Jon Marino of PEHub.com noted that P.E. firms are hiring and referenced a follow-up report for BDO USA’s third annual private equity “PErspective” report… 57% of private equity executives increased professional staffing and 62% plan to hire again this year.  This is a complete reversal from the layoff waves of prior years.  Here is more detail from that report.

Whether you like millionaires or billionaires or hate them, the one aspect that is so unfairly portrayed about companies bought by private equity firms is as follows: Most businesses bought by private equity firms need to be turned around or need to be run better.  Sure, they get leveraged up and they scrap inefficient operations.  The dirty secret that private equity firms are not defending enough is that many of these companies would have headed for bankruptcy in the long-term if they had not stepped in.  If that results in a liquidation rather than a pure bankruptcy, guess how many jobs get lost at those companies… all of them, rather than some.

The business sector is not just a one-way street.  Companies hire workers in good times and most fire in bad times.  We even ran our own 2011 Layoff Kings.

JON C. OGG

This is the claim of a report by Bloomberg News. That’s the highest level of domestic production since 1992, and is based on data from the US Department of Energy.

The most startling claim is that the US could “become the world’s top energy producer by 2020.” That makes sense because the US is the world’s top energy consumer, and if we are energy independent, then the US must also be the top producer.

How does the US get there? Expanded production and more efficient consumption. US liquids production in 2011 rose to 5.7 million barrels/day and natural gas production rose to 22.4 trillion cubic feet in 2010. The US consumes about 19 million barrels/day of liquids, and will never produce that much crude, but rising natural gas and coal production could balance out the total number of BTUs produced with those consumed.

Environmental groups will raise objections to the energy independence story because the abundance of fossil fuel resources will lead to a diminished effort to replace carbon-emitting fuels with clean renewable sources.

And if the US can cut its imports of crude, the US trade balance would also get a lift. Bloomberg notes that a reduction of 4 million barrels/day would slice $145 billion from the annual US trade deficit.

The US is already a net exporter of refined products like gasoline and diesel fuel due to automobile mileage improvements and fewer miles driven. As liquids production from the shale fields increases and domestic demand decreases, US refiners could continue to grow exports.

Overall, though, US per capita consumption of crude oil is little changed since the mid-1990s. The US imports about 15.4 barrels of crude every year for every person in the country.

One political benefit of increased US production, regardless of whether or not energy independence is achieved, is the increased flexibility it gives the US in foreign policy matters. In dealing with Iran, for example, the US need worry less about the possible effects of a cut to Iranian crude exports.

One thing the Bloomberg article misses, though, is the price that consumers will pay. Right now, the abundance of natural gas has driven down domestic prices for gas dramatically. If, as seems likely, the US gets involved in exporting natural gas, the domestic price will inevitably rise. Likewise, the link between the price for Brent crude and US pump prices is not likely to be broken, which means US drivers will continue to pay high prices for gasoline.

The US may reach energy independence, or something near it, but all that really means is that what was once a domestic supply source has become internationalized and US consumers will be paying more, even as they consume less.

Paul Ausick

• CBO projects a $1.1 trillion federal budget deficit for fiscal year 2012 if current laws remain unchanged.
• As a share of the U.S. output measured by Gross Domestic Product that shortfall of 7.0 percent is nearly 2 percentage points below the deficit recorded in 2011.  It is still higher than what was reported of any deficit between 1947 and 2008.
• Over the next few years, projected deficits in CBO’s baseline decline markedly, dropping to under $200 billion and averaging 1.5 percent of GDP over the 2013–2022 period.

Here is the CBO’s out and caveat: “But substantial changes to tax and spending policies are slated to take effect within the next year under current law. So CBO has also prepared projections under an “alternative fiscal scenario,” in which some current or recent policies are assumed to continue in effect, even though, by law, they are scheduled to change. The decisions made by lawmakers as they confront those policy choices will have a significant impact on budget outcomes in the coming years.”

It is pretty sad that when you take the top earners and consider that taxing them at 100% it would not fix the problem.  Some revenue enhancements will be needed in time regardless of the political bantering today, but there are two key things that ultimately need to be addressed: growth needs to rise, and government spending needs to be brought way down.

There is an a 29-slide show that can be accessed on the CBO blog showing more of this broken down.

JON C. OGG

In today’s annual outlook speech, Ben Bernanke has said that the FOMC is prepared to look at other actions to support the economy.  More importantly, Bernanke telegraphed that another round of easing is on the table but no formal decision has been made as of yet.

Is that QE3 or QE4?  Either way, Bernanke and friends are already introducing the United States to the same rate structure as Japan.  Now we just have to see what more forms of Utopia Juice they can cook up to serve the masses.  Hopefully it is not what they drank in Jonestown.

JON C. OGG

The core inflation (ex-food and energy) projections are:

• 1.5% to 1.8% in 2012
• 1.5% to 2.0% in 2013
• 1.6% to 2.0% in 2014

The headline inflation rate projections are as follows:

• 1.4% to 1.8% in 2012
• 1.4% to 2.0% in 2013
• 1.6% to 2.0% in 2014

For Jobless rate expectations, the new projections are as follows:

• 8.2% to 8.5% in 2012
• 7.4% to 8.1% in 2013
• 6.7% to 7.6% in 2014

Here is the U.S. GDP expectation ranges:

• 2.2% to 2.7% in 2012
• 2.8% to 3.2% in 2013
• 3.3% to 4.0% in 2014

Here is the expectation ranges for when the first rate hikes will come up:

• 2 of 17 officials: sometime in 2016
• 4 of 17 Officials: sometime in 2015
• 11 of 17 Officials: sometime in 2014 Or Later
• 3 of 17 Officials: sometime In 2013
• 3 of 17 Officials: sometime In 2012

JON C. OGG

What was new and unexpected was the comments on how long exceptionally low interest rates will remain in place.  Rather than through mid-2013, the FOMC now has language that will accommodate that near-zero rate stance at least through late 2014.  If that is not a dovish Fed, there never has been one.

