KeNo's Housing and Economic Portal: Thursday July 30 Housing and Economic stories

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TOP STORIES:

Harry Schultz Letter predicting FDR-style bank holiday and says US Embassies and State Departments preparing through foreign currency purchases - (www.marketwatch.com) A leading newsletter paints a grim picture of the future. The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term. The Harry Schultz Letter (HSL) was my pick for Letter of the Year in 2008 because it really did predict what it rightly called a coming "financial tsunami." But its performance in 2008 was still terrible, albeit arguably for technical reasons. ( See Dec. 28, 2008, column.). Now HSL has bounced back big-time. ( See April 13 column.) Over the year to date through May, it's up a remarkable 81.7% by Hulbert Financial Digest count, compared to 4.1% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Of course, simple arithmetic dictates that doesn't make up for 2008 -- over the past 12 months, HSL is still down 48.19% versus negative 32.63% for the total return Wilshire 5000. In fact, the damage inflicted by 2008 was so great that HSL is also under water over the past three years, down an annualized 14.89% against a drop of 8.18% annualized for the total return Wilshire 5000. Still, over the past five years, the letter has achieved an annualized gain of 9.19%, compared to negative 1.26% annualized for the total return Wilshire 5000. This reflects its success in catching the post-millennium hard-asset bull market that caused me to name it Letter of the Year, for more conventional reasons, in 2005. ( See Dec. 29, 2005, column.) And over the past 10 years, the letter still shows an annualized gain of 3.65%, against negative 0.86% annualized for the total return Wilshire. In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen .... within 180 days, but could be 120-150 days." Yes, yes, it's paranoid. But paranoids have enemies -- and the Crash of 2008 really did happen. HSL's suspicion: "Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)." HSL is still sticking with its 20-year "V" formation forecast, but emphasizes that within the current 10-year downtrend phase there will be rallies that will "last 1-2 years." It attributes its current success to "successfully trading almost daily, especially in commodity stocks (coal/potash/energy/ fertilizer/gold). Take profits constantly and rebuy on mini pullbacks. Prefer non-U.S. dollar companies; many such companies are listed in U.S. & Canada or Australia." HSL says: "The world is staggering today between stagflation and net deflation right now; it varies widely around globe. Net deflation is a maybe 35% risk, due to toxics and/or deepening depression. Bit more likely, we'll slowly creep up to a dangerous 4.5% inflation on average, medium-term. But the wild card is the currency risk, which has a 50% (?) chance of boiling over and causing literally overnight (i.e. 24 hours) mega inflation in the asset markets." Nevertheless, in the very short term, HSL's charting leads it to say: "we MAY not get a new bear market decline that many bears are predicting. Likewise, DJIA & S&P500 may build a Head-and Shoulders right shoulder."

