The "D" Word

It has been bounced around a bit of late, but there has probably been no serious talk of this turning into a Depression. It seems unthinkable with all we know today that it could happen. A few Doom-and-Gloomers have made passing reference to the possibility, and a few heretics have proclaimed we are on the verge or in one, but there have been few if any credible sources to say we are there or almost there. That is why this piece got my attention. When the managing director of the IMF says that advanced economies are already in "D" territory, plus a lot of downside risk, it deserves some attention.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home

In my experience, the IMF has been one of the few official bodies that has been calling it like it sees it. They predicted, as I recall, about $2 trillion in losses long before we got to $1 trillion. At the time, their prediction was at the high end of most estimates, yet now it is probably toward the low end. Roubini is around $3.6 trillion right now.

Whether right or not, this has to give some doubt to how effectively we can fix our financial institutions with the support we are offering. Some of these institutions are effectively insolvent, and have been for some time. When their losses double or perhaps even triple, then what? We are simply throwing good money after bad.

I suggested last week that we need to nationalize certain of the too-big-to-fail financial institutions. Perhaps not all of them but some of them. We are in some instances giving them more money than they are worth in terms of market captial. Why then shouldn't we, the taxpayers, own them.

Some commented in response to my nationalization post that there are millions of individual investors who invested in these institution that would be wiped out if we nationalize them. These are people told by consultants to put their money in these companies as safe havens paying good dividends. I truly feel for these people, but they are already toast if they invested in these companies and did not sell already. For example, Citigroup was at a high around $57 a share. Let's use an easy math example and say you had $57,000 in Citigroup at the high, i.e. 1,000 shares. Now your investment would be worth less than $4,000, and that is after a 10% gain Friday. Taking the other $4,000 is not wiping these people out, they are already wiped out. And they need to understand that holding this particular stock is going to be speculation, not investment. Could it go up several hundred percent this year? Sure if the government gets stupid, but it could also get wiped out. "Investors" are not in this stock now, or should not be, "speculators" should be the only owners.

Mind you, this is not to say that if you have a stock down 40, 50, 60 or so percent that continuing to hold it is a bad idea or speculation. My comments are isolated to a few poorly run financial companies that in my view deserve to fold one way or the other. There are still plenty of companies out there that undoubtedly will survive and that are probably good bets right now. Indeed, several very good investment books I have read would highly recommend this period as a promised land for investment. You see certain very good investors like Buffet putting his foot back into the pool. He certainly sees potential for more downside but he certainly knows it is foolish to try to guess a bottom.

I do not recommend individual stocks, but right now I personally am only investing in very well capitalized stocks with little to no debt. And of course they need to have a good product/service that will not become obselete. There are a lot of these out there, you just need to look. They too can go down significantly from here, but they will likely do quite well when we come out of this.

Disclosures: None

Sure - I Buy That

The lead article at Bloomberg all day has been "U.S. Stocks Rally on Speculation Jobs Data to Spur Stimulus." Lest you have been in a cave, the jobs data referred to was rather dismal.

http://www.fdic.gov/news/news/press/2009/pr09017.html

By this measure we need some really terrible news next week on the economic front to maintain our rally. For those CEOs out there paying attention, if you want to really benefit your stock portfolio, fire as many people as you can. It will only make things better for everyone. Seriously (not).

And another fun message comes from Bank of America, which was up 27% today. Why? They came out and said they needed no more U.S. government support (right). And other financial companies were up over 10% on speculation that the government plans will not wipe out shareholders (right). And the tooth fairy promised to leave Obama five trillion dollars for stimulus, which seems to be where we are going (right). I definitely see all this as very positive news, and so did everyone else as the market was up nicely today. I am really thinking this is a sustainable rally (right).



http://www.bloomberg.com/apps/news?pid=20601087&sid=anDuRfPVtQL8&refer=home



We Have A Plan



The Senate has apparently approved a plan that is somewhat less than the over $900 billion I have been hearing lately. Indeed, it is under $800 billion. Still too much to flush down the tubes, but better less than more.



http://online.wsj.com/article/SB123393201756256999.html



Another Two Bite the Dust

Another bank or two going down, another week, hardly big news. Get used to it.

http://www.fdic.gov/news/news/press/2009/pr09018.html

http://www.fdic.gov/news/news/press/2009/pr09017.html

Disclosures: None

In This Together

I posted the other day on some possible benefits of people not being able to go out to dinner and the movies all the time. People having a game night, eating at home and getting to know each other; these may be good things for the new reality. Now I am not in the least oblivious to the pain and suffering to those out of work, without heat, without food and the like, and I fully support any government efforts to end any such suffering. Yet beyond that there are some side benefits to the situation. Our materialistic society is becoming a bit less materialistic. We may eventually resort to talking to each other for entertainment. And on a front I am looking at now, this may lead to family moving back in together.

