Andrew Busch

Here’s What the Markets Are Going to Focus on Today:

House Budget
FISCAL 2011 BUDGET: TREASURY DEPARTMENT
10 a.m. Feb. 24, 210 Cannon Bldg.
Full Committee Hearing
House Budget Committee (Chairman Spratt, D-S.C.) will hold a hearing on the president’s proposed fiscal 2011 budget for the Treasury Department.
Witnesses Scheduled: Timothy F. Geithner, secretary of the Treasury

House Financial Services
HUMPHREY-HAWKINS MONETARY POLICY REPORT
10 a.m. Feb. 24, 2128 Rayburn Bldg.
House Financial Services Committee (Chairman Frank, D-Mass.) will hold a hearing on the Humphrey-Hawkins Semiannual Monetary Policy Report, current economic conditions, and the outlook for the financial sector and the broader economy.
Witnesses Scheduled: Ben S. Bernanke – chairman, Board of Governors, Federal Reserve System

House Oversight & Government Reform
TOYOTA RECALL
11 a.m. Feb. 24, 2154 Rayburn Bldg.
House Oversight and Government Reform Committee (Chairman Towns, D-N.Y.) will hold a hearing titled “Toyota Gas Pedals: Is the Public At Risk?”
Panel: Ray LaHood, secretary of Transportation; David Strickland, administrator, National Highway Traffic Safety Administration
Panel: Akio Toyoda, president and CEO, Toyota Motor Corp.; Yoshimi Inaba, president and CEO, Toyota Motor North America Inc.
Panel: Joan Claybrook, president emeritus, Public Citizen, and former administrator, National Highway Traffic Safety Administration; Clarence M. Ditlow, executive director, Center for Auto Safety; Fe Niosco Lastrella, lost family members in a car accident involving a Toyota vehicle; Kevin Haggerty, experienced sudden unintended acceleration in a Toyota vehicle

The budget story is a negative for the markets and Geithner will be grilled over the assumptions, projections, and exclusions to the 2011 Obama blueprint for spending. The monetary policy report will be mixed for the markets as Bernanke walks the fine line of talking optimistic and supporting his rate hike all the while justifying the verbal barrage by Fed members saying the rate hike was not going to mean additional rate hikes soon. Finally, the Toyota situation is just a negative, but it may be past its sell date for impact.

Summing it up, the Bernanke testimony will outweigh Geithner/Toyoda (CEO). Given the big drop in consumer confidence yesterday and the lack of jobs, the members of the US House will be all over Bernake and it should be confrontational with Kanjorski, Waters, and Paul all getting the shots in on the chairman.

According to Vogue Magazine, whom does our current US Treasury Secretary most closely resemble?

a. Lyle Lovett

b. The current Bachelor

c. Frodo

d. JFK

e. Aragorn

f. a & d

g. c & e

Answer below…..

Vogueing: The answer today’s quiz is f. In this story, Vogue states that Geithner is, “A lithe and athletic 48 years old, Geithner, who was named one of the 100 most beautiful people of 2009 by People magazine (it may have helped that his brother works for the publication), has the kind of looks that can go either way: Half an inch one way he’s John F. Kennedy; half an inch the other he’s Lyle Lovett.” With this kind of reporting, is it any wonder that Geithner doesn’t want to act out the Onion’s story about sitting on top of the Capitol dome?

When it comes to Greece, deny, deny, deny!: Today, we had an official denial from not only the European, but also Germany on the report yesterday of a E20-25 billion bailout fund for Greece. The report in Der Spiegel yesterday sounded more like a trial balloon that was today pricked by authorities. It underscores that the situation is still in flux, but at least it’s being discussed. Athens pledged to take new steps should they be needed on the deficit reduction program. The FT continues their string of decidedly bearish EU stories with a mash-up of how southern Europe has threatened the integrity of the entire European unity for 60 years. Coupled with a weaker than expected German IFO business climate number, the Euro sank on the news.

