Friday, December 12, 2008
I Tried
I tried to post yesterday and only got out a couple of botched titles. Power still out here, so don't look for much before Monday.
We Interrupt This Broadcast - For Freezing Rain
Interesting day here in New Hampshire. Freezing rain all night pretty much wiped out the electricity for the entire state. I have some charge on my computer, but the phones and internet are out too. I am currently connected through a phone card, but it has taken all day to get a connection. Apparently, even the cell towers are down. I am not saying it is bad, but a back hoe had to clear our street of fallen trees. Oh well, at least I got the day off to spend at home with no electricity or computer.
Given the week signal I have I am not going to attempt to surf and blog today. Hopefully things will recover tomorrow, though the radio said it could be several days. If that happens we may join some of our neighbors in some local hotels with power.
Given the week signal I have I am not going to attempt to surf and blog today. Hopefully things will recover tomorrow, though the radio said it could be several days. If that happens we may join some of our neighbors in some local hotels with power.
Thursday, December 11, 2008
Evening Edition
This is terrible. Wall Street bonuses are to go down 50% this year to the lowest level since, dear Lord say it isn't so, 2002. What will they do, oh what will they do. I am not meaning to sound cold here, but I am looking to emphasize the headine that Bloomberg chose for this article, i.e. noting the bonus reduction versus the job loss. I personally am amazed that Wall Street is having any bonus this year. I mean the markets are down a tad, don't you think?
The true meat of the article is that Wall Street expects to lose 170,000 jobs between July 2008 and December 2010. Last I checked, losing your job is a bit more depressing than having your bonus cut in half, but the headline news is still the bonus problem. Nitpicking I know, but tell that to the 170,000.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMPdmak0IjJQ&refer=home
30,000 Jobs Here, 30,000 There - Could Add Up
Bank of America has announced it plans to lay off between 30,000 and 35,000 employees over the next three years. Not a big surprise given the Merrill merger, the economy and the doo doo they have on their books. Good news is that it is smaller than the 52,000 announced by Citigroup. Expect more of same from their brethren.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aswiJZGC2Ca8&refer=home
Bad - It is very, very bad
If the auto industry does not get a bail, watch out. I continue to think that some Senators are playing hardball to get a better deal but wholly intend to give them some relief. There are hundreds of thousands and, with the knock on effect, perhaps even millions of jobs affected if the auto industry is allowed to fold. At a minimum, the government needs to either craft a non-bankruptcy bankruptcy or allow them to go into Chapter 11 with the goverment planning on providing the DIP financing. The companies are not about to get debtor in possession financing otherwise, so this would seem to be the minimum the government can do. This is a much better use of money than all the dollars they have thrown at the financial industry, yet it is really being dragged out.
Now you may start thinking that Ford, or perhaps moreso Toyota or other foreign car companies are a good bet if GM and Chrysler have to fold because some big competitors are gone. I am not saying no, but here are some other things to consider:
The true meat of the article is that Wall Street expects to lose 170,000 jobs between July 2008 and December 2010. Last I checked, losing your job is a bit more depressing than having your bonus cut in half, but the headline news is still the bonus problem. Nitpicking I know, but tell that to the 170,000.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMPdmak0IjJQ&refer=home
30,000 Jobs Here, 30,000 There - Could Add Up
Bank of America has announced it plans to lay off between 30,000 and 35,000 employees over the next three years. Not a big surprise given the Merrill merger, the economy and the doo doo they have on their books. Good news is that it is smaller than the 52,000 announced by Citigroup. Expect more of same from their brethren.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aswiJZGC2Ca8&refer=home
Bad - It is very, very bad
If the auto industry does not get a bail, watch out. I continue to think that some Senators are playing hardball to get a better deal but wholly intend to give them some relief. There are hundreds of thousands and, with the knock on effect, perhaps even millions of jobs affected if the auto industry is allowed to fold. At a minimum, the government needs to either craft a non-bankruptcy bankruptcy or allow them to go into Chapter 11 with the goverment planning on providing the DIP financing. The companies are not about to get debtor in possession financing otherwise, so this would seem to be the minimum the government can do. This is a much better use of money than all the dollars they have thrown at the financial industry, yet it is really being dragged out.
Now you may start thinking that Ford, or perhaps moreso Toyota or other foreign car companies are a good bet if GM and Chrysler have to fold because some big competitors are gone. I am not saying no, but here are some other things to consider:
- If the car companies are on the edge of the bankruptcy, their parts suppliers might just be there too. If they are there, the last thing they need is a couple of months of receivables tied up in auto company bankruptcies. I suspect some of these companies also supply other car manufacturers, so a bankruptcy by a parts manufacturer could disrupt a lot of car manufacturers.
- Those parts manufacturers not taken down by a GM and/or Chrysler bankruptcy may well insist on payment up front instead of after the fact from the remaining manufacturers. That certainly puts a crimp in the remaining car manufacturer's finances if it happens.
- Seriously I had a three, but while I wrote one and two I forgot three. It is really good and when I remember what it is I will be sure to let you know. Getting old is no fun - or at least not as much fun.
http://www.nakedcapitalism.com/2008/12/auto-rescue-bill-lacks-votes-to-pass.html
http://www.nakedcapitalism.com/2008/12/gm-hires-advisors-to-prepare-for.html
Admit Your Mistakes
I noted earlier today that gas prices are likely to go higher soon, in part because crude oil is up 16% this week. Well, this week's spike may lead to a temporary spike in gas prices, but I was thinking more long term. I gave one reason for my expectation, the OPEC meeting where they are expected to announce production cuts.
There are other reasons for an anticipated increase. For example, Russia, another leading oil producer, is considering joining OPEC, which may further coordinate supply quotas. Also, OPEC announced that their production was, for a change, in line with their existing quotas. The news that they were actually living within their quotas (most of them cheat) may have been taken as good news for those looking for higher oil prices, but, seriously, did they have any choice? I doubt that they decided to all of a sudden abide by their quotas. My suspicion is that they could not sell any more oil and had no choice other than to stay in quotas. Still, I expected earlier today that anitipated production cuts by OPEC would increase price. It pays to see the data.
I must recant my prediction as the data that I am now seeing tells me otherwise. I am a big fan of certain individuals and their opinions but I am even a bigger fan of facts, otherwise known as data. For example, adjustable rate mortgages (ARMs) are resetting a lot this quarter and that will continue at a high rate next year (Calculated Risks has nice charts showing this). Now 30 year fixed mortgage rates are down a lot so you might not think the resets will not be that bad, but a lot of ARMs are tied to the LIBOR and that is still fairly high. Translation, a boat load of loans will reset at higher rates next year barring a miracle and that will likely lead to another wave of foreclosures - barring a miracle. This is a fact worth knowing (and one key fact in my expectations). I like data. Reversion to mean is another data point (in various environments) that I like.
