Daily Digest - July 9

• 1) IMF calls for deficit cuts in US

"WASHINGTON (AP) -- The International Monetary Fund is calling for the United States to make a stronger effort to curb its budget deficits.

The IMF said Thursday that in addition to cutting government spending, the Obama administration will have to consider raising taxes to get the U.S. deficit down to a manageable level.

The IMF proposed a range of possible tax increases that would be certain to generate huge political opposition, from reducing the popular tax deduction for home mortgages to instituting a national sales tax."

• 2) States May Face Pension Pressure as New GASB Rules Widen Funding Deficits

"July 9 (Bloomberg) -- States may face increased retirement- fund deficits and pressure to stop skipping pension contributions under proposals being reviewed by the Governmental Accounting Standards Board.

Pension-forecasting proposals from the rule-making organization, released June 16, would revise methods for projecting liabilities and investment returns. The changes mean estimated investment income likely will be reduced from current assumptions and unfunded liabilities will increase, Moody’s Investors Service said July 6 in a report. "

"Estimates of the gap between the value of U.S. public- pension plans and the amount needed to cover promised benefits range from $500 billion to $3 trillion."

"As fiscal 2010 began, states had only 65 percent of the amount needed to cover promised benefits, down from 85 percent a year earlier, a Wilshire analysis of 125 retirement plans showed. "

"Soaring Payments

Pennsylvania’s payments into its retirement plans are projected to almost triple in two years, to $3.7 billion from $1.3 billion in the current budget, Governor Ed Rendell said July 6 in a statement.

In New Jersey, the $29.4 billion budget passed last week was balanced partly by skipping a scheduled $3 billion pension payment this fiscal year. Public defined-benefit plans in the Garden State were underfunded by $45.8 billion as fiscal 2010 began, according to a state bond-offering document in May. In its June 23 report, George Mason’s Mercatus Center in Arlington, Virginia, put the deficit at more than $170 billion. "

• 3) Newark, New Jersey's Booker Says Mayors Face Wrenching Choices

"July 9 (Bloomberg) -- Newark Mayor Cory Booker, who runs New Jersey’s largest municipality, said U.S. cities will be forced to make “gut-wrenching” decisions to cut as much as 20 percent of their spending in the next year.

In Newark, that led Booker to propose firing “hundreds” of city workers last month and to seek concessions from unionized employees to help close a $180 million budget deficit.

“Government has to start shifting into this new era that we’re in and dealing with the realities of this,” the mayor said yesterday in a Bloomberg Television interview. He spoke in Sun Valley, Idaho, where he appeared on a media-industry conference panel about the business of running a city.

“This is a story not just for the state of New Jersey,” he said. “You’re seeing it in Sacramento. You’re seeing it happen in Albany and you’re seeing it happen all over the U.S.”

Booker, 41, who won a second term in May, also has said the city may seek to convert its water system into a municipal authority to raise as much as $100 million in three years. One in four residents in the city of more than 260,000 people lives in poverty, according to Census data."

• 4) Legal noose tightens on Europe's monetary union (By Ambrose Evans-Pritchard)

"The plot continues to thicken at Germany’s constitutional court, a body with power of life or death over Europe’s monetary union.

Contrary to general belief, Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, and since May 7 for banks exposed to debt from Spain, Portugal, and Ireland as well.

Should they succeed, of course, the eurozone risks disintegration within days, and perhaps hours. I am not sure that investors in New York, London, Tokyo, Beijing, or indeed Frankfurt quite understand this.

There are now four cases at the court – or Verfassungsgericht – arguing that these disguised bank bail-outs breach multiple clauses of EU treaty law, and therefore breach Germany’s supreme and sovereign Basic Law.

A quintet of professors – Wilhelm Hankel, Wilhelm Nölling, Joachim Starbatty, Karl Albrecht Schachtschneider, and Dieter Spethmann (ex Thyssen CEO) – have just broadened their complaint over the Greek part of the bank rescue to include the new €440bn Stability Facility, which breaks EU law at every turn.

It also covers the European Central Bank’s mass purchase of Greek, Spanish, Portuguese, and Irish bonds from private banks. This enables investors who bought these bonds during the credit bubble in order to boost yield – just as they bought US subprime CDOs to boost yield – to shift the consequences of their own misjudgements onto taxpayers (Hedge funds were already “long” Club Med debt, of course, when the ECB stepped in so they simply make a speculative gain from taxpayers).

