Forecasts & Trends : Barack Obama

Healthcare Reform or Government Takeover?

Gary D. Halbert — Tue, 22 Sep 2009 20:54:00 GMT

In This Issue:

Reactions to the President's Healthcare Speech
Omissions & Falsehoods In President Obama's Healthcare Speech
A Re-Run of Clinton Nationalized Healthcare?
Conclusions - So What Should We Think Now?

Introduction

President Obama addressed a rare joint session of Congress on September 9 when he spoke at length about his desire to substantially reform America's healthcare system. Whether you are among the apprx. 56% of Americans who now oppose the healthcare reform bill in the House, or you are among the apprx. 43% who support it (latest Rasmussen poll), it is important to know the facts - a number of which the president failed to address or misrepresented in his speech.

With opposition to the House healthcare reform bill rising almost daily over the last month or so, there was great anticipation ahead of the president's speech. Many in the media commented that Mr. Obama needed to "hit it out of the park," and that the speech needed to be a "game-changer." Politicos on both sides of the aisle agreed afterward that the speech was delivered extremely well. Unfortunately, it raised more questions than answers.

Many thought the president would soften his recent healthcare rhetoric and reach out to Republicans and Independents. He didn't. He chose instead to shore up his base. Many thought he would compromise on the so-called "public option." He didn't, exactly. And while President Obama's approval ratings rose a few points just after the speech, opposition to the Democrats' healthcare reform bill has soared to new highs since then.

While I have refrained from writing at length on the healthcare reform debate, I feel the issue is just too important, and too politically charged, not to speak out. In the pages that follow, we will delve into some of the biggest problems and challenges with the House healthcare bill, H.R. 3200 - America's Affordable Health Choices Act of 2009. Given that there is so much misinformation on healthcare reform out there, on both sides, maybe this will help.

Reactions to the President's Speech

As noted above, the immediate reactions to the president's healthcare speech on September 9 were almost unanimously favorable. There is no question that Mr. Obama is a great orator. But the real question is whether the president changed enough minds to breathe new life into the struggling healthcare reform bill stuck in Congress To my surprise, George Stephanopoulos of ABC news (and a former Clinton aide) wrote a column entitled "Obama Speech No Game-Changer" soon after the speech.

Whether you liked or disliked the president's speech, it did change some minds favorably, but for only a few days. A Rasmussen poll released a few days after the speech showed that, for the first time, a slim majority - 51% - of Americans favored the Democrats' healthcare plan, while 46% opposed it. But those approval numbers began to fall significantly last week. This from Rasmussen on September 16, one week after the speech:

One week after President Obama's speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August. [As noted above, the latest numbers this week are 56% opposed and 43% in favor.]

Just a few days earlier, Rasmussen's poll showed that those who "strongly favor" the plan were at 28%, while those who "strongly oppose" were at 38%. Now, two weeks after President Obama's speech, the latest numbers are only 23% strongly favor the plan and 44% strongly oppose it. This is very bad news for Team Obama.

Conclusion: President Obama gave a great speech, as he is known to do, and it helped the healthcare ratings for a week or so. But the reality is that a majority of Americans do not want this government healthcare plan, and that number is likely to rise even more as people learn more about the Democrats' plan.

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.

Misrepresentations, Omissions & Falsehoods
in President Obama's Healthcare Speech

The number one problem with the Democrats' massive healthcare reform proposal is a simple matter of supply/demand. There is no way to provide healthcare insurance and coverage to 46 million people who do not currently have coverage, with the same number of doctors, nurses and hospitals/clinics, without rationing healthcare. Even if the number is half that, some 23 million people (or even just 15-20 million as some argue), the problem is still the same.

The law of supply and demand also dictates that if we substantially increase the number of Americans covered (demand) with the same number of doctors, nurses and hospitals/clinics (supply), the cost of healthcare will increase, perhaps significantly, unless there is rationing. We must look no further than Canada or Great Britain to see how this will happen.

The question at the end of the day is, why can't the president and the Democrats just admit that there will be rationing and just be straight with the American people? In all of his healthcare speeches, President Obama totally avoids this simple supply/demand fact. The president wants us to believe that we can insure and provide healthcare to at least 15-20 million more Americans and actually spend less. No wonder that millions of Americans are up in arms over this!

Some observers have called this a "convenient fantasy" on the part of President Obama and the Democrats. How are we are going to save money by spending a lot more money - $1 to $2 trillion over the next ten years? How are we are going to solve our exploding fiscal problems with a massive new federal bureaucracy that will control at least one-sixth of the national economy going forward?

President Obama claims that the new government-run healthcare system "won't add one dime to the deficit." Unfortunately, presidential administrations and Congress are notoriously bad at forecasting the costs of their pet projects, especially entitlement programs that are intended to be permanent.

President Bush's Medicare Prescription Drug program is a perfect example. When it was passed in 2003, the White House and the Congressional Budget Office forecast that it would cost apprx. $400 billion over 10 years. Guess what - the CBO now projects it to cost $1.2 trillion over 10 years. Do we really think Congress and Obama's cost forecasts are any better? I doubt it!

Obama says the government will guarantee that you can keep your current insurance, even though his healthcare plan would encourage your employer to stop offering it; and when they do, you will have no option except the government-run plan. The same is true should you get fired or decide to change jobs - the government-run option is the only option in H.R. 3200.

In addition, he says we aren't going to insure any illegal aliens; however, in H.R. 3200 passed by the House Committee on Education and Labor, there were no citizenship verification provisions to assure that illegals can't apply and get benefits. Yet President Obama promises that the new healthcare plan will only cover American citizens. (Maybe he plans to make them all citizens - amnesty - before the new system goes in place - think about it.)

At one point during his healthcare speech to a joint session of Congress, President Obama drew cackles for remarking that "there remain some significant details to be ironed out." No kidding! Here again, Obama delivered a message that was strikingly similar to the one that has failed to resonate with the American people thus far. The reason is that while Obama can paper over political and policy realities by speaking in broad strokes, it's always the specifics that have caused him problems. Healthcare is too big not to nail down the specifics!

As he has done before, Obama pledged to veto any bill that added to the federal deficit. But despite that commitment, the Congressional Budget Office projected that the House Democrats' healthcare reform plan would cost over $1 trillion over the next decade and add a minimum of $239 billion to the deficit.

Obama again touted the cost-saving potential of "preventive care." Here, too, the independent Congressional Budget Office has determined that preventive measures would actually increase health care costs, and that a so-called Medicare Commission that Mr. Obama has suggested would have a negligible impact on curbing government healthcare spending. Why are the president and the Congress ignoring these warnings from the independent CBO?

Back in May, President Obama went before the American Medical Association and declared, "No matter how we reform health care, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you'll be able to keep your health care plan, period. No one will take it away, no matter what." He has made this exact claim in numerous other healthcare speeches.

In his latest speech before Congress on September 9, Obama offered a more nuanced pledge that "nothing in this plan will require you or your employer to change the coverage or the doctor you have." As noted above, this is simply not true if you lose your current coverage for any reason under H.R. 3200.

Regardless of whether or not the proposed healthcare legislation specifically requires that Americans give up their private coverage, there are still many changes to the system that could cause many people to lose it anyway. For instance, one provision Obama backed in his latest speech - to tax expensive health plans - is explicitly aimed at encouraging employers to drop benefit-rich policies in hopes that it would help rein-in medical spending (ie - rationing).

At another point in his recent healthcare speech, Obama said that, "The middle-class will realize greater security, not higher taxes." How does this jibe with the preceding sentence in the paragraph just above? Then, at another point in his latest speech Obama gave an unwavering endorsement of a requirement that individuals either purchase health insurance, or pay a tax.

Under the Senate version of healthcare reform/mandate proposed by Senate Finance Committee Chairman Max Baucus (D-MT), individuals would face a tax of at least $750 annually if they do not purchase health coverage. How is this "greater security, not higher taxes"?

And while the Baucus healthcare proposal would provide subsidies to lower-income Americans, those subsidies would stop at 300% of the federal poverty level. What that means is that a family of four with a household income above $66,150 would face a tax of $3,800 if they do not obtain health insurance, while individuals with income above $32,490 would face a tax of $950. Yet Obama argues that this is not a "tax," if it's something that is good for you. Yeah, right!

This is a problem that Obama himself noted when he was campaigning against Hillary Clinton back when he said he opposed such mandates. In a February 2008 debate referring to healthcare reform, he said, "In some cases, there are people who are paying fines and still can't afford it, so now they're worse off than they were. They don't have health insurance and they're paying a fine." He was referring to conditions under a similar healthcare mandate in Massachusetts.

During his speech two weeks ago, Obama advocated the creation of a plan to be offered on a government-run insurance exchange that would be "administered by the government just like Medicaid or Medicare." He said that the reason we need such an option is that, "by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers."

Yet later in the same speech, he argued that he could pay for most of his proposal with cuts to Medicare that would not have any impact on benefits to seniors. Say what? The reason, he explained, is that we could save money by reducing "the hundreds of billions of dollars in waste and fraud…" in Medicare - the very government-run program he touts as a model for the creation of a new government-run healthcare program. Do they really think we are that stupid?

While acknowledging that the new plan would be run by the government, Obama tried to argue that it wouldn't be subsidized by taxpayers, but only funded by the premiums it collects. Sorry, but I must point out that any new government plan would require taxpayer money to fund huge start-up costs - at the least, and should it run into financial trouble, it's hard to believe that lawmakers would allow it to fail without pumping taxpayer money into it, just as they did in the cases of Fannie Mae and Freddie Mac (and those were allegedly private companies).

President Obama speaks in such broad circles and contradictions. You can keep your current plan and doctors, but not really; your taxes will not go up, but they probably will have to; we won't cover illegals, but there's no way not to; etc., etc. No wonder the number of Americans who oppose government-run healthcare is now at a record high - 56%!

A Re-Run of Clinton Nationalized Healthcare?

A recent article on Forbes.com, just after the president's latest speech before Congress, caught my attention and further explained the current healthcare debate as follows:

Before a tense and packed House, the President told Congress:

‘Millions of Americans are just a pink slip away from losing their health insurance, and one serious illness away from losing all their savings... And in spite of all this, our medical bills are growing at over twice the rate of inflation...'

That's President Clinton, sixteen years ago almost to the day, in a speech about a complex health-care plan built on government expansion, with billions in hidden costs. Last night, a President--who was only 32 then--is now in the White House, out to prove that nothing has changed in the minds of the Democratic leadership since the Clinton debacle.

President Clinton's health-care legislation didn't fail in 1994 because people didn't want better health care. The White House plan failed because it was too bureaucratic, too complicated, and too expensive.

Last night, President Obama's response to sixteen years (and one angry August recess) worth of bi-partisan doubt was to double down and bet even more political capital on the same approach. It's as if he expected Americans to tune in, and suddenly realize their mistake.

This was supposed to be the Administration of the post-partisan rational center. Arguments were supposed to work with this White House. While many critics of President Obama's health-care plan have been too extreme, some rational criticism should have broken through. The speech was brilliant--unless you've actually read the [healthcare] legislation behind it, which contradicts many of the President's restated "commitments."

Last night, the President said that, "Nothing in this plan will require you or your employer to change the coverage or the doctor you have." Countless observers have already shown that this is not true, as proposed new regulations mandating a whole range of benefits, setting community rating schemes, and banning individual incentives will radically change many existing plans.

Last night, the President said his reforms would fight rising costs, not add to the deficit, and reduce government waste. Countless observers have already shown that the President is wrong, among them the Congressional Budget Office, which calculates that the plan will increase costs and explode the deficit. And, as I observed in the Washington Examiner, government waste will grow under ObamaCare, since the House bill creates a sea of new Washington-based programs, offices, and bureaucracies (53, by one count) to micro-manage your health insurance, your hospital, and even your family doctor.

Last night, the President said competition from a government-run insurance plan was needed to "give Americans a choice." And the President has been shown to be wrong there, too. Federal employees have over 230 private alternatives to choose from in their existing health exchange…; a public plan would just add one new option (a government financed and price controlled one, at that). [Emphasis added, GDH.]

It's not that President Obama wants to turn the health-care policy clock backwards sixteen years. It's worse than that. It's as though the last sixteen years never even happened. It's like a health-care Groundhog Day where Americans wake up to the same tired arguments for government-run care every morning, simply because Democratic Presidents can't resist testing the same pick-up lines on an unwilling America.

And the lines are wearing thin. The President (yes, Obama this time) told Congress that "our collective failure to meet this challenge--year after year, decade after decade--has led us to a breaking point." Has it really? When President Clinton conjured similar fears about pink slips and millions losing coverage to Congress in 1993, 15.3% of Americans were uninsured. In 2007, the percentage of Americans without insurance was...15.3%. A solution to this problem is needed, but the fact that it hasn't grown worse is a sign that Congress has time to think, and little reason to panic.

Since President Clinton spoke of health inflation in 1993, health costs continued to rise faster than wages, but President Obama refuses to acknowledge years later that the U.S. health inflation rate is almost identical to rates in government-run systems [in other countries]. Rising costs must be attacked, yes, but if rationed health management can't stop health inflation in Britain or Ireland, will a rush to President Obama's version of HillaryCare do any better?

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 - So What Should We Think Now?

Some surveys indicate that a majority of Americans think we need reform of our healthcare system. This explains, in part, why President Obama and the Democrats are so hell-bent on passing a massive overhaul of our healthcare system this year. Yet plenty of other surveys show that appx. 80% of Americans are happy with the healthcare insurance and care they have now. So what gives?

What gives is that liberal presidents dating back to Theodore Roosevelt have tried to nationalize healthcare, and every attempt has failed. The simple fact is that virtually all Americans would favor healthcare that costs less - what else is new? Likewise, a majority of Americans would like to see healthcare insurance available to everyone - somehow.

But as has been consistent for over 100 years, a majority of Americans do not want to see the federal government take over healthcare - doctors, nurses, hospitals, etc. - and be in a position to mandate what care we can and cannot receive.

The problem is, the current president and the Democrats in the majority in Washington feel otherwise. They see government-run healthcare as a giant power grab, as I have discussed previously. They believe that the government is a better arbiter of our healthcare needs than we are. And they see Obama's presidency as the best opportunity they have had in years to ram it down our throats, even if it means by a simple Democrat majority "reconciliation" (51%), which they just might be arrogant enough to pull off. Nancy Pelosi and Harry Reid have all but promised to do this if necessary to pass their healthcare plan.

On most political issues, I would argue that the party in power should go ahead and try to ram it down our throats, and suffer the political backlash in the next election, in this case the 2010 mid-terms and the 2012 general elections. But when it comes to healthcare reform, if it passes, there is almost no chance to roll it back once it is in place. This is precisely why the Democrats don't want their takeover of healthcare to be implemented until 2013!

President Obama and the Democrats in Washington know this. They thought they had it during President Clinton's administration, but the American people fought back and stopped it. Now they see their odds even better with President Obama in office, although public opposition is now growing daily, 56% oppose/43% approve as this is written. So, it remains to be seen what will happen this year.

As it stands now, most of the political observers I read believe that some form of government-run healthcare will pass this year or next under President Obama. Even some moderate to conservative analysts I read have concluded that the time has come to provide some form of health insurance to all Americans. But the question is, as always, how to pay for it?

Sadly, I have not seen a single comprehensive healthcare reform proposal from the Republicans or other non-Democratic groups, and that disappoints me greatly. Streamlining the complex insurance licensing process so that insurance companies can offer policies across all state lines is not being discussed, in what would seem to be a slam-dunk starter for reforming healthcare.

Likewise, letting small businesses band together to buy insurance to cut costs is not on the table. Serious medical malpractice (tort) reform is also AWOL. Providing tax credits/subsidies for low-income Americans to purchase health insurance is not on the table either.

Plus, if we can reform Medicare and trim hundreds of billions in waste, as President Obama suggests, why not do that now and use those savings to subsidize health insurance for low income Americans?

I am also puzzled as to the rush to pass healthcare reform at any cost. We're talking about reforming an industry that makes up 16-17% of the world's largest economy. Doesn't that merit taking the time necessary to do it right? Evidently not, if you're a Democrat.

At the end of the day, I just don't get it. Have we reached the point where there is no alternative to a massive government-run healthcare system? I don't think so. But it remains to be seen if we can derail the Democrats' plans for nationalized healthcare.

Finally, I recognize that this has been a polarizing editorial on my part. I will get roundly criticized for it by my moderate/liberal readers, and those who favor government-run healthcare, which I can handle as always. But the issue of nationalized healthcare is just too important for all of us - and for the economy - for me to remain silent.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Has Obama misread the tea leaves? (excellent read!)
http://www.realclearpolitics.com/articles/2009/09/10/the_goldilocks_principle_in_american_politics_98233.html

Does Obama lie?
http://www.realclearpolitics.com/articles/2009/09/18/does_he_lie_98363.html

Obama omits crucial details on healthcare
http://article.nationalreview.com/?q=ZTI2YmFlYmVkYjgwZmQ0NTk2MjUzNzZhYTgyOTVmMTY=

Federalization of college loans teaches health care lesson
http://washingtontimes.com/news/2009/sep/18/back-door-to-a-public-option/

On the Economy & Obama's Trillions

Gary D. Halbert — Tue, 08 Sep 2009 20:33:00 GMT

IN THIS ISSUE:

The Economy - More Signs of Recovery
Is the Recession & Credit Crisis Over?
Obama Adds $2 Trillion to Debt Forecast
Economic Assumptions Still Too Optimistic
What in the World Are They Thinking?
Do They Want Control Even If It Ruins The Economy?

Introduction

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office's (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which estimated that the national debt will more than double over that 11-year period - not including over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over the next decade.

The White House Office of Management & Budget (OMB), which is partisan, runs budget deficit projections similar to those of the CBO. The OMB's deficit projections over the same period, 2009-2019, showed the national debt increasing over $2 trillion less than the CBO's forecast of $11.11 trillion. However, on Friday, August 21, the White House quietly announced that the OMB had revised upward its deficit projections to fall in line with the CBO's. So, it's official.

The only good news on the deficit front is that both the CBO and the OMB recently revised downward the fiscal 2009 budget deficit, which closes out at the end of September, from the earlier reported $1.8+ trillion to around "only" $1.6 trillion. Time to break out the bubbly, right? Wrong! We will look at the latest deficit projections as we go along, but the problem is still the same; Obama seems intent on spending this country into financial ruin.

But first, there is more good news on the economic front. More and more forecasters now believe that GDP has moved into positive territory in the 3Q, and perhaps it has. Unfortunately, we don't get our first 3Q GDP estimate until the end of October. The latest GDP estimate for the 2Q was unchanged at -1.0%, which was better than expected. I will cover the latest encouraging (and not so encouraging) economic news just below.

The Economy - More Signs of Recovery

We have seen considerably more positive signs than negative over the last month. Let's begin with the ISM manufacturing index which rose sharply to 52.9 in August, up from 43.4 in July. It is the highest reading since June 2007. A reading above 50 in the ISM index indicates that the economy is recovering. The ISM "new orders" index jumped 9.6% in August to 64.9, which confirms that inventory rebuilding is intensifying, albeit from very depressed levels.

Durable goods orders jumped 4.9% in July (latest data available) following -1.3% in June. Industrial production increased 0.5% in the same period. The factory operating rate also increased modestly in July. Construction spending, however, was still down slightly in July.

The Index of Leading Economic Indicators rose for the fourth consecutive month in July (latest data available) with a rise of 0.6% following a gain of 0.8% in June. Four consecutive up months in the LEI is quite encouraging, indicating that the worst of the recession is likely behind us, and the economy may move into positive territory before year-end.

The Consumer Confidence Index bounced back in August to 54.1 versus 47.4 in July. After rising sharply in the spring, the Index drifted lower in June and July so the latest recovery was welcomed. The University of Michigan Consumer Sentiment Index also closed out higher at the end of August.