So getting some data on oil supply, demand and the like, is fantastic. And this has led to my mea culpa. The future is never certain, but from what I am reading here, in the medium term oil prices will stay low and perhaps go down further. For us, that is a good thing at least (at the most) in the medium term. Sure, I would like cheap gas for the rest of my life, but in time cheap oil will lead to distress in the Middle East, Russia, Venezuela and elsewhere. Some of these countries do not have very good crude and they cannot economically sell what they have at today's prices. They will eventually get desperate if oil prices stay where they are, and at least one of them has nuclear arms. So maybe - just maybe - we need to have oil prices go up a bit for global security/serenity. We too often forget the big picture and focus too narrowly. We are on a global stage and need to consider global impacts. Cheap oil is good and bad, just depends on your perspective.
http://www.platts.com/weblog/oilblog/2008/12/one_economists_dire_prediction_1.html?S=printer&
Folks, I have to end the night noting how incredible this day has been for me. First, last night Michael Panzner, a mentor of mine, quoted me on his blog and then today, Seeking Apha, another site I frequent, asked me to be a contributor to their site. These I consider honors from those I respect. Thanks for the support. But before I sleep, let me repeat my current motto - Hunker Down! The worst is yet to come. I truly mean that.
Lala Land
Yves at Naked Capitalism has a nice discussion on how financial institutions are moving another $610 billion of assets into the make-believe land of Level 3. That is where bad assets go when you send them to their room. Technically, it is suppose to be for assets the institutions cannot price using market price or pricing on comparable assets. Thus, they are allowed to price them using "unobservable" inputs. You know, the invisible kind from lala land. Yves does a good job of pointing out the games these institutions are probably playing, so I will not repeat that here.
Rather, let me focus your attention on another aspect of it that perhaps the financial institutions themselves are not considering; when you are playing games with your books and you know it and everyone else knows it, you are only adding to the sense of mistrust that is freezing the credit markets. "Credit" after all is derived from the Latin word for trust. No trust, no credit. Moreover, you are just kicking the can down the road. Eventually those bad assets will blow up and you will have to deal with that impact on your balance sheet. Putting them in Level 3 simply allows you to delay the day of reckoning. Why not go ahead and face the music now when everyone is already expecting your results to suck wind. The sooner we get this behind us the better.
Of course, that's easy for me to say.
http://www.nakedcapitalism.com/2008/12/quelle-surprise-banks-increase-mark-to.html
In the interest of full disclosure, my daughter calls her grandmother Lala. If you knew her grandmother, you would understand.
Making Some Progress
The attached Marketwatch piece has plenty of bad news for the third quarter, including a slight downward adjustment to the household net worth in the U.S. of $2.81 trillion. I hate it when that happens. Nonetheless, I am looking for silver linings here and the article has one. Despite the massive drop in net worth, Americans were able to reduce household debt for the first time ever recorded. Now I know this is more due to there being no new credit available than to us all voluntarily deciding to live within our means, but progress is progress even if it is forced upon us. As painful as this will be to the retail sector, we need to cut our debt, which means cutting consumption. We certainly are not going to be doing it by increasing our wages.
Obviously the government wants us to go out and spend and make everything look good. Retail sales will look good, store owners will look good and China factories will thank us, but nobody benefits in the long run by us living beyond our means. It is a new world coming, so get used to it. It would not be so painful had we let it happen sooner.
http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D
573,000
That's the number of weekly unemployment insurance claims being reported by the DOL. This number is continuing to rise and sadly will undoubtedly do so for some time to come. As I have noted before, high unemployment typically tends to hang around quite a while (months or even years) after a recession has ended, and this one has not ended, so this will be the situation for a long time to come.
http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D
You Knew It Would Not Last
One of the few things easing the pain lately has been low prices at the pumps. Gas is the cheapest it has been in years and OPEC doesn't like it one bit. Low demand at low price does not make a happy Middle East - or Russia or Venezuela. So it is not surprising that OPEC is expected to agree to a production cut at its December 17th meeting. That expectation is already driving the price of crude north again. Today nearly up to $49 a barrel, which is a week-to-date climb of 16%. Don't expect it to stop there. I suspect OPEC would like to see it at least in the $75-80 per barrel range. Of course they agree to cuts and then some of them cheat, but there will still be some reduction in output. The question then becomes whether other oil producing countries try to fill the production void. Perhaps, but for now don't expect the price at the pump to continue in the same direction it has for the past few months. Time to fill up the tank.
Rather, let me focus your attention on another aspect of it that perhaps the financial institutions themselves are not considering; when you are playing games with your books and you know it and everyone else knows it, you are only adding to the sense of mistrust that is freezing the credit markets. "Credit" after all is derived from the Latin word for trust. No trust, no credit. Moreover, you are just kicking the can down the road. Eventually those bad assets will blow up and you will have to deal with that impact on your balance sheet. Putting them in Level 3 simply allows you to delay the day of reckoning. Why not go ahead and face the music now when everyone is already expecting your results to suck wind. The sooner we get this behind us the better.
Of course, that's easy for me to say.
http://www.nakedcapitalism.com/2008/12/quelle-surprise-banks-increase-mark-to.html
In the interest of full disclosure, my daughter calls her grandmother Lala. If you knew her grandmother, you would understand.
Making Some Progress
The attached Marketwatch piece has plenty of bad news for the third quarter, including a slight downward adjustment to the household net worth in the U.S. of $2.81 trillion. I hate it when that happens. Nonetheless, I am looking for silver linings here and the article has one. Despite the massive drop in net worth, Americans were able to reduce household debt for the first time ever recorded. Now I know this is more due to there being no new credit available than to us all voluntarily deciding to live within our means, but progress is progress even if it is forced upon us. As painful as this will be to the retail sector, we need to cut our debt, which means cutting consumption. We certainly are not going to be doing it by increasing our wages.
Obviously the government wants us to go out and spend and make everything look good. Retail sales will look good, store owners will look good and China factories will thank us, but nobody benefits in the long run by us living beyond our means. It is a new world coming, so get used to it. It would not be so painful had we let it happen sooner.
http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D
573,000
That's the number of weekly unemployment insurance claims being reported by the DOL. This number is continuing to rise and sadly will undoubtedly do so for some time to come. As I have noted before, high unemployment typically tends to hang around quite a while (months or even years) after a recession has ended, and this one has not ended, so this will be the situation for a long time to come.
http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D
You Knew It Would Not Last
One of the few things easing the pain lately has been low prices at the pumps. Gas is the cheapest it has been in years and OPEC doesn't like it one bit. Low demand at low price does not make a happy Middle East - or Russia or Venezuela. So it is not surprising that OPEC is expected to agree to a production cut at its December 17th meeting. That expectation is already driving the price of crude north again. Today nearly up to $49 a barrel, which is a week-to-date climb of 16%. Don't expect it to stop there. I suspect OPEC would like to see it at least in the $75-80 per barrel range. Of course they agree to cuts and then some of them cheat, but there will still be some reduction in output. The question then becomes whether other oil producing countries try to fill the production void. Perhaps, but for now don't expect the price at the pump to continue in the same direction it has for the past few months. Time to fill up the tank.
Wednesday, December 10, 2008
Truly Humbled
I gave hommage to Michael Panzner and within a day he finds it and posts it on his site, one I follow religously. Thanks is all I can say. His posts are well worth the read and I am looking forward to reading his new book, When Giants Fall. His posts and his book, Financial Armageddon, have led me well this past year. When I told friends a few months back of his predictions, they were in a state of shock and asked for more information. I told them to read the book as Michael Panzner knows much better than I. And now Michael has a new book I intend to read. I just want to say thanks to Michael for the hat tip.
