The Turning Point, Deflation or Inflation?

The US government is throwing hundreds of billions of dollars at the financial crisis.  Look at Citigroup.  Just over the past weekend, the government, in exchange for $27 billion in Citi preferred stock, will inject $20 billion of capital in the struggling firm and guarantee $306 billion in troubled mortgage assets.  Next up will be auto makers with their new plan.  For both Citigroup and the automakers “we the people” are again riding to the rescue.  You see these companies “are too big to fail”.
Citigroup at one time was the largest bank in the US (world?).  Read the Bloomberg article about Citigroup  by Bradley Keoun here.  The consensus is that if Citigroup failed it would be “disastrous” for the world economy.  Maybe, but at some point these bailouts will be disastrous for the US dollar and taxpayer.  How many toxic assets can the US taxpayer assume?
The only way out of this never ending mess may be reinflation, hopefully not hyperinflation.  Help to the debtors will come at the expense of those who have been prudent.  Those of us who are benefiting in the current disinflationary environment, with a strong US dollar, may be in for a rude surprise later if not sooner.
Expect a turning point soon, with a falling US dollar, increased gold and oil prices and a jump in long term interest rates as more programs are added to the $5 trillion already spent or promised.  Obama can’t wait to add his bailouts come January.  One has to ask: Just how much can the US government do?  The piper will have to be paid at some time and that time may be sooner rather than later.

Florida's Pension Fund

The headline in today’s St. Petersburg Times is “Pension fund plummets”. The State Board of Administration (SBA) manages Florida’s public investments.  The investments peaked in September, 2007 at $187.5 billion and since then have lost 1/3 of their value. The largest component of the SBA is the Florida Retirement System Pension Plan.  The decline has come both from the withdrawal of funds and investment losses.  Their is some derivative exposure.  The pension plan has lost more than 1/4 of its value, or $37.9 billion over the 13 month period since September 2007.  Since more than 1/2 of  the pension funds assets are invested in stocks the fund is at risk with the stock market declines.
The article goes on to note that “Florida isn’t alone.  Across the country, the financial crisis is wreaking havoc on public pension funds”.

Billions on Trillions on Billions

It is absolutely amazing at how many companies are lining up to get bailout money.  Forbes columnist Robert Lenzner has an article on this, click here to read it   Below is a summation.  Would you invest in failing companies?   No?  Guess what?  As a US taxpayer, you are!

• AIG initially wanted $85 Billion, it is up to $150 Billion and climbing*.
• Detroit Auto companies already got $25 Billion.  Now they want $50 Billion.
• General Electric got a $139 Billion guarantee (I thought they were blue chip?).
• Fannie and Freddie say they need more than the $200 Billion they already have, perhaps a lot more.
• Banks (Paulson won’t say who) have gotten $2 Trillion in emergency loans.
• The BEST USA banks (JP Morgan, Wells Fargo, Bank of America and Citigroup) may need $350 Billion
• Insurance companies like Hartford are buying small banks so they can qualify for bailout money, unknown billions here.
• States and cities will be lining up next at the Treasuries bailout window, more unknown billions.
• Read this weeks coming news to see who is next.

The Disaster in the US Auto Industry

Ford (F) and General Motors (GM) reported earnings today.  As expected, bad losses.  Will a government bail out help?  Will lower gas prices help?
The USA automakers have been on a downward spiral for years and this may be the end game.  GM’s merger with Chrysler is apparently off for now.   Detroit’s automakers are joining the long line at the oval office asking for money.  Only $50 billion, nothing compared to AIG, right?
Well, we are in the process of nationalizing the banks, might as well do the auto makers too. Even the world’s best auto makers such as Toyota (TM) and Honda (HMC) are suffering severe sales decline. You wonder how General Motors, Ford and Chrysler can possibly survive?
As an aside, I read an article today from Forbes about how many Detroit auto company employees and retirees savings may be at risk as GMAC also deteriorates.  See the article here.  This would compound the tragedy.

Obama's Dilemma

Well, we have elected Barack Obama as the 44th President of the United States. The Obama administration promises lots of change. Since we are going into recession, Americans are ready for change. Question is what and how?  Probably, another stimulus package will be forthcoming.
Mr Obama promises tax breaks for all but the upper 5% of Americans, who would pay higher taxes. Tax increases in recessionary times have been shown to make the economy worse not better.
I once read how a laborer said he liked rich people.  When asked why, he responded that rich men gave him jobs but poor men never did.   This might be something the democratic legislature might wish to ponder. Of course, I guess we could all work for the government.
I must admit that the Republicans richly deserve their losses. Corporate scandals, golden parachutes for executives of failing companies, failed regulation of exotic financial instruments, have all left a bad taste in voters mouths.
I don’t envy Obama, he has inherited a mess! Maybe he will provide the leadership to resolve things. Lets just hope the cure is not worse than the disease