Unfortunately, the rise in consumer confidence that began in the spring has not translated into significantly higher consumer spending. Retail sales in July fell 0.1%. Personal consumption expenditures, another measure of consumer spending, were up only 0.2% in July. Most Americans are still very concerned about the economy, and many are choosing to save rather than spend. The Commerce Department reports that the personal savings rate rose to 5% of disposable income in the 2Q, the highest rate in over a decade.

On the housing front, there was some good news in the last month. Pending home sales rose 3.2% in July following a gain of 3.6% in June. Actual sales of existing homes rose 7.2% in July to an annual rate of 5.24 million units. Sales of new homes rose 9.6% in July, the largest monthly gain since February 2005. Much of the increase in home sales in recent months is attributed to the up to $8,000 in tax incentives for first-time home buyers; yet no one knows what will happen when this stimulus program ends later this year.

The Labor Department announced last Friday that the US unemployment rate jumped to 9.7% in August, up from 9.4% in July, and above pre-report expectations. In August, the official number of unemployed persons increased by 216,000. The Labor Dept. also reported that there are now 14.9 million unemployed Americans, and this number is likely headed even higher in the months ahead.

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.

Is the Recession & Credit Crisis Over?

In the 30 years that I have been writing about the markets and the economy, a "recession" has consistently been defined as two or more consecutive quarters of negative growth in GDP (or GNP back in the old days). Likewise, two consecutive positive quarters meant that the recession was over. Be that as it may, if the initial GDP report for the 3Q is even mildly positive (which we won't get until the end of October), you're going to hear virtually everyone declare that the recession is over - whether or not that proves to be the case.

While I remain a bit skeptical, most of my trusted sources believe at this point that 3Q GDP will be at least mildly positive, and that the 4Q will be as well, in large part due to inventory rebuilding. But most of these same sources are not predicting a strong recovery in the economy. Some believe that there is still a real chance that we will slip back into recession in late 2010 or 2011, especially if consumers continue to save rather than spend.

As for the credit crisis, I think it is fair to say that it is no longer a crisis. But as anyone who is trying to get credit for a business knows, the banks are still not lending remotely as they were before the subprime blowup occurred. New lines of credit are few and far between. Many banks still have too many bad loans on their books, so they're not looking for new ones.

According to the FDIC, 84 US banks have failed so far in 2009, a record pace. So while it may be safe to say that the credit "crisis" is over, we are still far from being out of the woods. There are now 416 banks on the FDIC's "problem list" (up from 305 in March), so there will continue to be multiple bank failures every month for some time to come.

Then there's the 800-pound gorilla in the room - the Fed. At some point, the Fed will have to unload the $2+ trillion in questionable securities and toxic assets on its balance sheet. The Fed can't continue to print money ("quantitative easing") indefinitely; likewise, it will have to shrink the money supply at some point; and finally, short and medium-term interest rates will have to be allowed to rise somewhere down the road, especially if the economy rebounds.

Obviously, no one short of Ben Bernanke knows when this will happen. My best sources believe that because of the deflationary forces created by deleveraging, the Fed has at least a year to maintain its current stimulative policies without risking higher inflation. Similarly, they believe the Fed can wait a year or so before having to begin unloading assets and trim its balance sheet.

Virtually, everyone I read in the financial/investment world agrees that the Fed faces a daunting challenge when the time comes to unload these assets. This problem, above all, will continue to hold the threat of a double-dip recession over the economy and the markets. We all need to keep this in mind even if the economy goes positive for a few quarters.

Obama Adds $2 Trillion to Debt Forecast

2009	$1.845	trillion	2015	$785	billion
2010	$1.379	trillion	2016	$895	billion
2011	$970	billion	2017	$945	billion
2012	$658	billion	2018	$1.023	trillion
2013	$672	billion	2019	$1.189	trillion
2014	$749	billion

TOTAL $11.11 Trillion

As noted in the Introduction, both the CBO and the White House Office of Management & Budget (OMB) recently reduced the budget deficit forecast for fiscal 2009 from the $1.845 trillion noted in the table above to apprx. $1.6 trillion. So, the $11.11 trillion shown above would now be reduced to apprx. $10.87 trillion (if the latest projections prove to be correct).

Note that this astronomical amount does not include over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over next decade as the Baby Boomers retire. Nor does it include the existing national debt of $11.7 trillion. The $10.87 trillion is merely the sum of annual budget deficits over the 11 years from 2009 to 2019.

Given that September is the end of fiscal 2009, the talk is now focused on record budget deficits for the 10 years from 2010 to 2019. Never mind that the 2009 deficit will be apprx. $1.6 trillion, almost four times larger than our previous worst deficit in history, which was $438 billion in fiscal 2008 under President Bush.

If you take out the $1.845 trillion 2009 deficit from the table above, the CBO deficit estimate for 2010-2019 is $9.02 trillion. This is $9 trillion that we will add to the national debt over the next 10 years, based on Obama's budget projections. Yet for months now, the Obama administration has taken flack because its own OMB has maintained that the 2010-2019 deficits would only total apprx. $7 trillion. But that has recently changed.

Now if you're the President of the United States, and you have some news that is not flattering to release to the public (especially in a recession), you might decide to quietly release that news at the end of the day on a Friday, and hope that it doesn't get much play on the weekend news shows. That is exactly what happened on Friday, August 21.

At the end of the day on Friday, August 21, a senior White House official announced that the Office of Management & Budget had revised its deficit forecasts for 2010-2019 from $7 trillion to apprx. $9 trillion. At long last, that puts Obama's forecast in line with the CBO's forecast.

Obama Administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama's budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and revised the 10-year tally of deficits to $9.05 trillion.

Some in the media welcomed the presumably more accurate deficit forecast; some even went so far as to note that such huge spending will be just fine, such as liberal commentator Paul Krugman of the New York Times. Others, however, were quite critical and seriously questioned how the Obama Administration could have been off by $2 trillion in its forecast.

The conservative Weekly Standard published a scathing article on August 31. Here are some excerpts:

"What's $2 Trillion Among Friends?

$2,000,000,000,000. That's the amount by which the Obama administration raised its ten-year estimate of the nation's budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama's budget director, is ‘higher than desirable'. He might have added that the administration's critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There's worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of [carbon] emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds ‘deeply alarming'.

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the [national] debt will be equal to 76 percent of the [projected] value of the nation's output of goods and services, almost double the 41 percent when Obama took control of the nation's finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others."

Economic Assumptions Still Too Optimistic

Warren Buffet is absolutely correct. Whether it's $7 trillion or $9 trillion, it's way too much and unsustainable. Over the next five years alone, 2010-2014, the debt swells by $4.5 trillion. In fact, these projections could actually be too low based on the economic forecasts used in the projections. I should point out that this is not just an Obama phenomenon. White House budgets, whoever was president, have been laced with optimism, and no president has forecast a recession in these 10-year projections.

(By the way, all presidential administrations produce these 10-year forecasts on spending, revenues and the budget deficits/surpluses, even though they won't be in office 10 years from now.)

Consider the latest OMB projections for growth in GDP in the next several years in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms; the economy has not seen such a period of growth since the 1960s.

And we can almost be assured of at least one more recession, if not two, over the next 10 years, what with the government running massive deficits every single year. Remember, the Fed will have to unload some $2 trillion in troubled assets at some point in the next few years. And, most forecasters agree that at some point, foreigners are going to curtail US dollar purchases, which will likely drive interest rates higher, at the least, or a currency crisis at the worst.

Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the Obama administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019. While it is true that inflation is declining now, thanks largely to the big drop in energy prices over the last year, we are almost certain to see higher inflation down the road.

What in the World Are They Thinking?

Most Americans that keep up with the economy and rising government spending, even remotely, are very alarmed about the exploding debt that President Obama has proposed for the next decade. Many of us wonder, what in the world could they be thinking? Do they want to purposely wreck the US economy? Frankly, I'm beginning to think so, as I will discuss later on.

Here is a snapshot of how many liberals on the left think about the perpetual rise in government spending and exploding deficits over the next decade. What follows is an August 23 editorial in the New York Times by liberal commentator Paul Krugman. He boldly attempts to explain why Obama's massive spending and deficits won't be a problem. He is wrong, of course, and I have inserted many bracketed words to help his column be more readable. I will elaborate afterward:

"How big is $9 trillion?

There's been some hysteria [no kidding] about the [Obama] administration's new estimate that the cumulative deficit will be $9 trillion over the next decade. Don't get me wrong: this is bad. But it's being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn't. [really?]

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion [annually]. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we're talking about adding debt that's equal to around 40% of GDP [this figure is bogus - see comments below].

Right now, even if we do run these [trillion dollar annual] deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don't change the basic picture.)

Again, the debt outlook is bad. But we're not looking at something inconceivable, impossible to deal with; we're looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with."

Wow! So record trillion dollar deficits don't matter, Mr. Krugman? There are so many ways to debunk this article, I almost don't know where to start. Let's first look at Krugman's most egregious misrepresentation. In the second paragraph, he states that the $9 trillion in new debt will be only 40% of GDP by 2019. What he fails to note is that we already have $11.7 trillion in national debt today. If we add another $9 trillion, the debt will be $20.7 trillion - or 94% of GDP - by 2019!! Nice try, Mr. Krugman.

Second, it's a lame attempt to compare the economy today with the period just after World War II. We had the most robust economic growth in history just after WWII when we were rebuilding Europe, veterans were buying homes, durable goods, cars, etc. as never before and our manufactured goods faced very little foreign competition. May I remind you, Mr. Krugman, that we are not in that position today!

Third, why should we all just assume that the US economy will average 2.5% annual growth over the next 10 years, despite doubling the national debt, just because it is some historical average? As discussed earlier, we will almost certainly see another recession in the next decade, as foreign buyers of our massive debt may require higher interest rates or dump the US dollar.

Do you honestly believe the US economy will grow by 2.5% annually for the next 10 years when consumer spending is stagnant and Americans are increasing savings at the highest rate in over a decade? We've just been through the worst financial crisis since the Great Depression, and we are very likely looking at several years of below-trend economic growth. On top of that, if we spend the $9 trillion, taxes will have to go up on almost all Americans at some point, which is also bad for the economy.

Like your liberal cronies, you make these assumptions and leave out certain facts to justify your belief that bigger government and higher taxes are the answer to all of our problems. Mr. Krugman, take a look at Social Security, Medicare and Medicaid - and more recently President Bush's prescription drug program. Give me one example of how these government-run programs have been anything but a fiscal disaster. You can't.

Finally, Mr. Krugman (in case you happen to read this), let me say that I enjoy reading your columns and watching you on the TV talk shows. You give me insight and understanding as to the thinking of those on the far left.

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.

Do They Want Control Even If It Ruins The Economy?

As noted earlier, I have thought about this question for many years. Why do the liberals want the government to control most everything in the economy and our lives? While members of Congress have the best healthcare in the world, they will have dozens of family members and friends and countless colleagues that will be subject to the House healthcare bill, if it is passed. So why are they so hell-bent on passing it?

The answer can only come down to two questions. Question #1: Do they really believe that their proposed national heathcare program is the very best we can offer the American people? And if so, why doesn't Congress adopt it for themselves? Or Question #2: Is this really just a massive power grab that puts the government in control of our healthcare and our lives?

President Obama would like us to believe that nothing will change if healthcare reform is passed - that if you like your current insurance plan, you can keep it. But that is patently false and abundantly clear if you read the onerous House healthcare bill, or even just the highlights that are readily available on the Internet. If they ram this down our throats, I firmly believe that the quality of our healthcare will suffer and the costs will far exceed any estimates being put forth by President Obama and the Democrats.

At the end of the day, I have to conclude that nationalizing healthcare (one-sixth of the US economy) is nothing more than a giant power grab by the liberals. In addition, if our government racks up $10+ trillion in cumulative deficits over the next 10 years, as Obama proposes, we are on our way to financial ruin.

Bill Clinton never scared me; he was too much of a political animal to swerve too far from the center. Unfortunately, the same could be said of George W. Bush, who routinely strayed from his supposedly conservative principles. Not so with President Obama. Sadly, many of those who voted for him did not do their homework or they would have known that he is a left-wing ideologue, as I warned in these pages last year.

Sorry to end on such a negative note, but it is what it is.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Federal deficits to bankrupt America
http://washingtontimes.com/news/2009/sep/04/looking-behind-the-curtain/

ObamaCare's Crippling Deficits
http://online.wsj.com/article/SB10001424052970203585004574393110640864526.html

Massachusetts & the ObamaCare Mistake
http://www.realclearpolitics.com/articles/2009/09/05/obamacare_increases_costs_wait_times_98176.html

Obama Cannot Escape Hard Choices in September
http://www.realclearpolitics.com/articles/2009/09/07/obama_cannot_escape_hard_choices_in_september_98192.html

When Does the Spending Charade End?
http://www.ibdeditorial.com/IBDArticles.aspx?id=336955542241664

Is America On The Road To Financial Ruin?

Gary D. Halbert — Tue, 23 Jun 2009 19:53:11 GMT

IN THIS ISSUE:

Obama's Government Takeover Continues
Editorial: "Too Big to Fail, Or Succeed"
Americans More Concerned About Deficits
Economy May Have Seen the Worst of It
Conclusions

Introduction

The more I think about it, I believe that last week's E-Letter which revealed President Obama's plans to double the national debt over the next decade was one of the most important e-letters/newsletters I have ever written. If by chance you did not read last week's E-Letter, you need to click on the link above and do so now, since Obama's planned explosion in US debt will be a continuing theme in these weekly E-Letters for some time to come.

I sincerely believe that if our current $11.4 trillion national debt doubles over the next 10 years (and possibly even sooner), it will bankrupt America and send us into an even worse financial and economic crisis. President Obama's plans to run trillion dollar annual budget deficits for at least the next few years are almost certain to wreck the US dollar, which in turn will be very bad news for the stock and bond markets, not to mention the long-term inflation implications.

I have warned for over 25 years that politics are intimately intertwined with the course of the economy, the markets and thus our investments. This argument has never been clearer than today, and more and more Americans are coming to realize this. A Wall Street Journal/NBC News poll late last week found that 58% of respondents now believe that Obama's trillion dollar deficits are a greater concern than the recession in the economy. Maybe I'm making some progress!

President Obama has made public statements in recent weeks that he would prefer a smaller government had he not "inherited" this recession and financial crisis from George W. Bush. He has also said that he does not want to run (own) companies like AIG, GM and Chrysler. Yet his administration continues to promulgate new regulations that will make it even more likely that the government will eventually own much larger stakes in the private sector.

Obviously, Obama's plan to have the government take over national health care is a prime example of his intentions to greatly expand an already bloated, inefficient government and run unprecedented trillion dollar budget deficits. I have not chosen to weigh-in on the healthcare debate so far, partly because polls show that a majority of Americans want major healthcare reforms. All I will say at this point is, be careful what you wish for.

Last week President Obama announced sweeping regulatory changes that will dramatically affect the financial and investment markets for years to come. These so-called "reforms" could result in the government and/or the Fed owning some of our big banks and financial institutions that are deemed to be "too-big-to-fail." While the recent financial crisis suggests that some reforms are needed, having the government own or control many of our largest financial institutions is not the answer.

I will discuss these sweeping new financial regulations as we go along. I will also discuss the latest economic indicators which remain mixed, along with my thoughts on the investment markets. It's a lot to cover, so let's get started.

Obama's Government Takeover Continues

Last Wednesday, President Obama announced the most sweeping financial industry reforms since the Securities and Exchange Commission was created in 1934. Obama unveiled new proposals that would refashion the federal rules governing almost every corner of finance, and will push the government and the Federal Reserve much more deeply into banks and the private markets. The administration's 85-page "white paper" on financial reform sounded the opening salvo in a likely overreaching regulatory process that could expand for several years.

Most importantly, government supervision of all financial firms that are deemed to be big enough to threaten overall economic stability ("systemic risk") will be consolidated under, and be regulated by, the Federal Reserve. We're not just talking about banks here – the new regulations will allow the Fed to oversee any private or public companies that are deemed to pose systemic risks (ie- "too-big-to-fail").

These entities will be required to hold more capital and liquidity than other firms, and will face other regulatory requirements as deemed appropriate by the Fed and/or the Treasury Department. Firms that cannot meet the Fed's requirements can be taken over, partly or wholly, by the government – as was the case with insurance giant AIG, or simply shut down – as was the case with Lehman Brothers. This is scary!

Obama's regulatory net is also being cast over the credit markets whose growth contributed to the financial crisis. Those who package loans together for sale in securitizations (including mortgages) will have to disclose more and will be required to keep 5% of any deal to encourage sounder underwriting. Likewise, the new plan calls for payment of their fees to be spread over time and reduced if the loans go bad. Frankly, these specific regulations may actually make sense, while others are simply unnecessary government intrusions in the private sector.

The president's new reforms also include the creation of a Consumer Financial Protection Agency (CFPA). In theory, this new government agency will safeguard against mortgage, credit card and other abuses that may have contributed to the current crisis. In reality, this new agency may ultimately be the arbiter of who can – and cannot – get a home mortgage, what interest rates lenders and credit card companies can charge, etc., etc. Concern is already mounting that the new agency will take an overly restrictive view of permissible financial products, limiting access to credit and curbing good as well as bad innovation.

What follows are excerpts from an Investors Business Daily editorial published last Friday that fairly, I think, points out the assessment of those who will oppose Obama's sweeping regulatory reforms:

"Many on Wall Street have been stunned by a plan that subjects America's free-market capitalism to the controlling whims of bureaucrats, newly appointed czars and congressional committees headed by anti-business liberals such as Rep. Barney Frank.

‘We intend to take our case to Congress to explain why we believe adding new layers to a broken regulatory system is not the answer,' David Hirschmann, who heads the U.S. Chamber of Commerce's Center for Capital Markets, told the Los Angeles Times. Indeed, there are lots of objectionable things in the plan.

…We hope Wall Street — banks, investment houses, hedge funds, private investors — continues to speak up. The Democrats' plan slips the government's fingers around the economy's neck, choking off the risk-taking that is the very essence of America's capitalist success. Bold risk-takers will be replaced with risk-averse bureaucrats, and the dynamic growth engine that feeds our ever-expanding standard of living will be shut down.

This in turn will create a permanent bailout culture — one that will deem certain companies ‘too big to fail' and subsidize their failure with taxpayer money, while burdening small, entrepreneurial companies with unnecessary and costly regulatory oversight."

The IBD editors hit on only a few of the potential problems with President Obama's sweeping new regulatory reforms included in his 85-page report released last week. Analysts are still sorting out the details and considering the long-term implications. Certainly, some of the reforms will be welcomed by many Americans, especially those who believe that the government should control the private markets. But with any such government intervention, freedoms are sacrificed and free markets are restricted. A June 18 Wall Street Journal editorial makes the best argument I have seen regarding Obama's sweeping regulatory reform proposals.

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.

QUOTE: TOO BIG TO FAIL, OR SUCCEED
Everyone will want to become big enough to enjoy 'systemic risk' protection.
by Peter Wallison (senior fellow at the American Enterprise Institute)

In a speech at the White House yesterday, President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth . . . a transformation on a scale not seen since the reforms that followed the Great Depression." Indeed it is.

His plan, if adopted, will fundamentally change the nature of our financial system and economy. The underlying concerns and assumptions are clear, and they are made clearer by considering other ways that his administration has dealt with the consequences of competition -- particularly the faux bankruptcies of General Motors and Chrysler and the impending change in antitrust policy. Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are too big to fail. It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

In other words, the administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy -- insurers, securities firms, finance companies, bank holding companies, and hedge funds -- where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated. Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." But failure comes from risk-taking -- the very source of our economy's strength -- and it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

The turmoil following Lehman's failure occurred because market participants expected, after the rescue of Bear Stearns, that any larger firm would also be rescued. When Lehman wasn't, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing, Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers.

Contrast this with AIG, the administration's paradigm, which was saved by the government because it was allegedly too big to fail. That firm is gradually wasting away under government control, with the taxpayers footing the bill.