Evening Edition
Unethical Investing
There are a lot of views on this. Do you invest in companies that are hurting the environment, killing people (tobacco/alcohol), supporting child labor or suppliers in countries with poor labor safety standards - and so on and so on. Let's avoid for the moment the challenge in identifying these companies, much less the challenge in identifying mutual funds that invest in them. I know there are organizations that track this stuff, but who has the time to track the organizations that track them. Anyhow, with so many ways to make money out there I do generally tend to shy away from the sin profit. Nonetheless, during recessionary times, certain corporations that cater in vices do quite well, so you have to think about it. Here is a brief discussion on some dirty investments, if you are interested.
http://brontecapital.blogspot.com/2008/12/post-script-climate-change-from-left.html
You Are All Wet
A friend recently borrowed a big tarp I have to cover his campground as he was going on a weekend campout and they were calling for rain. It did rain and the tarp worked just as advertised. That may be the last TARP to work as advertised.
I am outraged that we have given so much money to someone who seemingly has no idea what to do with it and, most certainly, is not doing what he should. The right thing to do is withhold the rest until we can make sure it is spent (as in given away) wisely.
http://www.portfolio.com/views/blogs/market-movers/2008/12/10/finding-holes-in-the-tarp
Chart of the Day
Regression to mean is a common phrase, but do we truly understand it. Well, I borrow this definition of regression to mean from Wikipedia:
"Regression toward the mean[1][2] is a principle in statistics that states that if you take a pair of independent measurements from the same distribution, samples far from the mean on the first set will tend to be closer to the mean on the second set, and the farther from the mean on the first measurement, the stronger the effect. Regression to the mean relies on random variance affecting the measurement of any variable; this random variance will cause some samples to be extreme. On the second measurement, these samples will appear to regress because the random variance affecting the samples in the second measurement is independent of the random variance affecting the first. Thus, regression to the mean is a mathematical inevitability: any measurement of any variable that is affected by random variance must show regression to the mean."
Now that really clears it up - correct? Well, the way that I understand it is that some things maintain a relative correlation over time. Some fundamental changes can alter their correlation but overall they stay within a range of correlation. Notably, the mean or average is not the usual correlation. Most of the time the correlation is off the mean in one direction or the other. And sometimes the correlation stretches to be in extreme positions away from the mean - standard deviations away. This is all statistics and not my field, so ask you friendly neighborhood actuary or statistician for a better explanation. But let me try to explain a bit better with an example.
Median housing prices typically bear a fairly constant relationship to median incomes. This makes sense because your income determines what you can afford on a mortgage. Over the past few years when credit got stupidly easy to get, the median price of housing went far above the mean in terms of its correlation to the median income. This was because lenders did not care if you could afford what you were purchasing and purchasers, expecting prices to continue to skyrocket, did not care if they could afford payments. This came to an end and housing prices are reverting to mean.
There are an unlimited number of correlations for which this is used. House prices to rent is another common house price correlation. Why buy when you can rent the same type place much cheaper?
Regression to mean even might work for the stock market. With that in mind, the following, with a nice chart, is worth consideration. Keep in mind that when you go way over mean and begin regression, overshooting to below mean is not at all uncommon. On the market, we are still a smidge above mean and shooting below is probably more likely than not, but what do I know.
http://www.ritholtz.com/blog/2008/12/regression-to-the-mean/
Let It All Fall
Some of the blogs I follow are in favor of the government stepping back and letting the $%# hit the fan. It wouldbe an interesting exercise but not politically palatable, so do not expect it any time soon. I am not saying I am yet there, but certainly I think there are areas where government "support" is more a problem than a cure. Still, hopefully those in charge start to give serious thought to (a) whether we are better off without government intervention and (b) what are the unintended consequences of government support AND lack of government support. In other words, a bunch of geeks have to sit down and think through the alternatives. Kinda like the military war game exercises they constantly play to see what happens. Maybe the Fed and Treasury need to borrow a page from the military playbook and start running some simulations. Problem being that the shadow banking system is hiding all the critical inputs from sight, so we are always guessing at what "might" happen.
Input . . . Need Input
One of the robot movies featured a robot who needed input. Well, I would appreciate input too. Mind you, maintaining this blog in the evenings and morning when I am not working means I have a lot to look at in short order and the blogs and news sources I follow are so full of input I can only scratch the surface of what I want to read, much less what I want to learn, but if I am going to blog I want to have this be interactive. I don't have time to look at it all and appreciate your input and you giving me tips and links to important points. Please, focus here as I have to focus, but I do truly appreciate your input.
There are a lot of views on this. Do you invest in companies that are hurting the environment, killing people (tobacco/alcohol), supporting child labor or suppliers in countries with poor labor safety standards - and so on and so on. Let's avoid for the moment the challenge in identifying these companies, much less the challenge in identifying mutual funds that invest in them. I know there are organizations that track this stuff, but who has the time to track the organizations that track them. Anyhow, with so many ways to make money out there I do generally tend to shy away from the sin profit. Nonetheless, during recessionary times, certain corporations that cater in vices do quite well, so you have to think about it. Here is a brief discussion on some dirty investments, if you are interested.
http://brontecapital.blogspot.com/2008/12/post-script-climate-change-from-left.html
You Are All Wet
A friend recently borrowed a big tarp I have to cover his campground as he was going on a weekend campout and they were calling for rain. It did rain and the tarp worked just as advertised. That may be the last TARP to work as advertised.
I am outraged that we have given so much money to someone who seemingly has no idea what to do with it and, most certainly, is not doing what he should. The right thing to do is withhold the rest until we can make sure it is spent (as in given away) wisely.
http://www.portfolio.com/views/blogs/market-movers/2008/12/10/finding-holes-in-the-tarp
Chart of the Day
Regression to mean is a common phrase, but do we truly understand it. Well, I borrow this definition of regression to mean from Wikipedia:
"Regression toward the mean[1][2] is a principle in statistics that states that if you take a pair of independent measurements from the same distribution, samples far from the mean on the first set will tend to be closer to the mean on the second set, and the farther from the mean on the first measurement, the stronger the effect. Regression to the mean relies on random variance affecting the measurement of any variable; this random variance will cause some samples to be extreme. On the second measurement, these samples will appear to regress because the random variance affecting the samples in the second measurement is independent of the random variance affecting the first. Thus, regression to the mean is a mathematical inevitability: any measurement of any variable that is affected by random variance must show regression to the mean."
Now that really clears it up - correct? Well, the way that I understand it is that some things maintain a relative correlation over time. Some fundamental changes can alter their correlation but overall they stay within a range of correlation. Notably, the mean or average is not the usual correlation. Most of the time the correlation is off the mean in one direction or the other. And sometimes the correlation stretches to be in extreme positions away from the mean - standard deviations away. This is all statistics and not my field, so ask you friendly neighborhood actuary or statistician for a better explanation. But let me try to explain a bit better with an example.
Median housing prices typically bear a fairly constant relationship to median incomes. This makes sense because your income determines what you can afford on a mortgage. Over the past few years when credit got stupidly easy to get, the median price of housing went far above the mean in terms of its correlation to the median income. This was because lenders did not care if you could afford what you were purchasing and purchasers, expecting prices to continue to skyrocket, did not care if they could afford payments. This came to an end and housing prices are reverting to mean.
