Forecasts & Trends : Bailout

How to Recover From the Bear Market

Gary D. Halbert — Tue, 14 Apr 2009 20:05:16 GMT

IN THIS ISSUE:

Editors Note – The Fed Bails Out Insurance Companies
The Case for Aggressive Allocations
Third Day Advisors
Scotia Partners
Combining Both Programs

Editor's Note - Bailouts for Insurance Companies

Just hours after I sent you last week's E-Letter which alerted you to the serious financial troubles among the nation's largest insurance companies, the Treasury Department announced that TARP bailout monies will now be available for insurance companies. As I indicated, the insurance companies have desperately lobbied for bailouts, and now it looks like they will get them, at least for those that have recently bought up banks or other chartered financial institutions to qualify. I can't say I'm surprised.

Stay tuned as your insurance company may soon be controlled by the Obama administration, along with the banks, General Motors and who knows what else will follow.

Introduction

When you write a weekly E-Letter such as this one that goes out to over one million people, you can expect to get criticized from time to time. After all, people who disagree are more likely to respond than those who agree and appreciate the information provided – nothing new about that – especially since some of my weekly commentaries are devoted to political issues which are almost certain to draw responses from those who disagree with my conservative views.

Recently, however, I have received some criticism from a few readers regarding the fact that I include discussions about the investment programs that my firm recommends in these E-Letters. This comes as somewhat of a surprise, since this E-Letter is provided free of charge, and no one is forced to read it. Still, some readers insist that I should not write about the investment programs I believe in, as to them it somehow taints the integrity of the E-Letter.

I could not disagree more, especially given that we have just witnessed one of the most severe bear markets in history and two bear markets in less than a decade. The active management investment programs I recommend have served to significantly reduce losses in this bear market, and thus they are more relevant than ever. I can only guess that the criticism is coming from those who don’t want to be reminded that their buy-and-hold, low fee portfolios were recently gutted (50% or more) by the Bear Market Express.

This aversion to investment topics may also be indicative of how so many have been misled for so long, and feel they must now stay the course and hope that the market returns to its historical norms. They may make adjustments to their overall portfolio but, as I see it, this is tantamount to rearranging the deck chairs on the Titanic. Of course, everyone is entitled to their opinions.

My firm, on the other hand, is offering a lifeboat to those mired in the clutches of buy-and-hold strategies that have not only failed to meet their investment needs, but in many cases, have resulted in huge losses that have pushed investors even further away from their eventual goals. The reason I mention the investment programs we recommend is that I firmly believe that they offer a viable alternative to some of the failed buy-and-hold strategies that have been so prevalent in the marketplace for many years.

Apparently, many of you are coming around to my point of view regarding active investment strategies that have the flexibility to move to cash or hedge long positions in bear markets. We were pleasantly surprised when about 300 of you who read this E-Letter registered for our March 25 Webinar with Scotia Partners and hundreds more have viewed the recorded version on our website since then. And we have seen the largest influx of new clients and new money in many years in just the last 3-4 months, sadly thanks to the bear market.

Even some mainstream financial advisory firms are now dipping a toe in the active management waters. I am amused at some of the commercial ads that urge investors to come in and visit with an investment counselor to learn of “new” strategies for the current market. In all likelihood, you’ll learn about some of the same strategies I’ve been recommending for almost 15 years.

So, let it be known that from time to time I will continue to discuss how active management strategies can fit into your portfolio. This week, I will revisit two of the money managers that we recommend. You can either read on and see how these two managers have made money this year, despite the bear market, or settle back in your buy-and-hold deck chair and disregard the remainder of this week’s E-Letter. It’s your choice.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Aggressive Programs May Help Recovery

As I have mentioned many times in this E-Letter, the goal of basic active management is to attempt to move to cash in down markets to reduce portfolio risk. However, some investors seek out programs that use leverage or can go both net long and net short in the market for the aggressive portions of their portfolios.

In such programs, the potential for profit (or loss) exists no matter what the market’s direction. As I have written before, I characterize this type of program as being one where the best defense is a good offense. Unfortunately, many of these programs are available only to wealthy investors through hedge funds.

Fortunately, there are aggressive investment programs that are open to virtually any suitable investor. In light of how many retirement portfolios have been decimated by two bear markets in less than a decade, even moderate investors may want to consider having an aggressive investment or two in their overall portfolio. Of course, these allocations should be only a small portion of the assets, but it IS possible to include small allocations to aggressive investment programs and still end up with an overall moderate-risk portfolio.

With that in mind, I’ll spend the remainder of this E-Letter highlighting two aggressive money managers that you have previously read about in these pages. In the discussion below, I’ll briefly summarize the strategy employed by each manager as well as update their performance information.

After that, I’ll show how a combination of these programs might be a viable alternative for aggressive investors who want to diversify their portfolios by including two leveraged, long/short active management strategies. If you would like to learn more about active management strategies in general, see the link to my Absolute Return Special Report in the Conclusion section below.

Third Day Advisors Long/Short Programs

Back in January of 2005, I first introduced Third Day Advisors and its founder, Ken Whitley. The original Third Day program we recommended was the Aggressive Strategy, which allowed aggressive investors the ability to have a leveraged long and short exposure to the Nasdaq 100 Index. Over time, Ken has applied his signal to other market indexes, but all are based on the same underlying trading model.

Ken’s money management strategy is a proprietary blend of momentum, trend-following and overbought/oversold indicators. There are ten basic indicators that Ken uses to analyze the market, with a number of sub-indicators that also factor into each trading decision. Each indicator “votes” on whether to be long, short, or neutral in the market. The model is 100% mechanical, though Ken does reserve the right to override his system’s signals in the case of a national emergency.

Depending upon the market index, Third Day selects among index mutual funds available from the Rydex family of mutual funds. These funds are part of the Rydex Dynamic class of funds that seek to provide investment returns that correlate to 200% of the daily performance of the underlying index. Separate funds are provided for positive and negative (inverse) correlations.

The Third Day investment strategy does not currently employ any traditional stop-loss techniques to automatically exit losing trades. To limit risk, Ken varies his allocation based on the relative strength of his trading signal and market volatility. As a general rule, his allocations may range from a low of 15% to a high of 100% of the account value, depending upon the program. However, maximum allocations are rare and Ken’s various programs are projected to be in cash (money market fund) an average of 42% of the time in any given year based on historical performance.

The lack of a formal stop-loss trades and frequency of trading are additional reasons why Third Day’s investment programs should only be considered for the aggressive portion of an investor’s portfolio, where high volatility and significant periodic drawdowns can be tolerated.

Performance Evaluation

Both the Third Day Aggressive Strategy and S&P Plan have turned in strong performance so far in 2009. As of the end of March, the Third Day Aggressive Strategy posted a gain of over 13% for the first quarter of 2009, while the S&P Plan gained 11.20% over the same period of time. This is even more impressive when compared to the S&P 500 Index which was down over 11% (including dividends), even after an impressive March rally. Of course, past performance is not necessarily indicative of future results.

The Third Day Aggressive Strategy has the longest track record of all Third Day programs with actual trading beginning in November of 2001. This strategy trades the NASDAQ 100 Index, which is often seen as a proxy for the high-tech market sector. Over the course of our experience with this program, we have seen that the heavy high-tech weighting of this particular stock index results in it sometimes deviating from the direction of the overall market. Therefore, investors who elect the Aggressive Strategy should do so with the knowledge that it may be more of a tech sector program than one that is based on the broad market.

In light of the tech sector concentration in the Nasdaq 100 Index, Third Day also began to apply its trading signals to other market indexes. In 2006, the Third Day S&P Plan began actual trading. After watching its performance for a while, we began recommending it to our clients who wanted an active management strategy based on more of a broad-market stock index. Though the S&P Plan had a shorter actual track record than the Aggressive Strategy at the time, we were comfortable recommending this new program because we knew it was traded based on the same signal that Ken Whitley had been producing since 2001.

The actual performance information below provides detailed monthly returns and time window analysis for both the Aggressive and S&P Plan programs. This format will help you to more easily compare the two Third Day programs based on their actual performance. Keep in mind that all of the performance information shown is net of management fees and expenses.

Please see Important Notes at the end of this E-Letter.

As you evaluate Third Day’s performance, it should become clear to you that Ken’s Aggressive Strategy performed much better in the 2000 – 2002 bear market than in the most recent market downturn. Based on our research, we feel that this difference is largely due to a “disconnect” between the tech-heavy NASDAQ 100 Index and the broad market stock indexes.

Third Day’s S&P Plan, on the other hand, was better able to maintain more value during 2007 and 2008 than the Aggressive plan, again owing to the fact that this program is based on the broad market S&P 500 Index rather than the NASDAQ 100 Index. Remember, however, that past performance is not necessarily indicative of future results.

While we would like to have seen the S&P Plan pick up more gains from inverse (short) trades during the worst of the bear market, we have realized that Ken’s trading model is not as adept at handling high-volatility markets as are other programs, such as the Scotia Growth S&P Plus Strategy that I will discuss below.

However, we feel that the Third Day S&P Plan may be a good alternative for the aggressive portion of your portfolio when the market eventually bottoms out and volatility decreases. Also note that both the S&P Plan and Aggressive Strategy have posted double-digit gains as of the end of March. Past performance, however, does not guarantee future results.

The minimum investment for the Third Day program is $50,000 and it is custodied at Rydex Investments. You can obtain more detailed information about Third Day’s strategy and performance on our website at the following link:

http://www.halbertwealth.com/advisorlink/thirdday.php

At this link, you can also learn about an even more aggressive Third Day program called the Ultra Aggressive Strategy. This program also trades the tech-heavy Nasdaq 100 Index, but does so with trade allocations that can be as high as 100% of the account value. As always, read all descriptive and disclosure information on these programs before deciding to invest.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Scotia Partners – Riding the Waves of Volatility

As I mentioned earlier, Third Day’s investment programs experienced difficulty when faced with the high volatility that has characterized this bear market. Scotia Partners’ investment programs, on the other hand, have seemed to almost embrace the increased volatility, performing much better in the bear market than during the previous rally phase of the market.

In 2008, the Scotia Growth S&P Plus Strategy gained over 77% net of fees and expenses, when the S&P 500 Index fell 37%. So far in 2009, the Growth S&P Plus Strategy has posted a gain of over 28% as of March 31, while the S&P 500 Index is still under water. Since its inception in August of 2004, the Growth S&P Plus Strategy has produced an annualized return of 38.83% as of the end of March, while the S&P 500 Index can muster only a negative 4.76% over the same time period. Past performance, however, cannot guarantee future results.

Based on our daily monitoring of Scotia’s performance and trading, we feel that its success has come largely due to portfolio manager Cliff Montgomery’s trading strategy that seeks to trade only on those days that offer the best statistical probability of success. Otherwise, he’s content to sit on the sidelines in the money market awaiting the next opportunity.

Scotia’s Growth S&P Plus investment strategy is a combination of two proprietary trading models developed by Scotia’s owner, Cliff Montgomery. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model seeks to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. Once the long-term trend is identified, the intermediate-term trend is then determined using similar analysis. Only when the intermediate and long-term trends are in agreement will the basic model issue a trading signal.

With the overall market trend identified, the basic model looks for short-term movements against the trend. In other words, the strategy seeks to take advantage of the possibility of a “reversion to the mean.” Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

In addition to the basic trading model, the Scotia’s Growth S&P Plus program also incorporates a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. As I have said in the past, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Like the Third Day programs, Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. However, unlike Third Day, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal.

Because of the selective nature of the trading models, the Growth S&P Plus Strategy has historically been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short for an additional day. However, if even one indicator disagrees with the others, the model exits the market and goes to cash.

The performance information below tells the whole story. As you review this information, again remember that all numbers are actual returns and are net of fees and expenses, and that past performance cannot guarantee favorable future results.

Please see Important Notes at the end of this E-Letter.

As you evaluate Scotia’s performance, you see that its performance has increased dramatically since mid-2007. If you superimpose a graph of the CBOE Volatility Index (VIX), you will find that Scotia’s jump in returns coincides with a big jump in market volatility, as measured by VIX.

Initially, we thought that this might be an indication that Scotia’s programs were somehow “short-biased,” meaning that they entered into predominantly short trades, which would be favorable in a bear market. However, such a bias would be detrimental in a bull market, so we analyzed the individual trades to determine if there were any bias patterns. Our findings were significant:

Over the period of time from the inception of the Scotia S&P Plus Strategy (August of 2004) through December of 2008, Scotia had the following trading history:

165 Long Trades vs. 113 Short (Inverse) Trades
Win/Loss Ratio – Long Trades - 72%
Win/Loss Ratio – Short Trades - 65%
Win/Loss Ratio – All Trades - 68%
(Past performance does not guarantee future results.)

As you can see, there were actually more long trades than short trades, and a higher number of long trades were successful. The conclusion to be drawn is that Scotia’s Growth S&P Plus Strategy does not appear to have any specific long or short bias. However, because of the increased volatility generally associated with bear markets, such periods have the potential to produce greater relative performance than bull market periods.

The minimum investment for the Scotia Growth S&P Plus Strategy is $25,000 and funds are also held at Rydex Investments. You can obtain more detailed information about Scotia’s programs, including a less aggressive option known as the S&P Moderate Growth Strategy, on our website at the following link:

http://www.halbertwealth.com/advisorlink/scotia.php

As I noted above, literally hundreds of my readers have heard Cliff Montgomery personally explain the specifics of Scotia’s money management strategy via our recent webinar. If you missed it and would like to watch and listen to the full webinar discussion (including all charts), click on the link below:

http://www.halbertwealth.com/webinar/sco20090325/scotiawebinar.php

A Combination Approach

As you have no-doubt observed as you reviewed the above performance information, returns in any given time period can be significantly different – even among aggressive investment alternatives that are traded in a similar manner. Third Day’s Aggressive program did better than Scotia during some years in the up markets between 2003 through 2006, but not in others. Scotia has outperformed Third Day during the volatile bear market that began in 2007, but who knows how long this increased volatility may last?

If we had a crystal ball and could know exactly what kind of market environment to expect in the coming months and years, it would be easy to determine which of these programs to include in your portfolio. However, since we don’t have a crystal ball and most of the “experts” have been horribly inaccurate in their forecasts of what market conditions to expect, we have to find another way to take on the possibility of changing market environments.

If you feel that Scotia and/or Third Day would be suitable for a portion of your portfolio and are within your risk tolerance, I suggest that you consider combining the two programs within your aggressive portfolio allocation. While the past performance of these programs cannot guarantee success, we have seen that each has shown the ability to excel during certain types of market environments. Plus, these programs are not correlated with each other, with an R-squared value of only 0.02.

I would like to be able to provide a hypothetical illustration of these two programs together, but the disclosures necessary to do so would be too onerous in an already long E-Letter. Suffice it to say that, in some cases, combining programs can produce a smoother performance with lower drawdowns. While it’s granted that no combination would outpace Scotia’s recent performance, it is also important to realize that no market environment lasts forever, which is why it’s important to have a combination of programs in a diversified portfolio.

While it is difficult in this E-Letter setting to illustrate a combination approach, you can get an idea of how a combination of these two programs would behave by contacting one of our Investment Consultants at 800-348-3601 or by e-mailing info@halbertwealth.com. Plus, our Consultants can also show you how to incorporate less aggressive actively managed programs into your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I hope that by now you have seen that allocating a percentage of your portfolio to aggressive investment programs may help you to recover from the ravages of the bear market. Just keep in mind that aggressive allocations are not suitable for everyone and that such allocations should be kept to a small percentage of the overall portfolio, especially for moderate-risk investors. Never take on more risk than you should in an attempt to quickly recover all of your investment losses.

If you would like to receive more information about any of the programs I have discussed this week, give one of our Investment Consultants a call at 800-348-3601 or e-mail us at info@halbertwealth.com. You can also request information via our online request form. We also have other programs more suitable for less aggressive investors, so be sure to ask about them as well.

If you would like to learn more about active management strategies in general, I invite you to download my Absolute Return Special Report. This informative document explains the difference between active and passive management in much more detail, and also provides expanded descriptions of active management strategies you may want to consider for your own portfolio.

I hope that my discussion of the various actively managed programs available to you through my company is of benefit to you. I realize that some may not be in a position to invest right now, but it’s still important to know about these strategies for the future. We sometimes get calls from long-time readers who suddenly find themselves the recipients of a retirement plan rollover, inheritance, proceeds from the sale of a business or other large lump sum and are glad that they learned about active management before they had the money to invest.

In closing, I want to make it clear that my comments regarding complaints are not in any way an indication that I do not appreciate your feedback. I and my staff go over every response generated by my E-Letters, and I always appreciate your thoughts, concerns and questions. However, in regard to discussing the active management strategies we recommend, I feel it necessary to be outspoken for a number of reasons.

First, I feel that these strategies embody some of the best active managers in the country, and all have undergone our strict due diligence review before being recommended. Second, my firm has been evaluating and recommending active money managers for close to 15 years, so we’re not the new kids on the block. Keep this in mind when your buy-and-hold broker has a sudden revelation about active management strategies.

A final reason that mentioning these programs is important is that the financial media are now catching on that investors are leaving buy-and-hold strategies in droves. In some respects, that’s good. However, it also concerns me because some investors may become the victim of scam artists or enter into investments they don’t understand, all for the promise of making up all of their losses.

It’s a dangerous world out there for the investor, and there is no shortage of individuals who would be more than happy to separate you from the remainder of your nest egg. Therefore, to the extent that I can prevent that from happening, I feel it is my duty to do so and I make no apologies for it. As always, please read the Important Notes and disclosures that follow my signature below.

Offering hope for investors bitten by the bear,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), Third Day Advisors, LLC (“TDA”) and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS and TDA in exchange for introducing client accounts. For more information on HWM, SPL, TDA or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), the NASDAQ Composite Index and the NASDAQ 100 Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from those of the Advisors and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index, the NASDAQ Composite Index and the NASDAQ 100 Index is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite Index or the 100 NASDAQ stocks that comprise the NASDAQ 100 Index. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus, Third Day Aggressive Plan and Third Day S & P Plan, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in these programs are managed similarly, the results shown are representative of the majority of participants in each of these programs. The signals are generated by the use of proprietary models developed by Scotia Partners and Third Day Advisors with the objective of participating, on a leveraged basis, in trading days with the highest probability of success. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to these trading programs.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in these programs; (iv) Purcell Advisory Services (for Scotia) and Third Day Advisors will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs’ fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Dividends and capital gains have been reinvested. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Have We Turned The Corner On The Recession?

Gary D. Halbert — Tue, 31 Mar 2009 20:31:08 GMT

IN THIS ISSUE:

Finally a Little Good News for the Economy
Geithner's Latest Toxic Asset Bank Bailout
Does the PPIP Have Any Chance of Working?
Fed to Buy $300 Billion in Treasuries & a Lot More
CBO Assessment of Obama's Record 2010 Budget
Conclusions, Market Implications & What to Do Now

Introduction

Some weeks, it's tough to find a good topic to write about. Then other weeks, I'm overwhelmed with all there is to write about, as is the case this week. So, we'll touch several bases in this week's E-Letter. We'll begin with the latest economic news, some of which was surprisingly positive (especially housing). Unfortunately, the latest good news does not necessarily mean we've seen the bottom of the recession or the bear market.

On Monday of last week, Treasury Secretary Geithner announced the much-awaited new plan to take toxic assets off the books of troubled banks. The plan is called the Public-Private Investment Program. Under this new program, the government along with private investors would buy up toxic assets by way of auctions to get these loans off the banks' books. But will the plan work? I'm not optimistic. We'll discuss this in some detail as we go along.

As if the Obama administration is not spending enough already, the Fed recently announced that it will print and spend over $1 trillion in the months ahead to buy at least $300 billion in direct purchases of Treasury securities and at least another $750 billion for purchasing more toxic assets from banks and other sources. Where will it end? No one knows.

In my March 10 E-Letter, I predicted that President Obama's $3.55 trillion federal budget for fiscal 2010 would result in a deficit of more than $2 trillion, as opposed to the administration's estimate of $1.75 trillion. Turns out I was wrong – the Congressional Budget Office predicted last week that Obama's 2010 budget deficit will hit $2.3 trillion. Wow, this will be bad! The CBO agrees with me that Obama's economic assumptions are too optimistic.

Following those discussions, I will give you my latest thoughts on where we stand in the big picture. With the latest smattering of good news on the economy and the nice rebound in the stock markets, some analysts are concluding that we've turned the corner on the recession and the financial crisis. I think it's premature to make that call, and I will not be surprised if we see another downward leg before long. In fact, it may have already begun. Let's get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Finally a Little Good News for the Economy

As everyone reading this is all too aware, the economic news so far this year has been horrible. Rarely has any good news been seen in recent months. But there was some good news last week, and it came in a very good spot – housing. Existing home sales in February unexpectedly rose by 5.3% above January levels to an annual rate of 4.72 million units. It was the largest monthly jump since 2003; still, sales were down almost 5% below yearago levels.

The increase in sales of existing homes was strongest in the West and in Florida, one of the worst hit markets. February sales of existing homes in Florida rose 20%. Florida Realtors also reported a 15% gain in statewide sales of existing condominiums in February, continuing a trend in recent months for higher statewide sales of both the existing home and existing condo markets compared to yearago levels.

The median sales price for existing homes nationwide rose to $165,400 in February, the first monthly increase in over a year, but it remains 15.5% below yearago levels. Unfortunately, the inventory of unsold existing homes rose again in February, despite the improved sales figures, thus putting the backlog at an estimated 9.7 months supply at the current sales pace.

New homes sales also increased by 4.7% in February to an annual rate of 337,000 units. Economists had expected new home sales to decline to a rate of 300,000 annualized units, so this was welcome news. While the unexpected rise in new home sales might be seen as a positive movement for the beleaguered housing market, the February rate for new home construction is still the second-lowest reading since the last recession in 2002. The median price of a purchased new home fell to $200,900 in February, down over 18% from a year ago.

Housing starts jumped well above expectations in February, rising 22% over January levels. Rising housing starts might not sound like a good thing, as that could mean even more homes on the market, but reportedly over 80% of the February construction starts were for apartment complexes, not new single family homes. Also, building permits climbed in February for the first time in over a year.

On another front, durable goods orders rose a surprising 3.4% in February following six consecutive monthly declines. This news was bittersweet because the Commerce Department revised January durable goods orders further downward from -5.2% to -7.3%.

Elsewhere, the economic news continued to disappoint. Last Thursday, the government reported that 4Q GDP fell at an annual rate of -6.3%, down from -6.2% as reported last month. Consumer confidence continued to plunge in February to only 25.0, a new record low, down from 37.4 in January. However, the latest Rasmussen tracking poll shows that consumer confidence has rebounded a bit in March.

The Index of Leading Economic Indicators fell 0.4% in February. The LEI has fallen very sharply since the last peak in July 2007. The unemployment rate jumped to 8.1% in February from 7.6% in January. The consensus is for a rise to 8.5% in March and at least 9% by yearend. These are just a few of the negative reports we've seen over the last month.

In summary, while we've seen a few positive reports on the economy and the housing sector in particular over the last month, we are far from out of the woods on the recession and the financial crisis. Now, let's move on to the latest bank bailout proposed by Treasury Secretary Timothy Geithner.

Geithner's Latest Toxic Asset Bank Bailout

After Treasury Secretary Geithner announced his new Public-Private Investment Program (“PPIP”) on Monday of last week, the Dow Jones promptly rallied over 500 points. That followed a rally of almost 1,000 points since the low in early March. The Dow and the S&P 500 bounced just over 20% from their recent lows – that is until the latest near 5% downward reversal over the last two trading sessions (Friday and Monday). While the equity markets clearly liked the government's latest bank bailout plan, serious questions remain – such as, will it work, and will private investor groups want to get in bed with the government, which threatened to impose a 90% tax on AIG executive bonuses?

We'll get to those questions and others as we go along, but first let's examine how the Public-Private Investment Program is supposedly designed to work. In an online article in FORTUNE, CNNMoney.com's Jon Birger provided the following summary on how the PPIP is expected to work as follows:

“The [PPIP] plan tries to fix the banking crisis by encouraging the very behavior that got us into this mess in the first place -- using buckets full of leverage to buy mortgages, asset-backed securities and other so-called toxic assets. Moreover, it requires the participation of the very folks -- Wall Street bankers and investors -- whom officials in Washington have spent the last two months threatening and vilifying.

At its core, the Public-Private Investment Program (PPIP) harkens back to what the original bank bailout bill was supposed to do when it was first passed by Congress last fall: remove toxic assets from bank balance sheets, thereby freeing up more money for lending. The mechanics of the program would operate somewhat differently for stand-alone loans than for debt securities (basically bundles of loans packaged as asset-backed or mortgage-backed securities), but the general approach is the same. The government will match, dollar for dollar, any private-sector funds put towards buying these toxic assets.

And if that weren't incentive enough, the government will also facilitate cheap loans -- think of them as FDIC-guaranteed margin loans -- to private investors who will be able to leverage their distressed-debt purchases six to one.

Here's how it might work: Say a bank has a pool of residential mortgages with a $100,000 face value that are deemed good risks by the FDIC. The pool is then auctioned off, and in this example, the winning bid is $84,000. Of that, the government puts up $6,000, the private investor another $6,000, and the remaining $72,000 is financed via a FDIC-guaranteed margin loan.

The goal is to jump start the market for toxic debt and put the prices of these loans more in line with the underlying interest payments (which in some cases have declined far less than the market valuation of the loans or debt securities). Theoretically, once the PPIPs start buying and selling this stuff, the valuations will become clearer, opening the door to other private investors who may see opportunity but have shied away up until now due to the lack of price transparency.

That's the upside. The potential downside is what happens if prices continue to fall. And if you think taxpayers are mad now, just wait till they find out that, on account of government-sponsored leverage, a further 15% decline in the debt markets caused them to lose 100% of their investment in PPIPs. Says Tom Atteberry, co-manager of the FPA New Income bond fund: ‘I do see some irony in the fact that the proposed government solution to the problem looks a lot like a hedge fund and a primary broker -- with the primary broker being the federal government.'

There's also a question of whether Wall Street money managers will play ball with a government that has been bad-mouthing them and threatening them with confiscatory taxes. ‘If they go ahead with the 90% tax, nobody is going to want to work with the government,' says a top mortgage-fund manager, referring to the bill passed by the U.S. House of Representatives that would slap a 90% tax on bonuses paid to employees of bailed-out financial companies. ‘It's a deal killer,' says Rick Hughes, co-president of Portfolio Management Consultants, which directs $70 billion in institutional and retail accounts.

Even if the bonus tax isn't implemented, the mortgage-fund manager worries what might happen if PPIP works too well. He envisions a scenario in which money managers are hauled before Congress and accused of making millions on the backs of taxpayers. ‘I'd rather be attacked by a pack of wild dogs,' he says. There are other, more conventional ways that government involvement could discourage money managers from participating.

FPA's Atteberry notes that under the Treasury Department proposal, the FDIC would provide oversight to the PPIP funds. Atteberry says that if he were putting his firm's capital at risk, he'd want to know more about what ‘oversight' entails. For instance, will political considerations prevent investors from foreclosing on certain homeowners or force them to offer generous loan modifications? Says Atteberry, ‘Those are details you need to flesh out if you want to get private investors to come on board.'

Of course, it could be that some on Wall Street -- hedge fund managers in particular -- are so desperate for any source of income, they'll gladly accept these risks.

Prime brokers are extending less credit to hedge funds and investors are pulling out their money. So if the government now wants to become hedge funds' new BFF -- their new prime broker as well as their biggest investor -- why quibble about the details? ‘The reality is that a lot of hedge funds really don't have a business model any more,' says veteran Wall Street strategist Ed Yardeni. ‘The government is basically putting Wall Street back in business with a whole new business model, which is to take all the toxic assets, repackage them and re-sell them at a discount.'

‘Wall Street is getting paid to re-arrange the deck chairs on the Titanic -- but hopefully with a better outcome.'”

Many thanks to Jon Birger of CNNMoney.com for that summary. Obviously, there are still many unanswered questions about the Public-Private Investment Program. Geithner's roll out of the program last week was very short on details, and many private investors are going to be very wary of getting in bed with the government to buy up these toxic assets, even if the discounts are very attractive.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Does the PPIP Have Any Chance of Working?

If President Obama wants this plan to have any chance of working, he needs to make sure the Senate does not go along with the House in passing the 90% retroactive income tax on the AIG executives that received big bonuses. Hedge funds, private equity funds and the like will not want to pony up money to buy toxic assets if they fear that the government will change the rules on profit sharing in these PPIP transactions.

