Deficit | Sense on Cents - Part 3 Sense on Cents

Archive for the ‘Deficit’ Category

Social Security, Medicare, Increasing Deficits: How Will We Manage?

Posted by Larry Doyle on May 15th, 2009 4:29 PM |

The immediate issues of rising unemployment, increased foreclosures, available credit and the like dominate our economic landscape. That said, the mountainous hurdles on our economic landscape – Social Security, Medicare, and the Federal deficit – are getting larger and more in focus.

This week we have witnessed the following news releases:

Financial Health of Social Security, Medicare Worsens In Past Year as reported by Fox News.

Given plunging tax revenues due to increased unemployment, Medicare is actually running a net deficit this year. It will become insolvent at this rate in 2017, two years earlier than previously projected.

Given revised projections, Social Security will start running an annual deficit in 2016, a year earlier than previously projected. The fund will become insolvent in 2037, four years earlier than projected.

Does the American populace believe somehow or other a Wizard in Washington will solve the financial sinkhole represented by these two programs?

Are revenues going to miraculously appear to plug the holes in these funds? Don’t count on it. Without an increase in revenues, the government will obviously have to deal with the liability side of the equation. This liability side is only exacerbated by the soaring deficits. It was interesting to hear President Obama acknowledge the price of soaring deficits, that being higher interest rates, this week. As Bloomberg reported, Obama Says U.S. Long-Term Debt Load ‘Unsustainable.’

While Uncle Sam may spend millions of dollars and thousands of man-hours reviewing these programs and expected future costs, as with any debt, there remain three options: default, devalue, restructure.

I do not believe Obama or anybody else believes default is an option. Devaluing the debt is clearly on the front burner of the Fed, Treasury, and throughout Washington. How so? Keep the Fed Funds rate at 0-.25% until we get inflation going. If the “Washington wizards” believe they can control the inflation monster, that will be a miracle.

In regard to restructuring the debt embedded in these programs, I have no doubt we will see this happen on a grand scale. How so and when? In my opinion, given the magnitude of Obama’s plans across healthcare, energy, education, and the economy, he needs to find real savings somewhere.

In my opinion, I expect the future obligations of Social Security and Medicare to be written down during Obama’s first term by excluding payments to individuals whose net worth exceeds a certain limit. What number may that be? I would have to review analysis of demographics and net worth statistics to venture a guess.

This restructuring would be the greatest redistribution of wealth our country has ever seen. Similarly, it would define these programs as nothing more than government sponsored Ponzi schemes.

I see it happening. What do you think?

Tags: how to address deficits, how to handle gaps in Medicare, how to handle gaps in Social Security, Medicare. federal deficits, restructuring Medicare, restructuring Social Security, Social Security
Posted in Deficit, General, Medicare, Social Security | 1 Comment »

Midday Market Update . . . U-G-L-Y

Posted by Larry Doyle on March 5th, 2009 12:45 PM |

I had written that yesterday’s 2-3% upward move in the market was very likely a Dead Cat Bounce. Well, that cat is burrowing further into the ground as markets have more than fully retraced yesterday’s upward move and are making new lows. This type of price action, known as lower highs and lower lows, confirms bearish trends.

I hope our readers know that all financial information you could possibly want is on the Market Data tab on the Sense on Cents header. That resource provided by the Wall Street Journal is not only a great way to get a quick and comprehensive snapshot of all sectors of the market, but also a great way to keep your brokers and financial planners on their toes and working for you!!

Let’s take a quick look at the markets and then I will offer some commentary. (more…)

Tags: 2nd liens, banks, bonds, brokers, China, commercial real estate, commodities, corporate bonds, financial information, financial planners, GE Capital, General Electric, insurance companies, loan modification, market data, municipal bonds, Nouriel Roubini, stocks, trends, Wall Street Journal
Posted in China, Commerce, Congress, Current Affairs, Deficit, Economic Stimulus, Economy, Education, Equity Markets, Housing Crisis, Infrastructure, Insurance Industry, Mortgage Crisis, Mortgages, Real Estate, Unemployment, Wall Street | 1 Comment »

Overnight Trade

Posted by Larry Doyle on March 4th, 2009 6:31 AM |

Stocks in Asia rose on the heels of a report that China’s Wen May Announce New Stimulus Measures to Revive Growth

With China allocating this capital to a new stimulus, will that lead to lessened appetite for U.S. Treasury debt? In overnight trading, Treasuries Drop on Potential $60 Billion Note Sale Next Week.

In other market making news, the shine has come off gold somewhat. I had cautioned that I do not play in gold because of the large number of speculative traders. Gold dropped 3% overnight and is back to $910/oz.