The administration's fear of competitive outcomes is not reflected solely in financial-sector policies. Consider General Motors and Chrysler. They were defeated in the marketplace. Simply put, they failed to build automobiles [that] enough Americans wanted to buy.

Their disappearance would not have threatened the stability of the financial system, although it would undoubtedly have been disruptive for suppliers, dealers and employees. Yet the administration wouldn't allow them to fail, either. Despite all the talk about credit priorities, the fundamental point is that the administration used taxpayer money to overturn the market's verdict. If we want a preview of what the administration will do with the resolution authority it wants for large financial companies, we need look no further.

The same pattern with regard to competitive markets can be seen in the Justice Department's new antitrust policy. Christine Varney, the new assistant attorney general in charge of antitrust policy, has said that U.S. policy should be more like Europe's. Until now, U.S. antitrust policy has tried to protect competition. Europe attempts to protect competitors. Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.

The president has said on several occasions, including in yesterday's speech, that "I've always been a strong believer in the power of the free market." But his administration's prescriptions tell a different story. In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy -- a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.
END QUOTE

I could not agree more with Mr. Wallison's analysis above. Yet most Americans have no idea what President Obama's sweeping regulatory changes really mean, much less how they may negatively affect competition and the free markets. Most Americans only hear the media sound-bites which leave the impression that the Obama administration reforms will "fix" the financial markets once and for all.

Were some changes in regulation of the financial markets in order? Certainly. Subprime loans, "no-doc" loans and "liar" loans allowed millions of Americans to purchase homes they could never afford. Likewise, credit rating agencies allowed investment bankers to create AAA-rated bonds secured by these questionable mortgages, which greatly broadened the impact of the subprime debacle.

These and other abuses ultimately led to the housing crisis, the credit crisis and the most severe recession since the Depression. So, changes to the financial regulatory system were needed.

As I noted above, some of Obama's new regulations on mortgage lenders make a lot of sense and will help to curb abuses. But many others are nothing less than purposeful government intrusion in the private markets in ways that will stifle competition. In many ways, these new rules look more like nationalization than regulation.

Americans More Concerned About Deficits

While President Obama continues to enjoy high (but falling) approval ratings overall, the public is growing much more concerned about Obama's record-large budget deficits and government intrusion in our lives, as noted in this week's SPECIAL ARTICLES below. In particular, a new Wall Street Journal/NBC News poll published last Thursday had some surprising findings.

For example, a solid majority – 58% – were more concerned about the budget deficit than they are about the economy. Specifically, they said that the president and Congress "should focus on keeping the budget down, even if it takes longer for the economy to recover."

When asked about the expanding role of government (e.g. ownership stake in GM, executive compensation, health care, etc.) a whopping 69% said they were very concerned (49% answered "a great deal" and 20% answered "quite a bit").

On the issue of Obama's health care plans, the WSJ poll results suggest that the president still has a lot of convincing to do. 33% think it's a good idea, 32% think it's a bad idea, and 35% have no opinion. Put differently, 67% either think government run health care is a bad idea, or they're not sure.

The New York Times also released its latest poll last Thursday. It also revealed that the public is growing more wary of the expanding role of government. When asked if the government is doing too much or too little, the result was: 56% too much versus 34% too little.

These surprising poll results suggest that more and more Americans are realizing just how dangerous it will be for America to double the national debt in a decade or less, as I discussed in detail last week.

Economy May Have Seen the Worst of It

Barring a major negative surprise, I think we have likely seen the worst of this recession. The Commerce Department will release its final estimate of 1Q GDP on Thursday, and most forecasters expect it to be in the -5.5% to -5.7% range (annual rate), which is at least mildly less negative than the -6.3% plunge in the 4Q of last year. Together, these two quarters should prove to be the worst of the most severe US recession since the Great Depression.

There is a broad consensus that the US economy has continued to contract during the 2Q, with most suggesting a decline of 2-3% in GDP over the last three months. From there, though, forecasts vary widely as to what will happen in the economy during the second half of the year. While I continue to believe that GDP will remain in negative territory all year, a growing number of analysts believe that GDP could actually go positive in the 4Q.

We have had more good economic news in the last couple of weeks. Most importantly, the Index of Leading Economic Indicators (LEI) rose a better than expected 1.2% in May, following a 1.1% gain in April. These were the first back-to-back monthly increases in almost three years.

The Commerce Department reported on June 11 that retail sales rose 0.5% in May, the first increase in three months. However, the report indicated that much of the rise in sales was due to the significant increase in gasoline prices.

On the manufacturing front, the latest reports were mixed. The ISM Index rose modestly to 42.8 in May versus 42.3 in April. Remember that any reading in the ISM below 50 indicates an economy that is still contracting. Industrial production fell another 1.1% in May, while the factory operating rate slipped to 68.3% in May, down from 69% in April.

On the housing front, there was a bit of encouraging news. Housing starts rose sharply in May, thanks in large part to the federal home tax credit that expires in November. Building permits were also up modestly in May. However, the inventory of unsold homes remains at a record level with over 11 months' supply on the market. Home prices nationally plunged 19.1% in the 1Q and are down 32% from the peak in 2006. So the housing slump is far from over.

The US unemployment rate continues to spike higher, rising to 9.4% in May, up from 8.9% in April. A recent Wall Street Journal survey of economists found a consensus opinion that the unemployment rate will hit at least 9.9% by the end of this year. The continued rise in the unemployment rate is almost certain to keep consumers on the defensive.

While we are seeing signs that the worst of this recession is behind us, that does not mean the economy will move into positive territory by the end of this year. Consumer spending is still lagging and is likely to stay below trend for some time to come. The personal savings rate jumped to 5.7% in April (latest data available), the highest level in more than 14 years, and this trend is likely to continue.

The combination of declining housing and stock-market values with the heavy debt loads Americans took on during the housing boom has inflicted significant damage on household finances. The Federal Reserve's latest "flow of funds report" earlier this month showed that household net worth fell $1.1 trillion in the 1Q from the 4Q of last year to $50.4 trillion, putting it $13.9 trillion below its 2007 peak. Collectively, homeowners held 41.4% of the equity in their homes, the lowest level since records have been kept and down from 53.9% two years earlier.

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

As noted above, we have seen some encouraging signs in the economy. If you watch any of the financial channels, you will find that there is a great deal of optimism that the recession will be over before the end of this year. Sorry, but I just don't buy it. I continue to believe that the economy will still be in negative territory at the end of the year, as measured by GDP. I hope I am wrong.

As for President Obama's sweeping financial regulatory reforms he announced last week, we would hope to be implementing new regulations that should prevent anything similar to the sub-prime meltdown and the credit crisis from ever happening again. However, I believe that most of Obama's proposed regulatory changes are over-reaching and onerous. But Congress is likely to pass most or all of them, despite the long-term market implications.

On a positive note, I am very encouraged that more Americans are becoming increasingly concerned about the mammoth level of spending and deficits planned by the Obama administration over the next decade. Doubling the national debt in the next decade (or less) will have extremely negative consequences for the economy and stocks and bonds.

I feel that more of the public is coming to realize just how much exploding federal deficits will affect the future of their children and grandchildren. Perhaps we have come to realize just how large a sum one trillion dollars is, how long it could take to pay it back and who will be required to make those payments. More people want the government to do what every family must do - make tough decisions on which expenditures are most important and which can be deferred.

Finally, I believe that the public is picking up on the fact that capitalism's very structure is changing. Specifically, the government has switched from a role of economic supporter and regulator to owner and controller. This is a fundamental shift in the very nature of capitalism and could have ramifications far into the future. To me, this is the most disturbing of all of the recent events that have come to pass.

Let's hope that our representatives in Washington get the message that the recent polls are sending – that Obama's incredible spending and bigger government plans will wreck our economy over time. If not, it could be a very bleak future that we leave to our heirs. Sorry to end on a negative note, but it is what it is.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

Independent voters worried about Obama's spending
http://online.wsj.com/article/SB124570175501838333.html

More polls show growing concern over Obama's deficits
http://www.nydailynews.com/opinions/columnists/goodwin/index.html

Public confidence in Obama stimulus plan is falling
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/22/AR2009062202000.html?hpid=moreheadlines

Obama On Course To Double National Debt

Gary D. Halbert — Tue, 16 Jun 2009 22:27:44 GMT

IN THIS ISSUE:

Obama's Unprecedented Spending Spree
Obama's Deficits To Double The National Debt
Will The Markets Halt The Explosion In Debt?
How Will Obama Fund His Massive Spending?
Inflation Implications of Obama's Spending
Conclusions - Why Is He Doing This?

Introduction

It took the United States of America 233 years (1776-2009) to amass a national debt of $11 trillion. Yet President Barack Obama's record large 2009 budget deficit estimated at $1.85 trillion and his own spending plans for the next 10 years (2010-2019) show that our national debt will likely double over the next 10 years.

Using the Obama administration's own projections, the non-partisan Congressional Budget Office (CBO) estimates that, including the record 2009 budget deficit of $1.85 trillion, and huge annual deficits over 2009-2019 will result in an additional $11.1 trillion in national debt, on top of the current $11.4 trillion. As I will discuss below, the national debt will very likely more than double in the next decade because some of the CBO's economic assumptions may be too optimistic.

As noted above, the CBO also recently revised its estimate for the budget deficit for fiscal year 2009 to at least $1.85 trillion. But unless the economy rebounds soon, that number will very likely top $2 trillion by the end of September when FY2009 comes to an end. According to the CBO, Obama plans to run a FY2010 deficit of apprx $1.4 trillion and almost $1 trillion in FY2011.

Keep in mind that these deficits do not include even half of the massive costs for Obama's health insurance plan, which some experts now project will cost between $1.5 and $2 trillion over the next 10 years. Likewise, these projections do not include any money for the trillions that will have to be spent saving Social Security and Medicare over the next decade.

Whether you are a liberal or a conservative, these numbers should alarm you! If the national debt doubles over the next 10 years, it will almost certainly be a disaster for the US dollar and the bond markets, and it will almost certainly wreck the stock markets as well. The largest foreign holders of US Treasury debt are already expressing concern about Obama's record spending, and they could abandon the dollar and US Treasury securities if the national debt rises 50% over the next five years, and doubles over the next 10 years, as is projected by the CBO.

This week, I will discuss the market implications of the national debt doubling in the next decade. Let's get started. [Note: this week's E-Letter will print longer than normal because I have included several charts and graphs.]

Obama's Unprecedented Spending Spree

In just four months of his presidency, President Obama has shown he isn't afraid to spend hundreds of billions of dollars on corporate bailouts or run up trillions of dollars in US debt in an effort to end the economic and financial crisis. But in doing so, he has initiated the largest expansion of federal government since World War II and set up a massive challenge for his administration.

During the first 100 days of his presidency, Obama has signed the $787 billion stimulus bill into law, proposed an eye-popping $3.6 trillion federal budget for the 2010 fiscal year, taken over a massive $700 billion Wall Street bailout program (TARP) and created other multi-billion-dollar government programs supposedly to help grease the economic wheels.

In the wake of the economic and financial crisis, numerous respected economists and financial forecasters, including The Bank Credit Analyst and billionaire Warren Buffet just to name a couple, agreed late last year that the government should intervene with a large fiscal stimulus package to help rescue the US economy. Many of these same sources wasted no time jumping onboard when Obama floated his idea of a near $1 trillion “stimulus package” earlier this year.

After some congressional tinkering, the final stimulus package came in at $787 billion. While many argued that most of the huge stimulus should be spent in 2009 and 2010, President Obama strung it out over the next 3-4 years to fund his liberal programs, with relatively little of the money being spent in 2009 to jump-start the economy out of recession.

To-date as of late May, according to the Congressional Budget Office, Obama has only spent $37 billion of the $787 billion stimulus package this year. Are you surprised? Coming under increased scrutiny for not spending more sooner, Obama said last week that he is trying to accelerate the rate of spending of the stimulus money. Whatever happens, this misses the point we should be focused on.

The point is, while many respected analysts agreed that a large stimulus package was needed in the short-term, they didn't expect that President Obama would string-out the stimulus over four years with very little spent in 2009, plus continue to run trillion dollar annual budget deficits for several more years.

Now that the economy is showing signs of a modest turnaround - with only $37 billion in stimulus spending - some are suggesting that Obama should rescind the remainder of the $787 billion stimulus package and save the money. To that I say, fat chance!

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.

Obama's Deficits To Double The National Debt

Along with the President's request for a record $3.6 trillion budget for FY2010, he also submitted to Congress and the CBO his spending plans for the next decade. These numbers shocked even many of those who initially supported the $787 billion stimulus package. What follows are Obama's projected annual deficits for FY2009 and the next 10 fiscal years according to the non-partisan CBO:

2009	$1.845	trillion	2015	$785	billion
2010	$1.379	trillion	2016	$895	billion
2011	$970	billion	2017	$945	billion
2012	$658	billion	2018	$1.023	trillion
2013	$672	billion	2019	$1.189	trillion
2014	$749	billion

TOTAL $11.11 Trillion

http://www.cbo.gov/ftpdocs/100xx/doc10014/selected_tables.xls

You can confirm these huge budget deficits by the CBO at the link above.

[Editor's Note: Obama promises to cut the deficit in half in four years, and the $658 billion projected deficit in 2012 certainly accomplishes that, but it is still $200 billion more than Bush's record-large budget deficit of $458 billion in fiscal 2008.]

Where to begin?? First, these numbers should be staggering to anyone reading this, regardless of whether you are a liberal, a conservative or anywhere in between. Second, if these numbers prove to be reasonably accurate, the United States will go from a national debt of $11.4 trillion today to $22.5 trillion by the end of FY2019. As I will discuss below, it could be even higher. This is unheard of!

If you add up only the first five years, 2009-2013, you find that the national debt explodes by almost 50%. This unprecedented spike in the national debt will greatly exacerbate concerns on the part of our largest foreign buyers of Treasury debt, not to mention the downward pressure it will create on the US dollar and further upward pressure on interest rates.

If we look at the FY2009 deficit alone, estimated to be $1.85 trillion, we find that it equals 13.1% of GDP, according to the Congressional Budget Office. That's over twice the post-World War II record of 6% in 1983 under Ronald Reagan.

Fed Chairman Ben Bernanke testified last week that: “The ratio of federal debt held by the public to nominal GDP is likely to move up from about 40% before the onset of the financial crisis to about 70% in 2011.” That puts the debt-to-GDP ratio at its highest level since the early 1950s, as a result of the huge debt buildup during World War II and just afterward. The CBO projects that the debt-to-GDP ratio will soar to 82% by 2019.

In his House testimony last week, Bernanke added: “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” Of course, that comes from the head of the Fed which is in the process of buying up to $2 trillion in toxic securities and printing the money to pay for them.

Finally, to be fair, I must acknowledge that the current cycle of exploding debt began with George W. Bush. In the latter years of the Bush administration, spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit ($63 billion cost this year), and let spending on many domestic programs run wild. Over seven years, the wars in Afghanistan and Iraq added a total of some $900 billion to the budget.

All told, Bush raised federal spending from 18.5% of GDP to 21%, setting in motion a chronic budget gap by piling on new spending without paying for it. Long-time clients and readers will recall that I roundly criticized President Bush numerous times in these pages as he proved he could spend with the best of the Democrats.

Yet Obama has elected to take spending and budget deficits to a whole new level. Take note that Bush added apprx. $4 trillion to our national debt during his two terms, whereas President Obama is planning to add more than $11 trillion over the next decade. Americans should not buy into the idea that President Obama is only spending this much because he inherited a recession and credit crisis from Bush.

As Fortune magazine's financial writer Shawn Tully wrote last week, “Under Obama the Bush trend keeps going, but this time on steroids.” Doubling the national debt in a decade should be unconscionable!

As noted earlier, it is quite conceivable that the federal budget deficits could more than double, especially if Obama wins a second term as president. Why? First, the CBO projects that real GDP will grow by 2.9% in 2010. I certainly hope they are right, but I doubt growth will be anywhere near that robust next year. Second, the CBO projects that real GDP will grow by 4% in 2011 and 3.6% annually during the years 2012-2015. You can view these assumptions at: http://www.cbo.gov/budget/data/econproj.xls

The latest CBO estimates also assume there will not be another recession between now and the end of fiscal 2019. Granted, it is next to impossible to predict when the next recession will occur, but it is also a stretch to believe we won't have one again for over a decade.

The bottom line is, these economic growth projections are very optimistic in my view and that of several other analysts I read. Bond market maven Bill Gross of PIMCO fame agrees:

“The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don't count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have.” [Emphasis added, GDH.]

If real GDP does not grow by the CBO projections of 2.9%-4.0% in 2010-2015, then tax revenues will be lower than projected, and this will increase the annual deficits, unless spending is reduced accordingly or income taxes are raised significantly.

Likewise, the CBO does not factor in any federal expenditures that would be required to overhaul Social Security and Medicare in the next 10 years. Estimates on what it will take to make these agencies solvent in the years ahead vary widely, but most economists agree it will take at least $20-$40 trillion.

Thus, the national debt could easily increase by more than $11.1 trillion in the years 2009-2019, especially if President Obama wins a second term.

Will The Markets Halt The Explosion In Debt?

It is my strong opinion that the markets will NOT sit by and watch the national debt soar by 50% in five years and double in 10 years. In 2009-2011 alone, the projected deficits total $4.2 trillion. That amount alone will, in my opinion, be more than enough to send the US dollar sharply lower. And the dollar is already quite low as you can see in the chart below. From its highs in 2001, the dollar lost apprx. 40% of its value before rebounding modestly beginning in 2008.

Note that since late February, the US dollar Index has once again rolled over to the downside and is trading around 80 as this is written. If the dollar falls below the 2008 lows, I would expect another potentially powerful leg to the downside, fueled largely by the explosion in US debt and credible fears of rising inflation in our not-too-distant future.

With our major foreign lenders already complaining about buying US Treasury debt, a weaker dollar will only cause them additional concerns about rising inflation. Ditto for rising US Treasury yields. After falling significantly for the last several years, especially as the credit crisis unfolded, yields on Treasury securities have reversed sharply higher since the first of the year, much to the Fed's dismay.

[Note: Treasury futures decline when yields go higher.]

The 10-year Treasury note yield, for example, almost doubled in recent months, rising from around 2% at the beginning of the year to near 4% as this is written. Like the dollar, US Treasury yields are extremely sensitive to inflation expectations.

Adding to the problem is the fact that the largest foreign buyers of US debt are notably concerned about the trillions Obama plans to spend and the likelihood that it will lead to higher inflation in the US. China has recently called for the yuan to replace the US dollar as the world's reserve currency. That won't happen anytime soon, of course, but it certainly indicates the level of discomfort among the major foreign buyers of our debt, which include:

China	$768 billion	OPEC	$192 billion
Japan	$687 billion	Russia	$138 billion
Caribbean	$213 billion	Un. Kingdom	$128 billion

Source: U.S. Treasury Dept. as of March 2009.

Obviously, if the dollar resumes its bear market, and Treasury yields continue to rise, this will raise even more concerns among foreign lenders regarding higher US inflation down the road. In addition, this will not only hamper the modest recovery from this severe recession, but could also throw us back into a new recession over the next few years as Obama increases the national debt by $4.2 trillion in 2009-2011 alone.

How Will Obama Fund His Spending
If The Markets Force His Hand?

If the markets respond to Obama's enormous increases in spending and budget deficits as I fully expect they will, he will have to resort to other measures to fund his record large spending plans. Here are some examples of how he may attempt to do so.

During the campaign and since taking office, Obama has promised to raise taxes only on those Americans making $250,000 a year or more. For those making $249,999 or less per year, he has promised to leave in place former President Bush's tax cuts. But the math doesn't remotely add up.

Numerous recent studies have shown that if Obama wants to cover his spending plans by raising taxes only on those making $250,000 a year or more, he would have to raise their tax rate to at least 60%. That is not likely to happen (or so I would presume).

