I’ve been reading a lot of diaries lately urging Daily Kos readers to support Obama in 2012. They’ve ranged from “He’s our guy and we’ll support him to the end” to “I don’t like what he’s doing but the Republican will be worse so I’ll hold my nose and vote for him anyway”. Kos waded in with a diary supporting Obama because Democrats are stuck with him. I disagree. Obama in 2012 will get a major McGovern style ass-kicking if he is the Democratic nominee that will drag down Democratic candidates at every level. To update the Clinton campaign theme, “It’s still the economy stupid”. Here on Daily Kos and elsewhere secondary issues like gay marriage, right to chose (life), etc. are constantly debated. These are “full stomach” issues. If I can’t feed, clothe, and provide shelter for myself and my family, these secondary issues don’t matter.
If you believe that unemployment will be at 5 to 6 percent by November 2012 and that the economy will be growing at 2.5% or better, and that President Obama will get credit for this amazing turnaround then stop reading, HR this diary, and go have a great day.
Let’s begin by assessing where we are. Please note that I am pulling these facts from my memory. If I make a mistake, please correct me.
U3 Unemployment (the generally reported unemployment level) is 9.1%. The participation rate or number of people actually either employed or listed as actively attempting to become employed, remains near a 25+ year low. U6 unemployment, which measures underemployment and discouraged workers, remains above 16%. 21 out of the last 22 weeks new unemployment claims was 400, 000 or greater. The only week below 400,000 was at 399,000 (revised).
The August jobs (NFP) report had net new jobs added to the economy as zero. While there was an anomaly (45,000 striking Verizon workers), the Birth Death model added 87,000 jobs and has added 491K in the past year. For the past few years, the B/D model has added thousands of phantom jobs to the NFP report skewing the results. When the model results are revised using actual numbers in February of each year, NFP results have been revised down significantly. See the example below.
http://georgewashington2.blogspot.com/...
GDP for the first quarter grew at the anemic rate of .4% I believe the first revision of second quarter GDP was at 1%. Everyone (Goldman, Morgan Stanley, BofA, etc.) has been lowering their GDP growth expectations for the rest of 2011 and 2012.
The FED has guaranteed ZIRP (zero interest rate policy) for 2 years.
Consumer confidence has plummeted. For example, University of Michigan consumer plummeted 8 points in August to 55.7 and has plunged 20 points in the last 3 months.
https://www.economy.com/home/login/ds_proLogin_5.asp?script_name=/dismal/pro/release.asp&r=usa_csent&tkr=1109060935
Philadelphia FED survey of regional manufacturing dropped to -30 in August and other regional manufacturing surveys also dropped significantly.
http://www.calculatedriskblog.com/...
While US PMI remained slightly above the contraction-expansion break-even level of 50 mainly due to inventory building, global PMI was even closer to contraction at 50.1
http://uk.reuters.com/...
It should be noted that Non-manufacturing ISM did beat expectations but the internals of the report were weak.
http://www.zerohedge.com/...
The current US debt is 14.693 Trillion dollars.
http://www.usdebtclock.org/...
This means that we’ve basically spent the first 400 billion allowed by the debt agreement in August and that President Obama will need to soon spend the next 500 billion allowed by the agreement. “President Obama would be permitted to request another $500 billion increase in the coming months, which Congress could vote to disallow by a veto proof two-thirds margin. A further increase of between $1.2 trillion and $1.5 trillion would be available after a special committee identifies matching levels of additional spending cuts.” source CBS news
http://www.cbsnews.com/...
Expect more political wrangling on this point and we’re that much closer to the Austerity Obama and the Hair shirt Super Congress cutbacks.
We may get to see how awful Dodd-Frank really is very soon. (Every unbiased report I’ve read about DF has stated that DF has significant flaws most particularly it did not solve the TBTF problem or the derivative problem.) Bank of America (BofA) is in trouble. What a surprise. When I closed my small checking account in early 2010 with BofA I was asked why. I told the manager that I did not want to keep my money at an insolvent bank and nothing has changed my opinion about BofA since. Recently, someone posted in a comment that BofA had 400 billion in cash and cash-like securities like RMBS which constituted 25% (if memory serves) of BofA’s assets. I thought “Wow. That’s a lot.” later, I started wondering about the quality of BofA’s assets including the RMBS securities. In accounting, A(ssets) = L(iabilties) + E(quity). RMBS are residential mortgage backed securities and everyone knows that the securitization of the residential housing market is a mess with BofA/Countrywide squarely in the center of that mess.
http://www.nakedcapitalism.com/...
http://www.nakedcapitalism.com/...
http://www.nakedcapitalism.com/...
http://www.huffingtonpost.com/...
http://www.zerohedge.com/...
All these lawsuits and claims of illegal behavior indicate that BofA’s real liabilities may be significantly higher than reported. Since the heart of this matter is the failure to properly securitize the RMBS, then BofA’s RMBS (and other banks and investors) may in fact turn out to not be backed by anything. The resulting title cloud with subsequent failure to be able to foreclose could result in huge (60, 70, even 100+ %) losses on these securities. Many of these properties are currently underwater and a sale at current market price – if the property could be sold or foreclosed on at all – would result in a 20 to 30% loss. Does BofA’s balance sheet reflect the impairment of these assets? Does any of the banks balance sheets (JP Morgan, Wells Fargo, etc. ) reflect this impairment of asset value. Have the second mortgages on underwater properties been written down to reflect their impairment? With mark-to-model accounting or more commonly known as mark-to-myth or mark-to-make believe accounting, I strongly believe the answer is no.