I have read several articles recently that indicated the Treasury was already planning to recoup the AIG bonuses by subtracting that amount from the next round of bailout money AIG will need. That would have been an easy way to get the money back and put the onus on top AIG management to claw back the bonuses. But the Democrats in the House couldn't resist the opportunity to grandstand in front of the American people with an illegal, retroactive 90% income tax on the AIG bonus money.

Political commentator Dick Morris has an interesting take on the PPIP. Morris believes strongly that President Obama wants the PPIP to fail. Morris is convinced that, while Obama says publicly that he does not want to nationalize the big banks, privately Obama and Rahm Emanuel would very much like to see the government take over these large money center banks that have taken bailout money.

Morris argues that this is precisely why the president has been lambasting Wall Street and the big banks for weeks now, in the hope that private investors will not jump into the PPIP with both feet. Morris also believes that this is why Obama packaged the PPIP as Geithner's plan, not his own, so that if it fails he won't get the blame. If it does fail, Morris predicts that Obama will then nationalize the troubled banks. I sincerely hope this assessment is wrong!

As noted earlier, the stock markets reacted extremely strongly following Geithner's announcement of the Public-Private Investment Program. If it is to have any chance of working, he needs to get the details out fast, including assurances that the government won't change the rules in the middle of the game. We'll see.

Fed To Buy $300 Billion in Treasuries & a Lot More

The Fed Open Market Committee met on March 17-18, and the policymakers approved some bold new (yet troublesome) actions. Citing that the economy continues to worsen and the credit markets are still dysfunctional, the FOMC voted unanimously to authorize the Fed to make direct Treasury security purchases of $300 billion over the next six months, with a suggestion that much more could be authorized later on if needed.

This move is controversial because the Fed will have to print the $300 billion to pay for the purchases of Treasury securities. Many fear that this action (and likely more to come) will further sew the seeds of significantly higher inflation when we emerge from this recession. But as I have written often in recent letters, the Fed is scared to death of deflation and will do whatever they feel is required to avert a debt deflation in the economy.

At the same FOMC meeting, Bernanke & Company also voted to double the Fed's purchases of mortgage-backed securities and take on more agency debt. That means the Fed will purchase another $750 billion in toxic mortgage-related securities this year. Between the Treasury purchases and the additional mortgage-related securities – all of which they will have to print money for - the Fed's balance sheet liabilities will skyrocket to well above $3 trillion this year.

Here are excerpts from the March 17-18 FOMC official statement:

“In these [bad economic] circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities… and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

Following this announcement, yields on 10-year Treasury notes plummeted in the largest one-day decline on record to near 2.5%, down from above 3% just two days before. Stocks also rallied on March 18 and since then (at least until the last two days), a clear indication that many investors approve of the Fed's unprecedented actions in buying Treasury debt directly and doubling its purchases of toxic assets.

But it should also be noted that the US dollar plunged on the news that the Fed would be buying $300 billion in Treasuries and another $750 billion in toxic assets, and the implication that those numbers may well go even higher later this year. Keep in mind that these numbers are in addition to the $2+ trillion budget deficit we will have in fiscal 2010 (more on that below) and well over $1 trillion in each of the next several years.

Given the staggering size of these numbers, I don't see the US dollar going anywhere but down over the next several years. Maybe that's why China is threatening to stop buying US Treasuries and calling for a serious discussion of a new world currency at the upcoming G-20 Summit on April 2. I will discuss this issue more in coming weeks.

CBO Assessment of Obama's Record 2010 Budget

In my March 10 E-Letter, I discussed President Obama's record $3.55 trillion budget for fiscal 2010, with its projected budget deficit of a record $1.75 trillion. I also discussed why I believe the deficit next year will be well north of $2 trillion. Last week, the supposedly non-partisan (but Democrat controlled) Congressional Budget Office (CBO) released its own analysis of President Obama's proposed budget for 2010 and the next 10 years.

The CBO estimates the 2010 budget deficit at $2.3 trillion; the budget deficits for 2009-2011 at almost $5 trillion; with deficits of $1 trillion or more each year thereafter to 2019, and concludes that Obama's budgets would add $9 trillion to the national debt over that 10-year period, if enacted.

If you recall, I noted in my March 10 letter that I believe the Obama administration used economic assumptions that were too optimistic. I pointed out that Obama's projections for GDP growth were too rosy. Likewise, I noted that his assumptions for unemployment were considerably too low. I concluded that discussion by saying: But it will not surprise me if the deficit is $2 trillion or more in 2010. Now the Democrat controlled CBO agrees with me!

Interestingly, Obama has routinely criticized George W. Bush for out-of-control spending, which is a well-deserved criticism. In Bush's eight years, he – with the help of Congress – added almost $5 trillion to the national debt. Obama's budgets would add almost twice that amount - $9 trillion - according to the CBO.

I think most people reading this would agree that a 2010 budget deficit of $2.3 trillion is simply way too much, even in this economic and financial crisis. While Obama says his budget is necessary to get the economy out of the ditch, it could make things worse by ruining America's credit standing in the world. Unfortunately, it looks like he has the votes to get most of his budget passed.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions, Market Implications & What To Do Now

The 20% bounce in the stock markets and the latest smattering of good news on the economy have led some analysts to conclude that the worst of the recession and the credit crisis are behind us. That could be, but the forecasters I respect believe we will see at least another 1-2 quarters when GDP will fall 6-7% or possibly more. So, I am not convinced we've seen the worst of the recession or the credit crisis. I hope I am wrong.

The good news (if we can call it that) is that the US was the first major economy to go into recession; it has suffered a more severe contraction than most other sizable economies, with the notable exception of Japan; and it would therefore be reasonable to assume the US will be one of the first major economies to turn the corner.

Yet in many ways, calling the bottom in the recession misses the point. Unlike past recessions that were followed by a strong recovery, I believe (and my best sources agree) that we face at least a couple of years of very slow growth when this recession ends. Yes, the government and the Fed are spending trillions like drunken sailors, but this economic and financial crisis is likely to put a damper on growth for at least several more years.

With that backdrop, investors have to consider the likelihood (or unlikelihood) that the US equity markets bottomed in early March. With the major market indexes having plunged over 50% from their peak in late 2007 to early March, it is easy to assume that we've seen the bottom. I, on the other hand, am not so convinced.

But that, too, misses the point in my opinion. Whether the bottom is in or not, I fully expect the equity markets to at least retest the lows seen early this month when the Dow fell to 6,500 and the S&P 500 fell to 675. And there is no guarantee that those lows will hold. Therefore, if you are looking to exit failed buy-and-hold positions in stocks, and move to more defensive strategies, I would suggest doing so now.

My greatest concern at this point is that the new Public-Private Investment Program may not work. As I have written in several recent letters, it is clear that relatively little of Obama's $787 billion stimulus plan will be spent this year when it is needed most. Thus, that means that it is even more critical that the PPIP get started quickly and that it succeeds. As noted earlier, there is no assurance that it will get up and running quickly, or that it will succeed (or if President Obama is fully behind it).

If the PPIP does not succeed, I would expect the US equity markets to plunge once again, and if so, buy-and-hold strategies will get hammered again.

If you have been considering alternatives to the buy-and-hold strategy for a portion of your equity portfolio, such as the active management programs I recommend – which can move to cash and/or hedge long positions - now may the time to get such strategies in place.

Remember, it does not matter where you live; we have hundreds of clients all across America.

Finally, we hosted our second Webinar with Scotia Partners on March 25. I'm very pleased to report that almost 300 of you registered for this opportunity to learn more about Scotia's very successful investment program. If you missed it, you can watch and listen to the full Webinar discussion (including all charts) at www.halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Obama Budget - $9.3 Trillion in Deficits says CBO
http://news.yahoo.com/s/ap/20090320/ap_on_go_pr_wh/obama_budget

Obama Sticker Shock (more CBO budget analysis)
http://online.wsj.com/article/SB123776518094909023.html

Uncle Sam's Hedge Fund (the Geithner bank bailout plan)
http://www.realclearpolitics.com/articles/2009/03/uncle_sams_hedge_fund.html

Who Will Buy America’s Trillions In New Debt?

Gary D. Halbert — Tue, 24 Feb 2009 21:00:08 GMT

IN THIS ISSUE:

Federal Bailouts Surpassing $10 Trillion

Government Finance 101

Who Will Buy All This New Debt?

Bernanke: Crank Up The Printing Presses

Real Storm Clouds On The Horizon

Conclusions – Not Many I Can Find

Introduction

Over the last two weeks, I have discussed at some length President Obama's $787 billion stimulus package and Treasury Secretary Geithner's bank rescue plan that he said would cost $1½-$2 trillion or more. Add to that President Obama's announcement last week of another potentially $275 billion in a new bailout plan aimed at homeowners and mortgage lenders.

But these latest revelations are only the tip of the iceberg.

Bloomberg has recently discovered that with the passage of the $787 billion stimulus package, the federal government is now on the hook for $9.7 trillion in direct bailouts and associated government guarantees. Add to that Geithner's $1½-$2 trillion and another $275 billion to help the housing crisis, and you get pretty close to $12 trillion which is staggering.

Where will the government get that kind of money? In the pages that follow, I will discuss how the government normally finances its deficits, and how those sources are beginning to dry up due to the global recession. Unfortunately, it appears that the Federal Reserve will become the “lender of last resort” to fund the massive credit needs of the US government.

There are many serious implications of the historic bailout spending we have seen in the last year, with much more to come, especially if the Fed moves ahead to directly purchase trillions in Treasury debt. Sadly, there are no guarantees that this massive spending will even work. Even worse, we could be facing unprecedented inflation once we come out of this recession, or even before, as I will discuss below.

Federal Bailouts Surpassing $10 Trillion

Following announcement after announcement over the last year, Americans are growing dizzy from the various federal bailout plans. Who knows what the federal government is on the hook for? After filing a federal lawsuit to get the actual information on the bailouts and various bailout guarantees, Bloomberg reported the following on February 9:

“The stimulus package the U.S. Congress is completing would raise the government's commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation's home mortgages. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed.

The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus package to be approved this week, and the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients' names have not been disclosed.” [Emphasis added, GDH.]

As we all know, Obama's $787 billion stimulus has already been passed. The $9.7 trillion discussed above breaks down as follows. We have not spent it all yet, but it could happen depending on how things go. Bloomberg continues:

“The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.

The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world's companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It's 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.” [Emphasis added, GDH.]

Actually, the various bailouts and guarantees are even larger than Bloomberg outlined above. The day after this article was published on February 9, Treasury Secretary Geithner announced a new financial rescue package aimed at not only banks but also consumers, which will total another $1½-$2 trillion. That puts the total up to $11.7 trillion in bailouts and guarantees.

Then on February 19, President Obama announced his “Homeowner Affordability and Stability Plan” that will spend up to $275 billion for “refinancing loans for millions of families in traditional mortgages who are underwater or close to it, by modifying loans for families stuck in subprime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune, and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.” That puts us close to $12 trillion in bailouts and guarantees, and we're probably not done yet.

I could spend the rest of this E-Letter discussing the implications of spending this unheard of amount of money trying to bail this economy out of recession and unfreeze the credit markets. But a more basic question comes to mind: Where is the US going to get all this money?

Government Finance 101

Now that we know the real numbers, the question then becomes how the federal government intends to pay for all of these programs. Remember, the federal budget deficit is already scheduled to exceed $1 trillion this fiscal year, so where is all of this money going to come from?

That's a very good question. The answer may appear to be very basic, but please bear with me as it leads into more important matters below. The US government essentially has three ways to deal with budgetary issues. First, it can reduce spending on other programs in order to fund the bailouts. Of course, we all know that politicians will never cut spending, so there's no use in even entertaining this option.

Next, the federal government can increase revenues by raising taxes. President Obama has already indicated that he wants to raise taxes on those making over $200,000 to $250,000 a year, but has also lowered taxes (or increased giveaways, as the case may be) to those with lower incomes. To fund the bailouts, however, would require a massive tax increase that may even be more than liberals could bear.

Consider this: the total amount of personal income tax revenue received by the federal government in 2006 (latest data available) was just over $1 trillion. With trillions of dollars of bailouts either enacted or proposed, a tax increase in an amount to cover these expenditures would likely be dead on arrival in Congress, and certainly would make the economy even worse.

Numerous studies have shown that as you tax income at higher and higher rates, there is less of an incentive to take the risks necessary to invest in new businesses. This, in turn, can lead to reduced economic activity. In other words, higher income tax rates could stall the very economic recovery the bailouts seek to bring about. This is just another reason that increasing income taxes to fund the bailouts is not a good idea.

A final way to fund the activities of our federal government is through the issuance of debt securities. Accordingly, the Treasury Department issues a variety of T-bills, notes and bonds to finance budget shortfalls. Currently, the total debt incurred by the federal government (the “national debt”) is just over $10 trillion. That amounts to over $32,000 for every man, woman and child in America based on the Census Bureau's population clock. The annual interest on this debt amounted to over $454 billion in 2008, including interest accrued by bonds held by the government itself.

As you might expect, Treasury Department officials have indicated that money to pay for past and future bailouts and stimulus legislation will be funded by borrowing through the issuance of additional Treasury securities. That being the case, it might be interesting to see who currently purchases these debt instruments, and whether they have appetites for more.

By far, the single largest entity holding Treasury securities is the federal government itself. According to the recent Government Account Office's Schedules of Federal Debt, as of September 30, 2008 over $4.2 trillion of government debt is categorized as “Intragovernmental Debt Holdings.” Of course, the largest among this group is the Social Security Administration, but this category also includes various federal retirement funds, health care funds and agency trust funds.

The remaining $5.8 trillion of government debt held by the public is spread among a variety of holders, including Federal Reserve Banks, state and local governments, foreign governments and central banks, pension plans, trusts and many individual investors. By far, the greatest percentage of publicly held debt is owned by foreign interests, reaching a total of $2.8 trillion as of September 30, 2008. China has recently become the largest foreign holder of US debt, followed by Japan, the United Kingdom and a host of other countries owning smaller amounts.

Who Will Buy All This New Debt?

In light of having to fund additional expenditures related to the bailouts, I did some thinking about who among the various buyers of US debt might be able to expand their appetite for Treasury securities just ahead. While I'm not an economist or an expert in Treasury securities, the future does not look bright in my opinion.

Given that we're in a global economic recession, will the same foreign purchasers of US debt be able to continue to buy Treasuries at their previous pace, much less take on more? Let's take a closer look at just a few of the major sources of debt financing for the federal government.

Federal Government – As noted above, the single largest holder of Treasury securities is the US government itself, most of which is held in the trust funds for entitlement programs such as Social Security and Medicare. However, it is not likely that these trust funds can be counted upon to increase their purchases since the amounts they buy are determined by the excess of tax revenues over expenditures. Here are some things we know about these trust funds:

In 2004, the Medicare Hospital Insurance expenditures began to exceed tax revenues. This means that the Medicare Trust Fund is now in the process of cashing in bonds, not buying new ones.
The Social Security Trust Fund will actually be purchasing less and less government debt as the Baby Boom generation begins to retire and claim benefits. As more workers retire, tax revenues go down and expenditures go up. It is generally agreed that the Social Security benefit expenditures will outpace tax revenues in the year 2018 (if not sooner). This is hardly a scenario for a source of increased Treasury purchases.
Let's take this one step further. As the expenditures outpace tax revenues, trustees of these funds will have to start transferring money back into these programs to cover the shortfall. Where do you think they will get the money? That's right, they'll cash in some of their Treasury bonds. But wait, where will the government get the money to redeem the bonds? Well, they'll either have to borrow from another source or print the money, much as they plan to do to finance the bailout. So, in reality, the $787 billion “stimulus” and the $1½-$2 trillion bank rescue package Geithner announced two weeks ago may be just a dress rehearsal for an even greater expansion of the money supply starting in 2018 (or sooner).

Of course, the Federal Reserve can also purchase Treasury Securities, but must generally print the money to do so. I'll discuss this option and its possible negative consequences in more detail later on.

State and Local Governments – These sources of debt financing are now on the receiving end of the recent stimulus bill, and are not likely to be making new investments to the same extent they have in the past, and may actually have a net reduction in their Treasury securities holdings as states and cities seek cash to maintain their services.

Individual Investors – Treasury securities got a boost late last year as investors joined in a flight to safety. However, some observers see this as a one-time event as investors moved to the sidelines and out of equities. Future purchases by investors may be hampered by low rates on these securities.

Americans have been spending less and saving more over the last year or so. Most economists expect this trend to continue for some time yet. That may well be, but one estimate I ran across said that even if Americans got back to their historical average savings rate of 8%, this would mean only about $830 billion of new Treasury purchases - and that's IF the public chooses to invest its increased savings in Treasuries. Personally, I expect some new money from individual investors to continue to flow into Treasury securities as they seek a safe harbor in uncertain times, but this is almost certainly a temporary phenomenon. Who knows, to encourage private investment to help finance the bailouts, the government may even dust off some of the old bond promotions that they used back in World War II to encourage the public to buy war bonds.

Pension Plans, Endowments, Etc. – Many institutional investors got creamed in the recent bear market, with some losing half or more of their asset values. To the extent new contributions are made to these entities, they may continue to be a source of funding for the government. Plan trustees and investment managers have been burned, and may choose to buy safe Treasury securities until they feel better about the equity and bond markets, as well as the economy as a whole. But here, too, this is likely a temporary phenomenon.

Foreign Governments – Many foreign governments have bought Treasuries because they have been flush with US dollars from exporting goods to us. As the recession deepens and Americans cut down more on spending, fewer dollars will be flowing offshore, and this could affect the ability of foreign entities to purchase even the same amount of Treasuries, much less increase their buying activities. Plus, if we factor in the latest protectionist legislation like the “Buy American First” piece of the $787 billion stimulus bill, it might be hard to make a case to foreign nations for investing more in US Treasury securities.

The problem with all of the above sources of debt financing is that they may require concessions on the part of the Treasury to continue to buy its debt securities. Should the US be seen as unable to perform on these notes, investors may require a higher rate of interest to compensate for the added risk.

Foreign purchasers who have so reliably gobbled up our Treasury securities in the past are already balking. China recently demanded guarantees on the $690-plus-billion of Treasury securities it owns, which is not likely to happen soon but it is nonetheless a troubling development. Plus, in light of the global recession (or worse), our trading partners will likely have fewer dollars with which to buy our debt.

Bernanke: Crank Up The Printing Presses

In light of the above difficulties, there is little surprise that Chairman Bernanke recently announced that the Fed would be the purchaser of last resort of the potentially trillions of dollars of Treasury securities being issued to pay for the bailouts. I first brought this to your attention in my December 9, 2008 E-Letter. In a speech delivered in Austin on December 1, Bernanke first announced that the Fed was considering very large direct purchases of Treasury securities.

Speaking to the Austin Chamber of Commerce, Bernanke said, “Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited.”

Another option he offered was: “The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.” Bond prices soared on this news and yields fell to record lows.

This should not have come as a surprise. As the discussion above points out, the government has only limited ways to finance its deficits, and the global recession is serving to reduce some of those sources. Moreover, the Fed had already expanded its balance sheet by close to $2 trillion over the last year by buying up troubled assets. Even before Obama's $787 billion “stimulus” package became law, the Fed announced it would make up to $1 trillion available for consumer loans.

The problem with the Fed buying trillions of dollars worth of Treasury and other debt is that it has to print the money to pay for them. Most experts agree that we could be facing significantly higher inflation whenever the economy comes out of this recession, if the Fed monetizes trillions in federal debt by buying Treasuries.

Even when the economy and the securities markets are weak, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending “stimulus” would restore economic health.

Inflation is the product of the demand for money as well as of the supply. And if the Fed finances trillions in federal deficits and more bailouts in this recession, it could create more money than the economy can use. The result could be the return of “stagflation,” a term coined to describe the 1970s experience when the economy slowed but prices rose anyway. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation.

These concerns, however, are not at the top of Bernanke's worry list (or Obama's or Geithner's). Remember that Bernanke is a student of the Great Depression, and he believes that the government waited too long and did too little to head off the economic and financial crisis of that period. As I have noted frequently of late, Bernanke is worried about deflation, not inflation. Here are some excerpts from the Fed's last policy meeting on January 28:

“In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term [read: deflation].

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility [up to $1 trillion] to facilitate the extension of credit to households and small businesses.”

So it is clear that the Federal Reserve is prepared to purchase however many trillions of Treasury paper that are required to fund the massive bailouts President Obama is asking for. The implications of this massive monetization of government debt are far from clear, especially as they relate to possible inflation down the road. Ironically, there are no guarantees that any of this will work.

Real Storm Clouds On The Horizon

Ever since the end of the 1980-82 recession, I have been a consistent optimist regarding the US economy. For the last 25+ years, I have believed that the technology and productivity-led US economy would surprise on the upside, not without a brief recession or two along the way. I was correct. As long-time readers will attest, I have condemned the “gloom-and-doom” crowd countless times in my newsletter and in recent years in this weekly E-Letter.

Likewise, over those same 25+ years, I have predicted that the US stock markets would also surprise on the upside, and they did with the greatest bull market in history, which the gloom-and-doom crowd totally missed. I encouraged clients and readers to remain fully invested in US stocks, but with a significant allocation to strategies that had the flexibility to move to cash (or more recently hedge long positions) during periodic stock market downturns.

I also predicted since 1982 that inflation, which had reached 15% in the late 1970s, would be brought under control, thanks in large part to former Fed chairman Paul Volcker. Inflation has not been a major threat since then, despite non-stop warnings from the gloom-and-doom crowd and the gold bugs to the contrary.

My optimism over the last 25+ years was well placed, and hopefully allowed my clients and readers to take advantage of the greatest bull market in stocks and bonds ever. But I must admit that my optimism is fading fast. While I am not remotely in the gloom-and-doom camp today, I am not optimistic about America's future, especially in light of the discussion above.

Our nation is in the process of borrowing nearly $12 trillion in an effort to bail us out of the current financial crisis. As noted above, there is no assurance that this plan will work. And most importantly, there is no plan for how this money will be paid back.

So the government will be incurring the most massive federal debt ever at arguably the worst possible time in our nation's history. This fact is highlighted by the reality that tens of millions of Baby Boomers will be entering retirement (if they are lucky) over the next 10-15 years.

We have all seen reports of the strains this will put on Social Security over the next 10-20 years, which will mean even more government borrowing to shore up our nation's entitlement programs. If you believe the numbers, Social Security outlays will begin to outstrip inflows by 2018. I will not be surprised if it happens even sooner.

My confidence in the massive bailouts discussed above was never much, and is fading rapidly. Frankly, I am not sure what the best course of action is at this point. But I do not believe that putting the government into the largest net debtor position in our nation's history is where we should go. Likewise, I do not believe that the government should nationalize our largest banks, but it may very well do so in the months ahead.

Not to end on a political note, but I have warned repeatedly that President Obama comes from a political persuasion which believes that government ownership of the private sector is just fine. I hope not, but we are seeing this evolve after only just over a month of his presidency. It remains to be seen what we should expect next.

Conclusions – Not Many I Can Find

The financial crisis is far from over, and the government is planning to borrow and spend several trillions more over the next couple of years or longer. The Federal Reserve is pledged to be the “lender of last resort,” which could lead to a big rise in inflation in the coming years, or stagflation depending on how the economy does going forward.

The stock markets are devastated, with many people's retirement accounts down by half or more. There is little sentiment that a recovery to new highs will occur anytime soon, for good reason. Millions of Baby Boomers have nowhere near enough to retire into the lifestyles they previously envisioned. As the latest massive bailouts have been announced, stock market prices have consistently tumbled over the last few months to new lows. Does the Obama administration get the point? Obviously not.

At the end of the day, the question is: Will all of these bailouts work? Or are we just delaying the inevitable (as suggested last week in the article by Nouriel Roubini). The main point is that we could have just let banks, brokerage firms and other businesses fail, but this possibly would have created a global depression. However, are we still headed for that fate, only $10 to $20 trillion deeper in debt? Only time will tell.

President Obama is scheduled to speak before Congress tonight (Tuesday), at which time he is expected to present “a road map for how we get to a better day,” a senior adviser said on Monday. Then later this week, Treasury Secretary Geithner is expected to unveil more details on the massive bank rescue plan. It should be another very interesting week.

Best regards in troubling times,

Gary D. Halbert

SPECIAL ARTICLES:

Obama's Stimulus: A Colossal Waste (Read this!)
http://www.realclearpolitics.com/articles/2009/02/obamas_stunted_economic_stimul.html

Obama's Failing Leadership
http://www.humanevents.com/article.php?id=30804

How the GOP Should Approach TARP 2.0
http://online.wsj.com/article/SB123534958659044761.html

Obama should rebuke Attorney General Eric Holder
http://www.forbes.com/2009/02/22/obama-eric-holder-racism-america-cowards-opinions-columnists_attorney_general.html

Throwing Trillions Around Like Crazy

Gary D. Halbert — Tue, 17 Feb 2009 23:06:38 GMT

IN THIS ISSUE:

President Obama Gets His “Spendulus” Bill
Geithner’s Bank Rescue Plan Short On Details
Should The Government Nationalize The Banks?
Conclusions - Trillions of Dollars Being Thrown Around

Introduction

Today, President Obama will sign into law the enormous American Recovery and Reinvestment Act of 2009 - $787 billion – which was passed entirely by Democrats in the House and with the help of only three moderate Republicans in the Senate. Unfortunately, the final bill directs only about one-third of the money to tax incentives and apprx. two-thirds to spending projects. We will look at the highlights as we go along.

Treasury Secretary Timothy Geithner gave his much-anticipated speech on how the government intends to rescue the banking system and unfreeze the credit markets on Tuesday of last week. President Obama had led people to believe that Geithner’s speech would be long on details and substance. It wasn’t. In fact, Geithner has since been roundly criticized by the media.

There are those who now believe that it would have been better for the Obama administration not to have put out any information at all until they had the details. Certainly, the stock markets didn’t like Geithner’s speech; the Dow plunged over 400 points at one point just after the speech. In the pages that follow, I will summarize what little Mr. Geithner outlined last week.

While the latest Treasury rescue plan includes spending $2 trillion or more to rescue banks and get credit moving, there are some knowledgeable analysts that do not believe that will be enough to save the banks and financial institutions. As a result, we are hearing more and more about nationalizing the banks.

While I am NOT in favor of nationalizing the banks, I think we all should understand how and why it might happen. In the pages that follow, I will reprint a very informative analysis written by Dr. Nouriel Roubini. In it, he discusses why he believes that the latest bank rescue plan won’t work, and why he thinks the government will ultimately have no choice but to nationalize many of our largest banks. I think you should read it carefully, if for no other reason than to be informed.

President Obama Gets His “Spendulus” Bill

As you are no doubt aware, Congress passed the $787 billion mostly spending bill last Friday, and the president is expected to sign it into law later today. Unfortunately, the compromise bill includes only $281 billion (36%) for tax incentives and $506 billion (64%) in new government spending programs. Of the $506 billion, $198 billion is spending for programs such as unemployment assistance, Social Security benefits and added money for states to help with Medicaid for low-income and disabled Americans. The bill is loaded with pork.

In addition to the size of the spending in the bill was the concern that most of the money would not be spent until 2011-2012. We are told, however, that the compromise bill envisions spending at least half the money by the end of next year. But that remains to be seen.

The tax incentives in the final bill were further watered down to the point that most workers will see only an extra $8-$13 more in their weekly paychecks. Most of the other tax incentives were in the form of tax credits which won’t be received until they file their tax returns. All in all, I think it was a terrible piece of legislation, and there is no guarantee it will work.

Geithner’s Bank Rescue Plan Short On Details

Last Tuesday, new Treasury Secretary Tim Geithner unveiled the Obama administration’s latest “Financial Stability Plan.” For a week leading up to last Tuesday, President Obama had heralded the plan Geithner was to announce. Unfortunately, the plan outlined by Geithner last Tuesday was very short on substance and there were virtually no details. As the world watched and listened, the US stock markets plunged during and after the speech, with the S&P 500 Index down almost 5% for the week.

Here are some excerpts from Secretary Geithner’s speech. He began as follows:

Today, as Congress moves to pass an economic recovery plan that will help create jobs and lay a foundation for a stronger economic future, we are outlining a new Financial Stability Plan. Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses.

After these opening remarks, Geithner went on to describe the current financial crisis and how we have gotten to where we are. Thereafter, he began to describe the plan the Treasury has come up with. For starters, he said that US banking institutions would undergo a “comprehensive stress test,” essentially to determine which banks should go forward and which banks should be closed or merged with other stronger banks. Those banks that continue to operate would have access to funding from the Treasury.

