Jim Rogers: Currency Crisis Looming But Don't Short

The latest from Jim Rogers; he continues to avoid shorting as the amount of paper printing "prosperity" is overwhelming.

"Very few times in my life had I not had shorts." In fact he believes its the first time since 1987 he has abandoned his hedges. This type of thinking makes me really give pause - he is not bullish on the US economy, he simply is in abject fear of the level of paper printing going on that will drive up all assets regardless of the intrinsic value. [May 20: Jim Rogers Agrees with Marc Faber] [May 15, 2009: This was a Central Bank Printing Press Rally]

As we've been writing for the better part of the past year, the US has decided to kick the can the final time - this time moving risks and obligations from the private sector to the public sector (taxpayers). And this is how one eventually gets a currency crisis. When? Who knows... it could be years. But there is no place left to kick the can once you've used your government entities to suck up the bad decisions from the private sector.

He does talk about what the bond yields rising indicates in his mind... very similar to what we've been writing.

p.s. Oh Dennis Kneale, would it bother you THAT much to do some research on your guests? I know it's just a well paid TV gig that you can say whatever you want as long as it includes "buy stocks" and "I'm bullish" but can you at least give the appearance of doing homework. I mean, if you are not going to do "research" on Jim Rogers background ("I don't know how you were invested in the past" "So how long have you been living in China?") - who happens to be one of the most successful long term investors of a few generations... I can only imagine the 'research' done to trying to form questions to any other guest. But really I suppose it does not matter when every day ends with "I'm bullish" and "I love stocks".

Video 1...

A currency crisis is imminent, so investors should avoid shorting the market, said Jim Rogers, chairman of Rogers Holdings.

"I’m afraid they're printing so much money that stocks could go to 20,000 or 30,000," Rogers said. "Of course it would be in worthless money, but it could happen and you could lose a lot of money being short."

Rogers typically holds both long and short positions, but his perception of global currencies' instability has led him to pull out all his shorts, he said. The last time he can remember doing so was before the market fiasco in 1987.

Rogers called the US dollar a "terribly flawed currency," adding that it could be the starting point for the next currency crisis.

"I would suspect that somewhere along the line...someone's going to say, 'I'm going to start selling mine before everybody else does,'" Rogers said. "That's when you have a currency crisis."

But instead of pouring money into stocks, Rogers said investors should turn toward commodities. This sector will lead the recovery if the global economy improves, and if it doesn't, they'll still be the best place because of inflation, he said.

************

Video 1 is 7 minutes of mostly Rogers with host interruptions... below is a 14 minute video with an engaging roundtable discussion about the situation in bonds - both the CEO of Cantor Fitzgerald, Howard Lutnick, and Jim Rogers agree on our ultimate destination - it's just a matter of timing (as is everything in the markets). I thought I misheard at first but since it was repeated later in the interview Lutnick says the US won't return to "real growth" until 2014/2015. Somehow that doesn't just jive with green shoot city...

Well worth a listen, just skip all the CNBC hosts and you're good.

Updated Position Sheet

Cash: 55.3% (v 46.9% last week)
Long: 35.4% (v 33.8%)
Short: 9.3% (v 19.2%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

(click to enlarge)

LONG

SHORT

Weekend Reading

News we just did not have time to dissect during the week but still deserve notice

NYT: Are US Aerospace Companies Following in Detroit's Footsteps. An interesting story on how for the first time ever the US ran a deficit in aerospace trade. Can you hear our manufacturing base slip sliding away? You should - because it has become a roar. Part of the blame is the worldwide recession (hence exports are down) but more and more work that "Americans won't do... wait, are desperate to do since flipping houses doesn't work anymore" are leaving our shores (i.e. our imports are surging). Where to? 3rd world countries where labor is cheap... like Japan. Sigh. Just another step to the donut economy - a hollowed out middle class and the majority of people at each end.

...aerospace is showing an early symptom of the trouble that eventually undermined the three Detroit carmakers. For the first time on record, the United States ran a deficit in aerospace trade, according to the U.S. International Trade Commission.

Imports of aircraft and aircraft parts exceeded exports by $5.15 billion, a huge downward swing from the $11.4 billion surplus in last year’s fourth quarter. American manufacturers, particularly Boeing, still dominate aircraft sales in this country. But the engines and the thousands of parts that go into an aircraft assembled in the United States increasingly come from overseas, and that migration finally tipped the scale.

But trade issues and strikes aside, the most important reason for the first-ever trade deficit is the rise of imported parts and engines. They reached $22.8 billion last year, up from $17.9 billion in 2006 and $15 billion or less in the late 1990s. The nation’s aircraft manufacturers shop abroad more than ever for their ingredients, including the wings on some Boeing airliners — wings now made in Japan.

AP: China, Turkmenistan Seal $3 Billion Energy Loan. I can't stress this enough; our #1 competitor in the new century is creating long term deals via investment the world over to secure natural resources. Meanwhile, we're using our treasure on bailing out the financial oligarchs and keeping rates low so Americans can shop over and above their means.
USA

China will lend energy-rich Turkmenistan $3 billion to develop its vast South Yolotan natural gas field, Turkmen state media reported Saturday. The loan marks a key step in Chinese efforts to secure long-term energy supplies from ex-Soviet Central Asia and will likely loosen Russia's grip over Turkmenistan's gas exports.

An audit last year by British company Gaffney, Cline and Associates found that the Yolotan field near the Afghan border likely holds 7.85 trillion cubic yards (6 trillion cubic meters) of gas, making it one of the five largest deposits in the world.

WSJ: Fewer New Grads Head to Wall Street, Consulting. Let us pray a few go to sciences and math - an amazing HALF of these folks were going into financial/consulting 2 years ago. Follow the money kids... I mean, your heart!

The number of graduating Harvard seniors entering finance and consulting has fallen by half in the past year, the Harvard Crimson’s annual survey found. About one fifth of all seniors seeking full-time employment are taking jobs in one of the two sectors.

The number of seniors entering finance and consulting has fallen from 47% in 2007 to 39% in 2008 to 20% for the current Class of 2009. The financial sector saw the largest reduction, falling from 23% to 11.5%, while the share of seniors entering consulting fell from 16% to 8.5%.

