Fiscal (Non)Stimulus - Part Two

I posted the other day some (more) views on why fiscal stimulus is not going to work. I even attached a statistical analysis from a guy at Stanford (the West Coast's version of smart people) showing this to be the case. Well, let's consider it from a more back-of-the-envelope down-to-earth perspective.

Let's assume you are a somewhat average American making a somewhat average salary. Your life may be better or worse, but I need to start from some base-line. So you make an average amount and you have several thousand in credit card debt. You are worried about your job, your spouse is working part-time, your son needs dentures, you are worried about college, retirement, the house payment and the like. You have been cutting back where you can but are running out of places to cut. You are at least somewhat worried about your financial future and your children's financial future.

So now the government gives you a one time $1000 check. There may be another one or two some time in the future, but no guarantees. So you get this check. What do you do? Well, let's make this multiple choice:

1. You splurge on a new high-def TV;
2. You take the family (at least some of it) to Disney;
3. You have a big neighborhood party to celebrate the check;
4. You by some new furniture, clothes for the kids, a new car, whatever; or
5. You use it to pay some of those bills you were not sure how you were going to pay.

Okay, I made this a bit extreme, but not too much from what I can tell. Americans are wising up and spending their money in a more prudent fashion. If only the politicians were to learn how to do this, I could sleep better at night.

Fiscal (Non)Stimulus

While I do not have time at the moment to do a proper summary of the following by John Taylor at Stanford, it is a good read and not that long. Bottom line, he updates a statistical analysis of the impact of fiscal stimulus spending, like we did last year and are about to repeat, and concludes there is no evidence to support its assumed impact on consumption, i.e. it has no statistically significant impact on increasing consumption. In other words, giving people a rebate is not helping the problem.

I for one take a slightly different view. I do not want people to spend more. I think they are now, for a change, spending within their means and it needs to remain there. Consumer debt is actually going down right now, minimally at least, and that is a good thing. The problem is not a lack of consumer spending, it is that we have built up too many retail and other establishments to be supported by what we make. That, my friends, is why we are correcting. And that is why a lot of businesses NEED to go out of business.

The only thing that rebates might achieve is to shift a bit of debt from the consumer's pocket to the government's pocket, benefiting the pay down in consumer debt or the increase in savings. I do not, however, view this as an efficient use of government money. Rather, we need to be using the money to (1) deal with the fallout of a recession in terms of helping the unemployed, homeless, etc. and (2) work on building sustainable businesses and jobs. The latter is difficult, but spending on alternative energy, better education and the like makes some sense to me. Meanwhile the economy will correct itself and we should let it take its course. We should certainly not be building a massive deficit in trying to stop the inevitable.

http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=387

Quote of the Day

"When the best minds of the country are all going to Wall Street, there is a distortion in the allocation of human capital to some activities that become excessive and eventually inefficient." Nouriel Roubini

Dollar Up or Down

There is a race to the bottom on currency values. The lower your currency goes in relation to other currencies the better off you are exporting as your goods are cheaper. Yet, here is a reason why the U.S. may not be in a position to devalue and may, instead, have an incentive to go the opposite direction slowly but surely. This seems the wrong thing to do, right? Well, if we want anyone to buy Treasuries, probably not. Eventually fear will not cause a flight to Treasuries. Indeed, fear may at some point drive a flight in the opposite direction.

So you need something to keep people buying Treasuries. Well, the rates certainly are not going to do it at the moment. Recently some people were essentially paying the U.S. government to hold their money for them and that is not going to last for long. When people start deciding there are better places for their money - which they are already in the process of doing - then they will need an incentive for buying Treasuries. Foreigners, especially, are not going to buy Treasuries at very low rates when the dollar is devaluing, as that is a losing proposition. But if the dollar is rising gradually in value against their currency, they a Treasury investment, even at low interest rates, is providing growth through currency exchange rates. And since the U.S. desperately needs to sell Treasuries for years to come, this might be the tool of the day for them to do it, and perhaps the only way.

http://suddendebt.blogspot.com/2009/01/linked-bonds-and-fx.html

Knock, Knock, Knocking On Paulson's Door

Well the $300 billion given to financial institutions to get them lending did little to achieve that desired effect. The banks held on to the money for dear life, literally, and for good measure. It seems ratings downgrades in the last quarter of $1.84 trillion were enough to eat up all the TARP dollars on the bank's books. Meredith Whitney at Oppenheimer & Co notes that the massive downgrades will lead to "meaningfully lower" capital ratios. In other words, the institutions are no better off now than just before they received their TARP dollars and can be expected to be knock, knock, knocking on Paulson's door.

I have said it before and undoubtedly will again; some of these financial institutions need an orderly wind-down. At a minimum, if we are spending all this money on them, Uncle Sam should outright own them. Shareholders and bondholders lose out, as does management, which should be replaced.

http://www.housingwire.com/2009/01/07/downgrades-outpacing-tarp-funding-analyst/

But rather than getting bang for our buck, Paulson is getting us next to nothing. He claims he is not trying to duplicate private deals, like the one Buffet got with Goldman Sachs. Why in the H E double tootpicks not?!! There is no way for this money giving spree to avoid moral hazard without making these financial companies bear the pain, and a lot of it. So wake up Henry!!