Those institutions that need additional capital will be able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support. And this assistance will come with terms that should encourage the institutions to replace public assistance with private capital as soon as that is possible.

Geithner did not say how much money the Treasury is willing to make available to banks under this Financial Stability Plan, nor what terms and conditions would be placed on banks that take government money. There was nothing on whether the government would require equity from the banks. Some analysts expect Geithner will need at least $500 billion for this program.

Next, Geithner talked of a new “Public-Private Investment Fund” for purposes of making a market in toxic assets and removing troubled assets from the banks’ books. He said:

Second, alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets.

We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it. We believe this program should ultimately provide up to one trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works. [Emphasis added, GDH.]

So there’s another potential trillion of new government spending. Geithner then went on to talk about the next part of the rescue program:

Third, working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again. [Emphasis added, GDH.]

In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses - large and small.

This lending program will be built on the Federal Reserve's Term Asset Backed Securities Loan Facility, announced last November, with capital from the Treasury and financing from the Federal Reserve. We have agreed to expand this program to target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages.

Assuming the Financial Stability Trust costs only $500 billion (doubtful), we’re up to $2.5 trillion for this giant rescue package. But that’s not all. Geithner continues:

Finally, we will launch a comprehensive housing program. Millions of Americans have lost their homes, and millions more live with the risk that they will be unable to meet their payments or refinance their mortgages. Many of these families borrowed beyond their means. But many others fell victim to terrible lending practices that left them exposed, overextended, and with no way to refinance.

…The President has asked his economic team to come together with a comprehensive plan to address the housing crisis. We will announce the details of this plan in the next few weeks. Our focus will be on using the full resources of the government to help bring down mortgage payments and to reduce mortgage interest rates. We will do this with a substantial commitment of resources already authorized by the Congress under the Emergency Economic Stabilization Act. [Emphasis added, GDH.]

Note that Mr. Geithner did not put a number on the amount of money the government may be willing to provide to help Americans stay in their homes, preferring to use the term “full resources,” and there were no details as to how this money will be made available. Apparently, President Obama will speak tomorrow (Wednesday) with more information on the housing part of this giant rescue plan.

There was considerable disappointment over Secretary Geithner’s speech last Tuesday. As noted above, the stock markets started to plunge before the speech was over and the Dow fell over 400 points at one point and closed down 381 on the day. The markets were not happy!

It remains to be seen what the markets will do this week as we (hopefully) get more details. We are dangerously close to hitting new lows in the major equity markets, and that could bring yet another large wave of selling. Let’s hope not.

Should The Government Nationalize The Banks?

With the economy worsening by the month, and the credit markets still frozen for the most part, we are hearing more and more calls to nationalize the banks. Personally, I am NOT for nationalizing the banks. But if the latest credit market rescue plan outlined in very broad terms above does not work, it would not surprise me to see President Obama opt for nationalization.

With more and more talk of nationalizing the banks, I have chosen to reprint a recent article written by Nouriel Roubini, PhD. Dr. Roubini is a professor of economics at the Stern School of Business at New YorkUniversity and is chairman of RGE Monitor, a well-known economic consultancy firm. Roubini is best known for having warned about the subprime crisis and an impending economic and financial crisis way back in late 2005.

Roubini does not believe that the government’s rescue plans announced by Secretary Geithner last week will save the banking system, and he believes the system will have to be nationalized at some point, at least those banks that are insolvent. Whether you agree or not, I suggest you read the following closely, if for no other reason than to be informed.

QUOTE:
“Nationalize Insolvent Banks
by Nouriel Roubini

A year ago I predicted that losses by U.S. financial institutions would be at least $1 trillion and possibly as high as $2 trillion. At that time, the consensus was that such estimates were gross exaggerations--the naïve optimists had in mind about $200 billion of expected subprime mortgage losses. But, as I pointed out, losses would rapidly mount well beyond subprime mortgages as the U.S. and global economy spun into a severe financial crisis and ugly recession.

I argued that we would see rising losses on subprime, near-prime and prime mortgages; commercial real estate; credit cards, auto loans and student loans; industrial and commercial loans; corporate bonds, sovereign bonds and state and local government bonds; and massive losses on all of the assets--collateralized debt obligations (CDOs), collateralized loan obligations, asset-backed securities and the entire alphabet of credit derivatives--that had securitized such loans.

By now, write-downs by U.S. banks have already passed the $1 trillion mark (my floor estimate of losses), and institutions such as the International Monetary Fund and Goldman Sachs predict losses over $2 trillion (close to my original expected ceiling for such losses).

But if you think $2 trillion is already huge, our latest estimates at RGE Monitor suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be, at their peak, about $3.6 trillion. The U.S. banks and broker-dealers are exposed to half of this much, or $1.8 trillion; the rest is borne by other financial institutions in the U.S. and abroad.

The capital backing the banks' assets was just $1.4 trillion (last fall), leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private-sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to bring back the capital of banks to the level it had before the crisis, and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector.

These figures suggests the U.S. banking system is effectively insolvent in the aggregate; most of the U.K. banking system looks insolvent, too, and many other banks in continental Europe are also insolvent.

There are four basic approaches to a clean-up of a banking system that is facing a systemic crisis:

No. 1: Recapitalization together with the purchase by a government "bad bank" of the toxic assets;

No. 2: Recapitalization together with government guarantees--after a first loss by the banks--of the toxic assets;

No. 3: Private purchase of toxic assets with a government guarantee and/or--semi-equivalently (a provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets--something similar to the U.S. government plan presented by Treasury Secretary Timothy Geithner for a public-private investment fund);

No. 4: Outright government takeover (call it nationalization--or “receivership” if you don't like the N-word) of insolvent banks, to be cleaned after takeover and then resold to the private sector.

Of the four options, the first three have serious flaws. In the bad-bank model (the first, above) the government may overpay for the bad assets, at a high cost for the taxpayer, as their true value is uncertain; if it does not overpay for the assets, many banks are bust, as the mark-to-market haircut they need to recognize is too large for them to bear.

Even in the guarantee-after-first-loss model (No. 2 above), there are massive valuation problems, and there can be very expensive risk for the taxpayer, as the true value of the assets is as uncertain (as in the purchase of bad assets model).

The shady guarantee deals recently done with Citigroup and Bank of America were even less transparent than an outright government purchase of bad assets, as the bad-asset-purchase model at least has the advantage of transparency of the price paid for toxic assets.

In the bad-bank model, the government has the additional problem of having to manage all the bad assets it purchased, something that it does not have much expertise in. At least in the guarantee model, the assets stay with the banks. The banks know better how to manage--and also have a greater incentive than the government to eventually work out such bad assets.

The very cumbersome U.S. Treasury proposal to dispose of toxic assets, presented by Geithner, taking the toxic asset off the banks' balance sheets as well as providing government guarantees to the private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets). But this plan is so non-transparent and complicated it got a thumbs-down from the markets as soon as it was announced. All major U.S. equity indexes dropped sharply.

The main problem with the Treasury plan--that in some ways may resemble the deal between Merrill Lynch and Lone Star--is the following: Merrill sold its CDOs to Lone Star for 22 cents on the dollar. Even in that case, Merrill remained on the hook in case the value of the assets were to fall below 22 cents, as Lone Star paid initially only 11 cents (i.e., Merrill guaranteed the Lone Star downside risk). But today, a bank like Citi has similar CDOs that, until recently, were still sitting on its books at a deluded value of 60 cents.

Since the government knows no one in the private sector would buy those most toxic assets at 60 cents, it may have to make a guarantee (formally or informally) to limit the downside risk to private investors from purchasing such assets. But that guarantee would be hugely expensive if you needed to convince private folks to buy at 60 cents assets that are worth only 20--or even 11--cents.

So the new Treasury plan would end up being again a royal rip-off of the taxpayer if the guarantee is excessive in relation to the true value of the underlying assets. And if, instead, the guarantee is not excessive, the banks need to sell the toxic assets at their true underlying value, implying that the emperor has no clothes [i.e. – large bank failures].

A true valuation of the bad assets--without a huge taxpayer bailout of the shareholders and unsecured creditors of banks--implies that banks are bankrupt and should be taken over by the government.

Thus, all the schemes that have so far been proposed to deal with the toxic assets of the banks may be a big fudge--one that either does not work or works only if the government bails out shareholders and unsecured creditors of the banks.

So, paradoxically, nationalization may be a more market-friendly solution to a banking crisis. It creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and, most certainly, even the unsecured creditors, in case the bank insolvency hole is too large; it also provides a fair upside to the taxpayer.

Nationalization can also resolve the problem of the government managing the bad assets: If you're selling back all the banks' assets and deposits to new private shareholders after a clean-up, together with a partial government guarantee of the bad assets (as was done in the resolution of the Indy Mac bank failure), you avoid having the government manage the bad assets.

Alternatively, if the bad assets are kept by the government after a takeover of the banks and only the good ones are sold back, through a reprivatization scheme, the government could outsource the job of managing these assets to private asset managers. In this way, the government can avoid creating its own Resolution Trust Corp. bank to work out such bad assets.

Nationalization also resolves the too-big-to-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to the taxpayer. This too-big-to-fail problem has now become an even-bigger-than-too-big-to-fail problem, as the current approach has led weak banks to take over even weaker banks.

Merging two zombie banks is like having two drunks trying to help each other stand up. The JPMorgan Chase takeover of insolvent Bear Stearns and WaMu; the Bank of America takeover of insolvent Countrywide and Merrill Lynch; and the Wells Fargo takeover of insolvent Wachovia, all show that the too-big-to-fail monster has become even bigger.

In the Wachovia case, you had two wounded institutions (Citi and Wells Fargo) bidding for a zombie, insolvent one. Why? They both knew that becoming even bigger than too big to fail was the right strategy to extract an even greater bailout from the government. Instead, with the nationalization approach, the government can break up these financial supermarket monstrosities into smaller pieces to be sold to private investors as smaller (better) banks.

This "nationalization" approach was successfully undertaken by Sweden, while the current U.S. and U.K. approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze.

Japan wound up with a decade-long near-depression because of its failure to clean up the banks and the bad debts. The U.S., U.K. and other economies risk a similar near-depression and stag-deflation (multi-year recession and price deflation) if they fail to appropriately tackle this most severe banking crisis.

So why is the U.S. government temporizing and avoiding doing the right thing, i.e., taking over the insolvent banks? There are two reasons.

First, there is still some small hope (and a small probability) that the economy will recover sooner than expected, that expected credit losses will be smaller than expected, and that the current approach of recapping [recapitalizing] the banks and somehow working out the bad assets will work in due time.

Second, taking over the banks--whether you call it nationalization or, in a more politically correct way, "receivership"--is a radical action that requires most banks be clearly beyond the pale. Today, Citi and Bank of America look blatantly near-insolvent and ready to be taken over, but JPMorgan and Wells Fargo as yet do not.

But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit, even JPMorgan and Wells will likely look near-insolvent in six to 12 months (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).

Thus, if the government were to take over only Citi and Bank of America today, wiping out common and preferred shareholders and forcing unsecured creditors to take a haircut, a panic may ensue for other banks, and the Lehman fallout that resulted from having unsecured creditors taking losses on their bonds will be repeated.

On the other hand, if, as is likely, the current "fudging" strategy does not work, and most banks--the major four and a good number of the remaining regional banks--all look clearly insolvent in six to 12 months, you can then take them all over, wipe out common and preferred shareholders and even force unsecured creditors to accept losses.

So, the current strategy--Plan A-- may not work, and Plan B (or better, "Plan N," for nationalization) may end up the way to go later this year. Wasting another six to 12 months may risk turning a U-shaped recession into an L-shaped near-depression.

The political constraints the new administration faces--and the remaining small probability that the current strategy may, by some miracle or luck, work--suggest Plan A should be first exhausted before there is a move to Plan N.

But with the government forcing Citi to shed some of its units and assets, and starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the Federal Deposit Insurance Corp., the administration is laying the groundwork for the eventual, necessary takeover of the insolvent banks.

So while Plan A is now underway, the very negative market response to this Treasury plan suggests it will not fly. Markets were expecting a more clear plan, but also one that would bail out shareholders and creditors of insolvent banks. Unfortunately, that is politically and fiscally unfeasible. It is time to start to think and plan ahead for Plan N.” END QUOTE

Conclusions - Trillions of Dollars Being Thrown Around

As I have emphasized repeatedly over the last several weeks, the politicians in Washington, as well as our monetary officials such as Ben Bernanke, are scared to death about a “debt deflation” that could throw the country into a new depression – which would likely mean that they all lose their jobs! So they will stop at no lengths to avoid it. This is why we are seeing multiple trillions of dollars being thrown around.

The Geithner rescue plan announced last week, with almost no details to go along with it, would commit the government to at least another $2 trillion in spending, and maybe more. Add to that however much more spending President Obama is likely to announce tomorrow to rescue the housing market, which I expect to be up to another trillion.

Bloomberg estimates (based on government data they had to sue to get) that the government is already on the hook for $9.7 trillion in bailouts and various guarantee liabilities associated with the credit crisis – before the announcements over just the last week: 1) the $787 billion stimulus; and 2) at least $2 trillion in the Geithner plan. Not to mention what Obama announces tomorrow for housing.

We’ve never seen anything like this in the history of America, or even the planet for that matter. Making matters worse, no one knows if these efforts will work. And people wonder why the stock markets are going down.

Interestingly, I have been criticized over the last two weeks as I have written extensively about President Obama’s trillion-dollar “stimulus” package (if you add interest). I expect I’ll get more negative comments this week with the focus on the Geithner rescue package and Dr. Roubini’s piece on nationalizing the banks.

Some readers have complained that these are really just political matters that don’t belong in an economic/investment e-letter. I beg to differ – have you looked at the value of your investment portfolio recently? No one can argue any longer that politics don’t affect our investments.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Obama’s Tainted Win
http://www.realclearpolitics.com/articles/2009/02/obamas_tainted_win.html

Obama Chose Urgency Over Transparency (this from a liberal)
http://www.slate.com/id/2210698/

Geithner Can’t Find Gun, Let Alone the Silver Bullet
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=aN_dadtIVMZo

Is Geithner Ready for Prime Time?
http://www.realclearpolitics.com/articles/2009/02/is_geithner_ready_for_prime_ti.html

Support Wanes For Obama's Huge Stimulus Plan

Gary D. Halbert — Tue, 10 Feb 2009 22:01:58 GMT

IN THIS ISSUE:

Public Support For Trillion Dollar Stimulus Plunges
Senate Passes $838 Billion "Stimulus" Package
Republicans' Propose Alternative Stimulus Package
Problems With Obama's Trillion Dollar "Stimulus"
Final Stimulus Bill Will Be Higher Than $838 Billion
Frustrated Obama Says Spending IS Stimulus
50% of Americans May Pay Zero Income Taxes
Geithner Announces $2-$3 Trillion To Rescue Credit Markets

Introduction

Our new president called upon Congress to come up with a giant stimulus package. And there was never any doubt that the members of the House and the Senate would deliver. There's little in life they enjoy more than spending our money! The huge stimulus bill passed in the House on January 28, and the one the Senate passed today will cost American taxpayers over $1 trillion including interest.

Public support for the so-called "stimulus" plan was at 75% just a couple of weeks ago as reported by Gallup. However, as the American people got a good look at the massive $820 billion package passed by the House, and saw that apprx. two-thirds of the money would be spent on liberal spending programs rather than stimulus, support plummeted. As this is written public support for the huge rescue package is down to only 37% and falling.

Republicans introduced alternative spending packages in the Congress that were smaller and included a much higher percentage of stimulus versus spending, but they were ignored by the Democrats who were determined to pass their much larger, pork-laden bills.

It may surprise long-time readers that my oldest and most respected source for economic and market forecasts actually agrees that the government should pass a huge stimulus bill, and even a lot more if necessary to head-off deflation. They agree with the "Bad Bank" plan I discussed last week, whereby the government would reportedly loan banks up to $2 trillion as well as taking "toxic assets" off the banks' hands. In fact, they think the government should do whatever it takes to get the credit markets functioning again, including insuring bank loans if necessary, and it should do it sooner rather than later.

Whether we believe the bailouts and the stimulus package(s) are going to be a colossal failure that could lead to hyperinflation, or whether we believe they are likely to work – it doesn't matter. President Obama got his way, and we are about to see the largest government bailout in world history.

Public Support For Trillion Dollar Stimulus Plunges

Given the business I am in, I get lots of questions from friends, relatives and business associates about the huge bailouts and stimulus packages in the wake of the recession, the financial crisis and historic stock market meltdown last fall. Interestingly, almost everyone I talk to is against the government bailouts to banks, investment houses, AIG, automakers and the like. And now that President Obama and Congress are hell-bent on a new trillion dollar "stimulus" package, most people I talk to are livid!

But while most people I talk to are opposed to the bailouts, Obama had widespread public support for a large stimulus package just a few weeks ago. A Gallup poll in late January found that 75% of Americans polled wanted Congress to pass a big economic stimulus package. Yet that was before the House of Representatives passed its $820 billion "stimulus package" on January 28.

Many Americans who had been for a big stimulus package were not happy when they learned that almost two-thirds of the House bill was mostly pork-barrel spending, while only apprx. one-third went for tax cuts. Many in the national press are already referring to the bill as the "SPENDULUS" package.

As of late last week, the latest Rasmussen poll found that public support for the rescue package had plunged to only 37% for the bill and 43% opposed! Public support is falling by the day, and Rasmussen reported yesterday (Monday) that 62% of Americans now want more tax cuts and less spending in the stimulus bill. That explains why President Obama pulled out all the stops last week to get it passed quickly in the Senate, which will apparently happen later today.

Senate Passes $838 Billion "Stimulus" Package

Last Friday night, a compromise (if we can call it that) was reached between Senate Democrats and the three "moderate" (read: liberal) Senate Republicans: Olympia Snowe (R-Maine), Susan Collins (R- Maine) and Arlen Specter (R-Pennsylvania). Why they switched and agreed to vote for the Senate stimulus bill at the last moment is not known, as their meeting with Democrats was behind closed doors. But it is no surprise that these three "RINOs" (Republicans In Name Only") voted with the Democrats to give them a filibuster-proof 61 votes to enable passage of the Senate stimulus package.

As veteran political observers knew, the final Senate stimulus package would not be far from the House version – that's just how things work in Congress. Both the House and Senate Democrats wanted to give President Obama something in the ballpark of what he asked for, and they did, as they are in the majority, with a little help from the three liberal Republican senators noted above.

The Senate stimulus bill came in at apprx. $780 billion as a baseline, plus several amendments passed earlier to add another $55-$60 billion or more to the final price tag. While the final number is not yet clear as I hit the "send" button, it is estimated to be apprx. $838 billion, slightly higher than the House version.

The Senate version, we are told, has a slightly larger portion devoted to tax cuts, and a slightly lower portion going to spending programs than the House bill. Supposedly, the Senate version has apprx. 40% in tax cuts and apprx. 60% in spending programs, versus apprx. 33% and 66% in the House version, respectively.

The bottom line is, President Obama asked for, and the Congress provided, the largest spending bill in the history of the world by far, even though no one on the planet knows if it will work. And there is another $3 trillion on the way, as I will discuss at the end.

Now the US is committed to spending well over one trillion dollars (including interest) over the next several years on an economic rescue package, with no assurance that it will work.

Senate Stimulus Amendment To Help Automakers

Last Tuesday, the Senate passed an amendment aimed at helping both automakers and car buyers that will be a part of the $838 billion stimulus package. The amendment would allow most car buyers to claim an income tax deduction for the cost of automobile sales taxes and interest payments on car loans.

The amendment would permit qualified car buyers to deduct the sales tax on the purchase of new cars up to $49,500 in price. Individuals with incomes of up to $125,000 and couples earnings as much as $250,000 could qualify, including those who do not itemize their deductions. This tax break applies to new car purchases between last November 12, 2008 and Dec. 31, 2009. The cost is estimated at $11 billion.

While this amendment was hailed as a tax cut for consumers, it was probably more intended to help the struggling automakers and their union workers. Of course, there is no guarantee that car buyers will "Buy American."

Republicans' Proposed Alternative Stimulus Packages

As I wrote last week, the giant stimulus package requested by President Obama and drafted and passed by the House totaled appx. $820 billion. Unfortunately, the bill included only about one-third in tax cuts (stimulus) and two-thirds in pork barrel spending, with relatively little for "infrastructure" projects. So much for Obama's campaign promise to end wasteful spending in Washington!

The Senate stimulus bill, by comparison, includes apprx. 40% for tax cuts and apprx. 60% for spending programs. While an improvement, the Senate bill still has well over half of the money going to spending projects, with less than half going to direct stimulus in the form of tax cuts.

Given the very negative reactions to the bill proposed and eventually passed by the House, some Senate Republicans offered alternative stimulus bills of their own. One Republican group headed by Senator Mel Martinez (R-FL) introduced an alternative stimulus plan with a price tag of apprx. $713 billion. The proposal included $430 billion in tax cuts, $114 billion for infrastructure projects, $138 billion for extending unemployment insurance, food stamps and other provisions to help those in need and $31 billion to address the housing crisis.

All of these are expenditures that would directly help Americans. This Republican plan would direct 60% of the funds to tax breaks, whereas the Congressional Democrats' plans have only 33% or 40% going for tax breaks. The McCain alternative plan directed nearly 80% of the money to tax cuts as I will discuss below.

The Democrats' $820 billion House bill included apprx. $550 billion in spending that is reportedly divided among these areas: $142 billion for education and labor, $111 billion for health care, $90 billion for infrastructure, $72 billion for aid and benefits, $54 billion for energy, $16 billion for science and technology and only $13 billion for housing. Clearly, the Martinez-sponsored GOP stimulus plan would be preferable to the version passed by the House and the Senate bill that will be voted on later today.

Another alternative stimulus plan was offered by a Republican group headed by Senators John McCain and Lindsey Graham. Their alternative stimulus package totaled apprx. $445 billion and was heavily slanted toward tax cuts that I believe make much more sense than either the House or Senate bills.

The McCain plan would cut in half the payroll tax for all U.S. employees for one year to 3.1% at a cost of $165 billion. It would lower the 10% income tax bracket to 5% and the 15% bracket to 10% for one year at a cost of $60 billion. Slash the corporate tax rate to 25% from 35% percent for a year and drop the rate for small businesses filing as individuals to 25% from 35%, all at a cost of $50 billion.

The McCain alternative would also offer homebuyers a tax credit of $15,000 or 10% of the home purchase price, whichever is less, starting immediately at a cost: $20.4 billion. The plan would also extend unemployment insurance benefits and food stamps through 2009 and eliminate taxes on unemployment benefits for the same time period at a cost of $48.15 billion. The plan also includes $11 billion to discourage mortgage servicers and lenders from executing home foreclosures, beginning immediately.

Thus, over $356 billion – or almost 80% - of the $445 billion in the McCain plan would be spent for meaningful tax cuts and other benefits to individuals, and these things would happen in the first year.

The remainder of the $445 billion would be spent on building and repairing roads and bridges ($65 billion), improve, repair and modernize Defense Department facilities, and order and/or repair equipment, vehicles, material and ammunition for combat troops ($17 billion). It also includes $4.1 billion for public transportation systems, airport improvements and other infrastructure projects.

Republican Plans Never Had A Chance, Of Course

As noted above, I liked the McCain plan a lot and it would get the stimulus money spent much faster than any of the other rescue plans propose to do. Yet at the heart of McCain's plan was lowering key tax rates, including payroll taxes, which the Democrats thoroughly oppose. The $15,000 tax credit for home purchases, which House Democrats also opposed, would immediately boost home sales, which is the epicenter of this economic crisis.

Even the considerably larger Martinez plan discussed above is preferable to either the House or Senate plans which spend less on tax cuts and more on spending programs (on a percentage basis) than the Martinez plan. But neither the McCain plan nor the Martinez plan were even considered.

The Democrats in Congress shunned these plans and gave President Obama what he wanted - the largest spending bill in history with well under half the money going to tax cuts and most going to new and existing federal spending programs. In the end, Congress was all too happy to oblige.

With Democrats holding sizable majorities in the House and Senate, the Republicans had no chance of defeating Obama's trillion dollar so-called "stimulus" package, even though 11 House Democrats voted against their own plan.

Problems With Obama's Trillion Dollar "Stimulus"

As should be obvious from the discussion above, I have lots of problems with the giant spending plans passed by the House and likely later today by the Senate. First, they are too big in my opinion. Both of the bills allocate well over half of the money to mostly wasteful spending programs that Democrats have wanted for years. Second, the money will be spent over the next 3-4 years; if it was really a true stimulus package, at least half of the money should be spent over the next year.

The next area of concern is whether or not these new spending levels will become permanent. As an example, let's say that the Department of Education gets $100 billion in additional money on top of their already oversized budget. Is the $100 billion a one-time infusion, or will it become a permanent part of their "baseline" budget each year? We don't know, but certainly some Democrats will try to make them permanent.

Another area of serious concern is that the final stimulus bill will become a vehicle for new protectionism policies. The House added "Buy American" protectionism provisions for iron, steel and textiles to its stimulus bill. The Senate stimulus package also includes similar Buy American provisions, but the details are not yet clear.

Almost immediately, criticism was heard loud and clear from all of our major trading partners. The United States has made deals under NAFTA and the WTO to give trading partners such as Canada, Mexico, Japan and the European Union access to our huge "government procurement market." In exchange, we have received similar commitments from those countries. Hopefully, the final stimulus package will water down or eliminate the Buy American requirements so as not to damage trade relations.

Here is what the Wall Street Journal had to say about the "Buy American" issue:

"On Tuesday the Senate Appropriations Committee added ‘manufactured goods' to the list of items that must be American-made in order to qualify for stimulus dollars under the American Recovery and Reinvestment Act. Congress is signaling to the rest of the world that U.S. protectionists are in charge. Forcing U.S. contractors to buy domestic goods instead of shopping for the best price available world-wide means that taxpayers risk overpaying for their roads and bridges. And that means capital will be misallocated, fewer projects will be built and the bill will go ever-higher.

There is also the little matter of retaliation by our trading partners. The European steel industry has said that it will urge the EU to challenge the [‘Buy American'] provision at the World Trade Organization. That's the high road. Another course would be for other countries to lock American companies out of the bidding on their projects. China's stimulus is estimated at $600 billion. Caterpillar Tractor says that it has a ‘major initiative to compete in infrastructure projects around the world -- particularly in China -- and this would seriously undermine it' Congress must want more Caterpillar layoffs.

Increased protectionism didn't stimulate the American economy in 1930 and it won't now. In the post-bubble environment, Americans are likely to save more and countries like China are probably going to have to spend more. Washington should ask whether it wants to close down export markets just when those markets are offering the U.S. economy its best opportunity for recovery. One more thing: Is President Obama going to exert any restraint in this stimulus bill on the worst instincts of Congress?"

The Obama administration thus far seems unconcerned about the danger these measures pose. The protectionism provisions insisted on by the Democrats could undo whatever measured job creation the stimulus plan achieves by provoking US trading partners to reduce purchases of American-made goods. We need to keep a close watch on this.

This protectionist language also begs the question: "Where's Bernanke?" In 2006 and 2007, the financial media was full of articles about how Fed Chairman Ben Bernanke warned against protectionist policies, saying in a 2007 speech, "In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers."

Thus, you would think that Chairman Bernanke would be issuing similar warnings now as the protectionist-laden Obama stimulus plan rolls through Congress. Yet, I cannot find any reference of recent comments by Bernanke on this detrimental part of the stimulus plan. It has been reported that the Senate amended the stimulus bill to soften the "Buy American" provisions, so perhaps Bernanke has been exerting his influence behind the scenes to help us avoid repeating mistakes of the past.

Final Stimulus Bill Will Be Higher Than $838 Billion

Early last week, the Senate stimulus bill was actually above $900 billion. RINO Senators Collins, Snowe and Spechter refused to sign on unless the size of the bill was reduced. So Senate Democrats actually reduced the price tag by more than $80 billion, bringing it down to the $838 billion number, at which point the RINOS agreed to vote for it last Friday night.

It is important to note that of the apprx. $100 billion taken out, $40 billion was money directed to go to the state and local governments. One of President Obama's top economic advisors said on Sunday that the administration would press hard to get that $40 billion back in the stimulus bill when it goes to the Conference Committee later this week.

Lawrence Summers, Obama's chairman of the White House National Economic Council warned that without the infusion of federal money to state and local governments, the country could face "a vicious cycle of layoffs, falling home values, lower property taxes, more layoffs." So it is clearly possible, even likely, that the final stimulus bill will be higher than the $838 billion passed by the Senate.