On a related note, you know the job market is awful... err, I'm sorry (insert GREEN SHOOTS here!) when 4 of 10 HARVARD Grads cannot get employment. Can't be too fun for Joe 6Pack to see that, when he just spend 45K to pay for kid to get that liberal arts major ("I need to find myself") during 4 years at State U. Without the house ATM to pay for it, it becomes even more of a 'real cost' to Joe.

The worsening economy also took its toll on Harvard job seekers, as the number of students intending to work who already have jobs lined up fell from 66% last year to 59%.

WSJ: Dan Marino Sweetens Offer on His House. In the market for the home of one of the NFL's greatest quarterbacks of all time? Well you are in luck. He'll even throw in a signed football. 11 Photos here - not too shabby

Unable to find a buyer for his Weston, Fla., home, Hall of Fame quarterback Dan Marino has a new game plan: He’s throwing in $1.5 million worth of designer furniture—and a signed football, too.

The former Miami Dolphin first listed the house—about 25 miles west of Fort Lauderdale—three years ago and twice cut the price. Now, Mr. Marino, 47 years old, and his wife, Claire, are asking $13.5 million for the 15,000-square-foot Tuscan home on four acres. They built it in 1998 and among other things put in a new master suite and marble showers. The home has 10 bedrooms, 12 bathrooms and two powder rooms. The property includes two guest houses, a pool, a putting green, a 5,000-bottle wine cellar and a pond stocked with fresh bass.

Bloomberg: JPMorgan Hires Supertanker for Storage. Ever wonder what your TARP money is doing? It's storing oil to sell back to you at higher prices in the future... no wait, that's not TARP money. It's some other money ;) remember, money is fungible. But on a series sense, when you think our financial imperialists are out there simply making loans and charging fees left and right as they consolidate power in fewer and fewer hands. Think again - their hands are everywhere. I can only assume Goldman and the others are doing the same... which means our future is already set. Since these firms traders basically determine most of the price nowadays ahem...

JPMorgan Chase & Co., the second- largest U.S. bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.

The bank hired the Front Queen for nine months...

JPMorgan, which has never hired an oil tanker based on data compiled by Bloomberg going back five years, follows companies including Citigroup Inc.’s Phibro LLC unit ...

The firms are seeking to take advantage of higher prices later in the year.

JPMorgan hired the ship at $35,000 to $41,000 a day, according to the broker reports. The bank is also paying $1.6 million for the ship to sail from Singapore to Europe without a cargo, the brokers said.

One company is still hiring like mad (need 22,000 more Americans this year) and throwing quite lavish annual meetings with entertainers such as Miley Cyrus. Who else did you think it was? It's a Walmart Nation. Fortune: Walmart Celebrates its Growing Market Share

Somewhere Sam Walton is smiling. You wouldn't know that the country is struggling through one of the worst recessions in modern times from the mood inside the University of Arkansas' Bud Walton Arena here this morning, where Wal-Mart shareholders and employees gathered for the company's annual meeting.

During the meeting, which was hosted by the actor Ben Stiller and featured surprise performances from Miley Cyrus and Smokey Robinson....

Customer Growth Partners, estimates that since January, Wal-Mart's share of the $3 trillion U.S. retail market has edged up to 11.3%, compared with 10.5% during the same period a year earlier. (that's remarkable, over 1 in every 10 dollars of our shopaholic nation spent at WMT)

WSJ: Surplus of Bachelors Spurs Scams in China. Apparently, the "1 child" law and the preference for males, has some quite bad outcomes a few decades down the road. Economics (Supply/Demand) work in every market under the sun, as long as Uncle Ben or Uncle Tim does not interfere. Apparently, dowrys are skyrocketing ....

With no eligible women in his village, Zhou Pin, 27 years old, thought he was lucky to find a pretty bride whom he met and married within a week, following the custom in rural China. Ten days later, Cai Niucuo vanished, leaving behind her clothes and identity papers. She did not, however, leave behind her bride price: 38,000 yuan, or about $5,500, which Mr. Zhou and his family had scrimped and borrowed to put together.

When Mr. Zhou reported his missing spouse to authorities, he found his situation wasn't unique. In the first two months of this year, Hanzhong town saw a record number of scams designed to extract high bride prices in a region with an oversupply of bachelors.

Thanks to its 30-year-old population-planning policy and customary preference for boys, China has one of the largest male-to-female ratios in the world. Using data from the 2005 China census -- the most recent -- a study published in last month's British Journal of Medicine estimates there was a surplus of 32 million males under the age of 20 at the time the census was taken. That's roughly the size of Canada's population.

Time: This Porn's For You - Budweiser's Racy Web Ad. Ok... since it was in Time I thought I could get away with posting it here on our family friendly site ;) This could be one of the funniest videos I have ever seen although about 30 seconds too long (A+++ to the Asian cashier) but please, only view if you have a wide birth in regards to naughty things. The scope of the article is essentially how porn is now reaching a level of mainstream acceptance than even good ole Budweiser would put it in their ads.

The ad never aired on TV, and careful viewers will note that all the sexual devices are blurred and the strong language bleeped. It was made to be consumed, as beer is, by people over the age of 21. But, like beer, it is readily available if you know where to look. And again like beer, it can make you laugh.



The ad, which quietly appeared in February as part of a viral campaign, has attracted little notice thus far, but because it comes from a highly respected American brand, it seems to mark some kind of cultural tipping point, where pornography has soaked so far into the fabric of mainstream culture that it's no longer seen as a stain. The phenomenon, known as porn creep, is also evident in ads from such companies as American Apparel, Carl's Jr. and Quiznos. But Budweiser is a much bigger, better-known brand. "Why is such a huge company aligning itself with pornography?" asks Michael Solomon, a marketing professor at Saint Joseph's University in Philadelphia. "Because Budweiser must have calculated it was worth the risk to alienate some people, if they could reach their core buyers."

"The line has gotten really blurred," she says. "There's a whole generation that has been pornified. They don't think it's a big deal. Budweiser's tapping into that."

And to finish, the Palm Pre is everywhere! I kick myself each day watching that stock go up after contemplating it at $6 and reading it was "overvalued" in that range by the 'experts'. Gosh! A lot of gushing but enough with the 'iPhone' killer hyperbole.

