2 + 2 = 7

Bloomberg reports that consumer spending is increasing, savings are increasing, unemployment is increasing and people are more confident. I am shaking my head and scratching things. Let us do the math again on this one. Unemployment up, so less jobs and less income. Spending up, which is not due to a good jobs picture. Savings up, same story. Confidence up - based on what I must ask. This is all stimulus effects, i.e. us spending/saving money that our government borrowed for us. Yes, this spells recovery in my book. I am a happy guy now.

http://www.bloomberg.com/apps/news?pid=20601087&sid=an7UdA7Bo8xg

Come on people, we cannot borrow more money and create more debt to end a debt created bubble. It ain't gonna' work. Get with the program. More debt does not solve a problem due to too much debt - period! Yet that is our solution. Did I mention I am disappointed in the new Prez on the financial front? Not so much so otherwise but on the financial issues he is definitely listening to the wrong buffoons.

I hate to keep repeating myself, but let us go through it one more time:

• U.S. debt levels, as a percentage of GDP (which means it is gaged properly to past debt levels) continues to be at or near record levels;
• Housing prices are down drastically around the country and that equity was a common piggy bank;
• Unemployment is pushing on double digits nationally, and already there in many states; and
• The rest of the world is also sucking wind.

So this looks like a good time to be confident - to believe government stimulus dollars have fixed it all. Pardon me if I wait on he sidelines.

I hope to add more over the weekend; it has been a very taxing week.

Disclosures: None.

41, 42, 43, 44 and 45 - Five Banks Down This Week

The FDIC was busy this week. Five banks down in one week - impressive. CRE is taking a serious dive, private mortgages - especially prime - are worsening, and other factors are hitting local and regional banks very hard. We are approaching a rate of two a week. Now rate wise this is nothing like the S&L crisis but dollar wise - if you include some banks that had to be bought (with government strong-arming) then we are beating out the S&L crisis.

http://www.calculatedriskblog.com/2009/06/bank-failure-45-mirae-bank-california.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=af_dnRBsbs.c

Let Me Repeat

I just finished a new blog post but in reading some old ones wanted to repeat something that still rings true. I paste below something I wrote over four months ago. A lot economically and financially has happened since, but I still think the post hits the nail on the head. So rather than linking it, I am repeating it. For anyone new here, I still stand by every word. My key point then was the new reality, i.e. get used to a new economy for the long term, but looking at it again I particularly like my observartion on how laissez-faire economics and Karl Marx both had the same fundamental flaw - an incorrect assumption on human nature. This post is from February 15:

The article I am linking here compares our present economic demise to what happened in Japan in the 1990s. Japan suffered 15 years of real estate declines and over a decade of stock losses. It just started to recover a few years ago when the current recession hit it as well.

Here is one key paragraph in the article which comes early in the read:

"Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail."

I hate beating this nationalization drum so much but at some point someone important may pay attention. The second paragraph of this article to get my attention is that the U.S. seems to be in a similar situation:

"More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States."

And as big as you think the current plan is in the U.S., those who studied Japan think it is "timid." We cannot, however, afford anything else.
And here are a couple of key paragraphs. Japan tried what we are trying and it worked so (not) well. Oh well, go figure?

"Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks."

Overall, what Japan tried and we are trying is too comparable for comfort.

Here folks I will say again what I have been saying for a long time: we are in a very serious correction. I say correction as I truly believe we are righting ourselves. I say correction also because, as sure as hell, things were not right in 2007, so where we are going is a better place. We, as a people, were spending well beyond our means, and I mean WELL beyond our means. Our major financial institutions developed instruments that generate great wealth - for them - that allowed us to spend beyond our means. This period was doomed to failure and unfortunately got so severe that it is incredibly difficult for us to face.

My take is that we should do as little as reasonably possible and let the economy correct itself. I am not traditionally an extreme free market type of person. In a period of economic growth, especially great growth like we had leading up to 2007-2008, I am highly suspect that the market it operating properly. Moreover, I am a firm believer that capitalism and Karl Marx, in his Communist Manifesto, share the same delusion, which is believing in the ultimate good in human nature; some (many) people, including some in power, irrationally seek short term personal gain over long term rationality.

Despite not being the biggest fan of a "free" market economy (because some prudent level of government checks and balances is needed), I am a big fan of the economy correcting itself mostly on its own. We need backstops to help the victims of the correction, but in the end trying to stop it is foolish. Property and other assets will revert, and probably overshoot, the mean (the reality) on their values. We at best can prolong this happening but cannot prevent it, so in my book it is best just to let it happen, put it behind us and get on with it.

