Primary Dealers sell 26% of most recent Treasury auction back to the Fed at a profit and reduce their exposure to it as well.

In today's episode of "Flip That Bond", the Primary Dealers succeeded in flipping a whopping 26% of the just auctioned off 1% of 1/25/2014 (912828PQ7) back to the Fed. Today's POMO has closed with $7.720 billion in bonds maturing between 2013 and 2014 monetized by Sack Frost, of which, and this should come as no surprise to anyone, the bond most put back to the FRBNY, to the tune of $3.7 billion or 48% of all, was PQ7. Keep in mind that the PD take down in this bond was $14.2 billion. Just two weeks later the Primary Dealers have reduced their positions in this most recent auction by 26%. In other news, there is no monetization. And Tim Jeethner pays his taxes.

"The 18 Year Cycle" - S&P Adjusted For Business Revenues Means The 666 Lows Are Just The First Stop

Sean Corrigan's weekly "Material Evidence" is always a must read. In his latest edition, the uber-eloquent Brit puts simplistically worded Fed bashing to shame with an anti-Fed manifesto masterpiece that is off the charts on the Flesch-Kincaid reading level.  While we will post the full piece shortly, we wanted to bring attention to one particular chart which has not received any prominence in the past, namely the S&P adjusted for business revenues, which appears to have an 18 year periodicity, and whose mean reversion implies that we are only half way through the correction phase. In other words when all is said and done, when the Fed's POMO gun is finally out of bullets, Albert Edwards' and Nic Lenoir's S&P targets of ~400 will be spot on.

America needs Community and not Collectivism...very thought provoking article

Submitted by Giordano Bruno of Neithercorp Press

America Needs Community, Not Collectivism

Tyranny thrives by feeding on human necessity. It examines what sustains us, what we hope for, what we desire, what we love, and uses those needs as leverage against us. If you want safety, they will take it away and barter it back to you at a steep price. If you want success or respect, then you must bow to the existing arbitrary pecking order and play the game nicely. If you want to raise a family, then you must accept the state as a part-time parent. If you want kinship, then you must settle for a thin veneer of empty pleasantries and insincere associations. If you want independence, then you are simply labeled as a threat and done away with altogether. Autocratic rulers are first and foremost salesmen; they convince us that life itself has a “cost”, that we are born indebted, and all bills must be made payable to the establishment. First and foremost, we are sold on the idea that in all of this, we are ultimately alone…

It is within these manipulated concepts of cost and isolation that we discover the foundation of all totalitarian cultures: Collectivism.

Collectivism is not a space age invention or a product of the abstract musings of Marxists, though many seem to think that their version of a hive society is “new” and certainly better than anything ever attempted in the past. No, collectivism is a psychological prison derived from a beneficial instinct as old as humanity itself; the instinct to connect with others, to share experiences and knowledge, to build and create together. It is an instinct as essential to our survival as breathing. Collectivism uses this instinct as a weapon. It is a corrupted and poisoned harnessing of our intuitive nature. It is an inadequate and cancerous substitute for something which normally invigorates and supports healthy culture: true community.

In this age, our ideas of what constitutes “community” have been tainted and confused with the propaganda of collectivists. Our instincts tell us that the world we have been presented is hollow, while our controlled environment tells us that the world is just as it should be (or the best we’re going to get, anyway). How then, are we to tell the difference between natural community, and destabilizing and destructive collectivism? Let’s examine some of the root conflicts between these two social systems, as well as the philosophical shortcomings of collectivism itself…

Common Aspects Of Collectivism

Looking back at the single minded and highly dominating collectivist experiments of the past, it is easy to see the common threads between them. Certain methods are always present. Certain actions are always taken. Certain beliefs are always adopted. Here are just a few…

The Blank Slate: In order for the state to elevate itself in importance above the individual, it must first promote the idea that the individual does not exist, that your uniqueness or inherent character are only a byproduct of your environment. There are many methods to propagating this mindset. Junk science and establishment psychological theorists often treat the human mind as a mere bundle of chemicals and synapses. Emotions are pigeonholed as “hormonal reactions”. Conscience and even attachment a result of “conditioning” (i.e. H.F. Harlow’s ridiculous rhesus monkey experiments).

Existentialism attacks individualism from the philosophical end; suggesting that all actions and reactions are random results of a purely chaotic universe, while at the same time peddling moral relativism and apathy. If all is based on environment and chance, and there is no purpose or meaning to life, then why care about anything?

Religious organizations that choose to abuse their positions of trust also feed collectivism by standing in the way of personal awareness, or even making it taboo to value the individual over the collective (though people tend to wrongly blame the concept of religion itself, rather than the corrupt men who sometimes misuse it).

