Thursday, December 31, 2009

2010, Do I Dare Predict?

For 2009 I did predictions that I labeled as items I hoped would not occur. They were all pretty much doom and gloom predictions, though some, like unemployment topping 8% ,were a bit too optimistic. Still, my predictions on the stock market being down significantly were not right for the year (but would have been had the year ended March 9). So with the new year coming, is the gloom passing? Is the doom behind us? Am I an idiot?

Let's start with me simply posting here the first six headlines as they appear at this very moment at Bloomberg:

China Manufacturing Grows at Fastest Pace in 20 Months, Cementing Recovery
U.S. Jobless Claims Unexpectedly Decline to Lowest Level Since July 2008
South Korea's Exports Rise at Fastest Pace in 17 Months as Demand Revives
Commodities Post Biggest Annual Gain in Four Decades as China's Use Surges
Hatoyama Says He'll Focus on Deflation, Jobs as `Honeymoon Period' Ends
AT&T Biggest Winner With $15 Billion Savings From Lowest Yields Since 2005

Wow!! Those are some incredible stories!! Everything is absolutely fantastic!! And so, it is with heavy heart that I am still a pessimistic sod.

Now my quandry here is that I believe we are in a major bubble building process and I have no idea how long this process will last. I suspect it will pop in 2010 or 2011, but it could last longer. Still, I am going out on a limb and predicting the "POP" in late 2010 or early 2011. Too much air in too little time and too little balloon to handle it, in my opinion. So here are my predictions for 2010 (I am just guessing here so do not invest based upon them):

  1. The U.S. is going to start to run into some serious issues in getting other countries to buy its debt and finance stimulus spending. I am not expecting a massive sell-off by sovereigns, primarily China and Japan, who hold our debt but they will be net sellers, not net buyers in 2010, and their purchases will be hard to replace.
  2. As I did last year I am predicting the S&P will be down 10-20% by year end from where it ended today. Hey, the prediction did not work for 2009 so if I keep predicting it every year eventually I will be right. In truth, I do believe the market is well over bought and we have no where else to go but down as stimulus dollars wear off and the government runs out of stimulus dollars to throw at this mess. I really think we will be more than 30% off our current highs but am being a bit conservative in my prediction.
  3. The Euro will have some major hits as countries, like Greece, suffer some major ratings downgrades. Do not look to the Euro to replace the dollar any time soon.
  4. Interest rates in the U.S. will end the year roughly 2% above where they are currently. Mortgage rates have already increased steadily for the past four weeks. The Fed is running out of ammo to keep them down.
  5. Housing will remain stable but will not climb off the bottom it is at. Adjustable rate/Alt-A loans will peak in defaults and this will keep the banks on the sidelines. Fannie Mae and Freddie Mac will continue to provide most loans, with government support, and their books will continue to look worse and worse. Commercial real estate will continue to decline in the U.S. We are so overbuilt in this area that we could go a decade with no construction and still not catch up. Bottom line, real estate on the residential level is probably at its low or near there but do not expect any big increases.
  6. Tiger Woods will find the 19th Ho.

Disclosures: None.

Wednesday, December 30, 2009

When Will We Learn? ... Apparently no time soon

Let me start by apologizing for not blogging in quite some time. I know one of the regular rules of being a successful blogger is doing regular entries. Nonetheless, I have been in a state of disbelief for some time and have not felt like speaking out. To be honest, I have questioned dearly whether my pessimistic predictions are totally off base. After all, the stock market since the March 9 lows has been rather consistently skyrocketing, sales this holiday season seem decent, manufacturing indicators seem on the rise and housing seems to have stabilized, if not improved, in most regions, so what is there to be down about? Well, let's talk.

I will begin again by saying I am not a perma-bear. I love a good bull market and love to do trading into them. But I want a true bull, which means things are improving fundamentally over the mid-to-long term. Still, I admit to some day trading during the dot.com bubble and making some profits there. It was a fun ride while it lasted. If you rode that ride I ask you to look back and see where the Nasdaq was then versus today. Almost a decade exactly ago it was around 5000, whereas today it is a little over half of that. So you say, this is but a small blip in the market history and we will return to normal soon. So let us look at Japan a moment.

I recall in the early 80s being highly disturbed about how the Japanese were taking over the U.S., buying up all our landmarks and quickly becoming the number one economy. The U.S. was in a mild state of shock/awe that we could be taken over economically so easily, but Japan beat us at our own game. And then their bubble burst as well. The Nikkei 20 years ago was roughly four times as high as it is today. And this is not for a lack of trying. The Japan government has been spending excessively to revive the economy there. So much so that predictions are the debt will reach 246% of the GDP in the years to come. To put that in economists' terms, they have a whole world of hurt ahead of them.

http://www.calculatedriskblog.com/2009/12/japan-twenty-years-later.html

Undoubtedly the U.S. can never go that far into an economic abyss - - right? Well, I hope so, but in my view our reaction to this recession has been very poor, even disastrous. Why do I say this?

You do not need a doctorate in economics or finance to understand that when you have too much debt the answer is the cut back, spend less and pay down the debt. Not fun, but necessary. Yet the Administration has been hell bent on getting us to spend and do so while increasing debt. I have no idea why other than a political desire to create the short-term appearance of a recovery. That is absolutely all it will do as in the mid to long term it is highly problematic.

It does also not take a degree to understand that a country cannot survive by simply buying things. We need some productive, fruitful endeavors. Spending money to buy stuff is not a productive endeavor. Yet 70% of our GDP has been just that, buying stuff. Moreover, we have bought this stuff with credit, increasing our enormous debt load.

So let's return to some basic math. Tax receipts from individuals are down just under 30% YOY. Now there are several variables here but I am going to assume that a 30% reduction in tax receipts equates roughly with a 30% reduction in income. This is on an individual basis as on a corporate level there are no tax receipts at all as they are generally losing money. So if income is down, be it 30%, 20% or even 10%, how can the stock market and economists be signaling a grand recovery? If consumer spending is 70% of GDP and consumer incomes are down around 30%, how can the GDP be sustained?

http://seekingalpha.com/article/180174-the-coming-economic-nightmare-part-1

There are only two possible answers. First, we are incurring more debt to buy stuff. With mortgage rates low and a lot of refinancing taking place this is possible, though certainly not sustainable. Second, we are purely doing this off of government stimulus, which is what the stimulus is meant to do. So I have to ask, is spending built on government stimulus a good thing? Well, I suppose if it works to restart the economy, yes. But I tend to think with the record levels of private debt load in this country and others, stimulus spending cannot stimulate what does not and cannot exist. Just like Japan is learning, we have spent our wad and need to hunker down, pay down debt and perhaps do something called saving. This will take many years and the government throwing money at it only makes the situation worse, not better.

Why worse? Because the government is running up massive debt and our creditors are not real happy right now. Now we built most of this debt propping up the jerks that caused the problems and that makes me sick, but that aside we have a massive public debt problem building in this country. The sovereigns who have been buying our debt are increasingly less willing to do so and increasingly shifting their investments to short term investments. This enables them to pull the plug faster and from what I can see they are in the process of pulling the plug. If, when, this happens the new bubble we are building will burst. There are plenty of other pins around this bubble that might burst it, but this is one of the sharpest.

So as the new year arrives, all I can say is to be careful out there.

Disclosures: None.

Sunday, December 20, 2009

2 + 2 = ?

A friend of mine cornered me in the kichen this week. He knows I follow thngs financial but I suspect he does not read my blog, though he knows I do it. So he asks me, where do I think the market is going. I tell him I have no idea, and that is the truth.

Now if he bothers to read this, he will get a bit more insight. I said no idea, but that was my thought in the short term, which is what I think he was fishing for. Beyond that, however, and I have a belief.

Let me start by saying 67-70% (I have seen this range cited) of the GDP has been consumer spending in the U.S. over the past few years. Before I go on, think a minute about how any economy can support itself off of its citizens buying stuff. Stop --- give yourself time to digest this and--- let me repeat: 67-70% of our GDP over the past several years has been us buying stuff for ourselves. PLEASE STOP AND THINK ABOUT THIS A MINUTE OR TWO!!!! Most of our economy is us buying stuff. And mostly we are buying from China and other coutries. So who exactly is paying us to buy this stuff from other coutries NOW? No one, I suspect!!

And now you know the problem. We are all in big debt. We are paying it down but it is still near record levels. So we have little to spend, especially with unemployment at high levels and housing near a bottom.