Pennsylvania stiffs 69,000 state workers - (www.marketwatch.com) State freezes workers' pay for July as budget impasse continues. Two other states have yet to approve budgets, while California closes in on deal to close $26 billion deficit. Pennsylvania state workers' paychecks are a little light these days. Struggling to resolve a 17-day-old budget impasse, Pennsylvania is withholding pay for 69,000 state employees for time worked after July 1. Workers Friday received only 70% of their salary, covering days worked in June. Starting two weeks from now, they'll get nothing on payday until a state budget is approved. Pennsylvania is one of three states that have yet to pass budgets for fiscal 2010, which began July 1. The other two -- Connecticut and North Carolina -- are operating under temporary spending measures. Still two others, Illinois and Ohio approved their 2010 budgets this week. In California, which passed a budget in February, Gov. Arnold Schwarzenegger and lawmakers are moving closer to resolving a $26 billion budget shortfall that has forced the state to send out nearly 150,000 IOUs to residents, contractors and small businesses. When Pennsylvania state workers open their paychecks, they'll see the words "Budget Impasse Leave without Pay" for the time worked in July. Even after a budget is signed, employees won't see the money for several days. And they won't get interest on the money owed, said a governor's spokeswoman. Some 29 financial institutions, primarily credit unions, are offering workers no-interest or low-interest loans. Several food banks are also providing emergency supplies to employees in need. They can also check with the state to see if they are temporarily eligible for food stamps or welfare. Republicans and Democrats are battling over how to close a $2 billion budget gap. The former don't want to raise taxes, while the latter don't want to cut too deeply into state services. Lawmakers may take up the budget issue soon if the House passes its version Friday. It would then have to pass muster with the governor. California's furlough Fridays: Meanwhile, California residents are still reeling from their state's budget stalemate. The impasse has affected residents, businesses and the state's credit rating. Controller John Chiang has issued 147,000 IOUs totaling $662 million since July 2 in an effort to close a nearly $3 billion cash shortfall for the month. They are going to county social service agencies, those owed state income tax refunds and state vendors. Holders won't get the funds until the budget is passed or until Oct. 2, whichever comes first. They will receive an interest rate of 3.75%. Several dozen credit unions are accepting the IOUs, and Citibank said Friday it will do so until July 24. But Wells Fargo, Bank of America and JPMorgan Chase, stopped taking the paper after July 10. This has left some residents struggling.

California Budget Talks Falter as Treasurer Warns of Junk Debt - (www.bloomberg.com) California GovernorArnold Schwarzenegger and lawmakers failed to resume talks last night over how to solve a $26 billion deficit, even after the state’s Treasurer said crippling penalties from Wall Street loom. Negotiations between Schwarzenegger and legislative leaders stalled late July 15, mostly over proposed cuts to school funding. That prompted Treasurer Bill Lockyer yesterday to warn that the impasse could leave the state with a junk rating on its debt and unable to borrow money. “With every passing day, the state’s credit rating moves closer and closer to the junk pile,” Lockyer said in a statement. “If the Governor and Legislature dump us on that pile, they will end indefinitely the state’s financial ability to build schools, highways, levees - all the critical public works we need to rebuild California. If our credit rating sinks to junk status, the state will find the door to the infrastructure bond market locked shut.” The deficit in the $100 billion annual budget brought on by the longest recession since the 1930s and a political stalemate over how to fix it has drained California of cash, forced it to pay some bills with IOUs and caused credit assessment companies to cut their ratings on the state’s bonds. Schwarzenegger told reporters yesterday he thought they might be able to “close the outstanding issues very quickly.” A meeting of the so called “Big 5,” consisting of the Governor and top Democrat and Republican lawmakers from both the Senate and the Assembly, never materialized by day’s end. School Funding. At issue is the Governor’s proposal to suspend a constitutional amendment that sets a minimum level of funding for schools, which absorb more than 40 percent of the state’s general fund. Democrats want legislation to ensure that schools are repaid all the money that is cut, as well as guarantees spending would be increased when the economy recovers. “We are close, but until Democrats find a way to fund education without constitutional changes that lock the state into future spending, we will remain stalled,” said Schwarzenegger spokesman Aaron McLear. Controller John Chiang this month began issuing IOUs to businesses and others set to receive state payments to ensure enough cash remains to meet bond payments and others given high priority under the constitution.

