Mac Slavo's  Instablog

Sometimes, a bailout is not enough.

When Dubai World black swanned global investors last month with what amounts to be a reported $80 Billion in debt liabilities, it sent shivers down the spine of many a financial manager and stock trader. For those who were paying attention, Dubai’s troubled assets were no surprise, it was simply a matter of time. Oft repeated by contrarian analysts and investors like Dr. Doom Marc Faber, Gerald Celente, Jim Rogers, and Karl Denninger, the mathematical certainty of the economic crisis would play out - eventually.

It was a year ago that the entire global financial system, spear headed by the USA, faced the real possibility of total meltdown, that is if you trust the motivational fear tactics employed former Treasury Secretary Henry Paulson.

This week, the American public received word that the banks once deemed too-big-to-fail will be paying back their TARP funds, ostensibly because they are now cured of the financial contagion that threatened sudden death, economic collapse and the implemntation of martial law.

In addition to Bank of America and JP Morgan Chase, we have commercial real estate powerhouse and partially owned subsidiary of Warren Buffet Enterprises, Wells Fargo, which announced it will sell $10.4 billion in stock and exit the TARP bailout. According to a company statement, the bank plans to pay back $25 billion in taxpayer funds. CEO John Stumpf, presumably also doing gods work, says “we’re ready to fully repay TARP in a way that serves the interests of the U.S. taxpayer, as well as our customers, team members and investors.” Management did not comment on whether the share sales totaling around $14.8 billion, when you count additional plans to  raise capital, will devalue, by way of dilution, the amount of market capitalization held by shareholders.

Citibank, who also committed to repaying $20 billion in TARP funds yesterday saw a stream of positive news throughout the media when they announced their intentions. Just 24 hours later, Bloomberg reports that Citigroup’s Exit From the Bailout is Clouded by Citi Holdings Assets. It seems that CEO Vikram Pandit failed to mention that his company is “emerging from a U.S. bailout with higher capital levels and loan-loss reserves than any peer.” That amount to somehwere in the area of $617 billion.

Dubai showed how investors and traders are ready to run at the first sign of trouble. As has been the case for the last nine months, however, the Dubai crisis was quickly subdued by stories of bailouts from their sister city, Abu Dhabi. And indeed, Dubai has been rescued with what amounts to be a $10 billion bailout that should help the former real estate Mecca of the Middle East make at least a few payments to keep it a float for a little bit longer. Regional investment firms will receive some of their funds, but as for non-Middle Eastern investors, the verdict is still out, though, as Abu Dhabi’s rulers said, “they will not necessarily just bail out everyone across the board. They will be selective.”

This seems to be the norm these days, so it’s no surprise. Certain entities, for whatever reasons, are bailed out, while others suffer the collapse of their wealth for trusting in the belief that asset prices always go up forever.

As Real Estate Collapse (Wave One)  in the US proved, no asset will appreciate all the time. Like Dubai, the underlying assets in America, Europe, and even China have been slowly simmering for the last year or so. And once the public gets a taste of the toxicity, there will be no stopping the panic as everyone in just about every asset class decides to run for the exit.

When the panic does start, it may be an event perceived to be too-small-to-matter, like a Dubai that exposes several larger global players, which leads to a domino effect that will echo through the entire financial markets. It may start with debt defaults in an  Euro Zone country like Greece or Hungary, or maybe with commercial real estate or Wave Two of the Mortgage Meltdown in the US. It could be a geo-political event  with Iran and Israel, or a terrorist attack on a Saudi Arabian pipeline.

Right now, the world is on edge. The citizens of the US, as well as the global public don’t really know who to trust to tell them the truth. They are on alert, consciously or subconsciously, and if they perceive even a small threat, the fight-or-flight system will be activated.

Some say that a year ago we faced economic disaster on a massive scale. In one year, governments around the world have printed money, and done little else, except to provide daily lip service and commentary. The contagion has been lying dormant and will become an epidemic.

No bailout will stop it.

Reuters is reporting that White House economists see jobs growth by spring:

“I believe that, as do most professional forecasters, that by spring, employment growth will start to be turning positive,” Lawrence Summers, director of the White House National Economic Council, said on ABC’s “This Week.”

If most professional forecasters see employment growth by spring, then we can safely say that the exact opposite will be true. We refer our readers to previous professional forecasts from the FDIC and Ben Bernanke, as well as the unemployment forecast from professionals in early 2009.

