Thursday, January 6, 2011

Today's Links

1--More Bad News For States: State Revenue Plunges By 31% In 2009 To $1.1 Trillion As Spending Increases, zero hedge

Excerpt: According to just released Census Bureau data, in 2009 total state revenue plunged by 31%, from $1.6 trillion to $1.1 trillion. "The large decrease in total revenue was mainly caused by the substantial decrease in social insurance trust revenue. Social insurance trust revenue is made up of four categories — public employee retirement, unemployment compensation, workers compensation and other insurance trusts (i.e., Social Security, Medicare, veteran's life insurance)." But the drop in the top line did not stop states from spending more: in the same year, state government spending rose by 3%, while that pervasive source of backstop funding, the US government, saw its grants to states increase by 13% to $477.7 billion.....

2--David Rosenberg Goes On the Offensive, zero hedge

Excerpt: "What we have on our hands has been an economic revival and market bounce back premised on unprecedented monetary and fiscal stimulus. How the Fed and the federal government in the future manage to redress their pregnant balance sheets without creating a major disturbance for the overall economy is a legitimate question and, sorry, does not deserve a double-digit market multiple, in our view."...

Here is the reality. The U.S. economy was clearly sputtering by the spring and summer and we were calling for that early on as the consensus was gazing at 5%+ fourth quarter growth in Q4 of 2009 and 3%+ in the first quarter of 2010. Only when the long arm of the law — another round of monetary and fiscal stimulus — was extended to give Mr. Market a nice lift did the clouds part. That shows how fragile this recovery has been and remains — just read the FOMC minutes to get a glimpse of the array of downside risks cited (more on this below). While the 10-year yield did not finish the year at 2%, it almost got there in the fall and nobody, except us, was calling for that a year ago. So put that in your pipe and smoke it.

There is no doubt that we have had an incredible bear market rally on our hands. But that is exactly what it is. As we noted yesterday, as per Bob Farrell, even these spasms can go further than anyone thinks. But after a monstrous 80%-plus rally from the March 2009 lows (over such a short time frame, and the most pronounced bounce since 1955) this market has become seriously overextended in our view.

3--Rogoff Says Greek Bailout May Not Prevent Default, Bloomberg

Excerpt: Harvard University professor Kenneth Rogoff said Greece may yet default on its debts even after the euro member received a bailout from the European Union and the International Monetary Fund to help keep it afloat.

Though the single currency shared by 17 European Union nations is likely to continue, a few of the region’s members will probably have to restructure their debts, Rogoff said. Euro-region leaders last month agreed to amend the bloc’s treaties to put in place a permanent crisis mechanism in 2013 to contain future debt shocks. That mechanism won’t address existing budget stresses faced by countries including Portugal and Spain.

“We have Ireland, Portugal, Greece, people are worried about Spain,” said Rogoff, who is also a former IMF chief economist. “The debt problems across the periphery countries in Europe are really quite profound; the most likely scenario is that we are going to see a few of the countries end up restructuring their debt.”

Greece, which received a 110 billion-euro ($146 billion) loan from the EU and IMF in May after struggling to repay its debts, will this year post a 7.4 percent budget deficit of gross domestic product, compared with a 9.6 percent shortfall in 2010 and a 15.4 percent gap the previous year, the European Commission said on Nov. 29.

Ireland, which received an 85 billion-euro rescue package last quarter, will this year post the widest deficit in the EU at 10.3 percent of GDP, following 2010’s 32.3 percent, according to the commission.

4--The Smart Money Girds for a Drop in Stocks, Barrons

Excerpt: A wall of worry is building in the options market as the stock market surges higher at the onset of a new trading year.

Sophisticated investors are actively buying call options on the Chicago Board Options Exchange's Volatility Index (VIX) that would likely increase in value if the Standard & Poor's 500 index falls sharply by the middle of February.

The bearish posturing in VIX is ample evidence that some investors have not forgotten that the stock market never advances in a straight line, and never misses an opportunity to hurt the most people, most of the time.

"We're moving toward a euphoric peak where the market in aggregate will start acting like a bunch of rare-earth stocks," says Jim Strugger, MKM Partners' derivatives strategist.

5--Fed May Keep Easing at `Full Throttle' Until Decline in Unemployment Rate, Bloomberg

Excerpt: Federal Reserve officials signaled they’ll probably push ahead with unprecedented stimulus until the recovery strengthens and many of the 15 million unemployed Americans find work.

