Are We There Yet?

I am really thinking now, due to the market reaction over the past month or so and the fine result by Goldman Sachs and JP Morgan that we have reached a real bottom. Forgive me for saying otherwise over the past few weeks or months. I was totally off-base and had no basis for what I was saying. I am now Mr. Bull and expecting a fine recovery in short order.

Then again, that last paragraph is total BS. I am not a convert just yet. Yes, I am definitely seeing some possibly positive signs in terms of housing perhaps finding a bottom in some markets and the rate of unemployment perhaps slowing, but my view of certain fundamentals is not saying we are there yet. We have a ways to go from what I am looking at and from what the IMF is looking at. The IMF is now saying this will be long and nasty. Go figure.

http://www.nakedcapitalism.com/2009/04/imf-warns-downturn-will-be-prolonged.html

Sorry for the short post but I bowled this evening. Over the next few days I am going to a funeral and will not be posting.

Disclosures: None.

Consumers Hunkering Down

I gave a hypothetical example a couple of days ago about a baby boomer losing nearly half his or her retirement and virtually all home equity feeling the need to hunker down and start saving. As fate would have it, a survey was released today showing sentiment among future retirees is at a record low in terms of expecting a comfortable retirement - just 13%.

http://latimesblogs.latimes.com/shopping_blog/2009/04/worker-expectations-for-comfortable-retirement-plunge-ebri-survey.html

Now let's do 2+2 with this stat. 87% of the people do not have confidence that they will be comfortable in retirement. Now some of these are not that close to retirement so they probably do not count much. Nonetheless, the front end of the baby boom generation just started retiring, and this is a very large crowd. They do not by-and-large feel comfortable with what they have saved for retirement (I am at the tail end of that group and am not comfortable either), so what does this tell you about consumer spending? Consumer spending, after all, is roughly 70% of our GDP. What do you expect to come of this?

Giving money to banks so they can lend to consumers is only going to work if (1) the consumers qualify for credit - which is increasingly doubtful and (2) these debt laden consumers are seeking more credit. I suspect on (2) for the most part only those in desperate need for cash will seek credit and most of these will not qualify under (1). Go figure. At the end of the day, consumers are in a sink hole and will have a very hard time climbing out.

Now this 2+2 discussion did not include any review of Alt-A and Prime loan foreclosures, which now in $ figures are exceeding the subprime problems. It is not including new unemployment, which continues to worsen. And it does not include many other realities. I am trying to live in reality. Politicians should try to do so too.

Market Down

I read a blog noting that any climb or fall of 1-2% in the market is just business as usual in our current market. I agree. You could even raise the upper end of that range and be correct. Accordingly, I am not reading too much into today's drop. Nonetheless, let me note that the market has since March 9 had a meteroric rise - the best in many decades. A drop today - or any day - is to be expected. Given the rise, more could indeed happen. I have been predicting more doom and gloom but I am not attributing today's drop to that prediction - though the news that led to the drop was not a surprise to me. The next couple of weeks will be telling. You know my slant that the worst is yet to come.

Disclosures: None

"This is not good."

The quote above is something my wife just said as she is having problems with her computer. Nonetheless it equates equally well with the following link. Let me begin by noting it is positive in terms of short term market prospects. I guess throwing trillions at the problem may very well cause a nice bouce reaction or even a year or two of advance in the market. After all, Greenspan keeping rates around 1% for too long is one of the inspirations for our current doom and gloom. He helped build one of the biggest bubbles ever. Building another bubble to solve this one is not, in my book, a good thing.

Spending trillions to fix the problem is one heck of a lot of money. I don't think it is going where it needs to go to have the beneficial effect needed. Nonetheless, the bigger point is not the short term gains but the longer term consequences that this link discusses:

http://www.nakedcapitalism.com/2009/04/guest-post-fake-recovery.html

If he is right, we are simply spending a lot of taxpayer dollars to build a relatively short term fake recovery. That is a worst case scenario. We need to get this mess behind us and not kick the can down the road. Hopefully sanity will prevail in due course, but, then again, I have been here too long to believe that it will.


Disclosures: None.

This is Promising

Goldman Sachs and HSBC are finally doing something laudable. Goldman is selling shares and HSBC is selling assets, both to avoid or reduce government debt. Now I suspect they are both doing it to avoid government control and restrictions on pay, bonuses and the like, but I am all for it. I heard someone speculate that Obama was making government aid so onerous and painful that financial insititutions will do everything they can to avoid needing to go there. I can only hope that is the case and that this is a sign it is working.



http://www.bloomberg.com/apps/news?pid=20601087&sid=a3v8O6IgHva4&refer=home



http://www.bloomberg.com/apps/news?pid=20601087&sid=aBucQ1Prv8E4&refer=home



Unfortunately, not all the financial institutions have the ability or assets to save themselves. Think about the tens, even hundreds, of billions some fiancial institutions are now or in the future going to owe to us taxpayers. Assuming they survive, how many years, decades, centuries . . . do you think it will take them to pay it all back? Silly question of course because I am sure we will forgive the debt and let them off the hook when all is said and done. After all, if Lawrence Summers has anything to say, we will let them all off the hook so he can maintain his speaking fees. He made millions in speaking fees from Goldman and Citigroup on top of his $5.2 million in pay for a one day a week job for a hedge fund. Clearly we hired the right guy for the job. If you doubt me on Summers, read the following from Frank Rich at the NYT:



"We discovered, for instance, that Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs. Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration. This dynamic duo’s innovative gift to their country was banks “too big to fail.”"

Krugman Ain't Linkin' it Either

I am the first to admit I do not always agree with Paul Krugman, but as of late I am seeing eye-to-eye with him. Here is a nice piece from Calculated Risk on his take on the "Stress Test" and the IMF $4 trillion surprise I reported the other day.

http://www.calculatedriskblog.com/2009/04/krugman-on-economy-and-stress-tests.html

Overall, things are just rosy out there. But let me return to to my recent topic of the new reality. Here is another tidbit to chew on. Let's take an example that in my mind is likely multipied perhaps millions of times across this country. You have a baby boomer who is, let's say, 57 years old. Before the recession lets say he had $750,000 in retirement and a home worth $400,000 - half of which was equity. He was looking pretty good by most comparisons. Actually, compared to the average American this dude was dong mighty well. But let us assume he kept his money in equities despite the market downturn. Too late to take it out and too afraid to miss the recovery. He is frozen by fear and the unknown.

So now his retirement is worth, let's say $450,000 and his house is worth $225,000. He is lucky that he still has equity in his house - barely - but his retirement is no where close to where it needs to be. So what does this guy hoping to retire in under a decade do?

• Buy a new car
• Buy a vacation home
• Replace the old furniture
• Finish the basement
• Save everything he can and hope it is enough.

I am not going to answer this question for you. Multiply this example by millions, most of whom were probably in much worse shape than the boomer in this example, both before and after the recession. Yep, we are looking at a V shaped recovery. No doubt about it!

There are plenty more examples of workers in the country that have less financially sound stories than the example I just gave. We will see what this new world has to offer, but I do not see a massive rebound in spending any time soon.

Disclosures: None.