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

Disclosures: None.

Here's A Worthy Cause . . .

Seems the adult entertainment industry is hurting in this downturn too. People are just too darned depressed to think about sex, according to Larry Flynt, so he and others in the adult entertainment industry are looking for a government bailout. Now this seems a bit counter-intuitive to me. It may be that people are just turning to free porn, of which there is plenty on the internet (I am told), instead of spending money on Hustler magazine. The good news is that we may have found one industry where Paulson and the Fed will draw the line.

http://dealbook.blogs.nytimes.com/2009/01/07/bailouts-gone-wild-porn-chiefs-seek-5-billion/

Disclosures: None (really honey I don't look at porn)

Back To Selling Shoes

Kenneth Lewis at Bank of America seems to have perhaps bitten off a bit more than Bank of America can chew. Seems some of the "crown jewels" at Merrill Lynch are ending up in someone else's crown, just when Bank of America is struggling with reduced earnings and a greatly reduced stock price. I guess $40 billion doesn't buy what it used to. Personally I thought Bank of America was toast when it bought Countrywide Financial, even if it can take advantage of some tax rulings at the IRS. When they added Merrill to the mix, they just became extra-crispy toast. They are probably in the too-big-to-fail category, so good old Paulson will prop them up if need be. The problem might become one of too-big-to-save if things get really nasty. The immediate problem for Lewis, however, is stemming the tide of defections. If he can't, he can always go back to his old job of selling shoes. I believe there are a few mall vacancies right now, so setting up shop in a prime retail location should not be a problem.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aMzHGkCEv2P0&refer=home

Disclosures: None

Gettin' Hedgie With It

Hedge funds charge a flat annual fee for their services and then, on top of that, take up to 20% of your earnings if they make you money. So what happens when they took 20% of what turned out to be nothing? They get sued, that's what. And that is precisely what is happening to those highly skilled professionals who after tons of due diligence gave their client's money to Madoff. Negligence aside, the clients are asserting that the billions in fees they skimmed-off based on false profits should be returned as it was never really earned. Now I have not seen the precise wording of their client contracts, but I think the clients have a good point. It will be interesting to see what the hedge funds have to say in response. It might sound something like "Chapter 7."

http://www.bloomberg.com/apps/news?pid=20601087&sid=amj8XcwuSr0s&refer=home

Disclosures: None

Spin Doctors

I love the way the news media tries to put their spin on things. The market is up, they give an explantion why. The market is down, they explain that too. It is rare, however, that the same explanation is given for both directions. This morning, before the markets opened, Bloomberg noted that market futures were up slightly on an unemployment number that was in line with expectations. Since it was no worse than expected, the market viewed it favorably. Yet now with the market down a good bit, Bloomberg blames the drop on, you guessed it, the unemployment picture.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDxKw.jcCagU&refer=home

Disclosures: None

Half the Story

The media published unemployment numbers out today only tell half the story. In case you missed it, 524,000 more jobs lost, with unemployment going to 7.2% (and that is the government massaged number).

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaTj7p_k.QgY&refer=home

Why do I say it is a massaged number? Because the BLS adjusts the number using birth/death assumptions (births and deaths of businesses, not individuals) and these assumptions have been incredulous for pretty much all of 2008.

The 7.2% number is also a bit misleading in other respects too. The number, for example, does not take into account the marginally attached people, i.e. those who want to work but gave up looking for it more than four weeks ago, or the involuntary part-timers, i.e. those wanting full time work but who can only find lower-paying part-time jobs that provide little in the way of benefits. If you look at more comprehensive U-6 number, which includes these other individuals, versus the widely noted "official" unemployment U-3 number of 7.2%, you will see an unemployment rate instead of 13.5%. That, my friends, is the other half of the story. For a very nice detailed discussion of this, I highly recommend Mish's Global Economic Trend analysis.

http://globaleconomicanalysis.blogspot.com/2009/01/jobs-contract-12th-straight-month.html

Note as well that the number of people in the involuntary part-time category skyrocketed in 2008 and now stands at eight million. That is a 3.4 million increase in one year.

http://www.calculatedriskblog.com/2009/01/over-8-million-part-time-workers.html

Disclosures: None.

Nothing Greener Than Algae

Okay, I am breaking my own golden rule in a way, as I do not recommend any particular stock. Well, I am not really breaking it too much as I am more recommending a sector here, and I am not saying it will make money, just that it makes sense and should make money, eventually. Even if it does not make money, I think it makes sense to support. Go in with you eyes open here as you, like me, could pretty much lose your full investment. Most of all this post is because I think this alternative energy source gets way too little attention and deserves more.

I am talking algae. You know that green stuff that grows in ponds and can be a real nuisance to boaters. Well, it turns out that this stuff is up to 50% oil that can be converted into diesal fuel, and per acre, has the potential to outstrip the energy potential of other crops - like corn and soy - by thousands of percent per acre. Moreover, it can grow in areas where food producing crops cannot grow, so it is not taking food from the starving. And it is carbon neutral. Algae absorbs carbon dioxide as it grows, which it will release as it burns. And due to its need for carbon dioxide to grow, it grows quite well next to high carbon dioxide areas like power plants. Moreover, the part of algae not used for fuel can go to other uses like cattle feed, biomass and the like. In my mind, a near perfect fuel.