There are an unlimited number of correlations for which this is used. House prices to rent is another common house price correlation. Why buy when you can rent the same type place much cheaper?
Regression to mean even might work for the stock market. With that in mind, the following, with a nice chart, is worth consideration. Keep in mind that when you go way over mean and begin regression, overshooting to below mean is not at all uncommon. On the market, we are still a smidge above mean and shooting below is probably more likely than not, but what do I know.
http://www.ritholtz.com/blog/2008/12/regression-to-the-mean/
Let It All Fall
Some of the blogs I follow are in favor of the government stepping back and letting the $%# hit the fan. It wouldbe an interesting exercise but not politically palatable, so do not expect it any time soon. I am not saying I am yet there, but certainly I think there are areas where government "support" is more a problem than a cure. Still, hopefully those in charge start to give serious thought to (a) whether we are better off without government intervention and (b) what are the unintended consequences of government support AND lack of government support. In other words, a bunch of geeks have to sit down and think through the alternatives. Kinda like the military war game exercises they constantly play to see what happens. Maybe the Fed and Treasury need to borrow a page from the military playbook and start running some simulations. Problem being that the shadow banking system is hiding all the critical inputs from sight, so we are always guessing at what "might" happen.
Input . . . Need Input
One of the robot movies featured a robot who needed input. Well, I would appreciate input too. Mind you, maintaining this blog in the evenings and morning when I am not working means I have a lot to look at in short order and the blogs and news sources I follow are so full of input I can only scratch the surface of what I want to read, much less what I want to learn, but if I am going to blog I want to have this be interactive. I don't have time to look at it all and appreciate your input and you giving me tips and links to important points. Please, focus here as I have to focus, but I do truly appreciate your input.
You Say Inflation I Say Deflation
Few things seem to be dividing economists more these days than the debate over whether inflation or deflation is in our future. I think in the near to medium term, i.e. two to three years at least, we are looking at deflation. The bottom has fallen out of consumer spending and lack of demand leads to falling prices. Job losses, cut backs in hours and people in fear of losing their jobs all lead to wage pressures, which also leads to deflation. Oil is down, commodities are down, international trade is down and the Fed has the interest rate at a point where it is effectively negative (so it has little rate change it can do to fight deflation). And demand is down and dropping on a world wide basis, which will lead to continuing declines. So I am with Nouriel Roubini on this; look for deflation to be around for a while.
http://www.creditwritedowns.com/2008/12/roubini-how-to-avoid-the-horrors-of-‘stag-deflation’.html
Those calling for inflation recognize over the very short term we may have deflation but they point out that as the economy rebounds, the unprecedented dollars the government has thrown at us will start to get spent and inflation will ensue. They also remind us that inflation sets in after every recession ends.
http://www.moneymorning.com/2008/12/03/bailout-programs/
http://www.moneymorning.com/2008/12/08/inflation-not-deflation/
So be it. The distinction here may in part be one of timing. The moneymorning folks see the recession ending and the economy rebounding next Spring. They base this in part on the average recession since 1900 lasting 14.4 months, and we are over 12 months into this one. (I take it that their 14.4 includes the great depression, which was over 40 months, so average without that is likely a good bit lower). My problem with their thinking is that this is by no means an average recession. I also agree with Roubini that we will be lucky to see it end by 2010. We may see a nice bear rally in the market before then, but that will be followed by new lows, I expect.
So if you think the recession will linger for some time, you should expect deflation to linger for some time, despite helicopter Ben trying to avoid it. If you expect the recession to end soon, then inflation expectations are more rational, but by no means guaranteed. As the following article points out, the Fed can throw all the money at this it wants, but it cannot make banks lend it or consumers spend it. If people use it to pay off debt and save, which they will, then that is deflationary. And if financial institutions hold on to what they are given and don't lend it, that is deflationary too. Right now, that is what is happening and we could continue on that course for years to come.
http://www.forbes.com/financialadvisernetwork/2008/12/09/deflation-lending-saving-fan-ii-in_ags_1209soapbox_inl.html
Q Tip
Take a tip from Tobin's Q ratio and run for the hills, but perhaps not just yet. James Tobin, a Nobel Prize-winning economist, developed the Q ratio in 1969. It compares company market values to the relative cost of replacing their constituent parts. It is at .7 right now, which is not bad, but according to Russell Napier, each of the four biggest bear markets the past 80 years ended with the ratio at .3 or lower, which he expects this time around. Now he does not expect it to happen until 2014, so you might have time to ponder his prediction, but he does expect it.
So what does a Q ratio of .3 mean to stock values? It means the S&P dropping to 400, that's what. That is around 55% off where it is presently. I personally don't think we will get there, but who knows. If we do, it could be an incredible investing opportunity when it happens - assuming by then we are not all living in boxes next to railroad tracks eating rat-on-a-stick.
http://www.nakedcapitalism.com/2008/12/tobins-q-ratio-says-equity-bottom-much.html
Question for those smarter than me or for those with access to say a professor smarter than me. If I am reading it right, the above article concludes noting that the dollar will eventually devalue and that bear markets end when the market prices in deflation. I may not be reading it right. I thought that devaluation of the dollar would lead to inflation as the price of imports, oil commodities and the like would go up in U.S. dollars. Domestic goods would remain reasonably priced but anything imported - and we import a lot - would escalate in price. Any hoot, maybe I am just reading it wrong. Or maybe I am wrong on the impact of devaluation of the dollar.
Survey Says!
I would try to summarize the following from Bloomberg but there is too much in it to summarize. You might as well read it yourself. Caution - not for the faint hearted.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ado8P..GCtC4&refer=home
Let Them Fall
Here is a novel concept. In order to get housing stability, we need to let the prices fall. Gee, what a novel concept. Remember that old reverting to mean thingy. In the long run there are only two ways for housing to become affordable in a sustainable fashion. One, the prices drop to where they are affordable. Two, people on average see their wages go up to where they can afford the higher prices. Okay, I will let you pick which one is going to happen first. Go ahead . . . take your time . . . I can wait. If you picked number one, you have been paying attention.
Now the government does not like number one and it knows right now number two is pretty much impossible (though the infrastructure spending may help a bit), so it is looking for artificial - and thus not sustainable - ways to make housing more affordable. Freddie and Fannie are two ways, pushing for loan mods another, and throwing money at financial instutions yet a third. Well Freddie and Fannie are just becoming bigger messes (more on this below), financial institutions are not about to relax their lending standards any time soon, and the average Joe the plumber on the street knows not to buy until we hit bottom. So the sooner we let price declines work their magic, the better. Dean Baker is one of the economists that "gets it," as does his organization CEPR. Too bad the government is hell bent on making this problem last longer.
http://rismedia.com/wp/2008-12-03/house-prices-must-return-to-trend-levels-to-stabilize-market/
I promised more on Freddie and Fannie becoming more of a mess, well here it is. They are now considering doing refinancings without - I repeat without - requiring an appraisal. This can add a bunch of crap to their books (as in our books since we own them now). The only promising thing is that someone refinancing a house they believe is under water is attempting to keep it and make ends meet instead of walking away. It does not mean they will not go into foreclosure or later walk away, but the walk away inclined crowd is not likely to seek refinancing. Still adding to the garbage on the Freddie and Fanni books. Next step they are back to no doc liar loans with no credit check. I mean hey, these people already got their original loan so what is the problem in refinancing that loan without any underwriting whatsoever?
