Transition (August 17, 2004).
Last night the in-laws and some of their children were over at our place for dinner. At the conclusion, my spouse made the request that we declare where we each are at present, in our lives. When it was my turn to speak, I withheld. I said that it had always been my goal to live a life of vitality; that is, to be vital. I also said that I had designed my life to permit me to live that way. I then went on to describe some of the things I want to do: learn Spanish fluently, and take up welding, perhaps to build motorcycles. However, I also said I am not willing to do what everybody else is doing (presently, motorcycle building families is a topic on several cable TV channels).
But I didn’t say the core things. Why? Well, I’m in the process of re-evaluating my life. I do that from time to time. I have worked myself into a kind of “lull” in my business and I am in a kind of “maintenance” mode; I have no pressing outside commitments; my youngest child is just about complete with college (he would have been complete but for a breakdown which caused him to postpone graduation) and I have some assets, have a program and I and am on track.
So what are the core things I didn't reveal at the conclusion of dinner? Well, the big question is, what am I to do with the next 20 years of my life? I have a “good” 20 years or so remaining, God willing and I am beginning to look at “phasing myself out of business”. I am planning on working full time for another four years and then moving into a “part time” mode for another four years. That will get me to the pleasant age of 66. However, that brings up the question of “For what future endeavor am I phasing myself out? “or to put it succinctly, “what am I going to do with the rest of my life?”
I have begun to move in my stated direction; however, what then remains is the question “what exactly am I to do to remain vital?”
I have been fortunate to have been born at the end of the Industrial Age and with a skill set that made me useful. I also was fortunate to have had an education, both formal and informal, which provided me with insights and tools to pursue a reasonable life.
Well, here I am having celebrated my 58th birthday. The world is changing, and as I like to say, “The only constant is change”. Now don’t get me wrong, I have never really liked being a part of change. I am inherently lazy. I don’t like to take risks, I don’t like to work hard and I don’t like unknowns.
My customer base is changing (shrinking??) at what appears to be an increasing rate. That's sort of aligned with my intentions. I have achieved a modest success at this point in my life. The children have completed or nearly completed college. The youngest will probably complete his BS degree in December 2004.
This affords me an opportunity to look at what is next. That’s somewhat unsettling. I never did like this kind of introspection and reflection. Why? Well, I’ll probably get some insights into what makes me tick and will be compelled to make some declaration or other about the direction my life is to take. And then off I will go!
Monday, November 17, 2008
Going Back to June 2004
Back in June 2004 I wrote this:
"I am certain that, given enough time, our brilliant political leaders will screw this up, just as they have all the other social engineering initiatives. (For example, Dick Daley was backpedaling the "Service Economy" at the National Design Engineering and Manufacturing Show, and gave a keynote rally about manufacturing in the USA. Unfortunately, all the exhibitors at the predominant "Southeast Asia", "China", and "Mexico" pavilions, could have cared less!).
"I will be given a permanent "vacation". I just hope I am able to salt enough away to live on while on my furlough and pay for my insurance and all the benefits I will not be entitled to while working during my golden years at Wal-mart. Who knows, the best is yet to come! An alternative from the "If you can’t lick them, join them" Department: become a politician. Just one term in Congress and I get retirement benefits for life, which can't be raided, as can the Social Security "tax" fund".
"I am certain that, given enough time, our brilliant political leaders will screw this up, just as they have all the other social engineering initiatives. (For example, Dick Daley was backpedaling the "Service Economy" at the National Design Engineering and Manufacturing Show, and gave a keynote rally about manufacturing in the USA. Unfortunately, all the exhibitors at the predominant "Southeast Asia", "China", and "Mexico" pavilions, could have cared less!).
"I will be given a permanent "vacation". I just hope I am able to salt enough away to live on while on my furlough and pay for my insurance and all the benefits I will not be entitled to while working during my golden years at Wal-mart. Who knows, the best is yet to come! An alternative from the "If you can’t lick them, join them" Department: become a politician. Just one term in Congress and I get retirement benefits for life, which can't be raided, as can the Social Security "tax" fund".
Tuesday, November 11, 2008
Some Recent Data on the Economy and Housing Market
Note: Updates to the information presented here, are at the end of this post.
As a small business owner, I ongoingly do numerous assessments, for my own use, of projected business and related factors. This includes the status of the economy. The ultimate goal is to project and predict the rise or fall in business orders. This is not simply an exercise. It is vitally important to the well being of my business. I have decided share some of the data pertaining to the economy at large, my thought processes and general conclusions on this blog.
Economic statistics have been released as of September 30, the end of the 3rd quarter of calendar year 2008. Additional data is being released by various agencies and businesses related to the current banking and mortgage "crisis" which is morphing into a debt crisis, and pertaining to the U.S. economy. The popular media also issues articles in a more or less continuous stream. These are not always reliable, and as this was a presidential election year, I concluded that I must be more cautious than usual in my use of any data gleaned from the popular press.
See the end of this blog for comments added November 13 and later.
Summary
Based on the data available, it is my current opinion that on our present course, the economic "decline" could possibly reach its bottom as early as late 2009 or early in 2010. This is because of the continued deterioration of housing prices and resetting mortgages accompanied by rising foreclosures and the consequences of the stock market panic which as of October 30, 2008 had eliminated about $3 trillion in wealth. Retail, usually a buffer for jobs as in recent recessions, is also rapidly deteriorating. The International Monetary Fund today (Nov. 6, 2008) forecasts "only" a -0.7% contraction in the U.S. economic output in 2009. I consider a -1.0% contraction a possibility.
Positives
Positive factors include the conclusion of a torturous presidential election process, additional government stimulus, government intervention in failing mortgages, and falling energy prices, most notably oil. Retirees and others drawing social security benefits will receive a 5.8% increase in those benefits for 2009.
Other energy costs are also falling. Coal accounts for 92% of the electrical energy generated from combustible fuel in the U.S. Coal had risen 11% in the first 6 months of 2008, as compared to prices for all of 2007, but has recently moderated in price. Heating oil, which according to the EIA is used by 7% of U.S. households, was projected to rise in price by 23% this winter, but is now also expected to moderate and in New York state is currently about 1% above the price of one year ago.
With the IMF projection of possible simultaneous recessions in the U.S., Europe and Japan and also slowing growth in China, oil prices might stay at a low level longer than expected, perhaps until the middle of 2009. However, it is difficult to rely on that without additional consumptive data, specifics on OPEC production cuts, and details on the slowing Chinese economy . Recently, oil accounted for about two-thirds of the trade deficit. Falling oil prices and reduced U.S. demand should reduce the trade deficit. We'll know in November when data is released.
On a personal note, I use natural gas heating and I am on a "budget" plan with the local utility. Recently, my budget payment per month was cut in half! This was because in 2008 I achieved a sufficiently positive balance and the utility is projecting stable or falling prices. If that is indicative of what many others are experiencing, this provides a non-trivial injection into the pocket books of many consumers.
Negatives
Negative factors include overall negativity, falling confidence and pessimism. Foremost tangible factor is the astonishing deterioration in housing. Mortgages were projected to continue to reset for another five years.. However, the triggers built into these mortgages have accelerated the reset process, contributing to the current housing default rate. This should also accelerate the cleansing of these mortgages. The CMRI, an index of foreclosure risk, is predicted to continue to increase until December 2009 or January 2010. The consumer savings rate, while a positive, is also a negative as it removes government stimulus from the economy. Oil is currently falling in price, but will probably stabilize and could begin rising in Q2 of 2009. The losses sustained by owners of stocks of US corporations in 2008 are, I understand, greater than $5 trillion! If the stock market does not bottom out and stabilize, further panic selling may occur. This opens the door for further purchase of U.S. assets by foreign sovereign wealth funds. Consistently positive stock market data will contribute to improved optimism.
The government programs applied to date to address the credit and banking "crisis" have not been applied consistently. Congress would prefer to debate than to act. The Federal Reserve and Treasury departments are in a "rapid fire" reactionary state. Until the pace of the problems decelerates, this will probably continue and with it, more significant bad news will surface.
Consumer spending will continue to fall if for no other reason than the fact that with tightening credit, consumers will be forced to save first, and then spend. Even K-Mart is dusting off layaway programs for Christmas!
Unknowns
Factors which cannot be easily gauged include the full impact of current and future, unknown government stimulus packages. Stimulus to date has been "oblique", by which I mean it has been applied in a manner which does not always permit it to reach the economy at large. Nor can I gauge the status of the "unwinding" of debt, the full consequences of the restriction of credit to the consumer, and the savings rate by the consumer and consequences thereof. The negative savings rate became a positive one last quarter. At an annual rate, the BEA indicated that the consumer was saving about $297 billion. Link: Good News About Consumer Saving Also unknown, the current condition of the consumer as related to their optimism or pessimism. Pessimism that results in the saving of stimulus checks will further impede economic progress and short circuit the process. At present, we are as a society very pessimistic. I cannot gauge where the consumer will be in 6 months.
"Deleveraging" or the unwinding of debt, continues. This buzzword refers to homeowners, banks, companies and hedge funds, etc. selling assets so as to reduce outstanding debt. In some cases, this also meant selling currency as well as other assets to raise local cash. Apparently, many borrowings were in U.S. dollars or Japanese yen, due to low interest rates. The reversal of this borrowing has been used to explain why these two currencies soared. Unfortunately, this process is still going on, and it is said that hedge funds, as of October 10, were perhaps about 66% through their liquidation process.
The consumer has been, according to data, the driver in the U.S. economy. As the consumer withdraws, the economy contracts. So today we have a recession. How far will the consumer withdraw, and for how long?
If retail has a Christmas season as is currently predicted, and continues to cut its workforce, how long will it take for such businesses to begin the rehiring process?
It was predicted and there are statistics that support the notion that more people eligible for social security benefits would prefer to remain employed in the face of the uncertainty in the economy. This would provide some relief to government deficits. However, layoffs in sectors such as retail may force some of these into retirement. What will be the effect of increasing social securities recipients?
General Information
According to many "experts", the economy will not stabilize until housing has stabilized. If this is true, then the contraction could continue for another 18 months. That would yield a bottoming sometime after March 2010, rather than mid- 2009 as many "experts" are predicting. [Cautionary note: these same "experts" for the most part either missed or understated the depth and breadth of the current problem.]
The U.S. consumer who had been the driving force of the modest economic expansion since 2002, is now completely hobbled. The mild expansion of the last 6 years was fueled almost entirely by artificially inexpensive credit, which is no longer available to the consumer, coupled to a negative savings rate. Retirees, who if prudent, draw down their savings by 4% per year or less, are in a belt tightening situation as confidence and portfolios have been eroded, and yields on CDs are again falling. The losses in the stock and bond markets have reduced the value of these assets, and the amounts that retirees can safely withdraw by nearly 40% or in some cases, by more. The large increase in Social Security benefits (5.8%) will help, but will not restore lost savings or confidence.
I do have decreasing confidence in all predictions and anticipations which extend beyond six months into the future. That is because it is so difficult to determine exactly where the U.S. economy will be at that time. I don't think anyone can predict the effectiveness of U.S. policy and the bailout and "TARP" programs, the ultimate results of resetting loans on consumers and the economy at large. I do think that most economists and experts have understated the enormity of the current problems and as a consequence, have also overstated the rapidity by which the economy will recover. However, this is an incredible and resilient economy with fantastic companies and individuals. If we can prevent the politicians from doing what they do best, which is not very good, we have tremendous opportunities ahead. This is an opportunity to remake or at least, reconfigure the U.S. economy and break the various gridlocks in it. However, the U.S. Congress will continue to be a serious impediment to this.
I'll re-evaluate the economy on a quarterly basis. More frequent analysis is, I think, unwarranted, as the economy and the credit and housing fueled "crisis" go through their throes and gradually unwind. In truth, with the change to the Obama Presidency and so on, it may be two quarters, or spring 2009 before we can again gauge the depth and breadth of the economic quagmire, and also gauge the results of the various stimulus packages.
Other questions and issues
Other things to consider: Deficits for 2008 and 2009 may reach $1.5 trillion this year and $2.0 trillion next year. Depending upon how this money is spent, it may prevent a deep recession. If spent on infrastructure, it can make a lasting contribution. If not, it will simply be another of many debts passed to our children.
As a final note, it is my understanding that a lower trade deficit also means fewer dollars to buy U.S. debt. That debt as I have already stated, is mushrooming. So who will buy the debt? There are a few choices: the Federal Reserve can monetize it or can raise interest rates to attract capital from overseas. Or if U.S. citizens have sufficient savings, we can purchase it. What effect will possibly lower trade deficits (short term) and higher U.S. debt have on the economy?
Specific Information used in the above
1. Some efforts to reel in mortgage fraud are succeeding:
Efforts to eliminate mortgage fraud are having a beneficial affect. From "First American CoreLogic": On October 27, 2008, the company "announced that its Multi-Closing Alert Program has prevented more than $175 million in losses in its first 20 months for participating equity lenders who represent more than half of the equity lending market in the United States.
The Multi-Closing Alert Program helps lenders identify and stop multi-lien fraud, also known as “shotgun” fraud. Multi-lien fraud targets residential equity lending through fraudulent borrower schemes to apply for and close multiple loans on a single residential property within a short time period. The Multi-Closing Alert Program monitors all participating institution loan applications and pending closing activity and electronically notifies them of multiple activities occurring on a single residential property. According to data from First American CoreLogic, this type of fraud continues to be prevalent in several regions of the U.S., including California, New York, New Jersey and Florida". Link: Multi-Closing Alert Program Averts Fraud
2. Mortgage foreclosure risk is increasing:
From "First American CoreLogic": Core Mortgage Risk Monitor, Q3 2008 (July):
The International Monetary Fund Economic Update was released Nov. 6, 2008. It is subtitled "Rapidly Weakening Prospects Call for New Policy Stimulus". Regarding prospects as it pertains to the U.S. "In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period....However, these forecasts are based on current policies. Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth". The IMF further states that ""The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions". Link: IMF World Economic Update
4. Housing in the U.S. continue to fall and more homeowners now have "Negative Equity":
In a Nov. 11 article, the New York Times, using data from First American CoreLogic and other sources, made the following statements: "7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages". In the article, it stated that First American CoreLogic "evaluated 42 million residential properties with mortgages." This did not include certain states, for which limited data is available. These included "Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming". The company then used computer models to calculate the current housing values using comparable sales. The article also stated that "More than 10 million homes do not have mortgages". Link: A Town Drowns in Debt as Home Values Plunge
Comments Added November 13 and Later
November 13:
The OECD issued a revised economic forecast for the U.S. "Economic activity is expected to fall by 0.9 percent in the US next year, by 0.5 percent in the Euro area and by 0.1 percent in Japan as OECD countries enter a protracted slowdown, according to latest projections. Watch the news conference to present GDP, inflation and unemployment forecasts for the three economies ahead of the G20 summit on the financial crisis on 15 November 2008". Link: OECD Economic Projections November 13, 2008
November 18:
Labor Department figures indicated a decrease in consumer prices by 1% in October. This is the largest one-month decrease ever recorded. Labor Department records began in 1947.
The Labor Department reported a large decrease in motor fuel (gasoline) prices as well as in other energy. Price declines were also reported in many other areas and "core consumer prices", which are prices excluding food and energy, also fell in October. The amount was 0.1%, which was the first decrease in core prices in about 26 years!
U.S. wholesale prices, which include gasoline, fell a record 2.8% in October. Wholesale gasoline prices decreased 24.9%.
The price of "finished energy goods" fell 12.8% in October, the largest decrease since 1986. Food prices fell 0.2%. The October 2008 inflation rate was 3.66%, a very sharp decline from September's 4.94%.
As reported at Bloomberg: "Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September....[however] Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays......Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue".