Now I have to point out that there are some pretty sticky issues still keeping this near perfect fuel from being perfect. First, the government in the U.S. studied this fuel source for a long time and determined it was not economical. Oil would need to be something like $250 a barrel to justify it as an alternative. Well folks, we were not that far off this past summer and will be going back there in a couple of years or so, so the price is not that much of an issue for me, especially when this fuel source has so many benefits otherwise. Moreover, some of the companies looking at this are developing more efficient ways to grow the algae, and if they can help power plants meet carbon requirements and get credits, that is another source of income.

As I understand it there are still some other technical, yet surmountable, technical issues in dealing with growing the algae without contamination, getting the oil, choosing the right algae for the right products and so forth and so on, but nothing that I suspect cannot be cured with better research funding.

Let me be straight here, I have all of $206 invested in Valcent Products, an algae and verticle growing company (which is another nice story). It used to be more than that but the stock is down a good bit. I am thinking about investing more as I like the prospects and I like to be green.

Here is the Valcent site, which gives more information on algae and their other products. I am in it just for the algae and the verticle growing (low water consumption system) and cannot vouch for their algae system one way or the other. I am linking solely for the informational purposes on algae.

http://www.valcent.net/s/Ecotech.asp?ReportID=182039

Whatever company you choose, I think algae is a good investment choice whether or not you make money on the investment. It just makes sense on too many fronts.

Disclosures: Just those noted above.

Who is hiring? The unemployment office!

Seems that unemployment offices are reaching the tipping point in being able to handle the vast increase in unemployment claims (now at a 26 year high), which includes those calling in due to the increase in benefits from 13 to 20 weeks in November. The only good news is that the unemployment offices themselves are doing some rather massive hiring. Not enough to put much of a dent in things, I'm afraid.

http://www.financialarmageddon.com/2009/01/state-unemployment-claim-systems-overwhelmed-the-associated-press----growing-number-of-jobless-workers-strains-sometimes-kno.html


First the Bad News

Before the Obama $775 billion stimulus plan spends a dime, we are already dealing with a record budget deficit of $1.2 trillion. Now as a percentage of GDP this may not be as bad as we had to experience in WWII, but it is by far the worst since then, according to the CBO. The number is simply staggering and getting worse. Thank you TARP.

http://www.ft.com/cms/s/0/92d8a656-dcd6-11dd-a2a9-000077b07658.html

Thank God for the good graces of our trading partners who are quite willing to date to support our deficit spending and help save our economy. They continue, and undoubtedly will continue, to buy all the Treasuries we can print, and at very low rates, right?

Now it is time for really bad news.

I am not pretending to understand all the details like Yves at Naked Capitalism does, but the bottom line is that China, the largest foreign purchaser of our Treasuries, has better places to spend its money - like at home. With hot money heading out of the country and exports and tax income in a nose-dive, they don't have the money to spend even if they wanted to, and right now there are a lot of reasons for them not to want to.


For one, the U.S. can lessen its debt load by allowing inflation to go up greatly - assuming it can escape the deflation spiral and get that old inflation train running again. Think about it. You are paying very low rates on Treasuries, so if inflation goes over 10% or so it is like the holders of those Treasuries paying the U.S. a nice rate of return. The U.S. gets to repay in increasingly cheap dollars. This helps a lot if you are trying to avoid a default. U.S. default, no way - right? . . . If we don't continue to run levels of deficit that are ridiculous, right. But we need to watch what we are doing here.

So what happens when others are unwilling to pay for our deficit spending ways? I suspect we will find out before long. Time to rethink the concept of running trillion dollar deficits for years to come as I just do not see us being able to do so - even if it made sense. Our friends might not allow us to do so, or be able to let us do so. So time for a new plan that does not involve spending trillions of dollars. I never really thought the fiscal stimulus thingy was so smart anyway.

http://www.nakedcapitalism.com/2009/01/ny-times-china-cooling-on-us-debt.html

Okay, there is some good news too.

Nouriel Roubini - perhaps one of the most recognized faces of doom and gloom - sees the recession lasting two years (we are already over a year into it), with GDP only dropping 5%. I know what you are thinking "only" 5%? I know that is major, but I was expecting worse. Many aspects of this, like housing and unemployment, he does not expect to bottom until 2010, but overall it is a rather peachy outlook for Nouriel Roubini. Personally, I am not nearly as optimistic (yet) but this gives me hope.

http://www.marketwatch.com/news/story/roubini-forecasts-recession-last-2/story.aspx?guid=%7BD3E17944%2DFFE5%2D40D3%2DA0E4%2D564C8F901DDE%7D

Back to the bad.

Small and medium sized banks seem for the most part to have avoided the heat in the kitchen. Well, things are heating up for them. They for the most part were not as exposed to residential debt as some of their larger bretheren. But they nonetheless had some fairly significant increases in commercial real estate (CRE) exposure over the years and that seems to be an area in just a wee bit of trouble right now. Think about it, thouse building commercial buildings, malls and the like are sucking wind right now. How do they pay off existing debt on past projects? Answer, they don't. Part of this is due to pretty vast overbuilding in the CRE sector during the boom with easy credit times, leading to a lot of excess capacity, but the rest is due to a decline in commercial activity leading to a decline in a need for CRE. How many malls do you know with newly vacant spaces? Two-plus-two my friends.

http://www.calculatedriskblog.com/2009/01/commercial-delinquencies-double-over.html

Or in this case it should perhaps be three-plus-three. In another whammy to small to medium banks, small businesses are taking a total beating. Now I do not have handy any stats on SBL delinquincies or defaults lately, but I do have stats on small businesses having job losses. If they are hurting there, they are hurting on paying off loans. Let's look at this nice chart from ADP:

Pretty dramatic cliff diving there, if I do say so myself.

Enough bad news for me for one day.

Disclosures: None.

Down - All Down

Stocks down a bit today, pretty much everywhere. I don't follow the day-to-day swings that much right now as I am mostly in cash. Just a personal choice as deciding what to do is too complex. If you feel more confident there, good luck at that.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLKcxHJIFTJI&refer=home

Not Good For Some Alternative Fuels

The fact that ethanol from corn was leading to very high prices and people lacking food was a good price support for some alternative fuels. With corn, a relatively inefficent crop for ethanol production, becoming expensive, other alternatives were gaining traction. Now, well, corn is not so expensive and alternatives have a harder path. Back to the Obama Plan, I do like his investment in alternative energy; we need to invest in it even when it is not economical because some day it will be. And that day it will pay off. But until then, low prices for oil and corn will make investments in more expensive alternatives hard to support, both on the political agenda and the private industry agenda. My two or three hundred bucks in algae research is really going to hurt my portfolio.

China Sneezes and We Have a Seizure

For those who have not read me before or often, there are a couple of topics I write about a lot that fascinate me. One is the concept of "decoupling," i.e. that international economies are not linked. In other words, the U.S. going down has little impact on Europe or (sub)emerging economies. I never believed the decoupling theory, and those that did have been extremely quiet lately. Any hoot, about a year ago, some respected folks were still touting the praises of it. Here is an article from the Economist on decoupling that today is a bit entertaining. I especially like the part about emerging countries learning to spread their wings. I think those wings were quickly clipped.

http://www.economist.com/finance/displaystory.cfm?story_id=10809267

The other thing I write about a lot is China. This is in part because I have an adopted daughter from there and am returning in a few months for a second, which at my age is certifiably crazy, but the process has led me to read more than most would on China. And of late that reading has been financially focused. I have said here several times that the impact of this recession on China is very dramatic and may be much more so than in the U.S. It can and probably will lead to massive social unrest. It will be an epoch in their modern politics that is life changing. I am not about to predict here the worst that can come of it, but this is not a good thing to be considering. Either way you look at it, this is not good. Not good for them, means not good for us - politically, economically, militarily and otherwise.

http://www.nakedcapitalism.com/2009/01/more-bad-news-out-of-china-including.html

And it is not just China; Russia is in increasingly dire straights. It has thrived for some time on rich oil prices. Guess what, the prices are no longer where Russia can make a profit and, moreover, I just read today they are having problems with oil pipelines freezing. This has various problems tied to it. In the short run the businesses there are forced to seek government support, which leads to the Russian government obtaining massive new control over business in the country. If the problems continue in the long run, the government itself will get desperate for money, which, well, is not a good thing at all. Economic unrest leads to political unrest. Nothing on the immediate horizon from what I can tell, but in the next five years the potential for more international military activity is certainly in the cards.

Down Part of this Post

Marks & Spencer says this is the worst and the fastest retail decline.

http://www.calculatedriskblog.com/2009/01/marks-spencer-ceo-sharpest-downturn-in.html

The restaurant index is at a record low:

http://www.restaurant.org/pressroom/pressrelease.cfm?ID=1727

Intel suffering cannot be a good sign:

http://www.calculatedriskblog.com/2009/01/intel-business-deteriorates-rapidly.html

Mall vancancies reached a 10 year high:

http://www.bloomberg.com/apps/news?pid=20601087&sid=azgge9HHWzZE

and so forth and so on.

Sorry not so cheery tonight - or usually - but I hope to get there eventually. And we will get there - just not yet.

Disclosures: None other than a few hundred bucks in an algae company.

Input Needed!

I am asking my readers, however many there may be, for their input. I do this blog largely as it drives me to think through what I am reading and develop my own thoughts, which is what I am hoping you do with my articles. But here is my current dilemma. I like Obama. I want him to succeed. Heck, I want our country to succeed, but I am having increasing questions about any fiscal stimulus plan, and Obama's seems to be getting worse by the day. Not necessarily his fault as it is politics and getting this many idiots to agree to anything is problematic, but I am beginning to wonder if the plan, any plan, being defeated is, perhaps, a good thing.

Here is my two-plus-two logic on this, which has several points:

• If we give the average family $1000 through tax rebates, how is that really going to "stimulate" the economy in any sustained way? We may see a small spike in spending for the few that spend a small percentage of what they are given, but $1000 a family just helps to pay off some debt (I think paying off debt or putting it to savings is how it should be spent but not how the government wants it spent).
• How is giving big tax rebates to companies that have not even been making money going to help?
• The housing and other bubbles for the past decade or so have been built on debt. So exactly how is a stimulus package going to revive the economy when credit - rightly so - has dried up? You spend the minimal fiscal stimulus and then you go back to no credit.
• Why, oh why, would we want consumers to incur more debt? Why would we not want them to become more fiscally prudent? Why would we not want Americans spending less and saving more? All these in the long run are very, very good things, despite the short term pain, which, by the way, seems rather inevitable.
• Why would the U.S. government take on massive debt - that really, really risks a massive devaluation of the U.S. dollar and, more importantly, a shift from the dollar being the currency of default to being one of many, in order to avoid the truly unavoidable?
• Why postpone and perhaps increase the pain?