It has been widely reported by the German press – which should know better – that the court rejected the original case by the professors. This is untrue. Their request for an immediate injunction to block transfers to Greece was turned down (on the grounds that such a move would be too dangerous). The case is still pending.

In their latest broadside the professors said the rescue fund “self evidently” violates the no-bailout clause of the Lisbon Treaty.

They have seized on comments by France’s Europe minister Pierre Lelouche, who admitted after the summit deal on May 7 that EU leaders had carried out a constitutional coup. “It is expressly forbidden in the treaties by the famous no-bailout clause. De facto, we have changed the treaty,” he said."

• 5) China Cuts Rare Earth Export Quota 72%, May Spark Trade Dispute With US

"July 9 (Bloomberg) -- China, the world’s largest rare- earths producer, cut export quotas for the minerals needed to make hybrid cars and televisions by 72 percent for the second half, raising the possibility of a trade dispute with the U.S.

Shipments will be capped at 7,976 metric tons, down from 28,417 tons for the same period a year ago, according to data from the Ministry of Commerce yesterday.

Rising production of hybrid cars and music players such as Toyota Motor Corp.’s Prius and Apple Inc.’s iPod have driven up demand for rare earths even as China cut the quotas to shore up prices and ensure domestic supplies. The U.S. is looking at building a trade case on the restrictions, industry representatives said last month.

“The rare earths industry officials have realized that, after many years of continued growth in exports, the industry didn’t receive due profit returns,” Liu Aisheng, director of the Chinese Society of Rare Earth, said in an interview by phone from Beijing. “They adjusted the policy to ensure that the resources are optimally utilized.” "

• 6) Treasurys fall ahead of supply as worries fade

"The government will kick off the week by selling $35 billion in 3-year notes /quotes/comstock/31*!ust3yr (UST3YR 1.01, +0.01, +0.50%) , followed by $21 billion in 10-year debt. On Wednesday, it finishes with $13 billion in 30-year bonds /quotes/comstock/31*!ust30y (UST30Y 4.02, +0.01, +0.13%) . See Treasury's auction schedule.

"Supply is becoming a real issue for the marketplace, especially since the auctions have been moved up," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners. Ten-year yields "should hold [the] 3.10% area for now"

• Other news and headlines:

Romania rejected all bids at the tender to sell 3-year treasury bonds, on Thursday

US posts $166 Billion more Debt in a Single day...

Moody's Downgrades $4 Bln Of RMBS On Worsening Subprime Loans

Commercial Mortgage Backed Security Delinquency Rate Rising Fast

California local governments push to cut pension benefits

Asian market is much better than the West: Martin Hennecke, Tyche Group

Miami faces 80% chance of being hit by BP oil spill

Public Universities Face 'Dramatic' Funding Cuts, Moody's Says

Threat to Greek bank securitisation agreements

City facing a $67 million deficit (New Orleans)

District to seek $500 per pupil levy (Minnesota)

BP Fisherman: Oysters are All Dead (Video)

Projects put Pennsylvania taxpayers on hook for $963 million

US: Biggest defaulters on mortgages are the rich

NIA President on Bloomberg discussing Lebron James

Economy in U.S. to Cool as Consumers Spend Less, Survey Shows

Profit Growth to Slow to Year’s Lowest Rate in Third Quarter

Mish: Say No to Stocks, Because Optimism Is "Insane" (Tech Ticker video)

Florida legislature to consider oil drilling ban

BP slows Alaska offshore oil drill plan

Federal Budget Deficit Hits $1 Trillion For 1st 9 Months Of FY'10

Fascinating article. I wonder if those German professors will succeed in their efforts to declare the bail-outs "illegal"...

Legal noose tightens on Europe's monetary union
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006843/le...

If they do succeed in their efforts, will the European governments be able to just decide on a quick new treaty and ratify it? I wonder if there is an emergency clause they can invoke instead.

Poet

Here is my least favorite guy on CNBS.

 Should Fed Do More to Boost Economy—And If So, What? http://www.cnbc.com/id/38166071

With the economy weakening and fears growing of a double-dip recession, officials at the Federal Reserve seem to be split over how the central bank could or should respond.

CNBC.com

 In an interview Wednesday on CNBC, Dallas Fed President Richard Fisher declared unambiguously: “I think we’ve done enough.”

He pointed out that the Fed has injected some $1.4 trillion into the banking system, that banks hold some $1 trillion of excess reserves, and that nonfinancial corporations hold around $1.5 trillion of cash on their books.

