Good morning! Here’s what you need to know:
______________________________
OVERVIEW
- Goldman Sees Six Bad Months For The US Economy | A “fairly bad” scenario calls for 1.5 to 2 percent growth.
- Mortgage Fraud Could Be A Systemic Risk | Committing fraud to cover up fraud does not a robust recovery make.
- Stockman On Tough Times Ahead | The former Reagan budget director says politicians are “in a race to the fiscal bottom.”
- What Ails Microsoft | The perception that it’s an old-school holdout continues dogging its shares.
- Thoughts On The Tea Party | Is it any different from the rest of the GOP, or just louder?
______________________________
BRIEFING
1. Goldman Sees Six Bad Months For The US Economy
Goldman Sachs analyst Jan Hatzius told Bloomberg that his team sees two main scenarios: “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”
That fits with an earlier Goldman forecast that the Federal Reserve’s Nov. 2-3 meeting will produce $500 billion in either “big bang” or staggered quantitative easing. That will be its second round of such stimulus in this recession, so it’s dubbed QE2. More dollars printed will mean less value per dollar, hence the recent rise in the price of gold.
__________
2. Mortgage Fraud Could Be A Systemic Risk
Congressman Alan Grayson (D-FL) sent a letter to the Financial Stability Oversight Council, asking them to investigate the escalating foreclosure fraud epidemic, from which:
Obviously these originators and servicers [of subprime mortgage loans] didn’t keep good records of who owed what to whom because the point was never about getting paid back, it was about moving as much loan volume as possible as quickly and as cheaply as possible. The banks didn’t keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.
There are now trillions of dollars of securitizations of these loans in the hands of investors. … The liability here for the major banks is potentially enormous, and can lead to a systemic risk.
__________
3. Stockman On Tough Times Ahead
Former Reagan budget director David Stockman told the Fiscal Times that both major US political parties “are in a race to the fiscal bottom to see which one can bury our children and grandchildren deeper in debt. The Republicans were utterly untruthful when they recently pledged no tax increases for anyone, anytime, ever. The Democrats are just as bad — running their usual campaign of political terror on social security and other entitlements while loudly exempting all except the top 2 percent of taxpayers from paying more for the massively underfunded government they insist we need.”
He said the Bush tax cuts were never affordable, and are “nothing less than a fiscal travesty” after two unfinanced wars, a massive Wall Street bailout, and a trillion-dollar stimulus spending spree. His outlook:
We are not in a conventional business cycle recovery, so stimulus is futile and just adds needlessly to the $9 trillion of Treasury paper already floating dangerously around world financial markets. Instead, after 40 years of profligate accumulation of public and private debt, and reckless money-printing by the Fed, we had an economic crash landing, which left us with an enduring structural breakdown, not just a cyclical downturn. … The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings.
__________
4. What Ails Microsoft
A long-term chart of MSFT shows it flatlining when Steve Ballmer took the reins from Bill Gates. The stock has been dead money for a decade, but Institutional Investor notes, “Earnings for its latest fiscal year handily surpassed the Street’s expectations, and it posted a profit margin that rivals in other industries can only dream of: just under 40 percent. That’s about twice IBM’s and well above the profit margin of every large-cap name in tech, including Apple (30 percent) and Google (35 percent).”
Investors perceive two threats to Microsoft that keep its share price down: the rise of non-Windows portable devices like the iPad, and cloud computing. While Microsoft is coming out with its own tablet and is offering good solutions in the cloud, most onlookers see it as being too late and just copying the real innovators. Time is running out:
Many analysts think the way for Microsoft to rouse investors is by first exciting its customers. The trouble is, the days when people lined up at midnight to purchase an operating system are long past. Outside its own ecosystem, Microsoft and its engineers have never received the credit they deserve for getting Windows to embrace the innovations of others — which sounds a lot easier than it really is. … “They’re no longer perceived as a growth company,” says [Jefferies analyst Katherine] Egbert, who figures Microsoft has about a 12- to-18-month window to become relevant again.
__________
5. Thoughts On The Tea Party
Thomas Friedman on the Tea Party movement in the New York Times:
How can you take a movement seriously that says it wants to cut government spending by billions of dollars but won’t identify the specific defense programs, Social Security, Medicare or other services it’s ready to cut — let alone explain how this will make us more competitive and grow the economy?