1. Time - top 5 story
   
2. Newsweek - cover story on website
3. Fortune
   
4. WSJ's Walt Mossberg (with video)
   

/

Michael Steinhardt: "A Lot More Pain"

Great video on the non cheerleading financial station, Bloomberg... if you are unfamiliar with Michael Steinhardt he was a hedge fund manager when hedge fund managers had chest hair, and were generally over the age of 35. Before the dominance of quant funds, and HAL9000 program trading. That said, guys like Steinhardt in hedge funds and Peter Lynch in mutual funds had a lot easier environment to work in for much of their careers ... 83 to 99 the market generally created some great tailwinds versus nowadays when it wants to rip your head off and does nothing for a decade.

He has a profile here

Steinhardt Partners achieved a performance track record that still stands out on Wall Street: 24% compound average annual returns – more than double the S&P 500 – over a 28-year period. What's more amazing is that Steinhardt accomplished this record with stocks, bonds, long and short options, currencies and time horizons ranging from 30 minutes to 30 days.

... I think I've seen him once? (about 3-4 months ago) on CNBC in all these years I've been subject to the pom poms. I thought I posted that video on the blog but can't find it in archives... maybe I did not.

Needless to say, he sounds like he could write for Fund My Mutual Fund instead of drinking from the Kool Aid gang. Oh well the stock market is saying he is "wrong" because as the Oracle of all things, the stock market knows all about the coming 4-6 months. (as we saw in October 2007)

"A Lot More Pain"
"The Economy is Weak. It Will Remain Weak"
"The Dangers Out There Remain Consequential"
"The Dangers in the Economy are Most Everywhere"
"Savings Will Take a Different Perspective ... in the Hearts and Minds of the American Consumer"
"Spending Won't Pick Up in a Traditional Way as the End of Most Recessions"

All should sound familiar to our readers...

...but other than that, he waved a few green shoots around - 3 minutes (there appears to be "more" but Bloomberg doesn't post video in an easy to find format)

WSJ: Big City Skyscraper Burns Ozark Town

Great story here via WSJ: Big City Skyscraper Burns Ozark Town .... it shows how we are all interconnected by the financial web; the bankers (and insurance companies) are scoffing as they not only ripped off small/ medium town America (in this case Springfield, MO), but in an amazing step - were bailed out by the people of the same towns they ripped off. And now after they pay back TARP? Back to business as usual. It is great to be an oligarch. People keep telling me Wall Street has "changed"... I laugh. I heard all the same things about corporate America after Worldcom, after Enron ... executive compensation wil be reigned in! Corporate governmance will be better! Yes it will! For a few quarters, until Americans focus on the next American Idol and then lobbyists go to work unraveling the threads of any new policies... and we're back to square one. Reverse Robin Hood style kids.

p.s. Do you know what your city or state's pension fund is investing in? For that matter do you know what your staid life insurance company is investing or selling on the side? Cripes. I am sure some "AAA" rated product sold by Goldman, Morgan, Merrill, Lehman (whatever happened to those guys?) or Bear. Just remember, tell your grandkids their money was well spent in "savings the oligarchs... err, economy" and "Main Street = Wall Street". Dogma!

• SPRINGFIELD, Mo Losses at the police and firefighters' pension fund have thrown this Ozark city into its worst budget crisis in decades. The city wants to slash spending on health care, parks and roads. Skunk trapping may have to go, too. One of the pension fund's problems: It's an investor in a $1.1 billion speculative office skyscraper rising in New York's Times Square in the middle of a commercial-property bust. (oops. I recommend buying a commercial REIT stock to make up the problem... they are rocketing up every day as commercial real estate bust is "over" - per the stock market)
  

• That folks in places like Springfield wound up owning a piece of one of the biggest real-estate gambles in America is indicative of how widely today's commercial-property collapse has spread. Some in the industry believe the damage will be deeper than the previous crash of the early 1990s. (not if you listen to the soothing whispers of the stock market)

• There is some $3.5 trillion in commercial-real-estate debt outstanding -- more than the amount for auto loans, credit cards and student loans combined. And the default rate is rising sharply.

• Over the past decade, Wall Street unleashed a wave of "securitized" commercial-real-estate debt, just as it did in residential mortgages. Some $700 billion worth of commercial-real-estate mortgages were sliced up, packaged into securities and sold to a wide range of investors -- meaning that this time, the pain will be felt by many more players beyond banks and thrifts. (don't forget this "AAA" rated stuff went the world over, small towns in Scandanavia are suffering from this... I know, I know - it's all their fault-- the snake oil salesmen only bring you the junk, no one put a gun to your head to buy it...)

• Some pension plans bought real estate directly. Others invested through funds managed by Wall Street firms and insurance companies such as Prudential Financial Inc. The police and firefighters of Springfield are one of 272 pension funds, foundations and endowments that invested in a pooled real-estate fund managed by Prudential Real Estate Investors, a unit of Prudential.

• Losses for many such funds are now mounting. Some, including more highly leveraged funds run by Goldman Sachs Group Inc. and Morgan Stanley, have written down more than half their equity value.

• "We wanted a small portion of our portfolio in real estate, but we also wanted something that was as safe as possible in terms of the investment risk," says Evelyn Honea, president of the Springfield pension board, explaining its January 2007 decision to invest with Prudential. (err...)
  

• To sign up new investors, PRISA executives made calls on places such as Springfield, a city of about 150,000. In 2007, at a fire station community room known locally as an affordable venue for birthday parties, the Prudential managers handed out a brochure saying they would aim to put more vacant space on the market, allowing them to "increase income as the economy strengthens and market rents rise."
• Just as the building's sloping facade rose into the Midtown skyline, the market reversed. Reis now predicts that rents in the neighborhood of 11 Times Square will fall to about $64 a square foot by the end of this year, from a high of $76 in early 2008.

So you are trying to tell me... that when real estate prices go up.. it doesn't continue forever? Hmm... another fairy tale busted.

• The Springfield fund's board members in attendance -- one policeman, two firemen, one retired fireman, three citizens and two City Hall officials -- were generally impressed, meeting minutes show. Ron Hoffman, the retiree, noted Prudential's decades of experience: "The more history you have, the smarter you are going to be," he said, according to the minutes.

It's a great story actually - I encourage you to delve in. What's great is when you are a snake oil salesmen, you have such a higher level of financial acumen versus the lowly town folks you are selling the snake oil to. You can make anything sound great.... who do you think is going to win this battle of financial engineering and hocus pocus? A couple of city slickers from NYC or a couple of working class folk.