Last, but not least by a long shot, we have Europe. The European Sovereign/Bank debt situation reminds me of the plate spinning variety act on the Ed Sullivan show. The performer would place a plate on a wooden or metal pole and start it spinning. The spinning would keep the plate balanced on the pole. Then the performer would start another plate spinning. Soon, the performer would be running around keeping 8 or more plates spinning. If any one plate slowed too much, that plate would and its pole would crash. Falling the wrong way would start a chain reaction of plates falling and crashing. Let me just list some of the “plates” currently spinning in Europe.
1. Greek sovereign debt. Demonstrations. Will the ruling coalition lose control and the opposition gain control and tell the IMF, etc. to stuff it
2. Greek failure to meet austerity/GDP targets for continued bailout
3. Greek bank debt. Two, I believe, insolvent Greek banks recently merged to possiblely form a TBTF Greek insolvent bank
4. Irish sovereign debt
5. Irish bank debt. Every time we think that the Irish banks have been completely bailed out they come back for another bailout.
6. Spanish sovereign debt, Spanish bank debt with special emphasis on the Caja’s.
http://www.zerohedge.com/...
7 Portuguese sovereign debts.
8. Italian sovereign debt. Italian bank debt. The big Italian bank stocks have had huge losses recently and their trading has been stopped more than once. Demonstrations in Italy. Rollbacks of austerity measures. Will the ECB continue to backstop Italian debt?
http://www.zerohedge.com/...
9. Dexia, the Belgium TBTF bank, looks like it’s in trouble.
http://www.zerohedge.com/...
10. Liquidity is drying up in the Euro zone. Banks don’t trust each other and as a result the rates they charge each other are rising. Swap lines with the FED have been reactivated recently.
11. Will France be downgraded (like America was)? A French downgrade would place Germany on the hook for most of the bailout of the Euro zone.
12. Angela Merkel has been getting hammered in the state elections this year. She and her ruling coalition partners have lost all 6 elections. Most recently, in her home state, they were hammered with their worst showing in 20 years. When the German parliament has to approve the expansion of the European stability fund later this month, will politicians fearful for their careers back Merkel and vote to expand the fund or cause a government crisis and a Euro crisis? The vote in the Berlin state elections may be the key in answering this question.
13. Will the German Supreme Court rule the bailout was illegal on Wednesday? If they rule bases on the law, no question, they will rule the bailout was illegal. I expect them to pull a John Roberts and make up some stuff to justify not ruling it illegal but putting significant constraints on future bailouts.
http://www.zerohedge.com/...
14. The IMF has indicated that the current ESF expansion on the table is too small. Banks in Europe need to be recapitalized to the tune of a cool trillion.
http://www.zerohedge.com/...
In the interests of brevity, I won’t even discuss radioactive Japan or a slowing China.
Crystal Ball time. Where is the US and world economy going? People I trust, people that have been right about the economy for the last 2 years tell me that we’ve already entered a recession in the US. I seem to remember that the typical recession lasts between 6 and 19 months. If this is true, then November 2012 will see the US either still in a recession or just technically getting out of one. That means that unemployment will be significantly up during election season. The 99 week unemployment insurance cliff will have claimed millions. Economic news and confidence levels will be bad. Austerity won’t help. Housing will continue to sink and the financial sector will continue to be under pressure. The FED will institute more QE causing commodity prices (food, fuel, etc.) to surge. The Arab spring uprisings will be revisited with uprisings spreading to other parts of the world. Hungry people are desperate people.
This is the “good” news case. I strongly suspect that one or more US banks will be bailed out (probably BofA). In the best case for Obama, the bailout will be hidden behind an alphabet soup of letters and mostly done by the NY FED. The worst case involves blatant disregard for contract law and another TARP. We all know how popular that will be.
There are just too many plates spinning in Europe. At some point, one of the plates will fall. The question is whether that plate will set off a European wide contagion. Several people are predicting that this pan-European debt crisis will occur within the next year. Of course, since one banks assets are another banks or sovereign’s liability, this crisis will spread to the US financial sector. What exposure do JP Morgan, Goldman, Citi, Wells Fargo, BofA, etc. have to the Euro zone debt (sovereigns, banks, and corporations)? More importantly may be what is their exposure to euro derivatives? JP Morgan according to a chart I saw had over 90 trillion dollars in derivative exposure. An infinitesimal error could take down JP Morgan. How much counterparty risk does JP Morgan, Goldman, BofA, etc. have in their hedges? For example, if BofA blows up, how much of JP Morgan’s derivative exposure is now unhedged? This deal book article states JP’s exposure is 78 trillion.
http://dealbook.nytimes.com/...
Let me bottom line this for you. The economy is going to be a mess. I see a new financial crisis coming. Will it get here before November 2012? I don’t know but I think it is very possible. Under the scenario I’ve outlined, do you really believe that Obama has a realistic shot at winning the presidency in 2012? I don’t. I see him getting creamed and down ticket Democrats paying the price.