Facing the projected annual budget deficits from the CBO discussed above, Obama will have little choice but to renege on his promise not to raise income taxes on the middle class in the next year or two if the economy does not rebound robustly. I will go on the record and predict that Obama will repeal the Bush tax cuts on the middle class by 2011 if not sooner.

Yet even that will not come close to covering Obama's massive spending plans in the next few years. On this point, conservatives and even many liberals agree, including liberal maven Paul Krugman, a leading columnist for the New York Times. Krugman is urging Obama to raise income taxes on both the wealthy and the middle class.

The Obama administration clearly understands that its spending plans will lead to huge deficits in the future. Yet President Obama refuses to admit publicly that his spending plans will double the national debt in 10 years, as the CBO has projected, and he is reluctant to break his promise and raise taxes on the middle class (although I believe he will by 2011 at the latest).

Another option President Obama and Congress are now considering is a European-style “Value-Added Tax”(VAT) that will increase costs to ALL Americans for the goods and services we buy. Space does not permit me to go into all of the details of a VAT tax, but suffice it to say that additional federal taxes are levied on goods and services at various levels in the production process before these products and services are offered to the public.

In my opinion, the VAT tax is the most egregious way for politicians to raise taxes in an effort to deceive the public. Yes, the informed public will know exactly what is happening with a VAT tax, but many taxpayers will simply see it as the continual rise in the prices of goods and services due to inflation, and not as the result of an increase in taxes.

For over two decades, the VAT tax has been discussed only in the context of an alternative to our current progressive income tax system. The discussion has been, if we implement the VAT tax (or a national sales tax), we could eliminate the current income tax. Never before now has a VAT tax been discussed in addition to the current income tax. But it is on the table now!

Obama's press secretary said last week that a VAT tax is not on the table now, but others in his administration have admitted that it has been discussed. Congress is already considering a VAT tax openly. I will not be surprised if Obama and Congress try to implement a VAT in 2010 or 2011, especially if the markets react as I suggested above.

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.

Inflation Implications of Obama's Spending

Over the years, many clients and readers have asked me how and why we have had spiraling inflation at various times over our history. The textbook answer is that inflation rises when too much money is chasing too few goods and services. Too much money chasing too few goods is far too simple an explanation in today's incredibly complex financial world. Yet the basic premise is still true.

The Federal Reserve controls the money supply, and the money supply has skyrocketed over the last 18-24 months as the credit crisis has played out. Yet because of the severe recession, because consumers are spending less and saving more, and because home prices continue to implode, the dramatic rise in the money supply has not sparked higher inflation. In fact, deflation has been the greater threat over the last 18-24 months.

For the reasons noted above and others, the Fed has had the ability to pump up the money supply by a record amount over the last 18-24 months without generating sharply higher inflation. But most economists and financial analysts agree that at some point the Fed must remove some of this liquidity and increase interest rates or else inflation will begin to rise, perhaps significantly. This is part of the reason why Treasury yields have jumped recently.

As you can see in the chart below, commodity prices are already on the rise. The CRB Index represents a basket of traditional commodities (grains, meats, metals, sugar, cotton, rubber, etc.), and this index has jumped apprx. 20% just since mid-March.

Interestingly, the CRB Index does not include crude oil, heating oil or gasoline. As we all know, crude oil prices have surged from $35 a barrel in mid-February to above $72 a barrel last week. The national average price for a gallon of gasoline was over $2.60 last week according to the Dept. of Energy, and has risen over $1 per gallon since the first of the year.

So, it is clear that the seeds of higher inflation have been planted. But because the recession is likely to continue at least another quarter or two, I don't expect inflation to spike higher anytime soon. However, the Fed faces some very difficult choices in the second half of this year as the economy shows more signs of recovering.

Conclusions - Why Is He Doing This?

Based on the Obama administration's own spending projections, the non-partisan Congressional Budget Office projects that the US national debt will almost double by 2019. It will increase by 50% in the next five years alone, as Obama runs trillion dollar deficits for several years. The CBO now estimates that the fiscal 2009 deficit will be a whopping $1.845 trillion, and it could be even higher.

Fed Chairman Ben Bernanke warned that the US debt-to-GDP ratio will soar from 40% to 70% between now and 2011 as Obama records trillion dollar deficits. The CBO projects that the debt-to-GDP ratio will soar to 82% by 2019. Sadly, all of these numbers could come in even higher if the CBO's economic assumptions prove to be too optimistic, as I believe they will.

It is my belief that the US dollar will plunge, and bond yields will rise sharply if Obama insists on running trillion dollar deficits for the next several years. If so, the president will have to resort to raising taxes on not just the “rich” but the middle class as well. It may come in the form of a “Value-Added Tax” which will raise taxes for everyone. We'll see.

The commodity markets are signaling that higher inflation lies ahead. Maybe not in 2009 but it will almost certainly happen if Obama runs trillion dollar deficits for the next several years. We will see if the Fed can keep inflation under control. I doubt it unless the Fed is willing to risk another recession in late 2010 and 2011.

At the end of the day, the question is, why is President Obama willing to risk so much in order to spend record amounts of taxpayer money? I will leave that question for others to ponder.

Likewise, I have not opined in this letter as to Obama's push to get his health care “reform” program passed as soon as possible. However, there is a very good article on the subject in SPECIAL ARTICLES below.

Finally, I rest assured that I will get blasted by readers who are Obama supporters as a result of this E-Letter - I always do when I write anything negative about him. But as noted earlier, doubling the national debt in 10 years (or possibly less) ought to concern ALL Americans regardless of their political persuasion. If you agree, feel free to let me know.

That's all for now.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

The Beginning of the End of Private Health Insurance
http://www.reason.com/news/show/134016.html

A Red (Ink) Letter Day For Gov't: $1,000,000,000,000 In 8 Months
http://www.ibdeditorials.com/IBDArticles.aspx?id=329442095812782

Bonds - What Goes Up Must Come…
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/15/AR2009061502710.html

Where To Turn If You Lose Your Job

Gary D. Halbert — Tue, 09 Jun 2009 21:09:58 GMT

IN THIS ISSUE:

The JOHNSON O'CONNOR Research Foundation
Helping People Find The Best Careers For 87 Years
Scientific Testing To Determine One's Natural Aptitudes
Matching Aptitudes & Careers For Success & Happiness

Introduction

As you read today's E-Letter, be advised that the Democrat-controlled Congress is working furiously this very week on restructuring our nation's health care system based on orders from President Barack Obama. Obama has ordained that the do-over of US health care must include a "government-provided" health care option that will compete with the private sector health care system that we have had for decades.

President Obama's road map for our nation's future would eventually have all Americans enrolled in his nationalized health care plan, and this may well come to be over the next few years given the fact that the government has a blank check (printing press), unlike the private health care system we currently have. Obama's takeover of our health care system will make his takeover of the banks, AIG, the carmakers, and whatever else is to follow look miniscule.

As I warned often during the presidential campaign last year, President Obama comes from a political persuasion that has no problem with the federal government owning and controlling vast amounts of the private sector. There is now no question about this (actually, there never was, if you did your homework). But even I didn't foresee that Obama would spend and/or commit tens of trillions of dollars in just his first four months as president.

I will have much more to say in the weeks and months ahead about Obama's systematic takeover of health care and his massive expansion of government, but for this week we return to a theme I have advanced frequently over the years that is not directly investment related. I have received more positive input on what follows than just about any topic I have written about since I began this weekly E-Letter.

In the pages that follow, we will revisit the Johnson O'Connor Research Foundation which I have recommended for years. This update is timely in that the national unemployment rate is racing higher (now 9.4%) and may hit 10% or higher by the end of the year. If you or others you know have lost their jobs, or are likely to lose their jobs soon, a trip to Johnson O'Connor to find out what field you/they are naturally best suited for can be invaluable.

As always, the sophisticated aptitude testing at Johnson O'Connor is great for helping your kids or grandkids determine what career path they should (or should not) pursue. My daughter will be a senior in high school next fall, and her test results were extremely helpful now that we are deep into the college selection process for her.

A visit to the Johnson O'Connor Research Foundation can be one of the greatest gifts you can ever give your children, grandchildren or others who are dear to you (or maybe even yourself). What I am about to describe is something that has literally changed the lives of dozens of my friends and relatives over the last 30+ years. Some of you may have heard of Johnson O'Connor, but most of you probably have not.

Don't jump to any conclusions: this is not my favorite charity; in fact, it's not a charity at all; and I am not going to ask you to donate any money. What I am going to do is tell you how Johnson O'Connor helps people decide which career fields they are most naturally suited for, based upon scientific testing of their unique set of individual aptitudes. Everyone in my family has been through the testing, including me.

So, I urge you to read the following article, especially if you have any loved ones who have lost their jobs or are struggling to find a career path. Ideally, Johnson O'Connor is geared toward high school students who are trying to decide what to do when they grow up, and more specifically, which direction to go in college. But it can be equally helpful to those who are already on a career path but aren't happy or successful.

How I Learned Of Johnson O'Connor

Before I discuss the specifics about Johnson O'Connor ("J-O") and how they change lives, let me tell you how I found out about this unique organization. Even before I got out of college and graduate school, I knew exactly what I wanted do. Yet most college students are unsure of what they want to do after school and end up taking the best (or only) job offer they get. All too often, that first job (or series of jobs) doesn't work out, for various reasons. The problem is, bouncing around the job market for a year or two or more right after college can leave people way behind their peers who get on the right career path to begin with.

I had a friend I went to college and graduate school with who had trouble with her initial jobs after grad school. She had been a science major in college (as was I), and then shifted to business in graduate school. We both got our Masters Degrees in 1976. She landed a good job in Houston after grad school but was just never comfortable in the corporate world.

I was working in Dallas in the investment business in 1978 when I first learned about Johnson O'Connor, which has an office in Dallas. I requested information on their testing service and subsequently recommended that my friend go there. She went, and to her surprise, she learned that her natural aptitudes were not at all suited for either the corporate world or the science field.

Based on the assessment of her aptitude tests, Johnson O'Connor recommended she consider the field of interior design. While shocked at first, she ended up changing careers and was quite successful. I haven't kept up with her in recent years, but the last time I did, she had bought and renovated several old buildings into bed and breakfasts, and was happy and successful.

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.

I Had To Try It Myself

Given my friend's results, I referred several other friends (and my younger brother) who were struggling or unhappy in their careers to Johnson O'Connor. In every case, the result was the same: a seemingly radical change in career path that led to a happy and successful end.

While I was very happy and enjoying early success in my career in the investment field, I couldn't help but go to Johnson O'Connor myself. Actually, I was a little nervous about what I might learn. As it turned out, my test results of my natural aptitudes showed that I was well suited for several fields. Here were Johnson O'Connor's recommendations for me, in order:

1. Stock Broker
2. Investment Banker
3. Journalist
4. Fortune 500 CEO
5. Real Estate/Land Developer

[Before you jump to any conclusions, let me tell you that Johnson O'Connor does not allow you to tell them anything about what you may already be doing, career-wise, prior to the testing and analysis afterwards. Only after they have given you the test results and career recommendations do they allow participants to divulge their current occupation – or desired occupation if a student.]

Obviously, I was pleased with my results and somewhat relieved that I was already working in the investment field, as suggested by Johnson O'Connor's #1 and #2 recommendations. At first, I couldn't figure out where the "Journalism" aptitude fit in. But then, in my final exit interview, I happened to mention my weekly client newsletter, which I had begun in 1977. "There you go," the analyst replied, "your newsletter is where your journalistic aptitudes are coming out."

As for the Fortune 500 CEO option, the analyst noted that while I tested to have the aptitudes to be a big-time CEO, he also stressed that I would never make it that far up the corporate ladder, because my aptitudes also showed that I was (am) too impatient and needed to be in control of my own destiny. As for the real estate part, years later I became involved in several real estate developments.

An Invaluable Store Of Personal Information

As noted above, I have referred dozens of people to Johnson O'Connor over the years. In every adult case but my own, the results have suggested a change in career path, sometimes a dramatic change. While I haven't kept up closely with every person I referred to Johnson O'Connor over the years, I can tell you that everyone benefited significantly from the experience.

The information gleaned from the Johnson O'Connor aptitude tests and analysis is tremendously helpful. Not only does it help greatly with career selection, but it also helps to understand one's personality, the reasons for one's desires and all sorts of little "quirks" we all have. It is a unique learning experience that can help throughout one's lifetime.

Tremendous Help In Selecting The RightCollege

Last year about this time, we took our daughter to Johnson O'Connor in Dallas at the age of 16. Interestingly, her test results were quite different from her older brother who tested at J-O in 2006. My son who graduated from high school last year is quite the math whiz, so we were not surprised that he scored very high in the math-related tests at J-O when he was tested three years ago. But what we did not expect was that he also scored very high in the tests related to "spatial visualization" – an aptitude that is very important to engineers, architects, medical researchers, etc.

For example, when I look at a building, I just see walls (one dimensional), whereas for my son and others with high spatial visualization, they envision the same building in three dimensions in their mind. Likewise, they can look at a blueprint and easily envision what the completed structure will look like. In retrospect, I shouldn't have been surprised since my son has been one of those take it apart and put it back together kids since he was very young.

Based on my son's scores, Johnson O'Connor recommended that he consider a career in engineering, medicine/medical research, scientific research or architecture. He is majoring in engineering in college and absolutely loves it.

When you consider how much money it costs to go to college today, it is extremely valuable to know that you are sending your son or daughter or grandchild to a school that offers degrees in those areas they are naturally suited for, and where they'll have a much better chance of succeeding.

The "Personality" Test At Johnson O'Connor

Johnson O'Connor believes that all of us fit into one of two broad personality characterizations: "objective" or "subjective." Generally speaking, people with ‘objective' personalities are those who enjoy working with groups, enjoy working with different people, and are what we often refer to as "people people." Over two-thirds of those tested at Johnson O'Connor are objective personalities (as am I).

‘Subjective' personalities, on the other hand, generally prefer to work as individuals rather than in large, fluid groups. They like to advance in their careers based on their own individual work, or that of a small group or team headed by them. Subjective personalities can usually work alone for long periods of time and do not need as much recognition or encouragement as their objective counterparts.

My son tested solidly subjective, and quite frankly, that explained more to me about my son and his personality than I had learned in the 16 years of raising him! While my son gets along well with his school friends, and plays football, basketball and baseball, when it comes to his studies or school projects, he usually prefers to work alone – which is typical of subjective personalities. While he has lots of friends, he is not the "social butterfly" like his younger sister, who tested objective in her visit to J-O last year.

So, What Is The Johnson O'Connor Research Foundation?

The Foundation is a non-profit scientific research and educational organization that was founded in 1922. They have two primary commitments: 1) to study human abilities; and 2) to provide people with specific knowledge of and about their aptitudes that will help them in making decisions regarding which colleges to select and which careers to pursue.

Each of us has a unique combination of personal aptitudes. Some of our aptitudes are stronger than others. Johnson O'Connor (as well as others) believes that unless we are able to "exercise" (use) at least our stronger aptitudes in our work or elsewhere, we are very likely to be frustrated.

Hundreds of thousands of people have been to Johnson O'Connor and used their service to learn more about themselves and to derive more satisfaction from their lives and careers. Johnson O'Connor's unparalleled specialty is testing and identifying one's natural, inborn APTITUDES. In their own words:

"Aptitudes are natural talents, special abilities for doing, or learning to do, certain kinds of things. Manual dexterity, musical ability, spatial visualization, and memory for numbers are examples of such aptitudes. In a comprehensive battery of tests available only through the Foundation, these and many other aptitudes are measured. These measured traits are highly stable [always present] over long-term periods.

Every occupation -- whether it is engineering, medicine, law or management -- uses certain aptitudes. The work you are most likely to enjoy and be successful in is work that uses your aptitudes. For example, if you are an engineer but you possess strong aptitudes that are NOT used in engineering, your work might seem unrewarding, difficult and unpleasant.

Aptitude testing is one tool for career selection. It can help you find where your aptitudes lie, what type of work uses those aptitudes, and why certain occupations may be more rewarding for you than others… What the Foundation does is give you an inventory of your aptitudes and examples of types of work suggested by the combination of these aptitudes… The Foundation, however, does not provide employment counseling services."

Why Johnson O'Connor Is So Different

As noted above, Johnson O'Connor has been doing aptitude testing continuously since 1922. Over the years, they have pioneered (and continually improved upon) aptitude testing. Participants who take the tests will wonder, I assure you, how certain of the tests can be so revealing. Some are very simple tests, while others are more difficult for certain people. My brother, for example, breezed through all of the engineering tests that I could not begin to complete. That explains why he is a successful engineer and I am an Investment Advisor.

The tests are just one critical part; the analysis of the test results is equally important. The experts at Johnson O'Connor have the benefit of 87 years experience in evaluating the test results and making career recommendations accordingly. While they do not recommend only one career path (usually they include at least three or more), each recommendation is suited for the participant's unique set of aptitudes and abilities.

There are times, especially among older participants who are already entrenched in the workforce, when it is simply impossible to make a career change as suggested by the test results and analysis. In these cases, Johnson O'Connor often suggests certain hobbies or other non-work related activities that may help exercise one's stronger aptitudes which are not used in the workplace.

Johnson O'Connor's time-tested theory is that if one has strong aptitudes (and most people do), they need to be used and challenged on a regular basis, preferably in the workplace where we all spend a great deal of time during our lives.

Not An IQ Test, But Does Test Vocabulary

It is important to understand that Johnson O'Connor's aptitude tests are NOT designed to measure or determine IQ. There are various organizations that offer IQ tests (beware: not all IQ tests are accurate or valid). Most experts agree that IQ tests are not inherently helpful when trying to decide on a career path. Two people can have identical IQ scores but very different aptitudes.

Also, Johnson O'Connor's tests do not consist of written or oral questions. They maintain that it is too easy to answer a written question as one feels inclined at the moment, or as they feel it "ought" to be answered. So, J-O does not administer question/answer tests. Again, some of their tests may seem unusual, but they are time-tested and extremely effective.

Johnson O'Connor's battery of tests does include a vocabulary test. It is widely accepted that one's vocabulary is an indication of his/her general knowledge. Most experts, including Johnson O'Connor, agree that one's vocabulary level is one of the best predictors of overall success in school and of performance on the SAT-Verbal and other similar tests. A good vocabulary is also a common characteristic of successful people in many occupations.

Vocabulary knowledge is not an aptitude, however, in that anyone can learn new words and increase their vocabulary. Thus, as part of Johnson O'Connor's program, they teach participants the importance of increasing their vocabulary and provide some specific study materials that are very helpful in doing so. Parents, you will love this!

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.

Time Involved, Cost & Locations

Normally, the process involves two half-day testing sessions, followed by a third half-day when the results and analysis are provided. It is also possible to accelerate this to one full day of testing and a half-day of analysis.

In the last appointment, participants are given a transcript of their scores, including charts and graphs, as well as a book and other explanatory materials. All test results are strictly confidential. A staff member explains in detail each of the scores and what they mean. And they explain each of the career recommendations and why they were selected.

If participants have questions at any time (before, during or after testing), Johnson O'Connor is happy to answer them. One of the best features is the option of follow-up meetings and discussions after testing and evaluation, which are free in the first year after testing (afterward only $100 per follow-up session). I have several friends who went back for follow-up discussions regarding jobs they were considering and how those opportunities might fit their aptitudes and/or what adjustments they would likely have to make in that particular job. My daughter and I did a follow-up meeting for her late last year. This is an excellent opportunity!

The cost for the Johnson O'Connor testing and evaluation is currently $600. While this might seem pricey at first glance, I can't tell you how many times I have seen this testing pay off in spades. This is especially true for high school students who don't know what they want to do. It can save years of expensive college costs if the student knows in advance what he/she wants to pursue.

