Mish's Global Economic Trend Analysis

Governor Cuomo Declares New York "Functionally Bankrupt", Seeks Spending Cuts; California Governor Jerry Brown Cites Egypt, Demand Tax Hikes
Interactive Map of Global PE and Price to Book Ratios
Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record
Egyptian Vice President Talks with Opposition; Military Recognizes "Legitimacy of the People’s Demands"; Can the U.S. Deal with ElBaradei?

Governor Cuomo Declares New York "Functionally Bankrupt", Seeks Spending Cuts; California Governor Jerry Brown Cites Egypt, Demand Tax Hikes

Posted: 01 Feb 2011 04:52 PM PST

In an interesting compare and contrast scenario, democratic governors from the two largest states have vastly differing ideas regarding what to do about huge budget gaps. New York Governor Andrew Cuomo seeks spending cuts on schools and Medicaid, while California Governor Jerry Brown wants to ram through tax hikes.

The LA Times reports Brown cites unrest in Egypt to make his case for budget vote

Citing the pro-democracy unrest in Egypt and Tunisia, Gov. Jerry Brown called it "unconscionable" that GOP legislators are vowing to block his attempt to ask voters to extend tax hikes to balance the budget.

"When democratic ideals and calls for the right to vote are stirring the imagination of young people in Egypt and Tunisia and other parts of the world, we in California can't say now is the time to block a vote of the people," Brown said in his first State of the State address in nearly 30 years.

He said the budget has tough choices but that the people "have a right to vote" on the package. He challenged both parties to take the difficult votes necessary to balance the budget.

Jerry Brown Is Disingenuous

The moment a vote is put to the people, the teachers' unions, the police and fire unions, the prison unions, the transit unions, and in fact every union in the state will bombard taxpayers with promises of Armageddon if tax hikes are not approved.

Money for those ads will come from taxpayers of course.

Hopefully Republican tell Brown to go to hell, and if not, then hopefully taxpayers tell the unions to go to hell.

California does not have a revenue problem, it has a spending problem. The way you fix a spending problem is to cut spending. Until the governor is willing to do that Republican should hold their ground.

Cuomo's Budget Cuts Spending on Schools and Medicaid

The New York Times reports Cuomo's Budget Cuts Spending on Schools and Medicaid.

Declaring New York State "functionally bankrupt," Gov. Andrew M. Cuomo proposed a $132.9 billion budget on Tuesday that would reduce year-to-year spending for the first time in more than a decade, sharply cut back projected spending on education and health care, and cut the budget for state agencies by more than half a billion dollars in the next fiscal year.

In a novel and potentially risky move, Mr. Cuomo's budget defers specific Medicaid cuts to the work of a task force he appointed last month and which includes lawmakers and representatives of labor and health care interests. The task force's recommendations are due in one month — time that may buy Mr. Cuomo protection from the withering attack advertisements that those same interests typically unleash on governors seeking Medicaid cuts.

Presenting his budget to lawmakers and other officials at a state theater in Albany, Mr. Cuomo sounded stern, even angry, about the way past governors and lawmakers have built inexorable spending growth into future budgets, even as he urged the Legislature to join him in reigning in government expenditures.

He decried current budgeting practices as a "special interest protection program" that led to too much spending with too little accountability for performance, and called for a return to what he described as "reality-based" budgeting.

"It's not about the industry of government," Mr. Cuomo said. "It's not about the bureaucracy of programs. Government is there to serve people."

like Mr. Paterson, Mr. Cuomo is proposing to eliminate the annual cash subsidy that New York City receives through a state program, setting up a battle with Mayor Michael R. Bloomberg.

Offering a further glimpse of how he will seek to negotiate with the Legislature and outmaneuver unions and other special interests that dominate the budget process in Albany, Mr. Cuomo will seek agreement with lawmakers to reduce spending on adult and juvenile prisons.

But his proposal would defer decisions on which of the state's dozens of adult prison facilities to close to a task force of lawmakers and state prison officials. Should the task force fail to agree on prison closings, under Mr. Cuomo's proposal, the commissioner of the corrections department would be empowered to make the decisions unilaterally.

Similarly, the budget proposal would empower the executive branch to unilaterally make any Medicaid cuts that Mr. Cuomo's task force is unable to agree on its own.