Each one of these tactics is a tool in the arsenal of collectivists meant to degrade our social admiration for individual thought. Of course, if one actually studies beyond mainstream sources for information (as we have in numerous articles) on the many biological mysteries of the human mind, the numerous inconsistencies of clinical psychiatry, the irrational assumptions of existentialism, that person would find that the blank slate assertion is filled with so many holes it is laughable. However, as long as groups of men strive for power over others, the attacks on individualism will continue. As desperate as elitists have been through the years to build an environment devoid of independent thought, they have met only with failure. Perhaps you just can’t remove from all people those values which are inborn and intuitive, no matter how monstrous the world is around us.

Centralization Instead Of Cooperation: Cooperation in society is often spontaneous and dependent on a number of underlying factors working together at the right place, and at the right time. It takes a noble endeavor and even more noble leadership indeed to inspire the masses to step onto the same path towards the same direction. This is why legitimate large scale cooperation is so venerated in the annals of history; such events are truly rare and miraculous. Tyrants and elitists have no endeavors that rank as “noble”. They serve only their own interests. So, instead of trying to encourage cooperation they won’t receive, they centralize various systems by coercion. If you can’t convince the public to abandon their own paths for yours, then forcefully remove all paths until the people have only one choice left.

Economic centralization is very indicative of this maneuver. While we in the Liberty Movement see a whole spectrum of possible options for markets and trade, many other people see only what is right in front of them; the same crooked fiat money system controlled by the same gaggle of fraudulent central bankers. A large portion of our populace has been convinced that there is only one way to participate in the economy, and thus they act collectively, and blindly.

Another obvious example is the false left/right political system. While there are as many political views as there are people, most tend to affiliate themselves with one of two; Republican or Democrat. Even if you were to believe that the two major parties are honestly opposed, you have still allowed the establishment to narrow your choices down to two. Add the fact that both major parties actually support nearly the same exact policies and goals, and now your choices have been narrowed to one. Millions of people jump on this one bandwagon every four years, thinking that they are cooperating voluntarily, when they have instead been centralized, and collectivized.

Constant Fear, Constant Threats: Fear and survival are powerful motivators. Without ample self awareness and strength of character, these base instincts can overwhelm rationality and conscience. Every collectivist feudalist system ever devised has used a “common enemy” or an iron hand, to quell dissent in the citizenry and to forcefully unify them not under the auspices of an honest cause, but a terror so profound as to drive them to malleable despair.

When life and death hang in the balance everyday, and people have no time to relax, they can in fact go literally mad. All logic flies out the window, panic ensues, and the masses turn to whoever is ready to offer them a way to sanity; “sanity” meaning “comfort”. After a period of constant danger and distress, even fascism can feel comfortable for a while. Collectivist systems are always clashing with the bubbling tides of individual freedom. Because of this, they must continuously qualify their usefulness. There must always be an imminent threat over the horizon, otherwise, the strangling regulations of the state serve no purpose.

Individualism Equated With “Selfishness”: One of the inevitable conditions of collectivism is the demonization of free thought. In a collective, every person becomes a cog in a great machine. The majority begins to see itself not as a group of individuals acting together, but as a single unit with a single purpose. Any person who chooses to step outside of the box and point out a different view becomes a danger to the whole. A machine cannot function if all the parts are not working in harmony. Disagreement in a collectivist system is not considered a civic duty; it is considered a crime that places everyone else at risk. As a dissenter, you are not a person, but a malfunction that must be dealt with.

It is easy to tell when your nation is turning towards collectivism; you only have to gauge how often you are accused of “selfishness” every time you question the needs of the state over the needs of the individual. This argument arises incessantly in countries on the verge of a despotic shift. Interestingly, it is selfishness that tends to drive collectivists, not individualists. As we discussed earlier, collectivists act out of base fear, and a personal desire to survive regardless of the expense. They may disguise it as duty, or “universal love”, but at bottom, they are driven by pure self-interested. They are willing to sacrifice anything, including their own souls, to hang onto what little they have. They are especially willing to sacrifice what YOU have, to maintain THEIR standard of living, or to see their personal world view enacted. Is there anything more self-centered than a man prepared to destroy the livelihood and freedoms of others just to feel temporarily secure?

Promises Of A Fantastic Future: “Innovation” and “progress” are alluring dreams, dreams which can easily be realized in a free society made up of intelligent individuals thinking in ways which go against the norm. The more unique insights present in a culture, the more likely it is to surpass itself and succeed. Strangely though, it always seems to be collectivists who throw around visions of high tech trains, floating cities, and sustainability as benefits to relinquishing certain freedoms. The insinuation is that if people set aside their individualism, their society becomes stronger, and more productive, like worker bees who only strive for one thing; the perfect hive.

