Tim Iacono.

Spain, the U.K., Luxembourg, Portugal, Ireland - who's next to succumb to the scourge of deflation? Yesterday, the New York Times reported that Spanish merchants have been slashing prices with abandon, auguring in the possibility of a dreaded "deflation death spiral".

Prices dipped everywhere, from restaurants and fashion retailers to pharmacies and supermarkets in March.
...
With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.

Deflation can result in a downward spiral that can be difficult to reverse. As unemployment rises sharply and consumers cut spending, companies cut prices. But if sales do not pick up, then revenue can decline further, forcing more cuts in workers or wages.

Once again, falling prices are characterized as the potential source of much bigger problems ahead, as if the world had something even remotely close to "sound money" where currency maintained its value over long periods of time as it did in the U.S. prior to the creation of the Federal Reserve in 1913.

To review -- in the hundred years prior to the Fed, inflation rounded to zero, whereas, in the nearly hundred years since 1913, the U.S. dollar has lost 96 percent of its value.

Policies that have resulted in this loss of value, now accepted as conventional wisdom by central bankers around the world, make real deflation (the minus 10 to 15 percent per year variety, not the -0.1 percent Spanish version) a near impossibility today.

But, that doesn't stop dimwitted dismal scientists from looking there instead of at the bursting of the biggest asset bubble in the history of Mankind when identifying villains in the current economic and financial market maelstrom.

“It doesn’t mean it will spread here to the U.S., but we need to look closely at Spain and other places to understand the dynamic,” says Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “It’s like the front line of a new virus outbreak.”

If only economists would spend more time examining how they failed the world so miserably over the last few years instead of at a 19th century phenomenon, we'd all be better off.

In the U.K. too there is much gnashing of teeth where annual deflation is running at a whopping four times the rate now experienced to the south - minus 0.4 percent.

The funniest thing about English deflation is that it is, in large part, directly caused by central bank actions. The broadest measure of consumer prices includes mortgage costs, the vast majority of which are variable rate loans, and, as short-term rates have been slashed, these consumer costs have tumbled as detailed in this report in the Telegraph.

The Retail Prices Index (RPI) measure of inflation fell to -0.4pc in March, indicating that prices paid by consumers last month were lower than a year ago - a trend not seen since March 1960.

RPI inflation, which includes housing and mortgage costs, has been driven down by the the series of aggressive interest rate cuts from the Bank of England which have triggered lower variable rate mortgage repayments .
...
The economy is expected to remain in deflationary territory for many months, which will mean pensioners will receive the lowest possible increase of 2.5pc next year, adding just £2.40 to the full weekly pension, an amount criticized as "derisory and pathetic" by campaigners.

If health care costs in the U.K. are anything like those in the U.S., there are probably a lot of irate senior citizens.

A related story explains why we should all be fearful about deflation beginning with the moronic example of how, after television prices have been falling for the last 20 years, additional price declines will cause consumers to think twice. Really!?

1. It causes consumers and businesses to feel concerned about spending. Why buy that £400 television this week when you are confident it will be cut in price to £350 next month? The same applies to businesses – why invest in new machinery, or software when you think it will fall in price? Deflation can, if it becomes entrenched, cause the whole economy to grind to a halt.

2. Deflation causes wage cuts. Employers can argue that they do not need to give their staff a pay rise, because their staff can buy more goods with the same salary. Many companies are freezing pay and started cutting wages in some cases.

3. In theory, falling wages should not matter if the price of goods and services fall as well. But in practice it is very damaging psychologically. People paid £30,000 one year do not like being paid £29,000 the following year even if they can buy the same amount of goods. Everyone feels less wealthy, especially home owners whose main asset is falling in price. And when they feel less wealthy, they spend less, causing a vicious downward spiral in the economy.

4. Deflation causes the value of people's debts to mount. A £100,000 mortgage might cost £4,000 to service each year, but the value of the house could fall by £4,000 or more – a dispiriting experience, but you will still need to keep on servicing the debt.

Wage cuts, tumbling asset prices, and making debt service more expensive are all legitimate arguments but falling consumer prices really don't belong in this discussion unless it's something more than volatile energy prices and, in the case of the U.K.-style deflation, lower interest rates caused by the central banks that, ironically, are desperately trying to avoid seeing consumer prices move lower.

For a more complete discussion on this subject, see Seven key points on deflation or the many other items categorized under "deflation" at this blog.