But let us look at the solution. Ideally, it would be something that creates more jobs domesticaly so that we could make money to buy all this crap we have been buying to prop up 70% of the GDP. Ideally it would provide long term benefits and wages to support the economy. Well, ideal is apparently not in the cards.

Nope, we are shooting for much less than ideal. We are spending tens of billions to prop up the A-Holes who got us here. We are spending very little so far to build new jobs or support companies that will do so.

Obama was the worst vote of my lifetime. I w0uld give up my card carrying Democrat status but for my repulsion for the other side. I truly hope he wakes up soon. He needs to listen to Volcker soon!!



















11

Disclosures: None

Wednesday, December 16, 2009

Three Words: Stockholer Derivative Suits

Okay, I am attorney but I am not in any way, shape or form intending to hereby give advice (sounds like an attorney -right?). Nor do I work in the field of shareholder's derivative suits, though I do a lot of civil litigation. Still, one thing that has amazed me in all this is that stockholders of these financial behemoths have not been filing suit. The assertions out there of executives making highly risky moves to pump up there bonuses are rampant. This would, one would think, violate their duties to their shareholders. Sure, they are entitled to reasonable compensation, but when their primary objective appears to be to line their own pockets with tens of millions in bonuses at the detriment of stockholders, customers and the like, things seem to have gone a bit awry, morally and legally.

So why then are there no stockholder derivative suits? These are suits a stockholder can launch against the officers and directors of their corporation on behalf of the corporation to accuse these officers and directors of wrongdoing. It was created as the wrong doing directors and officers who control the corporation are not likely to cause the corporation to sue them. Here, where corporations made phony profits on unrealized gains from risky financial instruments and paid themselves a significant portion of those fantasy profits in bonuses, one has to wonder, why aren't the shareholders suing them? Their actions are not exactly a secret, as reported here:

http://www.nakedcapitalism.com/2009/12/former-barclays-chief-points-out-bonuses-were-paid-fruadulently.html

So why aren't the usual suspect law firms bringing suit? I have no idea myself as there could be tens or hundreds of millions in contingent fees to be had, but perhaps it is cost prohibitive as you know these "fat cats" will litigate you to death. Still, it seems like someone should be looking at this. Indeed, you would think some industrious U.S. Attorney looking to make a name for himself or herself would look into it. After all, the U.S. - as in us taxpayers - are now the largest shareholders of many of these institutions. Why can't we file suit? (I would be happy to discuss this with any U.S. Attorney with the guts to go there and do some research on it for free).

Such suits would do a world of good, I believe, in correcting some of the compensation/bonus problems that have infected financial corporations over the past decade. No one is worth the money these guys made, especially looking at the crap they created on the taxpayer backs. One successful suit would give those deciding on compensation and bonuses the leverage to say "Mr. or Mrs. CEO cannot make over X as reasonable compensation or we will be sued." I hope someone takes up this charge. If the government won't make these idiots (I have worse words for them, but this is a family blog) do what is right, it must be up to the rest of us to do so.

If you have some information that would help to support such a suit, let me hear it. As a movie character once said "I am mad as hell and not going to take it any more!!!" (And no, I am not soliciting business as I am in house and cannot take on any private litigation.)

Disclosures: None.

Thursday, December 10, 2009

The New Reality!

Back in February, before the market bottomed in March, before we knew there was a floor to our pain, I did a post that I still firmly believe is as accurate today, after a major recovery in the market, as it was then. And so I am posting it again. I said it then that it was one of the most important things I would ever tell you and these words are still true. We cannot, should not, return to where we were a few years ago and we need to adjust to the new reality of the future. So here it is:

"The article I am linking here compares our present economic demise to what happened in Japan in the 1990s. Japan suffered 15 years of real estate declines and over a decade of stock losses. It just started to recover a few years ago when the current recession hit it as well.
Here is one key paragraph in the article which comes early in the read:
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

I hate beating this nationalization drum so much but at some point someone important may pay attention. The second paragraph of this article to get my attention is that the U.S. seems to be in a similar situation:

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.
And as big as you think the current plan is in the U.S., those who studied Japan think it is "timid." We cannot, however, afford anything else.
And here are a couple of key paragraphs. Japan tried what we are trying and it worked so (not) well. Oh well, go figure?

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

Overall, what Japan tried and we are trying is too comparable for comfort.

Here folks I will say again what I have been saying for a long time: we are
in a very serious correction. I say correction as I truly believe we are righting ourselves. I say correction also because, as sure as hell, things were not right in 2007, so where we are going is a better place. We, as a people, were spending well beyond our means, and I mean WELL beyond our means. Our major financial institutions developed instruments that generate great wealth - for them - that allowed us to spend beyond our means. This period was doomed to failure and unfortunately got so severe that it is incredibly difficult for us to face.

My take is that we should do as little as reasonably possible and let the economy correct itself. I am not traditionally an extreme free market type of person. In a period of economic growth, especially great growth like we had leading up to 2007-2008, I am highly suspect that the market it operating properly. Moreover, I am a firm believer that capitalism and Karl Marx, in his Communist Manifesto, share the same delusion, which is believing in the ultimate good in human nature; some (many) people, including some in power, irrationally seek short term personal gain over long term rationality.

Despite not being the biggest fan of a "free" market economy (because some prudent level of government checks and balances is needed), I am a big fan of the economy correcting itself mostly on its own. We need backstops to help the victims of the correction, but in the end trying to stop it is foolish. Property and other assets will revert, and probably overshoot, the mean (the reality) on their values. We at best can prolong this happening but cannot prevent it, so in my book it is best just to let it happen, put it behind us and get on with it.

The same is true with other businesses. U.S. consumers for quite a while have been spending well more than they make and can afford. Their homes were their piggy-banks (I am among them) and their consumption seemed nearly limitless. American businesses added new retailers, outlets, malls, etc. to meet this increasing (false) demand. Now the demand is gone, so it is no surprise that so many businesses are closing down.

And here my friends is the most important thing I will ever tell you! Way too many people think the demand has just been reduced for a period of time. They believe this is a recession and things will eventually, if not soon, return to normal and the consumption will resume. Politicians are at the top of this list. What they fail to realize is that the last five to ten years were not normal. They were abnormal. Spending beyond our means is not the historic mean or sustainable. And so we face a new reality. A reality that is - hopefully - here to stay. It is in a way painful, but the sooner we realize it and embrace it the better.

We have house prices returning to reality. We have consumption returning to reality. We have many sectors returning to reality. Some would call it mean, but for this post I am calling it reality. And reality is undoubtedly an economy somewhat poorer and more deprived than we are used to. Less pay, fewer benefits, fewer jobs, fewer services and the like. We face a society with less and fewer on many fronts. What the government really needs to do is pare down and adjust for this and not try to artificially get us back to our foolish ways.

I posted a week or two ago on how families are coping in many respects for the better. Shopping trips, dinners out and movies are being replaced by dinners at home, game nights with neighbors and conservation. Buying is being replaced by barter. Families are moving in together. People are helping other people as best they can. The reality to which this recession/depression is forcing us is in some respects a better reality. This is not to say that my heart does not go out to those without jobs, benefits, food, heat or the like. It is upon those that I think the billions of government support needs to be spent; not the financial clueless that brought us here. I for one hope for a better, simpler tomorrow. My biggest fear at the moment is that the government will do so many stupid things in trying to stop a correction - stopping an adjustment to reality - that we will be totally screwed for a decade or two. Let's hope not.

Disclosures: None.

Wednesday, December 9, 2009

Obubblomics

Okay, I admit that it is hard to pronounce by I view the current "recovery" as Obubblomics, i.e. Obama stimulus causes improved numbers in the economy and builds a new bigger bubble destined to pop in incredible fashion. Even though it is a bit hard to pronounce at first, you have to admit that the word looks pretty cool. The truth is, however, that if you kick a dead dog it will move and if you kick harder it will move more, but that does not change the fact that the dog is dead. And so far I have seen nothing to suggest this dog ain't dead.

Debt, public and private, still a big issue. Unemployment, while perhaps reaching a bottom, is still a problem, especially when you consider the hundreds of thousands of jobs we need to create each year to simply support the growing job force. Housing may be at the bottom but there is plenty of fanthom inventory that will keep it down for long to come. And retail sales, though rebounding a bit this holiday season, are undoubtedly simply leading to more debt as the incomes are not there to support a climb. More debt, folks, is the last thing we need. I saw a post blaming it on "frugal fatigue." I like the term and think it may be right but guess what, get used to frugal as with our debt levels it will be with us a very very long time. I am expecting it to be part of our national economy dynamic the rest of my life time, and that is not necessarily a bad thing.

