Highly Disappointed

One of my greatest dissapointments with Obama has been his failure to utilize one of his greatest assets - Paul Volcker.

http://online.wsj.com/article/SB123940537361509771.html

Volcker has been dead on accurate in his take on our present economic situation. Moreover, he is one of the very few individuals who can say that he stayed true to his principles and did what he knew was right when everyone else was saying otherwise. He took interest rates to the roof and took some serious grief for same but he kept true to himself and it worked. He did what he had to do and that, my friends, is what is lacking in this Adninistration (and do not even get me started on the last one, though I did vote for Obama, which is why I am ranting). We are not yet willing to do what is politically incorrect. We are not willing to do moves considered socialistic - as in nationalizing banks. Screw the politics in my opinion, we are in all out economic war here and we need to pull out the stops. If some major financial institutions need to go down, so be it. Get it over with and spend taxpayer money cleaning up the mess.

I read yesterday that Obama was telling people that in the short term we need to spend some money to help the economy. Like buy a car or some other big expenditure. He noted that we need to pay down debt but nonetheless the everyone needs us to spend some money to stabilize the economy.

I have not heard worse horse s*&^ in quite a while. U.S. households, despite losses in home values and massive job losses, are now saving about 5%, which is a major improvement over spending more than we make, which we were doing before this recession. It is a low savings rate compared to where we should be but it is a major improvement over where we were. AND HERE IS THE BIG POINT TO UNDERSTAND!!! We are now returning to a sustainable spending pattern. We are not going back to our old spending ways and, even if we wanted to, cannot do so. Our old spending ways were tied to rising home values - and the ability to tap into them for credit - and the willingness of banks to extend cheap credit to anyone who could fog a mirror. Guess what - those days are done. The new reality will be quite different. Quite different indeed.

So what commentators are discussing as a recession is in my view the new reality. We have returned to where we need to be. Actually, in my view we have a bit further to fall, but either way we are close to where we belong. Unless some miracle happens and millions of jobs are created next week for buyers that do not exist, the U.S. economy is returning to where it needs to be.

This is painful. We have way too many banks, restraurants, retail establishments and the like. We built up for an economy that simply does not exist. We now have to adjust down to reality. We are getting there but the real question is whether we have downsized enough yet. Personally, I think not. Yet, let's assumed we have. If we have returned to reality - to where we need to be - why would the economy take off from here? Why would the stock market continue its meteroic climb? Why?

When you figure out the answers you will understand where I am coming from.

Consider this very carefully. People in the U.S. were spending more than they were making. This was possible because of easy credit and rising home prices. Both those enablers are gone, so the consumers are, without choice, retrenching. Consumer spending was roughly 70% of our GDP. So what happens when 70% of GDP retrenches - you are seeing it.

So the question is whether (a) the retrenchment is done and (b) what happens even if it is done. I doubt it is done but let's assume it is. I still do not see the spending returning to where it was. People now have a new attitude, which is good. People want to live within their means and save for the future. After all, they just saw their retirement accounts roughly cut in half, so the baby boomers are desperately trying to save and make up for lost ground. I for one am maximizing my retirement take and I am turning 50 this year so I am taking advantage of the catch up withholding.

So the question is, do you agree with my view?.

Disclosures: None.

Danger, Danger, Danger, Will Robinson

Well don't blame me when it happens. I am reading a lot of articles on how this is a bear market rally and it is over done. I have been saying this for weeks and I am bored with my repetition, so let me tell you how some other people are saying the same. You can start with the WSJ. It had a piece today on how corporate bond rates are generally a good predictor of the economy. And you guessed it, corporate bond rates are still in a maj0r funk.

http://online.wsj.com/article_email/SB123929216724105401-lMyQjAxMDI5MzA5OTIwOTkyWj.html

I separately subscribe the RGE Monitor. It is a free site and it is headed up by Nouriel Roubini, who to date has largely been dead on in this recession. I started actively tracking our current economic woes in January of 2008 and one of the key pieces I forwarded to my fellow investors at that point was Nouriel's testimony to Congress in about January 2008. At the time I told my colleagues that I hoped he was wrong but I suspected he was right. Guess what - so far he is right.