The professional forecasters that foresee job growth by Spring must not have spoken with Mr. Bernanke recently, who says  He Cannot Guarantee Double-Dip Recession Won’t Happen.

More from professional White House economic forecasts via Reuters:

Christina Romer, chairwoman of the White House Council of Economic Advisers, told NBC’s “Meet the Press” that there could be job increases in the first quarter of next year.

But Romer also said that even if payrolls begin to grow, the unemployment rate could go up again before it goes down as better prospects for employment attract more job seekers to the market.

Romer said the numbers “certainly do bounce around. I would anticipate some bumps in the road as we go ahead.”

Yes, there will certainly be some bumps on the road.

The question is, will the bumps look like this:

Or will they be more akin to:

If history is any guide, we’ll be traversing image #2, so we’d recommend MRE’s, a water filter, some warm clothes, hand warmers and backup oxygen.

Ed Yardeni of Yardeni Research has performed a Cost Benefit Analysis of Jobs Stimulus created under President Obama’s American Recovery and Reinvestment Act:

The Obama Administration is touting that their stimulus program has saved or created 640,329 jobs since it was enacted back in February through the end of October. This number is updated and posted on the Administration’s recovery.gov web site. That amounts to $246,436 per job based on the $157.8bn that has been awarded so far! Total compensation earned by the average payroll employee during October, on an annualized basis, was $59,867. If the government had simply used the funds awarded so far to pay for a year’s worth of labor, that would have paid for 2.6mn jobs!

Does this leave any doubt about government’s inability to efficiently handle this economic crisis or pretty much anything else? Rather than saving, we are spending even more. Private industry can create a $60,000 job and it costs $60,000. Government bureaucracy has somehow managed to complicate this seemingly simple process and increase costs by 300%.

A quick review of open and awarded bids for contract jobs created by the Recovery and Reinvestment Act available for viewing at FedBizOpps gives taxpayers some insight into the productivity and sustainability of the jobs being created with their hard earned and forcibly seized money:

–Repairing of existing roof needing correction on the Youth Services Building, Bldg. 45410, Fort Gordon, GA. (Open bidding) (Link)

–Removal and disposal of existing transite (asbestos) roof system and installation of new metal roof system including 24 gauge roof panels, roof insulation, rake & eave fascia, gutters & downspout, ridge vents, flashing, ridge caps, flashing, lightning protection system, and related items (Open Bidding) (Link)

–The Directorate of Contracting at Fort Carson intends to issue an Invitation for Bid (IFB) for the construction of a pre-engineered metal building to serve as the 71st EOD headquarters facility at Fort Carson, Colorado. (Open Bidding) (Link)

–The Department of the Interior, U.S. Geological Survey (USGS), Alaska Volcano Observatory has a requirement for fifty-nine (59), 1 Hz vertical borehole seismometers and fourteen (14) 1 to 2Hz 3-component borehole seismometers with delivery to Anchorage, Alaska. (Link)

–The intent of the contract is to stabilize existing roads near Yakutat in the Tongass National Forest - The work to be performed includes constructing cross drains, excavating and placing stumps and woody slash, excavation and barrier construction with locally available gravel. (Link)

–Margaret Bay Fish Passage Improvement - Work includes but is not limited to dewatering, installation of structures, excavation, placement of embankment, reconstructing stream bed and banks with in-stream weirs or log structures, haul, end haul, and rock excavation. (Link)

It is clear, after reviewing the synopsis for these contract offers, that the jobs being created are not actually jobs. They are contracts, and in most cases, are short-term. They will end as soon as the contract has been completed. There is nothing revolutionary here in terms of technology being created, or in terms of increasing the productive capacity of America for the long-term.

Yes, some of these projects are helpful, such as the roof needing repair in the Youth Services Center. But, that doesn’t mean we can just print billions of dollars to fund these types of projects just because we “need” them based on a bureaucrat’s subjective opinion. We need a lot of things in this country. But guess what? We’re broke, we’re actually worse than broke, which means we should only be funding projects related to essential services until we lower our existing debt load.

On top of that, the inefficiency in the system is obvious, as pointed out by Mr. Yardeni. To pay $246,000 per job created is asinine. Why not just print the money at the Fed, monetize Treasury debt, and then have the Treasury flush it down the toilet? The end result will be the same.