Link: Consumer Prices in U.S. Decline 1%, Most on Record
As a small business owner, I ongoingly do numerous assessments, for my own use, of projected business and related factors. This includes the status of the economy. The ultimate goal is to project and predict the rise or fall in business orders. This is not simply an exercise. It is vitally important to the well being of my business. I have decided share some of the data pertaining to the economy at large, my thought processes and general conclusions on this blog.
Economic statistics have been released as of September 30, the end of the 3rd quarter of calendar year 2008. Additional data is being released by various agencies and businesses related to the current banking and mortgage "crisis" which is morphing into a debt crisis, and pertaining to the U.S. economy. The popular media also issues articles in a more or less continuous stream. These are not always reliable, and as this was a presidential election year, I concluded that I must be more cautious than usual in my use of any data gleaned from the popular press.
See the end of this blog for comments added November 13 and later.
Summary
Based on the data available, it is my current opinion that on our present course, the economic "decline" could possibly reach its bottom as early as late 2009 or early in 2010. This is because of the continued deterioration of housing prices and resetting mortgages accompanied by rising foreclosures and the consequences of the stock market panic which as of October 30, 2008 had eliminated about $3 trillion in wealth. Retail, usually a buffer for jobs as in recent recessions, is also rapidly deteriorating. The International Monetary Fund today (Nov. 6, 2008) forecasts "only" a -0.7% contraction in the U.S. economic output in 2009. I consider a -1.0% contraction a possibility.
Positives
Positive factors include the conclusion of a torturous presidential election process, additional government stimulus, government intervention in failing mortgages, and falling energy prices, most notably oil. Retirees and others drawing social security benefits will receive a 5.8% increase in those benefits for 2009.
Other energy costs are also falling. Coal accounts for 92% of the electrical energy generated from combustible fuel in the U.S. Coal had risen 11% in the first 6 months of 2008, as compared to prices for all of 2007, but has recently moderated in price. Heating oil, which according to the EIA is used by 7% of U.S. households, was projected to rise in price by 23% this winter, but is now also expected to moderate and in New York state is currently about 1% above the price of one year ago.
With the IMF projection of possible simultaneous recessions in the U.S., Europe and Japan and also slowing growth in China, oil prices might stay at a low level longer than expected, perhaps until the middle of 2009. However, it is difficult to rely on that without additional consumptive data, specifics on OPEC production cuts, and details on the slowing Chinese economy . Recently, oil accounted for about two-thirds of the trade deficit. Falling oil prices and reduced U.S. demand should reduce the trade deficit. We'll know in November when data is released.
On a personal note, I use natural gas heating and I am on a "budget" plan with the local utility. Recently, my budget payment per month was cut in half! This was because in 2008 I achieved a sufficiently positive balance and the utility is projecting stable or falling prices. If that is indicative of what many others are experiencing, this provides a non-trivial injection into the pocket books of many consumers.
Negatives
Negative factors include overall negativity, falling confidence and pessimism. Foremost tangible factor is the astonishing deterioration in housing. Mortgages were projected to continue to reset for another five years.. However, the triggers built into these mortgages have accelerated the reset process, contributing to the current housing default rate. This should also accelerate the cleansing of these mortgages. The CMRI, an index of foreclosure risk, is predicted to continue to increase until December 2009 or January 2010. The consumer savings rate, while a positive, is also a negative as it removes government stimulus from the economy. Oil is currently falling in price, but will probably stabilize and could begin rising in Q2 of 2009. The losses sustained by owners of stocks of US corporations in 2008 are, I understand, greater than $5 trillion! If the stock market does not bottom out and stabilize, further panic selling may occur. This opens the door for further purchase of U.S. assets by foreign sovereign wealth funds. Consistently positive stock market data will contribute to improved optimism.
The government programs applied to date to address the credit and banking "crisis" have not been applied consistently. Congress would prefer to debate than to act. The Federal Reserve and Treasury departments are in a "rapid fire" reactionary state. Until the pace of the problems decelerates, this will probably continue and with it, more significant bad news will surface.
Consumer spending will continue to fall if for no other reason than the fact that with tightening credit, consumers will be forced to save first, and then spend. Even K-Mart is dusting off layaway programs for Christmas!
Unknowns
Factors which cannot be easily gauged include the full impact of current and future, unknown government stimulus packages. Stimulus to date has been "oblique", by which I mean it has been applied in a manner which does not always permit it to reach the economy at large. Nor can I gauge the status of the "unwinding" of debt, the full consequences of the restriction of credit to the consumer, and the savings rate by the consumer and consequences thereof. The negative savings rate became a positive one last quarter. At an annual rate, the BEA indicated that the consumer was saving about $297 billion. Link: Good News About Consumer Saving Also unknown, the current condition of the consumer as related to their optimism or pessimism. Pessimism that results in the saving of stimulus checks will further impede economic progress and short circuit the process. At present, we are as a society very pessimistic. I cannot gauge where the consumer will be in 6 months.
"Deleveraging" or the unwinding of debt, continues. This buzzword refers to homeowners, banks, companies and hedge funds, etc. selling assets so as to reduce outstanding debt. In some cases, this also meant selling currency as well as other assets to raise local cash. Apparently, many borrowings were in U.S. dollars or Japanese yen, due to low interest rates. The reversal of this borrowing has been used to explain why these two currencies soared. Unfortunately, this process is still going on, and it is said that hedge funds, as of October 10, were perhaps about 66% through their liquidation process.
The consumer has been, according to data, the driver in the U.S. economy. As the consumer withdraws, the economy contracts. So today we have a recession. How far will the consumer withdraw, and for how long?
If retail has a Christmas season as is currently predicted, and continues to cut its workforce, how long will it take for such businesses to begin the rehiring process?
It was predicted and there are statistics that support the notion that more people eligible for social security benefits would prefer to remain employed in the face of the uncertainty in the economy. This would provide some relief to government deficits. However, layoffs in sectors such as retail may force some of these into retirement. What will be the effect of increasing social securities recipients?
General Information
According to many "experts", the economy will not stabilize until housing has stabilized. If this is true, then the contraction could continue for another 18 months. That would yield a bottoming sometime after March 2010, rather than mid- 2009 as many "experts" are predicting. [Cautionary note: these same "experts" for the most part either missed or understated the depth and breadth of the current problem.]
The U.S. consumer who had been the driving force of the modest economic expansion since 2002, is now completely hobbled. The mild expansion of the last 6 years was fueled almost entirely by artificially inexpensive credit, which is no longer available to the consumer, coupled to a negative savings rate. Retirees, who if prudent, draw down their savings by 4% per year or less, are in a belt tightening situation as confidence and portfolios have been eroded, and yields on CDs are again falling. The losses in the stock and bond markets have reduced the value of these assets, and the amounts that retirees can safely withdraw by nearly 40% or in some cases, by more. The large increase in Social Security benefits (5.8%) will help, but will not restore lost savings or confidence.
I do have decreasing confidence in all predictions and anticipations which extend beyond six months into the future. That is because it is so difficult to determine exactly where the U.S. economy will be at that time. I don't think anyone can predict the effectiveness of U.S. policy and the bailout and "TARP" programs, the ultimate results of resetting loans on consumers and the economy at large. I do think that most economists and experts have understated the enormity of the current problems and as a consequence, have also overstated the rapidity by which the economy will recover. However, this is an incredible and resilient economy with fantastic companies and individuals. If we can prevent the politicians from doing what they do best, which is not very good, we have tremendous opportunities ahead. This is an opportunity to remake or at least, reconfigure the U.S. economy and break the various gridlocks in it. However, the U.S. Congress will continue to be a serious impediment to this.
I'll re-evaluate the economy on a quarterly basis. More frequent analysis is, I think, unwarranted, as the economy and the credit and housing fueled "crisis" go through their throes and gradually unwind. In truth, with the change to the Obama Presidency and so on, it may be two quarters, or spring 2009 before we can again gauge the depth and breadth of the economic quagmire, and also gauge the results of the various stimulus packages.
Other questions and issues
Other things to consider: Deficits for 2008 and 2009 may reach $1.5 trillion this year and $2.0 trillion next year. Depending upon how this money is spent, it may prevent a deep recession. If spent on infrastructure, it can make a lasting contribution. If not, it will simply be another of many debts passed to our children.
As a final note, it is my understanding that a lower trade deficit also means fewer dollars to buy U.S. debt. That debt as I have already stated, is mushrooming. So who will buy the debt? There are a few choices: the Federal Reserve can monetize it or can raise interest rates to attract capital from overseas. Or if U.S. citizens have sufficient savings, we can purchase it. What effect will possibly lower trade deficits (short term) and higher U.S. debt have on the economy?
Specific Information used in the above
1. Some efforts to reel in mortgage fraud are succeeding:
Efforts to eliminate mortgage fraud are having a beneficial affect. From "First American CoreLogic": On October 27, 2008, the company "announced that its Multi-Closing Alert Program has prevented more than $175 million in losses in its first 20 months for participating equity lenders who represent more than half of the equity lending market in the United States.
The Multi-Closing Alert Program helps lenders identify and stop multi-lien fraud, also known as “shotgun” fraud. Multi-lien fraud targets residential equity lending through fraudulent borrower schemes to apply for and close multiple loans on a single residential property within a short time period. The Multi-Closing Alert Program monitors all participating institution loan applications and pending closing activity and electronically notifies them of multiple activities occurring on a single residential property. According to data from First American CoreLogic, this type of fraud continues to be prevalent in several regions of the U.S., including California, New York, New Jersey and Florida". Link: Multi-Closing Alert Program Averts Fraud
2. Mortgage foreclosure risk is increasing:
From "First American CoreLogic": Core Mortgage Risk Monitor, Q3 2008 (July):
This map shows geographic areas, and does not represent the numbers involved. However, it has been estimated that 24% of all "underwater" or negative equity mortgages in the U.S. are in California.
You will note that large areas in California, Florida, Arizona, Nevada, and in the Northeast, most notably New Jersey, Massachusetts, Connecticut, Rhode Island, Virginia and lower New York state are classified as "High" or "Moderately High" foreclosure risk areas.
Of particular interest to me, as a resident near Chicago, Illinois, are the counties of Cook, DeKalb, DuPage, Grundy, Kane, Kendall, McHenry and Will, which are all "Moderately High" risk.
Risk is characterized by "home price declines, higher than average fraud and collateral risk, and a struggling local economy". The Core Mortgage Risk Index (CMRI) has risen "12% above a year ago and increased for eleven of the last twelve quarters. The CMRI -- which forecasts delinquency risk -- is currently 55% above the base period of Q1 2002, a period near the end of the last U.S. economic recession. Although significantly higher now than during the base period [Q1 2002], the CMRI is likely to continue rising nationally over the next 18 months". Link: Core Mortgage Risk Monitor Q3 2008
3. The global economy of developed countries, including the U.S., is contracting:The International Monetary Fund Economic Update was released Nov. 6, 2008. It is subtitled "Rapidly Weakening Prospects Call for New Policy Stimulus". Regarding prospects as it pertains to the U.S. "In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period....However, these forecasts are based on current policies. Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth". The IMF further states that ""The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions". Link: IMF World Economic Update
4. Housing in the U.S. continue to fall and more homeowners now have "Negative Equity":
In a Nov. 11 article, the New York Times, using data from First American CoreLogic and other sources, made the following statements: "7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages". In the article, it stated that First American CoreLogic "evaluated 42 million residential properties with mortgages." This did not include certain states, for which limited data is available. These included "Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming". The company then used computer models to calculate the current housing values using comparable sales. The article also stated that "More than 10 million homes do not have mortgages". Link: A Town Drowns in Debt as Home Values Plunge
Comments Added November 13 and Later
November 13:
The OECD issued a revised economic forecast for the U.S. "Economic activity is expected to fall by 0.9 percent in the US next year, by 0.5 percent in the Euro area and by 0.1 percent in Japan as OECD countries enter a protracted slowdown, according to latest projections. Watch the news conference to present GDP, inflation and unemployment forecasts for the three economies ahead of the G20 summit on the financial crisis on 15 November 2008". Link: OECD Economic Projections November 13, 2008
November 18:
Labor Department figures indicated a decrease in consumer prices by 1% in October. This is the largest one-month decrease ever recorded. Labor Department records began in 1947.
The Labor Department reported a large decrease in motor fuel (gasoline) prices as well as in other energy. Price declines were also reported in many other areas and "core consumer prices", which are prices excluding food and energy, also fell in October. The amount was 0.1%, which was the first decrease in core prices in about 26 years!
U.S. wholesale prices, which include gasoline, fell a record 2.8% in October. Wholesale gasoline prices decreased 24.9%.
The price of "finished energy goods" fell 12.8% in October, the largest decrease since 1986. Food prices fell 0.2%. The October 2008 inflation rate was 3.66%, a very sharp decline from September's 4.94%.
As reported at Bloomberg: "Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September....[however] Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays......Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue".
Link: Consumer Prices in U.S. Decline 1%, Most on Record
Sunday, November 9, 2008
China Does it Right
China announced a $586 Billion stimulus package, this will be spent on infrastructure by 2010. According to the New York Times, the money will include "constructing new railways, subways, airports and rebuilding communities".
Meanwhile, here in the US, we have a nearly trillion dollar "bailout package" for Wall Street and the Banks!
So the Chinese will be getting buildings, roads, public transportation and cities. All of that good stuff that creates jobs and produces something. What will we get? We'll get bankers buying other bankers, bonuses and dividends to stockholders. No infrastructure, no jobs.
So who is in action? That's a rhetorical question. Over the same period, our politicians are talking about a few hundred billion in stimulus checks, perhaps $30 billion or so to energy infrastructure. According to the "Obama-Biden Energy Plan", they will be "strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future". It is important to note that this plan permits the new administration and congress to earmark energy monies for bailing out the automotive manufacturers. This will be done to reward the UAW and other unions who strongly supported the Obama-Biden campaign. However, unless the transportation system in the US is transformed, this money will be wasted. Unfortunately, insufficient funds have been allocated by the Obamam-Biden team to do such a thing.
Do you think we have a problem here?
The article: China Unveils Sweeping Plan for Economy
The Obama-Biden Energy Plan: http://my.barackobama.com/page/content/newenergy
Meanwhile, here in the US, we have a nearly trillion dollar "bailout package" for Wall Street and the Banks!
So the Chinese will be getting buildings, roads, public transportation and cities. All of that good stuff that creates jobs and produces something. What will we get? We'll get bankers buying other bankers, bonuses and dividends to stockholders. No infrastructure, no jobs.
So who is in action? That's a rhetorical question. Over the same period, our politicians are talking about a few hundred billion in stimulus checks, perhaps $30 billion or so to energy infrastructure. According to the "Obama-Biden Energy Plan", they will be "strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future". It is important to note that this plan permits the new administration and congress to earmark energy monies for bailing out the automotive manufacturers. This will be done to reward the UAW and other unions who strongly supported the Obama-Biden campaign. However, unless the transportation system in the US is transformed, this money will be wasted. Unfortunately, insufficient funds have been allocated by the Obamam-Biden team to do such a thing.
Do you think we have a problem here?
The article: China Unveils Sweeping Plan for Economy
The Obama-Biden Energy Plan: http://my.barackobama.com/page/content/newenergy
Saturday, November 8, 2008
So you think you have difficulties?
The above is from IMF data. It is a bit old (goes back to 2007). However, for all you people out there in good 'ole America who think your lives suck, think about the fact that you spend much less on fuel, food and "drink" (excluding booze and lattes), than many of those on the planet. On the other hand, that excess cash allowed you to buy real estate and commodities futures. Or you are spending big bucks servicing your debt. But what you do with your spare change is your decision and YOUR problem. Next time you have cash burning a hole in your pocket, consider CDs (no, not Maria Carey, T-Pain or whoever; I'm talking about "Certificates of Deposit". Check with your local banker if you don't know what that is!)
Friday, November 7, 2008
Post Election Blues
Well, the presidential election and the primaries are finally over. The Democrats even let Joe Biden out from under his rock, after a time out for bad behavior. I'm sure he's glad to be back.