http://www.bloomberg.com/apps/news?pid=20601087&sid=amYW0UdC2LdY
In the interest of full disclosure, my sister works for Fannie Mae and my niece would be one of the first in line for the new no appraisal loan. She has a loan at over 14% and would love to refinance, but she is underwater on her mortgage. But Fannie would have to waive the credit checks too, as she has killed her credit rating trying to keep up with the mortgage payments, as in not keeping up with her mortgage payments.
http://www.creditwritedowns.com/2008/12/roubini-how-to-avoid-the-horrors-of-‘stag-deflation’.html
Those calling for inflation recognize over the very short term we may have deflation but they point out that as the economy rebounds, the unprecedented dollars the government has thrown at us will start to get spent and inflation will ensue. They also remind us that inflation sets in after every recession ends.
http://www.moneymorning.com/2008/12/03/bailout-programs/
http://www.moneymorning.com/2008/12/08/inflation-not-deflation/
So be it. The distinction here may in part be one of timing. The moneymorning folks see the recession ending and the economy rebounding next Spring. They base this in part on the average recession since 1900 lasting 14.4 months, and we are over 12 months into this one. (I take it that their 14.4 includes the great depression, which was over 40 months, so average without that is likely a good bit lower). My problem with their thinking is that this is by no means an average recession. I also agree with Roubini that we will be lucky to see it end by 2010. We may see a nice bear rally in the market before then, but that will be followed by new lows, I expect.
So if you think the recession will linger for some time, you should expect deflation to linger for some time, despite helicopter Ben trying to avoid it. If you expect the recession to end soon, then inflation expectations are more rational, but by no means guaranteed. As the following article points out, the Fed can throw all the money at this it wants, but it cannot make banks lend it or consumers spend it. If people use it to pay off debt and save, which they will, then that is deflationary. And if financial institutions hold on to what they are given and don't lend it, that is deflationary too. Right now, that is what is happening and we could continue on that course for years to come.
http://www.forbes.com/financialadvisernetwork/2008/12/09/deflation-lending-saving-fan-ii-in_ags_1209soapbox_inl.html
Q Tip
Take a tip from Tobin's Q ratio and run for the hills, but perhaps not just yet. James Tobin, a Nobel Prize-winning economist, developed the Q ratio in 1969. It compares company market values to the relative cost of replacing their constituent parts. It is at .7 right now, which is not bad, but according to Russell Napier, each of the four biggest bear markets the past 80 years ended with the ratio at .3 or lower, which he expects this time around. Now he does not expect it to happen until 2014, so you might have time to ponder his prediction, but he does expect it.
So what does a Q ratio of .3 mean to stock values? It means the S&P dropping to 400, that's what. That is around 55% off where it is presently. I personally don't think we will get there, but who knows. If we do, it could be an incredible investing opportunity when it happens - assuming by then we are not all living in boxes next to railroad tracks eating rat-on-a-stick.
http://www.nakedcapitalism.com/2008/12/tobins-q-ratio-says-equity-bottom-much.html
Question for those smarter than me or for those with access to say a professor smarter than me. If I am reading it right, the above article concludes noting that the dollar will eventually devalue and that bear markets end when the market prices in deflation. I may not be reading it right. I thought that devaluation of the dollar would lead to inflation as the price of imports, oil commodities and the like would go up in U.S. dollars. Domestic goods would remain reasonably priced but anything imported - and we import a lot - would escalate in price. Any hoot, maybe I am just reading it wrong. Or maybe I am wrong on the impact of devaluation of the dollar.
Survey Says!
I would try to summarize the following from Bloomberg but there is too much in it to summarize. You might as well read it yourself. Caution - not for the faint hearted.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ado8P..GCtC4&refer=home
Let Them Fall
Here is a novel concept. In order to get housing stability, we need to let the prices fall. Gee, what a novel concept. Remember that old reverting to mean thingy. In the long run there are only two ways for housing to become affordable in a sustainable fashion. One, the prices drop to where they are affordable. Two, people on average see their wages go up to where they can afford the higher prices. Okay, I will let you pick which one is going to happen first. Go ahead . . . take your time . . . I can wait. If you picked number one, you have been paying attention.
Now the government does not like number one and it knows right now number two is pretty much impossible (though the infrastructure spending may help a bit), so it is looking for artificial - and thus not sustainable - ways to make housing more affordable. Freddie and Fannie are two ways, pushing for loan mods another, and throwing money at financial instutions yet a third. Well Freddie and Fannie are just becoming bigger messes (more on this below), financial institutions are not about to relax their lending standards any time soon, and the average Joe the plumber on the street knows not to buy until we hit bottom. So the sooner we let price declines work their magic, the better. Dean Baker is one of the economists that "gets it," as does his organization CEPR. Too bad the government is hell bent on making this problem last longer.
http://rismedia.com/wp/2008-12-03/house-prices-must-return-to-trend-levels-to-stabilize-market/
I promised more on Freddie and Fannie becoming more of a mess, well here it is. They are now considering doing refinancings without - I repeat without - requiring an appraisal. This can add a bunch of crap to their books (as in our books since we own them now). The only promising thing is that someone refinancing a house they believe is under water is attempting to keep it and make ends meet instead of walking away. It does not mean they will not go into foreclosure or later walk away, but the walk away inclined crowd is not likely to seek refinancing. Still adding to the garbage on the Freddie and Fanni books. Next step they are back to no doc liar loans with no credit check. I mean hey, these people already got their original loan so what is the problem in refinancing that loan without any underwriting whatsoever?
http://www.bloomberg.com/apps/news?pid=20601087&sid=amYW0UdC2LdY
In the interest of full disclosure, my sister works for Fannie Mae and my niece would be one of the first in line for the new no appraisal loan. She has a loan at over 14% and would love to refinance, but she is underwater on her mortgage. But Fannie would have to waive the credit checks too, as she has killed her credit rating trying to keep up with the mortgage payments, as in not keeping up with her mortgage payments.
Tuesday, December 9, 2008
Evening Edition Doom and Gloom
I just saw this and wanted to get it out. NY Magazine on the Oracles of Doom and Gloom. Fortunately I have been following three of the six oracles they cite, which has helped me to survive financially in this environment. But the real reason that I wanted to post this is their future predictions. Let me address them seriatim.
Gerald Celente predicts our dollars will be worthless in the future. I generally agree. All this multi-trillion dollars in alphabet soup relief programs will quite possibly lead to the collapse of our currency in due time. Unfortunately, Celente seems to be right quite often. I look forward to searching him out in the future as I have not followed him to date.
Noriel Roubini, need I say more. I have reported here before on his predictions and recently noted I have this bad gut feeling that he is right, which is increasingly being supported by more data. Gut feelings are fine, but data tells the true story and it is not looking pretty.
Peter Schiff. I have not followed him. His prediction that this will be worse than the Great Depression could be true but I tend to think things won't get that bad. I do think it will be the worst recession since the Depression, like Noriel Roubini, but I think the global response will save us from the worst. Schiff, of course, now sees the global response as the problem, and for the most I cannot say I disagree that much, but I still think we will avert the extreme he predicts. It will likely be more like Japan, long and drawn out. The difference between that and the Great Depression may be hard to discern.
