Friday, February 27, 2009

The Amazing Shrinking Economy

Prior to the market's open, the Commerce Dept. reported that GDP for the 4th quarter of 2008 declined by 6.2%, much more than the previous estimate of -3.8%, and more than the consensus estimate of -5.2%. Word was also spreading fast that the federal government was about to take a 36% stake in troubled Citigroup, more than quadrupling taxpayer's stake in the bank.

Right out of the gate, stocks tanked, with the Dow down nearly 150 points within the first 15 minutes. After trading in a tight range through most of the day, the markets finally succumbed to the intensely negative pressure in the final hour, sending the Dow, S&P and NYSE Comp. to new lows, surpassing those made earlier this week. As I said in yesterday's headline: GAME OVER!

Dow 7,062.93, -119.15 (1.66%)
NASDAQ 1,377.84, -13.63 (0.98%)
S&P 500 735.09, -17.74 (2.36%)
NYSE Composite 4,617.05, -95.97 (2.04%)

According to this report by Lauren Tara LaCapra, citing credit analysis by Egan Jones, a proprietary firm, Bank of America should be up next to follow Citigroup to the government hand-out window.

Hasn't it become evidently clear to Tim Geithner at Treasury that his plan for submitting the banks to a "stress test" won't even come close to relieving the stress to the credit and finance system?

First, the executives, Citi's Vikram Pandit and BofA's Ken Lewis, haven't come clean as to what's lurking on (and off - as in tier three) their books, awaiting implosion. Second, the government's benchmarks in the stress tests are simply too optimistic. For instance, the GDP worst case component calls for GDP to fall by 3.3% in 2009 and grow by 0.5% in 2010. We're looking today at a fourth quarter of 2008 in which GDP declined by 6.2%, according to the government's own report, issued today, so shouldn't the worst case be closer to a 5.0% decline in GDP for 2009 and a flat year in 2010?

As far as wost cases are concerned, a drop of 5.0% isn't even that bad. It is entirely possible that GDP could collapse by as much as 8 or 9% in the first two quarters of 2009 and get worse from there. The government simply doesn't want to face reality, believing, amazingly, after all we've been through, that the system is still resilient. It's not. The major banks are broken and the government is not only complicit through non-regulation, but now looking wholly incompetent, decrepit and corrupted to its core.

So, when the government finally gets the memo, they should have the FDIC close down Citi, zero out the shareholders, pay off bondholders at pennies on the dollar, recapitalize what's left and sell it off - in parts, if necessary - to private hands - shareholders, regional banks or private investors. Then, rinse, and repeat with Wells Fargo & Company (WFC) and JP Morgan Chase (JPM). anything short of a complete shutdown of the banking behemoths will only serve to prolong the agony in the credit, bond and stock markets, severely crimp lending and prolong the recession, turning it into a depression.

The Obama administration and Geithner's Treasury Dept. must take off the kid gloves, stop treating the banks as sacred cows and deal with the colossal problems facing the nation.

One of the reasons the economy is in such a staggering decline, is how lucrative not working has become. A woman caller to the Rush Limbaugh radio show today said she recieved $459 per week in unemployment insurance benefits and the government has just added an additional $25 per week, courtesy of the stimulus bill. That equates to $25,000 per year for not working. There clearly needs to be more incentive to find work, as being on the dole has now become better than the wages of 30-40% working Americans.

Elsewhere, General Electric (GE), slashed its annual dividend, from 32 cents to 10.

Market internals confirmed the headline numbers. Declining issues ran ahead of advancing ones, 4131-1390. New lows overwhelmed new highs, 815-7. Not a single NASDAQ issue made a new 52-week high on the day. The daily advantage for new lows over new highs has now run a full 16 months, since October, 2007. Volume was the highest of the week, in a week which was probably the highest it has been all year.

NYSE Volume 2,248,907,000
NASDAQ Volume 2,457,442,000

Commodities were quiet. Oil lost 46 cents, to $44.76. Gold lost a dime, to $942.50, while silver gained 13 cents to $13.11.

The major indices closed lower for the week, for the 7th time in 8 weeks in 2009.

In closing, I want to take this opportunity to lay claim to the coinage of a new socio-economic terminology, by announcing the advent of the Post-Government Era, a spawning global movement of rampant avoidance and non-compliance of the various laws, taxes and decrees of governments around the world. As the myriad levels of government lay deeper and deeper burdens upon the populace in the large majority of industrial nations, people will naturally revolt, and that revolutionary fervor finds its roots in non-compliance, civil disobedience and outright rejection of authority.

It's deserving of the current rostrum of national governments to receive treatment of this sort, as they have, individually and as a group, compounded the problems of the people, overtaxed them to extraordinary levels and continues to treat them as worthless fodder. The Post-Government Era has begun.

You heard it here first.

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