Toyotathon: Today, we get the first of three scheduled congressional hearings on Toyota. The House Energy and Commerce Committee led by Henry Waxman (D-Cal.) gets the first crack at asking tough questions to a Toyota executive. While there certainly is a problem with some of the cars as witnessed by the massive recall, one has to wonder about the optics of these appearances. Since the United States owns 61% of General Motors, the conflict of interest is a serious question for those in Congress asking the questions. Of course, many members have lots of experience with this subject and I’m sure that will assist them with their line of inquiry and keeping the discussion above politics. It better. Toyota has a large US presence and it would be a disservice to auto workers in Kentucky, Indiana, Alabama and Mississippi to have this get out of control.

Greece Cools: There are two stories out on Greece today that are influencing the markets. The first to come out on Sunday was a story indicating that Greece wanted help/subsidy from the rest of the EU on their auctions. Greece indicated that the interest rates they will be paying are too high and will cause problems. “What we are saying simply is we need the help so that we can borrow at the same rate as other countries, not at high rates which in fact undermine our possibility for making the changes and cutting down our deficit,” Greek PM George Papandreou told the BBC’s Andrew Marr show. A program for Greece could be developed along the lines of the Build America Bonds here in the US which help states/municipalities raise capital. Most importantly, Mr Papandreou said Greece’s borrowing needs were covered till mid-March.

The next story came from Der Spiegle which stated that the EU/Germany may be willing to supply up to E25 billion in aid. ” The amount each country would contribute would be calculated according to its relative position in the European Central Bank, Der Spiegel explains. Germany would therefore contribute nearly 20 percent of the potential aid package, the equivalent of up to five billion euros, which would be made up in part of loans and guarantees.” Both stories had a salutary effect and the Euro rallied. While the Greece situation has been a major concern for the European Union, it now appears that the early part of the crisis has passed.

India like Brazil?: Bloomberg reports today that India’s credit rating may be raised from junk if Finance Minister Pranab Mukherjee provides a comprehensive plan to roll back fiscal stimulus and cut the budget deficit this week, Moody’s Investors Service said. “If we think the exit path is well articulated and well executed, the local currency rating could be upgraded,” Aninda Mitra, a Singapore-based sovereign analyst at Moody’s, said in a telephone interview on Feb. 19. India’s long-term local currency debt is placed at Ba2 by Moody’s, two levels below the investment grade and at par with Armenia and Turkey. Mukherjee has an opportunity to narrow the budget shortfall as accelerating economic growth boosts tax revenue and a stronger political mandate after last year’s elections paves the way to resume asset sales. Rating changes have less impact on India than other countries like Greece, which borrow more from abroad. India’s foreign borrowings make up only about 4 percent of government debt compared with 83 percent for Greece, according to Citigroup Inc.” While the last point may be true, I believe you could potentially get a Brazil-like impact on FDI into India with the ratings change.

The Washington is broken chatter is in hyper-drive out of DC with the announcement by Senator Evan Bayh (D, IN) that he is retiring. Bayh was particularly critical of the partisan wrangling and animosity currently on display on Capitol Hill. Bayh stated that he loved serving the citizens of Indiana, but hated the process of making law in the Senate.

Besides making the 2010 mid-term elections a bit tougher for Democrats to retain their large majorities, the comments Bayh made on CBS’s Early Show were particularly damaging. “If I could create one job in the private sector by helping to grow a business, that would be one more than Congress has created in the last six months,” he said. This will stand in stark contrast to the announcements we get today on President Obama’s 2009 $787 billion stimulus program.

Today marks the one year anniversary of the signing of the law creating the programs. It is the major piece of legislation that the harmonized Congress and White House have completed. Health care, cap and trade, and financial regulatory reform are still not ready to be done and may not see action ahead of the mid-term elections. While the Associated Press states that the stimulus bill has saved/created 3.5 million jobs, the President’s own economic team metrics showed that the program would stop unemployment at 8%. Perhaps it would’ve had the full amount of the stimulus been deployed. Estimates now show that only about half has made it out the door.

Bayh’s comments on job creation will stand in sharp contrast to whatever President Obama and Democratic leadership state today to celebrate the one year anniversary. The major problem with the stimulus plan is that is not nearly as effective as it could’ve been. The $170 billion in tax cuts for the middle income earners is a great example of the problems.