But St. Louis Fed President James Bullard, in an interview with the Washington Post, suggested that if the economy weakens, the Fed should step in again.

"If the economic situation changes, policy should react," he said. "You shouldn't sit on your hands...I think there's plenty more we could do if we had to."

There are several questions at play here. First, should the Fed step in? Second, if so, what tools are available? And third, would they have any effect?

Steve Liesman
CNBC Senior Economics
Reporter

Among the potential responses in the face of another economic downturn, the Fed could go out and buy more paper, injecting additional cash into the economy.

The trouble, as Fisher has pointed out, is that there’s a ton of cash out there and, he believes, it’s political and uncertainty that keeps it from being deployed. Muni bonds would be ripe for Fed purchases if the Fed wanted to get into the business of picking winners and losers among local and state governments.

The Fed could also lower the interest rate it pays on excess reserves from 25 basis points to zero to give a further incentive to the banks to put that cash to work, thought it’s hard to imagine that 25 basis points would have much effect.

(Several months ago at a conference, a British central banker actually suggested negative interest rates on excess reserves, that is, charging banks a fee to keep excess reserves on deposit at the Fed.)

Finally, the Fed could hyper-extend the commitment to keep interest rates exceptionally low for an extended period, somehow making it clear to investors that it won’t change rates for a number of years. The problem is that central bankers hate pre-committing policy to definitive dates, feeling it ties their hands if the economy changes.

Most interesting of all the comments are those by Fed Governor Kevin Warsh. In a speech that didn’t get as much play as it should have, he outlined a fairly strict test for any further action by the Fed.

“In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Warsh said in Georgia at the end of June. “I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility. The Fed's institutional credibility is its most valuable asset.”

The statement rings of skepticism that any good could come from further quantitative easing and sets a high bar for more action.

During the crisis, Warsh was a top lieutenant of Fed Chairman Ben Bernanke. But it’s unclear now if he’s speaking the chairman’s or his own book. It may be, now that the crisis has subsided, Warsh feels more free to speak his own, more conservative, mind about issues of Fed intervention.

Or Warsh could be doing what he’s done in the recent past: acting as an advance guard for the chairman’s own thinking. For his part, Bernanke has been neutral on the issue.

Testifying before Congress shortly after the Fed opened up international swap lines to combat the festering European crisis, Bernanke said: “Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery.”

Mish appeared on Yahoo's Tech Ticker (video on page)

"The optimism out there is rather insane," he says. There’s only a 15-20% chance of the market rallying, Mish tells guest host and Business Insider deputy editor Joseph Weisenthal. "It's more likely we go down there and test the March lows, and there's a decent chance actually that we break those lows," he says.

Mish says "it is nuts to be net long" stocks right now in the face of all these headwinds:

-- Slowdown in Europe as austerity measures take hold.

-- Slowdown in U.S. as stimulus fades, housing remains weak, state and local governments cutback

-- China looks to cool its economy in the face of growing housing bubble

Until Mish sees signs of sustainable job growth, he'll be firm in his bearish stance. "Without a driver for jobs I don't know how someone could be bullish on the stock market."

If not stocks, then what?

Mish is sticking with what's worked this year: Treasuries and gold. Treasury yields are still near record lows, but he think with the macroeconomy the way it is, it's very possible, "the bull market in Treasuries is not over." As for gold, he'd buy on the dips.

Real reform is when the retirement age for everyone is raised to 100 years.  It is time to realize that any sort of retirement is really up to the individual, not government.  The more government tries to better our lives by manipulating our lives, the more miserable, and oppressed we become.

The problem is that the majority of Americas didn't bother to save for retirement. They were counting on the gov't and there pension plans (although most of the pension plans are deeply under funded). Although this does matter at this point. Social Security is going to die well before the SS recipients do.

Voluntary charity on the part of individuals is one thing, but government mandated charity at the point of a gun is nothing but totalitarian oppression.

The biggest problem with Gov't and Corporate retirement plans is that they were raided by politicans and corporate execs to serve as their slush funds.  Politicans used the SS Surplus to pay for federal funded projects to help buy votes. Corporate board borrowed from employee pension plans to fuel company expansion in order to quickly drive up their stock price.  Virtually all gov't and corp pension plans for the executives and politicans are seperated from the public\employee pension plans. You never see Gov't or Corp Exec tap their own pension plans.

This guy (edit-Mike Norman) doesn't have a clue. Listen to him confuse money with wealth and explain how the SDR is "backed".