Frustrated Obama Says Spending IS Stimulus

Clearly frustrated, President Obama ditched his teleprompter in a nationally broadcast speech before House Democrats last Thursday night to bash Republicans for opposing his giant stimulus package. In what was the most pointedly partisan speech of his young presidency, Obama rejected Republican arguments that the massive spending in the $819 billion House stimulus bill should be replaced by a new round of massive tax cuts.

At one point, Obama not only chided Republicans for opposing the stimulus, but also for getting us into this economic and financial crisis in the first place. The President also defended the enormous spending in the stimulus package, saying at one point:

"What do you think a stimulus is? It's spending – that's the whole point! Seriously."

Millions of Americans watched this speech last Thursday night. Based on the media reactions, many people were very surprised by the President's remark above. But if you've been reading this E-Letter for long, you should not have been surprised.

50% of Americans May Pay Zero Income Taxes

It is currently estimated that apprx. 40% of Americans pay no income taxes. With the tax cuts, tax credits and tax rebates that will result from the massive stimulus package, millions more Americans will pay no income taxes going forward. Even worse, millions of Americans that pay no income tax will get another round of checks from the Treasury. Numerous articles I have read estimate that once the stimulus bill becomes law, 50%-52% of all Americans will pay no income tax at all.

This can only mean that the 50%-48% of us who do pay income taxes will be paying more, especially those with higher incomes. Obama has said repeatedly that he will only raise income taxes on those making $250,000 or more. But with half or more of the population paying no income taxes, Obama will be forced to tax the wealthy at European rates of 60-70% or more, or he will have to raise taxes on those making less than $250,000 – or both.

Along this line, I fully expect Congress to go after the Bush tax cuts very soon. I predict that Congress will roll back the Bush tax cuts as of the end of 2009 rather than waiting until the end of 2010 when they are set to "sunset" automatically. I also expect President Obama to go along. I have often written about how America's income tax burden is increasingly falling on those who make the most money and create the most jobs. Apparently, President Obama and the Democrats want them to foot the whole bill.

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Earlier today, Treasury Secretary Tim Geithner announced a massive new government effort to unfreeze the credit markets, purchase troubled assets from financial institutions, make loans available to small businesses, etc., etc. Secretary Geithner indicated that the government will spend up to $2 trillion to support these vast rescue efforts.

Geithner also indicated that the government would undertake serious measures to stimulate private investment in the troubled assets it will be buying from financial institutions, but he made it clear that the government will act swiftly in the meantime.

Secretary Geithner also indicated that the government is in the process of organizing another massive project to directly stimulate the housing market. He said the details of this housing revival effort will be announced soon and did not put a number on the amount of money they plan to spend on this project, but the assumption is it will be at least $1 trillion.

I wrote about the likelihood of this massive financial rescue effort last week, so you should not be surprised. Nevertheless, the prospect of the government spending another $3 trillion, in addition to the $1 trillion stimulus package passed by the Congress is simply staggering!

I will have more to say about this latest development as the details are made available. In the meantime, the stock markets are selling off hard following Geithner's much-anticipated speech. We can only hope that today's Treasury announcement and the passage of the Senate stimulus package don't send stocks into a new downward leg in the bear market.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Buy American, Buy Depression (very good)
http://www.realclearmarkets.com/articles/2009/02/buy_american_buy_depression.html

Pelosi's Indefensible Bill
http://online.wsj.com/article/SB123422399517965573.html

Detailed analysis of the "Buy American" protectionist threat
http://www.realclearmarkets.com/articles/Buy%2520American%2520_%2520Feb%25202009.pdf

Obama Seeks Multi-Trillion Dollar Bailouts

Gary D. Halbert — Tue, 03 Feb 2009 22:25:16 GMT

IN THIS ISSUE:

The Recession Continues To Deepen
So, How Deep & How Long?
Multi-Trillion Dollar Bailouts In The Works
Obama's $825 Billion "Stimulus" Package
Obama's Next "Big Bang" Bank Bailout
Fed Gearing Up To Buy Treasury Bonds

Introduction

We are witnessing the most aggressive government intervention into the US private sector in history, and I am not simply referring to President Obama's massive $825 billion so-called "stimulus" package passed last week by the House of Representatives. As we will discuss as we go along, there are also plans in the works to borrow and spend trillions more, which will result in the government owning even more of the private sector, starting with the banking system.

We should all recognize that President Obama and most of the Democrats in Congress have no problem whatsoever with the government owning (and eventually controlling) much of the private sector. What we are, and will be, witnessing is unprecedented and is being planned under the guise of the economic and financial crisis, when in fact there is a much larger political agenda ongoing now that the Democrats have control of the White House and the Congress.

Speaking of the economic and financial crisis, the US recession continues to deepen as does the global economy. The Commerce Department reported on Friday that US GDP slumped at an annual rate of 3.8% in the 4Q. Most of the other economic reports of late have also been on the negative side. Most forecasters now predict that 1Q GDP will also be down at least 3-4%. This week, we look at the latest data and some forecasts of what lies ahead for 2009.

Following that, we will examine the latest $825 billion stimulus package that was passed last week by the House. While initially touted as a way to jump-start the banks and unfreeze the credit markets, the final bill is loaded with pork-barrel spending and has nothing for the banks. Following that, we will discuss new government plans totaling $1-2 trillion to bail out the banking system. There is so much to talk about, I don't know where to start, but let's begin with the economy.

The Recession Continues To Deepen

As one analyst put it, there is still no light at the end of the tunnel for the US economy, which officially entered this recession in December 2007 (with the benefit of hindsight). As noted above, US Gross Domestic Product fell at an annual rate of 3.8% in the 4Q, the largest quarterly decline since 1982. The latest GDP number was not as bad as pre-report expectations, but it does reflect the reality that holiday retail sales plunged over 8% in December according to MasterCard.

The Consumer Confidence Index dropped to another all-time low in January, falling to a reading of 37.7, down from 87.3 one year ago. Consumers remain very pessimistic about the state of the economy and about their earnings. Those saying business conditions are "bad" increased to 47.9% from 45.8% in December, while those saying business conditions are "good" declined to 6.4% from 7.7% in December. These are the lowest readings since the Consumer Confidence Index has been in existence.

In what was initially thought to be a bright spot, the Conference Board announced last week that the Index of Leading Economic Indicators (LEI) rose 0.3% in December. However, the Conference Board was quick to point out that the increase in the LEI was almost entirely due to the large surge in the money supply in December. The economic component of the LEI was actually down -0.5% in December. The LEI has declined for the last seven months in a row.

The unemployment rate rose more than expected in December, to 7.2%, when every state in America saw its unemployment rate rise. The nation lost apprx. two million jobs in the last four months of 2008 alone. Employment data for January will be released this Friday, and analysts expect the unemployment rate to rise to 7.5%. At the rate major layoffs are being announced, the unemployment rate could approach 9% by the end of the year.

On the manufacturing side, most reports were worse than expected. The ISM Index fell to 32.4 in December, down from 36.2 in November, and worse than pre-report estimates of a decline to 35.4. This morning, the ISM Index for January showed a modest increase to 35.6, which was higher than expected. But keep in mind that any figure below 50 indicates an economy that is contracting.

Industrial production fell 2.0% in December, twice the pre-report consensus. Durable goods orders fell 2.6% in December following a decline of 3.7% in November. Factory orders plunged 4.6% in November (latest data available).

On the housing front, there finally were some encouraging reports. Sales of existing homes rose 6.5% in December to an annual sales pace of 4.74 million units according to the National Association of Realtors, although the NAR noted that many of the sales were "distressed sales" in an effort to avoid foreclosure.

Thanks to the unexpected home sales increase, the inventory of homes for sale decreased 11.7% in December to 3.68 million units. That represents a 9.3-month inventory of unsold homes at the current pace of sales, down from a 11.2-month supply in November. The median home sales price fell to $175,400 in December, which was down 15.3% from the same period in 2007.

New home sales, on the other hand, fell more than expected in December to apprx. 331,000 units. Housing starts fell more than expected in December to apprx. 550,000 units – this is actually a good thing. Building permits also fell more than expected in December to apprx. 549,000 units, also a good thing from an economic standpoint, though not so good if you are or work for a builder.

So, How Deep & How Long?

The truth is, no one knows for sure how long this recession will last or how bad it will get. As noted earlier, most forecasters are predicting that GDP will fall by 3-4% in the 1Q. Among the analysts and forecasting groups I read and respect, there are basically two camps. One camp believes that the recession will get worse, perhaps considerably worse, the credit markets will remain very tight all year, and that a mild recovery will not begin until sometime in 2010.

The other camp is less pessimistic and believes that the economy will begin a slow recovery and the credit markets will unfreeze in the second half of this year. Most in this camp believe that the vast sums (trillions as we will discuss below) the government and the Fed are throwing into the economy will fill the void left by contracting consumer spending. Some in this camp are optimistic that the unexpected upturn in existing home sales in December will have marked the bottom of the housing slump.

Personally, I have been leaning more toward the first camp. However, as we will discuss in the pages that follow, if the Treasury and the Fed are prepared to throw an additional $1-$3 trillion of liquidity into the economy, perhaps the outcome is somewhere between the two camps noted above. In either case, we will not be out of this recession any time soon.

Multi-Trillion Dollar Bailouts In The Works

As I noted earlier, I do not wish for this week's E-Letter to be considered a political piece, but there are some political realities that sophisticated investors must consider. The question for me is where to start. I choose to start this discussion with a quote from President Obama's Chief of Staff, Rahm Emanuel, shortly before Obama took office.

Rahm Emanuel, who was a senior political advisor to former president Bill Clinton, and most recently a member of the House of Representatives from the state of Illinois, is one of the most powerful (and foul-mouthed) members of the liberal Washington elite. Interestingly, Emanuel supported Hillary Clinton in the campaign, but Obama picked him as Chief of Staff anyway.

As President Obama's Chief of Staff, Emanuel is essentially the second most powerful politician in Washington. Mr. Emanuel stated the following to the Wall Street Journal after Barack Obama named him as Chief of Staff prior to his inauguration (read carefully):

"You never want a serious crisis to go to waste. What I mean by that is that you have an opportunity to do things you could never do before. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with."

Let me interpret this political message that Emanuel unintentionally stated: We are in an unprecedented financial crisis that will pave the way for the implementation of the liberal policies that we believe in, including things that the American people would not otherwise tolerate. And some of those things are now in the pipeline as I will elaborate below.

You have no doubt heard about President Obama's estimated $825 billion "stimulus" package that was passed by the House last week (with not a single Republican voting yes). As you probably also know, that "stimulus" package was loaded with pork-barrel spending that, during the campaign, Obama said he would not tolerate.

What you probably do not know is that Obama has an additional stimulus plan to recapitalize the banks and financial institutions that could total $2 trillion or more, and will mean that the government gains substantially more equity ownership of the major banks and financial institutions, as well as others.

Should President Obama run into problems financing these huge bailout initiatives, the Federal Reserve has let it be known that it stands ready to purchase a trillion or more in long-term bonds in order to keep interest rates low and keep the credit markets from seizing up, according to recent statements from his new Treasury Secretary, Timothy Geithner.

We will look in more detail at Obama's breathtaking plans in the pages that follow, beginning with the latest $825 billion "stimulus" package passed by the House last week. Then we will look into the potentially $2 trillion rescue package for the banks and the possibility that the Fed will be buying hundreds of billions of Treasury bonds, if needed.

Obama's $825 Billion "Stimulus" Package

Unless you are politically tone-deaf, you know that President Obama has proposed another so-called ‘economic stimulus package' of apprx. $825 billion, on top of President Bush's $700 billion "Troubled Asset Relief Program" (TARP) last year, of which only apprx. half has been spent so far. Obama will now get to decide how the other half is spent.

Oh, and let's not forget the additional $800 billion that the Fed intends to spend in an attempt to further unfreeze credit markets for homebuyers, consumers and small businesses. Never mind that the Fed's plan aims to do the very things that Secretary Paulson initially planned for TARP – buy up troubled mortgage securities – but then said there were better uses for the money.

Many analysts have argued for several months now that Bush's TARP program was not enough to keep our nation's largest banks afloat, and that much more in the way of rescue funds would need to be made available by the Treasury. Plus, most analysts also agreed that any such new stimulus package should include tax breaks and incentives to get consumers spending again to revive the plunging economy.

As a result, many of these same analysts welcomed the idea of the additional $825 billion Obama requested. That is, until they saw how Obama planned to spend the money. Most analysts figured that the $825 billion would go to banks in the form of loans or other capital injections, and to consumers in the form of tax cuts, rebates or other tax incentives to put money in their pockets.

But when the Obama administration finally released the substance of the $825 billion stimulus package, most analysts (your editor included) were shocked. The latest enormous stimulus package is loaded with pork. Around two-thirds of the $825 billion is liberal pork-barrel spending, with little for infrastructure rebuilding; only around one-third is tax cuts and credits for consumers; and there is nothing in the bill for helping the banks.

Remember, this was Obama's proposal. The House tweaked it a little, but not much in the end. The plan passed by the House last week totaled $819 billion, with only $275 billion for tax cuts and a whopping $544 billion in new spending programs as outlined below. The Senate, which has yet to vote on the bill, reportedly has plans to increase it to apprx. $900 billion. For discussion purposes below, I will simply refer to it as the $825 billion stimulus package.

As reported last week, the liberal spending components in Obama's plan include an estimated: 1) $92.3 billion for education, labor, etc.; 2) $88.9 billion for Medicaid to help out state budgets that are in the red; 3) another $79 billion for states that are running budget deficits; 4) $59.5 billion for transportation and urban development; 5) $48.9 billion for the Energy Department; 6) $27 billion for the Agriculture Department; and 7) $15 billion for the environment – just to name a few.

If your blood is not already boiling, get this. Obama's $825 billion bailout also includes over $5 billion that is targeted for low-income housing assistance organizations that prominently includes Chicago-based ACORN, which is really a left-wing political group that Obama worked for in his early days after law school. ACORN could be a big recipient of this money, even though it is under federal investigation for voter fraud. Hmmm.

As you can see, the bulk of Obama's $825 billion stimulus package is targeted toward government agencies – not consumers or banks – and is estimated to result in at least 600,000 new federal employees. So Obama's first major legislative initiative – supposedly a stimulus package to jump-start the economy – is a bloated spending package to increase the size of government, with only about one-third going directly to help consumers.

The Democrats in the House were surprised initially at the makeup of the bill, but quickly passed it last week with few changes. As you have likely heard, Obama's giant "stimulus" package was voted against by every Republican in the House of Representatives and even a number of Democrats. Assuming the Senate passes it (or something even larger) in the next week or two, it will soon become the law of the land.

Making matters worse, precious little of the spending and tax breaks will occur in 2009. According to the Congressional Budget Office, only apprx. $93 billion of the $825 billion will be spent in fiscal 2009, the time we need it most, and only apprx. $225 billion would be spent in fiscal 2010. The balance reportedly doesn't get spent until after that time, when we should be out of the recession.

Instead of giving the economy a "targeted, timely and temporary" injection as Obama had promised, the plan has been larded with spending on existing social programs or hastily designed new ones, with much of it permanent - and not enough of it likely to create new jobs. The Obama administration says that it wants 75% of the money to "spend out" within 18 months. But the Congressional Budget Office estimates that, under the House bill, only 64% of the spending and tax cuts will hit the economy by 2011.

Also troublesome is the likelihood that the bill will become a vehicle for new protectionism policies. The House added "Buy American" protectionism provisions for iron, steel and textiles, and the Senate seems bent on expanding the list of products. The Obama administration seems unconcerned about the danger these measures pose. The protectionism provisions insisted on by the Democrats could undo whatever measured job creation the stimulus plan achieves by provoking US trading partners to reduce purchases of American-made goods.

And finally, there is the question of whether or not these large new amounts of spending will be counted toward the "baseline budget" for all of the government departments receiving funds under Obama's $825 billion spending plan. For example, will the $92.3 billion going to education, labor, etc. mean that their baseline budget going forward is permanently $92.3 billion higher?

The $825 billion stimulus plan is supposed to be a "one-time" expenditure. But we will have to wait and see if this is true, or if all the departments getting this new money will try to say that their budgets should be increased by that amount permanently in future fiscal years. In Washington, it is easy to give money away, but it is next to impossible to scale it back.

Obama's Next "Big Bang" Bank Bailout

In addition to the $825 billion stimulus package discussed above, Congress also approved the release of the remaining $350 billion from the TARP program to the Obama administration last week. Late last week and over the weekend, Obama and his spokespersons promised that new Treasury Secretary Geithner will soon be announcing their plans for how to spend the remaining $350 billion of TARP monies – plus a whole lot more. What could this mean?

The Wall Street Journal reported on Thursday of last week that the Obama administration is planning another $1-$2 trillion bailout aimed at restoring the financial health of US banks. What, you haven't heard about this yet? Surprise, surprise. This may explain why none of Obama's $825 billion stimulus plan, and apparently none of the remaining $350 billion of TARP funds, will be targeted to banks and financial institutions that are teetering on the brink.

The Wall Street Journal noted the following last Thursday, January 29:

"Government officials seeking the revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health… The potential size of the rescue efforts being discussed suggests the administration may need to ask Congress for more funds [a trillion or two]… The administration is expected to take a series of steps, including relieving banks of bad loans and securities.

The so-called ‘bad bank' that would buy these assets could be seeded with…as much as $1 trillion to $2 trillion raised by selling government-backed debt or borrowing from the Federal Reserve."

Wow – another $1-$2 trillion bailout of the banks! The question that arises, of course, is how will the government make these enormous funds available to the banks? Will they be in the form of loans or direct giveaways? New Treasury Secretary Geithner said last week that such new money would be loaned to the banks. Thus far, government loans to the big banks have been made in return for non-voting "preferred shares" in these banks.

Yet given the magnitude of the loans they are talking about – $1-$2 trillion – it is entirely possible that the government will have to take collateral in the voting "common stock" of the banks, potentially giving the government some element of control over the banks and their operations. This sounds like the first step toward "nationalizing" the banks.

On Wednesday of last week, Treasury Secretary Geithner said that he wants to avoid nationalizing banks if possible. He stated: "We'd like to do our best to preserve that [banking] system." Read that quote very carefully. I read it as follows: We'll try to avoid nationalizing the large banks, but if we feel we have to, we will. This is very scary!

As I have stated twice over the last two months, President Obama comes from a political persuasion that has no problem with the government owning – and eventually controlling – large parts of the private sector. Many Americans who voted for Obama had no idea, or ignored the fact that he embraces this ideology.

So we should not be surprised if the government ends up owning big equity stakes in our nation's largest banks over the next year or so. And there is even the chance that the government will actually nationalize the banking system before it's over. Hello Europe!

Fed Gearing Up To Buy Treasury Bonds

The massive bailouts we have already seen, plus those outlined above to follow soon, lead to one pivotal question: How is the US Government going to pay for all of this? Since we're already running a trillion-dollar deficit, the new spending would have to be funded by selling even more Treasury debt. Thus, this leads to additional questions such as: 1) Who is going to buy these trillions in new government debt? Will foreigners continue to buy US Treasury securities as they have in the past; 2) Or will these trillion-dollar deficits spook them away; and 3) Will the US dollar plunge as a result and lose its status as the world's reserve currency?

It is impossible to know the answers to these questions, and the Obama administration knows this. Therefore, the Federal Reserve is gearing up to be the "lender of last resort" as Obama's massive bailout programs move forward. The Wall Street Journal reported last Thursday that the Fed is gearing up to purchase long-term US Treasury securities on a massive scale.

This has never happened in the post-Great Depression era. Yet the Fed is reportedly now gearing up to directly buy US Treasury bonds in case Obama's bailout plans for the banks don't work. Supposedly, the Fed has the legal authority to directly buy long-term US Treasury bonds, but it has never done so on a massive scale before.

Government officials are trying to put lipstick on this pig by claiming that the Fed's action to buy Treasuries will help to reduce long-term interest rates and thus facilitate more business and mortgage borrowing. However, the real reason is that there's likely not going to be anyone left to buy our Treasuries, especially if the Dems pursue idiotic protectionist measures that would harm the very trading partners we rely on to buy our debt.

And if the government usually sells Treasuries to finance its operations, where will the money come from to buy its own Treasury securities? That's right, folks. They'll just keep the printing press running until they have enough. As I have noted before, Obama and our monetary authorities are scared to death about deflation, and they will do anything within their power to avoid a debt deflation (a la: Japan) from unfolding in the US, regardless of the inflation implications down the road.

Fed chairman Ben Bernanke has recently stated in public that the possibility of the Fed buying Treasuries is real. The latest policy statement from the FOMC made it clear that the Fed "is prepared" to take such a step as a result of the "evolving circumstances" in the credit crisis. I interpret these developments to mean that the Fed will fire up the printing presses immediately if Obama has problems raising the trillions of dollars he plans to spend.

Conclusions?

I have always tried to tackle the complicated issues of the day and explain them in ways that most anyone could understand. Yet the current economic and financial crisis defies a simple explanation. Yes, we know what lead us into this crisis – home mortgages were made available to millions who had little or no chance of being able to make the payments.

Pundits can argue as to who is to blame for this. Conservatives can make a strong argument that the incentives for giving home loans to people who could never make the payments go back to the Clinton presidency, which is true. But liberals can argue, rightly so, that these sub-prime lending practices continued, and even increased, during the Bush administration.

Yet where to place the blame largely misses the point, in my opinion. We are now in what looks to be the worst economy since the Great Depression. Not even the best thinkers of our time suggested that we would be in such a broad-based financial crisis a year ago. But here we are.

It is clear that President Obama prefers a Keynesian approach to solving this crisis – that is by spending trillions of dollars and substantially increasing the size and scope (control) of government. This should not have come as a surprise to anyone who has read this E-Letter for long – I warned you about this on numerous occasions well before the election in November.

Interestingly, we learned yesterday that the Republicans in Congress are busy crafting their own economic stimulus package to counter President Obama's. There are few specific details known about this GOP rescue package as I prepare to hit the "send" button, but it appears that the Republicans' stimulus package will focus on numerous tax cuts and spending that might help the economy in the near-term. Depending on what the Republicans come up with, I might write about that next week – we'll see.

Getting back to the economic discussion at the beginning of this letter, this recession is clearly worse than even the naysayers predicted. As discussed above, it could last a few more months, or it could last well into 2010. Whatever proves to be the case, it will not be good news for the stock markets, which are flirting with new lows as this is written.

In recent weeks, I have emphasized that the mantra of "buy-and-hold" investing is going the way of the buggy whip. Investors around the world have seen their portfolios crushed by the bear market. And it may not be over.

Over the last couple of months, we have seen a significant increase in interest for our actively managed investment programs that have the ability to move to cash (money market) or hedge long positions, and especially our more aggressive programs that will "short" the market. It seems that more and more investors are coming around to my views on risk management.

If your investment portfolio has been hit hard over the last year or so, maybe now is the time to reallocate some or all of your portfolio to professional money managers and strategies that have the potential to get out of the way of bear markets. Call one of my Investment Consultants at 800-348-3601 if you are interested in learning more about these strategies.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Obama Should Fix the Flawed Stimulus Package
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/31/AR2009013101535.html

Lessons from the Stimulus Fight
http://www.weeklystandard.com/Content/Public/Articles/000/000/016/100dyjdy.asp

Public mixed on stimulus package.
http://www.usatoday.com/news/washington/2009-02-02-poll-stimulus_N.htm

Economic & Investment Outlook For 2009

Gary D. Halbert — Tue, 06 Jan 2009 22:10:01 GMT

IN THIS ISSUE:

Editor's Notes On BCA & The Other Gary Halbert
Obama & The New Age Of Big Government
The Economy -- Have We Seen The Worst Of It?
Are The Bailouts Necessary & Will They Work?
The Latest Disappointing Economic Reports
Stock Markets -- Might We Have Seen The Bottom?

Introduction

2008 proved to be a catastrophic year in the financial and credit markets as well as for most investors as judged by the global equity markets. The credit markets and bank lending activity ground to a virtual halt, something not seen in most of our adult lifetimes. Consumer confidence and spending, which now accounts for over 70% of US GDP, fell off a cliff in the span of just 3-4 months late last year. We are now in an unprecedented "credit crisis," the outcome of which remains to be seen.

The US government and the Federal Reserve have responded to the credit crisis in ways that most of us could never have imagined, and they are not nearly done yet. Much more is to come. We can agree or disagree with these giant bailout measures, but like them or not, even more enormous government rescue programs are sure to come in the Barack Obama administration, on top of his already aggressive plans such as nationalized health care, etc.

One thing to keep in mind is that our new President is a man who embraces government ownership and control of the private sector, so we can expect more massive bailouts in the next year or longer as needed. Already, Mr. Obama is suggesting another fiscal stimulus package approaching $1 trillion this year, and that is just the beginning -- I promise. But the point of what follows is not a political piece. The question is whether or not the plans will work.

What we do know is that we are officially in a recession that reporting agencies now believe began in December 2007. Most forecasters now expect that GDP plunged 4-5% (annual rate) in the 4Q of last year, and will continue to fall for at least a couple more quarters. Meanwhile, deflation is becoming a greater threat. In the pages that follow, we will take an in-depth look at the latest economic and inflation numbers. I'll give you the latest thinking from my best sources on what may lie ahead.

But first, I have a couple of important Editor's Notes that have resulted from many reader inquiries, before we get into the meat of this week's letter. Let's get going.

Editor's Notes

The Bank Credit Analyst: I frequently get questions from long-time readers asking why I do not mention the Bank Credit Analyst (BCA) or quote from their monthly reports as I have for many years. Considering the amount of interest, an explanation is in order.

You may recall that BCA maintained throughout 2007 that the subprime mortgage dilemma would be contained to the housing market, and that a recession was not the most likely scenario for the US or the rest of the world. Then in early 2008, BCA did an abrupt about-face on the subprime crisis, complete with a forecast of a credit crisis and a potentially deep global recession.

I have to admit I was surprised that BCA was late in identifying perhaps the most significant trend change in our lifetimes and an oncoming credit crisis. However, no economic forecasting service is perfect, and I have a number of other sources of economic and financial forecasts that were also late to recognize the full effect of the subprime debacle. So that is not the reason I no longer quote BCA.

Quite the contrary. In early 2008, BCA contacted me in regard to my summarizing and quoting their materials. According to BCA, some of their subscribers had complained about having to pay a large amount of money for what I periodically offered to my clients and E-Letter readers for free. When I first began sharing BCA's outlook over 20 years ago, my comments were limited to a monthly newsletter that went only to my clients and prospective clients. Now, however, my Forecasts & Trends E-Letter goes out to over a million e-mail addresses each week.

While BCA has long been a valuable source of information for me, I fully understand their concerns. After all, they make their money through subscriptions, so anything that might diminish their subscription base would obviously need to be addressed. As a result, I agreed to no longer quote or summarize BCA's views of the economy or markets in light of their concerns.

Finally, it is important to note that BCA has never been my sole source of economic information and forecasts. My staff and I review numerous other sources for forecasts and analysis that help me in forming my own view of the economy, the markets, etc.

The "Other" Gary Halbert: As a reminder, to this day I am often confused with Gary C. Halbert, which is most interesting since Gary C. Halbert passed away in early 2007. For the record, I am Gary D. Halbert and am no relation to Gary C. Halbert; in fact, I never met the man. Apparently, Gary C. Halbert was a successful copywriter and marketer at some point in his life, and he had a newsletter called "The Gary Halbert Letter" and a website by the same name.

The confusion typically occurs when someone does an Internet search for "Gary Halbert." If you type Gary Halbert into Google, for example, the entire first page of results are for Gary C. Halbert -- even though the man has been dead for nearly two years. The first Google result for me -- Gary D. Halbert - is not until the lower part of page two.

We have often wondered how much business we have lost over the years from investors who searched the Internet looking for me but found the other Gary Halbert instead and were not favorably impressed! I have no idea why Gary C. Halbert's website is still on the Internet.

If, however, you type in "Gary D. Halbert," you'll find me at the top of the non-sponsor results. Bottom line: if you should refer someone to me, please advise them to include my middle initial "D." if they wish to find me on the Web. Better yet, advise them to go to my website at www.halbertwealth.com.

On that note, let me extend a huge THANK YOU to all of our clients who have referred friends, relatives, etc. to us over the years. Client referrals are one of our best sources of new business!

With the above noted housekeeping items out of the way, let's turn our attention to the economy, the ongoing credit crisis and the investment markets. But first, let's consider the bigger picture of what to expect from President Obama. The following is not meant to be a political slam on our soon-to-be new president; rather it is simply a perspective on the times to come.