And let me end this by explaining why you might want to ask yourself why pension funds need to take more risks? Well we've delved into that many times - we have promised our public employees far more than we can actually pay them. [May 4, 2009: 4820 CALPERS Retirees Receive Annual Pensions in Excess of $100,000] [May 7, 2008: Vallejo California Votes for Bankruptcy] [May 8, 2008: It Pays to be a Firefighter in Vallejo] So the only way to make it up is to raise taxes (nah!) or increase rates of return. To increase rates of return - you have to take stooopid (sic) risks.... so it's all full circle and comes back to approving promises we can never really pay. An American ethos it appears.

• The long-underfunded pension fund was under pressure to boost returns at the time, Ms. Honea says. To avoid asking taxpayers for a greater contribution, actuaries were telling City Hall it had to boost the annual rate of return on the fund's investments to 7.5% from about 5% to meet future obligations to retirees. Real estate seemed to be an answer.

It's all connected folks.

And what of Springfield's pension fund?

• In Springfield, meanwhile, the pension fund's market value was down to $91 million at the end of March, from $131 million a year before. Nearly 10% of that was tied up with PRISA.

Ah well, I guess now they, as MANY pension funds across the country, will need to find a new investment that can generate not 7.5% but 17.5% because we have so many promises to pay off to retirees that there is no money to pay for. I guess it's time to call those city slickers from NYC to get that pension plan into a NEW investment that can create even bigger returns (for the NYC folks at least) Another transfer of wealth from the many to the few.... successfully executed.

What's that? It's not a problem after all?? Why?

Look! In the sky! It's a bird! It's a plane! No, it's a HELICOPTER! Our solution is here! We'll bail out the nation's pension funds and pay our retirees with money we don't have! How??

Printing Presses!!!!! [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment $1 Trillion Bailout]

Problem Solved. Nothing to see here... move along.

Free Market Frowning at Federal Reserve & Uncle Ben

We've written about this topic quite a few times [May 29, 2009: Bernanke Bid to Lift Housing Scuttled by Rising Rates] but I think this AP story does an excellent job explaining it even better than I have, especially for those who are not so familiar with the bond market. I said about a month ago that what bulls were gleeful over (bond rates rising) would eventually lead to hand wringing - that has now come to pass, and I read for the first time Friday that Fed Fund futures are now signaling the potential for an increase in rates by the end of the year. That's how bipolar this market is and how quickly it changes its mind... we are an A.D.D. people who can't stay on one thesis for a few months, before we flip from one view to other (many times 180 degrees different). While I think that the Fed increasing rates this year is complete garbage - I just want to let you know already that's what bond traders are switching to.

Basically, Uncle Ben is in between a rock and a hard place... frankly if the American people were not so addicted to 'nearly free' money there would be zero issue with rates rising. It would indeed be a sign of health, even in my books. But our entire consumption based economy is based on 0% rates on cars, 5% mortgages and the like. I wont' even begin to go into the long term implications when a spendthrift country goes on without any restraint and the world demands ever higher rates to be paid on our debt in the out years (2011+) If I were in government I'd be issuing 100 year bonds at the ridiculous rates foreigners are willing to pay for our junk... err, debt. In the coming weeks we have a 10 year and 30 year bond auction, which traders will be focusing on very strongly - as we wrote the Chinese (our top creditors) are not stupid, and have been moving to buying short term debt rather than long term. [May 21, 2009: NYT - Chinese Becoming More Picky About Debt] Since our bond market is still the deepest in the world, and they have to stash all their cash (much of it from us) somewhere, they are sticking it in the place they can remove it the quickest. This shields them from long term inflation and default risk... I know, I know - the US default? Never. Go back 2 years ago and review all the things you thought could "never" happen to the richest* country on Earth.

*excluding debt

Conveniently, you know who (Mr Geithner) was in China last week... I am sure on his knees praying the Chinese keep buying our 10 and 30 year debt so we can create the mirage that they have full confidence in our policies. While they mutter "we hate you" for your policies under their breath. [Feb 13, 2009: Ft.com - China to US: "We Hate You Guys"] I would not be surprised if the Chinese do it this time around and then we can all clap like seals, because we got the Chinese stamp of approval. How backwards is this world turning... Meanwhile, China is working on multiple initiatives to diversify out of the US dollar / debt - but those will take a lot of time to work through.

Everything I said about the increase in rates turning from "a great sign" to "uh oh"; I say the same for the "great" oil jump and the "reflation trade". If this continues on, it will stop being a cute way for speculators to bank coin out of the gambling halls called the markets, and it will turn into a hand wringing event for the few of us who remain in the "real economy". But for now, it's all joy and green shoots.... and a lot of wasted money by all arms of government (and don't believe for a minute the Fed is now no longer "independent" and simply another branch of the government - who backs them up? The same taxpayer that backs up all other arms)

[Let me also repeat what I stated Friday, while I think directionally the moves happening in the dollar, bond rates, and the like are the long term trend - but the move has been so vicious and in a short period of time, I'd expect a short term correction pretty soon in the opposite direction - but it will be temporary]

Via AP

• The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market. But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
• That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford. (sniffle... 5.25% mortgages are so unfair to America)
• To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy (inflation is all our enemies - we've just been brainwashed to believe it's great!) because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.
• Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported. [Jun 3, 2009: Weekly Mortgage Applications of Interest Today; Fed Already Loses $5 Billion on Mortgages]

This is actually why I covered my long bond short, and thought at the last Fed meeting they would announce even greater measures to manipulate the market. When they did not it caught me (and many) by surprise. But not to worry - another meeting at the end of the month. More American treasure can be thrown at the problem to fight the free market from its eventual path.

• "If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."
• Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time. (more 3%? try 13%?)
  

This was before my time, so I am seeing this term for the first time the past 2 weeks... just call me a blog vigilante.

• So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?
• One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending.
  
• Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.

Expect to hear what I've been blogging about for nearly 2 years... stagflation... to be bandied about in the mainstream press a lot in the months and quarters to come.

• "The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit." (the bond market seems to have more fortitude than politicians)

Rock (fiscally deranged federal government) Hard place (bond market)

• "Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.
• That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.