Still, frugal is fighting fiscal stimulus and its attempts to get everyone spending again. Frugal is fighting the new bubble the government is foolishly trying to build. Frugal will win out in time as this bubble will pop, but I am more concerned with the long term consequences of building a new bubble. This is not Lawrence Welk and we cannot keep pumping out bubble after bubble. This one could be our biggest and last.

Now I have to back track on some former doom-and-gloom predictions. I do not at this point think the bubble will necessarily pop in the next few months or, for that matter, the next few years. The ability of government dollars thrown at the situation to mask the issues is greater than I had ever imagined. So I am simply saying we need to hunker down for when it happens and I have given up for when that will be. I know this seems cheap as whenever the economy dumps in the future I can say I told you so, but call me to task on the reason for the future slump. If it is based on the underlying fundamentals I continually note here, I get to say I told you so. If it is based on Obubblomics, I get to say I told you so. So hold on to your seats, the next decade, in my view, will have even more economic problems than the last and the last had the most since the Great Depression.

From their lips to your ears.

A couple of people I respect have some words of advice. First, Paul Volcker. If you have followed me you will see that his involvement in Obama's economic team was one of the reasons I supported Obama. Little did I know that Obama and company would pay no attention to anything Paul had to say. Well, he is still speaking despite the Administration not listening and he still has plenty to say. Bottom line, he says the financial industry has added nothing (and has nothing to add) to the economy other that ATM machines. The elaborate financial products they have developed over the last decade or so add absolutely nothing to a productive economy. I agree!!!

http://www.nakedcapitalism.com/2009/12/volcker-little-evidence-financial-innovation-has-helped-economy.html

Another person deserving of some attention is Meredith Whitney. Now I have to say she turned somewhat bullish a few months ago with Nouriel Roubini and I think they were looking more to protect their reputations than to tell the painful truth, but it is good to see Meredith beginning to grow some bear hair again. She says in this link she was bearish all the past year but I know just a few months ago she was not quite as bearish as she is now, and she is definitely bearish now. Her linked video is well worth the listen and very telling. Some highlights:

  • Consumer spending is 70% of GDP and it is still under pressure;
  • State and local government spending is 12% of the GDP and it is under pressure;
  • Small and medium sized businesses simply are getting no credit to run their businesses and consumers have had credit card debt availability shrink by over a trillion dollars.

She sees 2010 as the year when the "sand", as she says, hits the fan. Now Meredith thinks this turd will come home to roost in the first or second quarter 2010. I think that is certainly possible but I have learned not to underestimate the staying power of government stimulus, which Obama continues to promise is in the pipeline. We will see. Either way, be prepared for things to get worse. If you have equity positions, perhaps it is time to put some hedges in place.

http://www.nakedcapitalism.com/2009/12/meredith-whitney-the-government-is-out-of-bullets.html

Disclosures: None.

Monday, November 30, 2009

Liquidity Ain't Solvency

So Dubai seems to be getting a restructuring of around $26 billion in debt. And all is well in Dubai World. Then again, think about it. Don't just think about the life line and how a major financial event was avoided, think about how in the world (Dubai World if you like) they will turn their financial center with man-made islands, massive sky scrappers and condos to the horizon into a financial success that can pay off $80 billion in debt over the years to come.

While you are chewing on that, imagine you are well-to-do financial institution or corporation (I did say imagine) that is looking to invest a bunch of money in a new HQ or financial center. If you had this financial freedom in today's economy, and I say if, would you go and buy space in Dubai World, which nearly just went belly up. Seriously, who is going to buy this stuff, especially with so many cheap opportunities out there.

And so you can give someone on death row a temporary reprieve while someone considers their appeal but it does not mean the end is any rosier. Dubai World in the end likely has no way to pay off this debt. They built their own demise. I foresee some day, years from now, all those man-made islands being reclaimed by the sea, as they should be. They should know better than to fool with Mother Nature. Don't believe me, go to Sudden Debt to get his read on the situation - liquidity does not equal solvency.

Many would argue we have just been masking our problems hoping that time will allow institutions to financially recover. I guess it is possible for us to outlive our problems but what happens if we run out of time before we run out of money? Do you think we will have the time to outlive our debts? Do you believe in miracles? If you do, I have a man-made island to sell you.

Disclosures: none.

Thursday, November 26, 2009

Surprise, Surprise, Surprise!!

It seems that Dubai World seeking to restructure its $59 billion in debt came as a big surprise, especially to those at Barclays Capital who just a few weeks ago recommended investing long in Dubai sovereign credit. If one were a cynic one might think this was somehow tied to the heavy exposure Barclays had to Dubai. Naah, that would never influence their recommendations.

http://www.calculatedriskblog.com/2009/11/dubai-default.html

Now I am not sure what about this outfit would ever make one suspect it was in financial problems. After all, it only built the biggest skyscraper in the world, created palm tree shaped man-made islands and had the most construction cranes going anywhere in the world, all built on tens of billions of debt. Add to that the current financial squeeze during the worst economic recession since the Great Depression and I can see where everyone seems surprised at their financial situation. Frankly, I am only surprised that others are surprised that Dubai World is in economically tough straights. Remember 2+2=4.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aklYbga4yU9E&pos=2

Now I know this is a government investment company for a wealthy government closely tied to other wealthy sovereigns, but stupidity knows no sovereign bounds, and their spending spree on building the most decadent place on earth was stupid. They get what they deserve and hopefully will serve as a lesson to deter similar excesses in the future. Housing prices have dropped 50% there and are expected to bottom around 70% from peak as the investment frenzie blows over. Couldn't happen to a nicer bunch.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aX1vnWP7gBVM&pos=10

Now the markets are reacting quite poorly to this news - at least those that are open - and there are some whispers that a default by Dubai could spell major problems for some European banks. It is being likened to the Russian debt crisis in 1998 and the Argentina default situation in 2001 and so forth and so on. And everyone seems surprised, treating it almost as a black swan event. Well if it is, plenty of folks had their heads buried in the Middle East sand.

http://www.nakedcapitalism.com/2009/11/dubai-world-restructuring-sovereign-risk-shock-or-no-big-deal.html

CREamated

Here is another bright spot. Commercial real estate is down over 40% - no shocker there. The real news is that a significant number of loans are coming due over the next few years. Defaults thus far have been tempered by a lot of interest only loans that are currently at low interest rates but absent significant restructuring some forecast $430 billion in losses. Ouch!

http://www.calculatedriskblog.com/2009/11/430-billion-in-cre-losses.html

Consumers Will (not) Save The Day!!

Not to worry as with past recessions certainly consumers will sweep in to save the day. Never mind the 10.2% unemployment rate (even with bogus government numbers), the record number of houses under water, the tightening of credit and crazy things credit card companies are doing to screw their client base, all is nonetheless well in consumer land - right? Well, perhaps not. According to the following link to Financial Armaggedon, consumers are being a bit frugal this holiday season. Go figure.

http://www.financialarmageddon.com/2009/11/roundup-of-holiday-spending-surveys-reports.html

Disclosure: None.

Friday, November 20, 2009

Fancy That

It seems the Feds are doing what they can to insure the banks have large amounts of capital so they can withstand another bubble bursting. And it seems many folks are talking of a bubble bursting. Hmm, wish I had thought of that. Of course for the banks to get more capital means they have less to lend, which is not what the government wants. Oh what a wicked web we weave.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP_4vjiIq7KU&pos=1

And the average investor seems to be catching on to the situation as they are fleeing to safer assets.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXJtmYH1p85A&pos=2

And outside the U.S., Asia is not so good either. Down this week. Are we to the breaking point yet? I doubt it as I am a pessimist about doom and gloom. I have been calling this rally a bear market rally for eight months and have no confidence it will end soon. I only have confidence it will end and, increasingly, confidence that it will end in spectacular fashion. Fasten you seat belts.

Disclosures: none.