Note the catchy title. I chose it to honor the color of the party of the winning candidate. Clever, yes?
So now the economists are predicting a deeper than usual recession. Aren't those the same guys and gals who didn't even see most of this coming? So I should listen to them? I think not. I'll continue my own research, and I'll post my conclusions from time to time.
As for the Obama button toter's, I saw this statement by a fan in a WSJ Forum:
"I believe the market will begin to turnaround in the upcoming weeks. President - Elect Obama will lift the spirits of people worldwide, and American Iconic companies such as Coke, Johnson and Johnson, Wal - Mart, etc. will lead the way. The market needed to contract, and shake out the casino/stock analyst. Wall street will regain its stride, as the market starts to respond the worldwide support for American goods. What we have learned is that the American Presidency is more than just a title, it is the measure of the Free - Market. When people believe that the American president is a good person, they respond by buying up American goods".
OK, pass the guy some more cool-aid.
The Onion had a piece on the emptiness facing these people, now that the party is over. What will they do? Maybe go to an orgy in the dorm, or plan an overthrow of some democracy. Is South Korea on the list? Of course, after proposition 8 in California, there is always the Mormon Church to attack. With the power of the web, the opportunities are endless! Onion Video.
To be serious for a moment, I am concerned by the naivete of some of these people. I'm glad they feel good, but feeling good and having confidence is not the same thing. Nothing has really happened yet. We don't even have President elect Obama's design for tackling the problems or a team to do it. In fact, the only thing we do have is most of the same congresswomen and men who got us into this mess in the first place. Wake up America!
The economy will turn around when people again have confidence in the economy. It will turn around when they reach the point that they are certain that a depression is not just around the corner, or if one has arrived, that we have survived it; and when they reach the point that they can trust their money in the stock market, and in the banks. Finally, it will turn around when the herd reaches the point at which they feel secure. We have a long way to go before the guy or gal in the street feels that way. At present, millions have seen a large chunk of their savings vaporize (or someone else's in the case of many home "owners"). However, it is very important to remember that the stock market will turn around before the economy does. So if you see the stock market turning up and staying there, that's a good sign. As for the economy, it will be a year or more before it actually bottoms. That's my guess, sometime late 2009 or early 2010. Sorry to all of you "instant gratification" people out there. Remember, the crazy people, the speculators, have been out of the asylum and running the financial system for a few years. It's going to take a while to clean up the mess they created. If you were flipping houses, or bought one in 2006-7 and expected a huge increase in value, you should be aware I am talking about people just like you!
I'll know the worst is over when the retirees climb out of their homes and into the light of day and again begin purchasing dinner at the diner down the street. At present, many of these people have apparently, like the proverbial turtle, pulled their head in and dug down. One local restaurant which these types frequent, told me their business was off 70%! Who knows when they will return? Perhaps they'll climb up into the sunlight with the return of spring, or when they begin feeling flush with the 5.8% SS benefit increase. Those retirees and other beneficiaries have a big impact on the economy. As of September, 2008 they numbered over 50 million! See Social Security Beneficiaries Snapshot. To put this number in perspective, in 2006, according to the US Census bureau, there were 144 million employed civilian workers in the US. See US Census Employed Civilians. So when the social security beneficiaries pull back, about 26% of the population with income pulls it's chips off the table. As some of these people work and collect benefits, there is possibly a larger effect on the economy.
For many of us, who have never experienced a true, deep recession, this is a new phenomenon. Unlike the "worst recession since the great depression" campaign rhetoric that Sen. Kerry used in his bid for the presidency, this is the real deal. Kerry was spouting bull. I do remember the Arab oil embargo, the recessions of 1973-74, 1980-82, and the stock market crash of 1987. I have been in the work force since 1963 (worked a real job in high school) so this is not a shock to me. However, it isn't pleasant, either. Now we have to deal with those around us who did not prepare, who refused to prepare, or who speculated and gambled, and deal with the fact that "People Will Be Strange."
Now everyone is impatient to get beyond this crisis. Heck, the unemployment numbers have just begun to really rise. It will take time for this to be resolved, and until then, we can only watch and deal with our personal realities. It took years to get into this mess. It will take years to get out of it. As I said earlier in this blog, we could bottom out in late 2009. But that means that at that point we are just beginning to claw our way out of the pit. If you don't believe me then do your own research, but do avoid MSNBC and the other minute miracle entertainers out there. And don't believe anything an economist or politician tells you.
Nor do we know what will be at the end of the tunnel when we do emerge. Given the typical Americans penchant for instant gratification, I have no idea on how these addicts will deal with the new reality. I do know that some and perhaps many of us will eventually come to the conclusion that the worst is over, and like the passing of a tornado, we will conclude it is safe to again emerge from our shelters. At that point we will breath a sigh of relief and allow our lives to resume. When enough of us have done this, the stock market will begin a reversal, people will begin spending some of the cash they hoarded during the "crisis" and the economy will rebound. Will we return to the "good old days" of the Internet boom, cheap credit and so on? No. We blew that wad of cash and sent much of it overseas. Nor will oil return to $25 a barrel; more likely it will return to $150 a barrel and continue upwards, perhaps reaching the predicted $200 a barrel in 2030.
Until then, I suggest we simply watch something besides the talking heads, the economists and that drivelling weatherman Tom Skilling on WGN-TV. Unless you enjoy the equivalent to listening to our economists. You know, 15 minutes of noise about the weather, and then the next morning no matter what Skilling said, you look out the window, go online to Weather.com and decide how to deal with the current events. As for TS's Proselytizing, as we know, the weather will do what it will do, and frequently, it has little to do with the "predictions".
On a positive note about the election, Pres. elect Obama may be the perfect guy for the job. Let him deal with his team-mates Nancy Pelosi, Harry Reid, Charles Rangel, John Dingell, Barney Frank and the rest of them. Have fun fella! This will be more entertaining to watch than the weather or the economists. Of that, I am absolutely certain. The trick will be to separate the wheat from the chaff.
Today, the New York Times decided to put a positive spin on the economy in the article:
Stocks Are Higher After Jobs Report. Here are a couple of choice quotes:
"Investors were not letting a barrage of grim economic news get them down.......After two days of heavy losses, shares on Wall Street bounced back on Friday................In late afternoon trading, the Dow industrials were up about 165 points............but they were still poised to close lower for the week after a two-day sell-off that sent the Dow plunging by nearly 1,000 points".
Ok, so this cool-aid would have me celebrating that the Dow is only down 835 points, or about 9% over the past three days. Wow, I am thrilled. If I had put $10,000 into the market at the close on Wednesday, I would have lost "only" about $710 by the close on Friday; it was actually a larger loss at the time the NYT issued their "news". That's what they call "bouncing back" in New York ? I'm sure my broker would be thrilled, as he made a commission on the sale. Oh, that's right, Wall Street is in New York City, isn't it? So my stock purchase was good for the big, rotten apple. Should I send some more $$$ to the poor people in Times Square? I think not! OK, to put a positive spin on all of this, as they say "long term" the stock market indexes always go up! However, brokers make no money selling Vanguard indexes, so it is some company's stock I would have purchased. In 5 years or so, my stock may be worth more than I paid for it, or then again, the company could have imploded, like Enron!
Note the catchy title. I chose it to honor the color of the party of the winning candidate. Clever, yes?
So now the economists are predicting a deeper than usual recession. Aren't those the same guys and gals who didn't even see most of this coming? So I should listen to them? I think not. I'll continue my own research, and I'll post my conclusions from time to time.
As for the Obama button toter's, I saw this statement by a fan in a WSJ Forum:
"I believe the market will begin to turnaround in the upcoming weeks. President - Elect Obama will lift the spirits of people worldwide, and American Iconic companies such as Coke, Johnson and Johnson, Wal - Mart, etc. will lead the way. The market needed to contract, and shake out the casino/stock analyst. Wall street will regain its stride, as the market starts to respond the worldwide support for American goods. What we have learned is that the American Presidency is more than just a title, it is the measure of the Free - Market. When people believe that the American president is a good person, they respond by buying up American goods".
OK, pass the guy some more cool-aid.
The Onion had a piece on the emptiness facing these people, now that the party is over. What will they do? Maybe go to an orgy in the dorm, or plan an overthrow of some democracy. Is South Korea on the list? Of course, after proposition 8 in California, there is always the Mormon Church to attack. With the power of the web, the opportunities are endless! Onion Video.
To be serious for a moment, I am concerned by the naivete of some of these people. I'm glad they feel good, but feeling good and having confidence is not the same thing. Nothing has really happened yet. We don't even have President elect Obama's design for tackling the problems or a team to do it. In fact, the only thing we do have is most of the same congresswomen and men who got us into this mess in the first place. Wake up America!
The economy will turn around when people again have confidence in the economy. It will turn around when they reach the point that they are certain that a depression is not just around the corner, or if one has arrived, that we have survived it; and when they reach the point that they can trust their money in the stock market, and in the banks. Finally, it will turn around when the herd reaches the point at which they feel secure. We have a long way to go before the guy or gal in the street feels that way. At present, millions have seen a large chunk of their savings vaporize (or someone else's in the case of many home "owners"). However, it is very important to remember that the stock market will turn around before the economy does. So if you see the stock market turning up and staying there, that's a good sign. As for the economy, it will be a year or more before it actually bottoms. That's my guess, sometime late 2009 or early 2010. Sorry to all of you "instant gratification" people out there. Remember, the crazy people, the speculators, have been out of the asylum and running the financial system for a few years. It's going to take a while to clean up the mess they created. If you were flipping houses, or bought one in 2006-7 and expected a huge increase in value, you should be aware I am talking about people just like you!
I'll know the worst is over when the retirees climb out of their homes and into the light of day and again begin purchasing dinner at the diner down the street. At present, many of these people have apparently, like the proverbial turtle, pulled their head in and dug down. One local restaurant which these types frequent, told me their business was off 70%! Who knows when they will return? Perhaps they'll climb up into the sunlight with the return of spring, or when they begin feeling flush with the 5.8% SS benefit increase. Those retirees and other beneficiaries have a big impact on the economy. As of September, 2008 they numbered over 50 million! See Social Security Beneficiaries Snapshot. To put this number in perspective, in 2006, according to the US Census bureau, there were 144 million employed civilian workers in the US. See US Census Employed Civilians. So when the social security beneficiaries pull back, about 26% of the population with income pulls it's chips off the table. As some of these people work and collect benefits, there is possibly a larger effect on the economy.
For many of us, who have never experienced a true, deep recession, this is a new phenomenon. Unlike the "worst recession since the great depression" campaign rhetoric that Sen. Kerry used in his bid for the presidency, this is the real deal. Kerry was spouting bull. I do remember the Arab oil embargo, the recessions of 1973-74, 1980-82, and the stock market crash of 1987. I have been in the work force since 1963 (worked a real job in high school) so this is not a shock to me. However, it isn't pleasant, either. Now we have to deal with those around us who did not prepare, who refused to prepare, or who speculated and gambled, and deal with the fact that "People Will Be Strange."
Now everyone is impatient to get beyond this crisis. Heck, the unemployment numbers have just begun to really rise. It will take time for this to be resolved, and until then, we can only watch and deal with our personal realities. It took years to get into this mess. It will take years to get out of it. As I said earlier in this blog, we could bottom out in late 2009. But that means that at that point we are just beginning to claw our way out of the pit. If you don't believe me then do your own research, but do avoid MSNBC and the other minute miracle entertainers out there. And don't believe anything an economist or politician tells you.
Nor do we know what will be at the end of the tunnel when we do emerge. Given the typical Americans penchant for instant gratification, I have no idea on how these addicts will deal with the new reality. I do know that some and perhaps many of us will eventually come to the conclusion that the worst is over, and like the passing of a tornado, we will conclude it is safe to again emerge from our shelters. At that point we will breath a sigh of relief and allow our lives to resume. When enough of us have done this, the stock market will begin a reversal, people will begin spending some of the cash they hoarded during the "crisis" and the economy will rebound. Will we return to the "good old days" of the Internet boom, cheap credit and so on? No. We blew that wad of cash and sent much of it overseas. Nor will oil return to $25 a barrel; more likely it will return to $150 a barrel and continue upwards, perhaps reaching the predicted $200 a barrel in 2030.
Until then, I suggest we simply watch something besides the talking heads, the economists and that drivelling weatherman Tom Skilling on WGN-TV. Unless you enjoy the equivalent to listening to our economists. You know, 15 minutes of noise about the weather, and then the next morning no matter what Skilling said, you look out the window, go online to Weather.com and decide how to deal with the current events. As for TS's Proselytizing, as we know, the weather will do what it will do, and frequently, it has little to do with the "predictions".
On a positive note about the election, Pres. elect Obama may be the perfect guy for the job. Let him deal with his team-mates Nancy Pelosi, Harry Reid, Charles Rangel, John Dingell, Barney Frank and the rest of them. Have fun fella! This will be more entertaining to watch than the weather or the economists. Of that, I am absolutely certain. The trick will be to separate the wheat from the chaff.
Today, the New York Times decided to put a positive spin on the economy in the article:
Stocks Are Higher After Jobs Report. Here are a couple of choice quotes:
"Investors were not letting a barrage of grim economic news get them down.......After two days of heavy losses, shares on Wall Street bounced back on Friday................In late afternoon trading, the Dow industrials were up about 165 points............but they were still poised to close lower for the week after a two-day sell-off that sent the Dow plunging by nearly 1,000 points".
Ok, so this cool-aid would have me celebrating that the Dow is only down 835 points, or about 9% over the past three days. Wow, I am thrilled. If I had put $10,000 into the market at the close on Wednesday, I would have lost "only" about $710 by the close on Friday; it was actually a larger loss at the time the NYT issued their "news". That's what they call "bouncing back" in New York ? I'm sure my broker would be thrilled, as he made a commission on the sale. Oh, that's right, Wall Street is in New York City, isn't it? So my stock purchase was good for the big, rotten apple. Should I send some more $$$ to the poor people in Times Square? I think not! OK, to put a positive spin on all of this, as they say "long term" the stock market indexes always go up! However, brokers make no money selling Vanguard indexes, so it is some company's stock I would have purchased. In 5 years or so, my stock may be worth more than I paid for it, or then again, the company could have imploded, like Enron!
Tuesday, November 4, 2008
What will Saturday Night Live Do Now?
A friend gave me a link to a YouTube video in which V.P. candidate Palin received a bogus telephone call from some comedians impersonating French President Sarkozy.
The video is supposedly funny; however, it underscored my opinion that what Americans really want is entertainment, not solutions.
This prompted the realization that if Sen. Obama does win the presidency as the polls currently predict, that the comedians on SNL will have a significant problem. Fey and Poehler will have to go back to work. I understand the SNL ratings have been up about 35% since their parody of Palin and Clinton.
At least someone is profiting besides the politicians, the pollsters and the political entourage.
However, the 100's of millions spent on the election this year will be suspended and lots of ad men, writers and so on will have to find something else to do. Perhaps get a job in the manufacturing industry? Oh, that's right, I forgot, we don't do that anymore. Our economy is based on the service industries, such as political service, postal service, fast food, banking, finance, criminal activities, entertainment, etc.
On a very positive note, the congress will also have to get back to work. No more campaigning, as Obama has done for the last 21 months. I thought we, the citizens of Illinois elected him as one of our representatives in government. Seems I just don't get it. Our purpose as citizenry is to elect these people so they have a springboard to a political future with lifetime paid insurance, benefits, political connections, etc., forever.
As for the congress, they'll get back to work, all right, and probably pass a lot of resolutions, just as they have done for the past two years. Oh, that's right, they aren't there to represent us, the citizenry, they are there to further the party, feather their political nests and represent the fringes of society; the rich, the too poor to work, the stupid and so on.
The video is supposedly funny; however, it underscored my opinion that what Americans really want is entertainment, not solutions.
This prompted the realization that if Sen. Obama does win the presidency as the polls currently predict, that the comedians on SNL will have a significant problem. Fey and Poehler will have to go back to work. I understand the SNL ratings have been up about 35% since their parody of Palin and Clinton.
