Budget Deficit

So let us get this straight. The average Philadelphia teacher is receiving compensation and benefits of $112,700 and 50% of their students dropout; while of the remaining students only 45% can do math, 35% can read, and 30% can write. But at least they have some nice murals dotting the decaying schools. Furthermore, every new year will bring higher 'fairer' pension payment requirements. This is a crisis that grows larger by the day and is willfully ignored by politicians beholden to these government unions. The sheer idiocy of the following plan to "save" the schools this year is lost on the brainless media twits mouthing the teacher's union talking points.

• Clearly it's time to bomb Assad (on Qatar instructions): Islamic State executes dozens of Syrian army soldiers (Reuters)
• Ukraine Declares Russian Invasion as Sanctions Threat Raised (BBG)
• Ukraine Reports Russian Invasion on a New Front (NYT)
• German Unemployment Rises as Risks to Economy Build (BBG)
• Ebola spreads to Nigeria oil hub Port Harcourt (BBC)
• FBI Probes Possible Hacking Incident at J.P. Morgan (WSJ)
• FBI, Secret Service investigate reports of cyber attacks on U.S. banks (Reuters)
• If you like your Venezuela, you can stay in Venezuela: Airlines Abandon Fliers Amid Currency Dispute (WSJ)
• Boomer Wealth Dented by Mortgages Poses U.S. Risk (BBG)
• People Aren't Buying Guns (BusinessWeek)

Ten years ago, when Europe was successfully pretending it is solvent for the benefit of German exports and Greece was happily masking its budget deficit disaster with Goldman Sachs currency swaps, the Olympic flame was about to light up the Athenian night sky. As BBC reports, the return of the Games to the Olympics' spiritual home was widely hailed as a success at the time. Now, not so much and most Greeks view the Athens Olympics with anger as a contributing factor to the country's economic catastrophe. The Games cost almost twice their projected budget, with organisers not opting to use any temporary, collapsible venues, as other host cities have done.

“If I scare you this morning, and as a result you take action, then I will have accomplished my goal," is how Casey Research's Jeff Clark began a recent conference speech. But the reality is that he didn’t need to try to scare anyone. Sadly, the evidence is overwhelming and has already alarmed most investors; our greatest risk is not a bad investment but our political exposure. And yet most of these same investors do not see any need to stash bullion outside their home countries. They view international diversification as an extreme move. Many don’t even care if capital controls are instituted. We're convinced that this is the most common - and important - strategic investment error made today...

There are many ways to look at the United States government debt, obligations, and assets. But TrimTabs's Charles Biderman cuts straight to the bottom line and add it all up - $89.5 trillion in liabilities and $82 trillion in assets.  There.  It’s not a secret anymore, and although these are all government numbers, for some strange reason the government never adds them all together or explains them - but we will. No one can really know what will have value in this politicized crony capitalistic system as the hyper-monetization ramps up... all I can suggest is to hedge your bets with some physical precious metals and some minimal leveraged real estate. Unfortunately, the more you know, the more you know you don’t know... invest and live accordingly.

With U.S. rates higher than those of major foreign markets, investors are provided with an additional reason to look favorably on increased investments in the long end of the U.S. treasury market. Additionally, with nominal growth slowing in response to low saving and higher debt we expect that over the next several years U.S. thirty-year bond yields could decline into the range of 1.7% to 2.3%, which is where the thirty-year yields in the Japanese and German economies, respectively, currently stand.

This week was interesting to say the least and it is ending with a bang.  We are covering a number of brief subjects this week.  I hope you enjoy them.

Egypt's surging budget deficit has hit its limit and the Oil Ministry has decided to cut its $20bn plus fuel subsidies. The result - mainstream fuel prices by up to 78% from midnight on Friday. As Reuters reports, previous governments have failed to curb energy product subsidies, fearing backlash from a public used to cheap fuel. We will wait and see the response but as one analyst noted "It should be noted that the effect of a rise in fuel prices will not affect the poor directly, since they do not own cars..." which makes perfect sense as long as the poor do not use or purchase any item that has fuel in its supply chain - brilliant! The government hopes the fuel subsidy cut will raise 40 billion pounds.

The boom is unsustainable. Investment and consumption are higher than they would have been in the absence of monetary intervention. As asset bubbles inflate, yields increase, but so do inflation expectations. To dampen inflation expectations, the Fed withdraws stimulus. As soon as asset prices start to fall, yields on heavily leveraged assets are negative. As asset prices decline, increasingly more investors are underwater. Loan defaults rise as mortgage payments adjust up with rising interest rates. When asset bubbles pop, the boom becomes the bust.

Christine Lagarde of the International Monetary Fund has told the European Central Bank that they need to consider Quantitative Easing if inflation continues to remain low, which it will. She stated: “If inflation was to remain stubbornly low, then we would certainly hope that the ECB would take quantitative easing measures by way of purchasing of sovereign bonds”.

As of this moment, US equity futures are perfectly unchanged despite what has been an almost comical reactivation of the 102.000 USDJPY tractor beam. Considering the pair has been trading within a 75 pips of the 102.000 level for the past month, one has to wonder when and what the next BOJ Yen equilibrium level will be reset to. Oddly enough, even as the USDJPY is very much unchanged, the Nikkei continues to rise suggesting that, as Nikkei reported, the GPIF is already investing Japanese pension funds in stocks. Which is great for the Nikkei catching up with the global bond bubble, what is not so great is what happens when the market realizes that the largest holder (excluding the BOJ) of JGBs is dumping, and the world's most illiquid major sovereign bond market rushes for the exits. Just recall the daily halts of Japanese bond trading from the summer of 2013 - we give it 3-6 months before it returns with a vengeance.

Overnight weakness following The World Bank downgrade, China's flip-flop on CNY and failed auction, Cantor's 'compromise-shattering' loss, appeared to be stabilized by a levitating USDJPY but when the budget deficit hit (as expected) it appears the market was hoping for a bigger deficit (and thus more to monetize and moar QE). Stock are diving lower with Trannies worst along with the Russell 2000 -1%. CNBC is already discussing if this is the pullback to buy for the next leg higher in stocks as money on the sidelines floods in...

A dispassionate discussion look at the rally in US Treasuries

The IMF has lied (about 'not' proposing a 71% income tax) and has been shown as a serial over-optimistic forecaster (world growth disappointments and hockey sticks) but the simply incredible hope that Christine Lagarde's PhDs created in their growth expectations for Ukraine make their Greece "Oops" moment look like nothing. As CFR rebukes, we see the IMF’s growth forecasts for Ukraine and Greece not as forecasts at all, but rather as assumptions necessary to justify the IMF’s interventions. Credibility -> 0.