Behold, the horror of 5.5% mortgage rates! (I say that facetiously as anyone who has bought a house in the past 30 years can attest to) [A Country that Cannot Function without Easy Money]

• Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif. That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.
• "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."

Rut Roh Raggy.------------------->

• All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.

And with that the house ATM 4.0 would go out with a whimper. If we get to 6.0%+ mortgages (still historically low), simply close down 75% of America's malls... we will have to rely on... (wait for it).... savings. That's what happens when you substitute asset inflation for actual savings in a country for a decade+.

To finish, whenever I (rarely) blog something very specific to the bond market I have to pull out this hilarious quote from James Carville...

At the beginning of the Clinton administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said: I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

Real May Unemployment Rate Reaches 13.4%

For newer readers I do an in depth post on the "real unemployment rate" a few times a year - the last version was in [Apr 3, 2009: Real March Unemployment Rate Reaches 12.5%] so you can see definitions and methodology for 'reality' there.

Most other months I just do a Cliff Notes version similar to what I did last month [May 8, 2009: Real April Unemployment Rate Reaches 12.9%] Let me reiterate as I always do in these posts, this number really only matters to economists or those seeking truth. To market participants it's more or less a game of cat and mouse and as long as things are in line with expectations DIRECTIONALLY, if not on an ABSOLUTE valuation - all is well in the world.

I wrote last month

From here on out as the federal government jobs start coming hot and heavy and the economy stabilizes I'd expect some months of 300K to 400K of job losses and then we'll improve to 100K to 200K a month later in the year.

I predicted in 2008 we'd see a 10% "government reported" unemployment rate which would mean in real terms (how the government used to measure things before they realized we could not handle the truth) 15% unemployment rate by the time this is all said and done, and I stick to it.

I thought this month we'd report closer to 500K (high 400Ks at best) per government reporting, 300K print surprised me... as it did everyone else. But I stick with what I wrote above...

For a Cliff Notes Version of why I say the Unemployment Rate is 13.4% (roughly) since the early 90s changes have been made to record keeping methodology - which skew the numbers higher than how they were reported before that time frame. So comparing numbers in the 90s / 00s to the 70s / 80s is not apples to apples. The closest approximation I can get to the old methodology is adding the "reported" rate (9.4% this month) to the delta between the broadest rate (U-6) and the "people who have been explained away over the years by government jiggering of report". This can be seen in the chart below (the difference between the blue and gray lines) and has been about 4% the past few months. So 9.4% + 4% (the delta) = 13.4%. Perhaps its 13.2%... perhaps its 13.8% - the exact number is not the issue... the fact we are off by this magnitude since we've made changes is.


Some will say the gray line U-6 aka the broadest measure of unemployment) is the true rate but a portion of those people are working, but only part time although they wish for full time work. So they would not of been counted in the 70s or 80s either... they are just people underemployed. I don't count them in my "unemployment rate" as I am trying to simply quantify what we'd be reporting if it was 1982 and we still lived in a world of reality, rather than acting as ostriches in a "we can't handle the truth" world.

*********************

So from there here is the top line look: 345,000 jobs lost with an astounding upwards revision to the previous 2 months of 82,000. I say astounding because almost every economic report the past 6-8 months has been number X and then revised down to Y 30 days later (of course the stock market jumps on the X number as "better than expected"). This is the first time in ages I can remember it going the other way.

Now keep in mind we are spending nearly $800B to create "or save" 3.5 million jobs per the stimulus plan so we better get at least 1 million jobs out of it! You know, $800K per job! :)

Here are the lurid details, I am going to list the last 3 months (May, April, March) so you can see the progress where applicable

Government presented unemployment rate

1. 9.4%
2. 8.9%
3. 8.5%

The unemployment rate per my best estimation (should be very close) as presented pre early 1990s adjustment i.e. how the data was presented in the 80s, 70s, 60s et al

1. 13.4%
2. 12.9%
3. 12.5%

The broadest measure of unemployment and underemployment (people unable to find full time work or at jobs outside their field, et al) (U-6)

1. 16.4%
2. 15.8%
3. 15.6%

Now 2 places we add jobs almost every month are government and healthcare. Which also are the 2 entitlement programs that will eventually bankrupt the country - but for now we're just happy we can create jobs there... because the private sector is unable to. Here is the pattern in government jobs - remember last month 66,000 census jobs were created while in March was the first time I can recall the # of government jobs decreasing. Considering our states are in complete budget disasters it is remarkable the job gains in government just keep on going or at worst 'flattish'.

1. -7,000
2. +72,000
3. -5,000

Private sector job losses (this includes "gains" from the birth / death model)

1. Can't find it this month yet, will come back to fill this in
   
2. 611,000
   
3. 693,000

The average work week actually got worse... somehow, from the lows the past two months, which were records. So as a median... people who are working, are working at below 80% of the "normal workweek"

1. 33.1 hours
2. 33.2 hours
3. 33.2 hours

How are their wages doing? They continue to suffer, and continue to go in the wrong direction - in March we were at least at +0.2% gain, now this is the second month at +0.1%. Remember multiply this number by 12 to get an annual 'wage inflation' 0.2% = 2.4% annual, 0.1% = 1.2%. Inflation, brought on by the Federal Reserve will scar the American consumer.

1. 0.1%
2. 0.1%
3. 0.2%
   

Now one of my favorite statistics... the birth / death model which in an estimate of businesses too small to measure, so the government guesses - has been positive almost every month during this entire recession. :) Apparently thousands upon thousands of small business are sprouting across America creating a bevy of jobs

1. +220,000
2. +226,000
3. +114,000

I want to show you those 3 in series because as the nation loses millions of jobs, the government is saying businesses too small to measure created half a million jobs in the past 3 months. Which is why I say even my 13.4% rate is conservative. For example the government 'guesses' that 100,000 construction jobs have been created the past 3 months (fully 1/5th of the birth death model gains) in businesses too small to measure. I'll let you decide for yourself what fantasy world you want to believe.

Here is a new statistic I am just beginning to track

• The number of people who've been out of work longer than six months rose by 268,000 to stand at 3.9 million. Representing 2.5% of the workforce, this figure marks the highest seen since 1983.

To end, the average hourly wage in America is now $18.54 - roughly $38,500. (before taxes) Meaning half the country is below that, and half above. Most readers I am sure are above... but try to imagine living your life in this cost of living environment on $20-$30K (before taxes) where 1/3rd of the country lives. A basic roof over your head in many cities is say $700/mo = $8400 a year. One can do the math from there... Walmart Nation is only growing.

************
So in reality this is an improvement (as we expected) from the hell that was last winter. If I add back "reality" to what the government says, we improved from losing about a million jobs a month during the worst of it, to losing about 600K this month. To put this in perspective, we lost about 150,000 jobs a month on average (with some spikes higher but nowhere near half a million) during the recession at the beginning of the decade. Worked hours continue to falter, and wages stagnate. Inflation adjusted wages continue to go backwards... after stagnating the entire decade.

I continue to expect this report to improve and then a lot of joblessness in America to persist throughout 2010. There are no real job drivers to create millions of jobs as the housing boom did in mid decade. So instead we await China to save us, and our government to create new jobs for us - more costs for our grandchildren to bear. The next job wave will come from the bubbles the Federal Reserve is in process of creating today. And we'll continue the bubble bust economy from here til ?

Let me conclude with a green shoot - as more Americans lose their jobs and stay unemployed, this reduces the costs in corporate America. More work is shuffled to the remaining workers (we call these productivity gains) and corporate profits can go up. Hence CEO bonuses can burst and then we can start talking "trickle down economics" again - although it's failed for a decade. So high 5 a CEO as you walk by... corporate profits should be surging from here. S&P 1200 with gas $4 and true unemployment 16% should be a powerful combination.

Bookkeeping: Continuing to Trade BHP Billiton (BHP)

The volatility in the "big 3" mining names this week has been extreme, most of it due to a lot of drama around Rio Tinto (RTP). BHP Billiton (BHP) has been moving around like a penny stock with its hair on fire in association. I continue to trade the name...

Recall we stopped out at $58.60 earlier this week, taking out almost our entire position due to "two gaps" and a steep ascent... then rebought on "two gaps" being filled at $55... just yesterday. With the stock over $60 today, I liquidated 1/3rd of the position for a quick 10% gain. (1 day) That takes us down from a 3%ish stake to 2%.

I will sell 95% of the remaining holding below the low of the day, which is $59.91. To give myself leeway, $59.80 or so will be a stop loss. Then we once again created a gap in the chart this morning and I'll repurchase at the bottom of the gap... around mid $57s. The 20 day moving average continues to move up and is now mid $55 which is where I'd buy more.

If this continues to work, I'll go to 99% BHP Billiton portfolio... ahem

As for the market, my S&P 950 "in the bag off great jobs number" did not come true... in my exponential moving average world that is my trigger to bathe in Kool Aid. The 200 day moving average is right below that. I am still waiting for it; remember last Friday we had a quiet market and then in the last 5 minutes we added some 1%+ in the market via "magic hands". So anything is possible and what happens during the day is now pretty much useless. Almost all the magic is premarket (80% of the days we're in the green) and in the last 15 minutes each day.

Let me also reiterate "short bonds, short US dollar, long foreign, long reflation" is quite possibly the most crowded trade since 'long commodities, short banks' late last summer. How long this can keep working is unknoweable but when everyone is on one side of the trade have your foot near the door and your eye on the exit. It's now at the point that 4 year children walk up to me in parks, tug on my pant leg, look up and ask "Mister. Mister! How do I do reflation trade? Tommy's doing it. I want to." When these things reverse they get ugly - fast. Every fiber in body says it makes sense to short 'reflation' here (long dollar, long US bonds, blah blah), but with the Invisible Hand scorched in our memories and watching the clock we've been cowered to taking the sensible trade against the massive crowd. So just watching for now...

The commodity trade is getting so egregious people are piling in even as the dollar does a technical bounce of a major oversold condition...

Long BHP Billition in fund; no personal position

1 in 6 Dollars of Income Now Via Government; Highest Since 1929

Quite an impressive economy we are transforming into. Do you see how the shell game is working? We borrow from the future [Mar 31, 2009: Financial Rescue Pledges Now $12.8 Trillion] to give to the current, whether it be financial oligarchs, states [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States], or indeed our individual citizens. We wave our hands in random order and scream this is prosperity. [May 19, 2009: Paper Printing Prosperity Defined] As record numbers go onto food stamps and on public assistance. Indeed.

This is what happens when you rip apart the middle class to give to the elite 0.2%. People lose the ability to provide for themselves in greater number. Living standards for the bottom third continue to decline. It's not just a political logo - we are moving to a bifurcated America. Maybe not 2 Americas... perhaps 3. Just wait until the "success" of the Federal Reserve attacks the lower 3rd group in the form of the most regressive tax, inflation, in the years to come.

Via USA Today: Benefits Spending Soars to New High

• ... one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.
• Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That's the highest percentage since the government began compiling records in 1929.
• In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008.

So let's review, we just piled on $55,000 of new debt to every American household just in 1 year last year. [May 29: In 1 Year US Taxpayers on Hook for $55,000 More per Household] And we gave back $17,000 to each household. Do you see where this is heading?

Now let me be clear I'm an advocate for social safety nets that make sense, i.e. the food stamp program is critical. (heck, I've been talking about this issue for 2 years while the pundits were telling you there would be no recession) I just want you to think about why we are in the shape when over 1 in 10 Americans are now on food stamps. [Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide] In the richest* country on Earth. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]

*excluding debts

Some detail:

• Unemployment insurance. One-fourth of the extra spending covers jobless benefits, a program started in the Depression. The stimulus law, passed in February, increased benefits.
• Social Security. The bad economy has prompted a 10%-15% jump in early retirements, the program's actuary says. A 5.8% increase took effect January 1. Bottom line: $55 billion in new costs.
• Food stamps. Enrollment hit a record 33.2 million people in March, up 5.2 million from last year. The stimulus law boosted the size of the benefit. Average March benefit: $114 per person.

Adam Lerrick, economist at the conservative American Enterprise Institute, says the benefits' explosion will eventually lead to an economic crisis. "We've seen this movie before in many countries. It always has the same ending," he says.

Gas Prices by State

It now is becoming clear to me that the powers that be, want Michigan to secede from the union. Expunging the manufacturing base over 20 years and now this? I mean, California gas prices I understand, but we don't have any of those high falutin environmental laws that add layers of taxes to our gas. How many times can we cry uncle?

I am going to add this link to the information blogroll for future reference. I thought all the nation was suffering under these $3 prices but it apparently is just 5 states.

In that case... buy stocks. The consumer is back (ex Midwest)

[click to enlarge]

1.5 Years Later, the Main Stream Press Gets "Underemployment"

While blog readers have been exposed to the truth for nearly 2 years now, the main stream press is finally understanding reality. I was almost joyous when I read this AP story since someone finally "gets it": Temp Work Helps Mask Joblessness Among Americans. As we wrote last in early 2008 [Apr 2, 2008: The Underemployment Rate is Rising]

I like this term I found in this CNNMoney.com article - "Underemployment"; I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers").

This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

More on this subject later in the day when we delve into "U6" but for now let's get to the story of what's really happening in the underbelly of America.... where the former white collar now thrive as waiters and midnight grocery clerks. Good news though, Walmart (WMT) is seeking to hire 22,000 more humanoids.

• It's a familiar predicament in today's economy, in which some 2 million people searching for full-time work have had to settle for less, and unemployment is much higher than the official rate when all the Americans who gave up looking for jobs are counted, too.
• ... now that work is over and Noel, 60, and more than 60,000 other Americans hired in April to help with the 2010 census are out of work once more. Because of the surge of hiring for the census, April unemployment only rose to 8.9 percent — a much slower increase than had been feared. Figures out today show unemployment now stands at 9.4 percent.

But consider these numbers:

• The 9.4 percent May unemployment rate is based on 14.5 million Americans out of work. But that number doesn't include discouraged workers, people who gave up looking for work after four weeks. (we now call these people shadow inventory I guess) Add those 792,000 people, and the unemployment rate is 9.8 percent.
• The official rate also doesn't include "marginally attached workers," or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.6 percent.
• The official rate also doesn't include "involuntary part-time workers," or the 2.2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level. Once those 9.1 million workers are added to the unemployment mix, the rate would be 16.4 percent. (this is our "U-6" level of unemployment or underemployment)
• All told, nearly 25 million Americans were either unemployed, underemployed or had given up looking for a job in May.
• The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland.
• (in Vermont) Many parents who were frantic last year about sons and daughters serving in Iraq and Afghanistan — the state has sent a disproportionate share of its young people overseas — now are relieved their children have a steady job with benefits. (always a silver lining - thank gosh we have wars!)
  

And when you read this please understand as I will show this afternoon (to newer readers) the 9.4% is a complete myth as well, we've changed the way we've measured unemployment since the early 90s so we are in far worse shape than the late 70s or early 80s in terms of unemployed. There is no longer an apple to apple comparison - we peaked in the 10% range in the early 80s, we are now over 13% as close to 'apples to apples' as we can get. Don't believe for a moment when the media tells you "it's not as bad as the early 80s".

[May 24, 2009: WSJ - Job Fight: Locals v Immigrants]

The Bull is Back

The bull is back... and I mean that on so many levels.

Let there be no doubt now; a close over S&P 500 950 puts us over the 200 day moving average in either the exponential moving average universe or the simple moving average universe. [Jun 3, 2009: Why I Use Exponential Moving Average] The squiggly lines assure us stocks can be bought without fear, and shorts are back to their role as heathens to be mocked or talked about in hushed tones at cocktail parties. As I peruse the "simple moving average" chart I posted in the Jun 3rd entry above, you see a perfect technical formation; a break over the (simple) 200 day moving average, then an exact retrace to the line (which was bought hand over fist).

As I judge the slope of the advance, we seem on track to all time highs on the S&P 500 by Labor Day. You laugh I know, but in a world where valuation means nothing - we can do this. Together. I call on all those Americans who sit at home in bewilderment to send their entire unemployment check to Etrade or Ameritrade and get into the party. I call on governments to take their federal stimulus money and apply it to the stock market so they can solve 2010 budget shortfalls "the easy way". I call on the federal government to put their money into the stock market so... wait a second, been there - done that. Nevermind.

A quick word on the employment report, which I'll report on more in depth later in the day - (1) I don't recall seeing such a variance between the ADP report and the government report but when in doubt I always trust the government over a private sector report (2) I cannot wait to see how many jobs were created out of thin air in the "birth/death model" and (3) there appears to be a shadow inventory* of unemployed people just as there is a shadow inventory of housing stock - despite "only" 350K people losing work, the unemployment rate jumped higher than expected.

*remember as I explain in each month's employment discussion in America when you are out of work for 4 weeks, AND stop "actively" looking for work - the government says you are no longer unemployed. Therefore, many of these "not unemployed" people apparently started looking for work again the past month. Even though they are not unemployed. Government reports are cool like that.

Normally I'd have pause that EVERY blog I scan now that is not of an economic focus is bullish and has given up the ghost on shorting. Or that EVERY blog is now on the same exact reflation trade. Normally, I'd be worried that these trades are CROWDED, or the ENTIRE crowd is now on one side of the boat. Normally, I'd be worried that each day I see I can buy stock on every dip and never have to worry about losing money within 48 hours. Normally it would seem so simple to be a long as to be egregious. I'd wax poetic about how this is setting us up for a reversal that no one is positioned for. But these are not normal times - I have the "insistent bid" always supporting us to make sure the market never really goes down.

So with that, a toast S&P 1000, hopefully by the end of the day or at latest next week. And I can break out my Dow 10,000 hat which was so fashionable in 1999. We've made much progress the past decade.

Like a lemming jumping over the cliff I'll be joining the stock hungry crowd and buying long exposure. The angry mob is running over each other to buy stock... preferably of the 40-70 PE variety.

Latvia Shmatvia.

Kool Aid.

Latvian Debt Crisis Only an Issue if Your Latvian?

Remember when Eastern European bank exposure was a major "Black Swan" event? Those were the days... way back when. Like 3 months ago. [Mar 2, 2009: NYT - Ukraine Teeters as Citizens Blame Banks and Government] [Feb 18, 2009: WSJ - Banks Reel on Eastern European's Bad News] [Feb 27, 2009: John Mauldin on Yahoo's Tech Ticker]

This was in fact one of my 2009 Outlier Predictions. In [Dec 16: 13 Outlier 2009 Predictions] we wrote

#12 Wildcard/Europe: Potential defaults on debt arise in a host of smaller countries - especially of the Eastern European variety. I don't know which ones, but they have been mini U.S.'s, borrowing over and above their head, but unlike the U.S. do not enjoy the fact the entire world rushes into their debt market when a crisis emerges. The opposite will happen - Iceland & Ecuador are just the precursor.

This one is "in the bag".

Why do you care about Latvia? You don't... we're Americans. We only care about ourselves. And now apparently China. Everything else is just details. But it's the #1 story in some UK papers. Now granted a small country like Thailand pushed the entire Asian region into crisis a decade ago as there is generally a domino effect, (Russia also went bonkers at the time) but ... well, let's just say 'green shoots' and smile at each other. Did this even make CNBC America?

Via UK Telegraph

• Latvia has become the first EU country to face a sovereign debt crisis after failing to sell a single bill at a treasury auction worth $100m (£61m), prompting fears of a fresh storm in Eastern Europe as capital flight tests currency pegs.

• The central bank has been burning reserves to defend the lat in Europe’s Exchange Rate Mechanism, but markets doubt whether Latvia has the political will to carry through draconian cuts in spending – or whether such a policy even makes sense at this stage.
• Tremors hit bank shares in Stockholm and triggered a sharp fall in Sweden’s krona. Swedbank, SEB and other Swedish banks have $75bn of exposure to the Baltic states, and face cliff-edge losses if the pegs snap.
• Fresh turbulence in the ex-Communist bloc would rattle West European banks, which have €1.3 trillion of exposure to the region. “We haven’t yet seen the full extent of the crisis in the East European banking system. Defaults are creeping higher,” he said.

Do you realize how little $75 Billion is nowadays? That little amount solved ALL 19 of the US banks "stress test" issues.

• “Latvia may be a small country but it has vast repercussions for the region,” said Bartosz Pawlowski, of BNP Paribas. “If the currency breaks in Latvia, it is likely to break in Estonia and Lithuania as well, and perhaps Bulgaria, with effects on other countries like Romania.”
• Latvia, a Baltic country of 2.2 million people, last year had gross domestic product of about $34 billion. But output plunged in the first quarter and is expected to contract by about 17 percent for the year. The government is struggling to reduce its budget deficit, which is estimated at about 9.2 percent of gross domestic product. The I.M.F. had agreed to a revised budget deficit of 7 percent from the original 5 percent, and meeting the current target will not be possible without further budget cuts.
• The G20 deal in April to triple the IMF’s fire-fighting fund to $750bn has reduced the risk of a currency conflagration, but while the larger reserves will buy time, it does not change the fact that some countries have taken on too much debt.
• Latvia’s premier Valdis Dombrovskis warned against a devaluation “quick fix” but may have fuelled the flames further by admitting that the lat is overvalued by a third. “If we’re talking of devaluation, it definitely won’t be less than 15pc. It’ll most likely be 30pc. Real incomes will shrink very fast. The immediate shock will affect absolutely everyone and everything,” he said.
• Fitch Ratings says foreign debt maturing in 2009 is equal to 320pc of foreign reserves.
• The finance ministry expects GDP to contract 18pc this year. House prices have fallen 50pc , the world’s most spectacular crash. A third of the country’s teachers are being fired and public salaries will be slashed by up to 35pc to meet bail-out terms imposed by the IMF and the European Commission. The policy risks a deflation spiral that defeats its own purpose. (my recommendation is to print money and throw it at the people, and especially your country's oligarchs - works fantastic here)
• “The level of adjustment is too extreme and it is testing the social and political fabric of the country,” said Tim Ash, from the Royal Bank of Scotland. “You have to ask whether they are sacrificing the Latvian economy to protect Swedish banks. It would be better to devalue now and clear the air.”
• Leaks suggest that the IMF favours devaluation, the normal cure for countries that overheat. It was overruled by the European Commission, deeming retreat from the ERM peg to be a threat to Europe’s fixed-exchange orthodoxy.
• Mr Ash said the crisis was playing out much like the final days of the Russia debacle in 1998 and the end of Turkey’s crawling peg in 2001, with momentum building until a critical point of no return,

Oh well, if there is one thing I've learned in the markets, is it you don't pay attention to something, it doesn't exist. So consider the Latvian problem "solved".

I don't have the link but I saw yesterday that Europe now thinks it should pull off the same scam as the U.S. - create a "stress test", let everyone pass and make the crisis disappear into the ether. Because as long as government puts its stamp of approval on it, we need to believe. I do have to say frankly folks - that was the best dog and pony show I have ever seen... a change of an accounting rule here, a stress test there, billions upon billions of futures buying at appropriate time and it's as if none of this happened.

On a kind of amusing related note - Putin is out shaming his oligarchs as anti rich sentiment rises. Thankfully, with oil surging the "oil economy" should be back soon.

• Vladimir Putin, the Russian prime minister, publicly criticised his most faithful oligarch on Thursday in an attempt to deflect growing social discontent on to the country’s unpopular super-rich.

• Mr Putin, who is a master at dispensing ritual humiliation, likened Oleg Deripaska to a cockroach and forced him to accompany him on a tour of Pikalevo, a factory town that has witnessed the most serious social unrest Russia has seen since the start of the global economic crisis.
• Last week Pikalevo’s residents vented their anger over job losses and unpaid wages at one of the oligarch’s local factories by blocking a major road and causing a 250-mile traffic jam. The unprecedented protest reportedly worried the Kremlin, which has long been afraid that Russia’s imploding economy could cause serious political unrest.
• Anxious to ensure that the Pikalevo problem remained an isolated one, Mr Putin sought to cast himself as the town’s saviour – and Mr Deripaska as its villain.
• “I wanted to bring here the authors of this tragedy, whose greed and ambition have made thousands of people hostage to this situation,” Putin said on state television. “Where is the social responsibility of business?”

And...

• The Kremlin touted the resilience of the economy at yesterday’s opening of the “Russian Davos” in St. Petersburg. BP Plc, Citigroup Inc. and Royal Dutch Shell executives and 2,000 guests heard little of nearby protests against what Premier Vladimir Putin called corporate greed.

Oh that's just rich...

[Dec 22, 2008: WSJ - Oil Crash Stirs Unrest in Russia & Protectionism on the Rise]