30 Jul 2011

News Just In: House approves revised Boehner debt-ceiling plan

The House of Representatives passed a bill on Friday to raise the debt ceiling and cut $22 billion from next year's spending. The bill, passed as part of a power play by Speaker John Boehner (R-Ohio), will nonetheless die in the Senate later Friday evening.
Just four days before the government may begin to default on its loans, the House voted on the bill after two earlier versions failed to win over anti-spending stalwarts in Boehner's party. The Senate is expected to immediately strip it of its content and replace the language with that crafted by Majority Leader Harry Reid (D-Nev.). A vote to begin debate on that measure is slated for later Friday evening.
By altering the content of his bill, Boehner was able to win the support of 218 members of the 240-member Republican conference. In the process, however, he further alienated House Democrats, none of whom ended up supporting his plan.
The bill slashes 2012 fiscal year spending by $22 billion and cuts $915 billion out of the national budget for the next decade. It would also establish a "super Congress," composed of 12 members from both parties and chambers, that would have the power to make major changes to Social Security, Medicare and other programs.
To gain support from the Republican conference's most conservative members, it also includes a requirement for the passage of a balanced budget amendment to trigger the second phase of the bill, which would raise the debt ceiling again later this year.
That provision was added on Friday morning to win over members who said the balanced budget amendment measure in the original plan, which required a vote but not passage, was too weak.
Requiring passage of the balanced budget amendment "got a lot of votes," Rep. Mo Brooks (R-Ala.)said after a GOP conference meeting on Friday in which Boehner announced the change.
Ahead of the vote, several Republicans who had opposed the bill as recently as Thursday night explained why Boehner's last-minute addition of a balanced budget amendment had been enough to bring them onboard.
"This is close enough to the spirit of [Cut, Cap and Balance] and maybe gets them [enough votes for passage]," Rep. Phil Gingrey (R-Ga.) said.
Rep. Jeff Flake (R-Ariz.), who is running for Senate in 2012, said Boehner's original bill wasn't sufficient because "it was only two parts of the Cut, Cap and Balance."
"The 'balance' is now there," he said.
Given the political reality that Boehner's bill is dead on arrival in the Senate, Flake wouldn't speculate on what needs to happen next to ensure a deal is passed by August 2. But he noted that at this point, there's "not that much difference" between Boehner's and Reid's bills. And if Reid were willing to attach a balanced budget amendment to his proposal, Flake said he would support that plan.
Reid's bill currently "has cuts, meager. Caps, eh, somewhat," he said. "But if you put some balance in there, I'm there."
The Reid bill would actually cut $2.2 trillion from the deficit over the next decade, while raising the debt ceiling beyond the 2012 election.
According to Rep. Mike Simpson (R-Idaho), who attended the meeting, said the mood had been friendly, with Boehner telling his conference "I love all of you."
Rep. Louie Gohmert (R-Texas), who declared himself a "bloodied and beaten 'no'" on Thursday, said he had likely been convinced by Boehner's appeals in the conference meeting.
"I need to read [the bill]," Gohmert said. "I think I can [support it], but I need to read it."
But while Boehner may have won with the Tea Party, he will lose with the Senate. Reid had already declared the bill a non-starter in the Senate, but said it was even less digestible with a balanced budget amendment requirement.
Cut, Cap and Balance, a House bill that would have raised the debt limit with a balanced budget amendment requirement, failed in the Senate earlier this month in a 51 to 46 vote. (Three senators were missing.)
Boehner's plan is expected to meet the same fate, after all 53 Democratic senators signed a letter earlier this week vowing to block the bill. House Republicans have indicated the Boehner bill will be their last offering to the Senate.
"Harry Reid has three different options," House Majority Leader Eric Cantor (R-Va.) said on Thursday. "One is to suffer the economic consequences of default, which all of us hope he doesn't choose. Two is to bring up the bill we sent prior [Cut, Cap and Balance] or to accept the compromise bill that we are sending over today," Cantor added.
After the Boehner bill fails in the Senate, the chamber will likely proceed with Reid's bill. Reid has been rallying support among Republicans for the plan, with some centrist Republicans hinting they may be willing to compromise.
"I'll vote for Boehner, and I'll vote for Reid," Sen. Scott Brown (R-Mass.) said on Friday. "I've already said that. We need to move our country forward. It's time."

Bullish on Silver?

Are you bullish on silver yet?

Admittedly, it’s been a wild ride for the white metal this year, as it rocketed from below $30/oz. in February to $50 in late April, only to be slammed back to $32 two weeks later. As of this writing, it’s recovered to just north of $40.
With that kind of volatility, one can be excused for being somewhat skittish about the market. But the fact is, the future looks very bullish for gold’s baby brother. We’ve been covering supply and demand factors on a regular basis in this letter, but today marks the arrival of a singular event that should have a profound effect on prices going forward.
On this day – July 22, 2011 – dollar-denominated Chinese silver futures are scheduled to begin trading on the Hong Kong Mercantile Exchange (HKME), thus giving Asian (especially Chinese) investors direct access to the metal and offering an alternative to the longtime dominance the U.S. has enjoyed in silver-bullion trading.
This follows the HKME’s launch of trading in gold futures on May 18. Both metals will be priced in U.S. dollars, with physical delivery to specified depositories in Hong Kong – a major conduit for the flow of metals into China.
For one thing, the new market ends the hammerlock the Chicago Mercantile Exchange (CME) has had on silver trading. Because of the competition, the CME will have less leeway to change margin requirements – as it did when it raised them three times in a week – by nearly an aggregate 100% – in late April/early May, sending the silver price into its tailspin.
In addition, investors in China and throughout the far East will find it easier to buy into bullion. This will be the first time that Asia will be able to conveniently purchase silver futures contracts and if they wish, to take delivery. Previously, those investors had to purchase CME-based contracts (if they were allowed to at all) that traded through the Hong Kong Futures Exchange, according to CME rules.
Consider also the price differential between gold and silver. With the former trading at 40X the latter, silver presents less of a barrier to entry to smaller or first-time investors.
The HKME also offers another advantage compared to the CME. Its standard contract is for 1,000 troy ounces vs. the CME’s 5,000-ounce minimum. Once again, creating increased liquidity for the customer was the goal.
As Albert Helmig, president of the exchange, puts it, “The new contract will enable buyers and sellers in China to trade effectively with their counterparts across the world, while at the same time allowing investors to gain exposure to silver-price movements and broaden their investment portfolio.”
All of this should spark a silver rush that is already running full throttle. As the U.S. dollar has weakened, the Chinese – historically protective of their hard assets – have been running for cover. Demand for the metal soared by 67% in China in the past three years, and the country was responsible for 23% of global consumption in 2010.
That’s likely just the beginning. China has a staggering $3.2 trillion in currency reserves, and as the “value” of fiat money deteriorates everywhere, they’ll want to move out of it. Imagine the effect on metals prices if just a fraction of one percent of those reserves went into gold and silver.
Institutional investors have taken note. New York-based Newedge USA – which was the biggest futures-commission merchant by measure of customer assets on deposit as of May – cites climbing physical demand in Asia as the catalyst that will drive silver prices, by its estimate, to $70/oz. in the near term.
One final note: Helmig says that the HKME’s future plans call for trades priced in yuan as well. That would be in keeping with the exchange’s motto – Chinese access, Asian pricing, and global risk management – and it’s a move that could really throw the floodgates wide open.
No secret what a flood of new demand will bring: Higher prices.
If you’re not yet bullish on silver and the handful of companies that mine it, perhaps you should be.

[Not only is now a good time to stock up on physical silver, the increase in demand will likely drive up silver producers’ stock prices. Casey International Speculator provides insights on the most promising junior companies in the U.S. and Canada, as well as worldwide. As always, a trial subscription is risk-free for ninety days.]

Ron Paul: "Default Is Coming"

Rep. Ron Paul (R-TX) explains why default by inflation is worse than default by not raising the debt ceiling.

Rep. Paul also talks about how the devaluing of the U.S. has led to record prices in gold bullion.

"Default is coming. The only argument that's going on now is how to default, not send the checks out or just print the money. In all countries our size, they always print the money," Paul said.

"They're going to raise the debt limit, and then they're going to print the money, and then they'll default by inflation, and that's much more dangerous than facing up to the facts of what's happening today."


SORRY, GRANDMA Skipping Social Security Payments May Prevent Default — But Cause Disaster

As the Treasury Department prepares to hit the swiftly-approaching debt limit with no agreement to lift it in sight, fears are growing that the government might opt to skip the next round of Social Security payments.
Experts warn that the program is such a vital source of support for so many low-income and elderly Americans that even one delayed payment could trigger a domino effect, sending millions of households into delinquency on a broad range of bills.
"What we are talking about here," said Joan Entmacher, vice president for family economic security at the National Women's Law Center, "is not the financial markets -- not that they are not important -- but the very ability of millions of Americans to buy food, pay their utility bills, their rent or mortgage and to generally function."
If Social Security payments don't come, Entmacher said, "there are a whole series of very serious, deeply frightening consequences that could, and very likely would, follow."
There are about 54.8 million Americans who receive some form of Social Security benefits each month, according to government data (see Table 2). Most payments are made to retirees, disabled individuals and certain dependent children and adults. The first of next month's payments are due Aug. 3. Another 15 million Americans are also due veterans' benefits, federal or postal employee retirement benefits and other payments beginning on that date.
For a substantial share of the people who receive Social Security benefits, that income is essential. About 40 percent of all unmarried individuals who receive social security benefits rely on the program for at least 90 percent of their income, the Social Security Administration's inspector general found in a November 2010 report. About 90 percent of women over age 80 derive nearly all of their income from Social Security benefits.
Losing that income could prove disastrous. Households that don't pay utility bills eventually face shut off. Banks can charge account overdraft fees. And creditors also generally charge late fees for overdue payments. Credit card companies can raise a customer's interest rate due to overdue bills.
"Suddenly the credit card with 19 percent interest goes up to an unmanageable 30 percent interest," said Entmacher. "I don't think it requires too much imagination to consider what happens to American households from there."
Until now, Social Security income has not only been essential for many households but also very reliable. About 88 percent of all Social Security recipients receive their benefits via direct deposit, according to the Social Security Administration. That means government funds appear in more than 47 million recipients' bank accounts or on dedicated debit cards around the third day of each month. For some recipients, the expectation of regular payment has shaped their financial lives for more than a decade.
"Millions of people arrange their household budgets around those payments," said Entmacher. "They know that if they write a check for their rent or their mortgage and put it in the mail on August 1 or 2 then by the time the check clears their Social Security will have arrived. So, they put that check in the mail and make that payment on time."
Others have set up automatic bill arrangements that pay out just before or after the payment date. If payments don't go out Aug. 4, millions of people might overdraw their bank accounts, Entmacher said.
The average bank charges an average of $30 to $35 per overdraft, said Kathleen Day, a spokeswoman with the Center for Responsible Lending.
"We think that it would be more than unfortunate if banks choose to take advantage of people who are financially vulnerable and use this potential situation to generate overdraft fees," said Day. "Of course, we don't know what will happen yet. No one does."
Many of the nation's largest banks have, so far, shied away from public statements about the way that overdrafts would be handled if the government fails to pay Social Security benefits in the event of default.
On Thursday, Bank of America, declined to comment on what its spokesperson described as a hypothetical situation. A bank spokesperson also declined to comment on conversations the bank has had with federal regulators.
The federal agency that regulates banks has instructed financial institutions to use judgment in assessing any overdraft fees that may result from social security benefit delays, the New York Times reported Thursday. The Treasury Department declined to answer questions Thursday about what, if any, limits would be imposed on overdraft fees if social security payments are simply delayed to avoid default.
In a statement emailed to The Huffington Post, the Treasury Department indicated that it is making plans in the event that a debt-ceiling compromise is not reached in Congress before Aug. 2.:
While only Congress has the ability to ensure the government pays all of its bills, Treasury will provide more information as we get closer to Aug. 2 regarding how the government would operate without new borrowing authority if the debt limit is not increased.
There is some debate about exactly how much money the United States would have on hand to pay interest on its debts if a debt-ceiling compromise is not reached in the next few days. According to the Treasury, about $90 billion in debt matures on Aug. 4 and the government must pay more than $30 billion in interest on Aug. 15., Bloomberg reported.
"Our view right now," said Nariman Behravesh, chief economist at IHS, an economic forecasting and market analysis company, "is that the chances of default are very low mostly because the kind of financial meltdown that could occur as a result of an actual default is almost unimaginable."
Without an increase in the debt limit, the Treasury Department will have to make what could be a series of economically disruptive moves to prevent default, Behravesh said. At the least disruptive end of the scale would be a decision to furlough a large number of federal workers for a short period of time until the debt ceiling could be raised, Behravesh said. The government could also delay payments to federal contractors.
"Those are not ideal choices but they could probably be managed for a short period of time," said Behravesh. "If a compromise is reached in a day or two, they're no biggie."
Near the other end of that scale would be a delay in payments due to states for things such as roads, schools amd foster care subsidies. Skipping those payments could lead to additional public worker furloughs and a hold on state and local government spending.
Then there are the millions of social security payments due Aug. 3. President Obama told CBS News earlier this month that he could not promise that Social Security benefits would be issued if a debt-ceiling compromise is not reached.
It is possible that that furloughing government workers and delaying other payments would not raise enough cash to pay interest on the national debt, Behravesh said. In that case, social security benefits would have to be held.
"We think they would try to avoid this at all costs because it would be effectively hari-kari , and by that I do mean political suicide," Behravesh said. "But if that happens, there is no question that the consequences would, almost immediately, be enormous and painful for a lot of households."

29 Jul 2011

Debt bill set for vote as White House urges compromise

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Photo  1 / 7
Speaker of the House John Boehner speaks during a news conference on Capitol Hill, July 28, 2011.
REUTERS/Joshua Roberts

A Republican deficit reduction plan headed for two major votes in the U.S. Congress on Thursday and its expected demise could force a bipartisan compromise to avert an unprecedented debt default.

The maneuvers in the divided Congress signaled no immediate end to the feuding that has brought the United States to the brink of an economic crisis. There were still hopes a compromise could be hammered out five days before an August 2 deadline to raise the U.S. government borrowing limit.

World markets, unnerved by the risk of a U.S. default and a credit downgrade, were watching anxiously. Top U.S. financial executives added their voices to a chorus of calls from the business community for Congress to make a deal that would banish the specter of default.

President Barack Obama's priority was to "lift the cloud and make sure that the United States does not default," White House spokesman Jay Carney told reporters, urging Congress to end its partisan battle and deliver a compromise deal.

It was unclear whether the deficit reduction bill presented by House of Representatives Speaker John Boehner, the top Republican in Congress, would overcome objections from conservative rebels in his own party and pass the Republican-controlled House on Thursday. A vote was tentatively scheduled for between 5:45-6:15 p.m. EDT .

The Democratic-controlled Senate would vote on the Boehner bill afterward and it would be defeated in that chamber, Senate Majority leader Harry Reid said.

Hopes for a deal were pinned on a compromise emerging after that.

"The markets are going to be on tenterhooks until we get an understanding of what the quality of the package is," said Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.

Republican and Democratic congressional leaders have been in touch throughout the week, according to lawmakers and aides. But they will not be able to begin serious negotiations on a final compromise until the option now on the table -- Boehner's bill -- is defeated either in the House or the Senate.

The White House's Carney said the debt stalemate had "already had significant negative impact on the economy."

"The American people have made clear they want a compromise," Carney said. "Our primary objective has to be to protect the economy and the American people from economic harm."

While most analysts hope a default will be avoided by an eleventh-hour deal, the risk remains for a damaging downgrade of the United States' top-notch credit rating, a move that would raise U.S. borrowing costs and rattle global investors.

A failure to raise the debt limit by August 2 could trigger a payments crunch that would shake the global financial system and could tip the United States back into recession.


Reflecting nervousness in the business community, chief executives from the largest U.S. financial firms sent a letter to Obama and members of Congress urging them to compromise to avert default.

"The consequences of inaction -- for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America's global economic leadership -- would be very grave," they said.

Nervousness over whether the U.S. Treasury will be able to meet debt obligations in August increased on Thursday, and investors were closely watching to see if the Treasury will unveil a plan over how it may prioritize payments.

Rates on Treasury bills maturing on August 4, two days after the Treasury has warned it may run out of cash, rose to around 18 basis points, up from 12 basis points on Wednesday and from around zero as little as two weeks ago.

The cost of borrowing in the repurchase markets, a key source of fixed-income funding, also rose as investors grew reluctant to hold Treasury securities, preferring cash.

Boehner has been cajoling rebels within his own party, aligned to the fiscally conservative Tea Party movement, to support his deficit-cutting bill, which does not deliver the severe spending cuts they demand.

The Republican House speaker was more upbeat in a Thursday morning meeting with party members than on Wednesday, when he had urged them to "get your ass in line" behind the bill.

Thursday's meeting seemed like a pep rally as wavering lawmakers were applauded as they stood up to say they would support the bill. Representative Mike Kelly handed out signs that read "Play Like a Champion" in the colors of Notre Dame University, famed for its football program.

Opponents of the Boehner bill, such as Republican Study Committee chairman Jim Jordan, stayed silent at the meeting.

Boehner has little margin for error to get his bill passed in the House. The bill needs 217 votes to pass in the chamber with 433 members and two vacancies. There are 240 House Republicans, so if none of the 193 Democrats vote for the bill, 23 Republicans could also vote no and the bill would pass.


In the hours leading up to the votes, the White House continued to call for a bipartisan pact.

White House spokesman Carney said a successful compromise must significantly cut spending, install a mechanism to tackle tax reform and entitlement spending in the future, and lift the debt ceiling through next year.

Boehner declined to say whether he would be open to compromise if the Senate defeats his bill, but indicated that he would keep the House in session this weekend.

After weeks of bickering and setbacks, some common ground has emerged between rival Republican and Democratic plans to cut the deficit and raise the debt limit.

A bill being pushed by Reid and backed by the White House would cut $2.2 trillion from the deficit over 10 years without raising taxes. Reid has said he is willing to incorporate elements of Boehner's plan into his in a way that could win support from both parties.

The concerns about the risk of a U.S. default and downgrade come as Europe is still struggling to stem its own debt crisis. Italy's borrowing costs soared at a bond auction on Thursday as investors worried about Rome's ability to cut its sovereign debt -- second only to Greece's in Europe at 120 percent of annual output.



In a letter to clients, JP Morgan analyst John Bridges made clear his bullish views for gold and gold mining equities. Bridges predicts gold prices will reach $1,800/oz by years end and that we are presently at a good entry point for buyers of the metal.
“Actually over the last decade there have been few bad times to buy the meta,…. but June and July have often offered the years’ best entry points.”
In justifying the case for gold, even at current levels, Bridges says,“Some people may argue that $1,600/oz is the top of the bubble, but we suggest that unless governments control their debt levels, investors’ fear of paper currencies will drive gold higher.”
The following chart is provided to outline the strong correlation between gold’s performance and US debt levels:
Gold Mining Stocks
So far in this decade long bull market in gold, gold mining equities have largely failed to participate and are lagging significantly behind the metal’s performance. Part of this is because of uncertainty regarding business conditions, including tax and regulatory factors, in most countries and the increased cost of production driven largely by high oil prices. In any case, Bridges says mining equities will play catch up eventually, and their long run prospects are positive.
“We believe the equities should follow the bullion price,” Bridges says. “[Gold equities] can lag gold when prices are high or the market is de-risking but it’s nonsensical for the two to diverge for long periods,… Already the equities have recovered most of the ground lost in Q2.”
Silver has a lot of the same fundamentals going for it, according to Bridges, but he describes silver as the “high beta gold”. ‘Beta’ is a finance term which refers to an assets correlative performance relative to the general market, and the application of the term to silver signifies its cyclical nature. Gold tends to have counter-cyclical benefits, while silver mimics the general market much more so. Furthermore, silver is more than twice as volatile as gold, but in the long run may have more potential and is trading further below its inflation adjusted high of ~$140/oz, using the BLS inflation calculator, than is gold.

28 Jul 2011

Housing’s Next Leg Down And QE3

That US home prices are once again trending down is no secret. But just how bad things are likely to get is not yet well understood. Consider this from the Atlantic’s Daniel Indiviglio:
Chart of the Day: The Housing Market Is Worse Than You Think
Has the state of the housing market gotten better or worse since the first quarter of 2009? To answer this, you have to define what you mean by the state of the housing market. If you mean sales alone, then the state of the market hasn’t changed much: existing home sales are up a little from that time, while new home sales are down a bit. But assessing the inventory of defaulted, unsold homes in the market probably provides a better measure of health.
The following chart created by Laurie Goodman, a housing market expert at Amherst Securities, shows the ominous rise of shadow foreclosure inventory. It was part of a slide in a presentation she recently gave at an event last week at the American Enterprise Institute on how the Dodd-Frank financial regulation bill is stifling mortgage credit.
This chart answers the question: what’s happening to the homes of all those defaulted borrowers that we hear about? Many of those properties are a part of so-called shadow inventory. This is the sort of limbo between when a home’s loan defaults and when the property is put on the market for purchase.
The increase shown above is staggering. The shaded area shows mortgages more than 12 months delinquent or in foreclosure (darker blue) and those seized by the bank (lighter blue). The sum has risen from just below 2 million in early 2009 to 3.35 million in April 2011. That’s an increase of more than 67.5% over this period of about two years.
Also interesting: despite accumulating more defaulted properties, banks are very careful not to increase the number of loans sold very much. Loans sold has been very steady from 80,000 to 95,000 over this period. So recently prices have begun declining again even though the inventory for homes available for sale is being kept relatively low compared to the number that should actually be available to buyers.
`According to Goodman’s presentation, even though homes sold are only about 90,000 per month, inventory is growing by around 60,000 per month. So the homes sold each month would have to increase by two-thirds just to keep up with the growing inventory — not to begin to cut the 3.35 million homes in the shadows. To conjure up enough demand to meet 150,000 sales instead of just 90,000, home prices would almost certainly have to fall faster.
Wow. Housing is heading back into a depression even though banks are keeping millions of foreclosed houses off the market. Bank auditors won’t let them hold these depreciating assets indefinitely, so in the coming year the trend will reverse, as banks are forced to clear out their real estate. That’s a ton of new listings at a time when even current listings aren’t selling. So unless something radical happens (a government subsidy aimed directly at housing, for instance), the next leg down in prices should be epic.
This will cause consumers to spend less as their main investment turns out to be an even bigger loser than they currently fear. So a housing crash becomes a broader recession.
To my knowledge no one has tried to calculate what kinds of losses banks are sitting on. So let’s speculate that the average foreclosed house is worth $20,000 less than its mortgage (a conservative guess since most California houses are underwater by way more than that). 3.5 million times $20,000 blows a $70 billion hole in bank balance sheets that will have to come to light sometime soon.
Since the government’s reason for existing these days is to feed the banks, losses of this magnitude will pretty much guarantee a response. If QE3 hasn’t already happened, this will bring it on.