Obama & The New Age Of Big Government

There is no arguing that Barack Obama is one of the most liberal politicians of our time, as is Joe Biden. President-elect Obama believes that more government is the solution, not the problem. He has stacked his new Cabinet with Clinton retreads who believe as he does, including Hillary Clinton as his Secretary of State designee.

President-elect Obama vows that as soon as he is in office, he will pass a gargantuan financial rescue bill (bailout) that is estimated to be as large as $800 billion to $1 trillion in an attempt to unfreeze the credit markets and create at least one million new jobs. No doubt the Democrat controlled Congress will go along. It appears that a number of Republicans will go along as well.

Mr. Obama says his huge rescue plan will be targeted at tax cuts and infrastructure projects that will create new jobs. I, however, predict that much of the bailout money will continue to go to recapitalize banks, financial institutions, automakers and other large companies that get into serious trouble. Obama may have no choice if he and the Fed are to stave off a debt deflation and a depression.

In fairness to President-elect Obama, he comes into office at one of the worst possible times in the last century. He is inheriting the worst economy in decades, the worst financial crisis since the Great Depression and a record large federal budget deficit -- just to name a few. He has an enormous job ahead of him with major problems that have no immediate solutions, and which may get worse before they get better.

But keep one thing in mind dear readers. President-elect Obama comes from a political persuasion that believes it is perfectly acceptable for the government to own equity stakes in the private sector. And he comes into power at exactly the time in which much of the public is more than willing to see this happen, and when even some conservative analysts admit that such steps are probably a "necessary evil."

Based on the many comments I receive from readers, it is obvious that many of you are totally against the government bailouts. Be warned, however, that the bailouts are far from over in my opinion. So it is in this context that I move on to more specific issues.

The Economy -- Have We Seen The Worst Of It?

As noted above, we see and read lots of economic, financial and investment forecasts at my company. Here is the general consensus on the economy of late (obviously, there are forecasts that are better and worse than the consensus I see out there). The general consensus is that the US economy (GDP) fell by an annual rate of 4-5% in the 4Q. We won't get the first official GDP estimate until the end of this month.

The general consensus is that the first half of 2009 will also see negative GDP, but perhaps not as bad as the 4Q we just endured. The unemployment rate is expected to rise to at least 8%, and some believe 10%, well before the end of this year. However, most forecasters currently believe that the US economy will bottom out and begin a slow recovery some time in the second half of this year -- assuming, of course, that there are no more big negative shocks, and that the banks slowly resume lending.

Some of my respected sources believe that, if necessary, the Obama administration and/or the Fed will institute some government mechanism that will guarantee bank loans if that's what it takes to unfreeze the credit markets. (I'm not making this up, folks.)

Assuming the economy bottoms out sometime in the second half of this year, the general consensus is that GDP will grow at a below-trend rate of only 1½-2½% for the next several years following 2009 as the world continues to deleverage (i.e. -- reduce debt).

Of course, there are some respected forecasters that believe the above noted scenario is too optimistic. Some believe that the bailouts will not be successful, the credit markets will not unfreeze this year, and that we are headed for a modern day depression. Others believe that even if the bailouts work, we will be facing runaway inflation in 2010 and beyond. Clearly, there are few, if any, rosy scenarios floating around today.

Are The Bailouts Necessary & Will They Work?

Most conservatives (and even some liberals) I talk to are opposed to the various government bailout measures to-date and the trillion dollar rescue package that President-elect Obama has planned. Many say, "Let ‘em all fail." Several media polls have shown that a majority of Americans are opposed to the bailouts. Personally, I would much prefer an economic stimulus plan that eliminated the capital gains tax and reduced other taxes, but that is not going to happen with the Democrats in control of Congress and the White House.

Given that reality, most of the sources that I respect agree that the bailouts and the various actions by the Fed were necessary in an effort to avoid a debt deflation and a possible depression. Their argument is that with consumer spending accounting for over 70% of GDP, and with consumer spending having fallen off a cliff, the government had to step in to keep us from going from a serious global recession to something worse.

In fact, some forecasters are calling on other countries to follow the lead of US policymakers and slash their interest rates and recapitalize their money center banks. Some actually criticize Europe for resisting such rescue efforts, while praising the UK for its financial rescue efforts.

Further, I would also say that there is a consensus in the forecasting world that it was a huge mistake for the government to let Lehman Brothers go bankrupt. Many analysts believe that it was the failure of Lehman that caused the major banks to put a lockdown on lending, even to each other.

I certainly don't expect to make any bailout converts with this discussion. However, I think it is pertinent to point out that there are respected analysts and forecasters that believe the government and the Fed had no choice but to do what has been done, and that the government may have to do even more if we are to avoid a depression.

Now to the question of whether the bailouts will work. At this point, the answer is we don't know. The first "economic stimulus package" of $168 billion last spring was considered pretty much a non-starter. Various sources have estimated that most Americans who received the tax rebate checks in late April and May saved most of the money or used it to pay off credit card debt or other bills, rather than spend the money as was hoped by the Bush administration.

One thing is clear, however: the Bush administration did not have a well-designed plan for how it intended to use the first $350 billion of the $700 billion Troubled Asset Relief Program (TARP). That was obvious when President Bush and Treasury Secretary Paulson changed the objective of the TARP from buying up troubled mortgage-related securities to recapitalizing the major banks and most recently the automakers.

Some (but certainly not all) of the criticism of Bush and Paulson may have been unfair. I don't believe anyone knew how difficult it would be to reinstate trust in the credit markets and to get the major banks lending once again. As discussed above, President-elect Obama will face the same challenge when he takes office, and talk of some kind of government loan guarantee program for the banks continues to gain momentum, for better or worse.

While it remains unclear if the bailouts will work, there is now little doubt that Mr. Obama's request for a massive new rescue program of up to $1 trillion will be passed by the Congress within the next month or two. Over the weekend, several leading Republicans stated that they would support such a huge stimulus program, provided it was not loaded with earmarks. So I believe it is safe to assume we will see Obama get his wish.

The Latest Disappointing Economic Reports

I have been poring over economic data for over 25 years, and I do not remember another time when the various reports have been as overwhelmingly negative as over the last month or so. Let's take a look at the latest numbers. As noted earlier, most forecasters expect that 4Q GDP fell by 4-5%; however, that report won't be out until January 30.

The final report on 3Q GDP was an annual rate of --0.5%, about as expected, following +2.8% in the 2Q. The decline in 3Q GDP was largely the result of a 3.8% drop in personal consumption expenditures.

The Index of Leading Economic Indicators (LEI) fell 0.4% in November (latest data available). The LEI has been falling for over a year. More troubling, the six-month change in the LEI was negative 2.8%, and the 12-month change was --5.6%. The Conference Board reported that the Consumer Confidence Index fell to a new all-time low of 38.0 in December.

Consumers' appraisal of current conditions grew substantially worse in December. Those claiming business conditions are "bad" increased to 46.0% from 40.6% in November, while those claiming business conditions are "good" declined to 7.7% percent from 10.1%. Consumers' assessment of the labor market was also considerably more negative than in November. Those saying jobs are "hard to get" rose to 42.0% from 37.1% in November, while those claiming jobs are "plentiful" decreased to 6.2% from 8.7% a month earlier.

The plunge in consumer confidence resulted in even worse than expected retail sales during the holiday season. Spending Pulse, an organization that collects consumer spending data from MasterCard, says consumers spent about 20% less on electronics, women's clothes and jewelry in November and December in comparison with the same period last year. Spending Pulse says total retail sales declined up to 8% during this holiday season.

The numbers are not all in yet, but it also appears that online sales declined for the first time ever. Reuters reported that online sales for the holiday period up to December 23 fell 3% from the same period last year, marking the first decline in Internet spending since comScore, Inc. started tracking online sales in 2001.

On the manufacturing front, the news is equally dismal, if not worse. The Institute for Supply Management (ISM), a purchasing management group based in Tempe, Ariz., said its manufacturing index was 32.4 for December, the lowest reading since June 1980, when it stood at 30.3.

Manufacturing activity failed to grow for the fifth consecutive month, according to the ISM, and ISM noted that the December decline was representative of all sectors of manufacturing. An ISM index reading above 50 indicates growth, while a reading below 50 indicates a slowdown. A reading below 41 is typically associated with recession in the broader economy.

Industrial production fell 0.4% in November and was 5.5% below yearago levels. Capacity utilization (the factory operating rate) fell to 75.4 in November, down from 81.1 a year ago. Durable goods orders declined 1.0% in November, following the huge drop of 8.4% in October. It was the fourth consecutive monthly decline in durable goods orders.

The unemployment rate jumped to 6.7% in November, the highest level in more than 14 years. Forecasters expect the December unemployment rate to jump to 7% when the latest report comes out on Friday. Nonfarm payroll employment fell sharply by 533,000 in November. As noted earlier, most analysts expect the unemployment rate to rise to 8% or higher in the first half of 2009. At 500,000 jobs lost per month, it could hit 10% by the end of this year if the economy doesn't begin to rebound.

News on the housing front was equally disappointing. Sales of existing homes plunged 8.6% nationally in November. New homes sales also declined again in November. The national median sales price for existing homes fell by the largest monthly amount on record in November. The median price was $181,000 as compared to $208,000 a year ago, a decline of 13.2% nationally. Of course, in many areas prices are down far more than 13% over the last year.

The National Association of Realtors reported that there were 4.2 million unsold homes on the market at the end of November. At the current sales pace, it would take 11.2 months to sell all the homes on the market. NAR also notes that many homeowners have taken their properties off of the market. Understandably, housing starts continue to plunge, with November starts at 625,000 versus 771,000 a month earlier.

Deflation -- Consumer Price Index Goes Negative

As I have discussed above and in previous E-letters, the government and the Fed desperately want to hold off deflation in the economy. This fear is the overriding reason behind the bailouts, including the potentially $1 trillion stimulus package Mr. Obama and Congress are planning. Lawmakers are particularly frightened now that the Consumer Price Index has gone negative for the last several months, and especially as it plunged lower in October and November.

In October, the CPI fell by a full 1.0% - the largest monthly dive since records began to be kept in 1947. Yet the record October decline was significantly eclipsed in November when the CPI plunged 1.7%. The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased a full 2.0% in November. Of course, the significant fall in energy prices is helping this trend along, but there is much more at work here than just falling gasoline prices.

For the 12 months ended November, the CPI actually rose 1.1%. That compares starkly to July of last year when the CPI was up 5.6% on a year-over-year basis. The trend in price inflation is clearly falling rapidly. Even the "Core" CPI -- less food and energy -- is falling. The Core CPI was down 0.1% in October and was unchanged in November.

Wholesale prices are falling even faster. The Producer Price Index fell 2.8% in October and another 2.2% in November. The 2.8% dive in October was the largest monthly decline on record. The Labor Department also reported that the price of imported goods dropped 4.7% in November and more than 10% in the past quarter. Prices are coming down in a hurry! This is Bernanke's worst nightmare!

Price data such as the above, and similar numbers from around the world, are leading to increased discussion about deflation. A recent cover story in The Economist made it pretty much official: Deflation, not inflation, is now the greatest concern for the world economy.

Over the past year, producer prices have fallen throughout the developed world. Consumer prices have been falling for the last six months in France and Germany. In Japan, wages have actually fallen 4% over the past year. Prices are also falling in China and Hong Kong.

So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.

Such assumptions are now under fire as the Fed has slashed short rates to zero. I assume we'll be discussing deflation a lot more this year.

Stock Markets -- Might We Have Seen The Bottom?

The US and global equity markets will be buffeted in 2009, on the negative side, by slowing economic growth, continued deleveraging, a shortage of credit and possible deflation. On the positive side, the markets should be aided by extremely low interest rates, the government's massive efforts to reflate the economy and unfreeze the credit markets and the possibility that a lot of money now on the sidelines could come back into the market at some point.

Unlike the general consensus about where the economy is headed this year (worse in the first half, but a recovery by year-end), there is no such consensus regarding where the stock markets are going over the next year or longer. Opinions and forecasts are all over the board.

Some analysts I respect believe that the US stock market is in a secular bear market, and that we probably have not seen the worst of it. If the economy is going to get worse in the near-term, and then grow at below-trend rates of 1½-2½% over the next 2-3 years after 2009, this is a rather dire forecast for corporate earnings, which supports the case for lower stock prices over time.

Other analysts I also respect believe that the waterfall collapse in equity prices in 2008 significantly overshot on the downside, and that the November lows could represent the bottom, although they would not be surprised to see a retest of the late November lows at some point.

Forecasters in the latter camp point to the fact that there is an ocean of money around the world that is sitting in Treasuries and other no-risk/low-risk vehicles earning next to nothing. They suggest that with an even modest uptick in consumer confidence, a flood of domestic and international money could come rushing back into US equities -- especially with the rebound in the US dollar last year.

Most analysts in both camps seem to agree that the equity markets are overdue for a potentially strong corrective rally which could play out over the next several months. Specifically, most forecasters I read believe that there will be some kind of "Obama rally" after the inauguration. The problem is that the broad equity indexes have already rallied 20-25% from the five-year lows in November.

Conclusions

One thing appears clear: 2009 is likely to be another wild year in the markets. So, what is an investor to do? Remain in cash and earn little or no return, or jump back into equities and risk losing even more money if the market retests the November lows as some analysts expect? I can't tell you what the market is going to do in 2009, but I can restate what I have said since beginning this E-Letter in 2002 -- it's wise to have at least part of your portfolio in an investment program that can switch to a defensive posture (cash or hedged) in uncertain markets, in my opinion.

While I don't have space in this week's E-Letter, in upcoming issues I'm going to discuss how active management -- investment programs that have the ability to go to cash or hedge long positions - benefited investors in 2008. I'm also going to highlight the huge inflows into some of these programs during 2008, even though most mutual funds were hemorrhaging assets badly. And you may be interested to learn where these inflows were coming from. What do they know that you don't know? The answer may surprise you.

I'll also bring you up to date on the performance of the latest additions to our AdvisorLink team, the Scotia Partners Growth S&P Plus and S&P Moderate Growth programs. While past performance cannot guarantee future results, suffice it to say that Scotia's programs continue to meet our expectations.

If you'd rather not wait on these future issues and want to learn more about Scotia and the other actively managed investment programs that have the potential to become defensive when market conditions warrant, feel free to give one of our Investment Consultants a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com. You can also find out more about these programs on our website at www.halbertwealth.com, or request a complete Scotia Investors Kit by completing our online Scotia request form.

Wishing you a profitable New Year,

Gary D. Halbert

SPECIAL ARTICLES

Tyranny of the Tax-Exempt (Must Read!!!)
http://www.newsmax.com/insidecover/obama_stimulus_package/2009/01/06/168219.html

Obama's Trillion Dollar Political Stimulus Package
http://www.realclearpolitics.com/articles/2009/01/fiscal_follies.html

Obama Eyes $300 Billion Tax Cut - What A Surprise!
http://online.wsj.com/article/SB123111279694652423.html

Obama Lies About Government Bailout Plan
http://www.aim.org/aim-column/obamas-lies-about-government-bailout-plan

The Recession & More Government Bailouts

Gary D. Halbert — Tue, 09 Dec 2008 21:21:18 GMT

IN THIS ISSUE:

Latest Grim Numbers On The US Economy
The Latest On The Government Bailouts
Fed Announces The Mother Of All Bailouts
Troubling Aspects Of The Fed's Latest Bailout
Fighting A "Debt-Deflation" At Any Cost

Introduction

The economy, the financial crisis and government bailouts were certainly hot topics for discussion among the large group of family and friends that we entertained over the Thanksgiving holiday and the weekend following. These sorts of issues would not normally come up at this annual gathering, but it is just more evidence that the current sinking state of the economy and the credit crisis is on the minds of virtually all adult Americans, no matter their financial strata.

Most of my Thanksgiving guests have been dizzied by all the different government bailouts that have been announced recently (haven't we all!), and most were very much against them, as is a majority of Americans according to several surveys. What most people don't understand is that the government and the Fed will do anything they possibly can to prevent the economy from falling into a full-fledged debt deflation.

Debt deflation is a cycle in which prices fall broadly, in some cases across the spectrum of assets. Most historians attribute the Great Depression to a debt deflation between 1930 and 1934. Likewise, Japan's decade of deflation and severe recession in the 1990s is the model everyone wants to avoid. For obvious reasons our monetary authorities do not want to see either happen again. I will be writing about deflation more in upcoming issues.

This week we will discuss the recent government and Fed bailouts as we go along, including some recent analysis by Stratfor.com and a nice chronicle of how the financial crisis has unfolded thus far. But first we want to take a look at the latest economic data, most all of which are bleak. While 3Q GDP was down only 0.5% according to the latest report, most analysts expect that the economy will plunge by at least 2-3% in the 4Q.

That's a lot to cover, so let's get started.

Latest Grim Numbers On The US Economy

I trust that everyone reading this is well aware that we are in a serious recession brought on almost entirely by the housing slump and the credit crisis which followed. The government and the Fed have proposed massive bailouts in an effort to get the credit markets moving, banks lending, and consumers spending once again. But is it working? The answer is, not yet.

Here are the latest economic reports. Last Tuesday, the Commerce Department revised its estimate of 3Q Gross Domestic Product from -0.3% to -0.5%, annual rate. In the 2Q, real GDP increased 2.8%. The decrease in real GDP in the 3Q primarily reflected negative contributions from personal consumption expenditures, residential fixed investment (housing), and equipment and software that were partly offset by positive contributions from federal, state and local government spending, private inventory investment and exports.

Most economists and analysts are expecting a much greater decrease in GDP for the 4Q. While we won't get the first estimate of 4Q GDP from the Commerce Department until late January, a recent survey conducted by the Philadelphia Fed suggests that real GDP will decline at a 2.9% annual rate in the 4Q. Likewise, the consensus now is that at least the first two quarters of 2009 will see similar decreases in GDP if not worse. There are plenty of analysts that now expect all of 2009 to hold negative growth for the economy. At this point, I cannot disagree. Things are indeed quite bleak.

The Index of Leading Economic Indicators (LEI) fell sharply in October, down -0.8%, marking the fourth decline in the last five months. The LEI declined sharply in October as stock prices, building permits, consumer expectations and the index of supplier deliveries made large negative contributions to the index. Without the very large positive contributions from inflation-adjusted money supply (the largest in seven years), the leading index would have been substantially weaker. Between April and October 2008, the LEI declined 2.4% (a -4.7% annual rate), falling considerably faster than the 1.2% decrease (a -2.3% annual rate) over the previous six months.

Durable goods orders (large ticket items) plunged 6.2% in October, more than double the 3% decline economists expected. The report showed widespread declines throughout manufacturing led by decreases in autos and airplanes. Factory orders plunged 5.1% in October. The manufacturing sector is being hit by the slowdown that is occurring in the rest of the economy. The prospect that the US, the world's largest economy, has entered what could be a severe recession is dragging down growth in other areas and dampening demand for US exports, which had been the one bright spot for the economy this year.

The unemployment rate surged to 6.7% in November as more than 500,000 jobs were lost in that one month alone. Most forecasters now expect the US unemployment rate to soar to 7% or above by the middle of next year. It will not surprise me if unemployment reaches 7% in the 1Q of next year.

As we all know, consumer spending accounts for apprx. 70% of GDP. In October, retail sales dropped 2.8% following a decline of 1.3% in September. It is unusual to see large drops in consumer spending in October with the holiday season approaching, but this is no usual year. Most retailers expect 4Q sales to fall below yearago levels this year.

It is encouraging to note, however, the latest media reports which indicate that on Black Friday (the day after Thanksgiving) retail sales were up 3% over last year. That increase was largely attributed to the fact that retailers had already discounted merchandise to levels not normally seen until later in the season.

The Conference Board's Consumer Confidence Index, which fell to an all-time low of 39.5 in October, rebounded modestly in November to 44.9 largely due to the sharp drop in oil and gasoline prices. However, the University of Michigan's Consumer Sentiment Index, which asks different questions, was basically unchanged in November at 57.9 versus 57.6 in September. Both measures of consumer confidence remain at very discouraging levels.

On the housing front, the numbers continue to worsen with no end in sight. New home sales in October fell to their lowest level in 17 years, according to data released last Wednesday. The US Census Bureau said the sale of new houses tumbled 5.3% in October to an annualized rate of 433,000. That compared to 457,000 one month earlier and was the weakest showing since 1991.

The number of existing homes in the US that were sold in October fell 3.1% compared to September and was 1.6% below the annualized rate in October 2007. Housing starts also fell sharply once again in October to a 17-year low. Building permits also continued to decline significantly in October.

Even though home sales are now down 69% from the July 2005 bubble peak of 1.39 million units, builders have not been aggressive enough in curbing production because the most critical variable of all, the unsold inventory backlog, rose to an 11.1 month supply in October from 10.9 in September. Thus, we may not have seen the worst of the housing slump yet.

The National Bureau of Economic Research (NBER) recently announced that the US economy is officially in a recession that began in December of 2007. This marks one of only a very few times that NBER has made such a determination without two consecutive quarters of decline in real GDP, which is the traditional definition of a recession.

To round out the latest economic reports, the Consumer Price Index fell 1.0% in October, the largest monthly decline in the index since its creation in 1947. The Producer Price Index (wholesale prices) plunged 2.8% in October. These drops in prices reflect the fact that we are in a severe recession, consumer demand is plunging, and producers are dropping prices in reaction.

The data above paint a troubling picture for the US economy and thus those around the world. The trouble is that the US economy is the world's engine of growth, and US consumers are the fuel of that engine of growth. Now, US consumers are being forced to cut back and save more.

The Latest On The Government Bailouts

As noted above, the government's efforts to head-off the US financial crisis have already gone beyond what many of us could have imagined just a year ago. This financial crisis has resulted in so many different rescue operations, involving trillions of dollars. The initial $700 billion rescue package that was finally approved by Congress in October boggled our collective minds. This financial crisis has evolved so fast that it is hard for most Americans to keep track of what has happened, much less understand it. Here is a good, concise chronology published by the Houston Chronicle (Chron.com) on November 25th:

QUOTE: Gov't Announces Another $800B in Bailout Plans

The government's commitments to contain the financial crisis now approach $7 trillion. That figure includes funds to guarantee certain corporate assets and debts, although those funds may never actually be spent. Still, the overall figure reflects the huge liabilities the government is taking on to battle the meltdown.

Among the government efforts announced Tuesday are plans to buy up to $600 billion in mortgage-related assets and up to $200 billion in loans for holders of securities backed by various types of consumer debt.

The new plans are the latest in a long list of government moves:

-- March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.
-- March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns.
-- May 2: The Fed increases the size of its loans to banks and lets them put up less-secure collateral.
-- July 11: Federal regulators seize Pasadena, Calif.-based IndyMac, costing the Federal Deposit Insurance Corp. billions to compensate deposit-holders.
-- July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.
-- Sept. 7: The Treasury takes over mortgage giants Fannie Mae and Freddie Mac, putting them into a conservatorship and pledging up to $200 billion to back their assets.
-- Sept. 16: The Fed injects $85 billion into the failing American International Group, one of the world's largest insurance companies.
-- Sept. 16: The Fed pumps $70 billion more into the nation's financial system to help ease credit stresses.
-- Sept. 19: The Treasury temporarily guarantees money market funds against losses up to $50 billion.
-- Sept. 29: The Fed makes an extra $330 billion available to other central banks, boosting to $620 billion the amount available to the Fed through currency "swap" arrangements, where dollars are traded for foreign currencies. It also triples to $225 billion the amount available for short-term loans to U.S. financial institutions.
-- Oct. 3: President Bush signs the $700 billion economic bailout package. Treasury Secretary Henry Paulson says the money will be used to buy distressed mortgage-related securities from banks.
-- Oct. 6: The Fed increases a short-term loan program, saying it is boosting short-term lending to banks to $150 billion. It says that by year's end, $900 billion in potential overall credit will be outstanding. It also says it will begin paying interest on reserves that banks keep with the Fed in hopes of coaxing banks into keeping more money on deposit at the central bank.
-- Oct. 7: The Fed says it will start buying unsecured short-term debt, so-called "commercial paper," from companies, and says that up to $1.3 trillion of the debt may qualify for the program.
-- Oct.. 8: The Fed cuts its benchmark interest rate a half percentage point, to 1.5 percent. It follows a one-quarter point cut on April 30 and a three-quarter-point reduction on March 18.
-- Oct. 8: The Fed agrees to lend AIG $37.8 billion more, bringing total to about $123 billion.
-- Oct. 14: The Treasury says it will use $250 billion of the $700 billion bailout to inject capital into the banks, with $125 billion provided to nine of the largest: Bank of America Corp., which received $15 billion; Bank of New York Mellon Corp., $3 billion; Citigroup Inc., $25 billion; Goldman Sachs Group Inc., $10 billion; JPMorgan Chase & Co., $25 billion; Merrill Lynch & Co. Inc., $10 billion; Morgan Stanley, $10 billion; State Street Corp., $2 billion; and Wells Fargo & Co., $25 billion. The $10 billion for Merrill has been deferred until its purchase by Bank of America closes.
-- Oct. 14: The FDIC says it will temporarily guarantee up to a total of $1.4 trillion in loans between banks.
-- Oct. 21: The Fed says it will provide up to $540 billion in financing to provide liquidity for money market mutual funds.
-- Oct. 29: The Fed cuts its benchmark interest rate to 1 percent, matching the low point reached in 2003. The rate hasn't been lower since 1958.
-- Nov. 10: The Treasury and Fed replace the two previous loans provided to AIG with a new $150 billion aid package that includes an infusion of $40 billion from the government's bailout fund.
-- Nov. 12: Paulson says the government will no longer buy distressed mortgage-related assets, formerly the centerpiece of the bailout, and instead will concentrate on injecting capital into banks.
-- Nov. 17: Treasury says it has provided $33.6 billion in capital to another 21 banks, with the largest stake being $6.6 billion to Minneapolis, Minn.-based U.S. Bancorp. So far, the government has invested $158.6 billion in 30 banks.
-- Nov. 23: The Treasury says it will invest another $20 billion in Citigroup Inc., on top of $25 billion provided Oct. 14. The Treasury, Fed and FDIC also pledge to backstop large losses Citigroup might absorb on $306 billion in real estate-related assets.

Citigroup will assume the first $29 billion in losses, and after that the government will absorb 90 percent of losses and the company 10 percent. In return, the government will receive $7 billion in preferred shares and warrants for more than 250 million additional shares.

-- Nov. 25: The Fed says it will purchase up to $600 billion more in mortgage-related assets and will lend up to $200 billion to the holders of securities backed by various types of consumer loans.

The Fed will buy up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The central bank also will buy $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The program on consumer debt will be supported by $20 billion of credit protection from the $700 billion bailout package enacted last month. END QUOTE

Fed Announces The Mother Of All Bailouts

As noted above, on November 25th, the Federal Reserve announced yet another huge bailout - up to $800 billion - aimed at freeing up seized credit markets. You would expect that this new, unprecedented bailout would be still making news and have been completely and utterly analyzed. I don't find that to be the case.

Actually, it's somewhat troubling that the Fed, acting under its own initiative and without any congressional approval, can uncork a bailout $100 billion bigger than the $700 billion TARP rescue package Treasury Secretary Paulson had to peddle on Capitol Hill. Even more surprising is that this newest bill aims to do the very things that Secretary Paulson initially planned for the $700 billion - buy up troubled mortgage securities - before he changed his mind on how best to use the TARP money.

I'll provide some analysis below, but first let's see exactly what the new Fed bailout has been designed to do. Much of the buzz on the street about this new Fed program has been that this is "Main Street's Bailout," meaning that the relief from this $800 billion of pocket change is designed to get to the ultimate consumer rather than going into bank stocks. Is Bernanke playing a little political football here? Maybe.

Stratfor.com had one of the better descriptions of the Fed's new plan to restore liquidity to the housing and consumer credit markets. I have reprinted an excerpt of Stratfor's November 25 article below, and will follow up with my own analysis:

QUOTE: In the past 24 hours, there have been two more major developments, enacted not by the Treasury but by the U.S. Federal Reserve, which, unlike the Treasury, enjoys both policy independence and control of the money supply.

First, the Federal Reserve is using its resources to take over the original idea contained in the TARP I program, launching a $600 billion package to purchase mortgages and mortgage-backed securities that started the problems in the first place. All of this funding will be applied to Freddie Mac, Fannie Mae and their immediate satellites. Because the Fed will be negotiating the terms of the debt purchase with the Treasury (the twins are currently under government conservatorship), price points will be determined very quickly.

And because the Fed enjoys policy independence and control of the money supply, it will not have to go back to Congress for approval or funding. If it deems necessary, it can simply print currency to "pay" for the effort. In essence, the sticky parts of the bailout program have now been handed to the institution with the most capability for unfettered action: the Federal Reserve.

Second, the Fed is using a new $200 billion credit facility to purchase AAA-rated debt -- credit card debt, car loans, student loans and the like -- that is currently foundering because of the dual impacts of the recession and bank skittishness. This program is less of a bailout and more of a reward for good behavior. The Fed will purchase only debt that is new; banks can swap their new loans for cash and then immediately turn around and lend again. Simply put, the Fed is offering the buy-up program as a sort of bait to draw skittish banks out of their holes. (The Treasury tossed in $20 billion for this as a sort of insurance policy.) [Emphasis added, GDH.]

What the government essentially has done in this admittedly confusing shell game is split the rescue program into two categories: a "good debt" management scheme and a "bad debt" management scheme.

With the exception of the $200 billion AAA facility, the Fed is in charge of the bad debt -- primarily the questionable mortgage-backed securities that touched off the problems to begin with. Because the Fed operates largely free of congressional and even presidential oversight, and because it controls the printing presses, it has the authority and ability to turn on a dime and make the serious decisions about how to reform or even (probably) liquidate Fannie Mae and Freddie Mac. If there is a financial loss, and there certainly will be, the Fed can handle it "off the books," so to speak. After all, it can print currency if need be. There would obviously be negative (inflationary) side effects to this, but the impact on the government's bottom line and the taxpayer's pocketbook would be less direct.

In turn, the good debt will go to the Treasury. Assuming Western civilization as we know it does not collapse, the government will be able to sell back the shares the Treasury purchased in the banks. In fact, profit levels for the government are actually written into the agreements with the banks. Not only will the government get the $350 billion allocated in TARP II back, it will make a healthy profit to boot -- if all goes according to plan. END QUOTE

The key is the last sentence and the last phrase - "if all goes according to plan." So far, I would say, not much has gone according to plan, assuming there ever was one. A year ago, most analysts believed that the subprime problems would be contained in the US mortgage/banking sectors and would not affect the overall investment markets. Now we know that these endemic problems have spread to all credit markets, virtually around the world.

Troubling Aspects Of The Fed's Latest Bailout

Reading through Stratfor's excellent analysis of the Fed's recent announcement, you may have picked up on some potentially troubling words. First, Stratfor talks about how the Fed can simply "print currency" necessary to pay for this bailout. Remember the controversy surrounding a 2002 speech by Ben Bernanke that alluded to printing money and distributing it from helicopters? Well, the printing press has evidently been placed on board the chopper at Gate One.

As a general rule, printing money is de-facto inflationary. History is filled with examples of countries that experienced hyper-inflation due to cranking up the printing presses. However, not as evident in Bernanke's "helicopter" speech was a footnote that addressed the fact that some inflation is actually a good thing, since it erodes the real value of outstanding government debt.

As I will discuss below, it can be argued that the Fed had to print money to fund bailouts or risk a severe economic depression. However, we need to be aware that the side effects from this "cure" may include increased inflation in the future. Even Fed Chairman Bernanke acknowledges the risk. In a speech last week here in Austin, he said that the Fed's balance sheet "…will eventually have to be brought back to a more sustainable level. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

Next, the Stratfor analysis discusses how the "sticky" parts of the process have now been handled. It is generally believed that Paulson backpedaled on buying up subprime debt from banks because the negotiations would have taken too much time to do the banks any good. Now, however, the Treasury and Fed will be able to negotiate directly on the price of any debt purchased, making these purchase transactions potentially much faster.

However, at what cost do we gain this additional transactional efficiency? We have an admittedly "unfettered" Fed dealing directly with the Treasury Dept. regarding the purchase and sale of hard-to-value debt. Does this bother anyone else out there, or have we come to the point where we have to believe the old line, "I'm from the government and I'm here to help you?"

Finally, Stratfor notes that the Fed's dealing with the bad subprime debt will produce almost certain losses, but that these can be handled "off the books," again by printing money if necessary. The resulting inflation would be a consequence, but would be a less direct way of spreading the cost around to the public. Note that Stratfor doesn't say that it won't impact taxpayers, just that inflation will be a less direct way of paying the piper than other possible methods.

Fighting "Debt-Deflation" At Any Cost

As noted in the Introduction above, discussions about the recent massive government bailouts, and especially the latest from the Fed, are going on everywhere in America. Surveys consistently show that most Americans do not agree with the huge government bailouts. Choruses such as "Just let 'em fail!" and "Where's my bailout?" are common.

What most people don't understand is that the government and the Fed will do anything they possibly can to prevent the economy from falling into a full-fledged debt deflation. Whether we agree or disagree with the bailouts, it is clear that our monetary authorities, namely Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke, believe that if large financial institutions are allowed to fail on a large scale, it would send the economy into a depression.

It appears quite clear to me that Paulson, Bernanke and company now believe that it was a serious bad decision to let Lehman Brothers go bankrupt. Now, they are doing everything in their power to make sure that no other large financial institution goes under, apparently no matter how much taxpayer money they have to commit, even to the point of firing up the Fed's printing presses as a last resort.

Deflation is typically defined as a persistent decline in the general prices of goods and services, or put differently, a negative inflation rate. A debt deflation is generally regarded as a persistent decline in the prices of goods and services, along with widespread loan defaults and bank failures. The last time the US experienced a serious debt deflation was in 1930-1934, the so-called Great Depression.

In the Great Depression, America saw Gross Domestic Product plunge by 10% annually on average, and the unemployment rate skyrocketed to 25%. Clearly, no one wants to see that happen again, especially Paulson and Bernanke, not to mention President Bush and President-elect Obama.

While most Americans seem to oppose the government bailouts, most of the financial/analytical/forecasting groups that I have followed for years believe that the bailouts were/are absolutely necessary. In fact, some of my most trusted sources believe that the government was slow to react to the credit crisis and has not done enough to make bailout money available.

Certainly, there is also agreement among my sources that the government has made some mistakes and did not have a clearly orchestrated plan for how and when the bailouts would happen or where the bailout money would be directed. Such evidence is clear in simply how many times the plans for the original $700 billion TARP bailout have changed.

At the end of the day the question is: What would have happened if the government and the Fed had done nothing in reaction to the credit crisis? Let's start with the easy ones. AIG would have clearly gone bankrupt sending shock waves through the banking and insurance markets worldwide. Merrill Lynch would have almost certainly gone under, perhaps taking Goldman Sachs, Morgan Stanley and several other large investment banks with it, along with Lehman Brothers.

It is impossible to know what would have happened if these giant financial players had been allowed to fail. Yet most Americans don't seem to care. Just let the chips fall. Would the failure of these instititions have triggered a financial collapse? I think the answer is yes.

But would these financial failures have sent the US economy into a serious depression if the government did nothing? There is no definitive answer. Clearly, Paulson and Bernanke feared that without the bailouts, we would have been looking at a global financial crisis and a worldwide depression of epic proportions.

Most Americans who oppose the bailouts have not, in my opinion, thought through the possible implications had the government done nothing to rescue the credit markets. While we can't be certain that a global depression would have unfolded had nothing been done, we also cannot know that it wouldn't. Think about that.

Finally, I would be remiss not to add the obvious: there is no guarantee that the bailouts will work. Only time will tell. But it is clear that the bailouts are not over. I expect the government to give bailouts to the automakers, one way or the other; if not this year, then President Obama will do it as soon as he gets in office. Likewise, Obama is planning another giant stimulus package - reportedly in the $700 billion range - for early next year.

The point is, the bailouts are not over. More are coming in the Obama administration, if needed. How much more we don't know. What we do know is that we will have a new president that comes from a political persuation that has no problem with the government owning parts of the private sector, which is a little scary now that the government already owns equity stakes in our nation's largest banks and AIG.

But that is another discussion for another time. Time to close and hit the "send" button. Hope this has been helpful.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Graphic NYT: Tracking The Bailout
http://www.nytimes.com/imagepages/2008/11/26/business/20081126_FED_graph1.html

Bernanke's Daring Experiment
http://www.realclearpolitics.com/articles/2008/12/bens_daring_experiment.html

Getting Out of the Credit Mess
http://online.wsj.com/article/SB122878188688689783.html

Instead of Spending, Cut Taxes
http://www.forbes.com/opinions/2008/12/08/friedman-cut-taxes-oped-cx_bw_rs_1209wesburystein.html

What To Do About The Global Financial Crisis

Gary D. Halbert — Tue, 14 Oct 2008 17:59:30 GMT

IN THIS ISSUE:

BaselineScenario.com Urges Larger Bailout
"The Next World War? It Could Be Financial."
My Initial Thoughts & Analysis On The Above
Huge Recapitalization Plan For Major Banks
Progress Report On The Larger Bailout Plan
Conclusions & What To Do Now

Introduction

The global market plunge over the last few weeks has been nothing less than stunning. The Dow Jones Industrial Average and the S&P 500 Index have plunged 36.2% and 38.8% respectively so far this year. From their all-time highs one year ago last Thursday, the Dow was down over 40% and the S&P 500 was down over 43% as of the close last Friday.

It is estimated that pension funds and retirement accounts have lost well over $2 trillion in value this year in the US alone, most of it as the markets have collapsed in the last month or so. Worldwide, stock market losses were estimated at $8 trillion by the end of the day on Friday. Fortunately, equity markets around the world rebounded strongly on Monday, with the Dow Jones soaring 936 points in the single largest up day in history.

Banks continue to fail, major corporations are teetering and trust among financial institutions has evaporated. This despite the fact that the government passed the massive $700+ billion bailout just over a week ago. Earlier this morning President Bush and Treasury Secretary Paulson announced a new plan that will have the government take direct equity stakes in major banks to the tune of up to $250 billion of the $700 billion rescue plan.

The latest plan to inject capital in the major US banks in return for equity stakes was part of an international plan whereby governments in Europe, Japan and elsewhere made similar equity infusions in their major banks. The question remains, however, whether this latest huge step will stem the crisis in the credit markets until the remainder of the $700 billion bailout plan can be implemented.

Some analysts believe that more government assistance will be needed. This week, we look at one such analysis from BaselineScenario.com that calls for significantly more bailout efforts by the government to free up the credit markets. While I am not ready to endorse such an expanded rescue plan, it is something we should at least be aware of, especially now that both John McCain and Barack Obama are calling on the government to buy up troubled mortgages en-masse and restructure them so that people can stay in their homes.

I know that many of my clients and readers don't agree with the government bailout plan and whatever else is to come. Normally, I wouldn't either. But these are not normal times, and this is the greatest global financial crisis since the Great Depression, potentially even greater. Thus, unprecedented actions need to happen, and they need to happen fast. We can sort out the details, such as increased regulation, who is to blame and who potentially gets punished, later.

BaselineScenario.com Urges Larger Bailout

BaselineScenario.com is a very useful website/webblog that was founded by Peter Boone, an Associate at the Centre for Economic Performance at the London School of Economics, Simon Johnson, former chief economist of the International Monetary Fund and current professor at the MIT Sloan School of Management, and James Kwak, a former McKinsey consultant and co-founder of Guidewire Software.

On their website, they have a lot of useful information, including an article entitled Financial Crisis For Beginners, which I am reprinting separately for clients and readers. This article explains in understandable language many of the intricacies of the credit markets and the financial crisis, along with some of the technical terms such as CDOs, CDSs and others. If you want to better understand the credit crisis, this is a good place to start. I will send a SPECIAL ISSUE of Forecasts & Trends E-Letter later today or tomorrow.

Last Sunday, the editors at BaselineScenario.com published the article reprinted below with their ideas for how to solve the global financial/credit crisis. Their urgings go well beyond the $700 billion government bailout and other actions the US has taken to date, and would involve a huge coordinated global response.

This article was picked up over the weekend by the Washington Post, Forbes and RealClearPolitics.com, so it is getting some serious attention, and I expect we will be hearing more about it just ahead. Just to be clear, I am not endorsing this plan, at least not yet. I present it only as something that serious investors should at least be thinking about as a possibility in a worst-case scenario.

Finally, since the BaselineScanario.com website is also a blog, it is updated regularly with new information. Thus, I would suggest that you visit the website at least occasionally to keep up with their latest thinking on the global credit crisis, and that of others who post there. With that introduction, here is the article we will focus on this week. Read it carefully.

Note that some of the recommendations in the report below were taken on Monday and Tuesday with the international plan for governments to take equity stakes in their major banks.

QUOTE:
The Next World War? It Could Be Financial.

By Peter Boone and Simon Johnson
Sunday, October 12, 2008

The global financial outlook grows more dire by the day: The United States has been forced to shore up Wall Street, and European governments are bailing out numerous commercial banks. Even more alarmingly, the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare.

The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.

But there's a broader concern. With European governments turning down his appeals for assistance, Iceland's prime minister, Geir Haarde, warned last week that it was now "every country for itself." This smacks of the financial autarchy that characterized defaulters in the financial crisis in Asia in the late 1990s. Similarly, when Argentina defaulted on its debt in 2001-‘02, politicians there faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia after the crises of 1998, local enterprises and banks took the opportunity of the confusion to grab property, then found ways to ensure that courts sided with them.

This is a natural outcome of chaotic times. Iceland's promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. British Prime Minister Gordon Brown's decision last week to sue Iceland over this issue may escalate the crisis. The use of counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom also has a potentially dramatic symbolic effect.

Most of the time, financial war of this kind is painful and costly. It will lead to decades of lower international capital flows and could have other far-reaching effects on politics and global peace. Unless the leading industrial countries take concerted action, there's a very real danger that we will all suffer more.

In addition, we're now likely to see substantially more defaults and credit panics in smaller countries and emerging markets. After Iceland's fall, every creditor to other nations with large deficits and substantial external debt must be looking for ways to reduce its exposure. The obvious risks include much of Eastern Europe, Turkey and parts of Latin America. Russia's difficulties show that seemingly solvent countries can be high-risk: While the Russian central bank has gold and foreign exchange reserves of $556 billion, the private sector has recently built up an estimated $450 billion of debt. Creditors don't want to roll over the debt, so the government is using its reserves to do it. It has already ordered $200 billion channeled through state banks to companies repaying debt. If oil prices fall [and they are], a seemingly highly solvent country [Russia] could quickly look nearly insolvent. Some other rising stars, such as Brazil and even India, may have similar problems.

Added to this are worrying signs that the credibility of U.S. authorities is on the decline. Despite Washington's moves to stabilize the financial system, credit and equity markets continue to drop. This pattern is reminiscent of the 1997-98 Asian crisis, when successive International Monetary Fund programs provided briefer and briefer respites from market routs in emerging economies.

There is now a risk that continued corporate and bank defaults within nations, matched by large shifts in capital flows across nations, will lead to a chaotic series of national and local defaults. If governments don't respond with sensible, coordinated policies, there's a risk of financial war. [Emphasis included, GDH.]

Here are six steps toward avoiding a situation of "each nation for itself":

1. The world's leading financial powers -- at a minimum, the United States, the United Kingdom, France and Germany -- should jointly announce national plans to require recapitalization of banks (i.e., restructuring their debt and equity mixture) so that they have sufficient capital to weather a major global recession. How this is done can be determined internally by each nation, but this should be a common goal, so that citizens and companies can again trust their banks.

2. The countries should announce a temporary blanket guarantee on all existing bank deposits and debts. This will, in effect, promise creditors that they can safely expect the institutions to function until the recapitalization takes place, and it will help prevent the large flows of funds that could occur as some banks or countries conduct recapitalizations earlier than others. This guarantee should only be temporary (say, for six months).

3. The monetary authorities of these countries need to lower interest rates dramatically. Europe, Canada and the United States recently announced a coordinated 0.5 percent reduction in rates. This is a good start, but only a start. More will be needed, and it won't stop the credit crunch within or across countries. The events of the last nine months have set us on course for a global recession in which commodity prices will continue to fall and demand will remain weak. Inflation will be low, and deflation (falling prices) is a risk. More interest-rate cuts will be needed.

4. The monetary authorities also need to remain committed to pumping liquidity into the financial system as long as credit markets and interbank lending remain weak. This should be promised for at least one year.

5. All industrialized countries and most leading emerging markets should commit to a sizable fiscal expansion [increased government spending] (at least 1 percent of GDP), structured to work within the local political environment, to offset the coming large decline in global demand.

6. Many families worldwide are going to have negative equity (i.e., mortgages larger than the value of their homes) due to declining home prices. There are going to be large-scale recriminations against lenders and politicians. The most affected nations, including the United States, the United Kingdom, Ireland and Spain, urgently need to develop programs to provide relief for homeowners, both to offset real hardship and to prevent a vicious downward cycle in home prices.

It's important to prepare properly: Partial and piecemeal actions will no longer work. Actions by one country alone, and the current pattern of small steps, are no longer credible enough to change the tide: Markets need to be jolted out of their panic. It's worth bringing a sufficient mass of economic power to bear in a comprehensive program to unfreeze the markets. If the major powers of Europe and the United States were to implement such a program, we can be sure that other countries would follow suit, dramatically relieving fears of bank failure in these countries.

We also need to let [equity and real estate] prices move to a level supported by the market, which unfortunately means that wealth is likely to decline even further. The events of the last six months will almost surely cause a recession, and large downward revisions in earnings estimates are a near certainty. The crisis has undoubtedly changed investors' perception of the risks of investing in equities and real estate. As we saw after the Asian crises, this can mean that stocks, bonds and other assets become very cheap, and it takes a long time for values to recover. Fiscal expansion and help to homeowners will reduce the pain from these losses, but it's important to be clear that the success of the program should not be measured by rising asset prices.

Finally, it's important for everyone to recognize that we are well past the days where even dramatic steps could have stopped the panic and prevented a major recession. A successful program will not prevent recession, and we will still see many personal, corporate and perhaps even national bankruptcies. Once the genie of panic and uncertainty is unleashed, it takes years to put it back in the bottle. What we need to do is to prevent a chaotic collapse arising from incomplete policies, lack of credibility and international financial warfare. END QUOTE

My Initial Thoughts & Analysis On The Above

The suggestions from the gentlemen of BaselineScenario.com are very bold and politically challenging on various levels. At first blush, their sweeping plan of global government interventions in the credit markets, with potentially massive capital injections for banks and across-the-board guarantees of depository accounts in full, may sound overblown to many readers. However, as noted above, on Monday and earlier today, the US and governments in Europe, Japan and elsewhere announced plans to inject hundreds of billions of capital into major banks in return for equity stakes in their stock.

Why would they do this? The credit markets remain frozen, many major corporations are teetering on the brink of failure, and we may have been facing another week or two of stock market collapse, with the commensurate plunge in pension and retirement savings. The major governments felt they had no choice but to directly recapitalize the major banks in an effort to unfreeze the credit markets and avoid, hopefully, a continued stock market collapse.

Many Americans still remain dead-set against the Treasury's $700 billion bailout plan, and presumably the latest announcement that the US government will buy shares of banks. Likewise, I would assume there will also be significant resistance to the even larger bailout plan as suggested above by the gentlemen at BaselineScenario.com. While I'm not ready to endorse their plan, I would also contend that public support for such a broader rescue plan could swing quickly in favor – if the stock market collapse continues for another week or two.

Finally, there is a growing consensus that the US government's piecemeal, one-at-a-time, financial crisis rescue efforts – Bear Stearns, Merrill Lynch, AIG, et al – and of late the $700 billion bailout bill, is simply not enough. So, it will be interesting to see if the latest international plan to recapitalize the major banks will work and stem the carnage in the stock markets. If the markets continue to collapse just ahead, expect every possible rescue option to be put on the table.

Huge Recapitalization Plan For Major Banks

This morning, President Bush announced a $250 billion plan by the government to directly buy shares in the nation's leading banks, saying the drastic steps were "not intended to take over the free market but to preserve it." Treasury Secretary Paulson specified that the $250 billion will come from the $700 billion rescue package approved by Congress just over a week ago.

The Treasury is set to buy equity stakes in Bank of America\Merrill Lynch, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of New York\Mellon Corp. and State Street Bank. Bloomberg reports the Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each.

Some of the big banks had to be pressured to participate in the program by Treasury Secretary Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first, as a way of removing any stigma that might be associated with banks getting bailouts directly from the government in return for an equity stake in their stock.

According to Paulson, the initial injection into the largest banks will be on the order of $125 billion, with the remaining $125 billion to be used as needed for other smaller banks and financial institutions.

Paulson also announced that the Treasury Department will insure new bank debts in an effort to get banks lending to each other once again. Insuring loans among the banks is a huge step to take. This comes after the announcement late last week that the Fed will backstop the commercial paper market as needed. If these bold actions don't free up the commercial credit markets, I don't know what will.

Paulson also announced this morning that FDIC coverage for non-interest-bearing commercial bank accounts will be unlimited. This action is primarily targeted for businesses that must hold more than $250,000 in banks to meet payrolls and other obligations.

Progress Report On The Larger Bailout Plan

President Bush and Treasury Secretary Paulson said this morning that the latest $250 billion bailout package for banks would come out of the $700 billion rescue package approved by Congress on October 3. If so, that would leave only $450 billion in the rescue kitty.

You may recall from last week's E-Letter that the final rescue package passed by the Congress stipulated that the Emergency Act will make only $250 billion available in the first tranche, with the next $100 billion coming upon the President's request, and the final $350 billion subject to a joint resolution of Congress. Since President Bush has committed the first $250 billion to the banks, it will be interesting to see how they get at the remaining $450 billion in the weeks ahead.

Many investors are rightfully concerned that the massive Treasury rescue plan will not get up to speed in time to begin settling down the markets. Some have suggested that the Treasury won't begin buying up troubled assets until after the new administration takes office on January 20. But apparently, the Treasury is steaming ahead and may be making purchases fairly soon.

The following is from TheStreet.com this morning.

QUOTE:
On Monday, the official in charge of the federal government's $700 billion effort to weed out troubled assets clogging credit markets and the U.S. banking system said the Treasury is working quickly to kick-start the program without sacrificing quality. Neel Kashkari, the Treasury's interim assistant secretary for financial stability, said the Troubled Asset Relief Program [TARP] has begun hiring key staff and is still seeking accounting firms and companies to review proposals and manage assets.

The Treasury has selected the law firm Simpson Thatcher to advise on structuring a program to acquire equity stakes in banks, as well as the consultancy Ennis Knupp to hire asset managers.

"e have accomplished a great deal in just 10 days, but our work is only beginning," he said in a speech at the Institute of International Bankers. "A program as large and complex as this would normally take months or even years to establish. We don't have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution."

Kashkari also said TARP was taking "aggressive steps" to combat potential conflicts of interest, since companies and individuals who can best help the Treasury are also those who will most need its help. "[F]irms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP," Kashkari noted.

Firms will be required to submit an outline of any potential conflicts of interest, and the Treasury will then perform its own independent investigation before hiring them. Treasury will only hire firms when "confident in our and their ability to manage any conflicts," Kashkari said…

Kashkari said there are also provisions in place to protect taxpayers that are footing the TARP bill, including a goal to preserve homeownership, restrictions on executive compensation and strict compliance rules.

Kashkari outlined five key positions the Treasury has already filled, including chief financial officer, chief risk officer, chief of homeownership preservation, chief compliance officer and interim chief investment officer. Those officials have decades of experience in various regulatory arms domestically and abroad, including the Treasury, Federal Deposit Insurance Corp., Federal Reserve, Commerce Department, International Monetary Fund and World Bank, among others.... END QUOTE

So it does appear that the Treasury is moving full-speed ahead to get the TARP up and running as soon as possible.

Conclusions & What To Do Now

Many Americans (and most conservatives) would be outraged if the US government were to enact a bailout on the order of what is suggested above by the gentlemen at BaselineScenario.com. But as discussed above, this morning's announcement of a $250 injection of capital (from the TARP) into banks in return for equity stakes is a big step in that direction.

It is too soon to gauge the public's response to today's big announcement, but I expect it to be very negative on balance. What I do believe, however, is that if the carnage in the stock markets continues for another week or two, most Americans might well change their minds and welcome such an expanded rescue effort aimed at the banks – if it stabilizes the markets.

Both Obama and McCain have come out in favor of the government buying up troubled home mortgages and restructuring them to allow people to stay in their homes. Thus, it would appear that such a plan is going to happen one way or the other, assuming the government has the money to do so.

Is that a good thing or a bad thing, given where we are in this global financial crisis? Think of the message it will send to hard working Americans who have sacrificed and kept their home mortgage payments current. I could see a great deal of animosity in neighborhoods where people have sacrificed to keep their payments current, while others get bailed out by the government.

However, such a rescue plan may be the only way to stop the downtrend in home prices that is clearly fueling the credit crisis and the economic downturn we are headed into.

Finally, everywhere I go people are asking me about what to do with their investments, including even people I don't know. The question is, Should I sell now and take my losses? Obviously, I don't know if the market meltdown is over. No one else does either, whether they admit it or not.

As noted earlier, we saw a huge rebound in the markets on Monday, and as I am about to hit the "send" button (noon today), the markets are holding the gains from yesterday. But this is no assurance that we've seen the bottom. A great deal depends on how the US government and other governments around the world react in the weeks ahead.

What I can tell you is that the stock market decline over the last few months has eclipsed the decline we saw in the 2000-2002 recession bear market and equaled the crash in October 1987. What I can also tell you is that the people who got hurt the worst in those bear markets were those that panicked and sold out near the bottom. Those who held on were eventually rewarded.

There is no doubt that the current global financial crisis is much worse than the recession and bear market of 2000-2002, and worse than the market meltdown in October 1987. The ultimate question is whether we believe the US and the stock markets will survive this credit crisis. I believe the answer is yes.

While most of my money is invested in actively managed strategies and alternative investments (futures funds, etc) that have lost a lot less than the market (and have actually made money in this decline in a few cases), I do have some money in passive buy-and-hold investments. I am not planning to sell these investments.

As always, past performance is not necessarily indicative of future results.

Wishing you better times,

Gary D. Halbert

SPECIAL ARTICLES

Stocks experience worst week ever.
http://news.yahoo.com/s/ap/20081010/ap_on_bi_st_ma_re/wall_street

U.S. stock rise as rate cuts spark rebound
http://news.yahoo.com/s/nm/20081008/bs_nm/us_markets_global

A Capitalist Manifesto
http://online.wsj.com/article/SB122385722252027327.html

Bill Kristol tells McCain to fire his campaign staff
http://www.nytimes.com/2008/10/13/opinion/13kristol.html?_r=1&ref=opinion&oref=slogin

Mortgage Bailout Passes, Finally - Now What?

Gary D. Halbert — Tue, 07 Oct 2008 21:04:06 GMT

IN THIS ISSUE:

An Inside Look At The Mortgage Bailout Bill

Equity Ownership & Limits On Executive Pay

Mortgage Assistance & The Bankruptcy Code

Expanded FDIC Limits On Bank Accounts

Was The Bailout The Right Thing To Do?

The Senate's $150 Billion In Extra Bailout Pork

John McCain Blew An Election Saving Opportunity

Electoral Map Now Leaning Heavily To Obama

Scotia Partners - Making Money In The Bear Market

Introduction

The massive $700+ billion bailout package finally passed Congress and was signed into law by President Bush late last Friday, to the dismay of millions of Americans. The House rejected the huge bailout bill on Monday, and the Dow Jones promptly plunged a record 777 points on that same day. Fearing the worst, the Senate amended the bailout with another $150 billion in pork and passed it overwhelmingly on Wednesday, with both Senators Obama and McCain voting in favor. On Friday, the House passed the bill by a comfortable margin.

This emergency bailout plan supposedly had only one goal: to allow the government to hoover up hundreds of billions in distressed mortgage-related securities from banks and financial firms to shore up our faltering banking and credit markets. No one knows if this rescue plan will work, or if the government will need even more money later. We'll discuss all of this as we go along.

The Senate passage of the $700 billion bailout bill on Wednesday included, drum roll please, yet another $150 billion in mostly pork barrel spending, bringing the final cost to $850+ billion. Why was this extra spending necessary? I would argue that the extra $150 billion in pork was added to buy more "yes" votes for the bailout plan in the Senate and sweeten the odds for passage in the second vote in the House. Wait until you read what they added below (hint: they think we are all idiots!).

I did not think that Secretary Paulson's initial $700 billion bailout plan was the best approach, with no accountability, no transparency and no oversight. That was never going to work or be passed. Actually, I would have preferred one of the alternative rescue plans that would have involved government loans and insurance for ailing banks, rather than the Treasury buying up distressed assets directly. But John McCain never got behind such alternative plans, so they fizzled, and now his presidential campaign is in real trouble.