At least someone is profiting besides the politicians, the pollsters and the political entourage.
However, the 100's of millions spent on the election this year will be suspended and lots of ad men, writers and so on will have to find something else to do. Perhaps get a job in the manufacturing industry? Oh, that's right, I forgot, we don't do that anymore. Our economy is based on the service industries, such as political service, postal service, fast food, banking, finance, criminal activities, entertainment, etc.
On a very positive note, the congress will also have to get back to work. No more campaigning, as Obama has done for the last 21 months. I thought we, the citizens of Illinois elected him as one of our representatives in government. Seems I just don't get it. Our purpose as citizenry is to elect these people so they have a springboard to a political future with lifetime paid insurance, benefits, political connections, etc., forever.
As for the congress, they'll get back to work, all right, and probably pass a lot of resolutions, just as they have done for the past two years. Oh, that's right, they aren't there to represent us, the citizenry, they are there to further the party, feather their political nests and represent the fringes of society; the rich, the too poor to work, the stupid and so on.
Saturday, October 25, 2008
Some Thoughts About the Week on Wall Street
There is a lot of uncertainty out there, and at this point, one cannot help but question the economic condition of the country. People are beginning to crack. I was mentally prepared for a "typical" bear market, but the stock market blew through that is a few weeks. So that brought me to the threshold of pain faster than I expected. However, I am hanging in there and have re-reviewed my financial plan, and my portfolio. I do have a list of stocks that are currently of great interest to me and I just purchased some NOV. As they say, the price was right.
For some calm, non-emotional advice on what to do now, go to this link: Rick Ferri on "What to do in this current market environment"
You can search for "Rick Ferri" using your favorite search engine, if you want to know more about who he is.
As for the negativity out there, those messages flashing across the screen on CNBC: "IS YOUR MONEY SAFE??" certainly don't help, but then, they are simply intended to keep us glued to the screen. I aso suspect that as the program is being beamed from NYC, that there is a built in "negativity bias". Too bad for the talking heads on the financial shows. Anyone who is sane has to question those people. Only recently Jim Cramer was playing the pied piper of the stock market, then turned on his adoring fans and told everyone to bail: Link to video Oct. 6, 2008: Cramer Says Now is the Time to Bail!
For more on Cramer, see: Link to "Forever the Cynic"
We all feel the pain; even with all the balancing and asset allocation I have done to my retirement portfolio, I am experiencing a paper "loss", or decrease in the value of that portfolio, just as everyone who has any exposure to the stock market has experienced. Index funds tanked. Bond funds were dumped. Etc., etc. This was not unexpected; financial people were flashing "bear market ahead" warnings for months. As a consequence I re-allocated by entire portfolio, that is; the portion that is not in cash. I had gone long on cash, as they say, with the remainder set up for a minimum 5 year and possibly a 10 year horizon. Ultimately, the horizon of my retirement accounts is 30 years.
As you can see, I do have a long term perspective, so even though I am not happy to be with our market and the economy in it's present state, I can take some solace that my time perspective is a long one.
To Quote Warren Buffett (Smart Money, May 1997): "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." I don't take this advice to literally mean I should buy all stocks and hold them for 10 years, but rather to buy with the expectation that I be prepared to hold them for 10 years.
I also am well aware that sometimes one can do everything right and still not achieve the desired result. So it is still possible to lose money in stocks and bonds. As the saying goes, there are no guarantees in life, no matter what the pandering politicians tell us.
I do have sympathy for those who expected quick returns from the stock market and invested that way, just as I have sympathy for those who purchased a home recently, expecting to flip it in a year or two. Housing is similar to the stock market. Breakeven on a home purchase is typically 5 years as compared to renting, according to most of the financial analysis I have read, and supported by my own, independent analysis.
As I see it, if we think housing or stocks always go up, we will be disappointed. If we think reversals, when they occur, will always be minor and corrected in a year or so, we will also be disappointed. If we think we can gamble and always win, we will lose, and lose big time. That's the way it is.
"The market, he had learned, was like the sea, to be respected and feared. You sail on its smooth surface on a placid mid-summer day; you were borne along by a favoring breeze; took a pleasant swim in its waters, and basked in the rays of the sun. Or you lolled in the quiet currents and dozed. A cold gust of wind brought you to, sharply — clouds gathered, the sun had gone — there were flashes of lightning and peals of thunder; the ocean was whipped into seething waves; your fragile craft was tossed about by heavy seas that broke over its sides. Half the crew was swept overboard... you were washed upon the shore... naked and exhausted you sank upon the beach, thankful for life itself..." Liars Poker, Rising through the Wreckage on Wall Street, by Michael Lewis Link to Liars Poker at Amazon
For some calm, non-emotional advice on what to do now, go to this link: Rick Ferri on "What to do in this current market environment"
You can search for "Rick Ferri" using your favorite search engine, if you want to know more about who he is.
As for the negativity out there, those messages flashing across the screen on CNBC: "IS YOUR MONEY SAFE??" certainly don't help, but then, they are simply intended to keep us glued to the screen. I aso suspect that as the program is being beamed from NYC, that there is a built in "negativity bias". Too bad for the talking heads on the financial shows. Anyone who is sane has to question those people. Only recently Jim Cramer was playing the pied piper of the stock market, then turned on his adoring fans and told everyone to bail: Link to video Oct. 6, 2008: Cramer Says Now is the Time to Bail!
For more on Cramer, see: Link to "Forever the Cynic"
We all feel the pain; even with all the balancing and asset allocation I have done to my retirement portfolio, I am experiencing a paper "loss", or decrease in the value of that portfolio, just as everyone who has any exposure to the stock market has experienced. Index funds tanked. Bond funds were dumped. Etc., etc. This was not unexpected; financial people were flashing "bear market ahead" warnings for months. As a consequence I re-allocated by entire portfolio, that is; the portion that is not in cash. I had gone long on cash, as they say, with the remainder set up for a minimum 5 year and possibly a 10 year horizon. Ultimately, the horizon of my retirement accounts is 30 years.
As you can see, I do have a long term perspective, so even though I am not happy to be with our market and the economy in it's present state, I can take some solace that my time perspective is a long one.
To Quote Warren Buffett (Smart Money, May 1997): "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." I don't take this advice to literally mean I should buy all stocks and hold them for 10 years, but rather to buy with the expectation that I be prepared to hold them for 10 years.
I also am well aware that sometimes one can do everything right and still not achieve the desired result. So it is still possible to lose money in stocks and bonds. As the saying goes, there are no guarantees in life, no matter what the pandering politicians tell us.
I do have sympathy for those who expected quick returns from the stock market and invested that way, just as I have sympathy for those who purchased a home recently, expecting to flip it in a year or two. Housing is similar to the stock market. Breakeven on a home purchase is typically 5 years as compared to renting, according to most of the financial analysis I have read, and supported by my own, independent analysis.
As I see it, if we think housing or stocks always go up, we will be disappointed. If we think reversals, when they occur, will always be minor and corrected in a year or so, we will also be disappointed. If we think we can gamble and always win, we will lose, and lose big time. That's the way it is.
"The market, he had learned, was like the sea, to be respected and feared. You sail on its smooth surface on a placid mid-summer day; you were borne along by a favoring breeze; took a pleasant swim in its waters, and basked in the rays of the sun. Or you lolled in the quiet currents and dozed. A cold gust of wind brought you to, sharply — clouds gathered, the sun had gone — there were flashes of lightning and peals of thunder; the ocean was whipped into seething waves; your fragile craft was tossed about by heavy seas that broke over its sides. Half the crew was swept overboard... you were washed upon the shore... naked and exhausted you sank upon the beach, thankful for life itself..." Liars Poker, Rising through the Wreckage on Wall Street, by Michael Lewis Link to Liars Poker at Amazon
Friday, October 24, 2008
The more Starbucks a country has, the bigger its financial problems
This according to Mr. Daniel Gross, at the website "Slate.com":
The more Starbucks a country has, the bigger its financial problems
"I propose the Starbucks theory of international economics. The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.
It may sound doppio, but work with me. This recent crisis has its roots in the unhappy coupling of a frenzied nationwide real-estate market centered in California, Las Vegas, and Florida, and a nationwide credit mania centered in New York. If you could pick one brand name that personified these twin bubbles, it was Starbucks. The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pit stops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone. Starbucks' frothy treats provided the fuel for the boom, the caffeine that enabled deal jockeys to stay up all hours putting together offering papers for CDOs, and helped mortgage brokers work overtime processing dubious loan documents. Starbucks strategically located many of its outlets on the ground floors of big investment banks. (The one around the corner from the former Bear Stearns headquarters has already closed.)"
Mr. Gross goes on to posit the following:
"My tentative theory: Having a significant Starbucks presence is a pretty significant indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It's also a sign of a culture's willingness to abandon traditional norms and ways of doing business (virtually all the countries in which Starbucks has established beachheads have their own venerable coffee-house traditions) in favor of fast-moving American ones. The fact that the company or its local licensee felt there was room for dozens of outlets where consumers would pony up lots of euros, liras, and rials for expensive drinks is also a pretty good indicator that excessive financial optimism had entered the bloodstream. "
The more Starbucks a country has, the bigger its financial problems
"I propose the Starbucks theory of international economics. The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.
It may sound doppio, but work with me. This recent crisis has its roots in the unhappy coupling of a frenzied nationwide real-estate market centered in California, Las Vegas, and Florida, and a nationwide credit mania centered in New York. If you could pick one brand name that personified these twin bubbles, it was Starbucks. The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pit stops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone. Starbucks' frothy treats provided the fuel for the boom, the caffeine that enabled deal jockeys to stay up all hours putting together offering papers for CDOs, and helped mortgage brokers work overtime processing dubious loan documents. Starbucks strategically located many of its outlets on the ground floors of big investment banks. (The one around the corner from the former Bear Stearns headquarters has already closed.)"
Mr. Gross goes on to posit the following:
"My tentative theory: Having a significant Starbucks presence is a pretty significant indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It's also a sign of a culture's willingness to abandon traditional norms and ways of doing business (virtually all the countries in which Starbucks has established beachheads have their own venerable coffee-house traditions) in favor of fast-moving American ones. The fact that the company or its local licensee felt there was room for dozens of outlets where consumers would pony up lots of euros, liras, and rials for expensive drinks is also a pretty good indicator that excessive financial optimism had entered the bloodstream. "
Thursday, October 23, 2008
Here Comes Socialism
If you don't think it is coming, in a serious way, then consider this. Today Alan Greenspan, former chairman of the Federal Reserve, former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox testified before the U.S. House Committee on Oversight and Government Reform.
After testimony by the regulators, Committee Chairman Henry Waxman said "The list of mistakes is long and the cost to taxpayers is staggering......Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible."
After testimony by the regulators, Committee Chairman Henry Waxman said "The list of mistakes is long and the cost to taxpayers is staggering......Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible."
The Good News
According to the US Bureau of Economic Analysis, the personal savings rate is up! Big time, to about $297 billion at an annual rate for the second quarter 2008 (the latest data available)! http://www.bea.gov/national/nipaweb/Nipa-Frb.asp
The consumer should also be feeling the effects of the recent decrease in oil prices. Where I am at, this translates to about $3.00 per gallon, or a 25% decrease. This should help people a lot. However, will it be enough to offset increases in mortgage expenditures due to increased rates, etc.?
There is a negative for this saving at this time; it is not a good thing for the economy. It removes at an annual rate $297 billion. This essentially negates some of the government stimulus. However, longer term, this is a very, very good thing.
The consumer should also be feeling the effects of the recent decrease in oil prices. Where I am at, this translates to about $3.00 per gallon, or a 25% decrease. This should help people a lot. However, will it be enough to offset increases in mortgage expenditures due to increased rates, etc.?
There is a negative for this saving at this time; it is not a good thing for the economy. It removes at an annual rate $297 billion. This essentially negates some of the government stimulus. However, longer term, this is a very, very good thing.
Wednesday, October 22, 2008
Ask me in 20 Years!
I was asked recently if I am invested in the stock market. That question was prompted by our recent financial "crisis" and the current aftermath. The answer is YES! Here are my reasons:
- Both my spouse and I are employed. We do save a portion of our earnings each month and a substantial portion of these savings goes into retirement accounts.
- We are of an age where it is likely one of us will still be on this planet in 40 years. Look at it this way. Consider that today it is the year 1968 and that one of us will probably still be on the planet in the year 2008! From the perspective of 1968, that's a long, long way into the future. A lot can happen in 40 years, and probably will. For example, there were seven (7) bear or near bear markets in that period, including the "bear market of 2008-2009". So we need a financial plan which can accomodate that unknowable, somewhat distant future.
- Inflation is a long term concern.
- There is evidence that the stock market is a good hedge against inflation, over the long term.
- That portion of the funds we do have "invested" are in a diversified portfolio. That portfolio is somewhat conservative and includes dividend paying stocks, mutual funds and bonds.
- We are applying the principle of dividend reinvestment. Dividend yields are highest when the stock market is at the bottom, and dividend reinvestment ensures that new shares are purchased at these lower prices. In the super- or mega-bear market of 1773-74 and during the ensuing malaise when stock market indexes were flat for nearly 10 years, there were dividend yields of up to 5%. Those yields enabled substantially better total returns than the market indexes would suggest.
- We have some funds, including an "emergency fund" which are not invested in the stock market and we can tolerate waiting 10 years for a market return.
- We are doing our best to maintain a long term focus.
- We are aware there are risks. There is always the unknowable. It is possible neither of us will be alive in 5 years. It is also possible that we will both be alive in 40 years. So we do our best to plan for both possibilities.
So that is our rationale. On the other hand, it isn't easy watching the government hand over $$ of our taxes to the banks and investment bankers who contributed to this mess. Nor is it easy listening to the whining of those who want to help the "poor homeowners". Many of those "poor homeowners" were as greedy as the bankers who got us into this mess. I suppose some sort of intervention will be necessary. There are rational arguments both for and against. I suspect that the financial turmoil will not end until the housing market is stabilized. One good thing, "Wall Street" has finally gotten the "black eye" it has deserved! No matter who is elected as President in 2008, there will be some change in the way that Wall Street is treated in America.
I think it is important to seperate the housing problems from the economy at large. I don't know how people will adjust to the reality of the new credit landscape. The worst could be over in 6 months. However, I do think it will take years to sort some of this out, and that home prices will fall for perhaps 5 years or until 2013. That will not necessarily be universal, as "all real estate is local" as the saying goes. However, California in particular will have many single-family homes priced below their peak levels of 2006-2007. Home valuations in the hardest hit areas will probably be 50% of their peak value. This is not my SWAG here, I am presenting numbers I have distilled from many sources.
As the economy stabilizes and panic recedes, many people will realize that things aren't as bad as they thought they would be. The stock market will recover. In particular, there will be a need to invest and as housing will no longer be the rock star it once was, the stock market may be considered a reasonable place for such investments. I base this optimism on the recent past, most notably the aftermath of the internet boom and bust of 2002.
When I was asked "why am I invested in the stock market", the question could as easily have been "why am I invested in America?", for that is what I am doing. I have always had a faith in the ability of this amazing country to transcend certain problems and idiosyncrasies of human beings. However, the past 10 years have been trying, and have tested that faith. Should I be concerned? Yes, I think I should be! Should I panic? No, and to help me in that I will attempt to watch as little financial news as possible. (Note: keeping these blogs going and minimizing exposure is going to be a task; I'll definitely be avoiding most of the "popular" media and as many of the "talking heads" as possible).
One other thing I keep in mind. A lot of the financial news is generated in New York and as we know, that town is tightening it's belt and looking toward gloomier times. I am of the opinion that this will cloud the news emanating from that city. Consider it an internal bias to the news. I will be listening for that bias.
The bottom line: Have I made good decisions? How will it turn out? Ask me in 10 to 20 years!