Wednesday, November 18, 2009

I Am Too Old For This $&!^

I turn 50 in two hours and 15 minutes - and probably will be there by the time I finish this post. So here I go. Let's start by noting real estate is still not doing so well. When the government is taking on or guaranteeing the vast majority of all loans, that cannot be a good sign. And when the FHA's insurance reserve ratio reaches a record low - well - figure it out for yourself.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRsDeHu7ywas&pos=4

The government, by the way, is the taxpayers, yet we are not yet paying the price. We will, but not yet. The price is being paid by foreign governments in part, like China and Japan, and Obama for one is afraid that they may become afraid of our deficit spending. So, the question becomes, who pays for all these loans when - if - foreign governments stop buying Treasuries. The Fed, by the way, has been buying the most lately but they now have stopped doing so, for a while at least. We will see where the next shoe drops.

http://www.nakedcapitalism.com/2009/11/obama-debt-could-cause-a-double-dip-recession.html

Now I am critical of Obama policies and I have nothing to dispute the arguments in the above link. Nor do I have anything to dispute what it said in the following. Indeed, I consider Geithner and Summers two of the worst things to happen to this country in a while. Only time will tell.


http://www.nakedcapitalism.com/2009/11/democratic-rep-defazio-calls-for-geithner-and-summers-to-be-fired.html

Here I am literally minutes from 50 and I am looking at a failing economy on what I view as faltering life support that few other people seem capable of seeing at the moment. Don't know if age is making me wiser or senile.

Pay It (Borrow it) Forward

It appears that the first time home buyers tax credit had its intended consequences and its unintended consequences as well. The credit undoubtedly increased sales, at least some, but, just like the cash-for-clunkers program, has borrowed sales from the future, as opposed to creating new buyers. Though the program was extended, its impact on sales seems to have come to a close. Only time will tell.

http://www.calculatedriskblog.com/2009/11/mba-purchase-applications-fall-to-12.html

If you are not convince yet, don't forget that the government's bogus unemployment rate is 10.2% and add that a million, yes one million, will exhaust their unemployment benefits (if not extended) in January, and you have cause to celebrate - not.

http://www.calculatedriskblog.com/2009/11/one-million-workers-to-exhaust.html

Okay, enough bad news for this year of my life. Disclosures: None.

Saturday, November 14, 2009

No One is Listening

The government does have a handful of people worth listening to. While not always hitting the nail on the head, Sheila Bair, Chairman of the FDIC, seems to be more right than wrong, in my opinion. Now this may be a bit of Monday morning quarterbacking, but she is publicly pointing out how it would have been better to break up some of the financial institutions instead of propping them up with TARP. A wonderful idea that the Administration doesn't seem to be willing to confront. Of course, when you fill you house with people from the industry, what do you expect.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajKGz8NRQipM

Did I Mention, The Recession is Over

You probably already know this, especially if you are part of the 10.2% unemployed, but everyone seems to be saying the recession is over. The NY Times notes this in the following article.

http://www.nytimes.com/2009/11/14/business/economy/14charts.html?_r=1&ref=business

Indeed, even Europe has passed the downturn and is on the road to recovery. Don' t believe me, read this.

http://www.independent.co.uk/news/business/news/britain-the-economic-sick-man-of-europe-1820527.html

Sure, the piece is a bit down on the prospects for the UK but most of the rest of Europe is just peachy.

Yep, that decides it, the recession is over and everything is fine. Why doesn't it feel that way?

Well, for plenty of people the recession has not ended and perhaps never will. They have hunkered down and will remain in that state for some time to come. Others have learned that being frugal is not the worst thing in the world, which of course is a matter of degree. There is a difference between frugal and true poverty. But for those getting by, just more cheaply, they are learning some of the joys of doing it yourself. My wife cannot understand why I like to mow the lawn, do the fall clean up, stain the deck and do other things around the house myself. In part it is the money I save but largely I just enjoy doing it. And if you can come up with projects that the whole family can do, so much the better.

http://www.financialarmageddon.com/2009/11/new-rallying-cry-for-americans.html

Disclosures: None.

Thursday, November 12, 2009

Hide Any Sharp Objects

I have not posted for a while and am not intending to do so to any extent for a while. The bubble is being inflated big time and while the stimulus from the government is almost over, I expect there will be more stimulus next year as the economy falters. Right now it is difficult to segregate what should happen in the economy versus what is happening due to stimulus. Since I expect stimulus to continue now into 2010, I am not making any short term predictions.

Medium to long term, however, we are building one hell of a big new bubble. Seriously, with unemployment over 10%, housing prices down to where a record number of houses are under water and debt at record levels with relatively minimal personal deleveraging to date (and public debt going off the charts), I see a very large bubble surrounded by pins and needles. What I do not know is when this bubble will burst. But it will and when it does God save us all.

Disclosures. None.

Sunday, November 1, 2009

A Lesson Learned

I took most of the advanced classes in high school, including calculus, physics, chemistry and the like. Not a big selection, but it was the stone age so I had slim pickins. Nonetheless, there was no personal finance class available, or any finance class at all for that matter. Learning how to manage your finances, how to save for retirement, how to save for your home and how much home you can afford, were all basics not available to me in school. Sure, there were finance classes in college but those were mostly tailored to those majoring in finance and they did not focus on individual finances for the most part.

I have a daughter who just turned six and a son who is two and I fully intend to teach them how to manage their finances. My daughter gets an allowance and half goes in the spending jar, a quarter in charity and a quarter in savings. I could tax her a third to teach her that lesson but that would just be too cruel. She will learn about taxes soon enough.

I just think our schools are leaving out valuable lessons that kids need to live a happy, productive and less stressful life. Life is too short to be spending most of it worried about debt. I have a fair number of relatives who were unable to manage their credit cards as they were never shown how. When you add to that the fact that the latest generation seems to be the entitilement generation, and you have a deadly mix. Don't believe me, believe the charts. This linked post at Sudden Debt has two of the most enlightening charts you will see this year. They compare individual income and GDP to debt over the past few decades. These are not at all pretty and I hope I can teach my children to avoid this trap.

http://suddendebt.blogspot.com/2009/10/more-personal-look-at-debt.html

Disclosures: None.

Friday, October 30, 2009

115 and Counting?

If my count is right and nothing more happens this evening, the FDIC took down 9 more banks today and I believe that is 115 for the year. Three or four years back we had zero closures for the year. Quite the change. Not S&P crisis levels in quantity, but the dollar values are right up there.

http://www.fdic.gov/


Continued Real Estate Woes

Remember Fannie Mae. You should because we own it. Lest you missed the news, virtually all new mortgages issued these days are ending up with the GSEs, either Fannie, Freddie or Ginnie. In any event, it would appear they are not doing so well. Below is a chart I have borrowed from Calculated Risk and I link here the actual blog, which I highly recommend. The best real estate site out there. As you can see from the chart, things are not going as well on the real estate front as the media would have you think. I cannot recall many charts this extreme.

http://www.calculatedriskblog.com/2009/10/fannie-mae-delinquencies-increase.html



What does this mean? I think it means the market was right to go down today.
Disclosures: None.

Wednesday, October 28, 2009

One Year Down

Happy Anniversary!

This week marks the one year anniversary of my blog. To celebrate, for those (two or three) of you that might be interested, here is a link to my very first post. Not too bad, if I say so myself:

http://financialspiltmilk.blogspot.com/2008/10/bad-october-bad-bad-october-go-sit-in.html

Looking back in retrospect, much of what I said - or at least repeated from others - was dead on. Okay, enough patting myself on the back, it's time to get on to other matters.

He is Sprott On - Dollar Destruction

One of the folks I like to follow is Eric Sprott. He does not do a blog or seek a lot of publicity, but he has had some of the best performing funds in Canada for many years running, so I like to occasionally go to his company's site (Sprott Private Wealth, LP) to read his monthly thoughts and those of his colleagues. Indeed, his group for at least the past year and a half has actively been recommending investing in gold and it just so happens that gold is setting records recently, so they hit that one on the head. Don't believe me, look at the articles by John Embry at the Sprott company site. He has for a long time been the biggest gold bull around, and apparently for good reason.

http://www.sprott.com/main3.aspx?id=55

Here is a link to Eric Sprott's September report on the U.S. dollar. Eric makes a very persuasive case for the dollar being toast. It seems we have been actively building our debt to the level we cannot hope to support even the interest payments in the future, especially when you throw in unfunded Social Security and Medicare obligations, so we have no reasonable alternatives. Bernanke is simply going to need to keep that printing press running full time, which will eventually and, probably, inevitably, lead to the dollar losing its status as the reserve currency. The value will continue to fall as well. This is no doubt why many are still recommending gold as a place to put your money.