Now, this has never been proven to be an advantage of collectivism. One could say given the evidence that a society flourishes less and contributes less the more centralized it becomes. Constructing immaculate castles, pyramids, magnetic highways, or space stations on the moon, does not necessarily make a culture great. It doesn’t even make a culture interesting. What is far more interesting is a society that seeks to enrich the lives of common men, rather than fabricating edifices and launching technologies while using people up as fuel for the collectivist fire. At any rate, I cannot think of a single extreme centralized system that actually delivered on the grand promises it made when in its initial stages of power. Whether this is because their pledges were impossible to fulfill, or because they never intended to fulfill them in the first place, is hard to say…

Common Aspects Of Community

Now that we have explored the intricacies of collectivism, let’s take a look at what it is designed to destroy. What makes real community? What are its benefits and its weaknesses? How does it begin? How does it end? Why is it such a threat to collectivists? Here are a few answers…

Real Purpose: Communities develop in light of meaningful exchange. Their purpose is natural and common. Their goals are not fixed, but evolve as the community progresses. The beneficiaries are the citizenry, sometimes even those who do not directly participate, rather than a select minority of elites. Because the actions of communities are decentralized, and based on a sense of honor and integrity instead of egomania, they tend to appear direction-less, while at the same time making vast and concrete achievements. Communities work best when purpose and destiny are self determined.

Voluntary Participation: There is no need to force people to participate in a system that operates on honesty, conscience, and individual will. In fact, many people today long for a system like this. When men and women apply their energies to something they believe in, instead of something they are manipulated into following, the results can be spectacular. Progress becomes second nature, an afterthought, instead of an unhealthy obsession.

Legitimate Respect: The purpose of a true community is not to keep tabs on the personal lives of its participants, nor to mold their notions. The rights of the individual are respected above all else. Again, the more varied the insights of a population, the stronger it becomes. For a community to attempt to stifle the viewpoints of its citizens would be to commit suicide. There is strength in numbers, but even greater strength in variety. Individualism takes effort, time, and dedication. A society made up of people who have made this journey cannot help but esteem each other.

Flexibility Leads To Stability: A wise man adopts that which works, and throws out that which fails. He does not dismiss methods out of hand, nor does he hang onto methods that disappoint simply because he cannot let go. He educates himself through experience. Adaptability, flexibility, agility in thought and in policy creates solid ground for a society to build. Communities survive by being able to admit when a mistake has been made, and by being open to new options. Rigid systems, like collectivist systems, cannot function unless the people conform to the establishment, and its deficiencies. Communities function best when the establishment conforms to the people, and the truth.

Mutual Aid: Collectivist systems are notorious for promoting the idea that “we are all one”, however, they usually end up becoming the most anti-social and uncaring cultures to grace the planet. You cannot centralize or enforce charity because then it is no longer charity, but slavery. Citizens of communities, on the other hand, actually seek to help each other, not because they expect immediate returns, or because it’s “good for the state”, but because they value an atmosphere of benevolence. The generosity of community helps individuals detach from dependence on government, or bureaucracy. The less dependence on centralized authority, the stronger and safer everyone becomes.

Mutual Defense: While collectivism sacrifices its participants for some undefined “greater good”, communities defend one another, knowing that if the fate of one’s neighbor is ignored, the fate of oneself may also be ignored by others. No one is “expendable” in a community. EVERYONE is expendable in a collective.

Building Community In A Modern World

The task of constructing meaningful community today is daunting, but crucial. In an increasingly centralized and desensitized world, the only recourse of the honorable is to decentralize, and to reintroduce the model of independence once again. This starts with self sufficient communities and solid principles. It starts with unabashed and unwavering pride in the values of sovereignty and liberty. It starts with a relentless pursuit of balance, and truth. It starts with an incredible amount of hard work.

The trappings of collectivism sometimes seem insurmountable. The mindless devotion of our friends and family to a system that harms them can cause us to lose hope, and to lose focus. We must remember how collectivism operates; by removing the power of choice from the equation. If we return that power, then many people who we may have once deemed “lost causes” might awaken as well. By exposing the masses to another option, a better option, we undo years of lies, and lengths of chain. If there was ever a perfect moment to begin this battle, now is the time; while Americans are still searching for solutions, and not too fearful to pursue them once they are found.

Moody's Says Time Shortens for U.S. Rating Outlook as S&P Downgrades Japan - Bloomberg

Moody's Says Time Shortens for U.S. Rating Outlook as S&P Downgrades Japan - Bloomberg: "Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens."