Mr. Cuomo is seeking to reduce the budget for state operations, among the larger pots of spending, by 10 percent, one of the steepest proportional reductions to any area of the budget. About $100 million in savings would be sought through agency mergers, but the bulk of the amount, $450 million, is intended to come through what Mr. Cuomo's budget proposal terms a "Labor Management Partnership."

Mr. Cuomo's budget also offers a more expansive glimpse of his plans to redesign New York's sprawling state bureaucracy, with plans to merge 11 existing agencies or authorities into just four entities. Mr. Cuomo will seek to consolidate the department of corrections, one of New York's largest agencies, with the state division of parole, and to move several agencies that handle programs for domestic violence and crime victims into the state division of criminal justice services.

Mr. Cuomo also proposes to reduce projected spending on the State University of New York, the City University of New York and their community colleges by about 10 percent, which would save more than $200 million. The budget saves another $135 million by eliminating subsidies for SUNY's teaching hospitals at Brooklyn, Stony Brook and Syracuse.

Band-Aid Approach

I applaud all of those moves, but most are nothing but Band-Aids. Cuomo needs to get at the root of the problem. To do that he needs to end collective bargaining of public unions, make New York a right to work state, kill prevailing wage laws, and make sure all new state employees do not get defined benefit plans, and go to merit pay for teachers.

Those moves would not only help the state, but would ease the pain of cuts on New York City. Moreover, if he did all that, I bet Republicans would agree to some tax hikes. The same applies to California Governor Brown.

Governor Cuomo is better than expected (but still off the mark). Meanwhile, Governor Moonbeam remains in outer space in regards to addressing California's problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Interactive Map of Global PE and Price to Book Ratios

Posted: 01 Feb 2011 12:52 PM PST

Isaac Presley at Seeking Delta sent me an excel spreadsheet of Price/Earning, Price/Book and Price/Sales ratios for 71 countries. Click on the above link to see his post.

Using Presley's data, Ross Perez and Ellie Fields at Tableau Software created the following interactive map. It is difficult to see all 71 countries at once so the initial view is the G-20.

Please give the map about 10 seconds or so to load. Hover your cursor over any circle or any line on the data (except the name of the country itself) to see additional details.

Caveats

Case-Shiller 10-Year normalized PE ratios are a far better measure of value. Unfortunately, we do not have that data for every country. As an example, however, the Case-Shiller PE ratio for the US is currently 23.

On a price-to-book ratio, Japan is the best value by far in the G-7. Once again however, these metrics assume accurate book values. I am not particularly apt to agree with most of them.

Absolute vs. Relative Values

The idea that one should buy "relative values" just to buy something is flawed. Yet, except for Japan with a price-to-book value near one, with most corporate debt wiped off corporate books, I see little "absolute value" elsewhere.

The problem with Japan is the Yen. To invest in Japan one needs to hedge that Yen exposure or a declining Yen could wipe out most equity gains.

Meanwhile the market grinds higher and higher.

Bernanke has succeeded in creating another bubble in equities, junk bonds, and leveraged-buyouts. From any realistic perspective, this is one strenuously overvalued equity market, globally, yet nothing prevents the bubble from getting bigger.

The greater fool's game is in full swing. When it stops is anyone's guess. I sure don't know.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record

Posted: 01 Feb 2011 10:26 AM PST

Treasuries Decline on Strong ISM Numbers

With a stronger than expected manufacturing ISM numbers, especially prices paid, U.S treasuries continued their slide.

Manufacturing continued to grow in January as the PMI registered 60.8 percent, an increase of 2.3 percentage points when compared to December's seasonally adjusted reading of 58.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

The ISM Prices Index registered 81.5 percent in January, 9 percentage points higher than the 72.5 percent reported in December and the highest reading since July 2008. This is the 19th consecutive month the Prices Index has registered above 50 percent. While 64 percent of respondents reported paying higher prices and 1 percent reported paying lower prices, 35 percent of supply executives reported paying the same prices as in December.