Now, of course, I must add a caveat. Sprott has undoubtedly a lot of investments tied to the value of gold and the devaluation of the U.S. dollar, so keep this in mind in reading his thoughts.

http://www.sprott.com/Docs/MarketsataGlance/09_09_MAAG.pdf

And as Eric points out in his October report, the foreign appetite for U.S treasury purchases is decreasing sharply such that the Fed is becoming "the" market for treasuries, which is dangerous indeed.

http://www.sprott.com/Docs/MarketsataGlance/MAAG_10_2009.pdf

(Update: Save your comments about how the dollar index was strengthening today, up .4% as I write, and how gold is down. It does not change the long term fundamentals discussed above.)

Survey Says . . . (cont.)

Just yesterday I noted how people continue to survey economists for their predictions and economists continue to be too optimistic. So much so that on several recent forecasts not a single surveyed economist was sufficiently pessimistic to predict the correct result. Well, it happened again today on the housing numbers for new home sales. Forecasts ranged from 412,000 to 460,000 and the actual result was 402,000. Time to wake up and smell reality.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiUI.AF0m0.0

Now tomorrow we get government preliminary figures on third quarter GDP growth. The median economist forecast is 3.2%. Now I cannot wholly dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but I think I am going to go out on a limb here and say 2.6%. Of course I should not ignore the fact that this will be a government preliminary number and some believe (you can guess where I stand) that the government cooks the books on the numbers. Nonetheless, 2.6% is where I stand. Feel free to add your vote. The winner will get special mention in my next post.

That Stock Thingy

I am shocked and dismayed. After a global 68% run in stocks and seven months of straight increases in the market we may - please, say it isn't so - have a month that ends down just a tad. Not a significant tad so far, but a tad nonetheless. How can it be?! The market can actually go down again?

I love this quote in the linked Bloomberg article that "The doubt and pessimism just won't go away." Seriously, we narrowly avoided a total financial meltdown seven short months ago and this is what this supposedly knowledgeable - quotable - person has to say. Unless Bloomberg is shooting for comedic relief, they need to be quoting better sources.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFRrXflshgvQ

So back to the question of why the market after seven months of going up, some months significantly, might actually now have a slightly down month. Heeellllooooo! Why shouldn't it. Let me count, just a few of the ways (hold on to your hats):

  1. Home building by any standard has well exceeded usual norms, compared to population and income, over the past several years - significantly. We are just now getting back to levels that are more sustainable, but we have the inventory overhang, increasing unemployment, existing housing sales and foreclosures, and multiple other problems facing home builders. Did I mention shadow inventory? If you do not know what that is, it is basically banks and homeowners who want to sell - foreclosure properties or otherwise - who are holding homes off the market. Look it up as some estimates of this shadow inventory are staggering. I refer you to Calculated Risk, the best site I know on real estate issues, both private and commercial.
  2. Debt, debt and more debt. I refer you to one of my favorite blogs, Sudden Debt, that focuses on this issue. To put it short, under Greenspan and Uncle Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Boy is that a wakeup call. How did we do that?
  3. I have written a lot lately about the financial bastards that brought us here. While I need not say more, I feel I must. The problem now is moral hazard. These institutions - according to numerous reports I have read of late - are returning to their risk taking ways. They are most certainly returning to rewarding officers and executives with handsome pay and bonus programs, despite these same individuals nearly causing the financial meltdown of the entire world. How can this be so soon - like less than a year - after we teetered on the edge of financial Armageddon? It is because the government stepped in with little to no conditions. And I suspect this was largely due to us letting wolves from the industry (who took on key government jobs, e.g. Paulson) guard us (taxpayer) chickens. You reward, or save, idiots for their idiotic behaviour and they will not only repeat it but build upon it. We folks, are building a much bigger bubble. In a few years you can quote me on that. And hey, I am not even an economist. No one surveys my opinion.
  4. As suggested above, the government is making a substantial number of wrong moves. For one, they need to take apart the too-big-to-fail institutions. Instead they promoted them getting bigger and now we do not know what to do with them. I had the same advice in my very first blog a year ago, linked above, and stand by it. Take them apart and let the officers and shareholders share the pain. Do not support them at taxpayer cost. Now I see a lot more other commentators, including many who know more than me, giving the same advice.
  5. Let me mention commercial real estate. One stat I read this year is that we have in the U.S. roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.
  6. And did I mention adjustable rate mortgages (ARMs). I read a report this past week that over 90% of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A lot of these will reset in 2010 and 2011, so we will see.
  7. Shipping (Baltic dry index), trucking, port activity, shipping rates, and so on and so forth are all pointing to economic activity being negative. Not diving like we were earlier this year, but not rebounding.
  8. Unemployment still increasing, not as fast but still increasing, and this has run on effects on retail spending, real estate and several other areas. As a side note I have to mention that a number of the bottom line improvements for companies this past quarter have been largely due to cost cutting (like layoffs) as opposed to increased sales. This does not spell recovery.

I could go on and on and in posts to come will do so, but the bottom line is that fundamentals are pretty much the worst they have been in my life time. Debt, government and private, continues to be my primary concern and you can easily see how many of the other areas noted above are closely tied to and - feeding or being fed by - that situation. Please feel free to add your thoughts, but I still have trouble sleeping at night - mostly because of my kids needing to deal with the stuff we are leaving for them.

Disclosures: None.

Tuesday, October 27, 2009

More of the Same - But Perhaps Some Are Listening?!

Finally, an honest banker among the big boys. Okay, he is retired, but that makes him a tad less biased, and as a former Chairman of Citigroup, the guy has major street cred and mojo, whatever that means. In any event, he agrees with Volcker - something I have been recommending for many months - that there needs to be a division between traditional banking and those that deal primarily with capital markets. And he agrees that more demanding capital requirements would help. Go figure?
http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=2

Hang Him High

If you ask me Stephen Friedman, who benefited by millions off taxpayers through what appears to be conflict of interest should repay it all. And the company for which he is a director should give us back around $14 billion. See, it turns out that Goldman made about $14 billion off of AIG's demise and that money came from the folks on the street - as in us taxpayers. Now they probably would have done okay without us, but that does not change the fact that they did even better with our money, just in time to start paying record bonuses again. Disgusted, I am, and I hope the prosecutors figure out a way to get the bucks back from Goldman one way or another. Friedman, on he other hand, deserves to be in jail in my opinion. He was playing both sides of the fence - director for the Fed of NY who approved AIG payments to Goldman and also director for Goldman - and to add insult to injury added his own multi-million dollar investment in Goldman before the Fed payment was announced to make sure he made out personally. I am ill again. Then again, I have been ill a lot lately. He claims he is being falsely portrayed, which is easy for someone with many millions of new found dollars to say.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

Must Read of the Month

And here is the must read of the day, week and month. I have mentioned before Jeremy Grantham of GMO. He is one advisor who understands what is going on. He is now out with his latest quarterly report. It is a long read - 14 pages - but do not skip to the ending. The tale is best read from cover to cover. Well worth the read and I highly recommend it.

http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf

Disclosures: None.

Survey says . . .

The consumer confidence numbers came out this morning and they unexpectedly (depending on your expectation) dropped. Indeed, not one economist, of the 79 surveyed, was as pessimistic as the actual result - not one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_xPp7Pzgs5E

I noted earlier this month how not one out of 80 economists surveyed was right or pessimistic enough on the jobs report on October 2 - not one.

http://www.google.com/hostednews/afp/article/ALeqM5jNat8FSYDU-6wVcrkdfTsuIylT4g

How is it we keep listening to these people? Very few of these "experts" forecast our current situation, yet we still like to survey them and some seem willing to believe them. Face it folks, the job market is in shambles, debt is off the charts (both public and private) and the current stimulus is running out of steam. What is there to be confident about? I am confident we are in for more pain, I just do not know when the markets will wake up to this fact and react.

Disclosures: None.

Friday, October 23, 2009

Are You Outraged Yet? You Should Be!!

A couple of days ago the market dropped due to an analyst downgrading Wells Fargo to sell from hold. Part of the reasoning was that the Wells Fargo profit was tied to mortgage servicing, which is not an income stream that is sustainable in the long run. As it turns out, however, the companies making the most from loan servicing include Bank of America, Citigroup and JPMogan Chase; go figure.

http://online.wsj.com/article/BT-CO-20091022-708579.html

So hey, you say, what does it matter where their profit comes from. Well, if you understand the situation, you are going to be just a little bit pissed off. Let's start with the fact the these financial institutions brought us the financial meltdown of the past year or two by playing a lot of financial games. We are talking derivatives and high leverage games that led to serious problems from which the entire planet is suffering. Next we move to the fact that we the people bailed out their collective arses at great cost. Our government debt is at record levels and our children and grandchildren will pay the price. Then we move on to how these too big to fail idiots continued providing big bonuses to themselves and dividends to their stockholders with our money. Upset yet? You will be. Now many of these companies are returning to profitability despite record numbers of Americans losing their homes due in no small part to the policies of the financial institutions. What do I mean by that?