Just as important, it can change the life of an adult child, loved one or close friend that is stuck in an unhappy or unsatisfying job situation, or anyone who has recently lost their job. Johnson O'Connor tests many adults who are in their thirties, forties and even fifties. Actually, this information on your aptitudes is very useful and very interesting to know at any age. With older people, naturally, they should have a real willingness to make a change.

Johnson O'Connor has testing centers in major cities around the country. The locations and phone numbers are listed at the end of this E-Letter.

Conclusions

I could not recommend Johnson O'Connor more highly! Whether you are a parent, a grandparent or whatever, you can give a young person a big advantage by having them tested at Johnson O'Connor. Even if you are not related, you can "gift" the testing fee to the minor, generally with no tax implications, or just pay it directly.

With the kids out of school for the summer, now may be a great time to plan to have your high-schooler tested. You'll be glad you did. Likewise, if there is an adult person that is close to you (spouse, relative, in-law, friend, etc.) who is struggling in his/her occupation, this is a chance to possibly rescue their career.

Even if you are happy and successful in your career, you will find it very helpful to know what your natural aptitudes are and are not. And if you have recently lost your job due to the recession, getting tested will greatly help you to know where to look for work. Either way, you will understand a lot more about yourself.

I encourage you to learn more about Johnson O'Connor Research Foundation at: http://www.jocrf.org.

In closing, let me remind you that I am not associated with Johnson O'Connor in any way. I receive no compensation or anything else for recommending them. I am merely one of hundreds of thousands of grateful folks who have been through their program over the years.

** Feel free to forward this to anyone you feel might benefit from it.

Johnson O'Connor Locations:

Atlanta	404-261-8013	Los Angeles	213-380-1947
Boston	617-536-0409	New York	212-269-0550
Chicago	312-787-9141	San Francisco	415-772-9030
Dallas	972-991-8378	Seattle	206-623-4070
Denver	303-388-5600	Washington, DC	202-828-8378
Houston	713-462-5562

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama Tells American Businesses to Drop Dead (read this)
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aaaBdVMkjPnU

Obama's 'Jobs' Numbers Are Phony
http://online.wsj.com/article/SB124451592762396883.html

Obama vows to speed up stimulus spending
http://www.latimes.com/news/nationworld/washingtondc/la-na-obama-stimulus9-2009jun09,0,5788007.story

The End of America's Financial Independence?

Gary D. Halbert — Tue, 28 Apr 2009 19:59:44 GMT

IN THIS ISSUE:

Obama Endorses Global Regulation For U.S.
Quotes From G-20 Communiqué
This Just Cannot Be True, You Conclude
FSB Will Be a Giant Bureaucracy - How Will They Fund It?
Is There Any Reason To Think It Won't Happen?
Conclusions – Could This Really Happen?

Introduction

President Barack Obama recently set the wheels in motion to render the ultimate control of our large financial institutions, large insurance companies, large hedge funds and quite possibly our financial markets as well, to a foreign entity. A new international regulatory agency was created at the recent G-20 Summit in London, and all G-20 countries signed onto it. Sadly, you probably have not heard a word about it until now.

Prepare to be outraged as you read what follows. And I will tell you how to confirm it on your own. Every freedom-loving American - whether conservative, moderate or liberal – needs to be aware of the information in this week's E-Letter. Please read it carefully and consider forwarding it on to those who would want to know.

Obama Endorses Global Regulation For U.S.

On April 2 at the recent G-20 summit in London, President Barack Obama endorsed handing over the regulation of all major US financial companies, including large insurance companies and large hedge funds, to the newly created international “Financial Stability Board” (FSB) which is headquartered in Europe. The FSB's predecessor organization was the Financial Stability Forum which primarily included the central banks of the G-8 countries.

At the April 2 Summit, the Financial Stability Board was expanded to all of the G-20 nations, plus Spain and the European Commission, and all member countries will be subject to the FSB's rules, regulations and enforcement.

The FSB will be allowed to regulate and enforce its will on all financial entities (and financial markets if need be) that are deemed to have “systemic risks,” meaning that they are so large that their failure could pose a threat to the world financial markets and/or global credit flows.

The Financial Stability Board's powers can supersede those of our own regulatory agencies such as the Securities and Exchange Commission, FINRA (formerly the National Association of Securities Dealers), the Commodities Futures Trading Commission and all other US securities regulators, and even the Federal Reserve if it is successful.

Yet it gets even worse. The FSB will also have the power to set executive compensation at financial institutions and any other entities and companies deemed to have systemic risk. The FSB has the power to regulate the “corporate social responsibility of all firms.”

What – you didn't hear about this? Other than a brief mention on FOX News, Bloomberg online and a piece by Newsmax.com, I have not seen any other mainstream media outlet touch this story. If you are suddenly feeling outraged, you should be! Why on Earth would Obama do this? One commentator noted that perhaps Obama feels so guilty for the US role in triggering the international credit crisis that he felt obliged to agree to put our financial industry under the FSB's control.

It is not as if the agreement to form the Financial Stability Board was a tightly kept secret. It was announced publicly in the official G-20 Communiqué which summarized and concluded the London summit on April 2. But the mainstream media has, with the exception of FOX, failed to bring this issue to the attention of the American people.

What follows are verbatim excerpts from the G-20 Communiqué that pertain to the new Financial Stability Board (be sure to read the bullet points below).

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.

QUOTE

Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.

We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.

To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;

that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;

to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;

to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds; [emphasis added]

to endorse and implement the FSF's tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms; [emphasis added]

to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;

to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;

to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and

to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.

END QUOTE

You noticed that I highlighted the key word “all” in the bullet points above from the G-20 Communiqué. If the FSB, in its international wisdom, considers a financial institution or company or a hedge fund “systemically important,” it may regulate and oversee it. This provision extends and internationalizes the recent proposals by Treasury Secretary Geithner and the Obama administration to regulate all firms that are deemed to be “too big to fail,” in whatever sectors of the economy they so choose.

You no doubt noticed the fifth bullet point above where the FSB says is will create and enforce “tough new principles on pay and compensation.” This means that the FSB will regulate how much executives are to be paid at financial firms – including US firms - that are deemed to have “systemic” risk.

The chairman of the new Financial Stability Board is Mario Draghi, Italy's central bank president. In a speech on Feb. 21, 2009, Draghi noted:

“The progress we have made in revising the global regulatory framework... would have been unthinkable just months ago… Every financial institution capable of creating systemic risk will be subject to supervision.”

“It is envisaged that, at international level, the governance of financial institutions, executive compensation, and the special duties of intermediaries to protect retail investors will be subject to explicit supervision.”

It is painfully obvious that these people lust for oversight and control of major US financial institutions and markets, and it appears that President Obama is willing to give it to them, sadly. Here is how Bloomberg described the FSB on April 3:

“Global leaders took their biggest steps yet toward a new world order that's less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets.

At the end of a summit in London, policy makers from the Group of 20 yesterday delivered a regulatory blueprint that French President Nicholas Sarkozy said turned the page on the Anglo-Saxon model of free markets by placing stricter limits on hedge funds and other financiers. The leaders also pledged to triple the resources of the International Monetary Fund and to hand China and other developing economies a greater say in the management of the world economy.”

This Just Cannot Be True, You Conclude

I'm quite sure many of you are thinking that this just cannot be true. Well, it is. Just Google the words “Financial Stability Board” and you'll find dozens and dozens of articles on this issue. Or you can go directly to the Financial Stability Forum's website at www.fsforum.org and find the information there, including the recent G-20 Communiqué, straight from the source.

Unfortunately, some of the articles you'll read online simply reprint the “talking points” that the G-20 put out there for public consumption, which all sound lofty and necessary, of course.

I'm sure many of you are also thinking that the President of the United States would never sign on to such a plan granting sovereignty over US financial firms and large hedge funds to a global regulatory agency dominated by European members – not even Barack Obama. But he did.

Some of you may be thinking that there's no way Congress would authorize such a dramatic shift in power that would subordinate our financial system and markets to a foreign body. I don't profess to know all the legalities that will be involved, but some analysts believe that President Obama may not have to gain congressional approval for this giant action; rather, that he will simply order our US financial regulators (SEC, FINRA, CFTC and others) to adopt the rules and regulations promulgated by the Financial Stability Board. This is really scary!

Finally, some of you may be thinking – in light of this terrible housing meltdown and credit crisis – that it's high time for some type of international agreement and standards for financial regulations. And I might agree. However, international rules and regulations could be agreed upon by the G20 members and put in place by each country's own regulators, not some foreign body dominated by Europeans. The same goes for regulating executive pay.

ENDORSED ADVERTISEMENT

FSB Will Be a Giant Bureaucracy - How Will They Fund It?

If the G-20 Financial Stability Board is going to regulate financial institutions (and markets if need be) pretty much around the world, it will have to be a massive organization. Let's take our own Securities and Exchange Commission as an example for comparison. The SEC reportedly has over 3,500 employees, and it is only responsible for overseeing the various US securities markets.

Just imagine how many employees the FSB will need to oversee, regulate and enforce its rules in the securities markets in 20+ countries. It would likely require offices, staff and enforcement personnel in each of the regulated member countries. The FSB could easily grow to an organization of 10,000-15,000 employees over the course of just a few years.

Likewise, we can only imagine how intricate and convoluted its regulations and enforcement proceedings would be to encompass so many different financial institutions and securities markets, especially since the FSB will be largely dominated by Europeans who have a socialist view of the markets and capital.

Then, of course, is the question of who will pay for it? The G-20 Communiqué was oddly (perhaps purposely) vague on the details of how this massive international regulatory agency will be funded. However, as best I can tell, it will be funded largely by the International Monetary Fund (IMF).

At the G-20 Summit in early April, the members agreed to increase the IMF's capital base by apprx. US$1 trillion in a combination of US$750 billion in new contributions from the G-20 members, and another US$250 billion in new Special Drawing Rights (SDRs), all of which will have to be printed out of thin air. You can bet that the US will be the largest contributor by far.

This new Financial Stability Board is so alarming in so many ways, and there may be no way to stop it now that Obama has signed onto it. And the worst part is that virtually no Americans have any idea about it. This is unbelievable!

Bad News For Hedge Funds

If you ask large hedge fund managers what is their secret to success, most would respond with one word – privacy. They go to great lengths to keep their various positions in the markets secret and unavailable to their competitors, and even their own investors in most cases. They don't want to give anyone information that can be used to trade against them.

Yet if the FSB deems a large hedge fund to have “systemic risk,” they could force the fund manager to disclose all of its positions, which could be very detrimental to its performance. The FSB will have this authority over any large hedge funds domiciled in any of the G-20 countries.

It remains to be seen what the FSB can do with the thousands of offshore hedge funds that are domiciled in places like Bermuda, Turks and Caicos, the Caymans, etc. that are not G-20 members. However, it is clear in the G-20 Communiqué that the Financial Stability Board intends to crack down hard on these so-called “tax haven” countries.

As discussed above, the other big hammer the FSB will wield is the ability to regulate and limit executive pay in financial institutions and large hedge funds that are deemed to have systemic risk. Large hedge fund managers typically receive an annual management fee, usually 1% of assets, with most of their compensation coming in the form of “incentive fees.”

Incentive fee compensation is a percentage of any profits that the manager generates. Often, incentive fees run 15%-20%-25% of net profits. Thus, a really successful fund manager of a very large hedge fund can make hundreds of millions of dollars a year. Yet the FSB will have the authority to put an arbitrary ceiling on what large fund managers can make if they are deemed to have systemic risks.

My prediction is that if the Financial Stability Board grows into the powerful entity that is clearly envisioned, we will see many very successful hedge fund managers close their doors and send the money back to their investors. The really successful managers have made tons of money over the years, and would likely not stand for such potentially onerous regulation.

Is There Any Reason To Think It Won't Happen?

President Obama promised a new era of “transparency” in governance during the presidential campaign. Whether you are a liberal or a conservative, I think you must conclude that the transparency promise was just an empty campaign slogan, when in fact just the opposite has been true, especially in the case of the FSB.

That point aside, are there any reasons to think that the international Financial Stability Board won't come to fruition, or that it will fail? Well maybe. The first point may sound way too elementary to be made, but it is probably valid. Do we think an international body made up of more than 20 countries will really be able to agree on anything substantial?

Compounding the problem is the nature of the new members. Whereas the FSB predecessor, the Financial Stability Forum, was a smaller, mostly-Western club in years past, the new membership will include China, Argentina, Russia, India, and Mexico, among others. If the US and Germany have been unable to agree on stimulus for the sagging economy, chances are that the inclusion of these new members will only make it more difficult for the G-20 to agree on its over-arching global regulatory mandates.

I would venture, however, that the newly admitted G-20 nations will have little to no serious input on the Financial Stability Board's rules and regulations. In fact, a broad set of mandates and guidelines have already been drafted, including those highlighted above in the G-20 Communiqué excerpts. The drafters of the rules were reportedly instructed to have them in near-final form by the next meeting of the G-20 finance ministers in Scotland in November. This thing is moving fast.

Next, some analysts have concluded that while the FSB may prove to be a lively debating forum for central bankers, it is unlikely to move beyond that unless member states can somehow be legally bound to follow its mandates. It remains to be seen if the FSB can come up with such legally binding international authority, even if Obama has given it his blessing.

And lastly, at some point the Financial Stability Board's onerous, cross border powers will have to come into the public view. It remains to be seen what the public backlash will be, not only in America, but in each country that may be asked to surrender its financial sovereignty to a multi-national regulatory body. Maybe that's the point when the public gets outraged. I hope so!

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 – Could This Really Happen?

The current weakened state of the global economy and the ongoing credit crisis unfortunately make the chances better for the FSB to become a reality, and for US financial markets to come under its control. President Obama went to the G-20 meeting knowing that they expected some concessions on his part to “make up” for the perceived unilateral actions by the Bush administration over the years. I'd say he more than lived up to their expectations. No, I'd say he gave away the farm!

Say what you will about former President George W. Bush (I've certainly criticized him often in these pages), but I don't think the new Financial Stability Board would have had a snowball's chance of becoming a reality when he was in office, at least not with the US signing on.

Enter President Obama. Armed with blame for the financial crisis, stories of bank failures and collapsing economies, the G-20 members were able to browbeat Obama into making concessions that would open up our financial institutions and markets to international regulation.

While I could support well thought out guidelines for financial institutions that are agreed upon by an international body like the G-20, such rules and regulations should be implemented by our own regulatory agencies like the SEC and others. President Obama should have never relinquished control of our regulatory agencies to a foreign entity.

There are those who believe that Obama wants to set the US on a course of submission to a new global government and a move toward socialism. But many Obama supporters insist these claims are absolutely false. Yet with Obama signing onto the Financial Stability Board, which will put our financial institutions (and possibly our financial markets as well) under foreign control, what can these Obama supporters say now?

However the FSB issue plays out, I believe that it bears watching closely by all Americans – liberals, moderates and conservatives – this is not a purely political issue. We are talking about nothing less than the national sovereignty of our financial institutions and financial markets and possibly a whole lot more if this move toward socialism is allowed to happen.

Unfortunately, it is not entirely clear if we can stop it. Hopefully, it is not true that Obama can commit the US to the Financial Stability Board without congressional approval. To me, the FSB is in fact a binding international treaty that should at least require ratification by a two-thirds vote in the Senate. The debate over whether the FSB is a treaty, or not, is where the fight will take place.

Freedom loving Americans need to get in this fight now! First, if you have any questions about the credibility of the information I have provided this week, get on the Internet and confirm it yourself. Type in Financial Stability Board and you will find plenty of information. Second, let your representatives in Washington know: 1) surrendering our financial sovereignty to the FSB is outrageous; 2) that it IS a treaty that must be ratified by the Senate; and 3) they had better not vote for it.

Let's not give up control of our financial institutions and markets to a new international regulatory body dominated by European socialists! We should all be able to agree on that, even though I'm sure I'll get some nasty responses to this week's letter. So be it.

Lastly, feel free to forward this E-Letter widely.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Moving Towards Europe – but Do Americans Want to Go?
http://www.realclearpolitics.com/articles/2009/04/28/moving_towards_europe_--_but_do_americans_want_to_go_96208.html

How to Spend $6.5 Trillion in 100 Days
http://aei.org/publications/filter.all,pubID.29769/pub_detail.asp

Obama: The Global Apologist In-Chief
http://www.latimes.com/news/opinion/la-oe-kirchick28-2009apr28,0,4218519.story

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

Why The Stock Markets Are Collapsing

Gary D. Halbert — Tue, 10 Mar 2009 20:46:56 GMT

IN THIS ISSUE:

The Economy Continues To Slump Badly

US Stock Markets Continue To Plunge

Obama's Multi-Trillion Dollar Spending Spree

Obama's Budget – The First $2 TRILLION Deficit?

Obama's Plan To Nationalize Health Care This Year

Obama's “Cap-and-Trade” Environmental Proposal

Conclusions – Why The Stock Markets Are Collapsing

Introduction

Economic news continues to worsen week after week. As I will discuss below, Gross Domestic Product contracted at almost twice the previously reported pace in the 4Q of last year, and most analysts now expect a similar or worse slowdown in the 1Q. Many forecasters now believe the recession will last all year, with a modest rebound beginning in 2010. We will look at the latest economic data as we go along.

The stock markets continue to plunge, even as trillions of dollars in bailouts and government spending have been announced. The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are down another 25+%. Both indexes are down more than 50% from their peaks in October 2007. While the equity markets are grossly oversold, there is still no evidence of a bottom, although I fully expect that we are close.

Investors around the world are stunned, not only as a result of the collapse in the US and global equity markets, but also due to the continuing severe credit crisis. More and more analysts and politicos are calling for the US to nationalize the major money center banks that are teetering on the brink of insolvency. Clearly, people around the world are preoccupied with the economic and financial crises.

In the following pages, we will recap the unprecedented spending that President Obama has proposed over the last six weeks, including his first federal budget proposal totaling a record $3.55 trillion for fiscal 2010. Obama's 2010 budget projects a record deficit of $1.75 trillion, and I believe it will be even higher as I will discuss below. No wonder the markets are not happy!

It is also clear now that President Obama has decided to use these crises as an opportunity to cram down all of his big liberal plans for the country this year. In addition to spending trillions of dollars, he is also moving forward with other major plans including “Cap & Trade” (carbon emissions), “Card Check” (expanding unions) and nationalized health care – just to name a few, all of which will eventually mean higher costs for American consumers.

When Mr. Obama was elected, most political analysts believed that he would attempt to enact these major liberal plans over the course of his four-year presidency. Yet it is obvious now that he wants them all this year, while Americans are preoccupied with the economic and financial crises. If he gets his way, it will dramatically change the face of America. More on this as we go along

The Economy Continues To Slump Badly

It will come as no surprise to readers of this E-Letter that the US economic numbers continue to falter. But by far the most shocking number released over the last several weeks was the latest 4Q GDP report released in late February. In late January, the Commerce Department's advance estimate for 4Q GDP was -3.8% (annual rate), which was the worst in well over a decade.

Then on February 27, the government revised this number to -6.2%, the deepest quarterly decline since early 1982. I have been watching US economic data for over 30 years, and I have never seen the Commerce Department miss the GDP number this badly over just a one-month period of time. Clearly, this economy is contracting severely.

The US unemployment rate continues to ratchet up rapidly. On Friday, the Labor Department reported that unemployment rose to 8.1% in February, up from 7.6% in January. Many forecasters predict this number to rise to near 9% by year-end, and some even project the jobless rate to reach 10% by the end of this year.

The Consumer Confidence Index plunged again to a new record low in February of 25.0, down from the previous record low of 37.4 in January. Consumers' appraisal of overall current economic conditions, which was already bleak, worsened much further in February. Those claiming business conditions are “bad” rose to 51.1% in February from 47.9% the prior month.

On the manufacturing front, reports are equally grim according to the reports for January (latest data available). Durable goods orders plunged 5.2% in January following a drop of 4.6% in December. Factory orders fell 1.9% in January following a plunge of 4.9% in December. Industrial production fell 1.8% in January following a drop of 2.4% in December.