Research shows very clearly that if recipients believe the cuts are temporary, they will save the money or pay down debt. If the recipients believe the cuts are permanent, they will spend the money. Given that President Obama just stated that all solutions to the US debt problems are on the table including a middle class tax hike, one has to believe that tax cut recipients don’t believe the cuts are permanent. Therefore, the cuts did not have their intended maximum positive effect and yet they contributed their full weight towards expanding the deficit.

Today, the NYT runs an article on how the gridlock is negatively impacting the nation’s ability to deal with a massive budget deficit and massive increase in public debt. Due to being shut out of the legislative process from health care to the stimulus bill, the Republicans are not cooperating on any additional measures to deal with the deficits in an election year. In fairness to the Democrats, the long term problems for the debt reside in entitlement programs that were expanded (Prescription Drug Bill) under Bush. The major concern is that solution put forward by the party in power solely focuses on raising taxes and raising taxes on the upper income earners.

This is also the major concern Conservatives have over the creation of a debt panel that President Obama is going to sign on Thursday. The solution will primarily focus on raising taxes and will exclude the truly important aspect of cutting the entitlement programs and cutting spending overall. It is the way of Japan. A poor man can’t spend his way to prosperity nor can a government tax it’s way to fiscal probity.

Until the President leads Congress on serious deficit reduction plans that include cuts to entitlement programs, all the articles about the disease of gridlock will be true and negative for the markets.

The on-going saga for Greece and the European Union continues and the latest headlines are these:

RTRS-PURCHASES OF GREEK BONDS BY EURO ZONE STATE-OWNED BANKS IS ONE OF OPTIONS CONSIDERED IN EU PLAN TO SUPPORT GREECE-EU SOURCE
RTRS-EUROGROUP ON MONDAY TO DISCUSS DIFFERENT OPTIONS OF SUPPORT FOR GREECE -EU SOURCE
RTRS-SUPPORT OPTIONS FOR GREECE COULD VARY FROM COUNTRY TO COUNTRY -EU SOURCE
RTRS-GREEK SUPPORT MECHANISM COULD BE STRUCTURED IN STAGES DEPENDING ON LEVEL OF NEED -EU SOURCE
RTRS-OBSTACLE TO MORE DETAILED AGREEMENT ON GREECE SUPPORT NOW IS LACK OF GERMAN JUNIOR COALITION PARTNER CONSENT-EU SOURCE
RTRS-COUNTRIES COULD PARTICIPATE IN SUPPORT FOR GREECE ACCORDING TO THEIR WEIGHT IN EURO ZONE -EU SOURCE

Sounds like the “determined support” is put off until Monday for further discussions. However, I don’t doubt that something will be done. According to Bloomberg, “…German, French, Swiss and U.K. banks have at stake in the so-called PIGS countries. Banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to the four countries, according to data from the Bank for International Settlements. Overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS.”

This shows the financial linkage within Europe to Greece and why a rescue package will be forthcoming. Note, the Euro is still getting a beat down in the currency markets as the “package” is likely to be delayed and is likely not to resolve the over-spending by Greece. Unto the strikes!

Today at 11:00 AM ET, I’ll be appearing on CNBC’s the Call discussing the potential bailout of Greece by the European Union.

Before anyone can savor the possible bailout/backing of Greece debt by Germany, we get these series of comments:

GERMAN GOVT OFFICIAL SAYS GREECE MUST PURSUE SUSTAINED PATH TO CONSOLIDATION
GERMAN GOVT OFFICIAL SAYS THERE IS NO DECISION ON AID FOR GREECE, AND IT’S NOT PENDING EITHER
GERMAN GOVT OFFICIAL SAYS IT’S NOT GERMANY’S JOB TO TELL GREECE WHAT IT NEEDS TO DO
GERMAN GOVT OFFICIAL SAYS NO DECISION PENDING ON AID FOR GREECE
GERMAN GOVT OFFICIAL SAYS THE QUESTION OF POTENTIAL GREEK DEFAULT IS NOT ON THE AGENDA

Greek bonds and equities had rallied prior to these comments and now the EU summit is doubted as to whether any debt guarantee will be forthcoming. Clearly, the Germans are worried about opening up their check book and subsidizing profligate country spending within the EU. The question now arises as to how Greece can resurrect itself and deal with the massive government deficit.