Private Equity firms are selling their investments by going public in the Financial sector.

BankUnited Raises $783 Million in Private Equity-Led Stock Sale - Bloomberg: "Buyout firms are trimming stakes after the Standard & Poor’s 500 Index climbed to a 29-month high, and the KBW Bank Index reached an eight-month high."

The POMO Submitted-To-Accepted Ratio: A Tell On How To Frontrun The Frontrunning Primary Dealers

To those who look to Fed POMO days as a guaranteed panacea to underperformance and an even more guaranteed green close, you are right (at least, so far). But that is only half the story. It turns out that combing through POMO data yields a very surprising set of outcomes, namely, that the ultimate return on any given POMO day is almost exclusively a function of the Submitted-to-Accepted ratio. As John Lohman highlights, "the generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome)." Indeed, the empirical result is precisely that. Which is why in addition to keeping track of POMO days, a far more critical piece of information is tracking the S/A ratio disclosed every day at 11am. If low, and if market performance is below a specific bucket's average, it may be a green light for a stratospheric ramp into market close, and a signal to frontrun the market alongside the Primary Dealers.

Without further ado, here is the statistical data compiled and associated narrative by John Lohman that predicts not only market performance, but Primary Dealer frontrunning via Fed monetization generosity.

POMO Submitted to Accepted ratio

In a prior  post (here), it was clearly demonstrated (to all save a few unnamed asshats who believe in coincidences against all statistical probability) that equities and interest rates tend to rally on POMO days relative to non-POMO days.  Here, using the Fed’s Total Par ‘Accepted’ and ‘Submitted’ data, we can show that, not only is this effect not a coincidence, but that the magnitude of the market’s reaction to POMO on any given day is positively correlated with the outcome of that day’s operation.

The POMO ‘Submitted-to-Accepted’ ratio can be thought of as being similar to a reverse bid-to-cover ratio in Treasury auctions.  Primary Dealers submit a certain volume of paper and the Fed accepts a portion of it.  If POMO is indeed having a direct impact on the markets, there should be a relationship between the submitted-to-accepted ratio and the size of the market’s response.

More specifically, the generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome). 

In fact, this is exactly what we find in the data.  The first chart below compares the returns on days when the ratio is below average (S/A < Avg.) with days when it is above average (S/A > Avg.).  Note that, indeed, the effects of POMO are pronounced when submitted/accepted is lower than average and subdued when it is above (vs. all POMO days).  And of course, the returns under all POMO scenarios is higher than non-POMO days.

To eliminate the potential impact of skew in the ratio, we also conducted the analysis above using the ratio’s median (S/A < Med. and S/A > Med.).  Note that the data has the same monotonic relationship.

To the extent the submitted-to-accepted ratio is a better indicator of the market’s response than is the actual size of the operation itself, there is evidence that Dealers are (surprise) front running in pre-POMO trading, but this is a topic for another day.  At a minimum, this analysis confirms the link between POMOs and market reactions, as well as illustrating that the success rate of dealer submissions is positively correlated with the magnitude of the market’s response.  Finally, it suggests the submitted-to-accepted ratio contains valuable information regarding post-POMO intraday trading on POMO days.

Horrible Employment/Unemployment and Durable Goods report. Bad report = SNOW....Good report = ECONOMY. What a bunch of jackasses.

New U.S. claims for unemployment benefits rose more than expected last week as harsh weather conditions in some parts of the country kept workers at home and caused a backlog in the processing of claims, a government report showed on Thursday.

Initial claims for state unemployment benefits jumped 51,000 to a seasonally adjusted 454,000, the highest since late October, the Labor Department said. That was the largest weekly increase since September 2005.

Economists polled by Reuters had expected claims to be little changed at 405,000.

The prior week's figure was revised slightly down to 403,000 from the previously reported 404,000.

A Labor Department official said four states had reported an increase in claims that was due to snow. In addition, he said, seasonal volatility also affected the data.

Still, the four-week moving average of unemployment claims—a better measure of underlying trends, rose 15,750 to 428,750 last week, implying a gradual labor market recovery that could compel the Federal Reserve to complete its $600 billion bond buying program aimed at bolstering the economy.

A separate economic report showed that orders for long-lasting goods unexpectedly fell 2.5 percent in December.

When volatile transportation orders were stripped out, durable goods orders rose 0.5 percent, the Commerce Department said, though this was a smaller rise than expected.

JIM CRAMER SAYS HOUSING DECLINE IS 0-V-E-R. Entire article below, I have to archive it when this IDIOT says something that conclusively and it is so far from the truth !