The jobless rate hasn’t fallen below 9.4 percent since May 2009 and will probably average that figure this year, according to a Bloomberg News survey of economists. Unemployment probably declined to 9.7 percent last month from 9.8 percent in November, according to the average estimate of a Bloomberg poll prior to a Labor Department employment report on Jan. 7.

“Right now it looks like the unemployment rate is the whole ball of wax,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “The majority just wants to keep going full throttle, and keep policy as accommodative as possible.”

6--To Bee Or Not To Be?, Washington's blog

Excerpt: Bees - upon which the entire human food chain rests - are suffering a sharp decline.

As the Guardian pointed out Monday:

The abundance of four common species of bumblebee in the US has dropped by 96% in just the past few decades, according to the most comprehensive national census of the insects [a three-year study published in the Proceedings of the National Academy of Sciences].

Sydney Cameron, an entomologist at the University of Illinois, led a team on a three-year study of the changing distribution, genetic diversity and pathogens in eight species of bumblebees in the US.

By comparing her results with those in museum records of bee populations, she showed that the relative abundance of four of the sampled species (Bombus occidentalis, B. pensylvanicus, B. affinis and B. terricola) had declined by up to 96% and that their geographic ranges had contracted by 23% to 87%, some within just the past two decades.

Cameron's findings reflect similar studies across the world. According to the Centre for Ecology and Hydrology in the UK, three of the 25 British species of bumblebee are already extinct and half of the remainder have shown serious declines, often up to 70%, since around the 1970s. Last year, scientists inaugurated a £10m programme, called the Insect Pollinators Initiative, to look at the reasons behind the devastation in the insect population.

7--Dead Birds Fall From Sky In Sweden, Millions Of Dead Fish Found In Maryland, Brazil, New Zealand, Huffington Post

Excerpt: ...recent reports of mysterious dead birds falling from the sky in both Arkansas and Louisiana. Thousands of dead birds were found in Beebe, Arkansas on New Year's Eve, and a few days later, around 500 of the same species were found 300 miles south in Louisiana. A Kentucky woman also reported finding dozens of dead birds scattered around her home. In the days prior to New Year's, nearly 100,000 fish surfaced in an Arkansas river 100 miles west of Beebe. Officials are now saying that fireworks likely caused the Arkansas bird deaths, and power lines may be to blame for the death of the birds in Louisiana....

Millions of dead fish surfaced in Maryland's Chesapeake Bay in the U.S., Tuesday, while similar unexplained mass fish deaths occurred across the world in Brazil and New Zealand. On Wednesday, 50 birds were found dead on a street in Sweden. The news come after recents reports of mysterious massive bird and fish deaths days prior in Arkansas and Louisiana.

The Baltimore Sun reports that an estimated 2 million fish were found dead in the Chesapeake Bay, mostly adult spot with some juvenile croakers in the mix, as well.

8--The Brighter Outlook, Calculated Risk

Excerpt: Back in early 2009, one of the key reasons I thought there wouldn't be a "depression" (defined as a 10% decline in real GDP) was because the drag from several key sectors was slowing (see Feb, 2009: Looking for the Sun)

The logic was similar last year when I argued for sluggish growth but no double dip recession - I just didn't see a huge decline in residential investment. I noted that "usually a recession (or double-dip) is preceded by a sharp decline in Residential Investment (housing is the best leading indicator for the business cycle), and it [is] hard for RI to fall much further".

Now we can even go further. As I argued in Question #2 for 2011: Residential Investment, residential investment, and residential construction employment, will probably make positive contributions in 2011 to real GDP growth and payroll employment.

From the ADP employment report this morning:

Construction employment was unchanged in December, ending continuous monthly declines since June 2007. The decline in Construction employment, since its peak in January 2007, is 2,306,000.

The tide is changing.

9--Fiscal Shock, Paul Krugman, New York Times

Excerpt: Republicans have, after all, been the party of fiscal irresponsibility since 1980; the GW Bush administration confirmed, if anyone was in doubt, that unfunded tax cuts are now in the party’s DNA.

Then along comes a Democratic president who presides over all of two years of deficits in the immediate aftermath of a severe financial crisis – which is a time when you’re actually supposed to run deficits. Republicans begin inveighing against the evils of red ink – and, incredibly, get taken at face value.

And even if you didn’t know the history, if you actually paid attention to what leading Republicans were saying, their lack of seriousness was totally obvious. You had the Ryan plan, which claimed to reduce the deficit but, if you actually looked into it at all, relied completely on magic asterisks; you had the declarations by top Republicans that deficits are terrible but there’s no need to offset the cost of tax cuts.

The idea that these people were allowed to pose as deficit hawks is stunning.

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