Finally, why do anything that simply tries to artificially support an unsupportable economy? Our problem is we built this house on debt and no longer have the credit to support the house. So why seek to support it?

Any answers are welcome. Those that agree (or disagree) are welcome to comment. I am thinking of a petition we could sign to Congress on the topic, but I know my late night emails to my Senators on the TARP were largely ignored. All I received, or should have expeceted, were emails and letters written for the (they thougtht) uneducated masses. Time to tell them othewise.

By the way, whoever is calling the plays in this Bowl for Ball State should look for a job with Paulson. He has not called anything right.

Again, this is a necessary adjustment. The pain is inevitable. The government needs to help with those losing jobs and home and relieve the pain there, but the rest of the pain is fool's gold to try to avoid.

Good Day

It has been a good day today. Busy at work, which is much better than the alternative. Yet I did take a couple of minutes to watch a bald eagle circling the sky outside my office window. Beat that! And my undergrad alma mater, Ball State, is playing in the GMAC Bowl (funded by taxpayers, it appears) as I write. Okay, they are losing, but they are in a bowl and that is what matters. All-in-all, not a bad day. And did I mention that my small portfolio was up nicely today. If only every day were as good as this - if only.

There are, by the way, many millionaires and billionaires not having nearly as good a day as I am. I have successfully avoided all the financial stress brought on by being in the Fortune 100 richest people and seeing your empire implode. Some cannot take the pressure and chose instead a coward's way out. I think suicide is the coward's way out in this situation (not all) because it only makes an already distressing situation all that much worse for those you leave behind. Better alive and poor than leaving your family.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aStLk8TPlUZo

Economic Slump Continues

Not a surprise (to me) but the economy continues its slump. Home sales, factory orders and service industries all continued their decline. Some less than expected and some more. Here is a fun point, a chief economist at UBS (like the cheery strategist from UBS I noted yesterday) is quoted by Bloomberg as stating that "[t]he economy fell off a cliff in the fourth quarter and is most likely still falling." Nothing like mixed messages.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aI_qS29m0uBA&refer=home

There were some bright spots today (like the market being up on false hope for the Obama Plan), but just as much on the not so bright side. Alcoa (remember the commodities bubble just a few months ago) is laying off 13% of its workforce, i.e. 13,500 employees. This all supports the Fed's view last month that our economy had "substantial risks." About time they woke up and smelled the economice mess they helped cause. Yes, down risks to the economy are "substantial." They actually have views on GDP and unemployment in 2009 and 2010 approaching my own, and this from a group that is typically rather reserved in what they have to say. So what does that tell you?

http://www.bloomberg.com/apps/news?pid=20601087&sid=ah1m1kDjp7Es&refer=home

http://www.calculatedriskblog.com/2009/01/fed-fears-long-recession.html

Survival of the Fittest

Here is a concept I would like to recommend to our government. The U.S. economy is in an inevitable adjustment to mean. The future economy here, for the next decade or so at least, cannot and will not support all the businesses out there. We had a very low level of bankruptcies between 2002 and 2007 because credit was way too easy, even for poorly run companies. So we have been artifically supporting a false level of companies/businesses. It is high time we let a lot of them fail.

Yes, I know this will lead to massive job loss and economic strife. Better to spend the dollars on aid to those losing their jobs than to supporting companies that have no business surviving. And here is the benefit; those that deserve to survive get rid of competitors that are cutting prices to unsustainable levels to survive. Think about it, the sooner the strong emerge and the weak subside, the sooner the economy returns to a sustainable level. Government money needs to support the employees, not the foolish companies they worked for.

Herein lies some of the problem with this recession. Some companies that should be allowed to fold, have too many knock-on effects to be allowed to fail. But I think these are in the minority. The government desperately needs to be making some tough decisions on who should and who should not survive. Instead of supporting them all, it is better to just take down those that should not survive, which will provide a good bit of the needed support to those that should survive. Letting the weak fail is a good thing - a necessary thing - in this environment. I do not think the current plan under consideration properly seeks to make these distinctions. We have time to fix that. Will we?

Credit Rates Low - Or No

Here is a nice piece from Sudden Debt showing that while Fed Fund rates and Treasury rates are hitting historic lows, even going negative, the rates companies are paying to borrow are still very high. This goes to show how ineffective the federal government has been in increasing the flow of credit on the corporate level. They have lowered effective mortgage rates for most Americans, but that is largely due to the government controlling almost all those loans through Freddie and Fannie. I guess they may need to take over lending directly to companies and take the financial institutions out of the equation if they want corporate borrowing rates to decrease. By the way, the attached has nice charts too.

http://suddendebt.blogspot.com/2009/01/are-you-listening-neo.html

Night all!

Disclosures: None.

Evening Edition - Will it Work?

While I have noted that I like the Obama Plan (or used to, see below) and have explained why, I nonetheless have also noted that I don't think it will work - at least not as expected. Principally, I don't think the government going into debt to inspire us to spend money is the answer to too much debt induced spending. It is just shifting the debt load for now to the government and away from the individual. Problem is that the government debt is our debt and some day that bird will come home to roost.

Well, Willem Buiter, a well known economist, thinks the bird coming home to roost is a major problem. He also thinks the fiscal stimulus is only temporary relief, not a cure. I tend to agree with him for the most part (if that counts for anything). I tend to think the bird coming home to roost will not be as severe as he anticipates. He thinks U.S. dollar denominated assets will implode and the U.S. will no longer be able to turn to our friends around the world to finance our stimulus ways. I think too many other countries have their economies tied to us for them to let that happen to the extreme he thinks, but I do expect countries like China to start spending more money on their own problems domestically than on supporting our needs, though supporting ours tends to help with theirs (in the wrong way).

Nonetheless, I do agree that the dollar will devalue and our fiscal stimulus is not going to work too well. All it is doing is trying to stop the inevitable, which is a shift in our economy to a more practical way of living, i.e. one not based upon debt to finance a living standard. Part of what I liked about the Obama plan was my belief that the spending, on the way it was intended to be spent, would at least get us some bang for our buck and lessen job losses, i.e. the pain. I do not expect it to fix the problem, just lessen the pain. But if Buiter is right, spending this much at this time is only adding to an already massive mess. He could be right.

There is a lot more in this piece, including his statements on economics generally. He seems to readily admit economists are wrong on a regular basis and to some extent they are simply trying to get things less wrong as time goes on. Interesting perspective for an economist.

This is a somewhat long piece but worth the read, especially if you are someone that means something in terms of the stimulus plan. Best to understand the ramifications, or at least possible ramifications, before we act. I am attaching Yves summary from Naked Capitalism that distills the piece better, but if you are truly interested in this area, the original read is worth the time.

http://www.nakedcapitalism.com/2009/01/willem-buiter-calls-for-less-us.html

I mentioned above that I am not as thrilled now with the Obama Plan. It appears that a major part of the plan, roughly 40%, may now come in the form of a tax rebate. Raise your hand if you do not want money in the mail? I see no hands. Okay, raise your hand if you want your own tax dollars back to you in the mail knowing you will have to pay them back again later? Still seeing no hands. Okay, raise your hand if you know a lot of the tax rebate will perhaps go to companies that have never made a profit and but for lax credit would have likely folded years ago, again money you will need to repay later in taxes? Hands? Anyone? Bueller?

Whether or not it is a desire to bring Republicans on board, as Yves notes, putting over $300 billion of these precious dollars on tax refunds is foolish. Especially if the goal is stimulus, there are better ways to spend your money. And if you buy into Buiter's logic above, this is truly stupid. Then again, to the extent it goes to individuals, probably 75% plus goes to pay down debt and to increase savings, so we are just returning it to ourselves for a few years until we have to pay it back in taxes. I recommend, by the way, that you save it or use it to pay off debt and not on spending. This is a painful adjustment but it is a necessary adjustment and things will be quite painful. You will need those dollars down the road more than today, unless you are just using it for necessities. Long story short, the plan gets worse by the day.

I am still seeing this as long and nasty. I expect no real relief before 2010 and that is getting increasingly remote. The potential for this to spiral downward in a dangerous way is increasing in my opinion. You are certainly reading different expectations elsewhere. I hope they are right and I am wrong. Those who are reading me to date feel free to keep score.

http://www.nakedcapitalism.com/2009/01/obama-considering-310-billion-tax-cut.html

There is one thing that I think could eliminate at lot of the pressure on the system right now, however, that is an important part of my pessimism. Companies, and I mean well run companies that did not get us into this mess, need regular credit for day-to-day activities. The financial institutions that are not lending need to get their collective CEOs together in a room with no windows and agree to start lending overnight - all of them. Limit it to good companies if you must but LEND THE MONEY!! If you all do it and agree to do it, it will work to all your collective benefit. By letting businesses fail because of a lack of credit you are only worsening the toxic waste already on your books and making your own recovery much slower. Stop waiting for the other guy to take the first step. Just a suggestion. Wonder what Paulson is suggesting behind closed doors.

Not Big News

Car sales still down - big time. Not a big surprise. Chrysler is down 53% from a year ago. I think some used car lots sell more vehicles than this.

http://www.nakedcapitalism.com/2009/01/obama-considering-310-billion-tax-cut.html

Bubblemeister

Here is a thought I just had. Obama should add another Cabinet post called Bubblemeister. The job would solely be to arm a small team of financially oriented souls whose sole purpose is to identify building bubbles and recommend ways to deflate them before they become a problem. Greenspan would call this foolhardy, but Greenspan drove the bus that got us here, so he fell off of my recommended list a long time ago. I am halfway serious here. Some federal department or agency really does need a committee or at least an individual with a red button to push when a bubble is building and recognized. And let's give them a big pin.

Disclosures: None

Excellent Strategery

Bloomberg has surveyed strategists and they are more bullish about 2009 than they were about 2008. At the beginning of 2008, the strategists on average predicted an 11% gain in the S&P. Off juuuust a smidge; it went down 38% instead. For 2009, they are predicting on average that the S&P will climb 17%. Hey, if they keep predicting a bull market every year, eventually they are bound to be right.

I especially like the optimism of David Bianco at UBS, who for 2008 predicted a 16% climb in the S&P. In July of 2008, well after this mess was obvious to pretty much anyone, he predicted that the rebound in stocks in the second half of 2008 would be "one of the greatest roars we've seen." That particular roar was deafening, wasn't it? I guess he failed to realize that bears roar, not bulls. Is it any wonder banks lack any credibility these days with predictions like these?

http://www.bloomberg.com/apps/news?pid=20601213&sid=a5mSOfz7Alhk&refer=home

What is amazing is that Mr. Bianco, with predictions like this, was not one of the 7,000 layoffs at UBS that they announced last year. Go figure?

"Catatonic Fear"

Perhaps some of the financial institutions for whom these optimistic strategists work are not listening to their own strategists. Right now it does not seem to be the case. Banks are still fearful to lend money and credit remains tight. Haven't they heard - the S&P is going up 17% this year and everything will be just dandy?

http://www.bloomberg.com/apps/news?pid=20601109&sid=aqLT6v88t.Jo&refer=home

I guess there is a nice sound-proof wall between the risk managers and the strategists at these institutions They are happy to be optimistic with our money, just not their own money.

VaRy Interesting

For those who missed it (hat tip Chris), the NY Times did a (very) long piece earlier this week on Value at Risk ("VaR") quantative analysis that is used by most financial organizations for evaluating the risk they have taken on through investments. Not their only model, mind you, but one that gets much more use than it deserves. I read the NY Times piece in full. While it provided some interesting historical perspective, it was still missing some key issues with VaR, despite its length (did I mention it was very long). The NY Times piece did note some of the public and private debate over the benefits, or lack thereof, of VaR, but the piece did not do a good job of explaining why VaR is very dangerous and misleading.

The biggest problem with VaR is that it assumes a normal Gaussian distribution for financial markets. But financial markets do not behave that way. They have fat tails (kurtosis), i.e. low probability events happen much more often in fiancial markets than a Gaussian distribution would ever predict, and there is a high variance among different types of financial markets making a one size fits all construct inadequate. Yet central bankers like the VaR and impose its use on financial institutions, whether it works or not.

Yves, at Naked Capitalism, does a nice piece explaining the failures in the NY Times piece and in VaR models. Well worth the read, and you will get much more valuable information from it than the NY Times piece, which, I should mention, was quite lengthy.

http://www.nakedcapitalism.com/2009/01/woefully-misleading-piece-on-value-at.html

Disclosures: None

Swedish vs. Japanese

People have commented a good bit on the right rescue plan for our fianancial system. You tend to know my view if you read my post. Well, I am not making it all up. We have a couple of very fine recessionary models to compare our response against. Two key comaprisons are the Swedish model the Japanese model. Let me begin by saying I have not studied either in detail but I understand that to stimulate the Japanese economy the government there eventually dropped a lot of yen on the fanancial institutions there. They are still in the hole, so you judge how well that worked.

Then again, a few countries, including Sweden, experienced their own banking crisis a few years back. From what I have read they nationalized the heck out of their financial industry and had no qualms about taking down the dead wood so the healthier companies could survive. Now as I wrote the other day, there is too much financial interconnectivity between major financial institutions today - but we really need to follow the Swedish lead if we can. Let me begin with a small quote from the attached article so you can judge wether this has relevance:

"Following the deregulation of the domestic financial market, the crisis in Sweden was also preceded by a rapid expansion of credit; in the course of five years, private borrowing grew from 85 to 135 % of GDP. The credit expansion coincided with a protracted boom and a significant proportion of the borrowed money was spent on speculation, both in real estate and in financial assets, such as equity. The real estate speculation in Sweden culminated in a bubble that burst in 1990-91. Shielded by the economic upswing, there had been many misdirected and overly optimistic investments in various industrial and other projects."

This site went on to note the high borrowing rate in Sweden as well as high public debt and a low savings rate - sound familiar? But here is the key part of the site:

"A common framework of measures was constructed for support of the banking system. A strategy for deciding which banks to reconstruct and which to liquidate was developed and explained to the general public. The measures were designed to minimise costs for the Government and the risk of moral hazard. Consequently, shareholders were not covered by the government guarantee and would lose their equity investments to the same degree as the Government had to provide support for their banks. This provided an incentive to the owners to avoid applying for state support unless it was absolutely necessary, to minimise the amount of support and to reduce the time-period of receiving support. We used a very simple, but clear and easy-to-explain, method of identifying banks which should be given support in order to survive and those which should be liquidated or merged. First you write-down the bank’s bad loans. Then you test the bank in a micro- and macroeconomic model. If the model indicates that the bank will be adequately profitable again in the medium-term future it should be given support to survive. But if the model indicates that the bank will never be profitable again the bank will not be of economic benefit to the society and should thus be closed or merged in an orderly manner."


This lesson plan is woth a lot more study, please read it. I am NOT saying I agree with all of it but it is worht some very careful thought. Some of it is much smarter that what we are doing.

http://www.riksbank.se/templates/speech.aspx?id=1752

Disclosures: None

Commercial Real Estate

One of my friends who has a business tied to commercial real estate asked the other day for indicators on when that might reboud. I pointed him at Calculated Risk and once again they do not dissapoint. As they point out commercial real estate usually lags resedential by five quarters or more, which spells problems for commercial real estate. Now as all real estate reports, things vary geographically, but generally this says to hunker down, which continues to be my advice in all sectors.

http://www.calculatedriskblog.com/2009/01/non-residential-structure-investment.html

Disclosures: None

2+2 - Sunday Edition

I apologize for the multiple independent posts this evening but some of the functionality on this blog seems to be down for the day. Here is a nice piece from Calculate Risk on how home sales are doing poorly and usually reboud 3-6 months before a recession ends. Not doing so yet. There is probably some correlation explaining this but it escapes me. They also note how unemployment usually continues to do badly after a recession ends and this one is not there yet. As usual, they have nifty graphs. This site is one of my favorites for statistics in understanding how bad things are this time around. As the articles they quote note, this one is different. I think fourteen months into the recession, that fact is a bit hard to ignore.

http://www.calculatedriskblog.com/2009/01/new-home-sales-and-unemployment.html

Disclosures: None

"It's going to be a miserable ride."

I wish that I had said that. The chief financial analyst at Key Bank says it will be late 2009 before earnings rebound. I think he is a smidge optimistic, but generally on the right track.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQVPQW1bTnY&refer=home

Disclosures: None

Go For It!!

Let me start by apologizing for the radio silence this weekend. Busy with stuff Saturday and did my first skiing in two years today. So while I wait for the ambulance to arrive so they can carry me to work tomorrow - these old muscles aren't what they used to be - I thought I might as well try to slip in a post. I will seek to add more after the family goes to bed and the pain dissipates.

So the "Go for it!" header refers to Yellen a yellin' about big time fiscal stimulus, as in the not seen in our life times kind of stimulus, as in pull-out-all-the-stops stimulus, as in act-now-think-later stimulus.

Don't get me wrong, I a big fan of stimulus, but one has to define what we are choosing to stimulate. Yellen seems to want to stimulate lending and spending. Let me check my blog archive a moment, and, yep, just as I thought, lending and spending is what got us into this mess. Call me silly but more of the same seems like a hair-of-the-dog cure. Feels good for a while.

Here are some things worth stimulating, in my opinion:

• Let' stimulate people to pay down their debts so they are not drowning in the stuff. It was not planned that way, but the stimulus package in 2008 mostly went to paying down debt and building savings. The right places in my view but not what the government wanted.
• Let's stimulate house prices getting to a rationale level with as little pain to (former) homeowners as appropriate. We need affordable housing for people but that does not mean they have to own the home. I have rented most of my adult life and it worked out just fine. Make sure those losing their homes have an affordable place to rent and put a roof over their heads and let home prices find their own bottom.
• Let's stimulate small, medium and large businesses, who simply need credit lines to do regular operations, such as for lines-of-credit for international trade, to actually be able to obtain the credit they need to operate. Those who do not deserve credit, so be it, but credit is the lubricant needed for many daily business functions by well run businesses of all sizes. The government should lend the money directly to worthy companies and skip the financial institutions. Giving the financial Goliaths money is like tearing it up and flushing it down the toilet.
• Let's stimulate lenders using appropriate underwriting techniques and borrows doing so responsibly. Wow, there is a heck of a concept for a change.
• Let's stimulate Congress to prohibit or at least highly regulate (going forward, at least) the risky derivative products, CDSs and other complex financial products that the companies dealing in them are not even able to understand. Seriously, someone needs to look over their shoulders a bit, at least for those that survive, and make sure shareholders and others are not being at too much risk.
• Let's stimulate the continuing search for affordable alternative energy. Here, I might mention, I define "affordable"with all variables considered. Cost is one (somewhat big) factor, but we need to consider sustainability, environmental impact, our ability to eventually take economic advantage of it, and the availability of it worldwide. By the latter factor, I am referring to wind, earth thermal, wave energy and other technologies that are highly geographically oriented. (And you thought I spent all my time on financial stuff.)
• Let's stimulate jobs in the right areas, like environmental, education, health and the like. Obama is going there and I like it.
• Let's stimulate from the bottom up. The financial imbalance between the rich and the poor and middle class in this country has been setting new records this millennium. The recession is trimming that difference a bit. Well, it is not too healthy for this discrepancy to grow too large as the bottom 90% are those that support our economy. Even the top 10% need to realize their success is tied to the ability of the other 90% to make ends meet.

Just a few thoughts here. More later.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXomybLEzm3U&refer=home

And as much as I like Obama's one plan, giving $300 billion in tax breaks for "stilumus" is wrong minded. Those recieving it I suspect will spend it the right way, as in paying down debt, not consumption, but when you call it stimulus, you suggest we want them to spend. He and Congress may want spending, but I want savings and debt reduction. Good old-fasioned values that need desperately to become new-fashioned imperatives.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avkJ478jcrgo&refer=home

I do agree on Yellen on one point, however, this recession is going to be far longer and deeper than the garden variety. Good to see someone with a bit of street cred agreeing with me, though I do not like her solutions (not to downplay the street cred of Whitney, Roubini and the like).

Disclosures: None