Cramer: Decline in Home Values Is ‘Over’

Published: Thursday, 20 Jan 2011 | 6:57 PM ET

Text Size

By: Tom Brennan
Web Editor, Mad Money

• Twitter
• LinkedIn
• More Share

A mea culpa may be in order, but not from Cramer.

Last summer there was a lot of talk about how the end of the first-time homebuyer tax credit would hurt existing-home sales and cause a big decline in prices. But on Thursday we got December existing-home sales numbersthat showed a sharp rise in activity and an actual bump in the median full-year price for 2010—up 0.3 percent from the year before.

No, that’s not a significant increase, but keep in mind it’s also the first gain in four years. And that despite the fact that more than one-third of homes are distressed, meaning they’re foreclosed properties.

Cramer said this existing-home sales number, coupled with Wednesdaydecrease in housing starts, has created a “monumental shift” that explains the turn in housing. Fewer new homes are being built, which helps to shrink the overall housing inventory and boost prices. It also puts the emphasis on existing homes, and explains the good numbers we got today.

This has Cramer thinking the housing market’s “on the mend” and that “the bears who keep saying that the market would fall off a cliff after the tax credit, they were just plain wrong” and “owe us an apology.” After all, they kept lots of investors out of some big moves in companies like Lowe’s [LOW 25.85  ---  UNCH    ], Sears [SHLD  76.61  ---  UNCH    ], Masco [MAS  13.61  ---  UNCH    ] and Whirlpool [WHR  88.76  ---  UNCH    ].

Now there’s little doubt that these very same bears will soon try to discredit these existing-home sales, Cramer said, but he’ll chalk that up to the same kind of disinformation we got when they said the end of the tax credit would hurt the sector. Not true. If there really were a glut of houses, people wouldn’t be buying. But they are.

“These good numbers can’t be denied anymore,” Cramer said. “The decline in value of homes is over. It ended a year ago, as I told you it did. I await someone, anyone, to come out and admit that they were wrong this summer. But they never will. They have no accountability. It disgusts me. It should disgust you.”

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website?madcap@cnbc.com

© 2011 CNBC, Inc. All Rights Reserved

CBO (Congressional Budget Office) report. I guess we know who drinks the Kool Aid.

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry - like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law." So between 2010's $1.3 trillion, 2011 $1.5 trillion, and 2012's revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

From the release:

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression. During the recovery, the pace of growth in the nation's output has been anemic compared with that during most other recoveries since World War II, and the unemployment rate has remained quite high.

For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation's output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

The Economic Outlook

Although recent actions by U.S. policymakers should help support further gains in real (inflation-adjusted) GDP in 2011, production and employment are likely to stay well below the economy's potential for a number of years. CBO expects that economic growth will remain moderate this year and next. As measured by the change from the fourth quarter of the previous year, real GDP is projected to increase by 3.1 percent this year and by 2.8 percent next year. That forecast reflects CBO's expectation of continued strong growth in business investment, improvements in both residential investment and net exports, and modest increases in consumer spending. It also includes the impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (referred to in this report as the 2010 tax act), enacted in December, which provides a short-term boost to the economy by reducing some taxes, extending unemployment benefits, and delaying an increase in taxes that would otherwise have occurred in 2011. CBO projects that inflation will remain very low in 2011 and 2012, reflecting the large amount of unused resources in the economy, and will average no more than 2.0 percent a year between 2013 and 2016.

The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. (By contrast, in the first 18 months of past recoveries, employment rose by an average of 4.4 percent.) Consequently, the rate of unemployment has fallen by only a small amount: After climbing to 10.1 percent of the labor force during 2009, the unemployment rate declined only to 9.4 percent by December 2010. Other measures of labor market conditions suggest even more slack than does the unemployment rate. For example, almost 9 million workers who have wanted full-time work in the past two years have been employed only part time.

As the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, CBO estimates. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO's forecast, does it reach 5.3 percent, close to the agency's estimate of the natural rate of unemployment (the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2 percent).

For the period beyond 2016, CBO's economic projections are based on trends in the factors that underlie potential output, including the labor force, capital accumulation, and productivity. The projections therefore do not explicitly incorporate fluctuations resulting from the business cycle. In CBO's projections, growth of real GDP averages 2.4 percent annually from 2017 to 2021, a pace that matches the growth of potential GDP over those years. The unemployment rate averages 5.2 percent in that same period.

The Budget Outlook

The recovery now under way might be expected to lessen the budget imbalance in 2011 by increasing tax revenues and decreasing spending for certain income-support programs, such as unemployment compensation. However, revenue growth will be restrained by the slow and tentative pace of the recovery and by the 2010 tax act.