Richard Russell. He anticipates the DOW will reach new lows and break the 50% down mark. I agree totally. I would explain why in detail, but I do that every day.
Barry Ritholtz. I refer to Barry at the Big Picture on a fairly regular basis. Barry hedges his statement on the attached article, but I know from following him that he is more bullish now than his comment reveals. No, he is not all the way back into the pool by any means, but I think he thinks we are past the worst. Sadly, I don't think so, but he knows more about this stuff than me and I respect his opinion. He certainly gets lots of air time on financial news shows.
Jeremy Grantham. Several months back I read a lot about his outfit GMO. Mostly a quant shop with a good dose of common sense thrown in when the computers do not make sense. I am not a big fan of quantative analysis. Sure, it can be a backup to proper analysis, but when we give our analysis over to mathmaticians and computers, we end up like Lehman, Merrill Lynch, Bear Stearns, etc. A lot of the derivatives mess was possible due to this kind of analysis. Nonetheless, GMO has done well and Jeremy Grantham is worth your ear. His prediction that volatility will die down as we become numb could be correct, but I think that will take a long time of us being beaten in the head with bad news. I know it seems it has already been a long time - get used to it.
Just my take on the oracles. My hat is off to them for the help they have provided me this year. I, however, would be remiss not to add my own oracle. Michael Panzner wrote a little book called Finacial Armageddon that came out in early 2007, which means it was largely written in 2006 or before, well before this debacle started. I started reading it at the beginning of this year and finally had to put it down as it was too scary for me. Pretty much everything that had happened was predicted by him but not everything he has predicted has happened. And the other things he predicts are somewhat worse than the oracles above predict. Nonetheless, he predicted the derivatives mess, the Fannie/Freddie mess, and numerous other messes that are still unfolding. Reading his book has been a user's guide to what is happening, so my hat is off to him as the last oracle. It is still a good read today.
http://nymag.com/news/intelligencer/52772/
Gerald Celente predicts our dollars will be worthless in the future. I generally agree. All this multi-trillion dollars in alphabet soup relief programs will quite possibly lead to the collapse of our currency in due time. Unfortunately, Celente seems to be right quite often. I look forward to searching him out in the future as I have not followed him to date.
Noriel Roubini, need I say more. I have reported here before on his predictions and recently noted I have this bad gut feeling that he is right, which is increasingly being supported by more data. Gut feelings are fine, but data tells the true story and it is not looking pretty.
Peter Schiff. I have not followed him. His prediction that this will be worse than the Great Depression could be true but I tend to think things won't get that bad. I do think it will be the worst recession since the Depression, like Noriel Roubini, but I think the global response will save us from the worst. Schiff, of course, now sees the global response as the problem, and for the most I cannot say I disagree that much, but I still think we will avert the extreme he predicts. It will likely be more like Japan, long and drawn out. The difference between that and the Great Depression may be hard to discern.
Richard Russell. He anticipates the DOW will reach new lows and break the 50% down mark. I agree totally. I would explain why in detail, but I do that every day.
Barry Ritholtz. I refer to Barry at the Big Picture on a fairly regular basis. Barry hedges his statement on the attached article, but I know from following him that he is more bullish now than his comment reveals. No, he is not all the way back into the pool by any means, but I think he thinks we are past the worst. Sadly, I don't think so, but he knows more about this stuff than me and I respect his opinion. He certainly gets lots of air time on financial news shows.
Jeremy Grantham. Several months back I read a lot about his outfit GMO. Mostly a quant shop with a good dose of common sense thrown in when the computers do not make sense. I am not a big fan of quantative analysis. Sure, it can be a backup to proper analysis, but when we give our analysis over to mathmaticians and computers, we end up like Lehman, Merrill Lynch, Bear Stearns, etc. A lot of the derivatives mess was possible due to this kind of analysis. Nonetheless, GMO has done well and Jeremy Grantham is worth your ear. His prediction that volatility will die down as we become numb could be correct, but I think that will take a long time of us being beaten in the head with bad news. I know it seems it has already been a long time - get used to it.
Just my take on the oracles. My hat is off to them for the help they have provided me this year. I, however, would be remiss not to add my own oracle. Michael Panzner wrote a little book called Finacial Armageddon that came out in early 2007, which means it was largely written in 2006 or before, well before this debacle started. I started reading it at the beginning of this year and finally had to put it down as it was too scary for me. Pretty much everything that had happened was predicted by him but not everything he has predicted has happened. And the other things he predicts are somewhat worse than the oracles above predict. Nonetheless, he predicted the derivatives mess, the Fannie/Freddie mess, and numerous other messes that are still unfolding. Reading his book has been a user's guide to what is happening, so my hat is off to him as the last oracle. It is still a good read today.
http://nymag.com/news/intelligencer/52772/
Damned If You Do Damned If You Don't
The following piece from the Telegraph makes a couple of points worth noting. First, credit is still pretty much non-existent, which is old news. Second, the act of governments around the world reducing interest rates is hampering lending, not enhancing it. This fits squarely into the unintended consequences category, but it is a consequence that will take a long time to undo. The government is now the lender of first, last and only resort and will be for a long time. Just ask the auto industry.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3685332/BIS-warns-of-collapse-in-global-lending.html
And it looks like we will soon be partial owners of the auto industry, whether we like it or not. Kinda like being part of some big national mutual fund. Perhaps we should give this mutual fund a name. I am open to suggestions, so feel free to leave comments. I am thinking something along the lines of All The Crap In the U.S. High Loss Fund.
http://www.bloomberg.com/apps/news?pid=20601087&sid=as5Uh_CslqcI&refer=home
Not Going Back
I have commented regularly on various reasons why the market will not be returning to its lofty highs of 2007 any time soon. Basically, those highs were attained with debt funded spending that will not resume any time soon. The following technical analysis from Aleph Blog agrees, finding that stocks in general are expected to earn a measely 2.26% a year for the next decade. For a baby-boomer generation on the verge of retirement looking to regain the 30-40% hole this recession just created in their retirement plan, this is not good news. But, you say, this is not possible. Equity investments average closer to 7 - 8% over time. Well "over time" is a big concept that may not correlate that well to a given decade or two. Just ask Japan's, whose lost decade is now looking more like a lost couple of decades. Hopefully this is wrong. Certainly there will be individual days where the market gains more than the 2.26% in a single day, like yesterday. But it is certainly possible that the next decade will be as anemic as the last. Nonetheless, the author at Aleph does note some alternative investments that may do better than stocks. Diversification is worth consideration.
http://alephblog.com/2008/12/09/a-reason-to-sell-stocks-amid-the-rally/
Of course there are plenty of folks who will tell you to stick to your guns and maintain a long term approach if you can. A lot can be said for the concept that right now is perhaps the worst time to take money out of equities, if you have not already done so. The chief investment adviser at Vanguard delivers the sage advice you will hear from most investment advisers. He does note you need diversification and you really need to look at your time horizon.
