Consumption Must be Maintained

With the first preseason game for the Patriots on at 7:30, and probably the first look at Tom Brady, I will have a few quick items for tonight. The author of The Housing Time Bomb left a comment that perhaps we may be enemies because I am a Patriots fan, and he is a Pittsburgh Steelers lover. To this I can only ask, why? The Steelers are a beloved good luck charm here in New England. In 2001 the Patriots shocked the Steelers, in Pittsburgh, at Heinz field on their way to the Superbowl win. In 2004's AFC title game the Steelers where soundly trounced, in Pittsburgh, at Heinz Field again as the Pats moved to repeat as champs. So in my opinion, I think the Steelers rock and I hope to see them in this years playoffs. We can still be friends!

I am expecting to do the usual Friday night fun stuff, so leave requests. Tomorrow will be the last post for a while so enjoy while you can.

Why Would the Government Take Your Gold?
The always entertaining "Mogambo Guru" penned a hilarious missive that answers the often asked question "Will the government take private gold away?". Key excerpt:

Why the Government Does Not Need Your Gold
...Perhaps it is all this talk of confiscation of gold that has Doug Hornig of Casey Research’s Gold & Resource Report commenting that when FDR made private ownership of gold illegal in 1933, the dollar was on the gold standard and thus 100% backed by gold.

The difference between then and now is that “we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation” which is (insert sound of trumpet fanfare) the winner of the coveted Mogambo Award For The Understatement Of The Week (MAFTUOTW).
It wins for two reasons, the first being that is so terrifyingly true! There are no constraints on the government getting the Federal Reserve to create as many dollars as it, or anyone, needs or wants, and thus it is beyond ludicrous to even compare the 1933 gold-backed dollar against the pathetic piece of almost-worthless fiat money that the dollar has become, to which Mr. Hornig alludes when he says that Obama has it easy, as “However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.”

And he is, alas, absolutely right. Unlimited amounts of money can be created just by asking for it. In fact, no one has ever disputed that fact, as it is the whole reason behind having a fiat currency! Hahaha!

In relation to the prospects for a confiscation of gold, he asks, “Given this kind of clout, what does he need gold for?” which is exactly right! If you can print money to spend, why do you need gold to sell to get money to spend Hahaha.

Makes you laugh until you cry.

Consumption Must be Maintained
Mish had an article up today that called attention to some comments made by Toll Brothers CEO Bob Toll during an outlook conference call. I read it early in the morning and it stuck with me all day.

Luckily Seeking Alpha provides written transcripts of such calls, so tracking down the information was no problem.

Here is the section on page 7 (near the bottom):

Steve Sullivan - Banyan Securities asks:
Bob, could you give us your thoughts about any form of government rebates going forward given the federal levels rebate is set to expire in the fall?

Robert Toll:
I sure can. My thought is that the government, which means we, are foolish for not following the example and lesson of cash for clunkers that's been made evident to us. You can feel, sense and smell that the market wants to turn in housing. If you took that 8,000 make it 15,000, did it just four months, and did it for new home construction, you'd put twice as many people to work, twice as fast as what's being done with the auto industry...

...This isn't China. They decide to build a highway, two weeks later they're going to work. You decide to build a highway here, two years later, you're still talking to the audience about the repercussions of that highway on the neighborhood. It's just a shame we don't jump on this...

...I don't know how many dining room sets and sets of curtains and garden tools are bought every time we build a tunnel, but I'll be they're very few. So the collateral impact on the economy from building homes is known to be tremendous and therefore I think the government, which again is we, ought to jump on it.
So send those cards and letters in folks to your local reps and to your senators. Maybe we could get it cooking.
With respect to the rebate expiring, I don't think it will for all of the reasons above."

This guy is serious about this.

On August 3rd I wrote exactly about "Cash for Blank" programs and estimated a $25,000 housing component, so $15,000 is a steal!

This put me in mind of a great science fiction film.

In John Carpenter's "They Live" the hero (Roddy Piper) stumbles upon sunglasses, which once put on, reveal that aliens have taken over the Earth and use hi tech signals to mask their appearance. the aliens also use hidden messages on magazines, newspapers, TV, and billboards to influence behavior. Here is a shot of one scene:

Please notice the huge "BUY" sign and the "CONSUME" sign is partially hidden.

Bob Toll thinks handing out cash, which he even knows comes from our own pockets, to encourage buying a home so you can fill it with curtains and such is a grand idea. I would ask Mr. Toll to start us all of with the handout by donating 10% of his net worth towards the cash for homes programs he would dearly love to see out in place. You will make it back and more on the back end Bob, no worries!

At a time when housing prices are still in freefall, inventory of homes is huge (with plenty of "shadow" inventory to boot), and mortgage losses have yet to reveal their final number, the pushing of housing sales is at best poor judgement, and at worst criminally insane.

Consumption must be maintained at all costs. No matter the costs.

Have a good night.

Silent Liquidity

Now that was a long weekend! Late night concert Friday night and then plenty of errands all weekend. When I got to work this morning it seemed like I had never left.