This post can also be viewed in themessthatgreenspanmade.blogspot.com.

Is $250,000 A Year Really "Wealthy?"

President Obama keeps saying he plans to pay for much of his new spending with taxes on the wealthy, but what should be considered "wealthy?" According to Obama's campaign speeches "wealthy" means families earning more than $250,000 a year, but $250,000 isn't worth as much in New York City as it is in Des Moines, Iowa. Many of these families are challenging Obama's assessment of what should be considered "wealthy," saying how they make more than that but are struggling to get by. Tim Iacono doesn't offer these families much sympathy, but looks closer at the situation in his blog post below.

There have been more than a few comments left here by readers over the years about families with big salaries and/or bonuses carping about how tough it is to get by on just a couple hundred thousand dollars a year in income.

Always of modest means, never having had to foot the bill for little ones around the house, and having avoided living and working in the Bay Area, my view of things is probably a bit slanted in the other direction but, to me, a quarter million dollars a year looks to be a huge opportunity to sock money away for retirement.

Via the Wall Street Journal comes this tale of the difficulty some have in making ends meet.

Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.

Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.

While not familiar with the local real estate market at all, clearly, you can get a lot of house for not too much money in Sevierville.

The story continues:

"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
...
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.

The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
...
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.

James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.

Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
...
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.

"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."

The Parnells should probably take a basic personal finance class or two and many of their problems might quickly be solved - that $4,000 a month in mortgage payments for a house that's too small, and some other property, should have set off alarm bells long ago.

Also, that top line of $260K that erodes to $144K after 401k contributions, medical care premiums, and taxes sounds a bit excessive - you can quickly get to about $40K for the first two items leaving their tax hit at $75K.

Does that sound right?

It's a good thing Ms. Parnell is not asking for sympathy because she's not likely to get any.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Moscow's Property Market Set For A Hard Fall

Somewhat surprisingly to many real estate observers, Moscow has become one of the most expensive cities in the world. While Moscow's real estate market held off longer than most, it appears that the gloom is catching up to the city now, and the aftermath isn't going to be pretty. Overseas Property Mall takes a closer look at the situation brewing in Moscow, Russia in their blog post below.

Moscow investors and banks are playing a deadly game of Russian roulette in a stand-off to see who flinches first as the city’s once booming property market falls to ruins around them.

Billions of rubles are tied up in commercial and residential property portfolios.

Homes, offices and shops are standing empty as rents are unaffordable, new build projects are being canceled, investors can’t refinance and the banks are sitting on a pile of yet to be realized toxic debt.

Russia’s fledgling property market has never seen a recession – since democracy and privatization prices have only gone one way – up.

Fueled by oil and gas profits, Russia is lagging a few months behind the rest of the world’s recession problems.

But the property market has the same intrinsic problems as those in the US, UK and other European countries:

• Oversupply of commercial and top-end residential accommodation
• Rents outstripping earnings
• Real estate prices starting to adjust downwards

According to the Moscow News, a professional couple with 75,000 rubles (£1,500) a month to spend on rent can only afford a two-roomed apartment.

Even at that price, which is quite low for a Moscow apartment in a reasonable area, there seems to be plenty of availability and some agents are struggling to move property, or are closing down.

In commercial markets, over the past few months, vacant office space has rocketed from 7.5% to 17.5%, says the Moscow Times .

Prestigious commercial projects have been canceled. Rents have fallen from £1,400 per square foot to £500 per square foot in the same period. Property prices have plummeted by at least 50%.

One Moscow property observer, Andre Bar’yudin says the market adjustment was a disaster waiting to happen because Russians are too naive in property dealing.

Under communism, a worker was allocated a property according to his job.

After the collapse of the Soviet Union, state-owned real estate was given away. Families were given the flats in which they lived. This created a large population of new homeowners with little of no knowledge of how a free market works.

Rather than buying and selling residential property, families swap and offer cash compensation to make up any unfairness in the pricing. About 80% of Russian residential deals are struck this way rather than through estate agent sales like in the UK.

The conclusion is outgoings outstrip yield and incomes, so the market adjustment was inevitable.

The bubble is about to burst as predicted, and this evidenced by Russia’s richest woman, billionairess Yelena Baturina reportedly going cap in hand to the government for cash aid as her property empire starts to disintegrate.

Ms Baturina won contracts worth billions of rubles from the Moscow authorities – coincidentally led by her husband, who is the mayor.

Her construction company has applied for a £570 million loan guarantee to stave off the creditors.

This post can also be viewed on overseaspropertymall.com.

Roubini Says Financial Gloom Not Going Anywhere

There has been a lot of positive momentum lately in the markets, and people are starting to think that the end is near for the financial crisis. However, Nouriel Roubini warns that this optimism is not based on facts. The facts say that we still have much longer to go with this recession, and getting one's hopes up that the end has arrived will just lead to disappointment, and likely a loss of capital. For more on this, read the following blog post from Mark Thoma that looks at Roubini's latest article.

Nouriel Roubini cautions not to get your hopes up too high:

End of economic gloom?, by Nouriel Roubini, Project Syndicate: Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. ...

Investors are talking of 'green shoots' of recovery... As a result, stock markets have started to rally... This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow ... in the last two quarters, US growth will still be negative .... in the second half of the year... Moreover, growth next year will be so weak ... and unemployment so high ... that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse... Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ...

By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. ... So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. ...

Let's hope the end is near, but if you are a monetary or fiscal policymaker, it's far to soon to let down your guard and declare victory. You have to assume it won't be over for some time yet, and plan accordingly. If things turn out better than expected the plans can stay on the self, and existing programs can be scaled back accordingly, but that can't happen until we are certain that recovery is around the corner and we are nowhere near that point yet.

[Also see the commentary surrounding the IMF's World Economic Outlook from Yves Smith, Dani Rodrik, and Real time Economics.]

This post can also be viewed on economistsview.typepad.com.

Initial Jobless Claims Down: Is The End In Sight?

The big news this morning was that initial jobless claims fell. While this is great news, the bigger question we are all hoping to have answered is whether or not this signifies that the end to the recession is near. Along with the initial claims report, James Picerno looks at some other data, and tries to address the big question in his blog post below.

This morning's news that new claims for jobless benefits fell last week is the best news yet for thinking that the recession has peaked. It's still too soon to break out the champagne, as we'll explain. But for the moment, a collective sigh of relief is in order. Maybe.

As the chart below shows, new filings for jobless benefits tumbled by 53,000—the biggest weekly drop since December. More important is the trend. Since reaching a seasonally adjusted high for this cycle of 674,000 for the week through March 28, new jobless claims have fallen in each of the subsequent two weeks, lowering the total to 610,000 last week. That's still an unmitigated sign of recession, but the recent fall also begs the question: Does the downshift have legs?

This is a critical question because, as we've written, initial jobless claims are a valuable forward-looking indicator for estimating when recessions bottom out. In our March 6 piece, we looked at the historical record and found that initial jobless claims peaked concurrently with, or sometimes ahead of the formal end of recessions since the late-1960s. That's valuable information since identifying the end of the business cycle downturn is much easier after it's obvious to the crowd. The National Bureau of Economic Research, which officially dates the start and end dates of recessions, makes its proclamations long after the fact. Meanwhile, most of the popular metrics for gauging the state of the economic cycle, such as the unemployment rate, are lagging indicators and so they're among the last to reveal when the recession has turned, much less ended.

Initial jobless claims, then, are a better albeit less-than-perfect metric to watch for gauging when the cycle may turn. There are other leading measures to watch as well. Indeed, the stock market's upturn of late has arguably been signaling that the worst of the recession has passed.

But while it's tempting to pronounce the cycle has turned, such thinking is still premature for a number of reasons. That includes the view of some economists that last week's numbers should be ignored because it came during a holiday week following Easter. Meanwhile, the war on deflationary pressures is still raging and key sectors of the economy are still bleeding quite heavily. The latest clues include yesterday's news that consumer prices posted a modest decline in March. Meanwhile, the government advises today that housing starts continue to sink (falling nearly 11% last month vs. February), as did new building permits (down 9% last month), a signal that the outlook for a rebound in construction remains dim.

Let's also recognize that even if the recession has bottomed out, that's a long way from saying that a return to growth is imminent. It's likely that the economy will tread water for several quarters at the least once the economy stops contracting. And while the stock market appears inexpensive, or at least fairly priced, it's still too early to expect that profits are set to rebound any time soon—for reasons we'll be discussing in more detail in the next issue of The Beta Investment Report.

Still, it's not too early to begin elevating risk exposures in those asset classes and their subcategories that are most attractively priced. If we were supremely confident what was coming, we'd be more aggressive in our adjustments to asset allocation. Alas, we're only mortal, and so we continue to act accordingly.