Everyone has been wondering if quantitative easing would expand via QE3 (or QE2.5)… Let’s just be honest.  This is more like QE4.

Fed governor Lacker sought to leave out the expected time period for the incredibly low interest rate horizon.  The Fed will also regularly review the size and the composition of its holdings and it is currently maintaining the plan to reinvest mortgage debt principal payments.

The Fed will also continue expanding the maturity of securities, which was that “operation twist” that has been in effect.

The wording was that global financial markets still pose significant risks and the unemployment rate is likely to decline only gradually with a modest pace of economic growth in the coming quarters.  Inflation is subdued and expectations remain stable for inflation.

Other notes: Housing remains depressed, business investing has slowed, household spending continues to improve.

The Fed left the Discount Rate flat at 0.75% and the vote was 9-1 for the Fed Funds Rate action with the sole dissenter being Lacker.

JON C. OGG

In Europe, “[t]here are three imperatives—stronger growth, largerfirewalls, and deeper integration.” For the US, which has a special role in the global economy, “The key policy priorities must be to relieve the burden of household debt and to deal decisively with the issue of public debt.” China “can help itself and the global economy by continuing to shift growth away from exports and investment, toward consumption.” The IMF should continue to push for more integration, and build up a loan fund of $500 billion to help meet what Lagarde sees as the need for $1 trillion in potential global financing needs.

None of this analysis is particularly new, but the forcefulness and details included in Lagarde’s speech are unusual. The entire speech is available here.

Paul Ausick

Detroit’s 14 largest employers, which have among them roughly 75,000 workers, are dominated by public organizations. That situation is not matched by any other large American city. More than half of the employees at these operations work for government entities, led by the city and school systems. Another third work for health care companies — hospitals, hospital systems and health care networks. Only a little over 10% work for private businesses.

The situation is among Detroit’s largest financial problems. Government entities are not part of a business tax base. In many cases, neither are health care systems and hospitals. In all other cities among the top 20 in population, most of the primary employers pay taxes to the city.

Detroit’s mayor and council can claim that they cannot be held accountable for the drop in employment among the large car companies. They can, however, be blamed for not getting those auto manufacturers to keep large factories in Detroit. These politicians also can be blamed for not getting private companies that employ even a few thousand people to relocate or add to their employee bases in the city.

The tragedy of Detroit’s situation is that local government easily could have seen that its business tax base had eroded. But it did not manage expenses based on the predominance of employers who cannot be taxed.

The worker base of Detroit’s largest employers is unusually vulnerable to layoffs as well. Austerity measures among governments with financial problems usually involve the firing of public workers. That means the city government and school worker bases are certain to shrink, which will add substantially to the number of unemployed people in the city. These people, in turn, will become part of the population that do not pay personal income taxes or pay very little.

The composition of Detroit’s worker base, among its largest employers, is a sign that when government workers overtake those in the private sector in number, the city has reached a point at which it is financially unmanageable.

Douglas A. McIntyre

That decision, technically being made by the State Department, was practically forced on the President by Congressional Republicans, as we noted at the time. Obama needs to electrify his environmental supporters and rejecting the Keystone XL pipeline project is the most highly visible way to do this. We also pointed out in December that supporters of the pipeline were not likely to vote for Obama in any case, so he has more to gain politically by rejecting the Keystone XL.

The decision probably does not mean that the controversy or the Keystone XL is completely dead. Canada has a second option for delivering the synthetic crude from the Alberta oil sands — a pipeline to the British Columbia coast has been proposed by Kinder Morgan Inc. (NYSE: KMI). Because that pipeline is completely within Canada’s borders, the Obama administration has just turned the whole issue of oil sands development back over to the Canadians.

US protests over the pipeline focused on possible environmental damage to sensitive areas along the pipeline’s route. But the real issue has always been the development of the oil sands, and Canada is not going to kill what is now the country’s golden goose. The synthetic crude will find a way to the sea one way or another. But right now, it doesn’t look like that route will be to the US Gulf Coast.

Paul Ausick

The Mosaic Co. (NYSE: MOS) is down by about 3.6% at $53.03 on close to 4 million shares, against a 52-week range of $44.86 to $89.24.  The larger rival and former takeover target of Potash Corp. of Saskatchewan Inc. (NYSE: POT) is down by 3.8% at $42.12 versus a 52-week range of $38.42 to $63.97.

CF Industries Holdings Inc. (NYSE: CF) is down by 3.7% at $161.00 and its 52-week trading range is $115.34 to $192.70.

Intrepid Potash Inc. (NYSE: IPI) is down the least with shares down “only 2.6%” on the day at $24.07 and against a 52-week range of $20.75 to $40.22.

Using an exchange traded fund can emphasize just how bad things are and the Market Vectors Agribusiness ETF (NYSE: MOO) is down 1.2% at $49.39 versus a 52-week range of $39.86 to $57.93.

With so much corn used in food for humans, ethanol, and animal feedstocks, corn unfortunately is a key driver for the fertilizer and potash markets. 

Sadly, things brings up the question… Just how much do the potash and fertilizer markets depend upon the taxpayer-funded farm subsidies in America?  Probably more than any of us care to think.

JON C. OGG