The Bloom Is Off The Rose

I'm talking about the rosy projections baked into President Obama's budget (yes, we're back to talking about that stuff again).

The budget - which, as you will recall, is supposedly going to result in a reduction of the deficit, by half, by the end of the President's first term - includes the following GDP forecasts:

2009: -1.2%
2010: +3.2%
2011: +4.0%
2012: +4.6%
2013: +4.2%

Wow. That's big. Especially when GDP shrank by 6.2% last quarter, and is expected to shrink by 7% this quarter (bet the over on that one). To produce the full-year 2009 forecast included in the budget, and assuming the 1Q09 expectation is met (but isn't worse than -7%), we'll need average growth in the last three quarters of this year of about 2.1% per quarter.

If you're buying that, I've got a great deal on some real estate in Phoenix for you.

I could dig back into past recessions to look at what growth was coming out of each of them, but that would be academic, as this isn't much like past recessions, nor is it all that akin to the Great Depression. Besides, I'm lazy. So let's just look at what some other prognosticators are prognosticating.

Here's the view from the Blue Chip Economic Indicators panel:

2009: -1.9% (even that assumes 1.8% per quarter growth for the rest of the year)
2010: +2.1%
2011: +2.9%
2012: +2.9%
2013: +2.8%

Or the Bloomberg Consensus:

2009: -2.5% (still assuming 1.6% quarterly growth for the remainder of 2009, but closer)
2010: +1.8%
2011: +3.2% (that's as far out as they go - and note that the Bloomberg panel tends to err on the optimistic side, especially going out a ways)

Then there's the IMF, which has no bias to be optimistic, as the economists making the projections are neither tied to the US government, nor employed by US banks:

2009: -1.6%
2010: +1.6%

The bottom line is that none of the 2009 projections are realistic, and even the rosiest projections for this and subsequent years represent the following percentages of the budget projections:

2009: 66%
2010: 66%
2011: 80%
2012: 63%
2013: 67%

So, given that President Obama's first term ends just after the end of 2012, let's do some very crude math - I say "very crude," because there are all manner of other influences that come into play (multipliers and the like), but I don't have all the administration's assumptions at hand. So let's just take what the projected 2009 deficit will be (and it will be worse than projected), and then see what the average annual reduction will have to be to halve it by the end of 2012. Then, we'll apply the percentages immediately above to those numbers, and see where it's really likely to be - again, crude math, but I'll make some observations following this little exercise.

The administration pegs this year's deficit at $1.7 trillion (that was immediately after the porkulus bill was signed and the President's budget proposed, but before the omnibus bill now being debated, which is only likely to get porkier). To cut that in half by the end of 2012, we'll need to trim about $850 billion, or about $283 billion a year.

But let's say the 66% figure for 2009 is accurate. That alone - absent any additional omnibus pork, a second stimulus, more bank bailouts, GM, Chrysler, AIG, etc., ad nauseum - means that this year's deficit would be more like $2.3 trillion.

Then, let's apply the 2010 percentage of 66% to the projected $283 billion deficit reduction. The result is an actual reduction of just $187 billion, bringing the deficit down to about $2.1 trillion.

Following the same procedure for 2011 (using 80%), we get a real reduction of $226 billion, which brings the deficit to nearly $1.9 trillion. Finally, applying the 63% figure for 2012 to the projected deficit reduction gets us less than $180 billion in actual deficit trimming, which brings the shortfall down to about:

$1.7 trillion.

Voila. In four years, we're likely to see the deficit shrink, alright - down to the level projected for this year.

Now, for those observations. The downside risk, in consideration of the aforementioned needy banks, AIG, GM, etc., not to mention the precarious situation of the states and municipalities, the likelihood of further stresses in the housing market due to a fresh wave of foreclosures set to hit this summer (due to three factors: prior modifications going back into default, a new wave of ARM resets, and balloon payments coming due on five-year balloon interest-only and jumbo loans), and the effects of the intertwining of global risk in the face of economic stresses abroad, is far, far greater than the upside risk of a miraculous economic resurgence.

Yes, I know, our intrepid Fed Chairman droned just this morning that there is a "good chance" the recession will end this year. The same Fed Chairman who, a scant year ago, told us the subprime contagion could be "contained," and was unlikely to spill over to the "broader economy."

Likewise, there is a significant chance all the recent spending makes things worse, not better. For an easy example, I don't know what the administration's assumptions are for funding costs on the debt required to finance these deficits, but I guarantee they are more optimistic than its GDP assumptions. Rates will go higher. Just today, long yields jumped due to concerns over some $68 billion in notes and bonds being issued this week.

Then there's the delicate task of weaning American business off the government teat, which will require a balancing act worth of the Flying Wallendas. Pull the plug too quickly, and the banks and other businesses fail. Pull it too slowly, and the costs go up, at best. That's the slippery slope of corporate welfare.

Once again, I admit to the use of fuzzy math. But really, can it be any more fuzzy than that used to support the budget's growth assumptions?

************

One quick rant: we all recall - painfully - the billions of dollars the government pumped into Citigroup. We also should recall that the infusion took the form of preferred stock. So what have the geniuses at Treasury done, as stewards of our tax dollars?

The other day, when Citi's stock fell to less than a dollar a share, they converted $25 billion of that preferred to common shares. At the low.

Note to Secretary Geithner: it's BUY low, SELL (or convert) high.

That move cost the taxpayer mightily. We now own about 36% of Citigroup. And what did we pay for that stake? $11.5 billion. What was Citi's total market cap at the end of the day?

$8.2 billion.

So we paid a premium of 40% over the value of the entire company for about a one-third stake. For a total premium, over what we got, of nearly 300%. At that multiple, it's hard to argue for a screaming "buy" signal.

But hey, good news! Citi's stock was up 40 cents today! So now our stake is worth almost $4 billion, and we still only paid $11.5 billion for it! If we can just get Citi to rally another $3 a share, we're at break-even.