Meantime, we're watching the leading indicators and trying to figure out if the apparent dawn is real or false. Coming to something more than a guess will take a few more weeks, perhaps a few more months. Let's hope it doesn't require several more quarters.

This post can also be viewed on capitalspectator.com.

What Will The Government Do With Goldman Sachs?

Storied investment banking firm, Goldman Sachs, is preparing to pay the government back around $5 billion in borrowed TARP funds, but whether or not the government will allow it to happen is the real story. Goldman no longer wants to be burdened with the rules and regulations being imposed on them by the government, and thanks to a $12 billion windfall from the AIG bailout the firm is in a position to return the funds. If they are allowed to return the funds, though, there is worry that it will put the other bailed out banks in a precarious position. For more on this, read the following article from Money Morning's Shah Gilani.

Not a fan of socialism? Me either. But, if the federal government has to backstop free market excesses with taxpayer dollars, how will it eventually unravel the veil, or tarp of intervention? Or should it? The answers are about to unfold before our eyes.

In the case of the government and Goldman Sachs Group Inc. (GS), a decision on whether Goldman can repay government bailout money and be freed to pay its employees whatever it wants, may determine the winners and losers coming out of this financial collapse, and what kind of government Americans will end up with.

In her extraordinary 1999 book, “Goldman Sachs the Culture of Success,” Lisa Endlich vividly chronicles the “history, mystique and remarkable success of the world’s premier investment bank.” That same year, the storied partnership structure of Goldman was junked in a wildly successful initial public offering (IPO).

I still keep three pages of notes distilled from Endlich’s book on how to create and foster a culture of success, a la the Goldman model. They now seem quaint in light of the winner-take-all at the expense of the shareholders mentality that eviscerated the old-school standards.

That’s not to say that Goldman isn’t still wildly successful. On Monday, Goldman pre-announced first quarter net income of $1.81 billion. Record net revenue of $6.56 billion from trading fixed income, currencies and commodities was offset by losses in stock trading, real estate, investment banking and money management. Nonetheless, earnings were almost twice analysts’ expectations.

Yesterday (Tuesday), on the heels of its good performance, Goldman announced that it had priced a public offering of 40,650,407 shares of common stock at $123 per share. Goldman will be its own sole underwriter and total gross proceeds are expected to yield approximately $5 billion.

Ironically, $5 billion is what Goldman needs to pay back the U.S. government in order to escape the salary and bonus caps imposed on bailout recipients.

A brief history.

On the remarkable day of September 15, 2008 Lehman Brothers Holding Inc. announced its intention to file a Chapter 11 bankruptcy petition. On the same day, venerable investment bank Merrill Lynch disappeared into the waiting arms of Bank of America Corp. (BAC). Six short days later, on a Sunday afternoon, the U.S. Federal Reserve announced approval of expedited applications by Goldman Sachs and Morgan Stanley (MS) to change their status from investment banks to bank holding companies. The rapid approval of their applications would, the Fed said, “provide increased funding support” allowing both banks to borrow directly and permanently from the Fed’s Discount Window and its other capital liquidity enhancing facilities.

But that wouldn’t be enough. As the crisis mounted, on Sept. 23, Goldman raised $5 billion from billionaire investor Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, BRK.B). And with the storied investor now onboard, Goldman rushed to raise another $5.75 billion in a common stock offering.

On Oct. 14, with the mushrooming cloud of the crisis enveloping seemingly every major bank in the country, then-Treasury Secretary Henry M Paulson (formerly Goldman Sachs’ Chairman and CEO) and Federal Reserve Chairman Ben S. Bernanke summoned the nine largest bank chief executives to Washington where they were told that they would each take a piece of government capital. Only Wells Fargo & Co. (WFC) is on record as saying it didn’t need the money, but the handout was forced on it too. Goldman itself took $10 billion.

On Wall Street, and nowhere more so than at Goldman, it’s about compensation. But recipients of bailout money are now facing the full disclosure of their executive compensation deals, as well as having to obtain nonbinding shareholder voting on compensation issues.

The Treasury is advocating a salary ceiling for recipient senior executives of $500,000 and any additional compensation to be paid in restricted stock that vests only when government funds have been entirely repaid. And there are restrictions on golden parachutes and threats that Congress will impose a 90% bonus tax.

It’s enough to make Wall Street quake in its canyon.

With the public backlash against the taxpayer-funded bonuses paid to executives and traders at crippled firms, banks are desperate to return government bailout money so they can be freed from government salary and bonus oversight.

But unfortunately for many of these banks, oversight is mandated for any recipient of “exceptional assistance,” which is defined as assistance of more than $5 billion.

No wonder Goldman wants to pay back $5 billion of the $10 billion it got.

I have nothing against the free market setting compensation benchmarks, or private companies paying successful executives whatever their shareholders vote to be acceptable. And I’m not singling out Goldman Sachs. But, nowhere else in the U.S. economy - or at the highest levels of government - is there anything like Goldman’s visible and invisible hands at work. And they’re working in the open and more insidiously, behind the scenes and through lobbyists, to make themselves a lot of money.

There is simply not enough space in any book, let alone any article, to list the power, placement and influence of current and former Goldman Sachs alumni pulling the levers of hedge funds, corporations, politicians and governments. If you want to enlighten yourself about what you don’t know about these players, simply Google: “List Goldman Sachs alumni.”

Goldman, as much as any investment bank, got its hands dirty in the subprime securities business and the credit default swap business. As to its influence and its claim to premier bank status, the first question that comes to my mind is: Would Goldman even exist today if Hank Paulson hadn’t had Goldman’s current CEO Lloyd Blankenfein in on meetings about saving American International Group Inc. (AIG)?

Out of the $185 billion that AIG received from taxpayers, Goldman got $12.5 billion for exposure it had to credit default swaps written by AIG. I’ve been told by some of my hedge fund and investment banking friends that Goldman deserved that money and that the entire counterparty structure related to almost every credit default swap was a risk.

But I like to point out that Goldman is only smarter than its peers because its trading desks are lighter on their feet. I remind them that Goldman stuffed the pipelines with toxic structured collateralized debt obligations (CDOs), and then was nimble enough to cover themselves better by buying credit default swaps to hedge their exposure to their own toxic slime and institutions that are too-big-to-fail, exactly like AIG.

What happens now with Goldman Sachs will set the precedent for everything else that the government will do or allow in the future with bailout recipients and industries. Will Goldman be freed up to overpay its risk takers and to make greater wagers as it also seeks to become too-big-to-fail? Will impositions be made on the corporate level, industry level, systemic level? Will free markets be free to leverage taxpayers indefinitely?

The argument, most recently made in yesterday’s Wall Street Journal op-ed page by Jonathan Macey, a law professor at Yale, that “demonetizing executive pay will also drive the best managers out of private companies and into hedge funds and other boutique investment firms” implies that there is a limited amount of talent available in America, which is a supposition that I find myopic, at best.

Besides, aren’t these the same people that got us into this mess?

And while letting public companies be run by shareholders - as Macey suggests - is supposed to work in principle, shareholders have been marginalized by the same Wall Street system that protects the institutions whose stocks and bonds they sell, trade and profit from.

All eyes should be on the curious relationship between government and Goldman for clues as to what shape the landscape will take when we eventually exit this calamity.

I don’t want our companies, our institutions or our economy socialized any more than Adam Smith would. But I do want to see the public tail wagging the dogs of Wall Street and government.

This post can also be viewed on moneymorning.com.

From Money Morning:

"I'd rather have this than gold." That's what one well-known fund manager recently told Barrons. Why? This special group of investments is set to pay out $4,201 guaranteed cash next month. And they pay out juicy cash sums all year long. But they're not income trusts, corporate bonds, or foreign bonds. In fact, only Martin Hutchinson is talking about them. Read his full report here...

Depression Looms Without More Stimulus

Do we really need more economic stimulus? We have already spent trillions of dollars attacking this financial crisis, and unfortunately we also have seen billions apparently wasted by poor policy decisions and implementation. All that aside, according to famed economist Robert Shiller, we need more economic stimulus or else we are likely facing another depression. For more on this, read the following blog post from Mark Thoma.

Robert Shiller says we need to continue with the monetary and fiscal policies we are pursuing, but both efforts need to be larger:

Depression Lurks Unless There’s More Stimulus, by Robert Shiller, Commentary, Bloomberg: In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. “Pump- priming” was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t. ...

In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level. ...

