US Deficit in July was $102 billion, Consumer Sales Are Down, and A Hedge Fund Blows Up?

August 13

U.S. Budget Deficit Hit $102.77 Billion in July (August 13 – WSJ WASHINGTON)

The U.S. government's budget deficit nearly tripled in July from a year earlier, pushed in part by aftershocks from failed financial institutions. The Treasury Department on Tuesday said the government ran a monthly deficit of $102.77 billion in July, up 182% from $36.45 billion in July 2007.

Outlays were $263.26 billion last month, up 27% from July 2007's $206.89 billion. Spending rose on a $15 billion disbursement by the Federal Deposit Insurance Corp. to cover deposits at failed financial institutions.

Government receipts were $160.49 billion, down 6% from the $170.44 billion recorded in the same month a year earlier.

Outlays were up 27%, and receipts were down by 6%, compared to last year. This is horrendous performance. I like to track receipts (taxes) because they are the least subject to statistical revisions and manipulation. They are what they are. With receipts down by 6%, it is pretty safe bet that we are already in a recession, making the BEA’s recent claim that our economy is expanding something of a joke.

This confluence of higher spending (a slam-dunk in an election year) and lower receipts is the exact sort of double whammy that I have been keeping my eye out for. Why? Because this creates additional borrowing needs by the government that will be especially tricky to fulfill if/when the recession causes foreign investors and central banks to have fewer dollars to loan to us. Fewer loans means fewer Treasury bills and notes bought, which means higher interest rates, which means lower economic activity, which means … (start at beginning and repeat until all the bad debt is rinsed away).

Also of interest in this piece, and something I was not aware of, is that FDIC actions count as part of the federal budget deficit. Since they seem to, I now wonder whether FDIC receipts have been counted in the past as having lowered the budget deficit? I will have to look into this a bit more.

U.S. Retail Sales Fall for First Time in Five Months (August 13 – Bloomberg)

Sales at U.S. retailers dropped in July for the first time in five months as record gasoline prices and tighter credit reduced automobile purchases.

The 0.1 percent drop followed a 0.3 percent gain the prior month that was larger than previously reported, the Commerce Department said today in Washington. Sales excluding automobiles rose 0.4 percent, less than anticipated.

The sales drop came even as the Treasury distributed tax rebates as part of the government's fiscal stimulus plan. Consumer spending, which accounts for more than two-thirds of the economy, is likely to keep fading, hurt by rising unemployment, falling property values and elevated fuel costs.

The Labor Department reported separately that prices of imported goods rose 1.7 percent in July from the previous month, after a 2.9 percent increase in June.

Treasuries were little changed after the reports, with benchmark 10-year notes yielding 3.89 percent at 9:21 a.m. in New York, from 3.90 percent late yesterday.

Lots of interesting tidbits here. First, according to even government statistics we are in a bit of a sales slump. I say it that way because I take all government economic statistics with a grain of salt. But even with that grain of salt, the reported drop in sales is directly in alignment with what my contacts out in the retail world are telling me. Second, I find the disconnect between the massive import inflation (running between 20% and 35%) and the ever-complacent Treasuries to be a source of amazement and amusement. Who is buying ten-year bonds that are paying a fraction of the reported rate of inflation? My bet is on non-economic payers (central banks) rashly attempting to maintain the status quo, more than on private investors making careful decisions.

Big liquidation triggers hedge-fund turmoil (August 9 – MarketWatch)

The liquidation of a big hedge fund or investment-bank trading portfolio is wreaking havoc in some parts of the hedge-fund business, managers and investors said Thursday. Black Mesa Capital, a hedge-fund firm that uses computer models to track down investment ideas, said that at least one large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, N.M.-based firm sent to investors Wednesday.

The warning is causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained Thursday by MarketWatch.

"Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers, Dave DeMers and Jonathan Spring, wrote. DeMers declined to comment Thursday.

Wondering what caused the mysterious melt-up in stocks and meltdown in commodities? This article could provide the explanation. If the large hedge fund in question is supposedly liquidating “massive positions," and they happened to be long-commodities and short-stocks, then this could explain what we’ve seen lately.

It is also possible that this could have been triggered by the sudden counter-trend movement (rise) in the dollar. At any rate, hedge funds have several trillion dollars in direct deposits to work with, but they are leveraged anywhere between 10 times and 40 times (or more) depending on the outfit. So they are controlling a pool of investments/assets that are at least as large as the entire US yearly economic output, and possibly the entire world.

It wouldn’t take much to create some serious ripples in the water, if one (or more) of them ‘blew-up’. At any rate, this is a pretty good article and worth a read.