Tax rates on track to soar as proposals form - (www.usatoday.com) American Idiots do not care as long as they are getting the money or subsidies and another group is paying. Well eventually, it will be the bottom 51% taxing the top 49% and then many Americans will care: Three tax increases proposed by President Obama and House Democrats on the richest Americans could produce the highest tax rates in a quarter-century. The latest is this week's proposal by House Ways and Means Committee Chairman Charles Rangel, D-N.Y., and others to impose a surtax of up to 5.4% on annual incomes of $350,000 or more to help pay for overhauling the health care system. About 500,000 taxpayers earning $1 million or more would pay the full surtax. Obama's budget, released in February, calls for letting tax cuts for top earners enacted at the beginning of the decade expire in 2011. That would raise the top rate from 35% to 39.6% on incomes above $373,000. During the presidential campaign, Obama favored bolstering Social Security by subjecting family income above $250,000 to the 12.4% payroll tax, paid equally by employees and employers. The tax currently is levied on income up to $102,000. All told, shifting the cost of health care, Social Security and other budget priorities toward high-income Americans would mean an actual tax rate above 45% for the wealthiest — "levels never seen," says Clint Stretch, a tax expert at Deloitte Tax LLP. When top rates were higher, tax shelters helped reduce the percentage of income paid. White House press secretary Robert Gibbs said this week that Obama "believes that the richest 1% of this country has had a pretty good run of it for many, many, many years." The top 1% had income of $557,000 or more, according to the non-partisan Tax Policy Center. Relying on top earners to pay for benefit programs risks reversal if Republicans return to power, says William Gale of the Brookings Institution, a think tank. "We cannot do this on the backs of the rich," he says. Robert McIntyre of the liberal Citizens for Tax Justice says Obama eventually must look beyond the 6.4 million taxpayers earning $200,000 or more. "At some point, you just can't squeeze them anymore," he says.

CBO Chief Criticizes Democrats' Health Reform Measures - (www.washingtonpost.com) Congress's chief budget analyst delivered a devastating assessment yesterday of the health-care proposals drafted by congressional Democrats, fueling an insurrection among fiscal conservatives in the House and pushing negotiators in the Senate to redouble efforts to draw up a new plan that more effectively restrains federal spending. Under questioning by members of the Senate Budget Committee, Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, said bills crafted by House leaders and the Senate health committee do not propose "the sort of fundamental changes" necessary to rein in the skyrocketing cost of government health programs, particularly Medicare. On the contrary, Elmendorf said, the measures would pile on an expensive new program to cover the uninsured. Though President Obama and Democratic leaders have repeatedly pledged to alter the soaring trajectory -- or cost curve -- of federal health spending, the proposals so far would not meet that goal, Elmendorf said, noting, "The curve is being raised." His remarks suggested that rather than averting a looming fiscal crisis, the measures could make the nation's bleak budget outlook even worse. Elmendorf's blunt language startled lawmakers racing to meet Obama's deadline for approving a bill by the August break. The CBO is the official arbiter of the cost of legislation. Fiscal conservatives in the House said Elmendorf's testimony would galvanize the growing number of Democrats agitating for changes in the more than $1.2 trillion House bill, which aims to cover 97 percent of Americans by 2015. A lot of Democrats want to see more savings, said Rep. Mike Ross (D-Ark.), who is leading an effort to amend the bill before next week's vote in the Energy and Commerce Committee. "There's no way they can pass this bill on the House floor. Not even close." Republicans also seized on Elmendorf's remarks, with House Minority Leader John A. Boehner(R-Ohio) saying they prove "that one of the Democrats' chief talking points is pure fiction." Senate Minority Leader Mitch McConnell (R-Ky.) said Elmendorf's testimony should serve as a "wake-up call" to Obama and Democratic leaders to heed requests from lawmakers in both parties to slow down the process.

OTHER STORIES:

Bank of America Profit Drops Less Than Expected on Fee Income - (www.bloomberg.com)

Citi reports profit after gain from Smith Barney - (www.marketwatch.com)

Stock futures extend losses after GE, BofA results - (www.reuters.com)

Gold off for 2nd day, mirroring crude losses as dollar rises - (www.marketwatch.com)

International Demand for Long-Term U.S. Assets Falls - (www.bloomberg.com)

Administration Weighs More Foreclosure Aid - (www.washingtonpost.com)

Two Jakarta hotels rocked by explosions - (www.ft.com)

China Debt Auction Demand Falls Short for Third Time - (www.bloomberg.com)

European Subsidies Stray From the Farm - (www.nytimes.com)

China's detention of an Australian mining exec threatens the countries' trade relationship - (www.latimes.com)

China First-Half Steel Production Rises to a Record - (www.bloomberg.com)