Bernanke Reports "Good News" on Inflation Targets

Today's Treasury Selloff

Yield Curve Spread 30-Year Yield Minus 2-Year Yield

Monthly Yield Curve Since 2001

click on chart for sharper image

Symbols

$IRX 03-Mo Treasury Yield
$FVX 05-Yr Treasury Yield
$TNX 10-Yr Treasury Yield
$TYX 30-Yr Treasury Yield

The chart depicts monthly CLOSES of treasury yields. Unfortunately E-Signal does not have a symbol for 2-year treasuries. StockCharts does, but it cannot produce that chart.

The yield curve is artificially steep as Bernanke continues to rob savers for the benefit of banks.

For thoughts on how Bernanke is hurting those on fixed income, please see Hello Ben Bernanke, Meet "Stephanie"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Egyptian Vice President Talks with Opposition; Military Recognizes "Legitimacy of the People’s Demands"; Can the U.S. Deal with ElBaradei?

Posted: 31 Jan 2011 11:45 PM PST

With each passing day, Egyptian president Hosni Mubarak's control is rapidly dissipating. The crisis is now in day seven. The military, called in to keep peace, has sided with the people. Some tanks even display anti-government messages.

It what seems to be a last ditch effort to buy time, Egypt's newly appointed Vice President is in talks with the opposition. That is a sign Mubarak may be in his final days before some agreement to replace him is hashed out.

The New York Times reports Mubarak's Grip on Power Is Shaken.

The government of Egypt's authoritarian president, Hosni Mubarak, shook Monday night, as the Egyptian Army declared that it would not use force against protesters demanding his ouster and, in an apparent response, Mr. Mubarak's most trusted adviser offered to talk with the opposition.

Hundreds of thousands have turned out into the streets over the last six days, and organizers called on millions of Egyptians to protest on Tuesday.

Within hours on Monday, the political landscape of the country shifted as decisively as it had at any moment in Mr. Mubarak's three decades in power. The military seemed to aggressively assert itself as an arbiter between two irreconcilable forces: a popular uprising demanding Mr. Mubarak's fall and his tenacious refusal to relinquish power.

How far Mr. Mubarak is offering to bend in negotiations remains to be seen, and given the potential ambiguities of both statements it is too soon to write off the survival of his government.

But the six-day-old uprising here entered a new stage about 9 p.m. when a uniformed military spokesman declared on state television that "the armed forces will not resort to use of force against our great people." Addressing the throngs who took to the streets, he declared that the military understood "the legitimacy of your demands" and "affirms that freedom of expression through peaceful means is guaranteed to everybody."

A roar of celebration rose up immediately from the crowd of thousands of protesters still lingering in Tahrir Square, where a television displayed the news. Opposition leaders argued that the phrase "the legitimacy of your demands" could only refer to the protests' central request — Mr. Mubarak's departure to make way for free elections.

About an hour later, Omar Suleiman, Mr. Mubarak's right-hand man and newly named vice president, delivered another address, lasting just two minutes.

"I was assigned by the president today to contact all the political forces to start a dialogue about all the raised issues concerning constitutional and legislative reform," he said, "and to find a way to clearly identify the proposed amendments and specific timings for implementing them."

Mr. Mubarak's previously unquestioned authority had already eroded deeply over the preceding three days. On Friday, hundreds of thousands of unarmed civilian protesters routed his government's heavily armed security police in a day of street battles, burning his ruling party's headquarters to the ground as the police fled the capital. On Saturday, Mr. Mubarak deployed the military in their place, only to find the rank-and-file soldiers fraternizing with the protesters and revolutionary slogans being scrawled on their tanks.

And on Sunday, leaders of various opposition groups met to select Mohamed ElBaradei, the Nobel Prize-winning former director of the International Atomic Energy Agency, to negotiate for them in anticipation of talks with Mr. Mubarak about forming a transitional unity government — an idea Mr. Mubarak's surrogate embraced Monday.

Egypt Offers Opposition Talks in Bid to End Protests

In a similar story, Bloomberg reports Egypt Offers Opposition Talks in Bid to End Protests

Newly appointed Vice President Omar Suleiman offered talks with opposition groups in a bid to end Egypt's unrest as protesters urged a million people to take to the streets today and force President Hosni Mubarak from office.

