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Sixty years ago we bought our first house. It was $11,000.00. About ten years later we sold it for $30,000.00. Basically housing prices rose steadily for sixty years. Along the way home ownership became a cult idea. It started with Roosevelt and ended in a crescendo of speculation and absurd overpricing. No one really knew why a house was worth so much and why everybody should have one. There were lots of theories. Are we now faced with a cyclical downturn in housing demand? Or have we reached a tipping point where more and more people say “Hey I don’t need a 3,000 square foot house… I just need a 1,200 or 1,600 square foot home.” That would be a break in the mania, not just a typical cyclical decline. I don’t think too many people would argue with the idea that everyone should have all the “good things in life”, the only real difference of opinion would be how to accomplish that goal.

Abraham Lincoln once had a debate with Stephen A. Douglas. They were both running for Senator of Illinois. Douglas said the slaves of the south were better off than the northern immigrants. His rationale was that slaves were property and generally treated better than the northern laborers. This appeared to be true at the time. Lincoln’s response was that the difference between the northern laborers and the slaves was that northern laborers would eventually be upwardly mobile, one after the other. One would a start business, many would begin to hire their own employees and another would rise up in someone else’s business. Whereas he said that slaves, on the other hand, couldn’t go anywhere. They had their chains.

Unfortunately there are many kinds of chains. One can be chasing an impossible dream that housing prices will rise forever, or that internet prices will rise forever, or that people will stay pessimistic forever or that the government will provide for you forever. We are reaching the point where millions and millions of people are working for the government. We are increasingly restrained by an enlarging government which is viewed as beneficial but instead, in many ways, is becoming a new form of imposed chains.

Almost every significant unionized industry in America has failed. Now the largest unionized segment in America is government. I’m not against unions, anymore than I am pro-incompetent management. But they have both often caused more harm than good and been well compensated along the way.

People don’t leave what they believe to be secure environments. With unionized government jobs you’re unlikely to leave. You give up on opportunity. You generally vote for those in control that convince you that this is a good deal. You are mentally captured by what they seem to be providing and give up almost any chance for significant opportunity. Are we now on the road to the subtle enslavement state? You may be free to go, but how can you. Lincoln was right when he implied that “chains” come in many different varieties.

Government can only be paid for by taxes. If wages and salaries aren’t rising, and stocks aren’t rising, and houses aren’t rising, there isn’t going to be much to pay for future government. Freedom to succeed will ultimately create the equal society. Reducing that freedom, whether well meaning or not, will ultimately prolong the problem. Certainly taxation without representation, where a small percentage of the people pay almost all of the taxes, will not work. The ultra wealthy who attempt to shield their real tax reducing methods, while shouting for equality, don’t help solve our problems.

In the background it may seem as if it’s just another recessionary time. But just as we may have been witness to a very long term secular burst of the housing bubble, are we now facing the same attitude spilling over to our common stocks assets? They haven’t risen in over a decade, they don’t pay high yields and trillions of dollars are wasted by corporate boards and management by buying back inflated stocks that are supposed to be a return of capital to shareholders. Yes, the money circulates through the system but it certainly hasn’t helped stocks go up and hasn’t raised the standard of living for a long time. We haven’t yet really begun the analysis of what’s happening to us. Take a look at why kids study Spanish, Calculus, Physics or Biology and most never learn a thing. It’s symptomatic. Stay Tuned…

Shepard D. Osherow co-founded the Sanford C. Bernstein & Company. You can read more at http://www.sheposherow.com/

Think inflation is tame? Then you probably don’t drive much. Since January 2008, gas prices have perfectly trended upward — increasing 78%. The scary part is prices are rising on speculation the global economy is recovering well. If the recovery actually transitions into a healthy economy, $4+ gas looks like it’ll be back. (Source: Gas Buddy)

This post is by Bob English at Precision Capital Management.

On the heels of the surprise discount window rate hike late last week, and on the eve of Bernanke’s Congressional testimony, speculation abounds as to the when and where of the next round of tightening.  We need look no further than the US Treasury press room, as it has announced today a revival of sorts for its Supplementary Financing Program (SFP).

Remember the SFP?  It’s back, though it really never went away.  Originally created in September, 2008 to provide a pool of funds that could be drawn upon by the Fed in emergencies without adding to excess reserves (before the Fed had the power to pay interest on excess reserves), the SFP hit its peak amount in November, 2008 at $558.9 billion.  Thereafter, it was quickly drawn down to about $200 billion by February 2009, where it remained until Treasury ran into debt ceiling issues in September and announced it would be wound down to $15 billion.  In fact, by January 6, 2010, only $5 billion remained.

Today, Treasury announced as follows:

February 23, 2010
TG-560

Treasury Issues Debt Management Guidance on the
Supplementary Financing Program

WASHINGTON –The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

“Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion.  This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills.  Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.”

###

We speculated after the September 2009 wind down announcement that it (1) would provide another $185 in liquidity for risk markets as the cash management bills that financed the program were not rolled over and returned to primary dealers, and (2) would increase demand for short term bills.  Since the process will now be reversed, it is reasonable now to believe the outcomes will be reversed as well.  Indeed, asZero Hedge noted in a similar story earlier, demand is already disappearing from indirects in short term bill auctions.

With the brunt of the $200 billion cash management bill sales expected to be picked up primary dealers, this will have the same effect as adding up to $200 billion to bank nonborrowed excess reserves (NBER) on deposit with the Fed.  As bank NBER is just north of $1 trillion, a 20% increase over eight weeks in the amount of non-borrowed money locked up at the Fed is material.  At a time when Agency and Agency MBS are drawing to a close, and with M2 money supply flat, this de factotightening move is a bit alarming.

Further, using the 13 week T-Bill rate of 0.1% as a proxy for the shorter duration 56 day (8 week) bill, it yields less than half the 0.25% paid by the Fed on excess reserves.  Accordingly, even if existing excess reserves are used to finance the SFP, resulting in a net wash in money locked up at the Fed, the marginal profit provided by this carry trade and so needed by the large banks will be materially diminished.  Under the same net wash scenario, this move could also be a precurser (test run?) for the term deposit facility proposed by the Fed.

For anyone who doubts the intent of these actions, we need only revisit the original press release by Treasury:

September 17, 2008

Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.

As the Fed now has myriad tools to offset the reserve impact of liquidity initiatives and is unlikely to restart such initiatives in the near term, this is purely and simply a reserve draining mechanism that will at best erode bank profits and, at worst, shrink an already precariously perched money supply.  We will analyze Fed statistics over the coming weeks and update as to which is the more likely scenario.

It’s important not to become too bearish in the short term on long term news, especially on a net down day in equities.  For those that subscribe to our daily reports, this does not affect our view that the US Dollar is topping this week and due for a modest 38% to 50% correction of the recent up leg.   A concurrent equities rally would still accompany, but we are now less confident in its ultimate potential.