The nation's factory operating rate fell to 72.0% in January, down from 73.3% in December. Elsewhere, the construction spending rate fell another 3.3% in January, down from 2.4% in December. This is the worst manufacturing downturn in decades.

On the housing front, the numbers continue to worsen. Existing home sales fell to 4.49 million in January from 4.74 million in December (again, latest data available). New home sales fell to 309,000 in January, down from 344,000 in December. Housing starts in January fell to 466,000, down from 560,000 in December. Meanwhile the median home sale price continues to fall, sliding to $170,300 in January, down 15% from a year earlier.

In summary, we find ourselves in the worst economic slump since 1981-82, and many would argue something worse. A growing number of forecasters are coming to the conclusion that we may be headed into a depression. But as I will discuss as we go along, Obama has authorized over $3 trillion in new spending, the Fed will spend up to $2 trillion and Congress has just passed more new spending projects. So, that much money should start to show up in the economy before long.

US Stock Markets Continue To Plunge

As noted in the Introduction, The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are both down over 25%. Both indexes are down more than 50% from their peaks in October 2007. The Nasdaq Composite Index fell 40.5% in 2008 and is down another 17.6% so far in 2009, down over 55% since the peak in late 2007.

Stocks have been battered with a steady stream of bad news so far this year, as noted in the latest economic reports above. In addition, there has been report after report of faltering banks. The government now owns 36-40% of Citigroup, which saw its share price fall below $1.00 last week. The 30 companies that make up the Dow Jones Industrial Average are commonly referred to as “Blue Chips” or the strongest of the strong. Over the last year, however, the number of Dow stocks trading under $10 per share has increased dramatically.

In addition to Citigroup, other beleaguered Dow stocks include General Motors at $1.50 per share, Bank of America at $3.00, General Electric at $6.00 (down 60% this year alone), and Alcoa at $5.00.

The government has also increased its equity stake in AIG, now reportedly owning over 80% of the insurance giant. Speaking of insurance, I am hearing from sources inside the industry that we could be hearing announcements soon that some major insurers are in serious financial trouble.

Investors around the world want to know what is driving the equity markets down so dramatically. Certainly, the credit crisis and the economic recession are weighing heavily on stock prices. But I believe there is much more to it than that. As I will discuss later on, I believe that the markets are voting NO on the massive spending Obama has authorized in his first 40 days in office.

Obama's Multi-Trillion Dollar Spending Spree

In sheer size, the economic measures announced by President Barack Obama to address “a crisis unlike we've ever known” are remarkable, rivaling and in many cases dwarfing the New Deal programs that Franklin D. Roosevelt famously created to battle the Great Depression. Here is a list of the massive spending that Obama has gotten passed or is proposing:

1. In February, Congress passed and Obama signed into law a record $787 billion stimulus bill, which is mostly new federal spending along with aid to struggling states and tax incentives.

2. Treasury Secretary Geithner announced last month that the government would make available up to $2 trillion on top of what has already been spent or promised in a rescue effort for banks and other financial institutions, including credit card companies and those who make student loans. We have yet to see the details on this massive rescue plan. Clearly, the lack of a detailed financial rescue plan for the banks is spooking the stock markets.

3. The president pledged up to $275 billion in federal aid to help stem the tidal wave of home foreclosures. Here, too, the details are unclear as to how it will work.

Add it all up and the total for these three spending proposals alone is over $3 trillion in new government debt over the next 2-3 years. In all, the plans noted above would raise the federal portion of the US economy to some 31%, more than twice the level after eight years of FDR's historic New Deal spending.

This does not include the remaining $350 billion in TARP money that Obama will get to spend this year. Plus, there is also talk of a second stimulus package later this year, one supposedly aimed at consumers directly.

And let's not forget that the Federal Reserve has purchased over $1 trillion in troubled assets and related securities over the last year alone. Fed chairman Bernanke told Congress recently that the Fed is prepared to double that amount this year.

President Obama and Bernanke tell us that all this massive spending is necessary to avoid a “catastrophe.” Yet no one knows if these huge spending programs will work. No wonder the stock markets are tanking.

Obama's Budget – The First $2 TRILLION Deficit?

President Obama unveiled the largest federal budget in history in late February – a whopping $3.55 trillion. With the economy in recession, the Obama administration projected that the budget deficit for fiscal 2010 would be a record $1.75 trillion. However, there are reasons to believe it will be even higher.

For example, Obama's budget plan assumes that Gross Domestic Product, the sum of all goods and services produced by the nation, will shrink by only -1.2% this year and rebound to about 3.2% by next year. Given that GDP plunged by 6.2% (annual rate) in the 4Q, and the likelihood that the 1Q will be just as bad or worse, we would have to see a huge rebound in the second half of this year for GDP to average only -1.2% for the year overall.

Furthermore, none of my trusted sources expect GDP to rebound to 3.2% in 2010. The point is, federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget, so the deficit is almost certain to be larger than projected.

Obama's budget plan also assumes that the US unemployment rate will average 8.1% this year and get slightly better in 2010. The US unemployment rate stood at 7.2% for December 2008. It has since risen to 7.6% in January and to 8.1% in February. Most economists now expect the unemployment rate to reach 9% by year-end. That does not average out to 8.1% for the year.

Here again, the unemployment realities will mean that federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget. As noted above, the Obama administration projects a budget deficit of $1.75 trillion for fiscal 2010. But it will not surprise me if the deficit is $2 trillion or more in 2010. No wonder the markets are tanking!

$410 Billion Omnibus Spending/Pork Bill

The Senate is expected to pass the huge $410 billion omnibus spending bill that will finance the government through the end of September any day now. This is possibly the most pork-laden spending bill in history. It is widely reported that the bill contains over 8,500 “earmarks” (pet spending projects for lawmakers' states and districts).

The omnibus spending package ran into trouble last week when several Democratic senators opposed not only the pork-barrel spending in the bill, but also the shear size of the bill - $410 billion. That is an 8% increase over the prior omnibus bill. Among the Democrats in opposition was Senator Evan Bayh of Indiana who told the Wall Street Journal:

“The omnibus increases discretionary spending by 8 percent of last fiscal year's levels, dwarfing the rate of inflation. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.”

During the presidential campaign, candidate Obama promised that he would wholly change the budget process in Washington by going line by line through spending bills, picking out the wasteful earmarks, vetoing the bills, and telling Congress to send them back stripped of the pork. President Obama has echoed that promise since he took office - but just not for this bill. Since this omnibus bill was largely negotiated last year when Bush was still in office, Obama labeled it “unfinished business,” which he says he will sign and “start fresh next year.”

So, it is politics as usual in Washington, only the numbers are much bigger! These historically huge spending programs and bailouts that Obama and the Democrats in Congress have authorized have really spooked the stock markets. And the Democratic spending machine isn't finished yet. Using the “never let a crisis go to waste” doctrine, Obama has made it clear that he plans to pursue massive spending for other pet liberal programs over the next couple of years.

Obama's Plan To Nationalize Health Care This Year

President Obama recently convened a health care summit at the White House, which was attended by “experts” across the health care and insurance industries. The Washington summit is to be followed by regional meetings across the country in the weeks and months ahead.

The summit concluded without specific details as to what an Obama health care system would look like. We do know that Obama's 2010 federal budget calls for the creation of a $634 billion health care reserve fund to cover reforms over the next 10 years. The President's remarks at the summit included the following:

“To the liberal bleeding hearts hoping for universal health coverage, I don't think we can solve this problem without talking about costs. And to those obsessed with costs…[we will] not slash the social safety net. I just want to figure out what works. We don't have a monopoly on good ideas. We've got to balance heart and head.”

For those fearing a total socialization of health care, this is at least some good news. By all accounts, President Obama is resisting the liberal calls for a “single-payer” socialized health system of the type that exists in Canada and Europe. So what can we expect? No one knows for certain just yet, but two of the ideas being floated are: 1) an expansion and retool of Medicare; and 2) some variation of the health plan that members of the federal government enjoy.

It is abundantly clear that Obama intends to enact his massive health care reforms this year, and unlike the Clinton administration, Obama appears to have the votes in Congress to get it done. So, now the question is, how to pay for it? As noted above, his 2010 budget includes $634 billion over 10 years to help fund his health care “reforms.” But where does this money come from?

The Obama administration says that $318 billion of it will come from tax increases on the “wealthy.” Another large portion will supposedly come from “internal reforms” to the Medicare system. Specifically, Medicare Advantage would be placed into a new competitive biding system that will supposedly do away with federal subsidies paid to these private medical plans, which is projected to save $175 billion over 10 years.

They say another $37 billion could be saved as home health care payments to Medicare are reduced, and a further $20 billion could come from higher rebates from drug companies for drugs sold to the Medicaid program. All of this only adds up to $550 billion. Where will the other $84 billion come from? I have no idea, and at the moment, neither does the Obama administration.

The Obama plan does not seem to be in danger of going the way of the ill-fated Hillary-Care proposal in 1993. House Representative Joe Barton (R-TX) was on hand for Obama's health care summit last week. Barton was pivotal in derailing Hillary-Care, but he told those assembled at Obama's summit that he largely supports the health care reforms that President Obama has outlined thus far.

Barring some big surprises, President Obama is going to get his massive reform of the health care system, whether we like it or not, possibly before the end of this year. While it may stop short of socialized medicine, the government will be in charge of our health care system, and we all know how well the government controls spending, costs and quality. Again, no wonder the stock markets are tanking!

Obama's “Cap-and-Trade” Environmental Proposal

The “cap-and-trade” concept is not a new idea. The type of cap-and-trade program that President Obama wants is very similar to that of the European Union. Yet, the EU's cap-and-trade program is in near-collapse, which demonstrates the weakness of this strategy.

Under a cap-and-trade system, polluters (think power generation plants, steel mills, etc.) are given a cap on greenhouse gasses they can emit into the atmosphere. If they exceed their limits, they can either make their process more environmentally friendly by upgrading technology and equipment, or they can buy credits from other entities that produce fewer emissions than their caps. The goal is that, as the overall emissions caps are reduced over time, industries will find that reducing emissions is more cost efficient than buying credits.

The cap-and-trade idea is often confused with a “carbon tax,” but the two are different. In a carbon tax, the government charges a fee for the production, distribution or use of fossil fuels, rather than creating a system of emission credits that can be traded among companies. Whatever the structure, virtually all agree that any program to curb greenhouse gasses will increase prices as higher costs are passed on to consumers. Even President Obama admits this.

President Obama's recent $3.55 trillion budget proposal calls for a cap-and-trade system to be implemented by the year 2012. The government would auction credits to power plants, industrial plants, etc., with some of the proceeds over the cost of administering the program to go back to taxpayers (I wouldn't count on it).

The Congressional Budget Office (CBO) estimates that a cap-and-trade system will cost middle-income families as much as $880 to $1,500 per year in added costs. Thus, Obama's plan to offset these increased costs through a payroll tax rebate ($400 for individuals, $800 for families) won't cover all of these costs. Plus, the liberals in Congress have not yet had their say. The final bill may concentrate the rebates on lower income families, possibly leaving many middle income and high income families out entirely. Of course, the rationale is that higher-income families will reduce their costs by lowering their energy bills through conservation. …Right.

Also, it is important to recognize that certain areas of the country will be hit much harder by cap-and-trade, especially those that rely heavily on coal for electricity. I have included a link to a very good article on which areas will be hurt the most in Special Articles below.

Here again, Obama's cap-and-trade plan serves as yet another tax on higher income folks who create most of the new jobs in this country. Critics also say that a cap-and-trade program could lead to the loss of as many as four million jobs and reduce the US GDP, but still may not effectively reduce emissions. Again, no wonder the stock markets are tanking!

Obama's “Card Check” Proposal To Strengthen Unions

It is no secret that Obama has long been an advocate for the organized labor unions. As a senator, he co-sponsored the “Employee Free Choice Act of 2007,” which was very favorable to unions but was fortunately never enacted. As a presidential candidate, he had a very pro-union agenda, including repeated promises of making “Card Check” the law of the land.

Card Check, considered one of the most sweeping revisions of labor law since the 1930s, would allow unions to do away with secret ballot voting by workers who are deciding whether or not to unionize. Instead, workers would be required to vote in public by signing a card signifying their desire for, or against, union representation.

Secret ballot elections have been the law of the land for a very long time, and even many union members do not want this to change. Critics of the Card Check system say that a secret ballot election is the only way to insure that employees are not faced with undue coercion when making their decision. Card Check changes all that, since union organizers can place a card in front of a worker and know exactly which box they check. Liberal union leaders have wanted Card Check for a long time, since it makes unionization much easier.

Union membership has been steadily declining since the 1950s when an estimated 35% of the American workforce belonged to a union. Today, the Bureau of Labor Statistics reports that only 12.4% of wage and salary workers belong to a union. By far, government employees are the most likely to be unionized, with a membership rate five times that of private employees.

Unions hope that the new Card Check rules, which are almost assured to pass and be signed into law, will help to put them back on a growth path. The economic consequences will be higher labor costs for producers, lower productivity and higher prices for goods and services to consumers over time. Just look at the big three carmakers and see how beneficial increased unionization is likely to be for the US economy.

Conclusions – Why The Stock Markets Are Collapsing

I now firmly believe that President Obama and his top advisers have made a calculated decision to try to ram through the largest parts of his liberal agenda this year, while the American people are preoccupied with the economic and financial crisis.

I recently wrote that Rahm Emanuel, Mr. Obama's new Chief of Staff, told a Wall Street Journal conference of top corporate executives late last year (comments he almost certainly probably wishes he could take back):

“You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.”

So Obama's liberal policy agenda that would have been considered aggressive over the full four years of his presidency is apparently going to be crammed down the American peoples' throats this year if possible.

Obama's massive emergency spending/bailout plans announced in just the first 40 days of his presidency total over $3 trillion, something never before remotely seen. Obama's 2010 federal budget of $3.55 trillion will likely result in a budget deficit of $2 trillion next year, and over $1 trillion in each of the next 2-3 years.

Meanwhile, the Fed is in the process of printing and spending another $2 trillion in debt to fund banks and buy toxic assets. Where this Fed printing and spending will stop is anyone's guess, unfortunately. The implications for inflation down the road are ominous.

And let's not forget the Congress which is about to pass a $410 billion omnibus spending package to keep the government running through September that was 8% higher than last year at this time, and included over 8,500 pork-barrel earmarks. Obama obnoxiously broke his campaign promise to veto earmarks by saying this enormous omnibus spending bill was “unfinished business” left over from the Bush administration, and promises to sign it into law.

On top of all this, Obama's liberal policy initiatives such as nationalized health care, cap-and- trade and Card Check (just to name a few) will add hundreds of billions in cost to American consumers over the years ahead. And despite what Mr. Obama says, taxes at all levels will have to eventually be increased to pay for this massive spending. It will change the face of America as we know it, but that is a story for another time.

The long-term implications of these unprecedented multi-trillion dollar spending plans are unknown. No one knows for sure if all of these huge spending efforts will work to revive the economy and unfreeze the credit markets. If they do, then there is the prospect for spiraling inflation in the years to come.

Investors around the world are watching their stock portfolios being decimated – down over 50% in just over one year – and are asking WHY is this happening? Sure, the subprime mortgage debacle was the catalyst. But in my view, the radical changes that President Obama is pursuing – sooner rather than later – are in large part why the stock markets are in a freefall collapse instead of a normal bear market.

Fortunately, the professional money managers I have recommended to you in this E-Letter over the last several years have done their jobs admirably. Their active management strategies that have the ability to move to cash or hedge long positions have limited losses to less than half what the stock markets have lost. Some have even made money in this historic bear market. As always, I must add that past performance is no guarantee of future results.

As always, I invite you to call us at 800-348-3601 so we can help you make sense of this frustrating investment environment. That is all for this week, depressing as it may be once again.

Wishing you the best in tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Deception at Core of Obama Plans
http://www.realclearpolitics.com/articles/2009/03/a_dishonest_gimmicky_budget.html

The Anti-Stimulus Plans
http://weeklystandard.com/Content/Public/Articles/000/000/016/249nhfrg.asp

Winners & Losers in Huge Congress Spending Bill (who got what in pork)
http://www.foxnews.com/politics/2009/03/09/winners-losers-proposed-massive-spending/

Who Pays for Cap and Trade?
http://online.wsj.com/article/SB123655590609066021.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

Obama's Tax Policy: None Dare Call It Welfare

Gary D. Halbert — Tue, 13 Jan 2009 18:54:31 GMT

IN THIS ISSUE:

Obama Pushes His Stimulus Plan
Dick Morris -- Tax Exempt Tyranny?
More On Obama's Plan From Peter Ferrara
It Depends Upon Your Definition Of "Tax Cut"

Introduction

I had originally planned to write about the Bernie Madoff scandal this week. In fact, I had already written the E-Letter that described how Madoff swindled investors out of tens of billions of dollars in a giant Ponzi scheme. Maybe I'll send that one to you next week.

But just in the last few days, we have learned the details of President-elect Obama's massive income tax overhaul, and the plan is much worse than we had anticipated. And you need to know about it ASAP, since it will negatively affect most of you who read this E-Letter on a regular basis.

Obama's liberal tax plan would give annual tax rebates to millions of Americans who already pay no income taxes whatsoever. Giving government tax rebate checks to those who already pay zero income taxes is nothing short of expanding the welfare state (or socialism as I prefer to call it).

Worst of all, if Obama gets his massive tax plan approved, it will mean that a majority of Americans will pay little or no income taxes, while the so-called "wealthy" will foot the rest of the bill. If we reach such a point, there will be little to no chance of true tax reform for the foreseeable future.

While the "rich" can afford to pay higher income taxes, it is this same group that creates most of the new jobs in this country. As we have seen often in the past, when the government unduly taxes the "rich," job creation grinds to a halt. We can hardly risk that in the current economic recession and credit crisis.

To get you the information you need to know, I have reprinted two articles below that are right on point. The first is from political writer Dick Morris who was a top advisor to Bill Clinton, who has since converted to a conservative. The second is from Peter Ferrara who is director of budget and entitlement policy at the Institute for Policy Innovation and general counsel for the American Civil Rights Union.

Together, these two articles expose the fallacies of Obama's proposed tax policies. Please read what follows closely. If Obama gets his way (and he probably will), it will affect us in profound ways, which is part of his grand plan. Hint: it will affect your pocketbook!

QUOTE:
"Obama Stimulus Fosters Tax-Exempt Tyranny
by Dick Morris & (wife) Eileen McGann

It now looks like half of President-elect Barack Obama's stimulus package will take the form of "tax cuts" for 95 percent of all Americans. Yet this wouldn't boost the economy as much as trigger a massive, unhealthy shift in American politics.

Under Obama's plan, the majority of American voters would pay no federal income taxes but would get money from the government instead. That is, these "refundable tax credits" are basically welfare checks -- and Obama's plan would leave the most of us collecting, not paying.

A $200 billion giveaway won't do much to get a $14 trillion economy rolling again. But the plan would leave any future taxpayer revolt no hope of majority support.

Today, the bottom 50 percent of U.S. taxpayers pays a total of $30.6 billion in federal income taxes on a combined income of about $1 trillion. So about 3 percent of all federal income-tax payments come from the poorest half of the country. (The top 1 percent pays 40 percent; the top 25 percent pay 85 percent of the federal income tax.)

Obama's plan -- he'd give all couples a $1,000 refundable tax credit and all single people $500 -- would funnel more than $50 billion to the lowest half of the country, thereby completely wiping out their total federal tax liability. In most cases, it would trigger a "refund" welfare check.

In one stroke, this would transform the majority of voters from taxpayers into tax eaters, and leave an increasingly small minority to pay the bill. Regardless of whether this is good economics, it is very dangerous politics.

