IRA's and 401k's to be Crammed Down While Tax Collections Plunge

December Employment Report; let us count the ways. 

     The ‘real jobs lost’ are 506,000 (NSA) – 661,000 people dropped out of the work force, meaning they have stopped looking for employment.  They are no longer counted among the unemployed.  Those not in the labor force dropped a whopping 843,000. 

       The labor force has shrunk by 1.9 million people since May.  This keeps the official unemployment rate from being much higher.  2.5 million lack a job but want one; yet they are not counted as unemployed. 

The participation rate in the labor force – the portion of adults either working or looking for work – declined to 64.6%, the lowest reading since August 1985. 

       The household survey showed a decline of 589k in jobs; if the participation rate remained unchanged, the unemployment rate would’ve hit 10.4%. Since July, the participation rate for both men and women has fallen sharply.  Nearly 1.3 million people have left the labor force since July. 

       For men, the rate has declined from 72.0% to 71.0%, a decline of 801,000 men.  For women, the rate has fallen from 59.2% to 58.6%, a decline of 491,000 women. 

U6 (comprehensive) unemployment hit 17.3%; 17.4% in October is the all-time high. 

Employers cut 4.2 million jobs in 2009, but this number will jump when the BLS performs its 824,000 downward revision to NFP in coming months.  About 15.3 million people are unemployed 

The economy has lost more than 7.2 million jobs since the recession began in December 2007.  

        The index of the number of firms hiring also backtracked in Dec, falling back to 40.0 from 42.4, but still above 33.8 in October. 

         The Employment-Population ratio tumbled to 58.2% in December, the lowest level since 1983. 

B/D (fictional) jobs are 59k. A record 6.13 million workers have been unemployed for more than 26 weeks (and still want a job). This is a record 4.0% of the civilian workforce. (series started in 1948) 

The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year.  

       The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained.  

Senate Democrats, meanwhile, have begun crafting a bill to encourage job creation, which Democratic aides said will likely focus on small business, infrastructure spending and “green” energy. The House passed a $154 billion jobs bill in December.

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return.

        The fact is that investors, much like national citizens, need to be vigilant and there has been a decided lack of vigilance in recent years from both camps in the US. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of “check-free” elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond. Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this “juice” was being squeezed into financial markets. If so, then most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.” There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be “so fine” in 2010. 

From corn to crude, prices for a wide range of commodities are on the rise across the globe, a trend that underscores — but could also hinder — a gathering economic recovery. 

        In recent months, global food prices have been growing at a rate that rivals some of the wildest months of 2008, when food riots erupted across the developing world. Higher prices could be a positive sign that companies are gearing up for a rebound in consumer spending, or the harbinger of a return to the upward spiral that plagued consumers before the recession took hold… 

       But Hugh Grant, chairman and chief executive of St. Louis crop-biotechnology company Monsanto Co., said the recession merely “masked” the 2008 food crisis.

       But rising commodity prices, in part, illustrate concerns that central bankers’ easy-money policies, aimed at rescuing the economy, will fuel inflation. “Inflation expectations are creeping up,” said Spyros Andreopoulos, global economist at Morgan Stanley in London. 

        Both actual price rises and fears of future inflation threaten to put central bankers around the world in a tough spot. On one hand, many want to keep interest rates low longer to support the recovery. But the need to keep prices in check could force them to hit the brakes sooner. 

        Food prices are a big concern in developing countries such as China and India, where food makes up a larger portion of consumer purchases. On Thursday, China’s central bank raised a key interest rate in a shift toward a policy of managing inflation. Economists say the Reserve Bank of India could raise interest rates as early as this month.

Key members of the Senate Banking Committee are in discussions to create a special bankruptcy court for “too-big-to-fail” banks, according to people familiar with discussions on the panel.

      The Federal Reserve Bank of New York may be compelled to hand over documents related to American International Group Inc.’s government bailout after the chairman of a House oversight committee said he will issue a subpoena.

Edolphus Towns, the New York Democrat who runs the Oversight and Government Reform Committee, said in a statement that he will issue a subpoena today to get New York Fed records concerning the decision it made to fully reimburse AIG’s partners. Banks including Goldman Sachs Group Inc. and Societe Generale SA were among beneficiaries of AIG’s rescue, called by lawmakers a “backdoor bailout” for financial firms.

The New York Fed, run by Timothy Geithner when AIG was rescued, had resisted since November calls to provide documents without a subpoena, Darrell Issa of California, the ranking Republican on the oversight committee, said today in a letter. The New York Fed asked AIG to withhold and delay the disclosure of information about the bank payments to the public, according to e-mails provided by Issa to Bloomberg News last week.