Moreover, outlays for many programs are projected to continue to grow and more than offset the decreases in spending (for unemployment compensation, for example) yielded by improving economic conditions.

The resulting federal budget deficit of nearly $1.5 trillion projected for this year will equal 9.8 percent of GDP, a share that is nearly 1 percentage point higher than the shortfall recorded last year and almost equal to the deficit posted in 2009, which at 10.0 percent of GDP was the highest in nearly 65 years.

By CBO's estimates, federal revenues in 2011 will be $123 billion (or 6 percent) more than the total revenues recorded two years ago, in 2009. The continued slow improvement in economic conditions is anticipated to boost revenues from individual income taxes, corporate taxes, and other sources by nearly $200 billion between those two years; however, revenues from social insurance taxes are projected to decline by more than $70 billion relative to their level two years ago, mostly as a result of a one-year reduction in payroll taxes included in the 2010 tax act.

Spending, for the most part, has been growing faster than revenues. Programs related to the federal government's response to the problems in the housing and financial markets are an exception; outlays recorded for the Troubled Asset Relief Program (TARP), for example, will decrease by $176 billion from 2009 to 2011, CBO projects. But if current laws remain unchanged, federal outlays other than those for the TARP are projected to be $366 billion (or 11 percent) higher in 2011 than they were in 2009.

According to CBO's projections, mandatory spending excluding outlays for the TARP will increase by $191 billion (or 10 percent) between 2009 and 2011. Significant growth in many areas—in particular, for Social Security, Medicare, and Medicaid—is expected to be offset only partially by reductions in outlays for other programs, primarily for Fannie Mae, Freddie Mac, and deposit insurance. Discretionary spending will increase by an estimated $137 billion over the two-year period; about one-third of that increase stems from funding provided by the American Recovery and Reinvestment Act of 2009 (ARRA). In addition, outlays for net interest will rise by an estimated $38 billion from 2009 to 2011, mostly because of substantial increases in borrowing.

Under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP.

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government's annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

CBO's baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. Consequently, they incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:

• Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;
• Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
• Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and
• Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law. For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, and 2009 or that modified estate and gift taxation were extended (rather than allowed to expire on December 31, 2012), and the alternative minimum tax was indexed for inflation, annual revenues would average about 18 percent of GDP through 2021 (which is equal to their 40-year average), rather than the 19.9 percent shown in CBO's baseline projections. If Medicare's payment rates for physicians' services were held constant as well, then deficits from 2012 through 2021 would average about 6 percent of GDP, compared with 3.6 percent in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946.

Beyond the 10-year projection period, further increases in federal debt relative to the nation's output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government's major mandatory health care programs—Medicare, Medicaid, the Children's Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt. To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.

Mark-to market on all bank loans killed by lobbyists. VERY GOOD for Banks, especially regional ones in depressed geographical areas.

By now everyone is aware that following tremendous pressure by the banker lobby, which knows too well the Ponzi jig will be immediately up if Quantitative Easing's TBTF Madoffs are forced to disclose the true value of their worthless assets (yes, true value comes from asset cash flow generation, not from diluting money), the FASB decided to stop its push for a return to MTM. From the WSJ: "Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets." Transparency? What moron would propose that in an economy that is so obviously healthy and surging. After all, the only way to validate a surging stock market, er, economic recovery, is through bullshit numbers pulled out of the ass. That way they can pretend to tell us the truth, we can pretend to believe them, and everyone will frontrun the Fed who pretends not to be buying stocks. And it would have been great if it ended there. Alas no. Following the announcement, none other than Bill Isaac, current Chairman of LECG, but far more importantly, former Chairman of the FDIC under Ronald Reagan decided to send out a gloating email to his entire address book explaining what a moral victory it is to kill the MTM monster that is the sole reason for the near collapse of capitalism in 2008, and how truly wonderful it is for everyone to live in perpetual lack of knowledge of what the true value of any company's assets really is. Unfortunately, this just goes to show what the existing, extremely bribed, leaders of the nation's most vital organizations really think.

And before we present Isaac's note, here is some more on how the banker lobby scored one more over the US peasantry, from the WSJ:

The Financial Accounting Standards Board preliminary vote would allow banks to continue valuing many of their loans at amortized cost, an adjusted version of their original cost, as they do now. That backtracks on an FASB proposal last May to expand fair value to bank loans. The reversal is a victory for the banking industry, which says it would have hurt lending and unfairly reduce banks' book value. Supporters of the FASB fair-value proposal say it would have improved transparency and unmasked potential weakness at banks.

The FASB indicated the overwhelmingly negative reaction to its proposal from companies and investors played a large role in prompting the board to change its mind. The board received more than 2,800 comment letters on its fair-value proposal, most of them opposed to the move.