PS: I know that the conventional wisdom is oil and other consumables will tank in a recession, or a serious recession. However, I couldn't pass up the opportunity to pick up some National Oilwell Varco (NOV)
Myths About the Financial Crisis of 2008
The Research Department of the Federal Reserve Bank of Minneapolis has published a paper with the title above:
http://www.minneapolisfed.org/research/WP/WP666.pdf
This is an 18 page document, consisting substantially of charts and diagrams. It states the following:
"The financial press and policymakers have made four claims about the nature of the crisis.
1. Bank Lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.
Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false."
http://www.minneapolisfed.org/research/WP/WP666.pdf
This is an 18 page document, consisting substantially of charts and diagrams. It states the following:
"The financial press and policymakers have made four claims about the nature of the crisis.
1. Bank Lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.
Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false."
The Non-Science of Campaign Economics
The New York Times had an article today entitled "On Health Plans, the Numbers Fly". The article began with "Economics, it is said, is the dismal science. Anyone paying close attention to the campaign debate over the economics of health care might wonder about the science part."
http://www.nytimes.com/2008/10/22/us/politics/22health.html?_r=1&pagewanted=print&oref=slogin
It is no sup rise to find that "economics as practiced in the political arena is often “just ideology marketed in the guise of science.”" to quote Dr. Uwe E. Reinhardt, a health economist at Princeton. To quote Dr. Reinhardt further, "It’s garbage in, garbage out....Every econometric study is an effort in persuasion. I have to persuade the other guy that my assumptions are responsible. Depending on what I feed into the model, I get totally different answers....I give a lecture on whether you can trust economists, and I tell them no,” Dr. Reinhardt said. “I tell them that if at the end of the year I tell you the time of day and you trust me, I have failed.”
It has been apparent for some time, that politicians work diligently to "cherry pick" the facts that support their position. Given their penchant for short term thinking, and the overwhelming desire to be elected, I am certain that they can and do say anything necessary to get the vote. Pandering in politics is an art form.
I have found it to be a lot of work to check the facts of the various candidates. That's probably why the vast majority of Americans prefer to go for the candidate that promises the most. It's the easiest and shortest route. Besides, one feels good in selecting a polished candidate. After voting for him or her, I can go back home and feel like I did my patriotic duty and saved the country, again! However, there is ample evidence that these people cannot deliver. They haven't delivered in my life time so what makes one so certain they can or will this time? Perhaps that is the incentive to register all of those 18 year olds out there. They haven't been listening to this for 40 years as I have, and they have the optimism of youth. Unfortunately, that's the same misguided, biologically based optimism which also drives many of them to practice unsafe sex, as well as take undue risks on the highway.
So when we listen to the McCain and Obama political camps spouting health care plans, alternative energy scenarios and budgets, I think it is wise to keep the advice of Dr. Reinhardt in mind.
http://www.nytimes.com/2008/10/22/us/politics/22health.html?_r=1&pagewanted=print&oref=slogin
It is no sup rise to find that "economics as practiced in the political arena is often “just ideology marketed in the guise of science.”" to quote Dr. Uwe E. Reinhardt, a health economist at Princeton. To quote Dr. Reinhardt further, "It’s garbage in, garbage out....Every econometric study is an effort in persuasion. I have to persuade the other guy that my assumptions are responsible. Depending on what I feed into the model, I get totally different answers....I give a lecture on whether you can trust economists, and I tell them no,” Dr. Reinhardt said. “I tell them that if at the end of the year I tell you the time of day and you trust me, I have failed.”
It has been apparent for some time, that politicians work diligently to "cherry pick" the facts that support their position. Given their penchant for short term thinking, and the overwhelming desire to be elected, I am certain that they can and do say anything necessary to get the vote. Pandering in politics is an art form.
I have found it to be a lot of work to check the facts of the various candidates. That's probably why the vast majority of Americans prefer to go for the candidate that promises the most. It's the easiest and shortest route. Besides, one feels good in selecting a polished candidate. After voting for him or her, I can go back home and feel like I did my patriotic duty and saved the country, again! However, there is ample evidence that these people cannot deliver. They haven't delivered in my life time so what makes one so certain they can or will this time? Perhaps that is the incentive to register all of those 18 year olds out there. They haven't been listening to this for 40 years as I have, and they have the optimism of youth. Unfortunately, that's the same misguided, biologically based optimism which also drives many of them to practice unsafe sex, as well as take undue risks on the highway.
So when we listen to the McCain and Obama political camps spouting health care plans, alternative energy scenarios and budgets, I think it is wise to keep the advice of Dr. Reinhardt in mind.
Tuesday, October 21, 2008
People Will Be Strange
We have experienced a significant financial shock, which resulted in a panic. To some, it looked like the end of the world, but it was not. However, this is not over yet, not by a long shot. That reality is just beginning to sink in. Most of us are in some form of denial, and will attempt to go back to "business as usual". The resistance to change is so ingrained in our lives! Within limits, denial will be useful, but there will be no "business as usual" and such a strategy will not work. We cannot avoid this.
Unfortunately, people have not yet adapted to the current reality. It is somewhat like a Jekyll and Hyde economy out there. We are in uncharted waters and we will be experiencing additional shocks, or after shocks. We are entering a nasty recession, not some mild blip on the radar and with it, a bear market with teeth. This will not be a short, shallow recession.
As a consequence, people will be a bit strange. Stress levels will be high. Many people will operate as if this is a mild recession, rather than the nasty thing it really is, and hope it will soon be over. It will get worse and we will experience lots of bad news in the months, and perhaps years, ahead. And, our stock portfolios will take a pounding. As we do this slow, inexorable downward spiral in fits and starts, anxiety will again rear it ugly head, not just once, but again and again, as the bad news continues coming. Cities and towns will succumb to the consequences of their poor financial planning. Some states may teeter on bankruptcy. The news will get worse, much worse, before it gets better. It's too bad we can't fast forward to mid 2009 or so, but that is the way it is and one might as well brace for the economic fits and starts.
In the midst of all of this, Americans will suffer withdrawal pains as the cheap credit with which we have funded our lives for these past years, is no longer available. How will we survive without our toys, without exercising that need for a quick fix and a spate of binge buying?
The good news? We are in the maelstrom and like a nasty storm that has been brewing on the horizon for some time, we are no longer observers but are in it, and we will be in the fight of it. The period of waiting with hushed breath is over. Most of us are resourceful and are capable of making good decisions and we will now have the opportunity to make them, and to use all of the stuff we have learned these many years while we sat, apprehensively waiting for this storm to arrive.
So relax, take a deep breath, and give your neighbors and co-workers a hand or at the very least, some slack. We are all in this together and at various times, it will be necessary for each of us to lend a hand to another, so we do get through this with decency and grace.
Unfortunately, people have not yet adapted to the current reality. It is somewhat like a Jekyll and Hyde economy out there. We are in uncharted waters and we will be experiencing additional shocks, or after shocks. We are entering a nasty recession, not some mild blip on the radar and with it, a bear market with teeth. This will not be a short, shallow recession.
As a consequence, people will be a bit strange. Stress levels will be high. Many people will operate as if this is a mild recession, rather than the nasty thing it really is, and hope it will soon be over. It will get worse and we will experience lots of bad news in the months, and perhaps years, ahead. And, our stock portfolios will take a pounding. As we do this slow, inexorable downward spiral in fits and starts, anxiety will again rear it ugly head, not just once, but again and again, as the bad news continues coming. Cities and towns will succumb to the consequences of their poor financial planning. Some states may teeter on bankruptcy. The news will get worse, much worse, before it gets better. It's too bad we can't fast forward to mid 2009 or so, but that is the way it is and one might as well brace for the economic fits and starts.
In the midst of all of this, Americans will suffer withdrawal pains as the cheap credit with which we have funded our lives for these past years, is no longer available. How will we survive without our toys, without exercising that need for a quick fix and a spate of binge buying?
The good news? We are in the maelstrom and like a nasty storm that has been brewing on the horizon for some time, we are no longer observers but are in it, and we will be in the fight of it. The period of waiting with hushed breath is over. Most of us are resourceful and are capable of making good decisions and we will now have the opportunity to make them, and to use all of the stuff we have learned these many years while we sat, apprehensively waiting for this storm to arrive.
So relax, take a deep breath, and give your neighbors and co-workers a hand or at the very least, some slack. We are all in this together and at various times, it will be necessary for each of us to lend a hand to another, so we do get through this with decency and grace.
How Bad the Recession? Waiting for the Other Shoe to drop!
Someone said it isn't rocket science to believe that the combination of the worst housing meltdown in 30 years, the worst financial crisis since the Great Depression, the bursting of the worst consumer debt bubble and the greatest government debt exposure in history, would result in a worse than usual economic recession.
Are we in a recession? Yes, it is official!
http://abclocal.go.com/ktrk/story?section=news/national_world&id=6460443
So what's next? Well, now there is talk about a severe "global" recession! Beyond that, your guess is as good as mine. However, the stock market is in what is considered to be an "oversold" condition and the value of some stocks is way, way below their norms. Some say this is a good time to go cherry picking.
We may get a nice rally at some point before the end of the year, as people recover from their initial shock and begin purchasing stocks again. But is the worst over? I doubt it, as in, we probably are not yet at the bottom of this bear market. It is typical in bear markets to experience a rally or rallies. These can result in an upswing of 10 to 20%, or more. However, the trend will remain downward until we reach the "market bottom". So we can expect a few more ups and downs and accompanying noise in the media.
If this recession is similar to the recessions of 1973-75 and 1981-82, unemployment will reach a peak of 10.8% and the recession will have a duration of 16 months. The current recession, if it lasts 16 months, would not end until the first quarter of 2010.
The Futurist has some data on past recessions which can be a guide: http://www.singularity2050.com/2008/10/a-history-of-stock-market-bottoms.html
However, some are predicting a long, drawn out decline that will continue until 2020! It is worth considering that substantial mortgage resets will continue into 2012. As for the duration of this recession, what's true? Well, this recession is the result of some "worst ever" events as I described above, so it would be reasonable to expect that it could very easily last longer or, be somewhat drawn out. It could be like the Japanese decline of 13 years (90%!) from 1990 to 2003, or it could be similar to the sideways U.S. market that lasted for 15 years from 1960 to 1975. It should be noted that the Japanese lowered their interest rates all the way to 0% during that country's prolonged recession, and it didn't help.
So here's an interesting chart that demonstrates the effect over several bear markets, and a scatter diagram:
http://dshort.com/charts/bear-markets.html?three-bears
http://dshort.com/charts/bear-markets.html?bear-scatter-chart
Additional note added 10/23/08:
What will it take to get this economy moving and the financial markets back to normal? Possibly time. According to the WSJ, which quoted Moody's, Economy.com: "About 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes." That will take some time to sort out. Today Federal Deposit Insurance Corp. Chairman Sheila Bair "suggested the government give banks a financial incentive to turn troubled loans into more-affordable mortgages." In a prepared statement and testimony before the Senate Banking Committee, she cited the experience of the FDIC has had modifying the mortgages it acquired from failed thrift IndyMac Bancorp. Ms. Bair testified that the FDIC program is in its early stages, but that more than 3,500 borrowers have accepted the proposed modifications. There is a thorny problem in all of this. Consider the politics. The government purchases bad mortgages. Fine. But what happens when homeowners go delinquent on these government backed mortgages? Who is going to be the fall guy for ejecting thousand of home owners, those "little guys" and "families" out of their homes when they do default? And it is a sure thing that some of these people will default. The situation is that dire, and as the economy cools, unemployment will increase 3 to 5 percent. Some people will get burned.
Chairman Bair's testimony should be available on the FDIC website:
http://www.fdic.gov/news/news/speeches/chairman/spoct2308.html
Several comments:
Are we in a recession? Yes, it is official!
http://abclocal.go.com/ktrk/story?section=news/national_world&id=6460443
So what's next? Well, now there is talk about a severe "global" recession! Beyond that, your guess is as good as mine. However, the stock market is in what is considered to be an "oversold" condition and the value of some stocks is way, way below their norms. Some say this is a good time to go cherry picking.
We may get a nice rally at some point before the end of the year, as people recover from their initial shock and begin purchasing stocks again. But is the worst over? I doubt it, as in, we probably are not yet at the bottom of this bear market. It is typical in bear markets to experience a rally or rallies. These can result in an upswing of 10 to 20%, or more. However, the trend will remain downward until we reach the "market bottom". So we can expect a few more ups and downs and accompanying noise in the media.
If this recession is similar to the recessions of 1973-75 and 1981-82, unemployment will reach a peak of 10.8% and the recession will have a duration of 16 months. The current recession, if it lasts 16 months, would not end until the first quarter of 2010.
The Futurist has some data on past recessions which can be a guide: http://www.singularity2050.com/2008/10/a-history-of-stock-market-bottoms.html
However, some are predicting a long, drawn out decline that will continue until 2020! It is worth considering that substantial mortgage resets will continue into 2012. As for the duration of this recession, what's true? Well, this recession is the result of some "worst ever" events as I described above, so it would be reasonable to expect that it could very easily last longer or, be somewhat drawn out. It could be like the Japanese decline of 13 years (90%!) from 1990 to 2003, or it could be similar to the sideways U.S. market that lasted for 15 years from 1960 to 1975. It should be noted that the Japanese lowered their interest rates all the way to 0% during that country's prolonged recession, and it didn't help.
So here's an interesting chart that demonstrates the effect over several bear markets, and a scatter diagram:
http://dshort.com/charts/bear-markets.html?three-bears
http://dshort.com/charts/bear-markets.html?bear-scatter-chart
Additional note added 10/23/08:
What will it take to get this economy moving and the financial markets back to normal? Possibly time. According to the WSJ, which quoted Moody's, Economy.com: "About 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes." That will take some time to sort out. Today Federal Deposit Insurance Corp. Chairman Sheila Bair "suggested the government give banks a financial incentive to turn troubled loans into more-affordable mortgages." In a prepared statement and testimony before the Senate Banking Committee, she cited the experience of the FDIC has had modifying the mortgages it acquired from failed thrift IndyMac Bancorp. Ms. Bair testified that the FDIC program is in its early stages, but that more than 3,500 borrowers have accepted the proposed modifications. There is a thorny problem in all of this. Consider the politics. The government purchases bad mortgages. Fine. But what happens when homeowners go delinquent on these government backed mortgages? Who is going to be the fall guy for ejecting thousand of home owners, those "little guys" and "families" out of their homes when they do default? And it is a sure thing that some of these people will default. The situation is that dire, and as the economy cools, unemployment will increase 3 to 5 percent. Some people will get burned.
Chairman Bair's testimony should be available on the FDIC website:
http://www.fdic.gov/news/news/speeches/chairman/spoct2308.html
Several comments:
- 3500 out of 7.3 million expected defaults is less than 0.05% of the mortgages which will default. We have a long, long way to go! I would be inclined to apply a margin of error to the foreclosure numbers in Chairman Bair's statement of +/-50% and that means that it is possible that 10 million homeowners could default!
- A default of 10 million would essentially reverse the housing gains made in the past 10 years. See: http://www.frbsf.org/publications/economics/letter/2006/el2006-30.html
What's a "Baby Boomer" to do?
Retirees and near retirees, including the "baby boomers" of which I am one, have been wondering how the financial meltdown will affect them. Here is the comment of one expert, as Quoted in the Wall Street Journal 10/21/08:
"Olivia Mitchell, a professor at the Wharton business school and a former member of a bipartisan commission established by President Bush to study possible reforms of the Social Security system, says the market crash should be a wake-up call for Boomers to "understand risk better," starting with the risk that they may live way past 64. "The Baby Boomers are going to have to work longer and eat less," Ms. Mitchell says. "And go back to what my mother was doing -- saving string.""
There you have it, from an expert!