Well, most banks securitized their mortgage portfolios and sold them off to investors. The loans were sliced and diced ad infinitum. Yet they remained the servicers on the loans, extracting fees for collecting payments and foreclosing on homes. As it turns out, many of the financial institutions that created the current mess are making loads of money off of the misery of those facing foreclosure. They are profiting from our pain and they are avoiding loan modifications because they can make more money through the foreclosure route. Are you outraged yet?

http://www.creditwritedowns.com/2009/10/why-mortgages-arent-modified-and-what-a-ruling-stopping-foreclosures-means.html

Disclosures: None.

Wednesday, October 21, 2009

I am Totally Doubting My Vote.

I voted for Obama. I have for years liked McCain but during the election he caved too much to the far right and made some rather radical statements, and then he had Governor Palin as VP and I had no choice. Not that I was adverse to Obama, but I was not totally sold on him and among Republicans McCain was one I felt I could support. I am still not saying I would vote for McCain, especially with his inexperienced Alaskan sidekick (not saying here that I like Biden, but he has some experience), but I would have many more reservations about Obama if I knew then what I know now. I did not vote for him in the primary and now I believe I was right.

So why so down on Obama? Well, he is paying attention on the financial front to idiots. You know, like Geithner, Summers, Bernanke, Paulson and the like. Meanwhile he is ignoring tons of respected economists who say to nationalize and break up the too big to fail idiots that brought us her. He is ignoring his respected advisors. He is building a new bubble, inspiring people to spend when they need to save. Building new problems, I suspect for political banefits, not benefits to the country. I am truly disheartened by his financial performance to date and truly believe we are financially in a very, very precarious state at this moment.

One man I respect is Paul Volcker. One reason I voted for Obama is that he had Volcker on his staff of economic advisors. Now the elected idiot is ignoring (and has for some time) his most knowlegeable and least biased advisor. WAKE UP OBAMA AND LISTEN TO THIS MAN!! HE IS SAYING THINGS FOR THE NATIONAL GOOD, NOT THE WALL STREET GOOD!! If this jerk does not wake up soon I will actively campaign against him in three years, probably sooner.

http://business.theatlantic.com/2009/10/volckers_quest_to_reinstate_glass-steagall.php#

Disclosures: I am a life long Democrat and doing this post was totally against my grain but someone has to do it.

Sunday, October 18, 2009

The End is Near - Or at Least a Lot Closer!!


I am squarely back in chicken little territory (like I ever left). Nonetheless, I have this really bad feeling. It could be the market reversal between March and now being the most extreme since the Great Depression (what was so "great" about it) or it could be that consumer debt versus income is still at record levels and climbing.

Either way, we are into the old bubble pop territory. Yep, I am not feeling at ease about this recovery. You judge for yourself.

Disclosures: None.

Friday, October 16, 2009

S&P P/E at 140!

According to the NY Fed, the S&P P/E hit 140 on October 7 and the market is up further since then.

http://www.newyorkfed.org/research/directors_charts/ipage20.pdf

Need I say more.

Disclosures: This is insane.

Sunday, October 11, 2009

The Sky May Not Be Falling But The Ice Is Melting!

Here is a must read article about our current mess. Whether you understand the complete ramifications of the article is not the important point for my purposes. You will understand the incredible charts, which are self-explanatory. If you look at these charts and still say we are out of the woods, you are in need of therapy. And if you understand the article, you know the charts are not even half the bad news.

http://jessescrossroadscafe.blogspot.com/2009/10/speculative-bubble-in-equities-and-case.html

My favorite chart is this one:

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0tSSvJdVtfy1fsn-x1TMB2fb0SNC-VyAoLffeEOmcHlfBMWMlQw3XRTYYS5bMXmiFpNXrKpPuTSn1DlubBHbSSab6zbNV1R4AtVjru1o1iI4ZWJ8AbHKRuJguCiB00-vdqv20FXF8laM/s1600-h/peratio.jpg

Look at that link and tell me you are dying to buy into this bull market.

It's the Demographics!

There has been significant focus on a whole host of economic woes facing us in this recession. Not to depress you, but if we escape our current economic mess, predictions are that the demographics in the U.S. still doom us to an ultimate depression. In other words, our economy was already doomed, without the recent recession, as we have an aging population to support and no obvious means to do so. So what happens if the current crisis is still looming or our newly created bubble bursts when the demographic issues really start to set in? I am moving to Brazil and taking my family with me. That is what happens.

http://www.nakedcapitalism.com/2009/10/guest-post-the-other-economic-crisis.html

And it would appear that the poor economic conditions are leading to an acceleration of the aging baby boomer population electing to retire and take Social Security, which will tax the system earlier than demographic models have predicted. We unfortunately, demographically speaking, are coming upon a time when people should be working longer, yet the bad economic times are causing the opposite.

http://www.financialarmageddon.com/2009/10/not-so-negligible.html

And to add to our demographic woes, pensions far and near - especially government pensions - are being severely stressed in this recession. Some managers claim they will never recover and be able to pay full benefits. Worse yet, despite significant drops in values over the past two years, many are turning to or keeping with risky investments to boost returns. If you read the lead in link on this post above, you will see how truly foolish such a strategy is today. The stock market is up at an unbelievable level right now, so the pensions should be taking their profits and hunkering down for a while. Economist after economist is referring to the current market conditions as irrational. And yes, I know that Keynes said markets can stay irrational longer than I can stay solvent, but at some point gravity sets in big time and I do not see pension managers catching the turning point this time around if they did not last time around. There most certainly is no significant medium term gain from where we are now, but heck, what do I know.

http://globaleconomicanalysis.blogspot.com/2009/10/five-major-pension-problems-one-simple.html

It's the Climate!

Now that I have you really in a good mood, let me pop this tidbit upon you. New research says that prolonged CO2 levels slightly above current levels (where we are heading and expect to head) may be tied to ocean levels 100+ feet higher than where they are currently. The scientists cannot say with any certainty how long it would take at these levels of CO2 for this to happen or if exceeding these CO2 levels significantly - as expected in the medium term - might tip the scales toward a rapid acceleration, but it is certainly something to tell you children about when they ask for a scary story. So what happens if the oceans rise 100+ feet? My home in New Hampshire probably becomes beach front. But with the accompanying financial melt down, I will consider moving to the Himalayas.

http://news.bbc.co.uk/2/hi/science/nature/8299426.stm

Disclosures: none.

Saturday, October 10, 2009

Mr. Peabody Economy

I have been on vacation for a few days, which explains the lack of posts, but I cannot get to sleep tonight, so I thought I would put in a quick word or two.

Today my daughter and son entered into their first turtle race. Their grandfather was kind enough to catch them a box turtle, Mr. Peabody, so named for his (or her) reaction to being picked up. The race consisted of five turtles being placed under a plastic clothes basket in the middle of a marked circle. The clothes basket is lifted and the first turtle to the circle line wins. Mr. Peabody took three rapid steps from where he started and then just stretched out his head for all to admire his pretty markings and wonderful progress. And there he stood and there he stayed until the end of the race. My kids took it all in stride.

I fear that our economy is acting a bit like Mr.Peabody. We had a lot of early stimulus, which got us off to a seemingly great start, for which we congratulated ourselves and looked around for others to do the same. Yet now that we have been through our initial stimulus and things are pretty much just as miserable as before for the vast majority of Americans, what next? It would seem, very little.

Now I am not saying the Administration is being complacent, just that there is little in the way of options. Sure we can do more stimulus, but when you scratch the surface, the only thing being spent is the stimulus and absent a few areas that make sense, like extending unemployment and health benefits, there is just so long you can stimulate some sectors. A longer broader cash-for-clunkers may generate more temporary sales, but you are simply front loading sales. As we saw in September, when the program stops, sales plummet. The same for the very costly first time home buyer's credit. There is just so much blood you can get out of a rock.