And how can you take seriously a movement that sat largely silent while the Bush administration launched two wars and a new entitlement, Medicare prescription drugs — while cutting taxes — but is now, suddenly, mad as hell about the deficit and won’t take it anymore from President Obama? Say what? Where were you folks for eight years?
Matt Taibbi on the Tea Party movement in Rolling Stone:
At the voter level, the Tea Party is a movement that purports to be furious about government spending — only the reality is that the vast majority of its members are former Bush supporters who yawned through two terms of record deficits and spent the past two electoral cycles frothing not about spending but about John Kerry’s medals and Barack Obama’s Sixties associations. The average Tea Partier is sincerely against government spending — with the exception of the money spent on them.
This is America, and we have an entrenched oligarchical system in place that insulates us all from any meaningful political change. The Tea Party today is being pitched in the media as this great threat to the GOP; in reality, the Tea Party is the GOP. What few elements of the movement aren’t yet under the control of the Republican Party soon will be, and even if a few genuine Tea Party candidates sneak through, it’s only a matter of time before the uprising as a whole gets castrated, just like every grass-roots movement does in this country. Its leaders will be bought off and sucked into the two-party bureaucracy, where its platform will be whittled down until the only things left are those that the GOP’s campaign contributors want anyway: top-bracket tax breaks, free trade and financial deregulation.
The rest of it — the sweeping cuts to federal spending, the clampdown on bailouts, the rollback of Roe v. Wade — will die on the vine as one Tea Party leader after another gets seduced by the Republican Party and retrained for the revolutionary cause of voting down taxes for Goldman Sachs executives.
Neil King agrees. He wrote in the Wall Street Journal:
For much of the past year, the meteoric rise of the tea-party movement has struck many as a threat to the Republican establishment. But in state after state, tea-party groups are putting the fireworks aside to form at least temporary alliances with the GOP as they strengthen their own organizations. Many of these groups are already looking beyond the November midterm elections and plotting strategies for legislative sessions and local elections next year. … “What we are witnessing is a very authentic grass-roots movement,” said Ned Ryun, president of Virginia-based American Majority, a group that trains conservative activists and candidates.
These periodic “Finance at First Light” briefings present a glimpse into my research. If you would like to read actionable investment advice based on this and other information, please consider subscribing to The Kelly Letter.
6 Comments
Regarding Friedman’s comments:
It’s called CHANGE! You’re going one way one day, and a different way the next. Something has to happen to cause a movement.
Maybe Obama’s policies were the straw that broke the camel’s back? Based on Friedman’s comments, there would be no grounds for any movement to pop up on the horizon. Who said conservatives were happy with Bush’s policies? They weren’t. It just wasn’t enough to cause a movement.
I like Friedman but I haven’t read his columns in ages. Has he voiced the same outrage over the global warming fiasco?
Good to see you back, Jeff! Been a while.
I hope you’re right that people have finally had enough, even those who supported wayward spending in the past, and that the Tea Party represents a new fiscally smart era for America. However, I’m skeptical. We’ve been over this territory many times together, and I still think neither party is facing reality when it comes to fixing the nation’s finances.
Until we see a proposal on the table to cut defense, Social Security, and Medicare, we’re just playing with bumper stickers.
I’m skeptical too.
I’m not too high on the idea of cutting defense if it means we are less secure as a nation. It’s a tough world out there. I am in favor of cutting nation building programs.
Social security and medicare HAVE to be cut. We simply cannot tax the hell out of people to make them solvent.
The Tea Party should stand for fiscal responsibility, but they don’t. They’re just a conservative Republican arm more interested in fear mongering and hate to get votes than they are about actually paying down the national debt.
I see a lot of ranting and raving about abortion, guns, immigration, and supporting a big national defense. Instead the Tea Party should focus on paying off debt, focusing on the big 3 spending problems: Social Security 20%, our military 20%, and Medicare 20%. Yet they don’t touch the big 3 spending problems because they’re just conservative Republican’s waving a Tea Party flag.
They’re all about change, but I don’t believe it, nothing is going to change. They just rant and rave about cutting programs and this and that, but they don’t amount to a hill a beans when compared to the big picture.
Instead we need to cut Social Security, Defense, and Medicare. That’s 60% of our budget and we’d have plenty of money to pay off our national debt, build roads, education, have healthcare, AND cut taxes at the same time!!
Defining the Tea Party as Republicans is a very convenient way to make them into something that can be managed or ignored. Don’t be too surprised if they ignore your best efforts to pigeonhole them and go their own way.
Not really my best efforts, but I get your point.