The same is true with other businesses. U.S. consumers for quite a while have been spending well more than they make and can afford. Their homes were their piggy-banks (I am among them) and their consumption seemed nearly limitless. American businesses added new retailers, outlets, malls, etc. to meet this increasing (false) demand. Now the demand is gone, so it is no surprise that so many businesses are closing down.

And here my friends is the most important thing I will ever tell you! Way too many people think the demand has just been reduced for a period of time. They believe this is a recession and things will eventually, if not soon, return to normal and the consumption will resume. Politicians are at the top of this list. What they fail to realize is that the last five to ten years were not normal. They were abnormal. Spending beyond our means is not the historic mean or sustainable. And so we face a new reality. A reality that is - hopefully - here to stay. It is in a way painful, but the sooner we realize it and embrace it the better.

We have house prices returning to reality. We have consumption returning to reality. We have many sectors returning to reality. Some would call it mean, but for this post I am calling it reality. And reality is undoubtedly an economy somewhat poorer and more deprived than we are used to. Less pay, fewer benefits, fewer jobs, fewer services and the like. We face a society with less and fewer on many fronts. What the government really needs to do is pare down and adjust for this and not try to artificially get us back to our foolish ways.

I posted a week or two ago on how families are coping in many respects for the better. Shopping trips, dinners out and movies are being replaced by dinners at home, game nights with neighbors and conservation. Buying is being replaced by barter. Families are moving in together. People are helping other people as best they can. The reality to which this recession/depression is forcing us is in some respects a better reality. This is not to say that my heart does not go out to those without jobs, benefits, food, heat or the like. It is upon those that I think the billions of government support needs to be spent; not the financial clueless that brought us here. I for one hope for a better, simpler tomorrow. My biggest fear at the moment is that the government will do so many stupid things in trying to stop a correction - stopping an adjustment to reality - that we will be totally screwed for a decade or two. Let's hope not.

Disclosures: None.

Economic Ping Pong

It is a well known psychological fact that we tend to read what supports our own belief and dismiss or ignore that which is counter to what we believe. I am guilty of it. I try to be balanced and at least read (though not generally link or talk about) pieces contrary to my slant, so tonight I will present a bit of both.

Let me begin by something that fits my own "present" slant. I say present because I like to think of myself as a realist first, optimist second and pessimist third, though I concede events of the last two years may have distorted my optics just a bit on the economic front. I started my blog in October of 2008 after months of emailing friends doom-and-gloom. One friend who called me Chicken Little initially finally caved (after losing some money) and suggested I start a blog. I thank him as this has been a fun adventure. In any event, I have been pretty consistently negative on what is happening since then. Whether I continue to be right is yet to be seen. I just do not see the stats that support a recovery, but then again, I do not see all the stats. Meanwhile, let me bounce you back and forth a bit from the good to the bad (with perhaps a bit of mixed messages in between). Keep your eye on the ball and see who wins.

Ping - Some More Bad Data

Credit card write-offs topped 10% and almost reached 11% in May. Moody's thinks they will top off next year around 12%, though since they went up over .6% between April and May alone, I am not sure the math works for me. Either way, a sign of our continuing woes on the individual level, including increasing unemployment.

http://www.nakedcapitalism.com/2009/06/credit-card-chargeoffs-rise-to-over-10.html

Pong - Now for Some Good News!

Durable goods orders are up, unexpectedly. That I would agree is a good sign overall. Companies do not buy goods meant to last several years if they do not expect to be busy using them for several years. These tend to be pricey items, so this is a good indicator. It tends to run counter to what I have read about a lot of insiders selling into the recent rally, significantly, but at least those making durable goods order decisions see the worst as behind us. Perhaps they are seeing something we are not (or at least I am not).