There is so much to talk about this week I'm not sure where to start, but I think the best place to begin is with a summary of the latest bailout bill, now that it has become the law of the land. We will also take a look at the extra $150 billion in pork that the Senate added to the bill. Next, we'll revisit John McCain's latest moves and the Electoral Map, which shows him falling fast in the polls.

Finally, we will revisit Scotia Partners, a very successful money manager that I have written about several times this year - and for good reason. As you can read at the end, Scotia is one of the few money managers that has done well in this bear market in stocks. As always, past performance is no guarantee of future results.

An Inside Look At The Mortgage Bailout Bill

Since my company is intimately involved in the securities business, and since government regulation of the securities business gets more complex every year, we engage top-notch law firms to help us sort through the regulatory maze. One of our main legal firms is Sidley Austin LLP, one of the leading law firms in the industry.

Sidley Austin released a detailed summary of the latest government bailout bill, and its possible ramifications, on Friday of last week. We appreciate these periodic reviews from our attorneys, and the ability to share them with our clients and readers. What follows is my abbreviated summary of Sidley's latest analysis of the final bailout bill.

On October 3, the House of Representatives passed the "Emergency Economic Stabilization Act of 2008,"(the "Act") which authorized up to $700 billion in new government spending (actually more than that) to bail out banks and financial institutions that hold troubled mortgage and related debt. The Act will create a "Troubled Asset Relief Program" ("TARP") which will be overseen by the Treasury and will be the vehicle in which distressed assets are purchased from banks and other sellers of mortgage-related securities.

The Act authorizes up to $700 billion to the Treasury Secretary to enable TARP to purchase and fund commitments to purchase "troubled assets" from "financial institutions." Financial institutions, in this case, are defined as those which are established and regulated under federal or state law, or have significant operations in the US (in the case of foreign entities). The Act suggests that financial institutions would include, but would not be limited to: banks, savings and loans, credit unions, broker-dealers and insurance companies. The 'but not limited to' language gives the Treasury significant flexibility in determining which entities may participate in the TARP.

"Troubled assets" initially include residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages originating on or before March 14, 2008. Yet the language also authorizes the Treasury Secretary, in consultation with the Fed Chairman, to purchase any other financial instruments they deem necessary to promote financial market stability, but such non-mortgage related asset purchases must be reported to the Congress. Again, the scope of potential asset purchases is very large.

The Act provides up to $700 billion to the Treasury, but unlike the original proposal, the Act will make only $250 billion available in the first tranche, with the next $100 billion coming upon the President's request, and the final $350 billion subject to a joint resolution of Congress.

The Act states that the Treasury can establish programs, vehicles or entities that are authorized to purchase troubled assets, manage the assets and dispose of them over time. I predict this will result in dozens of newly-created government agencies and sub-agencies and many new federal employees (presumably dominated by out-of-work ex-bankers) under the Treasury.

The Treasury Secretary is directed to minimize taxpayer expense by encouraging the private sector to participate in purchases of troubled assets, and to invest in financial institutions, thereby providing opportunities for private funds looking to leverage the TARP as a partner rather than a competitor. Here, too, the Secretary has broad flexibility in such partnership arrangements. However, the Secretary is required under the Act to take steps to avoid the "unjust enrichment" of any financial institutions that participate in the TARP. This will be tricky to enforce.

Interestingly, the Act stipulates that the Treasury "must make available to the public in electronic form the description, amount and pricing of assets it acquires pursuant to the Act within 48 hours of purchase, trade or other disposition." This language was included to require "transparency," meaning that the public will know what the Treasury is paying for the assets it purchases. This requirement is intended to make clear that there is a market for these distressed mortgage-related assets and what the government is paying for them.

I would point out that while some Americans may appreciate knowing what the Treasury is paying for these distressed assets, and while this knowledge may help in freeing up liquidity in these markets, there is little doubt that potential buyers of these same securities down the road will take what the government paid for then into account when submitting offers to buy these same securities in the future.

Equity Ownership & Limits On Executive Pay

Then there is the matter of the Treasury taking equity positions in those financial institutions that sell assets to the TARP. The Act requires that the Treasury receive either warrants with the right to receive non-voting common or preferred shares from participating public companies, or a senior debt instrument in cases where the selling company is not listed on a national securities exchange.

As I read it, this process will be very complicated since the Act envisions that the Treasury will get a large enough position in potential ownership (warrants) or debt to cover any losses it might incur when it eventually sells the assets down the road. If so, this suggests that the Treasury could require a large stake in the institutions wishing to unload toxic securities, which could discourage participation.

This, of course, also brings up the question we have had all along: How does the Treasury value many of these very complex and esoteric mortgage-related instruments? Many of these credit swaps, CDOs and derivatives are extremely hard to value, which is a big reason why we are now in a credit crisis.

Next is the matter of limiting executive compensation for those companies that wish to participate in the program. In addition to requiring an equity position in the companies wishing to sell assets to the TARP, the Act also requires the Treasury to limit the compensation paid to top executives of the participating companies, especially in terms of undue bonuses and so-called "golden parachutes." Specifically, the Act changes the tax code (Section 162m) such that the corporate salary tax deduction is reduced from the current $1 million to only $500,000.

These compensation changes include the top five executives in each participating company. This effectively will put a ceiling of $500,000 on the salaries of the top five execs of the participating companies, plus whatever bonuses, if any, that are allowed by the Treasury Secretary. Again, it remains to be seen just how many companies will take the equity hit and the executive compensation hit required to participate in the bailout program.

Next, we turn to the insurance provisions in the Act. In a concession to Republican opponents of the original Treasury plan, the Secretary is required to create a program for the guarantee of troubled assets, as an alternative to straight asset purchases. Under this plan, the Treasury could agree to insure troubled assets on the books of participating companies. Upon request from a financial institution, the Secretary may guarantee, on terms established by the Secretary, the timely payment of principal and interest on a troubled asset. Frankly, I don't understand how this insurance mechanism will work, but it is not clear that the Treasury will even make use of it.

Mortgage Assistance & The Bankruptcy Code

One of the most troubling aspects to the proposed bailout (at least for conservatives) was the suggestion that the Bankruptcy Code should be changed so as to allow bankruptcy judges to unilaterally modify terms of mortgage loans. The Act does not contain any such amendments to the Bankruptcy Code that would permit so-called "cram downs" by bankruptcy judges. However, the Act does contain provisions designed to insure that the government uses its vast powers as the owner of mortgages and mortgage-backed securities to facilitate loan modifications (such as reduced interest rates, principal amounts, monthly payments and/or extended time of repayment) in order to prevent avoidable foreclosures.

In fact, the Act requires the Treasury to implement a plan that seeks to maximize assistance to homeowners and to encourage servicers of underlying mortgages to take advantage of programs to minimize foreclosures, including the HOPE for Homeowners Program under Section 257 of the National Housing Act. Also, the Treasury is authorized to use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

Expanded FDIC Limits On Bank Accounts

In an effort to shore up confidence among depositors, Congress added a provision to the bailout bill to increase FDIC insurance from $100,000 per account to $250,000 per account beginning on October 3 and until December 31, 2009. While the Act provides this increased limit temporarily, the FDIC Chairman, Sheila Bair, said that she expects Congress to make the increase permanent later this year. If the credit crisis continues, I would expect Congress to insist that the government guarantee all amounts in bank accounts and credit unions, as it has already done for money market mutual funds.

Previously, to ensure that more than $100,000 was covered by FDIC insurance, many consumers had spread cash among multiple banks, especially in recent weeks. People had also been setting up separate accounts in each spouse's name at the same bank, which provided $100,000 for each of the two separate accounts, plus a joint account (husband and wife) which doubled the coverage to $200,000 - or $400,000 total for all three accounts. Under the financial rescue plan which raises the coverage to $250,000, this combination of a joint account and a separate account in each spouse's name will result in $1 million total coverage.

Was The Bailout The Right Thing To Do?

As noted earlier, I would have preferred one of the alternative rescue plans that would have involved government loans and insurance for ailing banks, rather than the Treasury buying up distressed assets directly. But what was abundantly clear was the fact that something had to be done. The financial markets around the world were seizing up, and we were facing an international credit crisis, which may yet be far from over.

So while the $700+ billion bailout, with the government directly buying up hundreds of billions in distressed mortgage-related securities, was not my first choice, the government had to take action in my opinion. Millions of Americans were outraged over the bailout plan and many still are. Yet the market plunge of 777 points in the Dow on Monday of last week, after the House failed to pass the bailout, certainly sent a signal to many Americans that the situation was growing dire.

While the summary of the bailout bill above should be helpful, there is still much that we don't know. We still don't know, for example, how the Treasury will price the assets it will be buying, especially in light of the new wrinkles such as the equity stake they will demand from the participating companies. Will the government pay too much, to the expense of taxpayers? Will they pay too little, thus causing more waves of failures? We don't know.

Likewise, we don't know if the $700 billion will be nearly enough. Estimates vary widely, but it is generally agreed that there is at least $2 trillion in troubled mortgage-related paper out there, just in the US. Fortunately, it is also generally agreed that not all of that $2 trillion in subprime and other mortgage-related paper is worthless. That remains to be seen, of course.

The next question is, when will we know if the bailout is working? A lot may depend on when it begins. Some suggest that it will be several months before the Treasury gets the bailout plan up and running. There is a feeling that it may have to wait until after the new administration gets into power on January 20. Personally, I don't think we can wait that long.

Clearly, the markets will let us know, loud and clear, whether the new bailout plan is an acceptable option, and just how soon it needs to get up and running. I for one do not believe the bailout plan passed last Friday is a panacea, and I certainly expect the markets to continue to be a wild roller coaster just ahead. Yesterday (Monday) was a good example when the Dow Jones plunged 800 points by mid-day before reversing to close down 363, or 3.5%, on the day.

The Senate's $150 Billion In Extra Bailout Pork

Politicians on both sides of the aisle in Washington have one universal solution for solving serious issues: When in doubt, just throw more taxpayer money at the problem. This line of thinking certainly came into play when the House failed to pass the massive bailout plan on Monday of last week. The Senate wasted no time in adding on another $150 billion to the already massive $700 billion bailout plan.

There was enormous pressure to pass some kind of massive bailout plan, especially with Bush, Bernanke and Paulson warning of financial Armageddon. So what was the Senate's first thought as to what it should do? Let's add even more money to the tab so as to make it easier for House members to change their votes. This is sick! Here is a summary of the last minute add-ons:

The Senate extended provisions to exempt many Americans from the Alternative Minimum Tax, which was never intended to affect millions of middle class Americans. Never mind that Congress does not have the guts to address this egregious tax measure directly and eliminate it.
Another provision added in the Senate would require most employers and health insurers to put mental-health problems on par with physical illnesses, including coverage for hospital stays and doctor visits as well as co-payments and deductibles.
The Senate bill also added in several more key elements designed to attract House Republican votes - particularly popular tax measures that have garnered bipartisan support. It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels. It would also continue a host of other expiring tax breaks, among them the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns. And there's more.
$397 million for the "domestic production activities deduction" for the motion picture industry, and another $81 million to extend and modify treatment of "certain film and television productions."
$179 million for tax incentives for "investment in the District of Columbia." $100 million in tax breaks for "certain motorsports racing track facilities." $61 million in added credits for "steel industry fuel."
$49 million in tax breaks for people (mostly in Alaska) receiving compensation from the litigation over the Exxon Valdez oil spill. $49 million for a charitable deduction for corporations that donate books to libraries. $33 million for an economic development credit in American Samoa. $2 million in excise tax exemption on "certain wooden arrows designed for use by children."

These are just some examples of the many spending measures that were added to the $700 billion bailout plan in the Senate. We can argue about the importance of these expensive add-ons, but they never should have been a part of a financial system rescue plan in my opinion. In total, these so-called "sweeteners" (formerly known as 'earmarks') were included in the Senate version at a cost to taxpayers of at least $150 billion, bringing the total tab for the emergency bailout bill to over $850 billion.

What is clear is that these huge add-ons in the Senate were designed to give more House members "cover" so that they could switch their votes in favor of the bailout package. Never mind the cost to taxpayers. And it worked. The bailout bill passed in the House rather easily last Friday. Such is the twisted political world we live in.

John McCain Blew An Election Saving Opportunity

I really hesitate to throw in this last point, but I shall. In my view, Senator McCain blew the last opportunity he had to save his presidential campaign with his vote in favor of the massive government bailout plan. Senator McCain has accurately portrayed himself as a political 'maverick' that has frequently gone against the Republican Party on numerous contentious issues over the years. That is why he is not so popular among the GOP faithful.

With public sentiment so overwhelmingly negative over this massive bailout bill, it would have been easy for either McCain or Obama to come out against it. But Obama quickly got behind the bailout. If McCain had come out against it, and in favor of one of the alternative plans (or better yet, offered a plan of his own), he could have generated a potentially large shift in public opinion in his favor. But he didn't for reasons unknown.

As the maverick on curtailing wasteful spending, McCain could have easily justified his vote against the bill, especially with the extra $150 billion in largely pork-barrel spending put in by the Senate, in which he is a member, but he didn't. Like Obama, McCain quickly fell into line.

For the first time during this presidential campaign, Senator McCain pulled ahead of Obama shortly after the successful Republican National Convention. But then the mortgage-related financial crisis began to unfold. The media, not surprisingly, laid the blame on the Bush Administration (what else is new), and McCain's lead in the presidential polls evaporated.

Over the last 2-3 weeks as the financial crisis rose to the front pages, McCain's showing in the polls has worsened by the day. The presidential election is far from over, but as this is written, Senator McCain is behind by 5-6-7 points or more in the national polls. He will need a major gaffe by Obama, or some other serious surprise, to have a chance of winning on November 4.

Maybe Senator McCain felt he had no choice but to vote for the massive government bailout plan. I don't know. But I do believe his failure to get behind one of the alternative plans, or suggest a new one of his own, has sunk his presidential chances.

Along that line, let's take a look at the latest Electoral Map where Barack Obama has taken a commanding lead.

Electoral Map Now Leaning Heavily To Obama

The general election is less than a month away and Barack Obama is dominating John McCain in both national and state polls. Not a single national poll has McCain in the lead; in fact, Obama leads by an average of nearly six points which is beyond the margin of error.

The states solidly in the McCain column now total only 163 electoral votes. The states solidly in the Obama column total 277 electoral votes. He only needs 270 to win. If the election were held today, Obama would win even if McCain carried all the toss-up states.

I hate to be the bearer of bad news but the situation is what it is. So is McCain totally sunk? Well, never say never, but his path to 270 looks very bleak. McCain would have to pull the mother of all hat tricks and carry all seven toss-up states. (They are: IN, OH, NC, FL, CO, NV and MO.) And, he would also have to recapture VA which is now clearly in the Obama column.

It should be noted that North Carolina, Indiana and Virginia have not voted for a Democrat for president in decades. NC last voted for a Democrat - Jimmy Cater - in 1976. And IN and VA have not voted for a Democrat president since Lyndon Johnson in 1964. This is a dire situation for John McCain.

The most obvious problem McCain faces is the financial melt-down. (No it isn't Sarah Palin, though she has not helped his cause with many voters.) The financial crisis could not have come at a worse time for him, or a better time for Obama. No other issue will have much traction between now and the election; it will be all financial crisis/economy all the time. This takes McCain's biggest strength - security/foreign policy - off the table. The party in power gets the blame and takes the credit for the economy, and now there is nothing but blame to be had.

The presidential lines have been clearly re-drawn - it's no longer close. This election is now Obama's to lose. If the Electoral trends continue as they have in the last few weeks, Obama could win in a landslide. If McCain manages to win, I am sad to say, he will be the political comeback artist of the century!

Scotia Partners - Making Money In The Bear Market

Since early June, I have written about the Scotia Partners investment programs several times in this E-Letter. Many of you have responded and requested information on Scotia's Growth S&P Plus and S&P Moderate Growth investment programs, and I'm pleased to say that a number of my readers have become clients.

Many others, however, have been calling periodically to see how the Scotia mutual fund programs fared during the market's wild (mostly down) gyrations in September. I am all too happy to update everyone!

During the month of September, the Scotia S&P Plus program was up a whopping 22.67% net of fees, and the less aggressive S&P Moderate Growth program delivered a net gain of 26.37%. As you can see, both of these programs compared very favorably to the S&P 500 Index's loss of over 9% during September. These are real numbers in real accounts in real-time trading.

From June 1st through September 30th, Scotia's Growth S&P Plus program has produced a gain of 60.37%, with the Moderate program close behind at +41.25%, both net of fees. Thus, the E-Letter readers who got on board early on have had quite a good ride, depending upon when their money was actually invested. The monthly details for both programs for June through September are as follows:

Program Name	June Return	July Return	August Return	September Return	YTD Return (as of 9/30)
S&P Plus	+ 16.21%	+ 8.66%	+ 3.53%	+ 22.67%	+ 112.59%
S&P Moderate	+ 6.94%	+ 5.92%	- 1.32%	+ 26.37%	+ 62.85%

Past performance is not necessarily indicative of future results.

Remember, the underlying investment strategy employed by Scotia's founder, Cliff Montgomery, has have thrived during the market's greatly increased volatility since the middle of 2007. Thus, it was no surprise to us that September's spike in volatility was actually good for Scotia's performance.

Hopefully, the financial markets will calm down soon, but the stock markets have continued their wild ride so far in October. Frankly, it is impossible to know how long this high level of volatility will continue. If you agree, then the S&P Plus and/or S&P Moderate program may be a good place for a partial allocation within your overall portfolio.

Many of you read about Scotia early on but wanted to wait and see how they would perform. Yet if you had invested on July 1, you would have enjoyed profits of 38.0% in the S&P Plus program, and over 32% in the S&P Moderate program in July, August and September alone. Again, past performance is not a guarantee of future results.

If you would like to see if one of the Scotia programs might be suitable for your portfolio, please call one of our Investment Consultants at 800-348-3601. Or, you can request additional information by sending an e-mail to info@halbertwealth.com, or clicking on our Scotia online request form link.

Also, be sure to read all of the Important Notes and disclosures following my signature below.

Wishing you profits,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL) and Purcell Advisory Services (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this letter is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts. For more information on HWM, PAS or SPL please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

The Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these Indexes may differ materially (more or less) from that of the Advisor. The performance of these Indexes is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus or the Scotia Partners S&P Moderate Growth trading programs as comparable to the stocks that comprise these Indexes. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus and Scotia Partners S&P Moderate Growth, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in these programs. The signals are generated by the use of a proprietary model developed by Scotia Partners. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the Scotia Partners trading programs' performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; (iv) Purcell Advisory Services will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees (which are deducted in full quarterly, and not accrued month-by-month), custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Might Uncle Sam Make Money On The Bailout?

Gary D. Halbert — Tue, 30 Sep 2008 19:36:00 GMT

IN THIS ISSUE:

The Latest $700 Billion Bailout Package
What Could Go Wrong? Potentially A Lot
What Could Go Right, If We're Lucky?
What Would Happen To The Profits, If Any?
A "Main Street" Backlash To Come?

Introduction

Like it or not, members of the House and Senate, with the approval of President Bush and both Senators McCain and Obama, reached a final agreement on the massive $700 billion mortgage bailout package over the weekend, with the much-awaited announcement on Sunday afternoon. Yet on Monday, the bailout bill failed to pass in the House of Representatives. As this is written, is not certain what will happen next. The next action probably doesn't happen until Thursday.

Assuming the latest rescue package (or some version of it) passes both houses of Congress, which is a real stretch at this point, it will give President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke most of what they asked for. I'll discuss the details below.

Most Americans do NOT like the latest huge government bailout of Wall Street banks, brokers, etc. Some polls late last week and over the weekend suggested that 65-75% of Americans opposed the bailout. I can understand why, especially with millions of American families struggling to make their monthly mortgage payments.

One reason for this anger over the bailout is the widespread perception that the $700 billion (or whatever the number turns out to be) is money down a rat hole that the government and taxpayers will never see again. While there are numerous risks in the bailout, the odds seem low that the government will lose all or even most of the bailout money. I will discuss some of the main risks to the bailout as we go along.

Interestingly, there is a growing number of intelligent folks in the financial world that believe the government could actually make a lot of money on this huge bailout effort, especially if they play their cards correctly. As I will discuss below, some respected analysts believe the government could net $1 trillion or more off of its investment of $700 billion.

Don't count me among this group, however. While I would concede that there may be some potential upside in this massive bailout program, we have to keep in mind that it's the government, after all, that will be running the enormous and complicated operation. The government is not known for making money, especially in complex financial dealings.

In any event, I do believe that if more Americans understood there is the potential to get most or maybe even all of the bailout money back, they might not be quite so angry about the deal. We'll talk about all of this as we go along this week.

The Latest $700 Billion Bailout Package

As discussed at length in last week's E-Letter, the massive rescue package floated by President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke on September 19 was fraught with problems. That plan would have us turn over $700 billion to the Treasury Secretary with no oversight, no transparency, no accountability and no legal challenge in the courts.

There was no chance that package was going to pass, as I pointed out last week. Yet over the ensuing week, all parties rolled up their sleeves, put in very long hours, made compromises on both sides of the aisle and came up with a much better rescue plan by last Sunday. Whether we like it or not, here is an overview of the latest massive bailout plan as we now understand it.

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use. More would be made available as needed. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Overseeing the program:The bill would establish two oversight boards. A new Financial Stability Oversight Board would be charged with ensuring that the policies implemented protect taxpayers and are in the economic interests of the United States. The oversight board would include the Federal Reserve Chairman, the Securities and Exchange Commission Chairman, the Federal Home Finance Agency Director, the Housing and Urban Development Secretary and the Treasury Secretary.

Second, a congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury's use of its authority under the rescue plan. Sitting on the panel would be five outside experts appointed by House and Senate leaders.

Insuring against losses:The Treasury would establish an insurance program - with risk-based premiums paid by the industry - to guarantee certain of the companies' troubled assets, including mortgage-backed securities purchased before March 14, 2008. The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.

Protecting taxpayers: One provision requires the President to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted. In addition, Treasury would be allowed to take ownership stakes in participating companies.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000. They also will not be allowed to write new contracts that allow for "golden parachutes" for their top five executives if they are fired or the company goes under. However, the executives' current contracts, which may include golden parachutes, would still stand.

Like it or not, these are the highlights of the latest proposed massive government bailout of troubled financial institutions which may yet be signed into law this week. While leaders of Congress praised themselves for acting quickly, it is indeed a very sad time for America.

What Could Go Wrong - Potentially A Lot

Let's be clear from the outset: this is the largest and most complex financial rescue plan in history. Given that fact, some argue that Treasury Secretary Hank Paulson is the right man for the job. Paulson was Chairman and CEO of investment banking giant Goldman Sachs from 1999 to June 2006 when be became Treasury Secretary. While Paulson may be very qualified to head-up this massive financial operation, we must keep in mind that the rescue plan will hardly be off the ground by January 20 when the new administration takes over.

Perhaps the new president will keep him on, but there's no guarantee. So, leadership of this massive, complex operation is a big, big question mark as we begin our summary of the possible risks and problems.

The next fundamental risk is this: the banks, brokerages and others will be trying to unload the worst of the worst of their mortgage-backed securities on the government for the best possible price. The question is, will the government pay too much?

The mortgage-backed securities (MBSs) that the Treasury will buy from the various financial institutions that hold them are in many cases very complicated instruments. Space does not permit a discussion of all the intricacies and the various combinations and mutations of these complex packages of MBSs (not to mention that I don't fully understand them all myself).

Suffice it to say that even the supposedly brilliant minds of Wall Street cannot determine how to value many of these securities today, so why should we think that government bureaucrats will know how to value them correctly? Why would we not assume that the Wall Street banks and brokers will convince Treasury to pay more than the securities are really worth?

And as I discussed briefly last week, the government has some incentive to pay more than these assets are really worth. After all, the supposed purpose of this massive bailout is to allow the banks and other financial institutions to recapitalize and resume lending and unfreeze the credit markets. If the government buys these MBSs at even further discounted prices, the banks would have to book even more losses, and more banks would fail.

The thinking is that since Uncle Sam has the deep pockets and the ability to hold these securities for a long time, it can pay the banks somewhat more than today's crisis values, thus allowing them to recapitalize. Presumably, the government can hold the mortgage securities long enough for them to recover and make at least a decent profit on some of them. That remains to be seen, of course.

I think we can all agree that the government has the deep pockets, at least as long as the world is willing to buy our Treasury bills, notes and bonds. But my question is whether the Treasury, the Congress (and the public for that matter) will have the patience to hold these distressed securities, potentially for years for them to recover. Or will there be pressure on the Treasury to dump these securities prematurely?

Patience is not a commodity that is in heavy supply in today's debt-laden, entitlement-oriented society in America. Baby Boomers need a renewed bull market in stocks to fund their retirement, which may be postponed due to this massive pool of MBSs hanging over the market.

Bottom line: if the Treasury is pressured into unloading these mortgage-backed securities before the economy and the debt markets have recovered, then we should expect to incur potentially huge losses and possibly yet another credit crisis.

Next, there is the question of how will the Treasury determine which banks and other financial firms get to participate in the bailout, especially in the first $250 billion tranche (assuming that is the final deal). One possible mechanism that has been discussed by Paulson and others is a "reverse auction." However, a traditional reverse auction may not be effective in this situation where the government is not necessarily looking to purchase the MBSs at the lowest possible price. The objective of the enormous bailout is not to drive more financial firms out of business, but to help them recapitalize, stay in business and resume normal lending.

Another tricky part of determining which banks and financial firms get to unload their bad debt is as follows. As noted earlier, everyone will likely try to unload the worst of the worst MBSs on the government. Some firms that are in better shape and have limited MBSs may be in a position to take less for them just to get them off their books, whereas firms that have much higher exposure to MBSs could yet go out of business were they to unload their toxic positions at further discounted prices.

The bottom line is, the process for determining which firms get to unload these securities, and at what prices, will be extremely complicated and risky. A lot could go very wrong.

The discussion just above is by no means a comprehensive summary of the possible risks to this massive mortgage bailout. In fact, it is overly general, but I think you get the idea that we are far from out of the financial crisis, even if the massive bailout becomes law later this week.

What Could Go Right, If We Are Lucky

As noted in the Introduction, there are some very smart people that believe the government could actually make a profit on the bailout, perhaps a lot of money if managed effectively. Bill Gross is one of the most highly respected money managers and financial writers around. He is the portfolio manager for the largest bond mutual fund in the world, PIMCO's Total Return Fund. He is also the author of two very popular books on investing.

Last Wednesday, Bill penned an editorial in the Washington Post in which he made it known that he was in favor of some form of the government rescue plan that was being debated in Congress last week. Furthermore, he made it clear that he believes the government could make a lot of money on the mortgage-related assets the Treasury intends to buy. He said of the bailout plan:

"The extreme measures [needed] are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from ‘troubled financial institutions' to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that…

Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below ‘par' or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth… The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic."

So, Bill believes the government should be able to make 10-15% on average on the distressed mortgage and related securities it purchases – IF the massive operation is managed well. Interestingly, it was reported in the media late last week that Bill offered to manage the government-owned mortgage/securities portfolio himself for free. Who knows if this offer is for real, but PIMCO manages over $825 billion in assets now, an amount similar to the size of the proposed bailout, so…. Hank, are you listening?

The next example of a savvy market maven who thinks the government could make some serious dough on the bailout package is Andy Kessler. Andy is a former hedge fund manager who made his claim to fame by reportedly taking $100 million in his fund's assets in 1996 to $1 billion by 2001. He has since written several popular books on investing and business.

Andy believes the government could make far more money on this mortgage rescue package than Bill Gross envisions. Here are excerpts of what Andy offered up last Thursday in his latest Wall Street Journal editorial (emphasis added):

"There is a saying on Wall Street that goes, ‘The market can stay irrational longer than you can stay solvent.' Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs [Collateralized Debt Obligations] from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than$2 trillion in notional value loans and home equity and CDOs for his $700 billion...

It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates… This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets,[the U.S.] will become a safe haven for capital...

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly."

What exactly does this mean? Kessler believes that the Treasury will recover at least $1 trillion off of the investment of $700 billion – even with some of the mortgage securities fetching zero – and quite possibly as much as $2.2 trillion. Only if the operation is bungled should the government lose a dime, so Kessler believes.

Finally, I'm seeing more and more analysts come to increasingly positive conclusions about how the government ought to be able to make money – and not lose money – on this massive mortgage rescue package.

