James Pethokoukis

19 risks for 2010

December 29, 2009

Courtesy of the Naked Capitalism blog:

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Repealing healthcare reform

December 29, 2009

Assuming ObamaCare passes, the GOP is already making a pledge to repeal it ASAP part of their 2010 (and beyond) electoral strategy. But Igor Volsky over at the Wonk Room makes some good points indicating the political difficulty of doing so, putting side an Obama veto of any attempts:

One more reason why 2011 looks bad

December 28, 2009

Interesting analysis from Deutsche Bank, especially the last part which I put in bold (via Econbrowser):

Big Government and the Big Split

December 28, 2009

The WSJ nicely sums up 2008:

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

Using Fannie and Freddie to influence the 2010 midterm elections

December 28, 2009

So the Treasury Department announces unlimited support for Fannie Mae Freddie Mac for the next thee years. I think Wall Street Pit raises a very provocative point on this might all relate to the 2010 election:

Watch out for (yield) curves: Kudlow vs. Goldman

December 23, 2009

The super-steep yield curve is hinting at a powerful recovery in 2010, so says Larry Kudlow:

Democratic congressman Parker Griffith to switch to Republican

December 22, 2009

Blue Dog Parker Griffith of Alabama is making the switch:

POLITICO has learned that Rep. Parker Griffith, a freshman Democrat from Alabama, will announce today that he’s switching parties to become a Republican. According to two senior GOP aides familiar with the decision, the announcement will take place this afternoon in Griffith’s district in northern Alabama. Griffith’s party switch comes on the eve of a pivotal congressional health care vote and will send a jolt through a Democratic House Caucus that has already been unnerved by the recent retirements of a handful of members who, like Griffith, hail from districts that offer prime pickup opportunities for the GOP in 2010.

The bear case on healthcare reform

December 22, 2009

So now what? My pal Rich Lowry takes a crack at the bear case for healthcare reform. His main points:

Rasmussen: Obama approval ratings at new low

December 22, 2009

Pollster Rasmussen indicates that healthcare is not helping the POTUS:

The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% of the nation’s voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (46%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21 That’s the lowest Approval Index rating yet recorded for this President. … For the second straight day, the update shows the highest level of Strong Disapproval yet recorded for this President. That negative rating had never topped 42% before yesterday. However, it has risen dramatically since the Senate found 60 votes to move forward with the proposed health care reform legislation. Most voters (55%) oppose the health care legislation and senior citizens are even more likely than younger voters to dislike the plan.

Political impact of surprisingly weak 3Q GDP

December 22, 2009

First, the Commerce Department:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the third quarter of2009, (that is, from the second quarter to the third quarter), according to the “third” estimatereleased by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 2.8 percent.