https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=BearLongViewTranscript
That Consumer Thingy
Over two thirds of our GDP is dependent on consumer spending. It was consumer spending that got us out of the last two recessions. But for various reasons, consumers for the most part are not spending now and will likely not resume their splurge any time soon. I have discussed some of the reasons for this, such as high debt load, job losses, stock losses, under water mortgages and the like. There is a reason I have not discussed that deserves some attention - fear of losing a job. Apparently with the unemployment rate rising quicky (even with the cooked government numbers that understate true unemployment), the percentage of people afraid of losing their jobs is skyrocketing. And such fear is undoubtedly putting a dent in spending. I agree with Obama, we have not yet reached bottom.
http://www.financialarmageddon.com/2008/12/less-than-optimistic.html
China Cliff Diving
Not too surprisingly, exports out of China are declining and industrial production will only rise about 5%, it's lowest rise since they started tracking it. This is a country that needs closer to 9% gain to basically tread water, due to the growing need for jobs, so a 5% gain is effectively a recession for China. This Bloomberg article mentions social unrest. When you have over a billion people, the phrase "social unrest" is not to be taken lightly. If for no other reason the article is worth reading as it quotes from Fan Gang. I like the name.
http://www.bloomberg.com/apps/news?pid=20601087&sid=abgmrMVPWrQw&refer=home
"Decidedly Bleaker" or "Significantly Weaker"
Oh what a difference a month can make. The economic situation, according to SunTrust, became "decidely bleaker" between the end of October and now.
http://atlanta.bizjournals.com/atlanta/stories/2008/12/08/daily24.html
Fed Ex, on the other hand, decided to go with "significantly weaker macroeconomic conditions." Either one seems to sum it up nicely.
http://biz.yahoo.com/bw/081208/20081208006344.html?.v=1
16% of All Mortgages To Go Into Foreclosure
Credit Suisse is predicting 8.1 million foreclosures by 2012, which is 16% of all mortgages. The number could be as light as 6.3 million or as heavy as 10.2 million. They believe subprime has peaked but will continue at high levels for a couple of years and that non-subprime will increase.
As I have said, I do not see the recession ending and the economy improving until the housing mess bottoms out. We are reverting to mean and the high foreclosure rate will undoubtedly cause us to overshoot the mean rather decidedly. With heavy foreclosures forecast through 2012, I continue to expect this to be a long drawn out affair. Hunker down!
http://calculatedrisk.blogspot.com/2008/12/credit-suisse-forecast-81-million.html
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3685332/BIS-warns-of-collapse-in-global-lending.html
And it looks like we will soon be partial owners of the auto industry, whether we like it or not. Kinda like being part of some big national mutual fund. Perhaps we should give this mutual fund a name. I am open to suggestions, so feel free to leave comments. I am thinking something along the lines of All The Crap In the U.S. High Loss Fund.
http://www.bloomberg.com/apps/news?pid=20601087&sid=as5Uh_CslqcI&refer=home
Not Going Back
I have commented regularly on various reasons why the market will not be returning to its lofty highs of 2007 any time soon. Basically, those highs were attained with debt funded spending that will not resume any time soon. The following technical analysis from Aleph Blog agrees, finding that stocks in general are expected to earn a measely 2.26% a year for the next decade. For a baby-boomer generation on the verge of retirement looking to regain the 30-40% hole this recession just created in their retirement plan, this is not good news. But, you say, this is not possible. Equity investments average closer to 7 - 8% over time. Well "over time" is a big concept that may not correlate that well to a given decade or two. Just ask Japan's, whose lost decade is now looking more like a lost couple of decades. Hopefully this is wrong. Certainly there will be individual days where the market gains more than the 2.26% in a single day, like yesterday. But it is certainly possible that the next decade will be as anemic as the last. Nonetheless, the author at Aleph does note some alternative investments that may do better than stocks. Diversification is worth consideration.
http://alephblog.com/2008/12/09/a-reason-to-sell-stocks-amid-the-rally/
Of course there are plenty of folks who will tell you to stick to your guns and maintain a long term approach if you can. A lot can be said for the concept that right now is perhaps the worst time to take money out of equities, if you have not already done so. The chief investment adviser at Vanguard delivers the sage advice you will hear from most investment advisers. He does note you need diversification and you really need to look at your time horizon.
https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=BearLongViewTranscript
That Consumer Thingy
Over two thirds of our GDP is dependent on consumer spending. It was consumer spending that got us out of the last two recessions. But for various reasons, consumers for the most part are not spending now and will likely not resume their splurge any time soon. I have discussed some of the reasons for this, such as high debt load, job losses, stock losses, under water mortgages and the like. There is a reason I have not discussed that deserves some attention - fear of losing a job. Apparently with the unemployment rate rising quicky (even with the cooked government numbers that understate true unemployment), the percentage of people afraid of losing their jobs is skyrocketing. And such fear is undoubtedly putting a dent in spending. I agree with Obama, we have not yet reached bottom.
http://www.financialarmageddon.com/2008/12/less-than-optimistic.html
China Cliff Diving
Not too surprisingly, exports out of China are declining and industrial production will only rise about 5%, it's lowest rise since they started tracking it. This is a country that needs closer to 9% gain to basically tread water, due to the growing need for jobs, so a 5% gain is effectively a recession for China. This Bloomberg article mentions social unrest. When you have over a billion people, the phrase "social unrest" is not to be taken lightly. If for no other reason the article is worth reading as it quotes from Fan Gang. I like the name.
http://www.bloomberg.com/apps/news?pid=20601087&sid=abgmrMVPWrQw&refer=home
"Decidedly Bleaker" or "Significantly Weaker"
Oh what a difference a month can make. The economic situation, according to SunTrust, became "decidely bleaker" between the end of October and now.
http://atlanta.bizjournals.com/atlanta/stories/2008/12/08/daily24.html
Fed Ex, on the other hand, decided to go with "significantly weaker macroeconomic conditions." Either one seems to sum it up nicely.
http://biz.yahoo.com/bw/081208/20081208006344.html?.v=1
16% of All Mortgages To Go Into Foreclosure
Credit Suisse is predicting 8.1 million foreclosures by 2012, which is 16% of all mortgages. The number could be as light as 6.3 million or as heavy as 10.2 million. They believe subprime has peaked but will continue at high levels for a couple of years and that non-subprime will increase.
As I have said, I do not see the recession ending and the economy improving until the housing mess bottoms out. We are reverting to mean and the high foreclosure rate will undoubtedly cause us to overshoot the mean rather decidedly. With heavy foreclosures forecast through 2012, I continue to expect this to be a long drawn out affair. Hunker down!
http://calculatedrisk.blogspot.com/2008/12/credit-suisse-forecast-81-million.html
Monday, December 8, 2008
No Pain No Gain
For those of you old enough, you may recall the federal funds rate hitting 20% in 1981, with the prime rate rising to 21.5% that year. I remember being happy to get a 10.5% three year ARM when I bought my first home in 1991, a mere decade later. Rates like these tend to emphasize just how easy the money was in the years leading up to the housing bubble.
Well the person we have to thank for the federal funds rate hitting 20% was Paul Volcker. And I do mean "thank." He was not always popular at the time but he had a horrendous inflation rate to fight and he did what he had to do. The CPI approached 15% in 1980 and Volcker knew he had to risk a nasty recession by increasing rates to fight inflation, and increase he did. We did go into a long hard recession and Volcker had to fight Congress to stick to his guns. At one point the Brick Layers Union sent him a load of bricks with a note saying they did not need them anymore thanks to the Volcker induced recession. But we survived and the country was much stronger for his unyielding ways.
