Apparently Your Government (And You) Can!

Thanksgiving is here and the government is in a giving mood, it seems.

The latest bailout / stimulus / call for help / "we have no idea what we’re doing" effort has been directed at Citibank, with the federal government prepared to provide more than $7.7 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup debt even as the Treasury injects $20 billion into the bank.

This $7.7 trillion is equal to half the national GDP, to put things into perspective. It includes $3.2 trillion already tapped by financial institutions in the biggest response to an economic emergency since the 1930’s New Deal and dwarfs the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP), which we’ve already heavily criticized in previous columns for its lack of oversight and strategic intelligence.

This new sum is equivalent to $24,000 for every man, woman and child in the country, and nine times what’s been spent so far on wars in Iraq and Afghanistan. This sum could pay off more than half the country’s mortgages, for that matter. Data from Bianco Research puts this number into even grimmer perspective:

The numbers in the table amount to the grand sum of $3.92 trillion. Now it’s potentially $7.7 trillion just to "solve" this banking crisis.

Modern day financial brilliance explains why the national debt stands at over $10.6 trillion as measured by the Treasury department (keep in mind the GBP is $14 trillion):

A Confidence Crisis Is Brewing

If you’re not feeling confident about the Fed and government’s latest actions, neither are the majority of senior executives. CFO.com surveyed America’s top financial officers and found the following misgivings amongst them:

• 40% feel that most of the $700 billion devoted to TARP will go to executive performance and retention payments
• 58% predict that banks will devote the majority of their bailout money to acquiring other financial institutions
• 48% are concerned that banks will over-allocate federal funds to strengthening bank reserves out of a sense of self-preservation
• 78% feel the bailout will have no positive effect on their business in the next 60 days, and
• 84% believe banks will require stricter debt terms in the future (despite "freer lending" being one of the provisions of the fiscal "stimulus" plan)

If even these guys (highly compensated senior executives) are cynical and pessimistic, then you have good reason to feel similarly negative about the excessive cash splashed around by your elected representatives.

The Global Equity Race To The Bottom

For further comparison, this potential $7.7 trillion can be measured against $16 trillion (37%) of the value of the world’s companies lost since Sept. 15. It’s not a pretty sight, as you can see. This chart shows the MSCI World Index, a free-float weighted equity index which includes developed world markets.

No one has been immune. The Dow Jones Industrial Average is down 36% since the beginning of the year … the S&P 500 has fallen 42% … the Nikkei 225 Index crashed 48% … the Frankfurt index (DAX Composite) is down 43% … and the Russian RTS has collapsed more than 71%.

"Hair of the Dog" Is No Cure At All

Drinking more alcohol to minimize the pain of a hangover is no cure at all.

And yet governments are again slashing interest rates despite growing criticism that one of the primary causes of the current crisis is artificially-low interest rates imposed by Alan Greenspan during his tenure as Chairman of the Federal Reserve.

The ECB is due to publish new growth and inflation forecasts on Dec. 4 but has already cut its benchmark interest rate by one percentage point to 3.25% since early October and signaled a further reduction next month. (The Bank of England, Bank of Canada, and the Fed in the U.S. have also lowered rates, while China’s central bank reduced its key lending rate by the most in 11 years today.)

What’s more, the EU is coordinating a 200 billion-Euro ($259 billion) stimulus proposal, which is equivalent to 1.5% of the 27-nation EU’s gross domestic product.

Here’s the Euro Refinance Rate over the last year:

It seems that the Euro rates are dropping as precipitously as the stock markets!

And the US debt markets reflect a similar scenario. A one year return of less than 1% (and a 30 year return of a measly three and a half percent!) indicates just how poorly the income markets are behaving right now:

Right now, it’s great to be a borrower (assuming you can find anything worth buying) but nightmarish if you’re depending on interest income to finance your retirement or investment lifestyle. 

Another False Dawn On The Horizon

Despite all this, U.S. stocks have risen for the fourth day in a row. The Standard & Poor’s 500 Index has had its steepest four-day rally since 1933.

Since 1933? That sounds rather ominous, considering that it took stocks forever and a day to recover the losses made during the Great Depression. It just goes to show that high levels of volatility are not an investor’s best friend.

Here we can see that the S&P is thrusting over the 20 day EMA, but at the same time it’s about to hit resistance at the 900 level.

That resistance is likely to be very fierce: The latest reports indicate that U.S. banks (including the latest member of the bailout brotherhood, Citigroup) may post $44 billion in writedowns and charges on bad loans in the fourth quarter. This prediction comes from none other than Oppenheimer & Co.’s Meredith Whitney, who is infamous on Wall Street for her bearish (and highly accurate report) on Citigroup on Oct. 31, 2007.

 That’s going to take quite a bite out of the cash poured into the bailout programs and there’s no end in sight yet.

Good investing,

Nick Thomas
Analyst, Oxbury Research