No Debt Relief Program for US Taxpayer
No Debt Relief for US Taxpayer April 13, 2011
As the saga between the U.S. Congress and the Obama Administration ended last week regarding the budget impasse and the near pseudo shutdownof the government, we are now setting our eyes on the real battle that is ahead - our level of debt. In the near future, our government will once again hit its debt ceiling, which if you can believe it, is now at $14.29 trillion! The number is truly staggering. From a matter of concept, it is difficult for one to comprehend just how much a trillion dollars is, and how much productivity is required to generate the tax revenue to accommodate that kind of spending and worse yet, that kind of debt obligation (the amount of money the tax payers owe bondholders). But now, multiply that by over 14 times!! Folks, get ready - how you view the government accommodating your lifestyle is soon going to require a massive change.
One of the concepts that we have noticed is that most people fail to realize, and worse yet politicians, that the debt is not a reflection of future spending desires and obligations - it is reflective to what has already occurred and to which is only getting worse. In other words, we have already spent over the years $14.29 trillion more than we have, and are about to ask for even more without any real plan as how to slow down or reverse the rate of spending. We do realize that there are debt problems to address in Europe, but the U.S. is the "mother ship" within this crisis. And the predicament that we have put ourselves in is if we don't raise the debt ceiling, the abrupt consequences would be staggering. When we do raise the debt ceiling, it will accelerate our problem as well as the urgency to attempt to fix it. If the debt ceiling is not raised, the result would be that the Treasury Department is without authority to borrow more, which means it would have to stop payment on bond principal and the interest payments, Social Security and Medicare payments would cease, and payments to veterans, etc. would halt.
So, we expect that Congress will raise the debt ceiling, avoiding this type of situation or the time being. But what will have to be done after that, will be a massive reform of spending and a completely different level of expectations of how the government is to function. The risk of not doing so and not following through on a planof massive reform is huge. All it will take, at this point, is for our major debt holders such as China or Japan to change it's policy with holding our debt. What would cause that to happen? By our major debt holders concluding that a fiscal train wreck is eminent after they finally do the math. And people are starting to use their calculators.
The International Monetary Fund warned that in order to just regain balance and attempt to slow the rapid deterioration in our budget, the U.S. Government would have to raise all taxes and cut all transfers of entitlements such as Social Security and Medicare payments immediately by 35%. Furthermore, delaying such an action will only make it worse. The challenge is, in our view, is if you raise taxes, it will accelerate the problem because it will suck money out of the economy that would have been spent in the private sector, and instead be used to servicedebt on money that we have already spent. The result is, it will decrease future tax revenues by hindering future economic growth and fuel a deflationary trend caused from a decrease in demand for goods and services by removing productive money from the economy.
Other big names within the bond investment world are now expressing concern of our current trajectory and even taking action as it was headlined through Reuters this morning: PIMCO Goes Short U.S. Government Debt- Reuters.
Maybe we will be motivated to implement the required reform after observing the train wreck that is slowly occurring over in Euroland. The debt crisis within the European community continues, even after all of the bailout efforts for Portugal, Spain, Ireland, Italy, and Greece have been put into place, the cost of insuring the debt of these countries are now well beyond the extremes that were measured during the worst periods of 2008-2009 credit crisis. So, as the stock market continues its upward trend, and the Bernanke printing press remains in operation, Portugal is on the brink of bankruptcy and a crisis with Spain may not be too far behind. The good news in the short run is Spain did manage to pull off a successful float of a $4.1 billion offering of 3year bonds. Meanwhile, though, the latest estimates required to bailout Portugal are now at $129 billion.
As the stock market makes an almost full recovery of its previous high achieved before the Japan earthquake, some trends exist that cause us to moderate our expectations for much higher prices. For one thing, investor sentiment for the stock market is almost at the same level as it was during October of 2007; Energy and food costs are once again absorbing a high level of U.S. wage and salaries - totaling 23%, which is usually a danger sign for consumer demand; real average weekly earnings are heading negative on a year-over-year basis, despite an increase in job creation; and even though the economy is heading into a third year of expansion, there has only been a 17% recoup of the job losses that occurred during the recession. There are signs though within the economy that are of good news. Let's hope these trends strengthen and continue.
A Review of Last Week's Markets
Looking back at last week, the market was flat. Most of the week traded in a very narrow range with some selling coming in on Friday. The previous two weeks were able to move about 4.2 percent higher, so maybe it was just a consolidation of the previous couple weeks' gains. As we move into earnings season, it looks like the market will be focusing in on the economy.
Meanwhile, commodity prices rallied, with silver spiking 8.5%, crude advancing 4.8% and gold gaining 3.3%. Like we mentioned last week, a $110 crude all of sudden is good, not bad. Analysts are talking about themagic price on crude being $125 a barrel. We're not sure what the price is that will effect growth, but it appears for now no one cares.
As far as gold goes, it appears that it wants to move higher in this pattern. As we have mentioned several times in the past, generally speaking, the prices for commodities, gold, silver, oil, and stocks have pretty much moved up and down together for the past several years. The point being, gold and commodities are proving to be an ineffective diversifier of risk - Meaning gold will most likely not be a good place to hide if we have another plunge in stocks due to a credit crisis.
The mergers & acquisitions market continues to be robust as Texas Instruments is buying National Semiconductor for $6.5 billion, an 80% premium. Corporations continue to find ways to use their cash to build their models. We expect that at the end of the day though, 20 percent of the employees will get pink slips within the first two years. But in the end, these deals keep the positive sentiment in place, and therefore, these big deals are keeping the bid in the market.
In overseas news, the ECB raised its benchmark lending rate by 25 bps to 1.25%. The trigger for higher rates has been signaled, as reflected in the Treasury market yields. There was some focus on the drama in Washington over the budget. Nevertheless, it had very little effect as the deal was done in the late hours, which is fitting as it was about as surprising and predictable as the plot in a "B" movie.
Looking forward to this week, it will begin the official kick off for the earnings season. As the results come out we expect that we will see more volatility this this week than last.
