Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stimulus Commitments and Stock Market Confusion

Stock-Markets / Stocks Bear Market Apr 03, 2009 - 07:20 PM GMT

By: Andy_Sutton

Stock-Markets Best Financial Markets Analysis ArticleTalk about mixed signals. Confusion reigns supreme. On Thursday the economy was recovering because factory orders went up for February, breaking a multi-month downtrend. However, today, there is no end in sight as the employment report was released and another 663,000 Americans have lost their jobs. There is another storyline there, but we'll save that for a different time. It would seem that commentators, economists, and policymakers alike are in a race to call the bottom. Fundamentals and economic analysis have all but disappeared under what is a seemingly never-ending wave of distortion caused by monetary creation.


$1 Trillion to the IMF and World Bank. $787 Billion to ‘stimulus', and a whopping total of $12.8 Trillion committed by the US alone with more to come. Let us take a sobering look at the commitments that have been created thus far (in Billions of Dollars) and eliminate some confusion:

Program/Entity Commitments (in billions)
Federal Reserve $7,765.64
Primary Credit Discount $110.74
Secondary Credit $.19
Primary Dealer Credit $147
ABCP Liquidity $152.11
AIG Credit $60.00
Net Portfolio CP $1,800.00
Maiden Lane LLC (Bear Stearns) $29.50
Maiden Lane II (AIG) $22.50
Maiden Lane III (AIG) $30.00
TSLF $250.00
TAF $900.00
Securities Lending Overnight $10.00
Term Asset-Backed $900.00
Currency Swaps $606.00
MMIFF $540.00
GSE Debt Purchases $600.00
GSE Mortgage-Backed $1,000.00
Citigroup Bailout (Fed) $220.40
BofA Bailout (Fed) $87.20
Treasury Commitments $300.00
FDIC Total $2038.50
Public-Private Investment $500.00
FDIC Liquidity Guarantee $1,400.00
GE $126.00
Citigroup Bailout (FDIC) $10.00
Bofa Bailout (FDIC) $2.50
Treasury Total $2,694.00
TARP $700.00
Tax Break for Banks $29.00
Stimulus (Bush) $168.00
Stimulus II (Obama) $787.00
Treasury Exchange Stab. $50.00
Sallie Mae (Student Loans) $60.00
FNM/FRE Support $400.00
FDIC Line of Credit $500.00
HUD Total $300.00
Hope for Homeowners (FHA) $300.00
Grand Total $12,798.14

Source: Bloomberg

Keep in mind that the above numbers do not represent the total cost of these programs. Just for example the second stimulus (HR1), which is counted as $787 Billion on the Treasury's tab will actually cost $3.27 Trillion. This total is arrived at by considering the extension of current provisions, total impact of the legislation, and $744 Billion in debt service (interest) that will need to be paid on the borrowed funds. If that level of understatement is present in even a small portion of the programs listed above, it will result in a ballooning of the overall totals.

Just for illustrative purposes, we can get a very rough estimate of the total impact of these commitments by making a couple of rather weighty assumptions:

•  We'll start making payment in 2020 since there is no possibility of a budget surplus until then. Unless of course the plan is to essentially take out a VISA to pay off a MasterCard, which is rather likely.

•  The interest rate paid on this debt will be an average of 3.70% (today's 30-year bond yield). Granted, this is not an exact number, but it will allow us to ballpark the total.

•  We are assuming that 100% of the committed funds will be used to engineer the various rescues.

Given these rather basic assumptions, the value of the current commitments will have grown to around $18.5 Trillion by 2020 when we'll make our first payment if everything goes well. Add on the 2020 value of our current national debt for a grand total of $34.5 Trillion. This is just for the current financial rescue and what we owe from past fiscal indiscretions. This accounts for none of the coming generational mess resulting from Social Security and Medicare. This accounts for none of whatever additional stopgap measures might be necessary to further ‘stimulate' consumption. This assumes that we stop accumulating more debt today. In other words, the $34.5 Trillion estimate should be viewed as an absolute best-case scenario.

Perhaps even more telling in the numbers above is the portion that has been dedicated to helping the real economy as opposed to the financial system. While some of these programs indirectly help Main Street, they were clearly created to benefit Wall Street. By our count, approximately 4% of the funds above were created with the explicit intent of benefitting Main Street. So for every dollar committed, 4 cents were given to Main Street. We get 4 cents, but have to pay back the full amount - at interest. Sounds like a great deal doesn't it? I'll be the first to admit that the 4 cents figure is easily disputed and debated, but the spirit of the recent rescues is crystal clear.