FASB changed direction on how to value loans because of "strong signals from the board's constituents," FASB Chairman Leslie Seidman said during a webcast Tuesday. She also noted that some loans—including those that banks trade actively instead of retaining in order to collect the payments on them—will have to be valued at market prices.

And the reason for why opacity rules:

At some large banks, their loans' fair value is billions of dollars less than their carrying amount.

That would dramatically reduce their shareholder equity—or assets minus liabilities—if the loans had to be carried at fair value.

Investors have said fair-value information is important to them even if they don't think it should be the criteria for valuing loans on the balance sheet, FASB members said.

Simply said, if everyone knew the truth, everyone would be insolvent.

And here is William Isaac's letter, which blames Mark To Market for the near end of capitalism. Conveniently his email is also provided.

Mark-to-market accounting -- a failed policy that was terminated by the Roosevelt Administration in 1938 because it was inhibiting bank lending -- was revived by the Securities and Exchange Commission and the Financial Accounting Standards Board in the 1990s over strong objections from the Fed, FDIC and Treasury.

The MTM policy senselessly destroyed some $500 billion of capital in our financial system when the markets collapsed in 2008.  This destroyed some $4 trillion of bank lending capacity and was a major contributor to the financial panic and ensuing economic collapse.

The FASB, almost inexplicably, proposed last year to EXPAND mark-to-market accounting to cover all bank loans.  This would have essentially shut down lending except for short-term lending to businesses with impeccable credit ratings.

See the press release below.  The FASB is apparently abandoning its plan to expand mark-to-market accounting.  This is an important first step improving US accounting as it relates to financial institutions.

Best regards, Bill

William M. Isaac, billisaac@comcast.net
Chairman
LECG Global Financial Services
1209 Westway Drive
Sarasota, Florida 34236
Tel: 941.388.0088

The U.S. Debt Clock - Get a bottle of your favorite hardest spirits before you click on the link. You'll need it.

http://www.usdebtclock.org/

The Pension disaster AKA The Municipal Bond disaster AKA The next huge financial disaster- Time to select where your munis are. I've been crying wolf for a year, maybe the boy did see a wolf ?

Pensions: A New Crisis is About to Hit the Headlines

My State presently owes its pension funds $208 BILLION, what about yours?

I’ve been thinking about pensions. Actually I’ve been thinking about the State of our Union, unemployment/ underemployment, working people, Illinois obligations, dona/ gifts, defined benefits, defined contributions, deferred compensation, and bankruptcy. We are about to venture into major untested areas in 2011. There are a great many problems facing US/ us, but the issue of pensions has not yet even been put on the table of concerns for our consideration. That is going to change in the very near future. Which state or city will be the first to seek redress or forgiveness from obligations? What will be the areas of forgiveness sought? When the first hits, many others will follow!

You see on Tuesday evening President Obama will deliver his third State of the Union message before the US Congress. We were told in advance that a central topic was to focus on unemployment/ underemployment. The officially released figures chronicle a 9.3% rate. This is nowhere close to the reality. Uncle $ugar eliminates people from the rolls after a “moving” defined period of time. Then, the assumption is made that such people are no longer looking for work. Just last month 600,000 people were dropped from the calculation for this reason… as were those who took a part time job to replace the full-time one with whatever benefits that they held. Re-considering these factors raises the rate to well over 22% of our population being unemployed --- a rate not unlike the Great Depression of the 1930’s. Obama will not address this number manipulation.

We are “about” in the middle of a major economic downturn. We have clearly not yet hit bottom, but Obama will not include this in his address either. Our government has refused to admit how there can be no recovery without job growth and a return to a “fully” employed populace. The President may come close, but the political “dancing” will preclude such an admission. The myth of “the recovery” has to be continued. Right now spin, hype, smoke, and mirrors are all they have going for them. As long as the public buys it, they in the government have bought more time before any great social upheaval.

People exchange their time and skills for some form of compensation. This compensation includes wages, salaries, bonuses, benefits, and pensions. Not all employment includes benefits --- particularly pensions. In my 15 or so years in public accounting and working for the government at the FDIC/ RTC, I was excluded from any so-called pensions. I did pay into Social Security and IRA accounts and will be able, GOD willing, begin to tap into these come December when I turn 62. I am not unlike many of the workforce in this regard. But… this is beyond the scope of my column for this week.

Federal, State, and municipal governments are feeling the recession/ depression. This is showing up in the deficits, and what and who they owe. Illinois is in one of the worst positions nationally in this regard. Since they are on the “cash basis” of accounting, there is no real chronicling of what are presently the state’s accounts payables, or outstanding liabilities. We have been getting some information in the media. The numbers keep growing. And… we can speculate.