The original article was entitled "Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?"
http://online.wsj.com/article/SB122455140262652669.html
"Olivia Mitchell, a professor at the Wharton business school and a former member of a bipartisan commission established by President Bush to study possible reforms of the Social Security system, says the market crash should be a wake-up call for Boomers to "understand risk better," starting with the risk that they may live way past 64. "The Baby Boomers are going to have to work longer and eat less," Ms. Mitchell says. "And go back to what my mother was doing -- saving string.""
There you have it, from an expert!
The original article was entitled "Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?"
http://online.wsj.com/article/SB122455140262652669.html
Monday, October 20, 2008
Was it Greed or Stupidity?
I saw an article on Henry Cisneros, Clinton's Top Housing Official. He now has some misgivings about the housing market:
http://www.nytimes.com/2008/10/19/business/19cisneros.html?_r=1&em&oref=slogin
I sent the article on to a friend with some comments. He replied with an email "Thanks for sending the article which I missed in my rush thru the day. I always thought he [Cisneros] was a bad guy, starting from the sex scandal and what I read about him....He is partly to blame. And there are zillions of others....In the housing disaster, more to blame nationally are the lenders who could have given fixed-rate mortgages but persuaded many people to take variable-rate loans which then turned sour, often containing verbal promises to turn the mortgages later into fixed-rate deals (which were lies)....For even educated people, understanding the terms of a mortgage are almost impossible. I am convinced that lobbyists for financial institutions made the contract language confusing....Next, consider Fannie May and Freddie Whatever. McCain blames them and Obama but consider the facts. While these two companies are huge, they are responsible only for 2% to 3% of the housing and mortgage disasters. And McCain's Rick Davis was chief lobbyist for Fannie Mae, receiving big bucks until one month ago.....But the real reason for the financial crisis is more with the packaged fiancial instruments that Wall Street sold around the world. Nobody--even the big guys--understands what the contents of these really are. My son....says even the sophisticated bankers do not. Blame the Congress (Republicans for 6 of the last 8 years), lobbyists and McCain for sticking to deregulation, and the phony "greed" mantra (as tough it is 100% Wall Street's fault now). The Dems are in for some of the blame but the root of all this goes back to Reagan and the start of deregulation....To quote McCain of two or three years ago, "Deregulation is good for the growth of our economy."
To this email I responsed as follows:
As they say, “The Road to Hell is Paved With Good Intentions”.
We are currently in the eye of the storm.
And yes, no one understands these collateralized debt obligations (CDOs) which were backed by asset and mortgage backed securities, because each contains pieces of thousands of mortgages, the true value and rating of which is unknown and would be difficult to determine.
The math was faulty; when constructing these financial instruments the failure or default rate for new non-collateral mortgages (0% down, no income, no asset “liar” mortgages) were assumed to be identical to “normal” or collateral (20% down) mortgages. This is of course ridiculous.
As I see it, the big failure was the ratings agencies. They gave these dubious instruments a rating identical to US Treasury bills and bonds. That is gross negligence. And yes, I do agree that they could not determine some of the underlying numbers. However, it is illogical to assume that a CDO or mortgage based security built from tranches (slices or pieces) of mortgages including sub-prime, sub-sub prime and so on, is as safe as a US Treasury bill and to rate them as such.
There have been a lot of articles alluding to this for the past several years. They were generally given titles such as “the disconnect of return to risk” and so on.
As has been said, there is more than enough blame to go around. Many politicians were eager to get the poor into their own homes; as is the case with many things, this is OK as long as the make-up is a very small percentage of the total mortgages. In the current “crisis”, the total number of houses sold included too many risky mortgages. As a consequence, we today have millions of people in homes they cannot afford to live in, or soon will not be able to afford to live in.
This is so because of the vast quantity of option-ARM loans out there. It is my understanding that these reset five years following the origination of the loan. However, these loans include a clause and if the borrower reaches a specific negative equity, somewhere in the range of 110% to 125% of the original loan balance, then the loan immediately resets to a higher rate. This some call a “surprise” reset. This event is automatic. It is anticipated that many option-ARM borrowers will face significantly higher monthly payment increases in the near future. How many? I saw a chart and it indicated loans totaling about $30 billion will reset in 2009 and as much at $70 billion will reset in 2010. These are not sub-prime loans.
As a result, defaults are expected to double again. Politicians or economists who expect the housing market crises will “bottom” in early 2009 are absolutely wrong, unless there is strong government intervention to prevent these automatic resets. This event is not a surprise. In March 2008, Goldman Sachs estimated that a 15% decline in housing values would occur and that 21% of the total number of people with a mortgage would owe more than their house was worth. However, it was also estimated that if a recession occurred then there would be a total decline in the value of housing of 30% and a whopping 39% of people owing mortgages would be under water. It is now a certainty that we are in or are entering a serious recession.
I am not certain if our government will intervene until it is too late. At present, congress is working on committees of lynching parties rather than averting this looming crisis. So batten down the hatches and be prepared for a potentially rough ride for the next two or three years.
Here is a chart to support what I said about loan resets:
http://www.goodevalue.com/wp-content/uploads/2008/04/imfresets.jpg
As for the “greed”, there are too many questions about that. Is it “greed” to expect to have things I cannot afford? Is it “greed” to expect to live in a house I cannot afford? Is it “greed” to want all of this stuff to the point that we feel entitled to our desires? When every man, woman and child in a nation expects that things will always turn out and that they can and will have in their lifetime whatever they want, at the expense of others, is that “greed”? Or simply stupidity?
http://www.nytimes.com/2008/10/19/business/19cisneros.html?_r=1&em&oref=slogin
I sent the article on to a friend with some comments. He replied with an email "Thanks for sending the article which I missed in my rush thru the day. I always thought he [Cisneros] was a bad guy, starting from the sex scandal and what I read about him....He is partly to blame. And there are zillions of others....In the housing disaster, more to blame nationally are the lenders who could have given fixed-rate mortgages but persuaded many people to take variable-rate loans which then turned sour, often containing verbal promises to turn the mortgages later into fixed-rate deals (which were lies)....For even educated people, understanding the terms of a mortgage are almost impossible. I am convinced that lobbyists for financial institutions made the contract language confusing....Next, consider Fannie May and Freddie Whatever. McCain blames them and Obama but consider the facts. While these two companies are huge, they are responsible only for 2% to 3% of the housing and mortgage disasters. And McCain's Rick Davis was chief lobbyist for Fannie Mae, receiving big bucks until one month ago.....But the real reason for the financial crisis is more with the packaged fiancial instruments that Wall Street sold around the world. Nobody--even the big guys--understands what the contents of these really are. My son....says even the sophisticated bankers do not. Blame the Congress (Republicans for 6 of the last 8 years), lobbyists and McCain for sticking to deregulation, and the phony "greed" mantra (as tough it is 100% Wall Street's fault now). The Dems are in for some of the blame but the root of all this goes back to Reagan and the start of deregulation....To quote McCain of two or three years ago, "Deregulation is good for the growth of our economy."
To this email I responsed as follows:
As they say, “The Road to Hell is Paved With Good Intentions”.
We are currently in the eye of the storm.
And yes, no one understands these collateralized debt obligations (CDOs) which were backed by asset and mortgage backed securities, because each contains pieces of thousands of mortgages, the true value and rating of which is unknown and would be difficult to determine.
The math was faulty; when constructing these financial instruments the failure or default rate for new non-collateral mortgages (0% down, no income, no asset “liar” mortgages) were assumed to be identical to “normal” or collateral (20% down) mortgages. This is of course ridiculous.
As I see it, the big failure was the ratings agencies. They gave these dubious instruments a rating identical to US Treasury bills and bonds. That is gross negligence. And yes, I do agree that they could not determine some of the underlying numbers. However, it is illogical to assume that a CDO or mortgage based security built from tranches (slices or pieces) of mortgages including sub-prime, sub-sub prime and so on, is as safe as a US Treasury bill and to rate them as such.
There have been a lot of articles alluding to this for the past several years. They were generally given titles such as “the disconnect of return to risk” and so on.
As has been said, there is more than enough blame to go around. Many politicians were eager to get the poor into their own homes; as is the case with many things, this is OK as long as the make-up is a very small percentage of the total mortgages. In the current “crisis”, the total number of houses sold included too many risky mortgages. As a consequence, we today have millions of people in homes they cannot afford to live in, or soon will not be able to afford to live in.
This is so because of the vast quantity of option-ARM loans out there. It is my understanding that these reset five years following the origination of the loan. However, these loans include a clause and if the borrower reaches a specific negative equity, somewhere in the range of 110% to 125% of the original loan balance, then the loan immediately resets to a higher rate. This some call a “surprise” reset. This event is automatic. It is anticipated that many option-ARM borrowers will face significantly higher monthly payment increases in the near future. How many? I saw a chart and it indicated loans totaling about $30 billion will reset in 2009 and as much at $70 billion will reset in 2010. These are not sub-prime loans.
As a result, defaults are expected to double again. Politicians or economists who expect the housing market crises will “bottom” in early 2009 are absolutely wrong, unless there is strong government intervention to prevent these automatic resets. This event is not a surprise. In March 2008, Goldman Sachs estimated that a 15% decline in housing values would occur and that 21% of the total number of people with a mortgage would owe more than their house was worth. However, it was also estimated that if a recession occurred then there would be a total decline in the value of housing of 30% and a whopping 39% of people owing mortgages would be under water. It is now a certainty that we are in or are entering a serious recession.
I am not certain if our government will intervene until it is too late. At present, congress is working on committees of lynching parties rather than averting this looming crisis. So batten down the hatches and be prepared for a potentially rough ride for the next two or three years.
Here is a chart to support what I said about loan resets:
http://www.goodevalue.com/wp-content/uploads/2008/04/imfresets.jpg
As for the “greed”, there are too many questions about that. Is it “greed” to expect to have things I cannot afford? Is it “greed” to expect to live in a house I cannot afford? Is it “greed” to want all of this stuff to the point that we feel entitled to our desires? When every man, woman and child in a nation expects that things will always turn out and that they can and will have in their lifetime whatever they want, at the expense of others, is that “greed”? Or simply stupidity?
Things to Watch to Determine if the Economy is Improving
Short term, there are several indicators which can be observed to give an idea of the state of the economy:
1. The so called "TED spread" or difference between LIBOR and US Treasuries. Ideally, watch the 3 month figure, which is normally about 1%:
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND
2. Commodities prices. Oil is a good indicator of confidence in the economy. Commodities and oil in free fall are an omen of lack of confidence. Consumption might also be useful to watch:
http://www.bloomberg.com/markets/commodities/cfutures.html
http://www.eia.doe.gov/emeu/international/crude2.html
http://www.bloomberg.com/apps/cbuilder?ticker1=DOEDMGAS%3AIND
3. Dollar weakening slightly against other currencies, most notably the Euro:
http://finance.yahoo.com/q/bc?s=USDEUR=X
Longer term, the inventory of existing homes for sale is a possible indicator:
http://www.data360.org/dsg.aspx?Data_Set_Group_Id=1395
http://www.realtor.org/research/research/ehsdata
Just for chuckles, here is a list of the prime rate. I was once one of the unlucky ones who had a home equity loan at the time the prime was 20%. My hat's off to former Fed Chairman Volcker! Ouch:
http://www.data360.org/dataset.aspx?Data_Set_Id=47
1. The so called "TED spread" or difference between LIBOR and US Treasuries. Ideally, watch the 3 month figure, which is normally about 1%:
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND
2. Commodities prices. Oil is a good indicator of confidence in the economy. Commodities and oil in free fall are an omen of lack of confidence. Consumption might also be useful to watch:
http://www.bloomberg.com/markets/commodities/cfutures.html
http://www.eia.doe.gov/emeu/international/crude2.html
http://www.bloomberg.com/apps/cbuilder?ticker1=DOEDMGAS%3AIND
3. Dollar weakening slightly against other currencies, most notably the Euro:
http://finance.yahoo.com/q/bc?s=USDEUR=X
Longer term, the inventory of existing homes for sale is a possible indicator:
http://www.data360.org/dsg.aspx?Data_Set_Group_Id=1395
http://www.realtor.org/research/research/ehsdata
Just for chuckles, here is a list of the prime rate. I was once one of the unlucky ones who had a home equity loan at the time the prime was 20%. My hat's off to former Fed Chairman Volcker! Ouch:
http://www.data360.org/dataset.aspx?Data_Set_Id=47
Friday, October 17, 2008
The Chinese on China - The Milk Scandal
From the New York Times, today:
The background: "One of China’s largest milk companies, Sanlu, based in the city of Shijiazhuang, was the most prominent dairy producer found to sell milk products tainted with melamine, a toxic chemical illegally added to watered-down milk to artificially increase the protein count and fool safety tests."
"....the milk scandal involves a web of complicity linking company executives to government officials. Those connections make sorting out responsibility a delicate political task. Rather than allow the courts to weigh in, officials prefer to press complainants to take compensation, said Teng Biao, a lawyer in Beijing who is collecting material for a possible class-action lawsuit.
"Traditionally in China, politics is always higher than the law,” he said.
“To protect Sanlu is to protect the government itself,” he added. “A public health crisis like this not only involves Sanlu. It involves many officials from authorities in the city of Shijiazhuang up to the central government. It involves media censorship, the food quality regulatory system and the corrupt deal between commercial merchants and corrupt officials.”
Link to the article:
http://www.nytimes.com/2008/10/17/world/asia/17milk.html
The background: "One of China’s largest milk companies, Sanlu, based in the city of Shijiazhuang, was the most prominent dairy producer found to sell milk products tainted with melamine, a toxic chemical illegally added to watered-down milk to artificially increase the protein count and fool safety tests."
"....the milk scandal involves a web of complicity linking company executives to government officials. Those connections make sorting out responsibility a delicate political task. Rather than allow the courts to weigh in, officials prefer to press complainants to take compensation, said Teng Biao, a lawyer in Beijing who is collecting material for a possible class-action lawsuit.
"Traditionally in China, politics is always higher than the law,” he said.
“To protect Sanlu is to protect the government itself,” he added. “A public health crisis like this not only involves Sanlu. It involves many officials from authorities in the city of Shijiazhuang up to the central government. It involves media censorship, the food quality regulatory system and the corrupt deal between commercial merchants and corrupt officials.”
Link to the article:
http://www.nytimes.com/2008/10/17/world/asia/17milk.html
Thursday, October 16, 2008
Candidates Avoiding the Really Tough Issues
This from the Wharton School, University of Pennsylvania. Link to full article is below.
"In the closing weeks of the U.S. presidential campaign, the candidates are focused largely on the global financial meltdown, which is formidable enough. But looming behind this front-burner concern are the very difficult long-term economic challenges of restoring Social Security and Medicare to solid footing, and providing health care coverage to the millions of Americans who are uninsured or inadequately insured....."
"We were so concerned about the $700 billion in the bailout bill, but nobody is talking seriously about the $12 trillion we need to make Social Security whole and the $65 trillion we need to make Medicare whole," says Wharton professor of insurance and risk management Olivia Mitchell. She worries that that when it comes to Social Security and Medicare, both candidates are more focused on the revenue side of the equation than on addressing the rampant growth of benefit obligations which would require cuts for beneficiaries...."
"According to Wharton insurance and risk management professor Kent Smetters, a former Congressional Budget Office economist, the Obama proposal would place a high percentage of the tax burden on one, small segment of the population and would only generate about 20% to 30% of the revenue needed. "There's not much talk about how to control growth on spending -- that's the real issue," says Smetters. "If you get more revenue, it doesn't solve the problem until you can control spending....."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2070
"In the closing weeks of the U.S. presidential campaign, the candidates are focused largely on the global financial meltdown, which is formidable enough. But looming behind this front-burner concern are the very difficult long-term economic challenges of restoring Social Security and Medicare to solid footing, and providing health care coverage to the millions of Americans who are uninsured or inadequately insured....."