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

Mixed (ball over the net) - Home Sales

Existing home sales were relatively positive this month - though one could argue that was seasonal (ask Barry Ritholtz). Still, any way you look at it new home sales (versus existing) are not doing so well. This does not bode well for builders, though homeowners trying to sell their homes may be a bit encouraged. In some markets homes are selling for less than builders can build them for and overall REO (which stands for Real Estate Owned, i.e. bank owned properties through foreclosures) sales are a significant portion of the sales, so I suspect this explains some of the growing lack of correlation between new and existing home sales. Make what you want of it but at very best it is mixed.

http://www.calculatedriskblog.com/2009/06/more-on-new-and-existing-homes-sales.html

Ping - King of England (Bank of, that is) Not Seeing Green Shoots

Mervyn King, Governor of the Bank of England, is more uncertain than ever about the UK recovery. Now I read yesterday that some view the UK recovery as ahead of the US (which I considered odd as we solidly were ahead of them going into it and their real estate bubble was considered worse in some respects, but what do I know), but here the Governor of BofE is not exactly a cheerleader for better times to come. He just does not see the "evidence" to change his view of things. I agree totally. Show me the evidence. Show me the data!! Don't show me indicators.

http://www.bloomberg.com/apps/news?pid=20601085&sid=ayQxVVOWbIMY

Pong - FOMC Statement - Things Seem to be Stabilizing

The market apparently did not react well to the report, but the Fed report overall was not terrible news. Overall they saw things stabilizing. Yet some saw that as bad news as it caused the Fed to do not much of anything when many were hoping it would do more. Okay, if you want the Fed to take further action you must not see the economy as on the road to recovery. Still, given the environment I consider this a Pong as at least the Fed sees things as improving. I am not agreeing with the Fed (and rarely have for years), just saying their report was relatively upbeat or at least mixed.

http://www.calculatedriskblog.com/2009/06/fomc-statement.html

The Competition is Close

But I have to confess I am running out of pongs (positives) and finding more pings (negatives), i.e. more support for my present slant. So what am I seeing? First - like him or not, he is good - and Warren Buffet is seeing no green shoots just yet. Now this is an individual that, as I recall, was talking a bit more optimistically a few months ago and most certainly started putting his sizeable cash holdings to work many months ago with Goldman Saks and other investments. Now these were more along the line of high rate loans with options for converting to equity holdings at good prices, so they were still smart moves (much smarter than our government did) but his mood seems to me a bit more reserved now than just a few short months ago. I disagreed with him when he seemed a bit more upbeat so am glad to see him returning to the fold. He certainly sees a load more data than me so he had me worried a bit when he got upbeat.

http://seekingalpha.com/article/145189-buffett-cnbc-interview-no-green-shoots-yet

Ping Again - Investment Advisers Know How to Save for Retirement - Not?

A couple or weeks ago I noted that I went to a presentation by Merrill Lynch on how to save for retirement. I noted the irony of how a company that - allegedly - had to go through a forced sale to Bank of America to survive, was telling me what to do with my money. Now they, like every other retirement investment advisor I have been to, were referring me to an outfit that had a "program" or "model"that did the investing for me and that automatically adjusted investments to be appropriate for my age. They automatically created the ideal risk portfolio. I still had to ask myself (not the presenter as she was clearly clueless) how accurate are these programs or models? As the author of Black Swan, Nassim Taleb, will tell you, none of these "models" or "programs" predicted anything like the past two years as at all being possible. In a word, these models the financial advisors live by are "flawed."

The biggest problem with these models is they are totally tied to historic norms. They expect history to predict the future and ignore what is happening in the present. The also ignore fat tails, i.e. the very, very low probabilities that might happen (i.e. the past two years). Well, the present is not at all like the distant past and, in my opinion, the future is not going to resemble it either. So these models have a flawed premise. I am sure they are now being tweaked, but I am also sure they have no more crystal ball on the next 10-20 years in today's environment than anyone else.

Nassim Taleb made a fortune - enough not to worry about working again - on being prepared for an event the models would never predict back in the 1990s. Most investors lost significantly on the same event. Need I say more.

As an aside, I recommend Nassim's book Black Swan. I read it last year and it is worth the read. Another good read is Michael Panzner's Financial Armageddon. When I read it most of it was still yet to happen and it was like looking at a crystal ball. Today it could largely serve as a history book on what just happened. In other words, Panzner saw this mess coming with amazing clarity. He was one of my early mentors and my hat is off to him. I am proud to be a contributor to Seeking Alpha with him. Now, back to my point.

There are those that believe steadfastly that the market - equities - will in time always outperform other investments. I suppose you need to define "in time." According to this link, despite the time frame you look at, you can do better in fixed rate, short term CDs, than you would have done in the S&P over various time frames. That has to shake your faith in the market. It at least has to wake you up to the fact that you need to read up on what is happening and actively watch where your money is invested. It saved my arse in 2008. And if you are reading this, you probably understand. If you look at the Nikkei over the past 15 years or even the Nasdaq over the last decade you will get the picture. Gains in equities even over a fairly long term are not guaranteed, so keep yourself an informed investor. Do your best to understand what is happening. That is my goal.

http://globaleconomicanalysis.blogspot.com/2009/06/long-term-buy-and-hold-is-still-bad.html

Disclosures: None.