The U.S. dollar continues to move higher versus the Japanese yen and is back close to par, 100 yen for $1 dollar.

I remain in the camp that the bond market will continue to be pressured by the global demand for capital.

One story that also bears watching is the “plundering” of Merrill Lynch. In breaking news the WSJ reports how Merrill Lynch paid a large number of individuals outrageous sums at the end of 2008. Merrill’s $10 Million Men highlights the details. If I am John Thain, I’m not sleeping well!!

Tags: Asia, China, equities, gold, Merrill LYnch, stimulus, U.S. Treasury
Posted in China, Deficit, Government funds, Mortgage Crisis, Stimulus Plan, Wall Street | No Comments »

Mo’ Money…

Posted by Larry Doyle on March 3rd, 2009 2:48 PM |

There are a string of events in the market today that all highlight the need for entities to refinance debt and raise capital. Given the tightness of credit and the onerous terms being exacted within the bond market, many firms are massively capital constrained. These issues are global in nature. From our friends at Bloomberg, I offer the links to a number of these situations. In light of these types of situations, one does not need to be in a hurry to buy stocks. Additionally, given the demands for capital, I still maintain that rates are headed higher.

I will share with you some of the current problem situations getting serious attention:

1. GE Falls Below $7 on Concern Finance Unit May Need More Capital

2. Corporate Bond Losses Drive Investors ‘to the Bunker’

3. Metlife, Lincoln Sink as U.S. Stock Rout Increases Capital Need

4. German Real Estate Firms Owe Billions, Face Deadlines

Tags: Bloomberg, capital, corporate bonds, credit, finance, General Electric, German real estate, Lincoln, Met Life, stocks
Posted in Banking Institutions, Business, Commerce, Credit Card companies, Credit Risk, Current Affairs, Deficit, Economy, Employment, Equity Markets, Global Finance, Hedge Funds, Real Estate, Reputation, Retail Business, Risk, Unemployment, Wall Street | 5 Comments »

A Virtual Smorgasbord

Posted by Larry Doyle on March 2nd, 2009 4:24 PM |

On the heels of the news about AIG, Berkshire, and HSBC, the equity markets have found no support today and are down 4%. While the malaise of the markets has much of the focus, let’s review a few other items that I see on today’s menu:

1. In regard to AIG, current CEO Edward Liddy and former CEO Hank Greenberg have started some public feuding over the nature of AIG’s problems. Greenberg is trying to make the case that the risks underwritten at AIG occurred after his departure. Liddy responded that the culture, the compensation system, and the division housing the bulk of AIG’s risk all developed under Greenberg. Wow!! When our country is screaming for leadership, we have senior executives playing the blame game and pointing fingers. How pathetic!! (more…)

Tags: 12th Street Capital, AIG, Berkshire Hathaway, California housing, CMBS, compensation, consumer finance, DJIA, economic activity, Economy, Edward Liddy, Hank Greenberg, housing, HSBC, Risk, RSI, Washington D.C.
Posted in Bailout, Banking Institutions, Business, Commerce, Credit Risk, Current Affairs, Deficit, Economic Stimulus, Economy, Employment, Equity Markets, General, Global Finance, Government funds, Housing Crisis, JP Morgan, Mortgage Crisis, Mortgages, Real Estate, Reputation, Unemployment, Wall Street, Warren Buffet | 8 Comments »

The Weakest Link is Weakening

Posted by Larry Doyle on March 2nd, 2009 6:00 AM |

The other day I highlighted the fact that 12 eastern European countries would solicit a bailout from the European Union over the weekend in Brussels. I defined this bloc of eastern European countries as currently the Weakest Link in the global economy. Well, if they were the weakest link then they just got weaker as they were rebuffed in their request for aid.

The dynamic at work in the weekend’s emergency meeting held in Brussels is a play on beggar-thy-neighbor policies implemented during times of economic stress.

There are actually a number of factors influencing the European Union’s refusal to provide bailout money to these eastern European nations. Included in these factors are the following: (more…)

Tags: Bailout, beggar-thy-neighbor, Brussels, coordination, Eastern Europe, economic stress, Economy, Euro, European Union, global economy, Hungary, instability, International Monetary Fund, Ireland, Poland, Portugal, Weimar republic
Posted in Bailout, Commerce, Credit Risk, Current Affairs, Deficit, Economic Stimulus, Economy, Equity Markets, Euro, European Union, Foreign Affairs, Foreign Policy, General, Germany, Government funds, Hungary, Russia, Ukraine, Wall Street | 2 Comments »

Why Are Interest Rates Headed Higher?