PIMCO Puts the FED in Their Place
Last week there were some voices from the FED trying to play the "we may raise rates" game. This is of course absurd, and it is puzzling why anyone at the FED would bother with such silliness. Today the bond giant PIMCO put the FED in their place by not only forecasting ZIRP until 2011, but going on the record that their investment portfolio is geared for just such a thing. As PIMCO is the Goldman Sachs of the bond market, it should be finally clear to any and all that there will be no drainage of FED liquidity any time soon. So stop saying otherwise, you are making my head hurt:
Fed Won’t Raise Rate Till 2011, Pimco’s McCulley Says

Aug. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke won’t raise borrowing costs before 2011 as the threat of deflation remains for the U.S., said Pacific Investment Management Co., which runs the world’s largest bond fund.
Benchmark rates will not rise “before 2011 and I’m not only forecasting that as a professional forecaster, but positioning portfolios on that proposition as well,” said Paul McCulley, 52, managing director at Pimco, in an interview that was broadcast by the Australian Broadcasting Corp. today, and taped earlier in the week. “What I’m worried most about is simply a shortfall in global aggregate demand relative to supply potential.”

Bond Auctions Over, Dollar May Now Resume it's Slide
After the massive debt issuance of last week, it came as a surprise to this blogger that the dollar was not lifted higher before the bond auctions. The delicate balancing act of keeping a stock market moving ever higher, yet maintaining the dollar in and around the 80 mark on the index can be tough. Of course now that the sales are done, the dollar has resumed it's slide downward, with a nice two step drop today alone:

While the downdraft has picked up some momentum, I would not get concerned until 75 on the index is breached. Should that happen, the dollar will become a big story. You may not hear much about it as stocks will be flying high at that time, but it would bear watching.

Not that you need to look very far for fundamental reasons for the dollar weakness, but if you want a nasty headline, check out this piece (hat tip reader Watchtower):

Biggest tax revenue drop since 1932
WASHINGTON – The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

I did not know most corporations paid income tax, so that was news to me! There is a nice graph in the story worth a look as well.

Silent Liquidity
The current period has been marked by debt destruction and deflation as it pertains to money supply velocity. Many of the inflation mindset see a graph like this one (I have seen this a few times just today, click for large view):

And wonder just how all this money is not finding a way into the market place. I wonder the same thing myself.

Much of the FED/Treasury inspired liquidity has been tied up by banks "hoarding" the cash. The argument is that banks will not lend out because they are fearful and still concerned over losses. This has resulted in money velocity falling precipitously. Hence no credit expansion.

This line of thought assumes that banks are both 1.) fearful of anything except making a killing and 2.) have real concerns over future losses.

The "Stress Tests" were concocted to give a free pass to the banks to conduct business as usual. If you have not been seized by now, you are either too small to bother with, or you are not going to be seized. The massive TARP bailout for the banks against overwhelming public opposition has surely emboldened the banks going forward. Goldman Sachs has had no problem posting monster profits with a straight face.

I think the banking system has been waiting for the right kind of story to materialize before they begin to deploy all of their new shiny capital. The recent crossing of 1000 on the S%P 500 and moving over 2000 on the NASDAQ has all the right looks of a speculative ramp up.

The banks will not flood enough money into the system through the stock market however. There needs to be an more diffusive method. I think the model the government will look to use is the wildly successful "Cash for Clunkers" hand out. Depending on how much the car being bought costs, the $4500 giveaway can represent anywhere from 10% to 25% of the purchase price.

One may wonder why the $8000 tax credit for first time home buyers was not such a good show. The $8000 is a small percentage of a home price, and it was a tax credit which is in now way as tangible as cash money in the hand.

Looking ahead I think we are going to see expansion of the "Cash for BLANK" model. You can already see how giddy the politicians are whenever they discuss the program and how well they think it is working. Here are some possible items I would expect to see:
-$4500 towards any car purchase, not just a clunker retirement
-$25,000 towards a new home purchase
-Revival of the Television money program, now expanded to $1000 to get rid of your old TV if you buy a new one
-Business tax credits for heavy equipment orders
I could go on.

Am I being sarcastic? I think a little. I do think we have not seen the end of the "Cash for BLANK" program idea. Seeing the response from the government and sadly a public looking to take on more debt just because it is 20% off has really changes my mind about frugality going forward.

Of course, should the indices continue to rise (they will) and several or more of the "Cash for BLANK" programs generate artificial demand for all sorts of items, we come to see that silent liquidity sitting in the bank vaults come into the marketplace. The banks need cover and renewed demand (forced by rebate lures) and a rapidly escalating stock market (has there been a down day in 3 months?) may be the all clear they were looking for.

One might wonder just how a higher debt burden will impact the unemployed. One might worry about wages which have been falling for a few years. One may be concerned that a flood of money into useless consumer items to present goosed GDP growth will not address our economic base problems.

The solution, as preferred by the government, is to target numbers. Whether you are talking about the indices, GDP, ISM, etc those numbers are going higher. Under the surface nothing has changed, nothing has been fixed. Plow Trillions of dollars into any economy and reward gambling and consumerism and you are bound to get some kind of a pop. The question is now that some kind of a superficial recovery is close at hand, will all that money finally make it into the economy?

I think that it will. Keep an eye on that dollar chart and remember, the DOW could be at 20,000, but that may not work out quite the way you think it will.

Have a good night.