And that brings us to the real crux or two of the problem. People cannot spend what they do not earn (or are given) without incurring debt. The cash-for-clunkers and first time home buyer's programs gave people monetary incentive to incur debt and stop saving. While this might provide a minor jolt to one sector or another, it does not cure the underlying cause of our mess, which is too much debt. Too much debt is fixed by paying it down. And to pay it down over the long haul you need more pay, less spending or both. If tax revenues in the various states is any indicator - and it is a very good one - then that more pay thingy ain't happening.

http://news.yahoo.com/s/nm/20091009/pl_nm/us_usa_state_budgets

This makes sense given the unemployment figures and reduced hours for those still employed. So without more pay the only way to pay off debt is (a) for the government to pay it off for us (which just moves it to another balance sheet) or (b) to spend less and pay it down [I will ignore (c), the default option for this point.] On (a), unless you are a too-big-to-fail financial institution that supplied us with those folks running the Treasury and Fed, it seems the government has no interest in paying off your debt. So we go to (b) and the government does not like (b) either. Why, because saving and paying down debt means recession and recession bad, recession very bad. Government want good and good, according to the government, is more debt.

What the government needs to do, however, is not promote more spending and debt (though most measures to date seem to have that aim). It needs to focus on job growth, which includes investments in new technologies, like alternative fuels, climate change related technology, agricultural improvements, lower cost health care technologies and the like. These will be the new technologies of this century; technologies we can develop, patent and export. Technologies that can improve the world environment, reduce dependence on non-renewable energy supplies, reduce dependence on countries that generally do not like us, assist developing countries and provide America with a strong footing going forward. George Soros seems to have his head in the right place, investing a billion on clean alternative energy.

http://www.nakedcapitalism.com/2009/10/soros-to-put-1-billion-in-clean-energy.html

Imagine what the U.S. could have done with the $180 billion it used on AIG alone! I am not saying there are a lot of easy answers, but we need to start spending our money finding the tough to find answers. This is something that will take some time and we are looking for quick fixes. But let me tell you a secret - with our debt load there are no quick fixes. It is going to take a long time to get out of this mess. And even if it doesn't, what in the heck are we waiting for on investing in our future? We should have started more productive spending on these technologies years ago. Instead we are spending trillions that, I believe, is simply leading to a new bubble, and a much worse one at that.

Disclosures: I own stock in Valcent Technologies, a company focused on biodiesel from algae and alternative agricultural systems.

Monday, October 5, 2009

Future Office Space

I work in Manchester, NH in an old textile mill. At one point, Manchester was the top textile producing location in the U.S. and probably one of the largest producers in the world. That was over a hundred years ago. Today none of those mills are still operating as mills. Some have been torn down but most these days are converted into offices, stores, hotels and the like. Well it looks like China is about to create some future office space. Their textile mills seem to be running very low on business these days.

http://www.chinastakes.com/2009/10/xmas-season-orders-dont-bode-well-for-chinese-exporters.html

Disclosures: None

Friday, October 2, 2009

"Sobering" Indeed.

Obama referred to today's jobs data, a loss of 263,000 jobs (roughly 100,000 more than economists expected) as sobering. Well, I agree, but to say it was unexpected is to buy into those that thinks we are in recovery phase. To me we are in the lull before the storm. By the way, of over 80 economists surveyed, none, not one, predicted the number to be as high as 263,000. That reality is sobering.

http://www.google.com/hostednews/afp/article/ALeqM5jNat8FSYDU-6wVcrkdfTsuIylT4g

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTo1p6Los8CI

But if you really want something sobering, I suggest the following link. As the author points out, if you are expecting consumers to start spending more money for an economic rebound then you are sadly mistaken. They are already spending at very high (record) levels in terms of a percentage of personal income and as a percentage of GDP. And even that is not really lifting us out of this recession absent government support. Even though consumers are pretty much spending as much as they can, the economy is still struggling. So I don't expect things to improve from here.

http://www.financialsense.com/Market/panzner/2009/1001.html

And as this piece points out, we are in for a world of hurt due to the size of the private debt that has built up. We may do well in the short to medium term while government spending/stimulus props us up, but that will in time end and then we are all in for a world of hurt.

http://www.nakedcapitalism.com/2009/10/the-recession-is-over-but-the-depression-has-just-begun.html

Now I hate repeating myself so much, but let's consider the math and see where it leads us:

  • the unemployment rate is nearing a two decade high;
  • those with jobs are working the these least number of hours per week ever (roughly 33);
  • adjusted for inflation, hourly wages are at their lowest in three decades;
  • overall debt, government and private, is at record levels;
  • foreclosures are mounting on both a residential and commercial level;
  • there are an estimated 13 months worth of shadow inventory of houses, i.e. those that will be for sale but are being held off the market for one reason or another;
  • When closing costs are considered, nearly 50% of all homes are under water on their mortgage;
  • We have now reached a record in terms of unemployed people who are staying unemployed beyond their unemployment benefits;
  • We also have a record in terms of job availability for the unemployed with job openings only there for one in six who are unemployed;
  • Our economy is over two thirds reliant on consumer spending, which is a totally unsustainable model going forward;
  • Financial companies have doubled their GDP contribution in the past decade or so, though it is now obvious that they are not adding any benefit to the economy; and
  • I am tired of repeating all this bad news with seemingly no one paying attention.

Folks, I am not saying when the problems will sink in and take hold, but they have to at some point. At the very best, our economy will be stagnant for years to come, probably over a decade. More likely, in my opinion, we have a world of hurt on the way with the only question in my mind being when will this reality sink in? You tell me. Until then, with the market near record amounts since March 9, I am personally going to hunker down for a while and see what happens.

Disclosures: None.

Thursday, October 1, 2009

Conspiracy Theories Abound!

Recently there has been a number of articles and blogs on Zero Hedge and some other conspiracy theory type blogs. I do not comment here either way, but I must admit it is a fun read. First, I link an NY Times article on Zero Hedge, a blog that came out of no where this year to be a cult favorite. Second, the first article quotes from Jim Chanos, of Kynikos Associates, which is the subject of a good bit of discussion at the second blog I link, which to me is a good bit more entertaining. Indeed, it has movie, or series, written all over it if it were not perhaps true or close to it.

First Link

http://nymag.com/guides/money/2009/59457/

Second Link

http://www.deepcapture.com/

If you are bored and want some entertainment, both are worth a few hour of fun reading. And imagine if half of what they say it true.

Disclosures: None.

I Don't Get This Math

Yes, the savings rate is up, but if you look at this chart, you will see it has a long way to go to get back to historic norms. With the wealth evaporation of the past two years, mounting job losses, aging baby boomers past their peak and other considerations, one has to wonder where the savings are coming from, even at this low level.

http://www.businessinsider.com/chart-of-the-day-personal-saving-rate-2009-9

Moreover, Bloomberg is reporting that consumer spending was up significantly in August. Indeed, the biggest jump since 2001 and not all of it was due to cash for clunkers.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSbaO.gu.aps

Yet first time unemployment claims were higher than expected last week and foreclosures - residential and commercial - are on the rise.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ak__6D.HTBQM

Finally, might I add that we as a country still have record amounts of debt.

http://blogs.reuters.com/rolfe-winkler/2009/09/30/krugman-and-the-pied-pipers-of-debt/

While on an individual level we have begun to deleverage (either through payment or default) on a government level we are increasing debt to dangerous levels. And there may be a limit to how long China and Japan will continue to fund our spending spree. Most Treasuries are now being bought by the Fed and foreign purchases were down 40% in the second quarter versus the first, so the government punch bowl may be taken away sooner than many expect.

There is something about this math that does not calculate for me. How can we make less, spend more and increase savings? The only answer I can think of is government stimulus. And government stimulus is not the same thing as an economy rebounding. And when that goes away we will see the recession in full bloom. Some view recession as a bad thing. While not dismissing the financial and other pain people will feel in a recession it unfortunately is the only cure for our excessive debt levels. It is a correction to many years of economically unsustainable spending on our part.

Disclosures: None.

Tuesday, September 29, 2009

The Sky is Falling!!

This is terrible, absolutely terrible!!! Compensation limitations may put Citigroup and Bank of America at a recruiting disadvantage. Oh my! I am not sure I will be able to sleep tonight!! Oh what will they do, what will they do?!

http://www.bloomberg.com/apps/news?pid=20601087&sid=av0Tkl_Q_pro

This Bodes Well!