Essentially, it would put those who actually pay the taxes that fund our government into much the same situation as landlords in New York City: hopelessly outvoted by their tenants, who use their political clout to limit rents and landlords' profits.

Since Ronald Reagan, the anti-tax movement has been based on a blue-collar revolt against high taxes; it would lose that constituency under the Obama plan. Taxpayers would be politically helpless and the tax-eating majority would have free reign to impose any levies it wished.

Almost all of the 68 million tax filers in the country's bottom economic half would get checks from Washington at tax time. Some would be among the 22 million who get money from the Earned Income Tax Credit. Others would get a $500 check through the (Bush-passed) Child Tax Credit -- and all would get funds through the new Obama tax credit.

Welfare no longer would be only for the poor because the majority of the voters would depend on government handouts. This very system is what makes European social democracies so resistant to change.

In 1980, the bottom 50 percent of the nation paid 7 percent of the national tax bill, after refund and credits. It now pays 3 percent; under Obama's plan, it would pay less than nothing (that is, it would net a profit from the IRS). In 1980, the top 1 percent paid 19 percent of the income-tax burden; now, it's 40 percent. Taxes have become the province of only the rich.

Of course, the shift in tax burden also mirrors the incredible increase in incomes of the wealthy during the past 30 years: The top 1 percent earned only 8 percent of the total national income in 1980; now, it earns 22 percent. And the poorest half has seen its share of national income fall from 17 percent in 1980 to only 12.5 percent today.

So it is both fair and sensible to give the poor a tax break and to draw the bulk of federal revenues from the rich. But to exempt the bottom half -- a majority of the voters -- from paying any taxes and to award them refund checks instead would dangerously alter the fundamental balance of national politics. For the economically well off, it effectively could become taxation without representation, which, as the founders of our nation warned, leads to tyranny." END QUOTE

I trust that most of my readers can fully understand the implications for high net worth investors if Obama gets his way, as looks increasingly likely. Now let's take it a step further with another thought-provoking article from Peter Ferrara, another high-level source. Read closely.

QUOTE:
"The Tax Cut Mirage
by Peter Ferrara

Obama Eyes $310 Billion in Tax Cuts" the headline blares. The Obama team comes to town to start the new year, and the run-up to his inauguration, with this announcement. How sly.

This Obama tax cut package is to be part of the broader stimulus package now estimated to cost $775 billion. The problem is that there are tax cuts and there are tax cuts, and there are other things Obama calls tax cuts that are not even tax cuts. The "tax cuts" Obama is proposing for his stimulus package, like the rest of his stimulus package, are not going to stimulate anything.

Tax cuts do not stimulate the economy by "putting money in people's pockets" which they can then spend, as even some Republicans, including George Bush, mistakenly say. That's an old-fashioned Keynesian strategy, and, if it worked, the same result could be achieved by sending out increased welfare checks, which also puts money in people's pockets, which they can spend. But it doesn't work, because it doesn't do anything to change the basic incentives governing the economy, and because just borrowing money and then sending it out to people, in "tax rebate" checks or welfare checks, doesn't add anything to the economy on net.

Tax cuts stimulate the economy when they involve reductions in tax rates. The reduction in rates improves incentives for savings, investment, business creation and expansion, job creation, entrepreneurship, and work, by allowing people to keep a greater percentage of the reward produced by these activities. This improves the economy not just by the dollar amount of the tax cut. The improved incentives affect every economic decision and every dollar in the entire economy. The astoundingly successful Reagan tax cuts in the 1980s, as well as the astoundingly successful Kennedy tax cuts of the 1960s, were both based on reducing tax rates, and were successful for these reasons.

But the Obama tax cut package studiously avoids any reductions in tax rates anywhere. The centerpiece of the plan is a $500 per worker tax credit, estimated to cost $150 billion. The government will just borrow $150 billion from the private economy to give away in these tax credits, so there will be no net gain to the economy. Nor will there be any improved incentives to save, or invest, or start or expand a business, or hire new workers. The credit does not even provide increased incentives to work, because once the worker is over a very low income threshold of about $8,000 per year, the amount of the credit does not increase for increased work and income.

Notice that these arguments apply even for workers who do pay considerable income taxes. Suppose you work and earn enough to pay $5,000 per year in income taxes. The Obama tax credit will reduce your income taxes by $500. In this case, the credit is a real tax cut. But it still will not stimulate the economy for the reasons stated above, it does not add to the economy on net and it does not improve incentives. It is a Keynesian tax cut, not a supply-side tax cut, because it is a flat cash rebate, effectively the same as more government spending, not a reduction in rates.

Keynesians think that the way to increase economic growth is to increase deficits and government spending. We tried that in the 1970s, and we got inflation along with ever worsening recessions. We tried it in the 1930s, and we got the Great Depression lasting for over 10 years. It doesn't work.

Indeed, the Wall Street Journal news story on the Obama tax package says regarding this $500 per worker tax credit, "This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion." Precisely. Bush and the Democrats joined together a year ago to agree on a stimulus package sending out $131 billion in "tax rebates" to workers all across the country. Those tax rebates were very similar to Obama's tax credits today. They involved no reduction in tax rates, or improved incentives anywhere. They were based on a Keynesian rationale, just like Obama's tax credits -- stimulate the economy by increasing government deficits and providing cash rebates for people to spend.

And, of course, that tax rebate stimulus package from a year ago didn't work. The economy continued to worsen throughout the year, and financial markets collapsed in the fall. Henry Paulson was back in September asking for another $700 billion, to save the economy supposedly from complete collapse, and another Depression.

Then there is the part of the Obama tax cut that is not a tax cut. The bottom 40% of income earners do not pay income taxes on net. The $500 per worker Obama income tax credit will consequently not reduce income taxes for these workers. It will involve instead another check going from other taxpayers to these workers, which is actually just increased government spending, indeed, increased welfare.

Indeed, another part of the Obama tax cut plan is even more overt. Obama proposes to include in that plan an increase in the scandal-ridden Earned Income Tax Credit (EITC). The EITC goes to the lowest income workers, who do not pay federal income taxes, and it is universally recognized as a welfare program. In this, as in other provisions of the overall stimulus package, Obama and the Democrats are effectively arguing that they are going to stimulate the economy by increasing welfare. Reagan and the Republicans stimulated the economy by cutting marginal tax rates, providing incentives to save, invest, produce, start and expand businesses, and create jobs (as Kennedy and the Democrats did in the 1960s). Now Obama and the Democrats claim they are going to do the same by increasing welfare and government spending.

Obama tries to argue that his $500 per worker income tax credit is a tax cut even for workers who do not pay income taxes because these workers still pay payroll taxes for Social Security and Medicare. But the only connection between this tax credit and payroll taxes is purely rhetorical. If Obama wants to claim credit for a cut in payroll taxes, then he can propose a cut in payroll taxes. Then Obama can tell us how much sooner the Social Security trust funds will run out and leave the program bankrupt because of his tax credit. The answer in regard to Obama's $500 per worker credit is zero, because that credit does not involve a reduction in payroll taxes of any sort; it is an income tax credit, not a payroll tax cut.

Another component of the Obama $310 billion "tax cut" package is a proposal for a one-year tax credit of $3,000 to businesses for each new job created, costing a pricey $40 billion to $50 billion. Congress already adopted a similar plan proposed by former Sen. Dan Quayle back in the 1980s, called the Targeted Jobs Tax Credit (TJTC). Over the years this has been changed into the Work Opportunity Tax Credit (WOTC), which provides $2,400 for each new adult worker hired, $4,800 for hiring a disabled veteran, and $9,600 for hiring welfare recipients, high risk youths, and qualified ex-felons. It is unclear whether Obama is aware of this history, but his tax credit is not going to produce any more hiring than the already existing WOTC.

Studies of these tax credits over the years have concluded that the credits have mostly gone for workers that would have been hired anyway, with little if any net new jobs created. And this does not include the jobs lost from the private sector when the government borrowed the additional funds to cover the tax credits. Steve Entin of the Institute for Research on the Economics of Taxation argues that such a tax credit is unlikely to stimulate much employment when the economy is down and businesses are not expanding. "Given the current degree of uncertainty about where the economy is headed," he writes, "the credit is not likely to achieve much for many months, until we are already on the upturn, at which time it would not be needed."

Other provisions of the overall stimulus package follow on the theme of stimulating the economy through increased welfare and government spending. The plan includes major expansions of unemployment compensation, including extending unemployment insurance to part-time workers. It also includes increased Medicaid coverage, and subsidies for employers continuing health insurance for laid off workers. Another $140 billion to $200 billion would go for aid to states to be spent on Medicaid and education. The government's borrowing hundreds of billions for such spending is not going to stimulate anything. It may produce a drag on the economy by increasing dependency.

Then there is another couple of hundred billion for increased spending on infrastructure, including building and renovating roads, highways, bridges, and schools, and making government buildings more energy efficient. Such infrastructure spending was the central strategy Japan used to counter its severe economic downturn of the 1990s, which nevertheless continued for over 10 years. In the U.S., these infrastructure projects take years to get up and running, and are often bogged down by lawsuits relating to the environment and other factors, leaving such projects unsuited for short-term stimulus spending. In any event, again, government borrowing of hundreds of billions for such increased spending would not add anything to the economy on net.

The Wall Street Journal reports Obama transition spokeswoman Stephanie Cutter as saying, "We're working with Congress to develop a tax cut package based on a simple principle: What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests."

This propaganda spin is exactly the opposite of what Obama is doing. Obama is studiously avoiding exactly what would work, with the biggest and most immediate impact, because he is so ideologically opposed to the pro-growth, free-market policies that would produce that result. Instead, his ideology is leading him to exactly what will not work to promote an economic recovery, increased welfare, government spending, and trillion dollar deficits. Here is what would work.

The Republicans should advance a proposal that would sharply reduce the 25% income tax rate that applies to the middle class to 15%. This would leave 90% of workers with a flat rate tax of 15%, or even less. Such reduced tax rates would provide real incentives to stimulate the economy, as discussed above. A bill providing for this should be introduced as soon as possible, to get the debate going. This proposal serves as an alternative to the rest of the Obama tax plan to be introduced later, as well as the stimulus package. Senate Minority Leader Mitch McConnell raised precisely this proposal last Sunday. Bravo.

Other proposals would promote economic recovery and growth even more. Most urgent, in terms of producing the biggest and most immediate pro-growth impact, is to reduce the outdated and uncompetitive federal corporate tax rate of 35% at least to 25%, if not the 19% recently adopted by Germany and Canada. The Bush tax cuts for capital gains and dividends should be made permanent. Also urgent would be to adopt immediate expensing, meaning deductions, for investment in capital equipment, rather than depreciation, which drags the deductions out over many years. This would have the same effect as a rate reduction for investors, by increasing the percentage of the reward that such investors could keep. A true economic boom would be created if Congress also reduced the top marginal income tax rate to 25%.

But McCain proposed most of these ideas, and Obama ridiculed them, and Obama won. So Republicans should not expect to be able to advance such ideas effectively in Congress right now, especially since they are in such a distinct minority. Conservative commentators can and should promote these ideas as the real effective and practical ways to promote economic growth and get America booming again, and Republicans can run on them in future races. But the one idea that Republicans can effectively advance right now politically is the middle class income tax rate reduction discussed above.

Another urgent, pro-growth reform is deregulation to allow drilling for oil and natural gas, offshore and onshore in ANWR and elsewhere, and renewed expansion of nuclear power production. This would promote economic growth both by reviving a powerful energy industry in America, and by providing low cost, reliable supplies of energy to the rest of the economy. Removing any regulatory barriers to development and production of alternative energy would be very helpful as well. But an alternative energy industry built on massive government subsidies would be a net drag on the economy.

Republicans and conservatives should be careful to note that the inherently powerful American economy retains natural tendencies to recover. They should not preclude that possibility in criticizing the Obama/Democrat stimulus package. Economic growth may well return later this year regardless of what Obama and the Democrats do.

But neither can we allow Obama to pose unchallenged as proposing enormous tax cuts when they are mostly a mirage, or worse, actually increased government spending and welfare, rather than tax cuts. We must start aggressively advancing that argument now, and the case more generally against Keynesian government spending and enormous deficits as the keys to recovery, and aggressively offer instead the real policies that would restore growth and prosperity, and set off a new economic boom." END QUOTE

[Peter Ferrara is director of budget and entitlement policy at the Institute for Policy Innovation and general counsel for the American Civil Rights Union. He formerly served in President Reagan's White House Office of Policy Development, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School.]

Conclusions

President-elect Obama's tax cut proposal has been criticized by many conservatives (and even some moderates and liberals) for being misleading because he says that it will benefit 95% of American households. Supporters, however, claim that the promise is legitimate and even some objective, third-party analysis has supported its merits. So who's telling the truth?

That's a very good question. I find it interesting that anyone can come to the conclusion that an income tax cut will benefit 95% of American households when the non-partisan TaxPolicyCenter estimates that approximately 38% of income tax filers pay no tax at all! To make Obama's statement true, you have to resort to an old Democratic tradition and ask what the meaning of ‘tax cut' is.

The secret of how the common-sense definition of reducing income taxes somehow morphs into a plan that benefits individuals who currently pay no income tax is a tale of political slight of hand at the highest level. After all, how can you reduce the income tax bite for someone who already pays NO income taxes? It sounds impossible, doesn't it? If your tax rate is effectively zero, then it would seem that you are already benefiting from the master design of a progressive tax system that increases rates as incomes go higher, right?

Wrong! (At least according to Obama and Congressional Democrats)

In today's world of political spin, a tax cut proposal need not apply only to those with income tax rates above zero. Instead, today's definition of a tax cut can include allowing those who already pay no income taxes to receive a check from the government. Let me make it clear, I'm not talking about getting a refund of all of the income tax withheld from pay. No, we're talking about receiving a government check over and above all of the withholding. In effect, it amounts to a negative tax rate for those who qualify, which is reportedly going to be over 50% of American households.

This negative tax rate is officially deemed to be a "refund," since certain tax credits are deemed to be "refundable," meaning that they are payable even if the filer's total tax bill is zero. Excuse me, but a "refund" used to be defined as a return of something that you had paid in. But that's not the case in the fairy tale world of Washington, DC. In Obama's plan, you can get something called a refund even though it really represents a check from the government drawn from all those unfortunate souls who actually had to pay income taxes. Can you say WELFARE?

Thus, in today's political world, we need to alter our common-sense definitions of some key terms, as follows:

Tax cut = Receipt of other people's tax money (but don't call it welfare or redistribution of wealth)

Refund = Check from the government that may or may not include any money you have actually paid in.

Taxpayer = Tax receiver, unless you have worked hard to earn a lot of money, and then the old definition applies.

Welfare = An outdated, politically incorrect word that used to mean government assistance. For the new definition of government assistance, see "Tax Cut" above.

Redistribution of Wealth = A socialist philosophy generally unacceptable to capitalist societies unless repackaged under another definition found to be more palatable to the general public. See "Tax Cut" and "Refund" above.

If Obama wants to put money in the hands of people in an effort to stimulate the economy, then he should proceed as Bush did last year and dole out checks to the populace. I don't particularly agree with the practice, but at least people would know what is happening.

To dress a government handout (more welfare) in the garb of a tax cut can have some very drastic and negative effects, in my opinion. First, as Dick Morris points out, it means all income tax receipts will come from the top 50% of wage earners. I still happen to be in the camp of those who believe that you hold government more responsible when part of the money is yours. Plus, it makes changing the current complexity-laden tax code virtually impossible since the alternatives such as a "Flat Tax" or "Fair Tax" would mean that the 50% who pay no taxes would have to start paying taxes again.

Another big negative is that the majority of voters can elect representatives that will pass laws with no tax consequences to the bottom 50%. Why not vote for expanded social services, it won't cost them anything, and they may even get a bigger government check. Can you say welfare? Or socialism?

Lack of participation in the funding of government is not a good thing. Alexis de Tocqueville, a 19th Century thinker, said, "A democracy cannot exist as a permanent form of government. It can exist only until the voters discover they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship."

Don't look now, but it looks like the time when the majority of American households that receive from the government, rather than pay any income taxes, is about to be upon us.

Very best regards,

Gary D. Halbert

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

Obama's Judges vs. Republican Opposition

Gary D. Halbert — Tue, 02 Dec 2008 23:02:31 GMT

IN THIS ISSUE:

Judicial Appointments - A Most Important Issue
The Bush Record On Judicial Appointments
Get Ready For Liberal Judicial Nominees
Will Minority Republicans Roll Over Or Fight Back?
What About The Obama Supreme Court?
Conclusions - What Obama Has In Store

Editor's Note

It didn't come entirely as a surprise that I got a lot of negative feedback on my November 4 E-Letter about the Democrats holding hearings on ways to highjack our 401(k) plans - and eventually other types of retirement accounts as well - into a quasi-socialistic "let us take care of you" Guaranteed Retirement Accounts (GRA).

Since that E-Letter was sent in the late afternoon on Election Day, I'm sure many readers didn't see it until Wednesday, and perhaps more than a few readers thought it came across as a sour-grapes piece because Barack Obama won the election by a comfortable margin.

In actuality, my article on the 401(k) proposal had nothing to do with Obama. Democrats were already holding these hearings before the election, and it will be these same Democrats who may send a bill to the president for his signature with the provisions I discussed, or worse.

The most important point, however, is that I have said since the inception of this E-Letter that I write about politics because I firmly believe that politics affect investments and the markets, and vice versa. Anyone with common sense should recognize that my article about the Democrats' 401(k) trial balloon actually proves the point I have been making all along.

The 401(k) proposal was purposely sweetened to fix the problem of recent large market losses by having 401(k) participants turn their accounts over to the government, which would in turn restore such account values to their August 15 balances. But the trade-off would be that these accounts would be invested in 3% government bonds, and Congress could then spend the money as it always does. Tell me how this does not affect our investments!

If you have been reading this E-Letter very long, you know that I often remind my readers of the unintended consequences that sometimes arise from laws intended to "help" people or right a perceived wrong. A good example is the Alternative Minimum Tax (AMT) law. When originally passed, it was targeted at less than 200 super-rich who were not deemed to be paying their fair share of taxes. Now, it hits millions in the middle class right where it hurts, and Congress has been wrestling with how to undo what was done in error.

If Congress can capitalize on the fear gripping retirement plan participants and pass a 401(k)/GRA law or something like it, we could be in for another round of unintended consequences. However, one consequence I can already predict is going to be higher taxes, and not just on those making over $250,000 per year.

Why write about politics and investments? So you, my readers, will know what's going on and contact your congressional representatives to tell them what you think. As for those who feel that I shouldn't write about politics in general, and about conservative politics in particular, I suggest you consider it a learning experience - just as I do when I regularly read liberal points of view.

Introduction

I have long maintained that the most enduring legacy of many presidents is often the judicial appointments they make, and especially those for Justices of the Supreme Court. You may recall that I wrote about the importance of this issue in regard to the 2008 election in my July 1, 2008 E-Letter.

Most people focus only on the Supreme Court nominations that presidents make during their terms in office. However, there are also very important judicial appointments presidents make to the various District Courts and the Circuit Courts of Appeal. Since judicial appointments are for life, they not only have the potential to extend a president's legacy beyond one or two terms in office, but can also affect the manner in which laws and even the Constitution are interpreted for many years to come.

It's no wonder then that the Democrats are now very excited about the prospects of judicial appointments. As President-elect Obama prepares to take office, he enjoys a majority in both Houses of Congress. As such, his judicial nominations should be slam dunks, no matter how liberal they are, unlike when President Bush found it almost impossible to get appointees confirmed as the Democrats found them to be "too conservative."

I'm sure you will recall this issue playing out before us as George W. Bush fought with Senate Democrats to have his nominees for federal judiciary vacancies confirmed. This confrontation eventually introduced such terms as "nuclear option" and "Gang of 14" into the national lexicon, which I will discuss further as we go along.

