Jobs, Puppy Dog Eyes, Buffett, China And Operation Twist

From Peter Tchir of TF Market Advisors

Jobs, Puppy Dog Eyes, Buffett, China and Operation Twist

Well, if you were wondering how the President planned to get the Republicans on board, it was by making the speech as much of a tear-jerker as possible.

With a focus on veterans and teachers and children it is clear that how he is going to paint the opposition.  It will be difficult to avoid being painted into a corner as a vote against the job plan will be portrayed as a vote against veterans and children.  Probably smart politics.

I cannot imagine China enjoyed the speech much.  If they are even a tiny bit paranoid, they have to feel a bit picked on.  It started with asking why we can't build new airports, etc., like they can and ended on why they aren't buying our cars.  Maybe it is safe to antagonize China, but I'm not sure we should be irritating our biggest lender.

Am I the only one who is getting uncomfortable with the role Warren Buffett plays?  Will his memoirs be added as an amendment to the constitution?  It is great that he wants to pay more taxes than his secretary, but his unique status does concern me.  It seemed a bit strange that he had a conversation with the President before he made an "investment" in BAC.  It does seem a bit strange, that 17 banks got sued, but Warren's WFC, which owns Wachovia, wasn't sued twice (once for each), because it was already "in settlement negotiations". 

So, will this jobs bill do much?  I don't see how.  Employers get a tax break, but that will likely be used to increase profits, because they remain uncertain of what happens when the breaks end.  No new jobs, and limited new spending.  For the employees - he said an average of $1,500 next year extra in their pocket.  Interesting but when he talks about cutting medicare and social security in the same speech, how much of that will be spent?  I think a lot of that will go into savings to offset future needs.  People making 50k a year aren't so dumb to just take this money and spend it, when they see future benefits getting stripped away.  The $4,000 tax credit for hiring new employees covers about 14 weeks at minimum wage (the sort of job this economy has been able to generate).  Maybe we will see a spike in layoffs ahead of that since it might be a good time to get rid of employees on the fringe, when you can get a free look at his replacement, courtesy of the government.

Another year of unemployment benefits?  Hmmmm.  Some talk about summer jobs for disadvantaged kids next year.  Ummm, that just sounded like a plea for some votes and to spin Republicans against disadvantaged kids. 

He is going to ensure that projects are ready to go and no waste.  Wasn't he going to go through the budget line item by line item?  If anything this seemed like a good way to introduce another czar.  He is fond of czar's and who better to monitor the infrastructure bank than an infrastructure bank czar?  I think this process will get bogged down quickly.

Futures are leaking and I expect after the trio of underwhelming speeches - Trichet's, Bernanke's, and Obama's, that will continue into the morning.  I would like to be long restaurants in DC as the safest bet is that lobbyists will be out in full force to protect loopholes, and to get in line for the food fight of handouts.

The one thing I think that is most interesting is that I believe Obama, Geithner, and Bernanke are working on a plan to show a big budget deficit reduction.  I am beginning to believe that Operation Twist is a stealthy way to reduce the CBO deficit projections and make the country safer.  Many believed QE2 was a stealth way to deflate the dollar and inflate assets and exports.  Since operation twist doesn't increase money supply, and is likely to have much of an impact on the interest rates mere mortals can get, I have been wondering why the focus on shifting to the 10 year point in the curve.

More and more I believe that it is both a way to protect ourselves from a run, but also a way to dramatically reduce the CBO deficit projections.

From 2017 until 2021, the CBO assumes the 3 month t-bill rate is 4.0%   The ten year rate is assumed to be 5.3%.  If we can lock a lot of money into 10 year rates at around 2%, this could be a huge savings on the projections.

Instead of using an average rate over 4%, maybe they will change the average rate to 3%, or lower.  On 12 trillion in net debt, even a 1% savings is $120 billion per annum.  I just started looking at the numbers, so have to figure out in more detail what the net debt is in the future and the interest rate used, but  I think these guys actually have a plan.  A plan that makes sense.  One of the few areas the CBO seems to be honest on in their projections was the future cost of debt.  The Fed could always control the short end, but it is hard to assume zero for that, but if the treasury and fed work together to lock in a lot of longer duration financing, it could change the future deficit picture materially.  I will have to play with the numbers from the CBO more closely, but this couldactually be a positive surprise to the budget picture.  In the meantime, GO PACKERS!