$99 Trillion

$99 Trillion is the total Present Value of the funding needed today if Social Security and Medicare were to be fully funded. I caught this stat in a speech by the Dallas Fed president Mr. Fisher the other day. He was quoting recent figures from a study and Mr. Fisher was trying to bring this massive problem to the attention of those in the financial community. It seems that very few in the political world want to talk about this massive problem. The Social Security Present Value was placed at $13 Trillion and the Medicare Present Value was placed at $86 Trillion. His point was that these numbers dwarf the US's annual GDP which is around $13 Trillion and that the political will must be strong enough to attack this problem, now.

Who Has The Fed's Back?

If the Fed runs out of money, who has the Fed's back? I ask this question not to knock the Fed but rather as a question that may need to be answered. The Fed's balance sheet is about $700 billion worth of Treasuries. They have recently opened up quite a bit of that to the Street. What if the Fed over extends itself? Who has the Fed's back?

Maybe there is nothing here. I thought it might be worth exploring though. First it was just regular banks that the Fed lent to. Now it is also the Investment Banks. Interesting as the Fed has expanded its reach. I would doubt that at the moment that the Fed is extended but if it continued to expand its reach and other banks or investment banks needed its help, would the Fed be able to answer the call? Something to ponder.

3 Month Tbill Now Yields 0.51%

0.51% for 3 Month T-Bills. The Lowest since the 1950s. Amazing. I am just stunned to see this low yield. Add this amazing stat to the list of off-the-wall stats from the past 8 months. There have been so many. Wall Street stats are made to be broken. But to see so many statistical oddities happen simultaneously is the stunning part. Amazing just amazing.

The list of the Deflationary Spiral of 2007 - 2008 is getting longer by the day.

Commodities - It Was Bloody Out There

I was just re-reading an old post I wrote about the day Wheat soared 25% in one day. I said in the post that with moves like that that there had to be some real damage to a hedge fund or trader or some entity. Well with the tremendous down moves today in ALL of the commodities I think it may be safe to say that there is someone on the wrong sides of these commodity moves today. The 60 point move in the Gold futures contract was enough to create large scale pain. But with the carnage across the entire spectrum there are likely many players hurting. The forces of these moves are amazing. Silver, Oil, Gold the list goes on. Just huge moves. I don't wish carnage out there on anyone as I have been on the wrong side of many a trade. I am just making an observation. It is just from my experience that says that with huge down moves like today's some person, trader or entity is likely in very large financial pain tonight.

The Fed Is Trying To Avert A Deflationary Spiral

The other morning CNBC had an interview with an analyst. I forgot his name as it was very early. But what he said made a lot of sense to me. He said that people (investors, traders) are underestimating the collective brain power of the Fed. His point was that those who thought the Fed had been asleep at the wheel were mistaken. He believed that the Fed would eventually figure a way out of the large economic problems facing the United States.

I recall that now as I think about where the US economy is at the moment. My line of thinking is that the US residential real estate market's rapid decline if left unchecked could spread through the system creating a possible deflationary spiral. If that were to happen money would become scarce and therefore much more valuable. Consumers would have a tendency to hold onto their cash thinking that prices would drop. Consumers would also begin to worry about how they were going to replace those precious dollars. A scenario like this would be devastating to the US economy. At the moment a scenario like this is also hard to imagine when commodities have been soaring along with prices of almost everything else. In my view today's inflation is past history and was caused by monetary policy errors made in the past. It is unlikely to continue. The possibility of a deflationary spiral though is real. It is real because cash and debt have become harder to get and because asset price deflation is occurring in many areas of the economy. The assets deflating include the US residential housing market, the US equity markets, and most importantly the US credit markets.

Ben Bernanke as leader of the Fed studied the Great Depression and is an expert on the problems to watch out for in the economy if deflation tried to gain a foothold. Unfortunately Bernanke gets a misplaced nick-name, 'Helicopter Ben' by traders and others in the business because many years ago he made a reference to monetary policy stating that to avert a deflationary spiral the Fed could drop dollars from helicopters. I believe that Bernanke through the thick smoke screen of current inflation really sees the possibility of a deflationary spiral and that this is what is driving his and the Fed's current thinking. The Fed and Bernanke do get it and know what the real threats to the economy are. It is still too early to see if the remedies offered are going to work though. Consumers can be offered cash but if they are not going to spend it then that can be troublesome. But at least the right man and is on the job. And to quote that guest on CNBC the collective brain power at the Fed should not be underestimated. The commodity markets sure received a dose of the Fed's brainpower the past couple of days.

The Markets are Killing Everyone

Equity bears were gored yesterday. Equity bulls got their comeuppance today (and since August). Commodity bulls were slaughtered today. Come on Gold futures down about $60 today! I repeat 60 points in one day!! Oil down $6. Silver $1.50!! These moves are enormous (but for the US and world consumers the commodity slide is very welcome). Of course Gold and many other commodities have been going up since 2002. And in the commodities market there often is much more leverage used. Wheat had that huge run up. Have to wonder how much was caused by leverage. I think commodity players can lever their accounts by up to 10 times. In the stock market one is only allowed to lever by a 1:1 ratio. In the financial markets it seems as though there has been one giant margin call. At the moment there are no hiding spots. Even those who thought they were safe in cash - like investments have at times run into trouble. Look at the ARS market. The ARS or Auction Rate Securities market has frozen and those who have their cash invested are locked in. The cash is likely to be returned but the timing is unknown. Unless it is good old fashioned T-Bills or Bank CDs for under $100,000 savers need to be careful what type of investments they use. Everyone is feeling this one. Unless you are a hermit and have your cash in Berkshire Hathaway CD's (they don't exist just offering a hypothetical), this has just been brutal.

Whiplash

One day the US indexes are soaring the next day they are crashing. I am getting whiplash.

The JP Morgan Bid for Bear Is a Joke

Bear shareholders should turn this deal down, this is an absolute joke. The assets that Bear holds are not getting any bids but the underlying cash flows behind the structured products exist. This bid by JP Morgan values those assets at zero. Those assets are not worth zero. Bear should shop the book around, as it should be worth much more than zero.

Disclosure: I have no Bear position nor am I aware of any position that the firm I work for has in Bear.

Later in day disclosure: I traded a tiny position in the equity from the long side and barely broke even.

Happy St Patrick's Day!

St Patrick's Day is a special day for my family as two of my grandparents met on St Patrick's Day.

So a Happy St. Patrick's Day to everyone!

Inflation Will Vanish

No doubt commodities have been on a tear. There is also no doubt that inflation has jumped back into the economic picture here in the US. Wheat Gold Oil. You name it it is likely to have gone up. Gasoline has lagged and Nat gas has lagged although they are both up. I don't think this is likely to last though as I am already seeing deflation pop into the picture.

The US consumer (courtesy of Fred Hickey from the Barrons round table in January) is about 70% of the US GDP and about 19% of world GDP. In other words the US consumer is king. The consumer is still spending but barely at positive growth rates year over year. The retail sales numbers show that. Most retailers except for WalMart are hurting. Interesting if you look at Walmart they have been actually cutting prices. Hard to believe when so many commodities are running that Walmart is cutting prices. I think it is interesting to look at the Manhattan real estate rental market as well. In February price increases in some locations were met by prices declines in others so basically a slight rebound from January. I quote the most recent REGNY report ( http://www.tregny.com/manhattan-apt-rental-report.jsp ), " In general, however, we’re seeing more inventory on the market than we have in a long time, and landlords struggling with excessive vacancies continue to offer concessions to support existing prices or attract new tenants quickly." This quote to me shouts deflation. "Landlords struggling with excess vacancies continue to offer concessions to support existing prices." If the banking sector continues to retrench then the Manhattan rental market will only get worse due to its large exposure to the financial industry.

So deflation does exist. It exists in the rapidly deflating housing ownership market and has now spread into the real estate rental market (at least in Manhattan). It exists in the credit markets. Credit is becoming more and more difficult to get with each passing day. Fannie Mae has to pay a lot more for money and that makes it more difficult for them to lend to home owners which then leads to existing home owners cutting prices to move their homes. HELOCS are getting tougher to get. Refinancing a mortgage has become problematic as the equity in the home has dropped from lower prices. The asset backed commercial paper market has stabilized although at much lower levels than previously. LIBOR has fallen back in line which should help home owners with ARMs but LIBOR does bear watching. The private equity sector of finance has come to a crawl as lenders are less willing to lend to fund equity purchases. The US stock market has taken about a 20% hit, so money is vanishing there as well. The cumulative effect on this is that there will be less dollars to lend, decreased sums of dollars from asset sales (housing and equities) and fewer dollars to buy goods. This will lead to possible deflation. This is why the Fed is pumping so much money into the system and will do so for the foreseeable future.

A disclosure here. In 2004 when the Fed kept rates at 1%, I worried about inflation as I thought the US was well on its way to recovery. I even emailed the Fed to tell them they were making a mistake by keeping rates so low. They politely responded with a form email. So its not like I am an inflation lover. But rather I see real signs that deflation is a problem and it is already starting to spread. I think it is possible that the US dollar rallies strongly as inflation pulls back and that commodities are likely to pull back as well. The key question is how bad does the recession get? If the US went into a deep recession then deflation could spiral. If the recession were mild lasting about two quarters then price pressures that exist now would some what pull back. If the US consumer continues to have trouble getting access to cash from asset sales or job losses increase then inflation should follow suit and vanish as well.

US Stock Indexes Year To Date Through Feb 29th

As of the close of February 29th 2008:

Dow = 12.266.39, -998.43, -7.5%

S & P 500 = 1330.63, -137.73, -9.38%

Nasdaq = 2271.48, -380.80, -14.35%

The stats are from Yahoo Finance and the calculations are from me.