"We were so concerned about the $700 billion in the bailout bill, but nobody is talking seriously about the $12 trillion we need to make Social Security whole and the $65 trillion we need to make Medicare whole," says Wharton professor of insurance and risk management Olivia Mitchell. She worries that that when it comes to Social Security and Medicare, both candidates are more focused on the revenue side of the equation than on addressing the rampant growth of benefit obligations which would require cuts for beneficiaries...."
"According to Wharton insurance and risk management professor Kent Smetters, a former Congressional Budget Office economist, the Obama proposal would place a high percentage of the tax burden on one, small segment of the population and would only generate about 20% to 30% of the revenue needed. "There's not much talk about how to control growth on spending -- that's the real issue," says Smetters. "If you get more revenue, it doesn't solve the problem until you can control spending....."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2070
Tuesday, October 14, 2008
To quote Rod Serling, we are now in the Zone
"There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call the Twilight Zone."
The above is from the opening of the original Twilight Zone television program. It premiered October 1, 1959 on CBS.
The above is from the opening of the original Twilight Zone television program. It premiered October 1, 1959 on CBS.
Monday, October 13, 2008
Ouch!
What else can I say about the latest "bang" to our economy? The market dropped as panic selling took hold. I actually purchased some stock in the past week, looking toward the long term.
Is it gambling? Could be, as our political leaders are as clueless as ever. I watched Sen. Joe Biden at a political rally on C-SPAN and there was Sen. Hillary Clinton, head rhythmically moving up and down, looking so much like a bobble headed doll on his right.
This is getting close to my "worst case" scenario of about a 50% loss. The problem is, we haven't even "officially" entered the recession yet, and already the market was down 43% off it's high set about 1 year ago.
I do have to admit, I am glad the waiting is over. I have been waiting for this "bang" for a few years now. Perhaps it is me, but I really couldn't see how we could avoid this. Too many people way, way overextended, too many people making money by moving money around, too many people always willing to blame someone else, way too many people willing to live beyond their means, and too many people expecting it will all turn out well, no matter what they do.
I have always had confidence in the American system, but the past 10 years have put that confidence under quite a strain. I am of the opinion that we as a nation face quite a "headwind". Americans have been too willing to put their trust in politicians, who really do little but make laws about collecting and spending our money. There is no long term planning! Thanks to the Internet and 100s of cable TV channels, we all have access to the same "information" and the picture is not pretty.
I use the word "information" with some hesitation. There is actually little true information available on the popular media, which has evolved from that age when it bragged that "we don't report the news, we make the news" to the very modern "we are the news". So there's not much reason to watch TV or radio news. Even NPR and PBS are very narrow in their news focus, although there is some air time given to the BBC. While travelling across Nebraska last year, I was delighted to be within range of the Omaha PBS radio station and expected to be able to hear at least a part of General Petraeus testimony before congress. However, the NPR channel had decided to play religious music for the Jewish holy days, instead. So I did not hear that testimony until I returned home and was able to get a copy of the transcript.
Th current financial crisis will, I fear, accelerate the flight from the dollar and further erode our ability as a nation to accomplish the many daunting tasks which do face us. It will also make world cooperation far more difficult as people all over the world have realized that this emperor really doesn't have any clothes!
After reading this, you may wonder if I am optimistic or pessimistic. As a businessperson, I am optimistic. I think that American businesses can and will continue to innovate and to operate successfully within the strictures imposed by our politicians. As a citizen, I am pessimistic. We have no viable energy bill and, for example, the Democrat's proposal of $15B per year for 10 years is laughable and woefully inadequate. We still have 78 million baby-boomers who will be retiring in the near future and a broken social security ponzi scheme. We have a failed medical system in which all comers are rewarded if people are ill. Need I go on?
Is it gambling? Could be, as our political leaders are as clueless as ever. I watched Sen. Joe Biden at a political rally on C-SPAN and there was Sen. Hillary Clinton, head rhythmically moving up and down, looking so much like a bobble headed doll on his right.
This is getting close to my "worst case" scenario of about a 50% loss. The problem is, we haven't even "officially" entered the recession yet, and already the market was down 43% off it's high set about 1 year ago.
I do have to admit, I am glad the waiting is over. I have been waiting for this "bang" for a few years now. Perhaps it is me, but I really couldn't see how we could avoid this. Too many people way, way overextended, too many people making money by moving money around, too many people always willing to blame someone else, way too many people willing to live beyond their means, and too many people expecting it will all turn out well, no matter what they do.
I have always had confidence in the American system, but the past 10 years have put that confidence under quite a strain. I am of the opinion that we as a nation face quite a "headwind". Americans have been too willing to put their trust in politicians, who really do little but make laws about collecting and spending our money. There is no long term planning! Thanks to the Internet and 100s of cable TV channels, we all have access to the same "information" and the picture is not pretty.
I use the word "information" with some hesitation. There is actually little true information available on the popular media, which has evolved from that age when it bragged that "we don't report the news, we make the news" to the very modern "we are the news". So there's not much reason to watch TV or radio news. Even NPR and PBS are very narrow in their news focus, although there is some air time given to the BBC. While travelling across Nebraska last year, I was delighted to be within range of the Omaha PBS radio station and expected to be able to hear at least a part of General Petraeus testimony before congress. However, the NPR channel had decided to play religious music for the Jewish holy days, instead. So I did not hear that testimony until I returned home and was able to get a copy of the transcript.
Th current financial crisis will, I fear, accelerate the flight from the dollar and further erode our ability as a nation to accomplish the many daunting tasks which do face us. It will also make world cooperation far more difficult as people all over the world have realized that this emperor really doesn't have any clothes!
After reading this, you may wonder if I am optimistic or pessimistic. As a businessperson, I am optimistic. I think that American businesses can and will continue to innovate and to operate successfully within the strictures imposed by our politicians. As a citizen, I am pessimistic. We have no viable energy bill and, for example, the Democrat's proposal of $15B per year for 10 years is laughable and woefully inadequate. We still have 78 million baby-boomers who will be retiring in the near future and a broken social security ponzi scheme. We have a failed medical system in which all comers are rewarded if people are ill. Need I go on?
Friday, October 10, 2008
Paul O'Neil on "The Root Cause" of the Banking Crisis
Paul O'Neil as quoted in Business Week, October 13, 2008:
The root cause of this crisis was "A combination of things. It begins with the stupid idea that you can put people in homes who have no income, no wealth, no regular job history. [Then there's the notion ] that in this marvelous world we've created of complex financial instruments, the originator of the loan can throw [the mortgage] out into cyberspace and someone will put a guarantee on it and it'll be amalgamated with a bunch of other stuff. And even though there may be a 3% to 5% risk of default, that's a manageable risk, and nobody will bet hurt. It's all a fiction".
Note: Mr. O'Neil was deputy director of the Office of Management & Budget, then CEO of Alcoa, and finally Treasury Secretary.
The root cause of this crisis was "A combination of things. It begins with the stupid idea that you can put people in homes who have no income, no wealth, no regular job history. [Then there's the notion ] that in this marvelous world we've created of complex financial instruments, the originator of the loan can throw [the mortgage] out into cyberspace and someone will put a guarantee on it and it'll be amalgamated with a bunch of other stuff. And even though there may be a 3% to 5% risk of default, that's a manageable risk, and nobody will bet hurt. It's all a fiction".
Note: Mr. O'Neil was deputy director of the Office of Management & Budget, then CEO of Alcoa, and finally Treasury Secretary.
Wednesday, October 1, 2008
It is Time to Take Back Our Country from the Politicians
We need to transform this country. To do this we must move beyond the political status quo, and we need a 21st century transformational energy policy NOW!
I got a letter from Al Gore yesterday. OK, so it wasn’t really a letter prepared for me; it was a form letter sent to me because I am on the MoveOn.org mailing list. In many respects, it was similar to many emails and letters I have received during the past 10 years. This particular letter was written on behalf of a group called the DSCC.
The DSCC's purpose is a variation on the familiar theme of “take back America”. This time, they want me to send a donation to assist them in building a filibuster proof Senate with at least 60 Senators from the Democratic party.
I find it amazing that these people want me to join millions of Americans to take America and hand it to them on a gold platter! What they are essentially telling me is "Take back America from the Republicans and give it to us. We'll take care of it and of you."
I have been voting for about 40 years and I am absolutely convinced that none of these people is going to take care of me. Their promises keep getting greater and the debt keeps getting larger. Now it is over $10 Trillion and growing. After multiple Democratic and Republican governments we have no energy plan and we have no funds in the SS trust fund (only IOUs which our descendants will have to pay back). So much for the good life!
I have had enough!
The only way we will take back America is if WE THE PEOPLE take it for ourselves.If you have any doubts about who REALLY owns this country, then the events of the past few weeks should have been a “wake up call”. I am referring to the bill before the congress, HR3997 Emergency Economic Stabilization Act of 2008 and the senate version which some cynically call the “No Banker Left Behind” bailout.
If you have been watching the deliberations in the House and the Senate, you should have noticed a strange thing. While the politicians continually rail either for or against it, it is generally described as something that is vital and that “we must have”. But no one can actually say exactly why we must have this specific piece of legislation. I do understand the issues of credit markets seizing, etc. However, why do we need a bill with the specific tenants of this one, such as authorizing our government to use nearly $1 Trillion of taxpayer dollars to purchase distressed assets, including those of “foreign authorities and central banks” at prices which the government has already stated will be “above market value” and therefore just about guaranteed to lose money for the taxpayer? I know this is included in the legislation because I read HR3997, and Secretary Paulson has made testimony to the fact regarding the prices that will be paid. I suggest you go to this link and you will be given a summary of the first 32 pages of the bill and a link to download it:
http://foreverthecynic.blogspot.com/2008/09/full-text-of-hr-3997-emergency-economic.html
The bill gives the Secretary of the Treasury broad powers and has a mechanism to reward the same firms that got us into this mess. Such firms will be hired to manage the money, for a fee:
http://foreverthecynic.blogspot.com/2008/10/secretary-of-treasury-to-be-given-broad.html
Why on earth would we do these things? I don’t know, but everyone from Senator Obama to Senator McCain say it is absolutely vital that we do this, and do it NOW.
I’ll tell you what we really need; we need an energy policy that diverts the flow of the 100s of billions of dollars we send each year to oil rich countries and instead, returns it to our shores, where it can be used to rebuild the manufacturing and infrastructure of this country. But we won’t have the funds to do this unless we first develop our own sources of energy. Then each and every year, those $100s of billions that we don't send to despots and tyrants all over the world will be put to use here, in America. Once we have the power and electrical transmission systems on line, we can transition from oil based automobiles to electrics, which we have simultaneously developed with R&D funds provided to companies right here in the USA. We will have to expand and upgrade our electrical transmission system. We can then use any funds surpluses to alleviate the deficit and we can sell the technology we have developed to others all over the world.
We can become leaders in this 21st century endeavor. Washington is beginning to get the word; today for the first time I heard Senator Obama talk about improved electrical transmission system as part of infrastructure improvements, while defending the “bailout” bill before the Senate. However, Washington has a penchant for moving slowly on most issues.
This is not "new" news. But our politicians have ignored most of this for over 30 years. One must ask, why would they do that? Maybe this problem is simply too complex for them to understand, just like the financial system and markets of this country.
It is vitally important that each and every American get on board and press congress, the Senate and our President, whoever he may be, to make this a national priority of the greatest urgency. This is not something to do tomorrow. It is something that must occur today. This transcends party politics and many of the issues that our politicians use to maintain their status quo.
We can build a better future. Politicians have been talking about a “National Energy Policy” for over 30 years and have done absolutely nothing. NOTHING! There is only one way and that is for us, the citizenry to take back our government from the politicians. We are the owners. We are the taxpayers. It is our country, not theirs. They are but civil servants elected to do our bidding. It is time we began treating them as such and acting like the owners we are. TAKE BACK AMERICA FROM WASHINGTON – NOW!
It is our choice and it is our opportunity. We can continue to support politicians and their failed or non-existent policies or begin looking beyond the hollow issues our politicians use to maintain their status quo. We can live in the past, or we can choose our future. These are exciting times we live in, and to use that often quoted phrase “a crisis is a dangerous opportunity”. Let us not waste it. This election, there is only one platform to vote for and that is for the candidates who have made energy transformation of this country THE priority.
What do YOU think and what are YOU going to do about this?
I got a letter from Al Gore yesterday. OK, so it wasn’t really a letter prepared for me; it was a form letter sent to me because I am on the MoveOn.org mailing list. In many respects, it was similar to many emails and letters I have received during the past 10 years. This particular letter was written on behalf of a group called the DSCC.
The DSCC's purpose is a variation on the familiar theme of “take back America”. This time, they want me to send a donation to assist them in building a filibuster proof Senate with at least 60 Senators from the Democratic party.
I find it amazing that these people want me to join millions of Americans to take America and hand it to them on a gold platter! What they are essentially telling me is "Take back America from the Republicans and give it to us. We'll take care of it and of you."
I have been voting for about 40 years and I am absolutely convinced that none of these people is going to take care of me. Their promises keep getting greater and the debt keeps getting larger. Now it is over $10 Trillion and growing. After multiple Democratic and Republican governments we have no energy plan and we have no funds in the SS trust fund (only IOUs which our descendants will have to pay back). So much for the good life!
I have had enough!
The only way we will take back America is if WE THE PEOPLE take it for ourselves.If you have any doubts about who REALLY owns this country, then the events of the past few weeks should have been a “wake up call”. I am referring to the bill before the congress, HR3997 Emergency Economic Stabilization Act of 2008 and the senate version which some cynically call the “No Banker Left Behind” bailout.
If you have been watching the deliberations in the House and the Senate, you should have noticed a strange thing. While the politicians continually rail either for or against it, it is generally described as something that is vital and that “we must have”. But no one can actually say exactly why we must have this specific piece of legislation. I do understand the issues of credit markets seizing, etc. However, why do we need a bill with the specific tenants of this one, such as authorizing our government to use nearly $1 Trillion of taxpayer dollars to purchase distressed assets, including those of “foreign authorities and central banks” at prices which the government has already stated will be “above market value” and therefore just about guaranteed to lose money for the taxpayer? I know this is included in the legislation because I read HR3997, and Secretary Paulson has made testimony to the fact regarding the prices that will be paid. I suggest you go to this link and you will be given a summary of the first 32 pages of the bill and a link to download it:
http://foreverthecynic.blogspot.com/2008/09/full-text-of-hr-3997-emergency-economic.html
The bill gives the Secretary of the Treasury broad powers and has a mechanism to reward the same firms that got us into this mess. Such firms will be hired to manage the money, for a fee:
http://foreverthecynic.blogspot.com/2008/10/secretary-of-treasury-to-be-given-broad.html
Why on earth would we do these things? I don’t know, but everyone from Senator Obama to Senator McCain say it is absolutely vital that we do this, and do it NOW.
I’ll tell you what we really need; we need an energy policy that diverts the flow of the 100s of billions of dollars we send each year to oil rich countries and instead, returns it to our shores, where it can be used to rebuild the manufacturing and infrastructure of this country. But we won’t have the funds to do this unless we first develop our own sources of energy. Then each and every year, those $100s of billions that we don't send to despots and tyrants all over the world will be put to use here, in America. Once we have the power and electrical transmission systems on line, we can transition from oil based automobiles to electrics, which we have simultaneously developed with R&D funds provided to companies right here in the USA. We will have to expand and upgrade our electrical transmission system. We can then use any funds surpluses to alleviate the deficit and we can sell the technology we have developed to others all over the world.
We can become leaders in this 21st century endeavor. Washington is beginning to get the word; today for the first time I heard Senator Obama talk about improved electrical transmission system as part of infrastructure improvements, while defending the “bailout” bill before the Senate. However, Washington has a penchant for moving slowly on most issues.
This is not "new" news. But our politicians have ignored most of this for over 30 years. One must ask, why would they do that? Maybe this problem is simply too complex for them to understand, just like the financial system and markets of this country.
It is vitally important that each and every American get on board and press congress, the Senate and our President, whoever he may be, to make this a national priority of the greatest urgency. This is not something to do tomorrow. It is something that must occur today. This transcends party politics and many of the issues that our politicians use to maintain their status quo.