We know that Illinois has NOT been making the requisite payments each year into the pension funds to meet the coming obligations. We know that 16 years ago, under Governor Edgar, the pension funding was current. We now know that the Prairie State is in arrears. The big Q is what is the liability?

Last week, I was forwarded an analysis that really set me on end. According to a report by the American Enterprise Institute, public pensions are under funded by more than $3 trillion nationwide. Illinois pensions alone are $208 BILLION UNDERFUNDED using realistic measures. The overall level of funding is 29% --- the worst in the entire nation. Illinois SERS pensions at 23% of funding is $36 BILLION in arrears, Illinois teachers pensions at 28% of funding is $98 BILLION in arrears, Illinois Universities pensions at 30% of funding is $35 BILLION in arrears, Chicago Teachers pensions at 43% of funding is S16 BILLION in arrears, and Illinois municipal pensions at 47% of funding is $24 BILLION in arrears. To get this money, total population and corporations of the state will have to be taxed. This will not occur without a fight --- so Illinois is looking for an “out” from these obligations and also what it owes schools, health care providers, and nursing homes. Be prepared to get stiffed!

It will go to the courts in 2011. States, unlike individuals and corporations however, cannot just file for bankruptcy and just walk from what they (in theory) owe. They will need special dispensations and approvals from the US Congress. This is already being discussed in the halls of Washington, DC and in the major law firms across this nation. Is there any precedent? A central matter for the courts on these pension questions will be: were these retirement benefits free gifts (dona) from the states and municipal entities, were they from defined benefit plans, were they from defined contribution plans, or were they really deferred compensation? How these pension obligations are classified will greatly impact the pension beneficiaries standing in the courts, and the final amount actually owed.

Illinois governments have played fast and loose with the pension monies in contract and labor negotiations. More and more pensions were the bargaining chips used to negotiate down salaries and wages. Promises were made for these future agreements to get labor and services up front. Such considerations will also factor into any settlement on the liabilities! Debate on these points will occur in the courts, in the arbitration hearings, and in the streets. A central question will be “should the entire general population be held liable to provide for the retirement of the few in the employ of the governmental units?”

Should all be required to pay for the benefits of those few, when they themselves are not eligible for such levels of “pensions?”  Hummm…?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Food riots and inflation fears

While the Fed refuses to extract its head from deep within the sand of ignorant hubris that only a career in Ivy League education can provide, the world continues to burn, in many places quite literally. For all those who are finding it hard to juggle all the rioting, and confuse their Cairos with their Calcuttas, below we present an interactive map disclosing all recent documented food price hikes, protests, and riots.

full map after the jump

U.S. in Debt Crisis Without Spending Cuts, Pimco's Kashkari Says

The U.S. may face a debt crisis without action to limit federal spending, according to Neel Kashkari, a former Treasury official who headed the taxpayer- funded $700 billion Troubled Asset Relief Program.

“Our debt is now starting to get away from us,” Kashkari, a managing director at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “InBusiness” with Margaret Brennan. “Indicators in the Treasury market are flashing caution.”

The difference in yields between 2- and 30-year Treasuries widened to a record and the yield on 10-year notes rose by as much as eight basis points to 3.41 percent.

Kashkari said confidence in Treasuries may plunge as the central bank continues to print money to buy bonds and as the U.S. government fails to tackle a more than $1.2 trillion budget deficit.

“To the extent that we continue to issue record levels of Treasuries year after year, after year, it’s inevitable that foreign buyers will begin to look elsewhere,” said Kashkari, 37, who is based inNewport Beach, California.

Total U.S. public debt was more than $14 trillion at the end of 2010, a 72 percent increase during five years. Foreign holdings of U.S. Treasuries have dropped from 55.4 percent of outstanding debt in May 2008 to 49.7 percent in November, according to Bloomberg data.

Fed View

Federal Reserve policy makers, who see unemployment falling too slowly for their liking, are giving no indication of stopping monetary-stimulus plans almost four weeks after Commerce Department figures showed gross domestic product grew at a 2.6 percent rate in the third quarter.

“To the extent that our major trading partners are improving their fiscal position more quickly than we are -- and by the way, that appears to be happening -- confidence could fall much more quickly than we expect,” Kashkari said as Chinese President Hu Jintao, leader of the U.S.’s second-largest trading partner, arrives in Washington for his first state visit to the U.S.

China owned $895.6 billion of American debt as of November, down 4.7 percent from a high of $939.9 billion in July 2009, according to Bloomberg data.