I have been dealing lately with the prospect that my brother-in-law might move in with us. There are several factors in this, but a key one is that he has no job at the moment. I like my brother-in-law and look forward to the work he can do around the house. For the room and board, this may be a good deal. And I would not mind building a more extended family at our house.

We have a new economic reality in this country and need to get used to it. As the attached from Financial Armageddon notes, expect more families to move back in together, which is not necessarily a bad thing. We have over the past decade populated millions of McMansions with 3-5 people and there is plenty of room for more. Bring in your friends and family and let them pay for their keep through chores that you may or may not currently pay to have done, like garbage service, cleaning people, lawn service, snow plowing, dog sitting, baby sitting and the like. We with incomes are perhaps paying hundreds per month on these services that someone living at home, like a live-in relative, could do. So if they have no job, you can give them room and board and make it a win-win situation. The real win-win is family coming together. Bad times may lead to good outcomes. How is that for a silver lining?

http://www.financialarmageddon.com/2009/02/more-in-the-family.html

And After That Silver-Lining Break, Back to Reality

Another record bites the dust. Credit card delinquencies are at a record level, up nearly half a percent in a month, which is major when the rate is 3.75%. Keep those erasers handy as more records are in our future:

http://www.nakedcapitalism.com/2009/02/credit-card-delinquencies-reach-record.html

And things otherwise are also sucking wind. Jobless claims are soaring to over 600K and factory orders are through the factory floor. I would give more detail but unfortunately I am quite busy and the linked article tells the tale.

http://globaleconomicanalysis.blogspot.com/2009/02/jobless-claims-soar-to-626k-factory.html

Disclosures: None

The Good News

Calculated Risk is one of my favorite sites, which you would know well if you follow me. They always have excellent charts and pass on well researched information, as opposed to me who has to do this part time in my free time, which is becoming rare. In any event, Calculated Risk has some promising news, which is based pretty much totally on terrible news to date. Based on the drop in car sales, the drop in new home sales and the drop in single home starts, it is obvious that either the declines have to slow sharply or might actually bottom out in 2009. At least one cannot physically continue at its 2008 rate of drop, new single family starts, as it would go negative. Another, new home sales, as a practical matters will not continue its decline rate as it would go down to nearly zero. And on the car front, well, it could continue lower but at some point cars simply wear out, so the rate of decline there should also abate, if not reach bottom, in 2009. But before you go out and buy stock in GM or Ford, keep in mind that car sale declines perhaps bottoming out does not tell you what companies will be selling the cars. Hyundai just had a nice report.

http://www.calculatedriskblog.com/2009/02/looking-for-sun.html

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

Then again, on the car front, perhaps things could get worse. There could certainly be some bankruptcies.

http://globaleconomicanalysis.blogspot.com/2009/02/downward-spiral-in-autos-gm-49-ford-40.html

Disclosures: None

P.S. I am starting to get tired of the occassional negative comments I get on Seeking Alpha. But for the 28 cents I have made in advertising dollars (they only pay when you get to $100) I would hang this up. Let's do the math, hundreds of hours of reading and posting for 28 cents. Perhaps I need a new profession. As they say, don't quit the day job. Seriously, I appreciate comments good and bad; they simply confirm my thesis that no two investors (or economists) in a room of 100 will agree to a proposition. And I thought attorneys were bad.

More China Mixed Nuts

I find that when I post on China I get a wide variety of comments on how good or bad things are there. Some seem to be from people who are there and most seem to be from people who know the situation better than me. Yet the commentators are like economists - you can get 100 in a room and not get two to agree to a single idea. I get some that say things are worse than I am reporting and some better. Now I expect some of this is due to a bit of distrust in the entities reporting the numbers. I am not just talking national stats here but regional stats and local stats. Oh my goodness, might politicians in China be cooking the books one way or another? They must be learning something from U.S. politicians if that is true as we are the experts on cooking stats. Either way, understanding where the China economy stands is a very tricky thing indeed. I will continue to endeavor to do so and try to report here what I think is the more accurate information, but it is a challenge.

http://www.nakedcapitalism.com/2009/02/china-agricultural-ministry-pegs.html

Of Course a Worse Case Can Be Made for Japan

http://www.nakedcapitalism.com/2009/02/japan-on-edge-of-abyss.html

But Japan has been sucking wind for a good decade and a half, so what is new here. Nonetheless, the fact that Japan has sucked wind so long should be a lesson/warning to us. It could happen here.

Keynes Rolling In His Grave

I will not spend a lot of time on this but I have seen a number of posts talking about how Keynes would call for massive fiscal stimulus spending in this economic evironment for the U.S. Well, I do not to profess to be a Keynesian expert but as I understand what he had to say, fiscal stimuls was what the U.S. needed to do in the Great Depression, and it is not a lesson for today. Then, we were the major exporter for the world, and now we are probably the major importer. I think Keynes would have a totally different view today of the mess we are in, so please stop using his name to justify what we are contemplating doing.

Disclosures: None

That Nationalization Thingy Again

I have called here for the U.S. government to start nationalizing some of the financial institutions instead of either giving them money, backstopping their bad debts or buying their toxic waste. Why spend and/or backstop well over a hundred billion on Bank of America and hundreds of billions on Citigroup when the two combined now have a market cap of under $60 billion. Just buy them and end the pain. We can sell off the pieces or reprivatize them later.

Unfortunately, any talk of privatization tends to elicit a rather visceral negative response in many people. It seems so anti-American of a thing to do. It is socialism. And governments are notoriously bad at running businesses. Well folks, last time I checked, it looked like the current management at these businesses is not doing too well at running them, so why should we simply keep supporting them?

It makes no sense to me that my tax dollars are being spent to benefit the shareholders and bondholders of financial institutions that are technically insolvent. If you are a shareholder of one of these institutions at this point in time, you are not an "investor" at all, you are a speculator, a gambler, and you know the risks. You are simply betting that the U.S. has no taste for privatization - and you may be right - but I hope that if enough people get on the bandwagon and write their representatives then Congress and the Administration just might begin to understand this is our money and it should be spent to our benefit. Do not privatize the gains and socialize the losses. That, my friends, is anti-American.

In any event, some excellent financial minds, such as Taleb, Roubini and Krugman, are backing the idea, so it cannot be all that bad. And while our situation may not be entirely identical, privatization did work well in Sweden in the 1990s to stem its financial crisis, so it can work. Certainly better than simply flushing our badly needed dollars down the drain by giving them away.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4Tl65kFU96s&refer=home

Disclosures: I own some shares in GE, which is getting some government aid.

Well Worth The Look

Not a lot of comment on this. This linked post defines cliff diving big time.

http://www.calculatedriskblog.com/2009/01/january-economic-summary-in-graphs.html

Mixed Signals on China

Folks at BlackRock and Barclays tend to think China is a good place to put your money. They note the GDP growth rate of 6.8% in the fourth quarter and expected government stimulus that will lead to a growth rate of 8% in 2009. Moreover, the Shanghai Composite Index was up an impressive 9.3% in January. That is impressive in comparison to the nearly identical 8.8% change in the Dow, though for the Dow it was in the other direction.

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

As the linked Bloomberg article notes, the Shanghai Index was trading at 15.5 times reported earnings, versus 50 times reported earnings at the peak. That is low in comparison to where things have been, but is it truly that low in this environment? I tend to agree with the Chariman at Morgan Stanley Asia, who quite appropriately observes:

“Most of the juice in the Chinese growth results in the last five or six years have been export-led,” Roach said in a Bloomberg Television interview from Zurich. “How can an export- led economy lead the world out if its export markets are going south?”

Indeed, how can it? Seriously, if you know, please comment as I cannot see it. China's two biggest export customers, the EU and U.S., are not going on a spending spree any time soon (even though their respective governments are trying to stimulate one), so any expectation that China will just bounce back seems misplaced. China is indeed doing some things to support its domestic economy but this seems small considering its situation. We will see. I for one am not buying up shares of Chinese companies at the moment.

Let me add a couple more points to the equation. First, China computes its GDP a bit differently than we do. I noted this in some detail last week. As Nouriel Roubini pointed out, if it computed GDP the same way we do, its fourth quarter GDP would be pretty much zero. Moreover, given the 9% growth for the year, a 6.8% growth rate in the fourth quarter, even by China standards, suggests a serious decline late in the year. So any growth forecast tied to the China fourth quarter GDP is perhaps misplaced.

Second, the evidence of what is happening in China does not show the economy there being quite so rosy. Times Online had a nice detailed piece today on how the economic decline there is causing some significant social strife. They give plenty of examples of what is taking place. China is suffering with the rest of us and likely is or soon will be suffering much more. Accordingly, I think the folks at Barclays and BlackRock need to take another look.

http://business.timesonline.co.uk/tol/business/economics/article5627687.ece

Disclosures: None