Housing: Underpinning or Pinned Under?

All of the above notwithstanding, many ‘experts' in the mainstream media have forecasted the recession to end by the end of 2009. How can this be so? It must be understood how many of these people view a recession. They are under the completely mistaken impression that the printing press is the solution to all economic maladies. Their biggest gripe with the Fed is that it didn't print enough money fast enough. The concepts of savings, genuine capital formation, and the resultant investments elude them. They don't understand that genuine capital comes from the foregoing of consumption, not the Greenspan/Bernanke printing press. It is also clear that these same people equate the housing and share markets with the overall economy.

Ben Bernanke, true to his promise, has managed to lower mortgage rates by around a full percent since the Fed started buying mortgage bonds in late 2008. This has touched off a wave of refinancing, which will put a few bucks back in consumers' pockets. Apparently that is enough to call an end to the recession. Never mind that job losses continue unabated and forget about the annoying fact that real estate prices are still falling. According to NAR, real estate prices have now fallen 28% from their highs back in 2006. That is quite a bit of equity that can no longer be borrowed against. Their own flawed model is broken and they still won't admit it. However, the equating of housing with the overall economy doesn't stop at the pages of your local newspaper. Cleveland Fed Governor Sandra Pianalto said recently that lower mortgage rates offer ‘encouraging signs' for the economy. It is pretty obvious that policymakers are of the opinion that if the housing bubble can just be reinflated that we could rewind to 2005 and forget about this meddlesome little crisis we now find ourselves in.

The stock market does NOT equal the economy

This is an obvious point, but given the public reaction to the recent rally off multi-year lows, it is one that needs to be reinforced. Think about how many times you have heard lately that the stock market is doing well therefore the economy must be getting better? These comments are not just limited to parties either, but have become regular fare on the evening news, newspapers, and even dedicated financial publications. At the severe risk of being repetitive, I am going to trot out a chart of the Dow Jones Industrials Average from 1929 through 1933. We all know the backdrop and how the economy contracted throughout this entire period. What is more telling is what happened to the DOW along the way.

After the crash of 1929, the DOW rallied significantly, getting back nearly 40% of what had been lost from the top. While traders made some serious money on the moves over the next 3 years, long-term investors were decimated, losing nearly 90% of their wealth when all was said and done. The important thing to note is that the real damage was done after the crash. Here is an even less comforting thought. In real terms, investors NEVER got that wealth back. The value of their dollars eroded faster than any subsequent gains in the stock markets. That situation has played out to this very day. This reality has manifested itself over the past 30 years in particular as the family has come to rely first on extra work hours, and finally, on credit to maintain pace.

The take-home message is that there are very clear examples in history that prove that sharemarkets do not equal the economy. A more recent example is the 2007 DOW. In the fourth quarter of 2007, while America was entering a recession (which would not be admitted until nearly a year later), the DOW was peaking at an all-time high of over 14,000. Clearly, the economy had been slowing for a period of time prior, yet the DOW surged ahead. It is imperative to separate the two.

Perhaps the following definition will provide some guidance and eliminate a bit of the confusion that seems unfettered these days. The word ‘economy' comes from the Greek words ‘oikos' and ‘nomos', which mean ‘house' and ‘law' respectively. Not much of a definition? Sure it is. I will take some linguistic license and say that it implies the order of one's house. This applies whether you're talking about individuals, businesses, states, or national governments. While we use fancy abbreviations, acronyms and statistics to describe the state of economic homeostasis, in the end what we're really doing is assessing the extent to which we've kept our house in order. $34.5 Trillion in debt and commitments? Borrowing more than 100% of the world's savings to finance it? Bailouts? The average person carrying over $16,000 in consumer debt - not including mortgages?

Let's get our house in order - then we can talk recovery.

Don't miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them” . Get your copy today by going to our website www.suttonfinance.net

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

SRSrocco
05 Apr 09, 10:27
Good Post

Andy,

Excellent post as usual. I listen to you on CINC and enjoy your interviews.

Keep up the good work Andy,

Steve


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules