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NEWSFLASH: Social Security is Now Cash Flow Negative

Surprise..Surprise

Friday, February 5th, 2010 - By Steve Christ

The world is full of crooks and liars...

And no ordinary con-man, Charles Ponzi was perhaps the most famous swindler of them all.

A nearly penniless Italian immigrant, Ponzi bilked thousands of investors out millions in 1920.

His bait, however, was as old as the hills. He promised his investors a 40% return in just 90 days. Naturally, it worked like a charm.

In fact, at his peak, Ponzi's promise became so irresistible that he was making $250,000 a day in a time when that kind of haul was off the charts.

But as everyone later came to learn, King Ponzi had no clothes. Behind the curtain there was nothing...absolutely nothing.

The promised investments in postal stamps were never made and Ponzi's scheme collapse of its own weight. Ponzi's magic, as it turns out, was in simply using the money he stole from new investors to pay off the old. He robbed Peter to pay Paul.

And when no more greater fools could be found, Ponzi's investors lost everything and Charles eventually went to jail. Nice mug shot huh?

But unfortunately, Ponzi's scheme was really never put to rest. Others like Bernie Madoff just picked up where Charles left off. One of them is your Uncle Sam, who is now running the greatest Ponzi scheme of them all.

It's called Social Security and for suckers like me who will never see a dime in return, it's the national scam writ large—-one of many.

And while I have no problem with keeping promises to retired folks, the way the program has been bankrupted by politicians irks me to no end. What's more, they continue to insist to the gullible that there is "nothing to see here" when everyone else knows otherwise.

The funny thing is the whole mess is now starting to blow up in their faces—just like it did with Mr. Ponzi himself.

The bad news is that the growing recession is making it happen well ahead of schedule since unemployed people can't be fleeced.

As result, the Social Security system is now paying out more than it receives.

That's called cash flow negative and 78 million baby boomers are only going to make it worse. The numbers in this case will never add up.

Unless, of course, we bail them out too...

From the Washington Post by Allan Sloan entitled: Social Security could be next to need a bailout

"Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.

But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present."

I wonder if the Chinese have any idea that they are never going to get their $800 billion back?

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OOPS!: The BLS Over Counted 824K New Jobs

Lies, Damned Lies and Statistics

Thursday, February 4th, 2010 - By Steve Christ

Don't look now but the Federal Government is about to admit to gigantic mistake. Apparently, they don't count so well.

Due to its "birth/death" model the Bureau of Labor Statistics (BLS) has undercounted the number of unemployed by over 800,000 jobs in the last 12 months.

OOPS......

You see, somehow throughout the last 12 months of one of the greatest recessions on record, the BLS model showed more jobs were created by imagined new businesses than were lost by those that went under.

All of which would only make sense in the twisted world of a government statistician.

Luckily for the markets, this is a story that has been known for sometime now.

So while this news may shock a few on Main Street in the morning, Wall Street will probably yawn.

Here's the story from CNNMoney entitled: Poof: Another 800,000 jobs disappear

"As bad as the government's jobs readings numbers have been during the Great Recession, we'll soon find out the real situation likely was worse.

Much worse.

Job losses during the recession may have been underestimated by close to a million jobs. So instead of employers cutting just over 7 million jobs from their payrolls since the economic downturn began in December 2007, it's expected that the Labor Department's new estimate will be a loss of 8 million jobs.

"It's an enormous understatement of the severity of the crisis," said Heidi Shierholz, labor economist with the Economic Policy Institute, a union-supported think tank. "It confirms that things were actually worse on the ground than what the reports suggested."

The new reading will come when the economists at the department's Bureau of Labor Statistics release their annual revision of U.S. payrolls from April 2008 through March of 2009 Friday, using data that wasn't available as the monthly readings were being estimated and reported.

Typically the revision results in only a slight change in the previous estimate — about 0.1% to 0.2% of the total number of jobs. But there was nothing typical about the twelve month stretch that ended last March.

But the department has already given a preliminary look at this Friday's revision, and it says it believes it will show 824,000 fewer workers on payrolls than the current estimates.

That would be the biggest downward revision in the 30 years for which comparisons of those adjustments is possible."

It is a comedy I tell you...lies, damn lies, and statistics.

The cleat of reality is out there folks—just don't expect to get it from the government. It is not in their interest.

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Chanos on China

Clouds on the Horizon

Wednesday, February 3rd, 2010 - By Steve Christ

If you're interested in the great Chinese bubble debate, here is an insightful video on the subject from famed short-seller Jim Chanos.

And while the video itself is on the long side, it's a great look behind the argument that the Chinese miracle is about to hit a huge pothole.

Roll the tape...

It looks like Chanos has nailed another one.

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FHA Defaults: Many More on the Horizon

The New Subprime

Tuesday, February 2nd, 2010 - By Steve Christ

Here is a story that should interest you....

Because when this one finally comes tumbling down the taxpayers will be on the hook for every single penny of it. You see, those awful subprime loans never really disappeared.

Instead, these folks simply moved into FHA loans—which in most cases are nothing more than subprime deals with the backing of the federal government.

In fact, your Uncle Sam has been using FHA loans to fund non-prime borrowers for some time now--all the way up to $729,750 in some cases.

That's how desperate we've become to prop up home prices (the old limit was $417K). The funny thing is that we are expecting different results this time, which by definition is insane.

However, the cold hard reality is that the agency now expects defaults on 25% of all the loans they insured in 2007, and 20% of those backed in 2008.