Another person I follow is saying the same thing. Barry Ritholtz, posts at RGE, but he also is a frequent speaker on financial related channels and he has his own blog that I follow at the Big Picture:

http://www.ritholtz.com/blog/

http://www.rgemonitor.com/us-monitor/256306/rally_too_flashy_for_our_liking

He is saying, accurately I believe, that we are oversold in a dead cat bounce and things will go back to normal and perhaps beyond,

http://www.rgemonitor.com/us-monitor/256298/earnings_season_is_crunch_time

Tell Us the Stess Test Results - Or Not?
Either way Transparency is Gone!

First you have the NY Times reporting that all is fine and well on the stress tests without - of course - any support for this proposition.

http://www.nakedcapitalism.com/2009/04/quelle-surprise-bank-stress-tests.html

Okay, they did say some banks will fail but overall a positive report. So what are the actual results of the stess tests? No one knows - or at least we do not know - because the Treasury is banning banks from revealing the results. So much for transperancy. Between that and the FSAB neutering the mark-to-market rule no one will have any freakin' idea how well banks are doing. To me, this is a signal to anyone thinking of buying these toxic assets or investing in banks to run as far away as fast as they can. By the way, another bank failed today. That makes 23 this year. Without the false government support for banks I have no doubt we would be over 100 and many would be some very big names.

http://www.calculatedriskblog.com/2009/04/bank-failure-23-new-frontier-bank.html



Disclosures: None.

Nice Day

I got home late due to bowling night - don't ask - but no time for a lengthy post. Good night at bowling and good day in the markets. No doom and gloom from me today. The news from Wells Fargo and other fronts was pretty good. I still have doubts but am gaining some belief that the March 9 bottom is the support level. We will see.

Okay, forget that crap, I am still expecting worse to come. Do the stats lie? We will see.

Disclosures: None.

Buffet Down - But Not For The Count

Moody's - a company whose parent is 20% owned by Berkshire Hathaway, which is virtually a controlling interest - has now downgraded Berkshire, not one but two notches. Fitch took it down a notch last month and S&P has it in their sights. This shows no one is immune - well almost no one.

I just like the irony that a company in which Buffet has a significant stake downgraded his company two notches. I do not view this as a run for the exits for Berkshire. It too planned for this and will do well. Buffet simply has certain stocks he will not sell so he is having to share a bit of their pain. But he is nonetheless going to do very well, I think, on picking up scraps during this downturn. Not time to count him out.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ap0wC18qtgkg&refer=home

Here is a Surprise!

Bloomberg summarized the minutes of the Fed March meeting quite nicely:

"Federal Reserve officials feared the U.S. economy might fall into a self-reinforcing cycle of rising unemployment and slumping business and consumer spending, making credit tighter in a weak financial system, minutes of the Federal Reserve’s March meeting show."

Mind you, this meeting was less than a month ago. I must admit I have been suffering under the same fear for several months and still am. I am a bit more optimistic at the moment - but just a bit. We will see. Nonetheless, for the Fed to have minutes that are this publicly negative is rare, very rare.

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

Let me add my own personal surprise to the mix. I have continued to call things as I see them and as I have said pretty much daily I do not see us at the bottom yet. I, on the other hand, do not see us significantly off the bottom but still not there yet. It is too soon to party, in other words. As the markets climbed at nearly a record pace in March and have not done too badly in April, I expected fewer people to pay attention to me. That has not happened. At the end of the day, however, I am either right or wrong. If I am wrong, please feel free to ignore me going forward. If I am right, feel free to follow the lead of one of my friends and refer me to all your friends and family. The particular friend I am mentioning will likely read this tomorrow. He called me Chicken Little last year, I believe about mid-year, as I was emailing colleagues (before I started this blog) about the pain I saw ahead. I think he is now a convert. He is the one who convinced me to start this blog. Go figure. Chris, feel free to chime in. I thank you for your support.

Any hoot, back to substance.

Buiter on another Warpath

I will not even attempt to summarize this for you as it is late and I am tired. Buiter is a doom- and - gloomer probably worse than me. He now raises the risk of the U.S. government or the U.K. government defaulting on debt. To me, and even Buiter, not likely, but it is a possibility to consider. If our government gets too crazy on its spending spree (incurring debt to fix a problem caused by debt) this could be an issue.

http://www.nakedcapitalism.com/2009/04/willem-buiter-non-negligible-risk-of.html

More Real Estate Pain to Come - Especially on the CRE Front!