Here’s an incomplete list of what they need to do and it should sound very familiar to US citizens:

Greece needs to reduce their deficit from 12.7% of GDP down to 10% by 2011 and then 8% by 2012 to gain some credibility. EU may want more.
Greece needs to cut or freeze spending for their major programs of public wages and pension payments. These account for 51% of its budget.
Greece needs to change the mentality of its citizens when it comes to welfare policy: The public views these as acquired rights like freedom of speech.
Greece needs to understand it can’t spend more than it takes in from tax receipts.
Greece needs to learn that if they heavily tax the private sector to pay for profligate spending that not only will the private sector stop creating jobs, but also that tax receipts will fall as companies leave the country.

The last one is what California is experiencing and should be a shining example for other states within the US union. How the European Union deals with Greece will be a precursor for how other nations deal with their own debt. Ultimately, neither Greece nor California will likely be allowed to default. The question remains as to whether either fiscally challenged state can deal with the concept that you can’t spend what you don’t have.

Apparently, the Greek government has called in the big hitters to help them with their fiscal dilemma. Joseph Stiglitz has been advising the government and his first analysis is to state that the austerity plan will likely stifle the country’s growth. The 2001 Nobel Peace Prize winner said that without balancing measures to stimulate the economy — such as development funds and other ways to increase liquidity — the deficit reduction could slow growth according to the WSJ.

“Slower growth could in turn lead to lower tax revenues and end up increasing the budget deficit. “I would give a strong cautionary note against deficit fetishism,” Mr. Stiglitz told a news conference in Athens. “If you have less success [stimulating the economy through other means], then I start getting worried.”

In essence, Greece’s problems represent similar predicaments that other Western countries have: large deficit spending to stimulate/resuscitate economic growth. this is the modern interpretation of Keynesian economics. Or is it? Remember, Keynes didn’t advocate running structural deficits to get the economy going (C+I+G+Ex-M=GDP) and thought they would chill rather than stimulate the economy.

In Fortune magazine, Carnegie Mellon’s Allan Meltzer had this to say on the current US deficits, ” Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future….We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that’s gone.”

“The type of stimulus he (Keynes) advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending as the source of durable job creation.” If Meltzer is correct, then both Greece and the United States need to focus on increasing private investment.

Therefore, a plan that contains increasing taxes on corporations or on capital creation is not what Keynes had in mind to stimulate private investment. At some point, nations will have to decide that they can’t spend money on programs they can’t afford. The recent discussions surrounding European and United States structural deficits has been prompted by a perceived crisis within the financial community over lack of credible plans and polices.

Stiglitz believes this fear is overdone and sees little chance of a default by Greece, United Kingdom, or United States. However, this doesn’t mean that the problems are going to be solved easily. In Greece, it’s cutting popular pension programs and government workers pay. In this country, the NYT on Sunday ran a very helpful graph on the US budget deficit and debt. Although cutting earmarks and other spending is helpful, the conclusion is that cutting entitlement programs of Social Security, Medicare, and Medicaid is the key.

It would take strong leadership to bring these up for discussion and propose meetings in front of cameras for this purpose. Until this discussion occurs, debt holders will be left to speculate over the outcome of austerity measures that don’t address the true issues.

As expected, the Bank of England left rates unchanged at 0.5% and the European Central Bank left rates unchanged at 1.0%. The BOE also signaled that they would not be expanding their QE program, but left open the option to buy more down the road should conditions change. We’re awaiting ECB’s Trichet to comment on Greece and the rest of the PIIGS to see if more will be done to assist them. Two of Greece’s largest unions are setting strike dates for February 10th and February 24th to protest the austerity proposals proposed by the government.