Stocks are at their highest valuation in five years. Think about that a moment. Between two and five years ago we were in a roaring economy, or at least we thought. Things looked fantastic. Housing was booming, consumers were spending, businesses were opening left and right, yet the valuations on the stock market were less than they are today. Today we have housing continuing to struggle, consumers ramping up their savings rate, unemployment on the rise, commercial real estate beginning a long fall, foreclosures on the verge of an Alt-A explosion, and debt, on a government and individual level, still in record ranges. Yet we have the highest stock valuations in five years. Yep, that bodes well for the market.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ae0oGD7XmN9U

Disclosures: I have a number of put options.

Sunday, September 27, 2009

The Voodoo that Feds Do

Okay, I just migrated away from my blog without saving an hour worth of work and it is all gone. So without all the verbage I had written, here are some well worth the read links about how the Fed is doing, and has for decades done, a terrible job and is in no small part responsible for the mess we are in, and is in no small part responsible for the new bubble we are seeking to build to get out of the last. I only hope they fail miserably so that we can suffer and take our medicine now. I for one do not want to put our mistakes on my children to deal with.

http://www.nakedcapitalism.com/2009/09/5324.html

http://www.calculatedriskblog.com/2009/09/fed-and-subprime-lendng-watchdog-that.html

To the Moon Alice!!

I think the market is taking off from here, not. Why not, let me count the ways:

  • consumer debt, while a smidge lower than it was at the beginning of the year, is still near historic high;
  • unemployment, while slowing, is going to go over 10%, perhaps 12%, and real unemployment is much higher, so this does not bode well for an economic recovery;
  • commercial real estate is heading into the dumper big time. I need not link anything here if you are reading up on things, but daily there are articles on how hotels, malls and the like are suffering;
  • residential real estate is reaching a bottom but, absent first time home buyer incentives, is still sucking wind. Builders still cannot hope to make money, especially if you include condos, which most stats do not include;
  • the market has climbed to a very high P/E, even in good times. This glass is the more than half full society is bound to come back to Earth;
  • there is a well known shadow inventory in the housing market. This is based on banks not foreclosing, homeowners not listing properties they would like to sell and the like. While official inventory is reduce down to less than eight months supply, we will see . . .; and
  • the too big to fail banks still have significant toxic assets on their books. No one, including them, knows how much.

And so folks, I continue on the doom-and-gloom troop. I dare you, convince me I am wrong.



Disclosures: None.

Thursday, September 24, 2009

It's 10:00, Do You Know Where Your Portfolio is Heading?

I don't know that the market will continue its decline tomorrow or even if it does for how long, but I do have a firm conviction on a macroeconomic level that the market is well above where it belongs at the moment and there is just so long it can defy gravity. I have given up on trying to predict when, but it will fall. And if the Nikkei is any indication, at the moment it is down 2.8%.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5wn0rKqNziY

"Shared National Credits [Pain]"

There is this thingy known as Shared National Credits whereby $20 million or more is collectively loaned by three or more unaffiliated institutions like banks, foreign banks, insurance companies, hedge funds, pensions and the like. Just think of them as big loans for big stuff. The FDIC just did a review, sampling, of these loans to see how they are doing. Answer, not too good. Mind you, there are $2.9 trillion of these outstanding, so not too good is problematic. What they call "criticized assets," i.e. anywhere from needing special attention to expected to be a loss, represent $642 billion of the loans, which is significantly higher than what they were in last year's review, when they stood at $373 billion. And you thought the worst was behind us.

http://www.fdic.gov/news/news/press/2009/pr09175.html

Then The Big News

Existing Home says unexpectedly declined in August. But if you are reading this, I suspect you already know that.

http://www.calculatedriskblog.com/2009/09/existing-home-sales-decline-in-august.html

Disclosures: None

Wednesday, September 23, 2009

The New Reality in Judging Success

French President Nicholas Sarkozy recently asked some very smart folks, including Joseph Stiglitz, to reassess how we should be gauging posperity. The traditional measure, growth in GDP, simply does not seem to hack it any more. At least that is what Stiglitz and the others concluded. They did not necessarily agree on the new roadmap or exactly what the new guage would be, they just agreed the old gauge is highly flawed.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aCcM_7rg22Bw

http://www.nytimes.com/2009/09/23/business/economy/23gdp.html?_r=1

Among the problems with a single-minded focus on GDP are:

  • It can be built on a debt bubble and, as we are now seeing, this is not a good thing http://www.nakedcapitalism.com/2009/09/its-the-debt-stupid.html;
  • It ignores environmental degradation and other quality of life issues that might potentially weigh on GDP growth;
  • It ignores economic inequality in that we don't care where the GDP comes from or whether it is benefitting everyone;
  • It ignores jobless rates;
  • It ignores health care; and
  • It ignores many of the things that tend to make us happy.

So what is the answer. Stiglitz and company did not say. Some, however, think the Danish might have the answer - taxes!

Yes, them Danes have one of the highest tax rates in the world, yet by pretty much all measuring sticks it is a highly prosperous country and a great place to live. I am not saying I would increase taxes tomorrow to 49% and make everyone happy, but certainly what the Danes are doing is worth some logical analysis. At least the country, taxes aside, seems to be focusing on some of the quality of life aspects to living that GDP growth ignores - or perhaps we just all feel we will feel better if we only have more to spend (based on debt or otherwise).

http://suddendebt.blogspot.com/2009/09/more-taxes-enyone.html

I don't have the answer, but I agree the single-minded focus on GDP is not it.

Disclosures: None

Sunday, September 20, 2009

Go Paul Go!!!

This post is about two Pauls.

I remember being greatly heartened before the election when I heard that Paul Volcker would be part of the Obama financial team. I was equally disheartened later to learn that he was given second tier status to the likes of Geithner, Summers, Bernanke and others. Well, I think Paul is a bit tired of the Administration not hearing his voice, so he is letting the public hear it.

If you are unfamiliar with Volcker, he saved this country's collect arse from financial ruin in the 1980s by being willing to tell people where to stick it and being willing to have faith in his policies against the head winds of political pundits looking to do whatever is popular at the moment. He raised interest rates to outrageous levels and controlled runaway inflation. He is now largely being ignored despite his fancy title. And I suspect he does not like it one bit.

http://online.wsj.com/article/SB125313031639216991.html

You go Paul.!!!

Hitting the Nail on the Head!!

I have said many times how outraged I am at the money going to the banks that got us into this mess and how fueling more debt is not the best way to end a debt created crisis. This linked piece puts the point much more eloquently than I can. It points out the fatal flaw in the neoclassical economists, you know like Summers, approach to the situation, which unfortunately is the exact approach we have taken. As the link very aptly points out the best way to deal with a debt driven recession is to funnel the money to the debtors so they can pay down their debt and not give it to the lenders so they can create even more debt.

http://www.nakedcapitalism.com/2009/09/guest-post-steve-keen-out-thinks-larry-summers.html

The link points out a speech by Obama wherein he noted that giving the money to banks has a multiplier effect as they lend to others. The problem being it multiplies debt, not equity. We are a nation of debtors that need less credit not more. We need debt reduction, less spending and a renewed sense of fiscal conservatism. We are getting there but no thank to the Administration's approach, which if it worked would only build a new and bigger bubble. This is what keeps me up at nights.

It is About Time!

Congress created a commission to study our current financial crisis. They cleverly call it the Financial Crisis Inquiry Committee. Gee, wish I had thought of that. What strikes me is that we are at least two years into this crisis and the committee is just getting started. Perhaps that is a hint on how this all happened. Hmm?

http://www.calculatedriskblog.com/2009/09/ny-times-financial-crisis-inquiry.html

Quack, Quack!! (Another Paul)

And now the second Paul. My parents are in town to meet their new grandson. It was a truly wonderful weekend in New Hampshire. Dad was pretty sick a couple years back but finally got an accurate diagnosis and seems to be doing much better. Mentally he was on his game cutting jokes and showing the wit I love. My daughter and son were both pretty good with minimal fighting and tantrums. Mom is doing great and the weather was simply perfect. And today we drove into Boston and took the Duck Boat tours, which involved a WWII converted amphibious vehicle converted into a tourist bus that drives all around the historical sites in Boston before launching into the Charles River and continuing the tour by sea. Our guide, Paul from Revere, was excellent and I learned a good deal about Boston and U.S. history in 80 minutes. I highly recommend it. Every time Paul would call out "One if by land and two if by sea" we would all shout out "quack, quack!" All that is except my two year old son who slept through nearly the entire tour.

Quack, Quack everyone!

Disclosures: none.