        “This subpoena will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout,” Towns said in his statement. Jack Gutt, a spokesman for the New York Fed, didn’t immediately return a call seeking comment.

       Geithner, now the head of the Treasury Department, was asked by the oversight committee last week to testify in public hearings about what he knew of the New York Fed’s efforts to limit disclosure of the payments. Thomas Baxter, general counsel of the New York Fed, said last week that Geithner wasn’t aware of the issue because the lawyer didn’t think it merited Geithner’s attention.

It may have taken 38 years but the world is starting to realize that the US dollar, the world’s reserve currency, can no longer function in that role without gold backing. Abandoning the gold standard on August 15, 1971 began the death of the dollar. All control and discipline has been cast aside for years; that is certainly been demonstrated by the privately owned Federal Reserve. Taking the lead of the Fed central banks worldwide have to a greater or lesser degree followed in their footsteps with aggressive stimulus in creating and issuing money and credit and lowering interest rates. The result has been rampant speculation, financial excesses, outright criminality and all the other problems excesses bring. That leaves us with a financial system awash in liquidity, which is in the process of forming another bubble. Worse yet, if the Fed and other central banks withdraw the liquidity the system will collapse. We are told of higher Fed interest rates in July. We will believe it when we see it. Withdrawal of liquidity and higher rates will allow the deflationary undertow to take hold and the worst part of the depression will begin. That said, America is in a money and credit bubble and sooner or later it will burst. Incidentally, we refer you to the section on China; they are in a bubble as well.

Recently the Chairman of the Fed, Mr. Bernanke, said Fed rate policy was right between 2002 and 2006, and that a low Fed funds rate was not the cause of the housing bubble, Ben is either dumb or a liar. It was all the fault of the Fed. The banks tell the Fed what to do and the Fed rubberstamps it. By banks we mean the 12 banks that own the Fed. Currently they see inflation perhaps hyperinflation, but they fear deflation even more. They see what we see, declining use of credit and saving by individuals, a decline in bank lending, an ongoing credit crisis masked by their issuance of money and credit, and still very little securitization. The end of quantitative easing is something the economy cannot cope with.

The dangerous excesses are in the treasury, Agency and MBS markets. They are not responsible for the Treasury and Agency mess, that was the creation of fiscal policies by this and the last two administrations. The mortgage disaster is where we believe they deliberately blew it. What the Fed did was destroy the credit of our country in tandem with government’s reckless spending. As a result the Fed is forced to hold interest rates close to zero percent as they monetized Treasuries, GSE and MBS paper. This and government intervention has distorted prices and even supplied us with a dollar carry trade.

A demand from government for money has been vicarious and it could be that the Treasury could be facing a debt spiral. In January and February the Treasury will need about $150 billion to service old debt and grapple at the same time with up to $300 billion in new debt. In recent months foreign government have been sellers of debt not buyers, leaving them buyers on a net basis of only some $8 billion. It should be noted that about $2 trillion in debt was sold in 2009. For the year foreigners’ holdings of all US liabilities fell about $44 billion and if you separate the Treasury holdings they fell about $38 billion. Those figures are borne out by a fall in reserve holdings of foreign central banks of dollars from 64.5% to 61.8% in just the last six months of the year.

The only other buyer of size has been the privately owned, “Federal Reserve,” which creates money out of thin air. They call it “quantitative easing,” another euphuism for creating money with wild abandon.

If you add in demands for cash by desperate state and local governments, insurance company and pension plans, you have a situation that could rocket exponentially. 

Our government is bankrupt as we have said over and over again and has been for the past 11 years. Only monetization has kept it afloat.

We suspect that secretly corporations are being told to buy Treasuries and Agencies. We do not see much of that kind of buying coming out of cash flow, so we would guess it would come from the sale of stocks, which does not bode well for the stock market. This comes at a time when 70% of the country wants the Fed audited and investigated.

If the monetization is ended the whole house of cards will collapse. Year on year, in order to strangle inflation, the Fed has an M3 outstanding of $14.193 trillion versus $14.317 trillion. They had been increasing M3 by as much as almost 18% and now it is negative. Incidentally, all major countries central banks have been doing the same thing, yet official US inflation is 2.7% and real inflation is 8-1/4%. Can you imagine what it would have been otherwise? That means the inflation is being caused by the stock of euro dollars and cash outside the US, which are obviously being cashed in or sold. Banks internationally starting in 1948 created euro dollars, and the banks have been creating them ever since, some trillions of dollars.