I reported last week on how prime mortgage delinquencies are now outnumbering subprime by number. This is a serious stat you need to understand as it represents very serious mortgage dollars potentially going into default and impacting the toxic assets we seem so keen to buy. But just as residential real estate seems close to a bottom, commercial takes off in losses big time. Not a surprise, but it is the next phase of this real estate downturn. On every front CRE seems to be sucking wind.

http://www.calculatedriskblog.com/2009/04/vacancies-vacancies-vacancies-and.html

http://www.calculatedriskblog.com/2009/04/cre-rents-fall-24-in-san-francisco.html

Unemployment Stats - What to Follow

The government says unemployment is nos 8.5%, a very high figure by historical standards, and most projections I have read predict us peaking over 10%. That is the "official" rate. This rate ignores a lot of people ready, willing and able to work. A good argument exists for using a different measure, U-6, to measure unemployment. I never expect the government to do this, but it is a consideration in judging unemployment. U-6 by the way, shows unemployment over 15%. Somewhere in between 8.5% and 15% is probably the truth but the reality is that government stats are under shooting. Big surprise!

http://globaleconomicanalysis.blogspot.com/2009/04/close-look-at-accelerating-rate-of.html

Disclosures: none.

Got Some Company

Marc Faber and George Soros were both quoted by Bloomberg today as saying we are basically in a bear market rally and more correction is on the way. Wish I had said that!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiM9jQWdgWQg&refer=home

Seems the markets were perhaps listening to them, as well as to some early earnings news and downgrades.

Geithner's Plan - More Educated Criticism

I have been critical here of Geithner's plan on various fronts. There have been and continue to be much smarter people than me on the same side of this fence. I guess time will tell who is right.

http://www.nakedcapitalism.com/2009/04/harvard-princeton-economists-say-no.html

Great Depression Comparisons Continue

In most respects this recession so far is not as bad in the U.S. as The Great Depression, but if you go and look at the "Four Bad Bears" chart at Calculated Risk, we are chronologically not that far off in terms of market losses from where we were then. Indeed, the DOW had a bounce at about the same point then as the markets have now, and then it just resumed its downward treck with the occassional bounce.

http://www.nakedcapitalism.com/2009/04/world-economy-falling-faster-than-in.html

I am not saying we will get that bad and I do not think we will, but I do think we have a bit farther to fall. And the next linked article notes that while the U.S. is doing a smidge better the global economy is not much better than the big one. This fits with my perception that this will be close but not as bad as The Great Depression. My principal reason is that the housing bubble still has some air to lose. Prime mortgage delinquencies are still increasing and housing prices for the most part have not hit bottom. When housing reaches a bottom banks can begin to properly value their mess and we can start the healing process properly. We can begin some recovery before then - as in the corporate and individual deleveraging taking place - but we will not be able to find a bottom until we know how bad housing has become. It effects the bank toxic assets and individual debt/capital.

While here, let me mention a comment I had today on Seeking Alpha. The person leaving the comment noted that it was a bad time to short stocks (I agree that it is very risky) and that we are about to return to a Goldilocks economy much like the 2002-2007 period. It is this latter part of the comment that I feel compelled to discuss. If people truly have this belief I feel the need to note otherwise. I for one think the stock markets will be somewhat better five years from now than they are today but nothing like what we saw between 2002 and 2007. If you take a close look at those years they were not Goldilocks at all. They were years of us here in the U.S. spending beyond our means, increasing debt and living beyond our means. Consumer spending was roughly two thirds of the GDP and it was built on a shaky ground. The housing bubble allowed people to borrow more against false real estate values. Debt securitization allowed banks to lend more than they otherwise would have and to reduce credit standards to a fog the mirror standard. And credit agencies made it all seem fine and well.

Now we have vastly reduced housing prices that will return very slowly, so the home piggy bank is adios. We have unemployment that should approach 10% by 2010. We have banks unable to securitize anything. We have banks unwilling to lend and those who are unable to borrow. We have other countries now waking up and unwilling to fund our foolish spending ways. The only entity trying to support massive additional spending is the government and that is just us borrowing money to pay ourselves to spend more money. I am sure that is sustainable - not.

So any thought that we will return to that "Goldilocks" economy that never really existed is in my mind nonsense. It never existed and we are now entering the reality that the future needs to be a leaner more practical economy. Indeed, it should have been before.

Just my take. If you want more, go back to my earlier post on the New Reality, one of my better posts in my opinion.

http://seekingalpha.com/article/117788-the-new-economic-reality

I am not saying we are returning to the Beaver Clever times, but nonetheless there will be more sobering times. Not a bad thing overall, though I do feel sorry for those suffering the worst of it.

http://www.nakedcapitalism.com/2009/04/world-economy-falling-faster-than-in.html

Just a Couple More Points

Before closing out I have seen a couple of key news point worth mentioning. First, Moody's reports that the corporate bond default rate was the highest in March since the Great Depression. In other words the highest in most of our lifetimes. My dad may have seen a higher rate as a toddler, but I suspect that is not too relevant today. By the way, the picture on my profile is my dad holding me. It is not the most up to date photo, but I love it nonetheless.

http://globaleconomicanalysis.blogspot.com/2009/04/corporate-bond-default-rate-highest.html

The second point is that the Treasury is delaying its report on the stress tests of the top 19 financial institutions. Not a big surprise here.

http://globaleconomicanalysis.blogspot.com/2009/04/treasury-to-delay-reporting-bank-stress.html

The bigger question is whether the stress tests applied sufficient stess (I think not) and whether the results will be shared with the public (I question to what degree). We will see.


Disclosures: None

Slow Progress - Not There Yet

A Deutsche analyst sees high yield, high risk bonds defaulting at 53% over the next five years. WOW! That is nearly twice the Moody's estimate and from what I have read a bit over the top. Nonetheless, a nice attention getter and perhaps a sobering reality.

http://www.nakedcapitalism.com/2009/04/deutsche-analyst-high-yield-defaults-to.html

You Darn Protectionist You

From U.S. stimulus plans that require the money to be spent on U.S. companies to other steps countries are taking to make themselves more competitive versus other countries, protectionist issues are cropping up left and right. History has shown these types of measures to be ill-advised. During the Great Depression, the U.S. took on protectionist measures big time and we isolated ourselves from the rest of the world. The extreme almost allowed Hitler to take over Europe. But for Japan's wake up call in Hawaii we may all be speaking German now. In another stroke of what might be referred to as protectionism, many countries are working very hard to keep their currencies at a point where the exchange rate is favorable to their domestic exporting companies. Go figure.

http://www.nakedcapitalism.com/2009/04/are-competitive-devaluations-starting.html

Punish Them Enough and They Will Not Come

I had an interesting comment recently about the possibility of the Obama Administration making it so painful for companies to get government aid - painful in terms of officers being fired, shareholders losing value and the like - that they would only do it as a last resort. I can only hope that is part of the master plan here. We certainly are not building in a lot of protection otherwise for taxpayers, but if taking the money means serious pain for those taking, we are protected. It does not appear that the plan is all the way there yet, but we can only hope. Still, why would you put forth a plan and then make it so punishing that you make sure no one uses it. Perhaps to save face - let me think about that one for a while.

http://www.nakedcapitalism.com/2009/04/congressional-oversight-panel-to-call.html

"Oh Jesus"

That is a quote from me when I opened this post on Calculated Risk. Seriously, within a second I said this under my breath - not to alarm my wife. The IMF is now warning of $4 trillion in losses. I am going from memory here but I believe about a year ago they were at a trillion and then 4-6 months ago they were at $2 trillion. To now double that figure is astounding to me. I have viewed them as not too conservative to date but also not too over the top. And that is what worries me about their new prediction. They are not doom and gloomers - they call it like they see it. And if they see it right. . . ?

http://www.calculatedriskblog.com/2009/04/report-imf-to-warn-of-4-trillion-in.html

Meredith Whitney has been right a lot over the past year or two and so she has a lot of street cred. She is now off on her own and still worth listening to. Yet if she is truly calling for house prices to fall another 30% I have to beg to differ (though a few select markets may get there). Overall, I think in real estate price drops the worst is behind us. Not all of it by any means, but the worst. Consider that prime mortgage delinquency rates are rising so the worst is not necessarily over but we are closer to the bottom than the top - in my opinion.

http://www.calculatedriskblog.com/2009/04/meredith-whitney-house-prices-to-fall.html

Done for the night as I am working on getting ready for an adoption. I am, nonetheless, trying to figure out why this recession is done. Why it has reached a bottom. I am not there yet.

Disclosures: I have some put options but they total about $3000 (well they originally did and are now closer to $2000). I did not bet the farm.

Did I mention I did a few thousand in put options last year in March and then the market climbed throughout April to the point my options were all down 50%-70%+. Well I eventually made money off of these, some over 500%. Go figure. I shook my head daily as the market went up last year not understanding why and I kept my options. I am now also shaking my head when the market goes up - admittedly, though, not shaking as hard as I did last year. Nonetheless, I am holding on to my put options, which now for the most part are down over 20%.

Disclosures Otherwise: None.

Who Knows What is Next -Certainly Not Me

Let me begin by saying that for now I am continuing to report negative news. I do it because the stats I think are important are not yet pointing to a bottom. I think they will perhaps late this year or early next look better, but they are not close yet. And so, for now, get used to me being a bit of doom and gloom. I hope to be cheery soon.

Everything Is Fine

Here's some news, if this article is correct on the reason for Asian markets rising a fourth day in a row, then someone is actually believing what Bernanke has to say. You know, the guy who - along with everyone else - touted how strong our economy is and how we have reached bottom throughout 2008.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5_oBMkb87S8&refer=home

And Geithner, another person whose every word I hold on to like life itself, has noted that he will oust CEOs from institutions that need "exceptional" aid. In my book that means there are already dozens that should be looking for jobs right now. Seriously, define "exceptional." To me it is pretty much anything over a billion bucks. To me, a billion is indeed exceptional and a fine case could be made for a much lower figure. We have all gotten too used to big numbers, especially when it comes to bailouts. Talk to any of the millions who lost their job over the past year and they can tell you that $100 would be pretty exceptional to them at the moment.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMWnzAPdYvl8&refer=home

Let the Foreclosures Begin

I noted yesterday that prime mortgages are now outpacing subprime in terms of the number of delinquencies. Translation - more dollars are going to hit the books from prime defaults than ever hit the books from subprime and subprime defaults started this ball rolling. Don't believe me, believe Bloomberg, which also reports that loan modifications are also not succeeding in the least.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2t62x0yDW84

Well now, we have another wave of foreclosures about to flood the already over-stocked real estate inventory: Fannie and Freddie are lifting their ban on foreclosure sales and evictions. Talk about the flood gates opening - get your foreclosure surfboards ready. Seriously, these flood waters have been building up for months and Freddie and Fannie are the largest lenders, by far, in the country. We will see.

As these foreclosures hit the market, there will be another pressure point on real estate prices, another impact on real estate inventories and another hit on builders who cannot compete against foreclosure/REO prices.

http://washingtonindependent.com/37160/fannie-freddie-quietly-lift-moratorium-on-foreclosures

I truly like the start of the next link. It truly tells the story. The rest of the article, which I attach, goes down a narrower trail of the beginning story, but I think the beginning requires more time. At bottom, the story is that financial innovation is simply a way of getting around regulation, of recreating old toxic (illegal) assets with new fancy names and of making profits out of nothing. In other words, financial "innovation" is pretty much always about someone gaming the system to pick the long straw. Eventually, the taxpayers get the short straw and we all look around to see why. Paul Volker is a hero of mine and he needs a greater voice in this Administration.

"There are two schools of thought on financial innovation. One is the mainstream view, repeated faithfully by a compliant media, that financial innovation is really really important and under no circumstances must be threatened. Then we have the Old Fart view, best represented by two men who by any standards ought to have retired by now: Paul Volcker and Martin Mayer. Volcker deems the ATM to be the most important financial innovation of the last 30 years. Martin Mayer tartly noted,

'Innovation allows you to go back to some scam that was prohibited under the old regime. How can you oppose innovation? The fact that the whole purpose of the innovation is to get around the existing regulation never seems to occur to regulators or members of Congress.'

And the moderate view comes from a dead man, John Maynard Keynes:
'When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.'"

http://www.nakedcapitalism.com/2009/04/some-musings-on-financial-innovation.html

How Stressful is the Stress Test?

A good argument can be made for the government stress tests - to be completed by the end of this month - triggering some legal mandates. First, if they show a material impact on the capital of the examined bank, then you have SEC reporting requirements. Second, if the bank turns out to be insolvent, then Sheila and the FDIC have some hard choices. I for one think they, as in the FDIC, have been looking the other way on certain "key" financial institutions already. You know, those to-big-to-fail thingies. Many should already be down and would be absent the taxpayer largess.

http://www.calculatedriskblog.com/2009/04/stress-test-update-regulator-meeting.html

And Now the Good News

HSBC was able to raise over $17 billion in a rights offering. This was at a 41% discount to the share price close April 3, which undoubtedly was already at or close to a multi-year low. I truly respect that HSBC did not want to go to the government for support and instead stuck it to their stockholders. Do you think they stuck it to the stockholders so the government would have no say on officer pay and compensation? Yes, I am a cynic.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXOm2cmMzocE&refer=home

Disclosures: None