We can build a better future. Politicians have been talking about a “National Energy Policy” for over 30 years and have done absolutely nothing. NOTHING! There is only one way and that is for us, the citizenry to take back our government from the politicians. We are the owners. We are the taxpayers. It is our country, not theirs. They are but civil servants elected to do our bidding. It is time we began treating them as such and acting like the owners we are. TAKE BACK AMERICA FROM WASHINGTON – NOW!
It is our choice and it is our opportunity. We can continue to support politicians and their failed or non-existent policies or begin looking beyond the hollow issues our politicians use to maintain their status quo. We can live in the past, or we can choose our future. These are exciting times we live in, and to use that often quoted phrase “a crisis is a dangerous opportunity”. Let us not waste it. This election, there is only one platform to vote for and that is for the candidates who have made energy transformation of this country THE priority.
What do YOU think and what are YOU going to do about this?
A letter to our Senators sent today re: $700B Bailout
This is the text of emails sent today to our US Senators and a version was also sent to our Representative.
"My spouse and I am opposed to the Federal bailout of Wall Street, HR3997 and the Senate version. I believe the plans are seriously flawed.
I have read the House version and first, I do not think taxpayer funds should be allocated for the purpose of purchasing the assets of “any” financial institution, and specifically “foreign authorities and central banks.”
Second, I do not think that funds should be used for the purpose of hiring firms to help manage the assets of companies the government basically nationalizes. This has the potential of providing federal funds to the firms that contributed to, profited from or participated in the failure.
Finally, I think the primary purpose of the plan should be to address the problems of the taxpayers who are being asked to pay for this plan. I do understand there is more than enough blame to go around, and that many people were stupid or at the very least ignorant, and possibly millions participated in some form of fraud. However, this is a reward to the people who promoted and profited from this situation.
We are homeowners who purchased below our means and are practicing a philosophy of living below our means. We are saving for our retirement and have invested in bank funds such as CDs and we also have 401(k), 403(b) and Roth-IRAs which we have used to invest in American companies. We are feeling the pain of the current financial situation and while I am “entitled” to retire with social security benefits, I am in fact working and paying taxes. Frankly, my financial future is in jeopardy.
We are registered voters and my spouse and I will be thinking long and hard about the forthcoming election and we will be voting our conscience in this matter. "
"My spouse and I am opposed to the Federal bailout of Wall Street, HR3997 and the Senate version. I believe the plans are seriously flawed.
I have read the House version and first, I do not think taxpayer funds should be allocated for the purpose of purchasing the assets of “any” financial institution, and specifically “foreign authorities and central banks.”
Second, I do not think that funds should be used for the purpose of hiring firms to help manage the assets of companies the government basically nationalizes. This has the potential of providing federal funds to the firms that contributed to, profited from or participated in the failure.
Finally, I think the primary purpose of the plan should be to address the problems of the taxpayers who are being asked to pay for this plan. I do understand there is more than enough blame to go around, and that many people were stupid or at the very least ignorant, and possibly millions participated in some form of fraud. However, this is a reward to the people who promoted and profited from this situation.
We are homeowners who purchased below our means and are practicing a philosophy of living below our means. We are saving for our retirement and have invested in bank funds such as CDs and we also have 401(k), 403(b) and Roth-IRAs which we have used to invest in American companies. We are feeling the pain of the current financial situation and while I am “entitled” to retire with social security benefits, I am in fact working and paying taxes. Frankly, my financial future is in jeopardy.
We are registered voters and my spouse and I will be thinking long and hard about the forthcoming election and we will be voting our conscience in this matter. "
Tuesday, September 30, 2008
Why the Bailout Proposal Failed
Watch these two videos and you get a clear picture of why the bailout proposal which is officially titled "HR3997 Emergency Economic Stabilization Act of 2008" failed to pass the house on September 29, 2008:
http://www.youtube.com/watch?v=mbD62gNi9WE
http://www.youtube.com/watch?v=S27yitK32ds
http://www.youtube.com/watch?v=mbD62gNi9WE
http://www.youtube.com/watch?v=S27yitK32ds
I'm not convinced!
The Fed and the Treasury insist that the current solution, that is to say, the bailout that failed, "is the only solution". Furthermore, both Bernake and Paulson have thrown $100s of Billions at this problem. How do we know that the current proposal will work? How do we know that the $700B will be enough? What happens if it isn't?
I am not convinced. Here is the summary of an alternative proposed by Karl Denninger on his website.
http://market-ticker.denninger.net/archives/593-CONGRESS-STOP-AND-THINK!.html
(Also see http://stopthehousingbailout.com/)
"The solution is simple, it is elegant, and it will work.
I am not convinced. Here is the summary of an alternative proposed by Karl Denninger on his website.
http://market-ticker.denninger.net/archives/593-CONGRESS-STOP-AND-THINK!.html
(Also see http://stopthehousingbailout.com/)
"The solution is simple, it is elegant, and it will work.
- Force all off-balance sheet "assets" back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Do it now.
- Force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy.
- Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly.
Once 1-3 are put in place then send in the OTS and OCC examiners and look at every financial institution in the United States. All who are insolvent and unable to raise private capital immediately are forced through receivership where the debt is converted to equity and existing equity is wiped out. With the CDS monster caged the systemic risk is removed, the bondholders provide the cushion for recapitalization (as it should be) and the restructured firm emerges with no debt while the former bondholders are now the owners (of the equity) in the resulting firm.
With a clean balance sheet the restructured firms remain in business and open the next morning able to raise and attract capital. "
Monday, September 29, 2008
"No Banker Left Behind" Bailout Fails
Just saw the news that the house voted down the $700B bailout plan "HR3997 Emergency Economic Stabilization Act of 2008".
Obviously, the electorate overwhelmed the Wall Street special interest groups.
Now it will get interesting!
Maybe we need a crises in our energy infrastructure and we'll finally get the electorate off their collective butts and stop taking what their local politician says for granted. What's next? We could actually get an energy program in this country and a real, viable, forward looking energy plan for the 21st century!
Obviously, the electorate overwhelmed the Wall Street special interest groups.
Now it will get interesting!
Maybe we need a crises in our energy infrastructure and we'll finally get the electorate off their collective butts and stop taking what their local politician says for granted. What's next? We could actually get an energy program in this country and a real, viable, forward looking energy plan for the 21st century!
It Started with the Rating Agencies
As for the current financial meltdown, there is more than enough blame to go around. There is no doubt that Fannie and Freddie Mac contributed to the problem by a lowering of standards, and that the Investment Bankers on Wall Street created the mess. But there is one fact about this which I think is a "smoking gun".
This failure is marked with something that I understand has never happened before. For the first time in history, bonds rated AAA defaulted while they were rated AAA. So the ratings agencies, who supposedly filter this stuff so we, the banks and others know what we are buying, either turned a blind eye, fell asleep at the switch, or were grossly incompetent. Or maybe all three!
These agencies should be fined and the executives who ran them, driven to the poor house!
This failure is marked with something that I understand has never happened before. For the first time in history, bonds rated AAA defaulted while they were rated AAA. So the ratings agencies, who supposedly filter this stuff so we, the banks and others know what we are buying, either turned a blind eye, fell asleep at the switch, or were grossly incompetent. Or maybe all three!
These agencies should be fined and the executives who ran them, driven to the poor house!
A Note to My Congressmen and Senators on the $700B "Bailout"
I mailed this note to my Congressment and Senators; unfortunately for me, Sen. Obama has been on the campaign trail so I assume he is too busy to read my letter.
"I have listened to the experts and it is apparent there are many concerns about the $700 Billion financial rescue plan. This is my concern.
Any deal providing a Wall Street company with cash for debt where the debt is risky will always include significant warrant coverage (an equity-based interest in the company). That is because for a certain portion of these deals the debt will not be repaid. You have to get very good returns, from the warrants, on the ones which pay off to make up for the ones which do not. Secretary Paulson, a top Wall Street guy, knows this like the back of his hand.
If we, as taxpayers, do not get "warrant coverage" from the financial institutions for taking over poor quality debt of very uncertain value, the Bailout proposal is in my opinion a scam on the taxpayer.
This should not and needs not be a transfer of wealth from the American taxpayer to the stock and bondholders of troubled financial institutions, but something that creates a financial system "timeout" and has the potential to cost the taxpayer very little."
"I have listened to the experts and it is apparent there are many concerns about the $700 Billion financial rescue plan. This is my concern.
Any deal providing a Wall Street company with cash for debt where the debt is risky will always include significant warrant coverage (an equity-based interest in the company). That is because for a certain portion of these deals the debt will not be repaid. You have to get very good returns, from the warrants, on the ones which pay off to make up for the ones which do not. Secretary Paulson, a top Wall Street guy, knows this like the back of his hand.
If we, as taxpayers, do not get "warrant coverage" from the financial institutions for taking over poor quality debt of very uncertain value, the Bailout proposal is in my opinion a scam on the taxpayer.
This should not and needs not be a transfer of wealth from the American taxpayer to the stock and bondholders of troubled financial institutions, but something that creates a financial system "timeout" and has the potential to cost the taxpayer very little."
Monday, September 22, 2008
The End of the "Service Economy" Experiment
Today the Government pressed hard for a $700 Billion bailout of Wall Street, that’s about $2300 for each man, woman and child in the USA. The Democrats, not to be outdone, pressed for their own bailouts for “Mainstreet”.
Meanwhile, it was reported in the WSJ on Thursday, September 23 that "Thousands of community banks, worried about the mounting volume of bad construction and land loans, are clamoring for a piece of the government's proposed $700 billion bailout plan."
http://online.wsj.com/article/SB122212518500765089.html
I don't think “Mainstreet” wants or needs a bailout. The politicians intend the “Mainstreet” bail out for those wall street wannabes who thought they would make a fast buck buying real estate and flipping it and then got caught with a ratcheting mortgage when the bottom dropped out. Or it’s for those other mini-wall streeters who thought they were entitled to a home at someone else’s expense.
Frankly, I would think that the average American would be insulted to be put into the pile with the likes of these people. So here’s a message to those in Congress: don’t insult me by telling me you are fighting to get me a piece of the bailout pie.
However, this is all quibbling, as I believe what we are seeing here is not the end of Capitalism, per se, but the end of that great political experiment called “the service economy”. That economy, as you will recall, was to be based on financial services, etc. and, for a short time, people did move from manufacturing to that industry. Manufacturing declined from 25 to 13% of gross domestic product and financial services increased from 11 to 21%. While this was going on, the politicians “sympathized” with the people in the rust belt, like Ohio, while at the same time taking $millions in donations from the financial services industry.
Note: For a list of donors for the Obama or McCain campaigns, or your Congressmen and Senators, go to this website: http://www.opensecrets.org/
So when I listen to the “crocodile tears” about the demise of “Main Street” I also check the list of donors. How disingenuous our politicians are!
So where do we go from here? Well, first, don’t vote for McCain or Obama. If you think they are going to be able or willing to correct this problem, you are wrong. McCain is a product of the system that created it, and Obama is the hand picked Democratic candidate with Senator Joe Biden, Jr. as his running mate. Senator Biden is also a product of the system that created this mess.
Neither of the Democrats is a reformer and probably cannot be counted on to address the myriad problems facing the United States as a result of this long term problem. Senator McCain is running as a reformer, but is really a question mark and probably cannot be counted on to address the problems.
If you think I am incorrect in this, then ask yourself this question: Where is our National Energy Policy? If your response to that question is the thought “What energy policy?” then you have realized the truth. These people are clueless.
Kevin Phillips, in his book “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism” sums up the problem we are facing this way:
"My summation is that American financial capitalism, at a pivotal period in the nation's history, cavalierly ventured a multiple gamble: first, financializing a hitherto more diversified U.S. economy; second, using massive quantities of debt and leverage to do so; third, following up a stock market bubble with an even larger housing and mortgage credit bubble; fourth, roughly quadrupling U.S. credit-market debt between 1987 and 2007, a scale of excess that historically unwinds; and fifth, consummating these events with a mixed fireworks of dishonesty, incompetence and quantitative negligence."
Read that again a few times and let it sink in. In particular, the end of the last sentence. If you think this is about the Bush administration, you are only partially correct. Mr. Phillips has few kind words for the Democrats. I suggest you buy the book and read it. And vote for someone else besides a Democrat or a Republican. If you can spare a few of your precious minutes, write a letter to your congressmen and Senators and give them an ear full.
So here we are, with a failed political experiment, no energy policy, deficits and future deficits so great as to boggle the imagination, and 78 million baby boomers standing there with their hands out expecting a social security check. Can you spell “bankrupt”?
Meanwhile, it was reported in the WSJ on Thursday, September 23 that "Thousands of community banks, worried about the mounting volume of bad construction and land loans, are clamoring for a piece of the government's proposed $700 billion bailout plan."
http://online.wsj.com/article/SB122212518500765089.html
I don't think “Mainstreet” wants or needs a bailout. The politicians intend the “Mainstreet” bail out for those wall street wannabes who thought they would make a fast buck buying real estate and flipping it and then got caught with a ratcheting mortgage when the bottom dropped out. Or it’s for those other mini-wall streeters who thought they were entitled to a home at someone else’s expense.
Frankly, I would think that the average American would be insulted to be put into the pile with the likes of these people. So here’s a message to those in Congress: don’t insult me by telling me you are fighting to get me a piece of the bailout pie.
However, this is all quibbling, as I believe what we are seeing here is not the end of Capitalism, per se, but the end of that great political experiment called “the service economy”. That economy, as you will recall, was to be based on financial services, etc. and, for a short time, people did move from manufacturing to that industry. Manufacturing declined from 25 to 13% of gross domestic product and financial services increased from 11 to 21%. While this was going on, the politicians “sympathized” with the people in the rust belt, like Ohio, while at the same time taking $millions in donations from the financial services industry.
Note: For a list of donors for the Obama or McCain campaigns, or your Congressmen and Senators, go to this website: http://www.opensecrets.org/
So when I listen to the “crocodile tears” about the demise of “Main Street” I also check the list of donors. How disingenuous our politicians are!
So where do we go from here? Well, first, don’t vote for McCain or Obama. If you think they are going to be able or willing to correct this problem, you are wrong. McCain is a product of the system that created it, and Obama is the hand picked Democratic candidate with Senator Joe Biden, Jr. as his running mate. Senator Biden is also a product of the system that created this mess.
Neither of the Democrats is a reformer and probably cannot be counted on to address the myriad problems facing the United States as a result of this long term problem. Senator McCain is running as a reformer, but is really a question mark and probably cannot be counted on to address the problems.
If you think I am incorrect in this, then ask yourself this question: Where is our National Energy Policy? If your response to that question is the thought “What energy policy?” then you have realized the truth. These people are clueless.
Kevin Phillips, in his book “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism” sums up the problem we are facing this way:
"My summation is that American financial capitalism, at a pivotal period in the nation's history, cavalierly ventured a multiple gamble: first, financializing a hitherto more diversified U.S. economy; second, using massive quantities of debt and leverage to do so; third, following up a stock market bubble with an even larger housing and mortgage credit bubble; fourth, roughly quadrupling U.S. credit-market debt between 1987 and 2007, a scale of excess that historically unwinds; and fifth, consummating these events with a mixed fireworks of dishonesty, incompetence and quantitative negligence."
Read that again a few times and let it sink in. In particular, the end of the last sentence. If you think this is about the Bush administration, you are only partially correct. Mr. Phillips has few kind words for the Democrats. I suggest you buy the book and read it. And vote for someone else besides a Democrat or a Republican. If you can spare a few of your precious minutes, write a letter to your congressmen and Senators and give them an ear full.
So here we are, with a failed political experiment, no energy policy, deficits and future deficits so great as to boggle the imagination, and 78 million baby boomers standing there with their hands out expecting a social security check. Can you spell “bankrupt”?
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