This in a world in which savers get little interest for their savings and in fact are losing some 5 to 7 percent by being in CDs, and Treasuries. This means cash holders are going to demand higher interest rates, which will put downward pressure on bonds, real estate and stock prices. There can be no economic recovery in that kind of an environment.

As this transpires investors are back pursuing risk assets the action, which brought about these problems in the first place. The corporate world is accumulating cash at a ferocious pace. It is not only investment grade assets, but piles of junk as well. Banks may have cut borrowing 18% to small and medium-sized businesses, but transnational conglomerates have no trouble getting funds. At the same time the fiscal deficit expands and monetary policy verges on madness.

The system should have been purged 2-1/2 years ago, but the bankers and Wall Street stopped that from happening. Now the mess is exceedingly worse. 2010 and perhaps 2011 will be bubble years. We hate to contemplate the outcome.

Some say 80% of Treasury and Agency issuance is being absorbed and monetized by the Fed. In the scramble to place debt the Treasury wants to increase the duration of its debt by about two years. Most buyers do not want 7, 10 or 30-year notes and bonds, so it is the Fed who has been buying the debt.

Up until about 6 months ago, year-on-year, 40% of total demand was absorbed by the Fed, or about $800 billion. We have been projecting these figures for months but no one wants to listen. On top of that we don’t know what secret deals have been made with other foreign central banks, like the $500 billion swap deal almost a year ago. During the first 6 months of 2009 the Fed also purchased $861 billion in MBS or 80% of issuance and holdings by banks, insurance companies, and Wall Street.

What could be underway now is a sustained increase in interest rates, as a result of the Fed’s actions and those of the Treasury as well. A ¾% increase in rates would cause Treasury interest rate costs to rise by $120 billion, an increase to 5% would add $650 billion a year in debt for interest alone. That is if they have lenders at that level of interest. It is obvious those lenders are not available at current levels and haven’t been available for some time. This is why 80% is being monetized by the Fed. Higher interest rates would squeeze the economy, which would make assets fall further in value, as unemployment rose even higher. This is why so much pure gambling is going on in the markets. The public doesn’t understand what is going on, so they stand still while they get shafted. If they hold Treasuries they are losing 25 to 30 percent of the buying power annually. If the Fed wasn’t suppressing interest rates they would be somewhere between 6 percent and almost 10 percent. As you can see, bonds are certificates of guaranteed confiscation. The Fed and the Treasury are stealing people’s money.

The path to destruction was chosen in 1990 when the system could have been more easily purged. That option is no longer voluntarily available.

The path chosen was for inflation and it is inflation we have, which will become massive inflation and in that process the dollar will be the big victim. The only thing the Fed can do is hold interest rates down and create more and more inflation. As each wave of Treasury funding washes over the economy the dollar gets weaker and inflation rises higher and more dollars get sold by foreigners and instability increases.

The only alternative to the carnage we face is gold and silver bullion, coins and shares. That is the only place ultimately where your wealth can be protected. As interest rates and monetization rise and the dollar falls with stock and bonds, you have little alternative but to be in gold and silver related assets. The only thing that won’t fall as the market drops is gold and silver related assets. If you do not have them, you had best get them because the window of opportunity could close quickly.

The Fed has again bailed out the legacy-money center banks and in the process has distorted true market prices. The Fed, Fannie, Freddie, Ginnie and FHA are the mortgage market. The market has been socialized and nationalized. Government runs the mortgage market not the lenders. 

Historically when government has interceded in markets more often than not the result has been disastrous. We wrote seven years ago that we believed that government wanted to own 50% or more of the housing stock so they could control people’s lives. They are well on the way to accomplishing that. Those who do buy homes get an excellent borrowing rate, but the Fed and the GSE control it, and the taxpayer gets to pay for it.

Eventually the free hosing market has been destroyed and the prices of homes have nowhere to go but lower. At the same time banks make less from their investments and less profits. Then they are forced to merge and eventually get purchased by mega banks that are being subsidized by the Fed as well. The average bank cannot lend because the profit is not there, so they keep money on deposit at the Fed earning ¼%, which is hardly what they are in business for. The situation is now that if the Fed or the agencies withdrew from the market it would collapse. That means housing and mortgages are in perpetual dependency. Wait until interest rates rise, and qualifier borrowers dry up and phantom housing inventory appears from the banks or even the agencies, what happens then? We will tell you, the $100,000 house becomes a $30,000 house. This is where this is all headed.