Well, Paul Volcker is a special economic adviser to Obama and he is warning that the medicine is not going to taste any better this time, although it will be a different prescription. Hold your nose for this one; he thinks America has to start living within it means!! Within our means!?!? Is this lunatic for real!?! Whatever will we do? Well, I guess we will live within our means.
And for those on Wall Street, he is no big fan of the financial engineering of late. He will certainly be seeking to take us back to financial times of old when companies actually had a pretty good idea of what risks they had on their books, where government actually cared what risks companies took on, and where you got credit when you deserved credit. God forbid!
Mind you, Volcker will have no direct power in his new position, aside from the power of persuasion, so there will be a limit to what he can achieve, but he does have Obama's ear, and that is just about as much power as he needs.
http://www.latimes.com/news/nationworld/washingtondc/la-na-volcker8-2008dec08,0,108304.story
http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html
So what happens when you have the President-elect saying we have not yet reached bottom and his special economic adviser saying there will be lots of pain ahead, with America's spending habits needing to undergo a fundamental change? The markets go up, that's what. Wait a minute, our leaders are talking more doom and gloom and the market goes up? What's up with this, you say.
Well Bloomberg thinks it is due to Obama's pledge to support a massive public works program. They could be right.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aaXccqvUzCPM&refer=home
My own personal view is that we finally have some leaders who are willing to call it like it is and the world knows it. Credibility has been incredibly lacking in the current administration, not to mention in corporate America. If I had a nickle for every time this year a politician or CEO said everything is fine, we are near the bottom, our capital structure is sound, the American economy is strong, and the like, I would have a sound capital structure myself.
I don't support everything that Obama is announcing economically, but I like most of it and, most of all, he seems to be showing the leadership flair the world is direly needing at the moment. That as much as anything will help us to get through all this. I don't intend to make this a politically oriented blog, but I think I have bipartisan support for the notion that George W. did not show the charismatic leadership necessary to lead us to recovery. People need hope, and I think Obama can supply it.
I guess Chicken Little just shed a few feathers. Did I mention that I consider the current rally to be a dead cat bounce? I strongly suspect we will retest the lows next year, but this could be a pretty nice run in the short term. We will see.
For those that understand charts and use them to predict bullish or bearish trends, you may want to visit Mish. He sees the temporary trend as quite bullish. Note his statement, however, on the long term outlook being nasty.
http://globaleconomicanalysis.blogspot.com/2008/12/bullish-looking-charts-s-500-nasdaq-bkx.html
Can you mod my mod?
Comptroller of the Currency, John Dugan, has noted that over half the loan modifications done in the first quarter this year were delinquent again within six months. The same held true for those done in the second quarter. Delinquency rates continue to go up, with the largest percentage increase in the prime category. Actual foreclosure starts are down in the third quarter just a tad because the number of loan modifications has gone up, nearly double the number in the first quarter. In other words, the increase in mods is causing a decrease in foreclosure starts. Of course if half or more of these modifications go into default again, the high rate of modifications in the third quarter is only kicking the can down the street a bit.
http://www.occ.treas.gov/ftp/release/2008-142.htm
Market Forecast
Okay, here is a market forecast that I feel fairly confident about. The DOW will move over 2% tomorrow. You get to pick the direction.
Well the person we have to thank for the federal funds rate hitting 20% was Paul Volcker. And I do mean "thank." He was not always popular at the time but he had a horrendous inflation rate to fight and he did what he had to do. The CPI approached 15% in 1980 and Volcker knew he had to risk a nasty recession by increasing rates to fight inflation, and increase he did. We did go into a long hard recession and Volcker had to fight Congress to stick to his guns. At one point the Brick Layers Union sent him a load of bricks with a note saying they did not need them anymore thanks to the Volcker induced recession. But we survived and the country was much stronger for his unyielding ways.
Well, Paul Volcker is a special economic adviser to Obama and he is warning that the medicine is not going to taste any better this time, although it will be a different prescription. Hold your nose for this one; he thinks America has to start living within it means!! Within our means!?!? Is this lunatic for real!?! Whatever will we do? Well, I guess we will live within our means.
And for those on Wall Street, he is no big fan of the financial engineering of late. He will certainly be seeking to take us back to financial times of old when companies actually had a pretty good idea of what risks they had on their books, where government actually cared what risks companies took on, and where you got credit when you deserved credit. God forbid!
Mind you, Volcker will have no direct power in his new position, aside from the power of persuasion, so there will be a limit to what he can achieve, but he does have Obama's ear, and that is just about as much power as he needs.
http://www.latimes.com/news/nationworld/washingtondc/la-na-volcker8-2008dec08,0,108304.story
http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html
So what happens when you have the President-elect saying we have not yet reached bottom and his special economic adviser saying there will be lots of pain ahead, with America's spending habits needing to undergo a fundamental change? The markets go up, that's what. Wait a minute, our leaders are talking more doom and gloom and the market goes up? What's up with this, you say.
Well Bloomberg thinks it is due to Obama's pledge to support a massive public works program. They could be right.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aaXccqvUzCPM&refer=home
My own personal view is that we finally have some leaders who are willing to call it like it is and the world knows it. Credibility has been incredibly lacking in the current administration, not to mention in corporate America. If I had a nickle for every time this year a politician or CEO said everything is fine, we are near the bottom, our capital structure is sound, the American economy is strong, and the like, I would have a sound capital structure myself.
I don't support everything that Obama is announcing economically, but I like most of it and, most of all, he seems to be showing the leadership flair the world is direly needing at the moment. That as much as anything will help us to get through all this. I don't intend to make this a politically oriented blog, but I think I have bipartisan support for the notion that George W. did not show the charismatic leadership necessary to lead us to recovery. People need hope, and I think Obama can supply it.
I guess Chicken Little just shed a few feathers. Did I mention that I consider the current rally to be a dead cat bounce? I strongly suspect we will retest the lows next year, but this could be a pretty nice run in the short term. We will see.
For those that understand charts and use them to predict bullish or bearish trends, you may want to visit Mish. He sees the temporary trend as quite bullish. Note his statement, however, on the long term outlook being nasty.
http://globaleconomicanalysis.blogspot.com/2008/12/bullish-looking-charts-s-500-nasdaq-bkx.html
Can you mod my mod?
Comptroller of the Currency, John Dugan, has noted that over half the loan modifications done in the first quarter this year were delinquent again within six months. The same held true for those done in the second quarter. Delinquency rates continue to go up, with the largest percentage increase in the prime category. Actual foreclosure starts are down in the third quarter just a tad because the number of loan modifications has gone up, nearly double the number in the first quarter. In other words, the increase in mods is causing a decrease in foreclosure starts. Of course if half or more of these modifications go into default again, the high rate of modifications in the third quarter is only kicking the can down the street a bit.
http://www.occ.treas.gov/ftp/release/2008-142.htm
Market Forecast
Okay, here is a market forecast that I feel fairly confident about. The DOW will move over 2% tomorrow. You get to pick the direction.
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