The announcement by Suleiman, one of Mubarak's closest advisers, that he would open talks was made on Egyptian state television. Thousands of protesters erupted in cheers in Tahrir Square, the downtown plaza which honors the 1952 revolution in which the Egyptian military overthrew a constitutional monarchy and proclaimed a republic.

State TV later reported that the talks between the Mubarak regime and some of its opponents had begun, but didn't identify participants. Opposition groups also called for all Egyptians to take part in a nationwide strike.

"If I hear the news correctly this morning, the military are in agreement with the people," Ong Eng Tong, a Singapore- based consultant with Hamburg-based oil trader Mabanaft Gmbh., said on Bloomberg television. "And this will be a repetition of what happened in the Philippines I think about 20 years ago during Aquino's time where everything will be settled once the military and the people get together."

The anti-Mubarak movement, backed by former United Nations nuclear official Mohamed ElBaradei and the Muslim Brotherhood, is aiming to force the resignation of the 82-year-old Mubarak after 30 years in power, said Mahmoud El-Said, one of the organizers.

The Egyptian opposition has set up a committee, including ElBaradei, 68, and the Brotherhood, that will convey the movement's demands to the government, said Ayman Nour, who was a distant second to Mubarak in Egypt's first multi-candidate election in 2005.

Mad Scramble to Size Up ElBaradei

Please consider U.S. Scrambles to Size Up ElBaradei

When President Obama unexpectedly won the Nobel Peace Prize in 2009, one predecessor was quick to applaud his selection for the award.

"I could not have thought of any other person that is more deserving of the Nobel Peace Prize than Barack Obama," Mohamed ElBaradei, then the director general of the International Atomic Energy Agency, said in a videotaped statement. He went on to praise Mr. Obama's commitment "to restore moral decency" to the lives of people around the world.

But on Sunday, Mr. ElBaradei, now a prominent face of the opposition on the streets of Cairo, was sounding a different tune. "The American government cannot ask the Egyptian people to believe that a dictator who has been in power for 30 years will be the one to implement democracy," Mr. ElBaradei told CBS's "Face the Nation." He called the United States' refusal to openly abandon President Hosni Mubarak of Egypt "a farce."

Mr. ElBaradei, 68, had a fractious relationship with the Bush administration, one so hostile that Bush officials tried to get him removed from his post at the atomic watchdog agency. But as Egypt's powerful Muslim Brotherhood and the secular opposition on the streets of Cairo have increasingly coalesced around Mr. ElBaradei to negotiate on their behalf, the Obama administration is scrambling to figure out whether he is someone with whom the United States can deal.

"Ironically, the fact that ElBaradei crossed swords with the Bush administration on Iraq and Iran helps him in Egypt, and God forbid we should do anything to make it seem like we like him," said Philip D. Zelikow, former counselor at the State Department during the Bush years. For all of his tangles with the Bush administration, Mr. ElBaradei, an international bureaucrat well known in diplomatic circles, is someone whom the United States can work with, Mr. Zelikow said.

However, he allowed, "Some people in the administration had a jaundiced view of his work."

Among them was John Bolton, the former Bush administration United States ambassador to the United Nations, who routinely clashed with Mr. ElBaradei on Iran. "He is a political dilettante who is excessively pro-Iran," he complained. Even some of Mr. ElBaradei's staff members chafed a bit when he softened the edges of I.A.E.A. reports, especially on Iran. They believed he was doing everything he could to avoid giving the Bush administration, or Israel, a reason to launch a military attack on Iran's nuclear facilities.

Dealing with Reality

For starters, I applaud ElBaradei's willingness to stand up to the Bush administration's Mideast war mongering efforts. President Bush blew trillions of dollars in a senseless war.

However, the current situation is different. ElBaradei needs to stand up to Obama to gain credibility of the Muslim Brotherhood. Therefore, ElBaradei 's criticism of Obama is essentially meaningless. Moreover, I see nothing wrong with his statements.

I find it humorous that people are asking "Can the U.S. deal with ElBaradei?"

The reality is the U.S. is likely going to have to deal with ElBaradei before that next Egyptian government is decided, whether we like it or not. Then the U.S. is going to have to deal with the next ruler of Egypt whether we like that person or not.

Let's hope Egypt chooses wisely. Then let's hope the U.S. deals with the outcome wisely. Unfortunately, our track record on the latter is abysmal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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