As for me, I'm not drinking the kool-aid just yet, but then again, I'm willing to admit that there's potential if a lot of things happen right. But a lot could go wrong as well. We are talking about the government after all, and one that may well be controlled by a liberal Congress and a liberal president for the next four-to-eight years. So I would not bet a dime that this massive bailout will end up being profitable. On the other hand, I do hope that it will.

What Would Happen To The Profits, If Any?

No doubt we will all rejoice if the $700 billion bailout reaps some big profits in the next 5-10 years (not that I am convinced, of course). As thoughts of some sizeable profits have become the talk of the town in recent days, questions have arisen as to what the government would do with the windfall should it happen.

Would Uncle Sam issue checks directly to the taxpayers? Not hardly! That would be seen as a tax cut, when in fact the taxpayers never had to loan the government any money directly to fund this massive $700 billion bailout.

Some intelligent observers have suggested that the government could use the potential profits from the giant bailout to pay down the national debt. This is precisely what Andy Kessler refers to above when he writes: "Over 10 years this could change the budget scenario in D.C." He is suggesting that the government could use the profit he projects (up to $1.5 trillion) to pay down the national debt.

Others have suggested that the potential bailout windfall could be used to help shore-up Social Security and/or Medicare. A trillion dollars, they suggest, could go a long way toward keeping these giant entitlement programs solvent in the years ahead.

That's a nice idea, assuming such a windfall profit actually occurs. But even if you assume that there will be some large profits some years down the road on this huge bailout, which I don't, what do you think Congress and the Administration in power at the time will do with the money? Three guesses, and the first two don't count.

They will spend it and delight in doing so. They will not send us a check or even cut taxes. They will not pay down the national debt. They will see it as a green light to increase the budget and thus the size of government. Just keep this in mind in a few years – if there are any profits to be dealt with.

Thus, I would insist that there should be clear language in the bailout bill, assuming one passes, that specifies exactly what would be done with any profits that might result from it. Yet that is not likely to happen.

A "Main Street" Backlash To Come?

As noted earlier, some polls over the last two weeks suggested that two-thirds to three-fourths of Americans were opposed to the Wall Street bailout. Clearly, millions of Americans are downright angry about it. A few polls indicated that the numbers were not as negative as 65-75% opposed, but clearly there are far more Americans who oppose the bailout than are remotely in favor.

This indeed raises the question of whether there will be a Main Street backlash if the $700 billion bailout is voted into law. Clearly, millions of Americans see this massive bailout as nothing more than the government's willingness to spend historic amounts of taxpayer money to bail out the Fat Cats on Wall Street.

Along this line, let me remind you of something I wrote last week: "the current financial crisis and the enormous $700+ billion government bailout virtually assure that, if elected: 1) Obama will not be able to push through his aggressive spending plans; and 2) McCain will not be able to push through any tax cuts. Realistically, the money for either of these proposals is no longer there."

Let there be no mistake, millions of Americans have been counting on the promises made by these two candidates. Most of Obama's supporters have bought into his promises of wide sweeping social reform, including nationalized health care, lower taxes on the middle class, and higher taxes on those making $250,000 or more a year. Likewise, many McCain supporters are banking on him extending the Bush tax cuts and other tax cuts he has promised.

If sound fiscal minds prevail, in light of the latest $700 billion spending bailout, neither candidate will be able to pursue these campaign promises. If people are angry today, they are likely to get even angrier in the months and years ahead. Why?

Despite the dire warnings of financial calamity from the White House, the Treasury Secretary, the Fed Chairman and some high-profile business leaders, much of Middle America wasn't buying the story that their own livelihoods were linked to the fate of the rescue package. Instead, average workers read the plan as the big guys in Congress bailing out their friends on Wall Street.

A majority of Americans didn't want Congress to use taxpayer dollars to bail out financial institutions, even if their collapse meant a rocky ride for investors in the stock market. A few congressmen and women admitted publicly that their calls from constituents were running as high as 100-to-one against the bailout plan.

Never mind that the collapse of Wall Street will almost certainly result in a recession, or worse, that will affect virtually all Americans. Never mind that the credit markets have seized up, and that lending for such things as home mortgages had ground to a virtual halt. Never mind that credit card spending may actually be at risk next.

I am reminded of the 1970s the movie "Network" which featured a news anchor who lost control and exclaimed, "I'm mad as hell and I'm not going to take it any more." I think that many in our country today have similar feelings, and no one knows at this point exactly what the eventual consequences will be.

Will there be a major backlash against the big Wall Street banks, brokers and others? Will Americans opt to move their money and their business to local banks that never participated in subprime mortgages, CDOs and other complicated mortgage backed securities? Will they move their investments from the Merrill Lynches of the world to local investment firms?

In my opinion, this suggests that big banks, big brokerage firms and multi-million dollar executive big bonuses may be in big trouble. We may well see a return to local community banks, many of which are in fine shape and have no subprime/MBS exposure at all. Local investment firms, financial planners and the like may benefit from a migration from "big box" brokerage/investment firms that were big players in toxic mortgage securities and still paid their CEOs and top execs multi-million dollar bonuses.

Unfortunately, we'll also likely see a move toward populist political candidates, who are far less friendly to big business – that being the Democrats. For example, Senator Obama has seen a big bounce in the polls over the last two weeks as the credit crisis worsened and the massive bailout was concocted.

If there is a further trend toward populist politicians, that will mean more spending and higher taxes, which will be bad for our economy over the long-term. But then, that's a subject for another E-Letter.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The Bailout Defeat: A Political Credibility Crisis
http://www.time.com/time/nation/article/0,8599,1845655,00.html

ACORN, Obama and the Mortgage Mess (what, you didn't hear about this?)
http://www.realclearpolitics.com/articles/2008/09/acorn_obama_and_the_mortgage_m.html

Congress lives up to its abysmal approval rating.
http://online.wsj.com/article/SB122273257698488295.html

What Goes Before a Fall? On Wall Street, Reassurance
http://www.nytimes.com/2008/09/30/business/30sorkin.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

Uncle Sam's $700+ Billion Toxic Securities Fund

Gary D. Halbert — Tue, 23 Sep 2008 20:03:55 GMT

IN THIS ISSUE:

Details Of The Massive $700 Billion Bailout
Government Guarantees Money Market Funds
Will Congress Pass The Bailout Plan?
Should The Government Bail Out Homeowners?
Will Uncle Sam Overpay For The Assets?
Credit Crisis May Tip The Election To Obama
Time To Prepare For A Recession Just Ahead

Introduction

By now, everyone reading this is well aware that the Bush Administration, the Treasury Department and the Federal Reserve Bank are pushing Congress to quickly approve a gargantuan $700+ billion bailout plan, with the hope of saving large banks, investment firms and other financial institutions that are overloaded with troubled mortgage-related securities.

This is by far the largest financial rescue plan ever envisioned on the part of the government, and I would argue, by far the most risky – both in terms of the potential losses for American taxpayers, and in terms of the sweeping, unchallengeable powers it would grant to the government. I will have more to say about the latter in the pages that follow.

Three questions emerge: 1) Is this massive bailout necessary?; 2) Is it the best way to solve the credit crisis?; and 3) Will it work? Unfortunately, the answer to all three is, we just don't know.

I believe that Treasury Secretary Paulson and Fed Chairman Bernanke were correct last week to fear that we were headed for a potentially serious run on banks and money market funds, starting possibly as early as this week, had the carnage in the markets continued. Whether you agree or disagree with the bailout, I think Paulson and Bernanke believed they had no other choice.

Of course, it remains to be seen if Congress will pass the colossal $700+ billion bailout this week as Bush, Paulson and Bernanke are urging. The stock markets that plunged lower early last week reversed their losses late in the week as rumors of the huge bailout package surfaced, culminating with the official announcement on Friday.

Yet on Monday of this week, the stock markets plunged again amid fears that Congress may not go along with the government's massive bailout plan. As this is written, it is impossible to know what will happen. But what is clear is that the US financial markets have frozen up, and if something significant isn't done soon, I believe we will be headed for a stock market crash and a serious recession or worse.

Finally, there will be millions of Americans who do not understand the dire implications of this financial meltdown, and will assume that this is just another massive bailout of the Wall Street rich by the Bush Administration and the Republicans (McCain included). Therefore, I expect this latest crisis and enormous bailout will likely hand the election to Barack Obama.

There are so many ramifications of this massive bailout that I don't even know where to start. But start we must, so here we go.

Details Of The Massive $700 Billion Bailout

We are told that the government's proposed $700 billion bailout may be structured along the lines of the Resolution Trust Corporation ("RTC") established in 1989 to liquidate the assets of failed Savings & Loans. But there is one distinct difference this time around. In 1989, the RTC was formed to take over assets of S&Ls that had already gone into bankruptcy.

This time, should the massive Treasury bailout (or something like it) be passed, the government will be taking over toxic assets of financial institutions that still survive, but are at risk of failure due to the mortgage related securities they hold. Here are the details of the massive government bailout plan, at least as we know at this point.

Under the proposal (the "Act") submitted to Congress on Saturday, the Treasury Secretary would be authorized to purchase mortgage-related assets from any financial institution having its headquarters in the United States, totaling up to $700 billion at any given time. On Monday, the government expanded the bailout to include foreign corporations with "significant operations" in the US that bought mortgage related securities.

The term "mortgage-related assets" is defined in the Act as: "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008."

If the bailout passes in its proposed form, the Treasury Secretary would be authorized to take wide-sweeping actions at his sole discretion.

Such actions include: 1) designating financial institutions as "financial agents" of the government, and requiring them to perform duties related to the Act as the government may require of them; 2) creating agencies to carry out the bailout and appointing such employees as may be required to carry out the authorities in the Act and defining their duties; and 3) issuing such regulations and other guidance that may be necessary to carry out the authorities of the Act.

Such actions also include: The Secretary shall have authority to manage mortgage-related assets purchased under the Act, including revenues and portfolio risks. The Secretary may, at any time at his discretion, sell or enter into securities loans, repurchase transactions or other financial transactions in regard to any mortgage-related asset purchased under the Act.

In short, the Treasury Secretary would have complete control of how the massive bailout effort is undertaken. The Act states: "The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act."

The only requirement under the proposal sent to lawmakers on Saturday is that the Treasury Secretary must report to Congress within three months of the first exercise of the authority granted in the Act and only semi-annually thereafter. Wow! $700 billion, and you only have to report to Congress twice a year!! But that is not likely to stand.

Over the weekend, Democratic leaders discussed enhancing oversight by carving out a special monitoring role for the Government Accountability Office (GAO), the investigative arm of Congress. The Republican leadership echoed similar wishes for tougher scrutiny, suggesting the creation of a congressional oversight panel, headed by top leaders in both parties.

Oversight, or lack thereof not withstanding, there was another bombshell in the rescue package. The bailout proposal sent to Congress on Saturday states the following: "Decisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

This provision, if it stands, would mean that the Treasury bailout would be beyond the rule of law, both as it relates to the current Treasury Secretary and the next one appointed by McCain or Obama. Obviously, this provision was included to protect against potentially unlimited challenges in the courts which could stall or prohibit the rescue efforts. This is very troubling.

While the brief summary above is not comprehensive, it should give you an idea of the enormity of the latest massive plan to rescue financial institutions to the tune of at least $700 billion – actually much more as I will discuss later on.

We will continue our discussion of the bailout plan below, but first here's the latest on the money market fund developments.

Government Guarantees Money Market Funds

I trust that virtually everyone reading this E-Letter has some assets in money market funds. As you probably know, the turmoil in the financial markets spilled over into the supposedly safe money market mutual funds last week. Last Tuesday, one of the oldest and largest institutional money market funds, the Reserve Primary Fund, announced that its share price had fallen below the $1.00 level to 97 cents. In financial terms, it "broke the buck."

The Reserve Primary Fund dipped below $1.00 as a result of the bankruptcy of Lehman Brothers. The Reserve Primary Fund, with over $62 billion in assets, announced last week that it owned $785 million in Lehman bonds, and that it was writing those bonds down to zero, which effectively caused its share price to break the buck. Redemptions were halted.

Also, last week Putnam Investments closed an institutional money market fund and said it will return money to clients, after investors pulled out cash despite the fund's lack of exposure to troubled financial firms such as Lehman.

To shore up investor confidence, the Treasury Department announced plans Friday to insure and guarantee US money market funds.

President Bush authorized the Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds. And the Federal Reserve announced it will expand its emergency lending program to help support the apprx. $3.5 trillion in assets in US money market funds.

The government guarantee will be in place for at least one year. Money market funds will pay a fee to be in the insurance program. So for now, at least, your money in money market funds is as safe as if it were in a FDIC insured bank. Note, however, that the Treasury pronouncement on the money market funds guarantee stated that the insurance only applies to money that was on deposit with such funds on or before September 19. Money deposited after September 19 is apparently not covered by the guarantee.

Now back to the $700 billion mortgage bailout.

Will Congress Pass The Bailout Plan?

As noted in the Introduction, the stock markets surged higher late last week as news of the massive bailout plan surfaced, reversing all or most of the huge losses incurred early last week. But then the nation had the weekend to think about the enormous bailout plan, and whether or not the Congress would go along with the gigantic intervention.

The House of Representatives and the Senate are both controlled by the Democrats. While I believe there is a sufficient sense of urgency regarding the passage of some kind of large bailout plan, I will not be surprised if the Democrats, along with some Republicans as well, will not approve the rescue package. I believe that is precisely why the stock markets tanked again on Monday.

As this is written, several prominent Democrats are insisting that such a bailout must be accompanied by increased regulation and oversight. Certainly everyone would agree that the regulation of our financial markets is sorely overdue for an overhaul. But as Treasury Secretary Paulson made clear over the weekend, he believes the funding of the huge bailout package needs to happen NOW, whereas the regulatory changes will take time to implement.

Over the weekend, Democrats and some Republicans also complained that the proposed $700 billion bailout does little to help homeowners that are struggling to make their mortgage payments. It is very possible that lawmakers will tack on additional hundreds of billions of dollars to the already enormous rescue package that would go directly to homeowners who may be facing foreclosure.

Some Democrats, including Barack Obama, are arguing that the rescue package must include restrictions on the compensation of corporate executives of companies that make use of the rescue program to unload toxic mortgage securities on the government. On Monday, even John McCain suggested that the top executives of companies seeking to participate in the bailout should not make more than $400,000 a year (no more than President Bush's salary).

Some Democrats, including Senators Chris Dodd (D-CN) and Chuck Schumer (D-NY), are pushing for more egregious changes in US bankruptcy laws regarding home foreclosures. The proposal that Dodd has sent to Treasury Secretary Paulson would let bankruptcy judges modify the mortgages of homeowners facing foreclosure to allow them to keep their homes. Judges rewriting existing mortgages so people can stay in their homes? This is scary!

Some Democrats, including Barack Obama, are arguing that the rescue package must include a second economic stimulus package of up to $100 billion, following the $160 billion sent out earlier this year.

Then there is always the risk that Congress will load the already huge bailout legislation with billions more in "earmarks." It would not surprise me if the final bill easily surpasses $1 trillion if it is actually passed, which is looking increasingly uncertain. In that case, one can only wonder if President Bush will sign it.

So, it remains to be seen if the massive bailout Act, or something like it, is passed or not. Based on the stock market plunge on Monday, and the rhetoric coming out of the Senate banking hearings this morning, I would say the odds are no better than 50/50 for passage. If that is the case, look for the stock markets to continue to tank. Something serious needs to happen soon.

Should The Government Bail Out Homeowners?

As discussed above, many Democrats and some Republicans are arguing that, as a part of the government bailout, something should be done to help homeowners who are struggling to make their mortgage payments. In particular, many in Congress want to minimize the effect on homeowners who financed their homes with subprime and other non-traditional mortgages.

Never mind that many of these families should never have been given a mortgage due to their credit history or employment (or unemployment) situation in the first place. Most of us have heard the term NINJA loans: No Income, No Job or Assets. We also heard about the so-called LIAR loans where mortgage applicants purposely lied about their financial condition to buy a house.

Of course, in the spirit of political correctness, the government has now identified families who lied on their applications to get a mortgage as "victims." Thus, while many moan and groan about the lack of moral hazard in relation to the Wall Street bigwigs who wanted to make money, no one seems to want to hold individuals responsible for lying on their applications.

Instead, as John McCain ridiculously claimed last week, they were "forced" to take these mortgages. Give me a break! While many mortgage lenders were clearly too aggressive in offering home loans, no one forced borrowers to take out these loans. Let's get real.

It is clear now that the Democrats who run Congress are going to insist that additional billions be added to the bailout plan that will help out homeowners who are having a hard time making their mortgage payments, with little regard to whether they lied about their financial condition when they applied. If so, the bailout plan could be substantially higher than the $700 billion the Treasury asked for – if it is passed at all.

In fact, if we consider what has already been spent on the mortgage crisis, the total may be well above $1 trillion already, assuming that Congress passes the $700 billion rescue package this week, plus whatever amounts they add to it.

Will Uncle Sam Overpay For The Assets?

Treasury Secretary Paulson made the rounds on the Sunday talk shows, pushing the $700 billion bailout plan, and urging lawmakers to pass it this week before they adjourn. One thing Secretary Paulson did not make clear was how the government would value the mortgage-related assets that it would purchase from those wishing to participate in the program.

A Treasury pronouncement released on Saturday made the following statements about pricing: "Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets… The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions."

The problem is, there's no liquid market for subprime mortgages and other mortgage-backed securities that have dragged down banks and investment firms. With no trading in the assets, no one knows what they are worth now or might be worth in the future. They are being carried on institutions' books with values based on various indexes that are in some cases little more than guesses. And as those indexes have gone down, the institutions have recorded huge losses.

Furthermore, some of the instruments are complex, opaque derivatives tied to slices of other derivatives and financed by the sale of credit-default swaps to hedge funds and a variety of buyers. How do you price something like that? 80 cents on the dollar, 20 cents on the dollar, or somewhere in between? Who knows?

The government is, in some respects, constrained in driving a hard bargain because the whole point of the rescue program is to help banks get back on solid footing - not to force them into much deeper write-downs, potentially exacerbating their problems staying afloat. At the same time, the market turmoil has complicated efforts to determine the "real" value of the assets.

Obviously, it is too early for the Treasury to have all these details worked out. Suffice it to say that it will be a complicated process that will have serious implications, not only for the government and the holders of toxic debt, but also for the financial markets themselves.

Credit Crisis May Tip The Election To Obama

Americans have grown increasingly nervous as the mortgage/credit crisis has unfolded this year. The failure of Wall Street financial giants like Bear Stearns, Lehman Brothers, Merrill Lynch, AIG and others has only heightened concerns among the public.

Add to that the significant stock market downturn over the last year, which has affected tens of millions of Americans' investment and retirement accounts. Until now, most people thought this credit problem was at least reasonably under control.

Yet, last Friday's announcement of a $700+ billion government bailout of the banks and financial institutions sent a shockwave not only to Americans but investors around the world. Few, if any, had an inkling that the number would be remotely that large, and now we know that the ultimate number could be much higher, well over $1 trillion. It was a startling revelation!

But here's the reason I now believe the massive bailout may gift the election to Obama. Millions of American voters will see the bailout as nothing more than another George Bush giveaway to his rich friends and cronies on Wall Street – at the taxpayers' expense. Many may believe that John McCain would do the same thing if he were president.

Many Americans will not understand the gravity of the current financial crisis which has the potential to trigger a global recession or worse. Many will not understand Secretary Paulson's plea to enact the bailout now and reform the system and pursue and prosecute the bad guys later.

John McCain and Barack Obama have been in a statistical dead-heat for the last several months, although Obama has been marginally ahead most of the time. McCain got a bump up following his selection of Sarah Palin and the GOP convention, but over the last week or so, Obama pulled back into the lead, marginally, in the national polls.

Because of the latest escalation in the credit crisis, and the gigantic $700+ billion bailout request, I expect that potentially millions of undecided voters will now opt to go for Barack Obama. Even some who had never before considered voting for Obama may be rethinking that decision in light of the latest developments.

A lot can change in the next 43 days to the election. Who knows what other financial surprises may await us between now and November 4? But if I were to have to bet today, I would sadly put my money on Obama to win by a comfortable margin.

I have made no secret that John McCain was not my first choice for the GOP presidential nominee. But I have also made it known that I would certainly prefer Senator McCain over Senator Obama by a long-shot. So, it is not easy for me to predict now that Obama will likely be our next president.

One last political point: the current financial crisis and the enormous $700+ billion government bailout virtually assure that, if elected: 1) Obama will not be able to push through his aggressive spending plans; and 2) McCain will not be able to push through any tax cuts. Realistically, the money for either of these proposals is no longer there.

In light of the credit crisis and the massive bailout plan, McCain is now hedging on his promise of tax cuts, realistically so. Obama on the other hand says his social spending programs, including nationalized health care, are "already paid for." How is that? By allowing the Bush tax cuts to expire (a tax increase) and raising taxes on those making over $250,000 a year. Yet Obama claims shamelessly that he will cut taxes for 95% of Americans. Never mind it's a lie.

Time To Prepare For A Recession Just Ahead

On Friday, the Commerce Department will release its final report on 2Q Gross Domestic Product. In its previous estimate, 2Q GDP was 3.3%, well above most expectations. The pre-report estimate is that the government will raise that number to 3.4-3.5% on Friday. But in light of the deepening financial crisis, this week's final 2Q GDP report will be ignored.

While I have tended to be on the more optimistic side for the last several years as it pertains to the US economy, I am now turning bearish. I believe the events we have seen over the last two weeks will crush consumer confidence in the weeks and months ahead.

It seems clear that most consumers are angered and alarmed by the proposed massive $700+ billion bailout of financial institutions. They certainly are not comforted by it. Many are scared by the magnitude of the crisis. Virtually everyone knows who Merrill Lynch is - or was. Now it is gone as an independent American financial icon. People are realizing that we are in dangerous territory.

I predict we will see a significant slowdown in consumer spending for the balance of this year unless the financial markets stabilize quickly. Consumer spending accounts for over 70% of GDP. If I am correct, then we are headed for a recession.

The Index of Leading Economic Indicators fell 0.7% in July and 0.5% in August (latest data available). The Index has been down in three of the last four months. This suggests that economic growth slowed significantly in the 3Q. I will be surprised if economic growth doesn't fall into negative territory in the 4Q.

Much will depend on whether or not the mortgage bailout works.

Conclusions

Given the scope and magnitude of the recent mortgage-backed securities bailout proposed by the government, I think there are a number of conclusions that we can draw:

1. The massive mortgage bailout is unprecedented and extremely risky, but some kind of government intervention is most likely necessary in order to avert a global financial meltdown;

2. While the government is asking for $700 billion, we already know that the Fannie Mae, Freddie Mac and AIG bailouts transactions will push the combined cost to well over $1 trillion, plus whatever the Congress adds on, and you can bet there will be a major addition that will directed, rightly or wrongly, to struggling homeowners;

3. We are now past the issue of "moral hazard," in my opinion. We are now truly in a financial crisis that could easily spiral out of control very quickly. Something major needs to be done quickly, and there is no time for political games. People are on the verge of panic, and the stock markets may continue to plunge. Expect volatility to remain sky-high for a while longer.

4. I now believe this financial crisis will send us into a recession just ahead. While I have correctly been more optimistic than most of my peers in newsletter-land for the last several years, I am now turning bearish on the US economy. It now appears just a question of how deep it will be and how long it will last;

5. It remains to be seen just how deeply this financial crisis will affect the campaign rhetoric coming out of the two presidential contenders. Any thinking person can see that a $700 billion to $1 trillion bailout will severely restrict any politician's ability to cut taxes or increase social spending, but let's see if we hear any scaling back of such campaign promises; and

6. Finally, I now believe that the housing/financial crisis and the massive government bailout may hand the presidential election to Barack Obama in November. The general public does not fully understand the seriousness of the credit crisis, and will deem the massive bailout as just one more example of President Bush bailing out his rich cronies on Wall Street

The race between McCain and Obama has been neck-and-neck for several months, but Obama has pulled back into the lead following McCain's convention bounce. Barring something unusual, I expect the credit crisis and the bailout to send Obama increasingly ahead in the polls, with a win likely in November.

In fact, the latest polling data out this morning show Obama pulling decisively ahead in Colorado, ahead in Virginia and up to even in Ohio and North Carolina. McCain has to carry every one of these battleground states to win, yet they are now trending to Obama.

If this trend continues, it will be Obama, a Senator for less than three years, who will be in charge of solving the worst financial crisis in most of our lifetimes.

Sorry for a depressing E-Letter, but things are what they are.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

How Fannie & Freddie Failed (prepare to be angry)
http://www.ibdeditorials.com/IBDArticles.aspx?id=306978378974502

Treasury agrees to some changes in mortgage bailout proposal.
http://online.wsj.com/article/SB122209290438362805.html

Obama's spending & McCain's tax cuts are out the window now.
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091903185.html

‘Wall Street' No Longer Exists
http://online.wsj.com/article/SB122212959612065505.html

Bailouts - Bear Stearns, Housing - What's Next?

Gary D. Halbert — Tue, 08 Apr 2008 19:47:00 GMT

Bailouts are on the rise. Over the weekend of March 15-16, in a desperate move, the Federal Reserve bailed out Bear Stearns, the large investment bank that got into trouble over subprime mortgages and related securities in a deal with J.P. Morgan-Chase. But for the first time, the Fed...(read more)

Forecasts & Trends : Bailout

How to Recover From the Bear Market

Have We Turned The Corner On The Recession?

Who Will Buy America’s Trillions In New Debt?

Introduction

Federal Bailouts Surpassing $10 Trillion

Government Finance 101

Who Will Buy All This New Debt?

Bernanke: Crank Up The Printing Presses

Real Storm Clouds On The Horizon

Conclusions – Not Many I Can Find

Throwing Trillions Around Like Crazy

Support Wanes For Obama's Huge Stimulus Plan

Introduction

Public Support For Trillion Dollar Stimulus Plunges

Senate Passes $838 Billion "Stimulus" Package

Senate Stimulus Amendment To Help Automakers

Republicans' Proposed Alternative Stimulus Packages

Republican Plans Never Had A Chance, Of Course

Final Stimulus Bill Will Be Higher Than $838 Billion

Frustrated Obama Says Spending IS Stimulus

50% of Americans May Pay Zero Income Taxes

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Obama Seeks Multi-Trillion Dollar Bailouts

Introduction

The Recession Continues To Deepen

So, How Deep & How Long?

Multi-Trillion Dollar Bailouts In The Works

Obama's $825 Billion "Stimulus" Package

Obama's Next "Big Bang" Bank Bailout

Fed Gearing Up To Buy Treasury Bonds

Conclusions?

Economic & Investment Outlook For 2009

Introduction

Editor's Notes

Obama & The New Age Of Big Government

The Economy -- Have We Seen The Worst Of It?

Are The Bailouts Necessary & Will They Work?

The Latest Disappointing Economic Reports

Deflation -- Consumer Price Index Goes Negative

Stock Markets -- Might We Have Seen The Bottom?

Conclusions

The Recession & More Government Bailouts

Introduction

Latest Grim Numbers On The US Economy

The Latest On The Government Bailouts

Fed Announces The Mother Of All Bailouts

Troubling Aspects Of The Fed's Latest Bailout

Fighting "Debt-Deflation" At Any Cost

What To Do About The Global Financial Crisis

Introduction

BaselineScenario.com Urges Larger Bailout

QUOTE:The Next World War? It Could Be Financial.

My Initial Thoughts & Analysis On The Above

Huge Recapitalization Plan For Major Banks

Progress Report On The Larger Bailout Plan

Conclusions & What To Do Now

Mortgage Bailout Passes, Finally - Now What?

Introduction

An Inside Look At The Mortgage Bailout Bill

Equity Ownership & Limits On Executive Pay

Mortgage Assistance & The Bankruptcy Code

Expanded FDIC Limits On Bank Accounts

Was The Bailout The Right Thing To Do?

The Senate's $150 Billion In Extra Bailout Pork

John McCain Blew An Election Saving Opportunity

Electoral Map Now Leaning Heavily To Obama

Scotia Partners - Making Money In The Bear Market

Might Uncle Sam Make Money On The Bailout?

Introduction

The Latest $700 Billion Bailout Package

What Could Go Wrong - Potentially A Lot

What Could Go Right, If We Are Lucky

What Would Happen To The Profits, If Any?

A "Main Street" Backlash To Come?

Uncle Sam's $700+ Billion Toxic Securities Fund

Introduction

Details Of The Massive $700 Billion Bailout

Government Guarantees Money Market Funds

Will Congress Pass The Bailout Plan?

QUOTE:
The Next World War? It Could Be Financial.