News you can use:

Monday, May 4, 2009: Warren Buffett says he sees the economic slide ending, but won't put a timetable on recovery.

He believes Treasury Secretary Paulson and Fed Chairman Bernanke acted honorably and intelligently when they forced Bank of America to close the Merrill Lynch acquisition. Considering the fragile situation at the time, had Bank of America been allowed to invoke a major adverse change clause and back out, it may have been disastrous for the financial system. And although they have sympathy for Wells Fargo's complaints about being forced to accept TARP money against its will, by and large they believe the government handled the financial crisis well.

Inflation: The aggressive stimulus policies will have consequences, and might produce inflation. The US borrows from the rest of the world and will have an incentive to reduce the cost of that debt by inflating the currency. It is the easiest way out, and therefore the most likely. Incidentally, US revenue from taxes this year is going to be lower than last year; and so the people actually paying for the AIG bonuses and all those other expenditures we had recently are the Chinese and other foreigners who are buying US government bonds. They will see their purchasing power erode, perhaps substantially. The impact of foreign exchange rates is unclear since other countries are doing even worse than we are, running even larger deficits per GDP in order to offset falling demand.

Future of the world's economy: While Buffett has no idea what the near future holds, he believes that, over time, people will live better. We are able to produce today much more than our ancestors did, even though they had the same inherent intelligence and natural resources we have. But our system unleashes human potential and that process has only just started. There will be greed and fear, but the trend will be improving. Despite all the horrors of the 20th century, with two world wars, political turmoil, a Great Depression and several recessions, US standard of living improved sevenfold. Our enormous human potential will generate much more progress, despite occasional hiccups.


Tuesday, May 5, 2009: Inflation: Kraft Foods, Inc., the world's second largest food maker, said first quarter profits gained 10% on price increases and cost savings. Net income advanced to $660 million from $599 million a year earlier.

I waited to post this week's blog for one day, because I wanted to know more about the following two items. They are the real news of the week.

Thursday, May 7, 2009: Associated Press: Some of the nation's largest banks will be scrambling to demonstrate that they can raise capital after results of government stress tests leaked out, showing many need more funds. The Treasury Department will officially release results later Thursday. The tests were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession. It turns out many of the banks do: Wells Fargo & Co., Citigroup, Inc. and Bank of America Corp. all need billions more, regulators have told them. Citigroup will need to raise about $5 billion; Bank of America will need to raise $34 billion; Wells Fargo needs between $13 billion and $15 billion; GMAC, the lending arm of beleaguered automaker General Motors, is said to need $11.5 billion; Morgan Stanley is looking at between $1 billion and $2 billion. The Journal said at least seven of the banks will need a combined $65 billion. The entire group is deemed to need around $100 billion combined. Officials have said they will not let any of the 19 institutions tested fold.

The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year. But economic assumptions have changed since the tests were designed in February. Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.
General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.

Thursday, May 7, 2009: General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.

Many people were surprised that President Obama forced Rick Wagner to resign as the Chairman of General Motors. I was not. I believe that Mr. Wagner knew General Motors was going to file chapter 11 bankruptcy when it took the $15.4 billion from the federal government. I also believe President Obama found out about this and gave Mr. Wagner a choice of resigning or going to jail.

I can see no other option for General Motors than filing chapter 11 bankruptcy on or before June 1, 2009 and that, as I pointed out last week, is going to test the strength of the current stock market rally.