Of course, Greece is not the only country with major fiscal problems. Portugal, Spain, Italy, and Ireland are all seeing their sovereign CDS prices shift out significantly with Portugal now at the level Greece was at during December. This is the first true test of the Maastricht marriage for all of the Euro zone members and highlights the major problem with the construct: it’s not a true union.

Case in point, it seems the IMF is the only body that may have the legal capability to assist these countries in their time of need. This reminds me of something, what is it?

I’m thinking of what happened between the shotgun marriage of Bear Stearns to JPM and the failure of Lehman. Nothing. Nothing happened for 6 months even though US authorities knew they could potentially see another major problem. This is what I think could be happening in the Euro Zone and with the European Union. The ECB and EU know they have a problem with some of their members not meeting the 3% debt to GDP metric and yet there doesn’t seem to be any action to legally assist these countries or have the legal authority to create something like a TARP.

This is the test many have predicted that would eventually come for this quasi-union. Given the sloth-like movement of the EU parliament, it may take a true crisis for them to create what is needed to avoid this in the future. The clock is ticking on the EU/ECB and they’re wasting time.

Today, President Obama holds a press conference to discuss the details of his 2011 budget. According to the press release, here are the key facts:
Overall 2011 Spending: $3.834 trillion.
2011 Discretionary Spending: $1.415 trillion.
2011 Projected Deficit: $1.267 trillion or 8.3 percent of GDP (down from $1.556 trillion or 10.6 percent of GDP in 2010).
10-year Deficit Reduction: $1.2 trillion, excluding war savings.
Tax Cuts: More than $300 billion in the next 10 years for individuals, families, and businesses.
The White House fact sheet also contains these highlights: “The Budget includes $100 billion for immediate job-creating investments in small business tax cuts, infrastructure, and clean energy. This includes a new Small Business Jobs and Wages Tax Cut to spur small business hiring and wage increases; this will cost $33 billion. Extend for another year the Making Work Pay Tax Credit for 110 million American families. Increase the child care tax break for middle-class families. Eliminate the tax on capital gains from new investments in small business. Extend through 2010 the Recovery Act provision that allows small businesses immediately to expense up to $250,000 of qualified investment.”

They are proposing a 3 years spending freeze on non-security discretionary spending to save $250 billion over 10 years; cost cutting of $20 billion, bank tax fee of $90 billion over 10 years, elimination of tax preferences for oil, gas, and coal companies for $40 billion over 10 years; and allow the 2001 and 2003 tax cuts to expire for households making more than $250,000 raising $678 billion over 10 years. This 2011 budget will be the third year in a row of trillion dollar deficits.

The simple figures to understand are these: receipts versus outlays. In trillions, 2009: 2.105 receipts, 3.518 spending; 2010 2.165 receipts, 3.721 spending; 2011 2.567 receipts, 3.834 spending. Spending increases every year. Today, there are no surpluses and the spending remains high: 5.8% increase in 2010 and 2.9% increase in 2010. Note, the anticipated increase in receipts for 2011: a massive 18.5% increase from taxes.

The longer run projections are for $8.5 trillion in deficits over the next ten years. The public debt will reach $10.5 trillion in FY11, an astounding 68.7 percent of GDP. Even with today’s low rates, interest costs would more than quadruple by the end of the decade, reaching $840 billion in 2020, and overall spending will remain well above the historical average at 23.7 percent of GDP by 2020.

When I think of this structure, several phrases come to mind: This isn’t rocket surgery. It’s rare, but not unusual. We have to run it up the flagpole to see if it floats. It’s a classic mixed metaphor.

The Obama budget is doing something now that will incent people to hire workers that in the long run is going to cost them their jobs. It’s ironic that the plans are to provide a tax cut to hire workers (Small Business Jobs and Wages) and then a tax hike (2001-2003 Bush cut roll off) to discourage it. Remember, many small businesses are subchapter S and the profits roll straight through to individual tax returns. So when you tax earners over $250k, you hurt small business. Cheap loans (any loans) will help, but incenting people by letting them keep them own money is better for the economy and for job creation.

While the President met and debated Republicans over the weekend, we’ll have to wait and see for any breakthroughs for cooperation on the budget. So far, I don’t see any carrot at the end of the tunnel.