Those, by the way, were the default rates that imploded the entire sub prime industry.

As for the FHA it looks like it's only a matter of time now before it needs to be bailed out.

To that end, here is a great story on this unfolding debacle from Washington Post by Dina ElBoghdady and Dan Keating entitled: Rising FHA default rate foreshadows a crush of foreclosures

"The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency's troubles with the 2007 and 2008 loans in October, when he told a House panel that "rogue players on the margin" immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. "That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today's balance sheet," Stevens said at t

Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.

For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008." (emphasis mine).

Of course the bigger problem here is that without FHA financing for the last three years the housing downturn would have been much worse at this point. Even still, all they have really done is kick the can a little further down the road.

Let's face it, bubble gum and duct tape is the only thing holding this market together.....

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5.7 % GDP Fails to Boost the Markets

More From the New Normal

Friday, January 29th, 2010 - By Steve Christ

The winds of change the that we have been warning about just keep on blowing. Since then the S&P 500 is down about 5.75% after falling from a high of 1150.

Earnings, meanwhile, have actually been pretty good across the board.

Even still, the downtrend has continued as the next big question for the markets seems to be "That's great... but now what?"

That sentiment was only further underscored this morning when the GDP number failed to give the markets a much needed boost.

Following a decent number, the markets have basically yawned again—as in "What's next?"

That's the new $64,000 question the bulls can't seem to answer— even though the economy did grow faster than expected at the end of last year.

In fact, the 5.7 percent annual growth rate in the fourth quarter was the fastest pace since 2003 offering the strongest evidence yet that the worst recession since the 1930s ended last year.

However, even after two straight quarters of growth there is still plenty to worry about since the expansion in the fourth quarter was fueled primarily by companies refilling depleted stockpiles, a trend that will eventually fade.

And while the report did provide an upbeat end to a dismal year, the larger truth is that the U.S. economy declined by 2.4 percent in 2009. That's the first annual decline since 1991 and the largest drop since 1946.

What we are left with then is an economy that most analysts think will only grow by 2.5 percent this year. Better yes.... but no where near enough to put a dent in the unemployment number which seems like it will be stuck in 9-10% range for some time to come.

What's needed, of course, is for consumers to ride to the rescue since 70% of our GDP comes from consumer spending.

The problem is wages and benefits paid to U.S. workers ended the year with the smallest rise on records going back more than a quarter-century. What's more, the Middle Class has been practically squeezed into oblivion by the rising cost of everything on their list of must-haves.

As for raises, they can practically forget it since the loss 7.2 million jobs over the past two years has put a lid on wages. Meanwhile, a separate report from the Labor Department released earlier this month showed that nonsupervisory workers' inflation-adjusted weekly earnings fell by 1.6 percent last year, the sharpest drop since 1990.

The result is an incredible amount of economic slack since you can't get blood from a stone. On top of that, consumers just aren't as willing to bury themselves in debt anymore.

Instead they are actually saving money for a change.

That's the "new normal" the markets are struggling to come to grips with.

In the meantime, the S&P 500 is teetering on support...

spx chart

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The Boom Bust Rap Anthem

The Battle Rages On

Wednesday, January 27th, 2010 - By Steve Christ

This video is too good not share.....

The battle rages on.

Hayek is right by the way, speculative bubbles lead to malinvestment—big time.

Just think what we could have done with the trillions spent on McMansions, granite countertops, and hot tubs.

A consumption based bubble is nothing more than a fools errand.

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Case-Shiller Home Price Index Points to a Double Dip

Rebound is Tenuous at Best

Tuesday, January 26th, 2010 - By Steve Christ

Just when you thought the real estate market was showing signs of a recovery, reality rears its ugly head.

According to the National Association of Realtors (NAR), existing home sales plunged in December, falling nearly 17 percent in their largest month-over-month drop since record-keeping began. Meanwhile, December's inventory jumped to a 7.2-month supply of unsold homes, notably higher than the 6.5-month supply recorded in November.

What's more, according to the latest figures from the Case-Shiller Home Price Index, prices have started to slip again...pointing to a double dip in home prices.

From Reuters by Lynn Adler entitled: Home prices suggest tenuous housing rebound

"Home prices slipped in November and were softer than expected in the latest sign that a rebound in the U.S. housing market is still tenuous, according to Standard & Poor's/Case-Shiller indexes on Tuesday.

The S&P composite index of home prices in 20 metropolitan areas slipped 0.2 percent in November after a revised 0.1 percent October dip, for a 5.3 percent annual drop.

A Reuters survey had forecast a 0.1 percent November rise. Prices were originally reported as unchanged in October.

"Up until a while ago it looked like home prices might have bottomed," said Suvrat Prakash, U.S. interest rate strategist at BNP Paribas. "There might be a double dip in home prices, which could feed through to the rest of the economy," he said, adding that housing still faces many hurdles.

Several major government supports for housing are soon ending, including an extended and expanded home buyer tax credit for which buyers must sign contracts by April 30.

The end of such incentives just as mortgage rates rise and foreclosed properties start hitting the market could pressure prices anew, economists agree."

That being said, the real test for housing looms large this spring when the Fed exits its program to buy mortgage backed securities (MBS).

Since the inception of the program in January 2009, the Fed has spent $1.148 trillion in the agency MBS market, or 92 percent of the allocated $1.25 trillion, which is scheduled to run out in March 2010. When that well runs dry, higher interest rates are practically a given which will send prices even lower.

Needless to say, the headwinds are gathering....

Related Articles:

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