Posted by Larry Doyle on March 1st, 2009 3:57 PM |

While our domestic stock markets are down approximately 50% over the last 14 months, there has been a rush of cash into short term money market funds, government bond funds, and in the last few months corporate bond funds and municipal bond funds. As I mentioned in my February 2009 Market Review, I am increasingly nervous about bond investments at this juncture. Why? I’m glad you asked.

1. Primarily due to the massive global government funding needs which are just starting to hit the market. In a recent piece, the highly regarded Financial Times projects global government debt issuance to TRIPLE in 2009.

German Prime Minister Angela Merkel is concerned about European countries looking to tap the markets on or near the same dates. She is proposing global coordination of debt issuance so as to insure that rates are not DRIVEN higher. (more…)

Tags: Angela Merkel, bond markets, cash, consumers, Economy, European Community, Financial Times, GDP, German bunds, Greece, Ireland< Portugal, Money Market Funds, municipalities, pension funds, sovereign credit risk, stock markets, Warren Buffet
Posted in American Consumers, Auto Industry, Commerce, Congress, Credit Card companies, Credit Risk, Deficit, Economy, Employment | 7 Comments »

When the Oracle of Omaha Speaks..

Posted by Larry Doyle on February 28th, 2009 4:20 PM |

Warren Buffett’s annual letter to shareholders is always a highly anticipated event by market participants. Given the fact that Berkshire is effectively a diversified holdings company, Buffett has a unique perspective into a wide array of businesses. He also has the wisdom of investing over many years and through many challenging markets.

Well, if misery loves company, it has a solid partner in the person of Warren Buffett because 2008 was Berkshire Hathaway’s worst year ever. In reviewing Buffett’s letter allow me to offer some highlights. For those who have an even passing interest in the markets and investing, reading this letter is akin to attending an opera by Pavarotti.

I beg your indulgence as I attempt to be the opening act and provide an overview of the “Oracle of Omaha’s” thoughts on the markets and economy: (more…)

Tags: American Express, Berkshire Hathaway, Economy, Fannie Mae, Freddie Mac, markets, OFHEO, Oracle of Omaha, Pavarotti, U.S. Treasury, Wall Street Journal, Warren Buffet
Posted in Banking Institutions, Business, Commerce, Current Affairs, Deficit, Economic Stimulus, Economy, Employment, Equity Markets, Fannie Mae, Freddie Mac, General, Global Finance, Housing Crisis, Risk, S&P 500, Unemployment, Wall Street | 1 Comment »

“My Mama Told Me . . .

Posted by Larry Doyle on February 28th, 2009 2:20 PM |

. . . You Better Shop Around.”

What does that wonderful song from Smokey Robinson and the Miracles have to do with our economy? I’ll tie that in a bit later.

More and more people are inquiring of me how and why banks are making credit tighter both in terms of availability and in terms of rates charged.

This tightening of credit is due to the “crowding out effect” from dramatically increased government borrowing along with the actuality and likelihood of increased defaults across all consumer and corporate loans. In the face of those defaults, banks will set aside more capital in reserve to cushion those losses.

What is a consumer to do? There are two tactics:

1. Everything’s Negotiable which I highlighted in a post dated December 23, 2008. Talk to your bankers and/or credit providers. Put your banks and other credit providers in competition. Where does one start and how does one easily comparison shop? I’m glad you asked because that leads me to point #2.

2. Shop around (thank you, Smokey)! Sense on Cents provides links via our Primers (in the right sidebar) for a look across the market to virtually every consumer credit need. Remember I have NO professional relationship with any of these entities. From borrowing needs to investing, with many stops in between, I hope these primers help you navigate the economic landscape going forward!!

And now, a trip down memory lane . . .

Tags: banks, capital reserves, consumer credit, consumer loans, corporate loans, credit, crowding out effect, defaults, Economy
Posted in American Consumers, Auto Industry, Banking Institutions, Business, Commerce, Credit Card companies, Credit Risk, Current Affairs, Deficit, Economy, Employment, Fund managers, Global Finance, Government funds, Home Loan, Housing Crisis, Insurance Industry, Mortgage Cram-Down, Mortgage Crisis, Mortgages, Real Estate, Retail Business, Risk, Unemployment, Wall Street | 1 Comment »

February 2009 Market Review

Posted by Larry Doyle on February 28th, 2009 10:13 AM |

Prior to going to the comments section of my son’s report card, human nature dictates that I first look at the grades. In that same vein, let’s see how the markets performed for the month of February: