Why This Recession Is Different

I think most people are already sensing that this recession is a bit or a lot different from those we have been through in modern times. It is longer than most already and it is being touted as worse than most. And I believe we are just getting started. So why is it so different? Let me note a few variables that may make this time around a bit different:

1. Consumer spending got the U.S. out of its recession the past couple of times around, but this time we have the opposite. Consumers are spending less, paying down debt and actually saving money. No consumer rescue this time, despite how much money the government throws at consumers;
2. This crisis is global. There are virtually no countries escaping its impact. Which means there are no good global economies to support those that are lagging.
3. There is no sweet spot in our U.S. economy. Real estate rising helped in prior recessions and other areas seemed to be okay, but not this time around.
4. The consumers in the U.S. have been living off debt for a long time to the point where they spent more than they made. Wages under eight years of Bush admininstration did not increase much at all. Reversion to mean is unavoidable and painful.
5. The financial companies have lost their traditional ways of making big bucks and their traditional ways are still haunting them with losses. I think they will still be haunted into 2010 until the real estate market bottoms.
6. Tens of trillions of dollars in credit default swaps make any orderly wind down of insolvent institutions incredibly complicated. Every company that may go down may take down others because of it.
7. The U.S. does not have an sustainable economic plan. Way too much of our economy, as in GDP, is based on consumer spending. Transitioning to a more reliable model will take many years.

There are more reasons, but these will do for now.

Disclosures: None

The Great Mindgration

Okay, I coined the word "mindgration" and I'll give you that it is not my best stuff, but let's just roll with it for now. The concept is that there are smart people being born, graduating high school and going into college daily. What is their incentive and what will they study? I chose law and, admittedly, it was not a plan for social good. It fit my talents and I perceived that I could make a decent living at it. In the past decade or so many chose careers on Wall Street. Smart minds there could get rich, very rich, and in short order. Now the money is no longer there. Now with hundreds of thousands of people being let go from financial institutions, those in college are forced to find another path. Accordingly, there is a mindgration under way.

Where will the talent flow? Hopefully a fair amount will go into research and development in productive areas, like alternative energy, agriculture, health science and the like. If we can commit the brain waves that went to complicated financial products into brain waves on improving our lives, it may actually make a difference. One can only hope.

Mixed Feelings

Okay, I rant a good bit about money going to bad banks and how it is money down the drain. I know it is easy for me to do this as I am just a spectator. Those making decisions need to consider what happens if they let a bank or other financial institution fail. They saw the consequences of Lehman going under and they are afraid, very afraid. So the answer seems to be to let them all be supported for now and hope things work themselves out in time.

My problem is that we need to thin the ranks. I know this is quite complex due to the links between financial institutions but we need to figure out a way to thin the ranks. They all cannot survive. Some need to be wound down so the stronger can survive. Solutions based on propping up the entire mess are simply not working and will not work.

The government also seems to be focused on mortgage assistance, propping up home prices and getting people spending again. These are all wrong moves in my opinion. We got to where we are because people bought homes they could not afford, home prices got out of any rational relationship to incomes and people spent more than they made or could afford. In short, cheap and easy credit made for poor decisions. To me, the answer is aiding those that lose their homes, supporting just those who can truly afford their mortgage on reasonable terms, letting house prices return to where they should be and insisting people get their debt paid down before they are offered more credit. Very painful indeed, but necessary. We need to take our pain now and get on with it. The moves we are taking are only kicking the can down the road and making it worse.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEs9iy5D54Rw&refer=home

Disclosures: None.

Technically Insolvent

The banking problems are by no means isolated here. Britain has a host of its own problems. One of its own, RBS, is noting that a number of the major British banks are technically insolvent. At Yves, at Naked Capitalism, aptly notes, it would be good if U.S. financial institutions were as frank about the situation.

Of course the government there, as here, will come to the rescue. That to me is the problem, but I will not bore you with that discussion again. I just did it yesterday.

In the long run, no real financial recovery is in sight until real estate hits bottom. With a lot of option ARMs resetting this year and next, I do not expect an overall real estate bottom until 2010 at the earliest, in the U.S. Some of the real estate issues are even worse in Europe, which could make its economy suffer even longer, which will be a drag here as well. Europe lagged us in the economic drop and will undoubtedly lag us in the return. The same can probably be said for (sub)merging economies that rely on us and Europe for exports. Even when some of that demand returns, it will take time for them to catch up. A host of factories in countries like China are now shut down and millions of workers have returned home to rural areas. Reversing this trend there will take a long time as this recession is building a distrust there that will mentally be difficult to turn around. This presents an opportunity for some enterprising companies in the U.S. and Europe to fill the void, but those opportunities are still a good bit in the future.

http://www.nakedcapitalism.com/2009/01/british-banks-deemed-technically.html

http://www.calculatedriskblog.com/2009/01/uk-new-200bn-bad-bank-bailout-plan.html

Show Him the Door

I suggested yesterday that BofA should show CEO Ken Lewis the door. Too many wrong moves at the wrong time. Well, I am just now seeing that others agree. I am not a stockholder, so I am not directly impacted, but when his mistakes put over $150 billion in taxpayer money at risk, I think I have a vote. This is a big thumbs down in may book.

http://www.ritholtz.com/blog/2009/01/drumbeat-for-ken-lewis-resignation-builds/

I Called That One

Yesterday I noted there would be more bank failures announced on Fridays. Well, Sheila Bair just proved me right again. It is so tough being me and being right so often - though it really helps to make easy predictions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFJf5K7zppCg&refer=home

http://www.fdic.gov/news/news/press/2009/pr09006.html

My prediction by the way was based upon increasing problems in commercial real estate and small business loans, both of which are quite problematic for local and regional banks. Expect many more this year.

China, Oh China

I write a lot about China as my daughter is from there and her mei mei, little sister, should be coming from there in about two months. I also write about it because it is the number three economy, the largest world population and a major potential place for political and social unrest in years to come. Fitch is now predicting a hard landing in China. If you have followed me (and perhaps believe me) this is no surprise. I mean this fits right into my two-plus-two theory of financial life. Two-plus-two is simply my own approach to macro-economic ideas. Not unique to me, just how I like to think about it. Let's apply two-plus-two to China.

Here we have a lot of twos, but you will get the idea. What does China face:

1. All their trading partners, for the most part, are in a severe recession, so they are not selling much;
2. The Baltic Dry Index, an index of shipping, is at absolutely rock bottom. Much of this is due to a lack of trade but some of it is due to a lack of credit and letters of credit that allow trade to flow on ships. Either way, not good for China.
3. China needs about 8% growth just to tread water. Anything less there is a recession, and right now it is looking like much less.
4. China is not totally export driven, but another major domestic business support is commercial real estate, and that area is really sucking wind right now.

There are more reasons, but these are up there. These are objective factors that simply prove what otherwise is speculation. China, like the rest of the world, is in dire straights.

http://www.nakedcapitalism.com/2009/01/fitch-foresees-hard-landing-for-china.html

Job Losses Continuing

This is hardly a surprise that job losses continue. Unemployment usually peaks long after a recession ends and right now we are not seeing the light at the end of this recession tunnel. Here are some of the latest losses, which I think adds up to about 50,000 jobs. We truly need to help these people instead of spending $138 billion on BofA. Spending that much on a company that helped to cause the problem when we have so many more more pressing problems is making me sick. This is just disgusting what we are doing. Just my opinion.

http://www.fdic.gov/news/news/press/2009/pr09006.html

Disclosures: None.

The Right Move And The Wrong Move

Today provides two fine examples of the right and the wrong way to deal with the mess that financial companies have created for themselves. First, the right way. Citigroup has announced that it is splitting itself up and selling off some pieces. Imagine that, it is going to get smaller. Now it may have taken an $8.3 billion loss to push Citigroup in the right direction, but at least it is there now. It is voluntarily taking itself out of the too big to fail category, shaking up its board of directors and taking steps on its own to survive in a smaller form. This, my friends, is excellent news!

I am sure there will be many challenges ahead for Citigroup, not the least of which is getting an acceptable price for the pieces it sells. It may, and likely will, still need further government support during this process, but this is one time where I think government support is money well spent. We need to support those companies making the right move. Too bad they didn't do this a few months ago before we spent tens of billions propping Citigroup up in its current form.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a717rlC3lQd0&refer=home

And then we have a fine example of the wrong move. You know who I am talking about - Bank of America. Here we have a financial institution already too big doing what it can to get even bigger and then finding out it bought into not one but two big messes it should have left alone. Rather than splitting up, selling assets and seeking to survive in a smaller form, it goes running home to Uncle Sam asking for more support, and Uncle Sam is happy to provide it to the tune of $138 billion. I know only $20 billion of that is an actual cash infusion for preferred shares on which we will get 8% and the rest is "just" a back-stop on bad loans and CDSs, but it is still a waste of money. We should be insisting that Bank of America start selling off pieces. Instead, here we are giving it the money to buy more.

Bank of America just posted a fourth quarter loss of $1.79 billion, which does not include another $15.3 billion in losses at Merrill Lynch. Yet it is still going through with the acquisition Merrill Lynch, which we the taxpayers are paying for and more. It fully admits that we should expect more and perhaps bigger losses for quarters to come, surprise, surprise. It is just inexplicable to me that we would support this mess, especially doing so with seemingly few, if any, conditions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aa4eMvYBBEIw&refer=home

And what is really mind-boggling about this is that we are not only supporting it but seemingly Ben and Henry pushed BofA to go through with the Merrill deal when BofA was having doubts. The Laurel and Hardy of the government bailout efforts apparently feared what would happen if the deal fell through and Merrill went the way of the dodo bird. Yes, there would be major knock-on effects, but what happens now of BofA goes under? Again, folks, this is the wrong move. These institutions need to be broken apart, with certain parts being wound down and others sold.

http://www.nakedcapitalism.com/2009/01/wsj-bank-of-america-to-receive-20.html

The only good news here to me is that BofA had to take its dividend down to a penny, and undoubtedly will get some securities lawsuits from its stockholders for not disclosing the major mess it was getting with Merrill before the stockholders voted on the deal. BofA is laying off 35,000 employees, but unfortunatley CEO Lewis is - not yet - one of them. We can only hope the stockholders show him the door and make it 35,001.

Evening Edition

Okay, I hoped to go read Benjamin Graham, but then I saw some more news worth passing on, so I am still here. Let's look at this, Deutsche Bank reporting a loss of $6.33 billion is hardly a footnote. The bank losses continue big time. Ask Citi, ask BoA, or Deutsche Bank. Just getting worse, perhaps much worse, before it reaches bottom. I briefly considered putting in that it will get much worse before it gets better, but I think in the long term it will just get worse before it just stays there. I do not expect it to bounce for many months to come. Just my humble assessment.

http://www.calculatedriskblog.com/2009/01/deutsche-bank-warns-of-633-billion-loss.html

Decidedly Down And Expect More

Let me apologize up front, but I just got in a new shipment from Amazon.com and have a lot of reading to do. I just started Benjamin Graham's The Intellegent Investor (which some of the best investors in the world recommend) and it is hard to put down, so this post may be a bit slimmer than most. Then again, when I get started I often have a hard time stopping. And there is plenty to talk about. Don't believe me? Here are the current headlines at Bloomberg:

•Asian Stocks Slump as Japan Machinery Orders, U.S. Sales Fall; Sony Drops
•Apple CEO Steve Jobs Will Take Medical Leave Through June; Shares Plunge
•Japan Machinery Orders Fell 16.2% in November as Economic Slump Deepened
•Asia Bond Sales Rise to Highest in a Decade on Government Debt Guarantees
•Ford, Chrysler Pull Out of Tokyo Automotive Show; GM Also Said to Cancel
•Bank of America May Need More U.S. Money to Absorb Cost of Merrill Lynch
•U.S. Stocks Tumble on Retail-Sales Report; GE, Macy's, Citigroup Decline

Not a pretty picture at all.

I am not going to address all of these, but let's start with the Bank of America situation. I discussed it a bit last week but bad news has a way of hanging on and on and on, especially for financial stocks. Two big mistakes by Bank of America in my view: Countrywide and Merrill Lynch. The only thing that might be a worse decision than these two decisions is the pending decision by Paulson to prop up Bank of America with additional backstops to let the Merrill Lynch deal get done. I have a headache just thinking about it.

http://www.nakedcapitalism.com/2009/01/us-negotiating-to-backstop-bofa.html

I have noted that the Obama plan is not likely to work and many others agree. A plausible case can be made for the argument that the stimulus is vastly too small if it is to achieve the desired stimulating effect, and that making it big enough to work will take it to a point where we simply cannot fund it. It will take the deficit to an insupportable level. I think the better argument is that it is the wrong approach. We need to try to control the collapse, the correction, to make it orderly as possible, but we need to let it happen and get on with it. Some smarter than me seem to agree:

http://www.nakedcapitalism.com/2009/01/wolf-versus-pettis-on-us-stimulus.html

"this is no regular cycle slowdown"

The Baltic Dry Index has been seriously at the bottom of the barrel for a while and now signs are that shipping continues to be at disastorous levels. Let's see, no sales taking place, no need to replace inventory, no need to build products and no need to ship products. It all seems to make sense, don't it.

http://www.nakedcapitalism.com/2009/01/asia-europe-shipping-rates-drop-to-zero.html

CRE Being CREamed

Those that have followed the situation know that the decline in commercial real estate followed residential by over a year, so it has some catching up to do, and catching up it is. It is truly taking a dive. Thing is, CRE is more of an issue for local and regional banks than residential was on that level. This will pose a major risk to smaller financial institutions, along with small business loans. Watch for the Friday bank failure reports by the FDIC to be on the rise, big time.

http://www.calculatedriskblog.com/2009/01/feds-beige-book-on-cre-grim-and.html

Retail Bankruptcies?

Yes one of my easier predictions for 2009 continues to prove me true. Okay, a teenager that hangs out at the mall a lot saw this coming long before I did, but it is what it is.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aQQNRBXKKUp8&refer=us

Didn't I Kick That Can Already

Kicking the can down the road might but time, but eventually, if you keep moving forward, you will eventually catch up to it. California foreclosures seem to be a can that was kicked and is now coming back to roost. Do they kick it again? Have we bought enough time to reduce their impact? Are we back in trouble in California? I guess we never were out of trouble in California. I used to want to live there, but now I am thinking Canada. Okay, the temperature here in New Hampshire is in single digits as I write this (fahrenheit) and I am still considering Canada. How desperate is that?

http://www.housingwire.com/2009/01/14/foreclosure-activity-fires-back-up-in-california-report/

Gotta' go now - and I did not even mention the terrible stock market performance today - Benjamin Graham is calling. I hope to soon be able to report on his sage investor advice. I know already it is a good time right now to read this book. Buffett read it at age 19.

Yadda, Yadda, Yadda

Nothing much worth discussing at length and I am sleep deprived, so here are some links worth reading:

China having big problems. Nothing new here, just more confirmation:

http://www.nakedcapitalism.com/2009/01/setser-hot-money-fleeing-china.html

Citibank doing major moves to survive in a smaller mode. This is a good thing. The financial 800 pound gorillas need to become monkeys that are more agile.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBWY6gY52_R8&refer=home

http://online.wsj.com/article/SB123185686674677225.html

FHLB banks in big doo doo, go figure. The U.S. government put a gun to their head and made them pull the trigger with a massive addition of bad debt. The monitors are now showing they are brain dead and have been for some time. Go figure.

http://online.wsj.com/article/SB123185686674677225.html

Disclosures: None

Now I Am Getting Scared

This is the 100th post for my blog and, well, some interesting stuff to note. Overall, somewhat of a slow news day, but there were a few gems I stumbled across well worth consideration. If you look back to my predicitions for 2009, some fit that mold quite nicely. Yes, I realize we still have over 50 weeks to go and anything can happen, but it is my 100th post, so let me feel smug just for one day.

Prediction 7, Political Instability

One of the major concerns I noted in tough financial times is political instability. This takes numerous forms. First, certain countries were not too strong to begin with and can be the subject of military or revolutionary overthrow. A lot of these countries, such as some in Africa, were heavily reliant on commodities to support them financially. With most commodities seeing the bottom fall out, instability is on the increase drastically.

Second, some countries, like Russia, were able to build relatively large reserves and can - at least for now - take advantage of the crisis to nationalize some institutions they would like to nationalize and control. Moreover, they can use their remaining military might to perhaps invade and acquire weakened neighboring assets. Expect Russia to begin testing the waters even more as oil is at a price where it is not profitable for Russia.

Third, some countries like Pakistan pose a regional or larger nuclear threat as they become increasingly financially unstable. The IMF is aiding Pakistan, but with inflation over 20% they have many challenges ahead. God forbid their strife leads to nuclear arms getting into the wrong hands.

Fourth, some countries like China are going to face increasing social instability and pressure to no longer support their trading partners, i.e. the U.S., which will have its own effects here. And increasingly, emerging economies just starting to learn the advantages of capitalism, are now learning its disadvantages and may revert to other models. At a minimum, many poor countries will blame the U.S. for their woes, perhaps correctly in part, and the U.S. will have many years of work to restore whatever good reputation it had. Expect a lot more anti-U.S. sentiment in years to come. Oh how far we have come since we had the whole world behind us after 9/11.

The simple truth is that when people are hungry or cold or desperate, they start to believe anyone promising hope and better times. Radicals gain traction and ideas that would be repugnant to morality in normal times suddenly seem more sane. It was no mystery that Hitler gained prominence in a desperate economy.

And you thought this was just an economic mess.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ai1qca78_ezs&refer=home

Prediction 3: Stocks Lower YoY By Year-End 2009

The market being down substantially at the end of 2008 may lead folks to believe it cannot go much lower. They may be right or they may be wrong. In historical terms, however, it is worth noting that in inflation adjusted terms the S&P is still at its highest ever, excluding the recent past since 1995. For comparison, the value of the S&P versus U.S. GDP in 1974, a very low point, was 31% of GDP. Now it is still 100%.

The point being that while we could have a nice rally, stocks are not that cheap today compared to lows of the past. And with all the other problems we face at the moment, how incredible is it to believe that we actually do revert to something matching the lows by historical standards. That could well be another 40-50% down from here. That is lower than I predicted, but any prediction is just a guess, educated or not.

I will point out that the S&P is already down over 3% this year. I expect a bounce for the Obama inauguration and thereafter for a week or so, but that will run against a very strong headwind of truly awful earnings results, so I do not think it will last long. Again, just a guess.

http://www.nakedcapitalism.com/2009/01/some-cautionary-observations-from-marc.html

Prediction 4: Increasing Bankruptcies

This one was a gimme. More bankruptcies were inevitable. Still, no one says your predictions have to be unpredictable. The WSJ thinks a lot more is on the way, and there was at least another jewelry store going under today. Not to mention that covenant-lite lending is causing the payout on bonds and loans, when bankruptcy occurs, to be just pennies on the dollar. Oh well, the big wheel just keeps on rolling.

http://online.wsj.com/article/SB123171955382272193.html

http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html

http://www.calculatedriskblog.com/2009/01/retail-bankruptcy-shane-jewelry.html

And some auto dealerships could easily be high on the list of bankruptcies.

http://globaleconomicanalysis.blogspot.com/2009/01/gm-expects-to-lose-500-us-dealerships.html

Longest Recession for the U.S., EVER!?

I did not put this in my 2009 predictions as it would not come true in 2009 and, in any event, I still believe it is more likely wrong than right. But here we have a definitional problem. I think fiscal stimulus spending will technically bring us out of a recession for a quarter or two, but then we will plunge into the darkness again for several years. So by pure definition, this is hard to call. Certainly it will be the worst and longest since the Great Depression, but will it be longer? Perhaps, but by a slim margin. Just a guess!

http://www.financialarmageddon.com/2009/01/more-than-just-average.html


Enough doom and gloom for one night. I may have nightmares.

Silver Lining

I know this is anecdotal as well, but what the heck. During these tough times I am seeing some good things happen. I am seeing family helping out family. There are several instances in my own extended family where family members have worked together to help out those in economic (and other) need on a much greater scale than in the past. This may or may not be a bonding experience in the long run, but it is nonetheless rewarding to see it happen. Times like these are times when you need family.

The same can be said for neighbors. A bit more limited here than family as your neighbor is not about to pay your mortgage for you, but neighbors are still helping out and sticking together. Well, at least where I live.

Now I realize not all families are like mine or neighborhoods either, but I do have a glimmer of hope that these hard times are bringing out the best in people. Eventually it may lead to the other end of the spectrum, but for now I am seeing some positive things in terms of people coming together.

I would be remiss not to add the another silver lining here. We have been acting truly stupid over the past decade or so. Spending well beyond our means, building debt and expecting tomorrow to fix it all with higher real estate values. We are now, finally, coming back to reality. We are now doing what makes sense. We are spending within our (more limited) means and perhaps even saving a smidge. Guess what, this is normal and sustainable. We can live this way. Not all the existing businesses and financial institutions can live with this reality, but we can. Government needs to wake up to the fact that this is a good thing that is happening - no matter how painful it will be for a while. Please write your Congress people and ask them to do what they can to allow this correction to correct. Spending trillions to prevent it will only make it worse and kick the can down the road. Don't agree, let me give you a two-plus-two lesson.

Point one: over the past few years savings was nonexistent and Americans actually spent more than they made. Now there were numerous enablers for this; easy credit, the housing bubble, our trading partners, low interest rates, mortgage securitization and the like. They all enabled us to spend more than we made for years and now most of these are all disablers. The housing bubble has popped big time, credit is dried up, our trading partners are in severe pain and securitiztion is a word that will exist only in history books. These are all facts, not fiction. If you disagree, time to read another blog.

Point two: how do we cure a decade or so of debt-laden over-consumption by trying to inspire consumer spending through the government taking on massive deficits? I can wait here while you ponder. Take your time. We have a lot of time, so consider the answer well. Done? If you gave this some serious thought you only have one answer. The government taking on more debt to "stimulate" us to spend more money is perhaps the most idiotic move imaginable. Okay, on a short term basis, this may ease the pain and buy some time, but are we really looking for short term gain here. We need long term solutions. If those smart folks out there can explain to me how fiscal stimulus makes sense in this environment, please enlighten me. Seriously, I want to know. This is just befuddling for me.

Disclosures: None.

Getting Tough Out There

Okay, this is entirely ancedotal, but I had a rather spooky weekend. I went to Wal-Mart today and half of the checkout lanes that were open were empty. Literally, multiple employees standing around chatting with no one to check out. Same thing at the grocery store yesterday - though a new one just opened up down the street, so I expected that. Then we went to dinner tonight at my daughter's favorite restraunt, which six months ago would have involved a long wait on a weekend, and it was maybe 75% empty, both when we came and left. Maybe just all coincidence here, but I have rarely seen so many people working at stores and restraunts with virtually no work to do. Maybe I am just now noticing or maybe it is not big deal. We will see.


Raise Your Hand If You Love Credit Card Companies

They have more tricks than Houdini. Late charges, increased rates for any late payments, hidden fees and the like. Companies we love to hate. And they are not getting any more huggable. Congress is cracking down on them to some extent and they are not rolling over. These are companies desperate for cash and they know where to get it. What they perhaps do not appreciate is the goose that laid the golden egg thingy. People are in paying-off-debt mode and the companies that screw them the worst will be paid off first. I for one have an elephant's memory on credit card companies that put the screws to me or relatives and will never get their cards again, despite them wasting money on weekly mailings to me. I just smile as I tear them up.

The word to the wise here is to look at your credit card statements and pay them off promptly when you can. Look at the interest rate and any other charges. We are in deflationary times and the Fed is pushing zero on rates, so if you rate is increasing, you have a desperate bank trying to fleece you. Find some way to pay off the debt and cancel the card. Pay them back by never taking another card with the company. Let's boycott the bad. If the government will not take appropriate steps to eliminate some of these culprits, we need to take our own moves.

These companies abusing their clients are just sealing their own fate. I am not shedding any tears if they in fact disappear.

http://www.nakedcapitalism.com/2009/01/chase-behaving-badly-unintended.html

Disclosures: None