In a President Obama Administration, the shoe will be on the other foot, and it will be the Republicans in the minority who will be fighting Obama's presumably liberal and possibly activist judicial nominations. It's going to be very interesting to see how much or how little difficulty Obama will have filling judicial vacancies with left-leaning judges while his party controls the Senate.

Currently, there are 37 federal judiciary vacancies with 26 Bush appointments pending. Virtually all of the names pending the certification process were nominated in 2007 or later, while the Democrats have had control of Congress. Thus, there's little wonder why these nominees have not been confirmed, and I trust they never will. With a Democratic president and Congress, the liberals have to be salivating at the prospect of being able to substitute their own nominees for all of these vacancies.

This week, I'm going to discuss the importance of federal judiciary appointments, and what kind of judges Obama is likely to nominate. Will the Republicans roll over and allow liberal judicial nominations to be confirmed? Or, will they exhibit the same cohesiveness that Democrats showed during the Bush Administration and attempt to block unacceptable nominees, even though they are in the minority? These are good questions, and ones that might be among the earliest tests of the Republican Party.

Judicial Appointments - A Lasting Presidential Legacy

As a practical matter, many of the policies of a particular presidential administration may disappear shortly after they leave office. However, judicial appointments continue on for the life of the appointee and thus, can have a much longer effect. Unfortunately, most Americans are usually more attuned to what new administration policies are being proposed and what laws are being passed by Congress than the judges that are being appointed to the courts.

The federal judiciary includes Supreme Court justices, US Courts of Appeals (Circuit Court) judges, and District Court judges. Individuals for these positions are nominated by the President and confirmed by the Senate. Nominees are typically suggested by members of the president's political party, and generally share a similar political ideology.

Before being confirmed, however, the nominees are subjected to confirmation hearings by the Senate Judiciary Committee, and these events are usually more of a partisan political forum than actual hearings. Once these hearings are completed, the full Senate votes on the nominees. A simple majority vote is necessary for confirmation, and judges are appointed for a life term. Obviously, the Democrats will have more than a simple majority in the Senate next year and beyond.

In years past, these judicial hearings were generally quite respectable with tempered dialogue between the Committee members asking the questions and the nominees. But those days of reasoned debate vanished when Ronald Reagan nominated Robert Bork for the Supreme Court in 1987. Judge Bork, who was a devout anti-abortion conservative, was vehemently opposed by the Democrats who attacked him viciously.

Judge Bork unfortunately became the ‘poster child' of such partisan attacks, lending his name to a now-generic verb - "Borked" - meaning to prevent someone from attaining a public office by attacking their character and/or political philosophy. While Robert Bork's name was eventually withdrawn from nomination, similar attacks occurred during the confirmation hearings of Justice Clarence Thomas. One speaker at a 1991 National Organization for Women conference stated, in reference to Clarence Thomas, "We're going to Bork him. We're going to kill him politically..." Despite these attacks, Thomas was eventually confirmed by the Senate, but not until after one of the ugliest hearings processes in recent memory.

Thus, it was no surprise that President Bush had difficulty getting many of his judicial appointments confirmed, especially when the Democrats regained majority control of Congress beginning in January 2007. Since then, judicial hearings have regularly been highly politicized, decency and decorum were thrown out the window, and nominees were frequently subjected to an uncomfortable and often bitter confirmation process filled with both partisan and personal attacks.

Now, it will be very interesting to see how things change next year when Barack Obama becomes president. I fully expect the Democrat-controlled Senate to once again return to the days of decency and decorum and rush to confirm Obama's judicial appointees, many of whom are almost certain to be "activist" judges... But I'm getting ahead of myself.

The Bush Record On Judicial Appointments

During his two terms, President Bush has had mixed success in regard to federal judiciary vacancies. According to the White House website, Bush has had 61 Circuit Court judges and 261 District Court judges confirmed as of October 6, 2008. Plus, President Bush has had two nominees for Supreme Court justices also confirmed by the Senate.

However, as discussed above, the road to these confirmations was not without serious bumps along the way, and numerous nominees withdrew their names after being blocked by Democrats. The Dems didn't approve of judicial nominees with political values attuned to those of Republicans, and who would be more likely to resist "legislating from the bench" and other forms of judicial activism.

Thus, Senate Democrats banded together and filibustered Bush's "objectionable" nominees during Senate debate. I'm sure you recall from high school government class that a filibuster is an obstructionist tactic, usually in the form of indefinite debate, intended to stall or kill legislation by preventing it from coming to a vote. It is most often used by a minority party to block votes on objectionable legislation, or in the case of this discussion, votes on judicial nominees.

There is a way to end a filibuster, called "cloture," which ends debate and forces a vote. Invoking cloture takes the vote of three-fifths of the Senate, or 60 Senators. Thus, if the minority party knows that the majority party can muster 60 votes, it probably wouldn't pursue a filibuster. However, if the majority party does not have 60 votes to bring debate to an end, then even the threat of a filibuster can be a powerful weapon.

During President Bush's first term, and until the end of 2006, the Senate Democrats knew that the Republicans could not muster the 60 votes necessary to invoke cloture. As a result, Senate Democrats threatened to filibuster those judicial nominees that they felt were inappropriate for the job due to their conservative political views.

All of this came to a head in 2005 when Senator Trent Lott coined the term "nuclear option" in regard to a little-used procedural way to end a filibuster with a majority vote instead of the usual three-fifths rule. The term was later changed to "constitutional option" in light of negative connotations surrounding anything termed "nuclear," but the result is the same.

Interestingly, the Republicans lost their nerve and chose not to use the nuclear option for shutting down Democrats' filibusters over judicial nominees, which disappointed many conservatives. The Republicans buckled when the Democrats threatened to shut down the Senate and prevent consideration of routine legislative business if the Republicans tried the nuclear option.

Threatened with gridlock over judicial nominations, the stalemate was finally broken by the now-famous "Gang of 14," led by none other than John McCain, among others. The Gang of 14 was a bipartisan group made up of enough Senators from both political parties to prevent the use of the nuclear option as well as filibusters in regard to judicial nominees. The result was that certain of President Bush's nominees were blocked, but others were confirmed without filibusters, nuclear options or shutting down the Senate.

I'm providing all of this background because now the tables are turned and the Democrats are in control of both the Executive and Legislative branches of government. Depending on the outcome of Senate elections in Minnesota and Georgia, the Dems may or may not have the 60 votes necessary to invoke cloture, so we could see a repeat of the 2005 judicial battle played out in the months and years ahead - only this time with the Republicans in the minority. I will come back to this issue later on.

Get Ready For Liberal Judicial Nominees

Of course, Senate Republicans might not threaten filibusters if they feel the judges nominated by President Obama are mainstream jurists who are not judicial activists or do not engage in "legislating from the bench." Some consider the Cabinet appointments President-elect Obama has announced so far as being moderates for the most part, so they expect future judiciary nominations might be the same.

However, Obama's appointments so far have largely been announced to show Wall Street and foreign nations that he's willing to go with experience rather than a strict liberal philosophical alignment. Since judicial appointments can carry on long after these Cabinet members are retired and selling their memoirs, it's possible that Obama might pay homage to the far left by nominating liberal judges. This is actually what I expect to happen.

Since we do not yet know the identity of Obama's judicial nominees, we don't really know how liberal they might be, or how the Republicans will react. However, we do have some hints about who Obama may nominate based on his past statements.

Considering that Barack Obama was a professor of constitutional law for 10 years would seem to indicate that he knows a thing or two about the principles upon which the country was founded. However, constitutional lawyers, scholars and judges tend to fall into one of two categories: First, is the category called "originalists," meaning that they tend to believe that the Constitution should be interpreted based on its original wording and intent.

Basically, originalists believe that if judges are allowed to interpret the Constitution to mean anything they want within the context of current society, then the Constitution means little or nothing. Instead, originalists believe that the original document is sufficiently flexible to take into consideration the changes in our society without sacrificing the wording and original intent of the Founding Fathers.

The other constitutional interpretation category is made up of legal practitioners and scholars who believe the Constitution is a "living document" that should evolve over time to take into consideration societal changes. In contrast to originalists, those who support the living document thesis believe the Constitution should be subject to re-interpretation and even amendment from time to time to fit the needs of current society.

Generally speaking, most conservatives are originalists, while most moderates and liberals support the ‘living document' interpretation of the Constitution. Unfortunately, the majority of lawyers, judges and legal professors are now in the living document camp, as noted in a recent speech by Supreme Court Justice Antonin Scalia.

So, in which camp does Obama reside? He's firmly in the camp of those who believe the Constitution should be interpreted as a "living document." This is not just speculation by conservative pundits, but is clearly evident from Obama's writings and speeches regarding judicial issues. The following are quotes made by or about Obama on various occasions that speak directly to the issue:

From Obama's book, The Audacity of Hope: "I have to side with Justice Breyer's view of the Constitution--that it is not a static but rather a living document and must be read in the context of an ever-changing world."
When asked about what kind of justice he would want to appoint to the Supreme Court during a primary debate, Obama said, "I taught constitutional law for 10 years, and . . . when you look at what makes a great Supreme Court justice, it's not just the particular issue and how they rule, but it's their conception of the Court. And part of the role of the Court is that it is going to protect people who may be vulnerable in the political process, the outsider, the minority, those who are vulnerable, those who don't have a lot of clout."

". . . ometimes we're only looking at academics or people who've been in the [lower] court. If we can find people who have life experience and they understand what it means to be on the outside, what it means to have the system not work for them, that's the kind of person I want on the Supreme Court."
In explaining his vote against [Supreme Court Nominee John] Roberts, Obama opined that deciding the "truly difficult" cases requires resort to "one's deepest values, one's core concerns, one's broader perspectives on how the world works, and the depth and breadth of one's empathy." In short, "the critical ingredient is supplied by what is in the judge's heart [not the Constitution]."
"We need somebody who's got the heart, the empathy, to recognize what it's like to be a young teenage mom, the empathy to understand what it's like to be poor or African-American or gay or disabled or old - and that's the criterion by which I'll be selecting my judges."
Surprisingly, however, when faced with the nomination of conservative Janice Rogers Brown for the DC Circuit Court of Appeals, Obama said the following in opposing her confirmation: "The test of a qualified judicial nominee is also not whether that person has their own political views. Every jurist surely does. The test is whether he or she can effectively subordinate their views in order to decide each case on the facts and the merits alone. That is what keeps our judiciary independent in America. That is what our Founders intended."

Hmmmm....It seems that our new president is fine with straying from a strict interpretation of the Constitution in some cases, but not in others. Put differently, Obama seems to believe it is fine for liberal judges to "interpret" the Constitution as they see fit, but conservative judges must "subordinate their views."

In any event, it's pretty clear, at least to me, that Obama is in the camp that believes the Constitution is a living document and should be interpreted accordingly. In other words, judicial activism will be just fine as long as it's the little guy against the big guy, but is not acceptable if it is deemed to line up with a conservative political mindset.

In addition to his own well-documented feelings about judicial activism, there is little doubt Obama will also feel pressure from Democrats in Congress to appoint liberal, activist judges. Based on a number of articles and blog entries I have read, the liberals feel that it's high time they had their turn to appoint judges with political views akin to their own. In essence, they see the federal judiciary as being slanted to the right as a result of Republican presidential administrations in 20 of the last 28 years.

Will The Republicans Roll Over Or Fight Back?

There seems to be no question about the liberal ideology that is likely to influence Obama's judicial nominees. As noted above, Obama's own words indicate that he advocates judicial activism on matters where the heart should overrule the letter of the law. Thus, the big question becomes, what will Republicans do when faced with Obama's liberal judicial nominees with a proven record of judicial activism?

While judicial appointments may not be the first potential area of conflict the Republicans will encounter with the new Administration, they are likely to become prominent within the first year of an Obama presidency, especially given the many unfilled judicial seats. How they react to Obama's judicial nominees, especially if they are known judicial activists, may set the tone for the next four years or longer.

As noted above, when the Democrats were in the minority and were faced with conservative nominees, they held together and filibustered nominees that they felt were too conservative for their tastes. President Bush was forced to withdraw numerous judicial nominees. This resistance eventually escalated to the point when the Gang of 14 intervened. The point is, all of this resulted in more moderate judicial nominees after 2005.

Knowing that the Senate Republicans didn't resort to the "nuclear option" when they were in the majority, will they wake up and become a cohesive resistance to activist judges nominated by Obama? Or will they roll over and allow them to be confirmed? I hope that they do provide some stiff resistance to judges who want to legislate from the bench, but I have to admit that I wonder if the defeated Republican establishment has the stomach for such a fight.

Of course, the next question to ask is whether the Democrats will be as fearful of using the "nuclear option" should the Republicans filibuster Obama nominees. Buoyed by the shift in power to the left in both the Executive and Legislative branches of government, my bet is the Dems will have no trouble at all resorting to the nuclear option to block efforts by the minority Republicans to stall judicial appointments.

Not only do I think the Senate Democrats won't hesitate to use the nuclear option, I also think their constituency would rebel if they hesitate to employ this drastic step. There is no doubt that the liberals are going to demand that Obama load the courts up with the most activist judges they can find. It remains to be seen if he will oblige them, but I would not be surprised.

What About The Obama Supreme Court?

Much of the above analysis is directed toward appointments to the District and Circuit Courts. While these positions are certainly important, we also need to be thinking about the potential for Supreme Court appointments during Obama's presidency. As I noted above, I wrote about the importance of the 2008 presidential election on the makeup of the Supreme Court back in July. However, since we now know who the president will be over the next four (or possibly eight) years, it bears repeating.

It is very likely that President Obama will have the opportunity to appoint at least two and possibly three Supreme Court justices in his four year term, and probably more if he wins a second term. Considering the above discussion about the liberal mindset Obama has in regard to judicial activism, his Supreme Court appointments are almost certain to be on the liberal side.

Thus, let's look at the current makeup of the court, and who may be retiring soon. In the current makeup of the Supreme Court, we have four generally conservative judges - Roberts, Scalia, Thomas and Alito; four consistently liberal judges - Stevens, Souter, Ginsburg and Breyer; and one sometimes swing voter - Anthony Kennedy (often more on the liberal side).

Casual readers might tend to think it is a good idea to have the High Court so well balanced. Admittedly, there are arguments to support such a position. But President Obama has the potential to change that if more than two Supreme Court justices retire on his watch.

Supreme Court justices tend to keep their retirement thoughts and plans to themselves, so there is no way to know with certainty if any of the current justices are likely to retire over the next four years. However, it is believed that some of the older Supreme Court justices have had health issues, so it would seem very likely that at least one or two or more will retire over the next four years.

Next, it has long been believed that certain Supreme Court justices prefer to retire when the sitting president is someone who shares their political ideology, and who is likely to appoint a like-minded replacement. So, even if their health isn't a problem, some justices choose to retire when it is politically expedient in terms of their likely replacements.

Now that Barack Obama is President-elect, it is widely believed that the two most likely Justices to retire will be John Paul Stevens and Ruth Bader Ginsburg. Justice Stevens is now 88 years old, so it would come as no surprise if he chooses to retire during the next four years, perhaps as early as next year.

Interestingly, Justice Stevens was thought to be a conservative judge when Richard Nixon appointed him to the 7th Circuit Court of Appeals in 1970, and when Gerald Ford appointed him to the Supreme Court in 1975. Yet Justice Stevens was at best a moderate on the High Court in his early years, and soon shifted to the liberal side on most issues.

The next most likely Justice to retire is thought to be Ruth Bader Ginsburg, who is now 75 years old. Justice Ginsburg was diagnosed with colorectal cancer in 1999 and underwent surgery followed by chemotherapy and radiation treatments. While the surgery and treatments were deemed to be successful, it is unclear how long she wishes to remain on the High Court. Justice Ginsburg is widely considered to be the most liberal justice on the Court, and like Justice Stevens, she may have been waiting to retire until someone more liberal is in the White House.

Most analysts agree that the make-up of the High Court won't change much if Justices Stevens and Ginsburg retire (or pass away) during an Obama presidency, and I might agree. Obama will likely appoint two equally liberal judges. I think we can count on that.

Judging by age alone, the next most likely justices to retire over the next few years are Antonin Scalia (72) and Anthony Kennedy (72). Importantly, if either Justice Scalia or Justice Kennedy should retire, Obama will have the opportunity to dramatically shift the balance on the High Court to the liberal side. Justice Scalia is widely considered to be the most conservative judge on the Supreme Court. If Justice Kennedy, who is considered the "swing" vote, is replaced with another liberal ideologue, that too would represent a significant shift on the High Court.

Conclusions - Who Knows What Obama Has In Store

President Obama will likely have the opportunity to appoint at least two Supreme Court justices in the next four years. His appointments will very likely be liberal, "living document" judges. Most likely, Obama will be appointing liberal judges to replace retiring liberal judges with no net change on the overall balance of the High Court. That's the good news, we hope.

Yet if more than two Justices retire in the next four years, or should Obama go on to a second term, he may have the opportunity to shift the Supreme Court to a much more liberal bias. And keep in mind, these Supreme Court choices are lifetime appointments.

As a practical matter, I don't care quite so much what the political orientation of a judge is, IF they make their decisions based on what the Constitution says and not what they want it to say. No doubt there are some conservative judges that slant their interpretations to fit their political orientation, but I think they are the vast minority. Likewise there are plenty of other judges who are overly liberal in their decisions.

Judicial activism, however, is alive and well and it now appears that we have a president and majority in Congress who agrees with this method of interpreting the Constitution and the laws of the land. Fortunately, Presidents Reagan, Bush I and Bush II have had a conservative impact on the judiciary that should continue to reduce legislation from the bench in the future. But that can change decidedly in President Obama's Administration.

I have reluctantly refrained from discussing my many problems with Barack Obama in recent weeks as it looked increasingly that he would be our next president. And now he is. So just as well that I refrained. I have chosen my topics carefully.

As I discussed last month, our 401(k) plans may be at risk of government takeover under the new Democrat regime. This week, I focused on the Supreme Court and lower court implications. These are two topics we Americans need to be very aware of.

There will be other topics that we, as investors, will need to focus intently on in the months ahead, and I will get back to those in future issues. The combination of the global recession and financial crisis will likely dominate upcoming topics. But we cannot lose sight of critical issues like our retirement plans, the Supreme Court and what the liberal Congress is up to.

With a new, liberal president coming into office, we need to keep our antennae up!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama's Judges and the Senate
http://online.wsj.com/article/SB122792243571465873.html?mod=googlenews_wsj

Obama's Far-Reaching Reforms Can Wait
http://www.realclearpolitics.com/articles/2008/12/obamas_hard_choice.html

In Barack we trust? (written by a liberal)
http://www.salon.com/opinion/feature/2008/11/29/obama_choices/

Bill Clinton to release donor list & more (very interesting)
http://www.politico.com/news/stories/1108/16054.html

Forecasts & Trends : Barack Obama

Healthcare Reform or Government Takeover?

On the Economy & Obama's Trillions

Is America On The Road To Financial Ruin?

Obama On Course To Double National Debt

Where To Turn If You Lose Your Job

The End of America's Financial Independence?

Have We Turned The Corner On The Recession?

Why The Stock Markets Are Collapsing

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?

Obama's Tax Policy: None Dare Call It Welfare

Introduction

QUOTE: "Obama Stimulus Fosters Tax-Exempt Tyranny by Dick Morris & (wife) Eileen McGann

QUOTE: "The Tax Cut Mirage by Peter Ferrara

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

Obama's Judges vs. Republican Opposition

Editor's Note

Introduction

Judicial Appointments - A Lasting Presidential Legacy

The Bush Record On Judicial Appointments

Get Ready For Liberal Judicial Nominees

Will The Republicans Roll Over Or Fight Back?

What About The Obama Supreme Court?

Conclusions - Who Knows What Obama Has In Store

QUOTE:
"Obama Stimulus Fosters Tax-Exempt Tyranny
by Dick Morris & (wife) Eileen McGann

QUOTE:
"The Tax Cut Mirage
by Peter Ferrara