In our analysis of the current economic crisis, we conclude that the government should have two targets. One would be a joint fiscal-monetary policy target. The same kind of expansionary policies embodied in the government expenditure stimulus and tax cuts that are already being tried have to be done on a big enough scale and for a long enough time in the future. ...

The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies... Achieving this requires new approaches, like those announced by the Bernanke Fed and the Obama administration, but on a continuing and even larger scale. ...

In this crisis, acceptance of these measures is being replaced with outrage. It is increasing the blood pressure of the public, and that can’t continue without damage to our system. ... It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.

It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.

It is now time to keep our eye on the ball and set clear targets to fix a system that broke when our animal spirits got out of bounds.

This post can also be viewed on economistsview.typepad.com.

Treasury Yield: What Does The Future Have In Store?

A lot of people have been turning to Treasuries as the investment of choice in these unpredictable and rough economic times, but will it ultimately prove to be a good move? While widely considered "risk free" investments, that is far from the truth. There are many things that perspective Treasury investors need to keep in mind when weighing their investment options. The following blog post from James Picerno offers some insight into what is going on right now in the Treasury market, and hopefully will help investors make an a better informed decision.

It's hard to dismiss the ongoing news about China's anxiety over its massive holdings of American debt. What's worrisome for China is ultimately a concern for the U.S., with fallout that may come sooner than we think.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," Chinese prime minister, Wen Jiabao, said last month. It was a rare public admission of apprehension by a high-ranking Chinese official on the delicate and increasingly precarious lender-borrower relationship that describes the U.S. and China.

Yesterday came word that China's purchases of U.S. bonds slowed in the first two months of this year, according to new data from China's central bank, The New York Times reports. "Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend," the Times notes. The trend may now be reversing, although the notion that a pivotal point in the U.S.-China financial relationship may be near remains intact.

The fear is that China will slow (cease?) buying new Treasuries, a decision that's likely to force up interest rates in the U.S. For the moment, there's no reason to dismiss that scenario, at least when it comes to the recent trend in the yield on the benchmark 10-year Treasury Note. As the chart below shows, the march upward to the 3% mark is alive and well.

What makes the rising yield in the 10-year so striking is that it comes in the wake of the Federal Reserve's announcement last month that it would directly target lowering rates on long Treasuries. The market's initial reaction was to buy Treasuries, which resulted in one of the biggest one-day drops in interest rates on record. For a time it looked like Bernanke and company had struck gold. But confidence that the central bank has complete control over the long end of the curve has been evaporating in recent weeks.

As the above chart shows, the 10-year yield collapsed by around 50 basis points on March 18, down to around 2.5%. As of April 9, the 10-year's yield had climbed by to roughly 2.9%, just under the level where when the Fed made its bombshell announcement last month.

High interest rates in the U.S. necessarily make the dollar more attractive, at least for a time. No wonder, then, that the buck's value is rising in forex markets in recent weeks, in sympathy with higher interest rates on the 10-year. The U.S. Dollar Index is just about at the highest level since the Fed's March 18 disclosure, a news event that had initially sent the buck tumbling. Meanwhile, commodity prices generally have been inching higher as well, as per the CRB Index. Commodities are generally priced in dollars, so it's no surprise that a strong dollar equates with higher commodity prices.

Higher interest rates are almost surely the path of least resistance in the years ahead, in part because the U.S. deficits are sure to be large in the wake of all the monetary and fiscal stimulus of late. The problem is that the arrival higher interest rates now, this week, next month, next quarter come at an especially inopportune time: before the economy has sufficiently recovered. The Fed surely seeks to keep long rates below 3% for the rest of the year, or so one might speculate. But it's not clear that the markets are willing to go along for the ride.

In the old days, the Fed's powers were such that it had more control over keeping interest rates low and thereby providing the economy with ample monetary stimulus until the forces of growth rose anew. Engineering that scenario this time may be tougher, much tougher. One reason is that much of the control over future rates has been transferred to foreigners, courtesy of holding large quantities of U.S. debt. That may not be fate that rates will rise. Indeed, China surely wants to keep U.S. rates low in order to boost growth here, which will promote imports of Chinese goods. But no one really knows how these forces will play out.

Perhaps the cycle will be salvaged if the economy rebounds quicker than the crowd expects. Alternatively, the Chinese and other foreigners decide to buy large quantities of Treasuries in the months and quarters ahead. There are solutions to the current dilemma, but no one should expect that they're a forgone conclusion.

This post can also be viewed on capitalspectator.com.