Day Late and a Dollar Short

Okay, after today's market drop many may be a bit more than a dollar short, but my point is that this post is a day late. I promised a follow-up piece over the weekend and it never materialized. My apologies.

Any hoot, back to the chase. Now the market over the past week has been down more than up, today somewhat significantly so. Bloomberg blamed it on the World Bank revising its forecasts for this year and next to be more pessimistic. I scratched my head reading this thinking I had already read that tidbit of information some time ago. Turns out, I was right.

http://www.nakedcapitalism.com/2009/06/world-bank-cuts-growth-forecast-mid.html

So why is Bloomberg blaming today's drop on this week-and-a-half old news? Guess they have to blame it on something. I blame it on people waking up to reality.

Missing TARP Dividends - Not a Good Sign

Some banks seem to be failing to make their TARP dividend payments to you and me. Now this could be due to various factors because the TARP agreement allows them to miss six before being in default. Now it could be they have better ways to make money from the money, they have better uses for the money or, maybe, just maybe, they do not have the extra cash they need to pay the dividend and still make ends meet. You decide.

http://www.calculatedriskblog.com/2009/06/number-of-banks-suspend-tarp-dividends.html

Retail Woes

I mentioned over the weekend some reasons for retail to suck wind for a while. Well, here is yet another reason from Calculated Risk. They note some pretty solid evidence that the housing boom created a false wealth effect and led to consumers spending money they did not have. Now that the opposite is in place on housing, the opposite is in effect on consumer spending. Go figure.

http://www.calculatedriskblog.com/2009/06/housing-wealth-effect.html

Calculated Risk has another rather entertaining piece on what the brains at Harvard were saying about housing in 2005. Apparently everything was coming up roses and the risks were quite minimal. Glad I am not smart enough to go there.

http://www.calculatedriskblog.com/2009/06/harvard-on-housing-2005.html

Now I am returning to my old drum beat; we have been living above our heads off massive debt and this has helped support and stimulate a world economy. We are now in big trouble because:

• we still have record levels of debt to pay down;

http://deadcatsbouncing.blogspot.com/2009/06/will-healthcare-costs-burst-us-debt.html

• we have no economic model in place in the U.S. to provide the jobs to pay off this debt (our GDP is 30% based on a financial sector, which was built on a house of derivative cards) and fully two thirds of our GDP is based on consumer spending, which is a bit circular in terms of helping to support further consumer spending;
• we have an aging population of baby boomers that just lost 40-50% of their retirement and significant home value but they are going to be retiring beginning in a year or two, with increasing percentages over the next 10-15 years;
• our government cannot fund its upcoming Medicare or Social Security obligations, much less fund the current multi-trillion dollar bailout - which in time could/should lead to a severe weakening of the dollar; and
• we have more than twice the retail footage per person here than in the nearly any other country and there is no way for us to support this much retail.

And at least one Nobel Prize winning economist says it will take us a while to regain our lost wealth. He is not saying this will be a lost decade. He is saying it will be a lost decade and a half. Tell that to those baby boomers. Wait a second, I'm a baby boomer!

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKMxwUC4D3nw

Spent

I do not like to say it but we Americans are, in a word, spent. Our savings are spent, our retirement is spent, our future - at least for the short term - is spent. Neither we nor the world should be looking to us to spend our way out of this mess. We did so the past couple of recessions but now we are spent. We do not have the means to fund our way out of this recession despite our government's desire that we do so . And we shouldn't in any event. Spending and creating new bubbles got us into this mess. So what might happen here?

There are a whole lot of possibilities, but one is that some other country takes up the spending mantle. I do not see any easy candidates as the world is in a mess, but we Americans are spent and someone else has to take our place, perhaps several other countries have to do so. Between that and a dollar about to become toast, our products - what few exist - might become competitive, even cheap, so - ironically - we may return to a country based on exporting our stuff elsewhere. Okay, I doubt it. We are too spoiled for our children to return to blue collar jobs. Our children are too spoiled from our spending ways to live within the means of a blue collar wage. They will not be able to afford all the big screen TVs, cars, computers, cell phones and other niceties we have made them accustomed to. We will see. I don't think they will have a lot of choice. I don't see a lot of high-paying financial sector jobs in our future.

Yet let me mention this. At the height of the U.S. manufacturing and exporting several decades ago, before the jobs floated elsewhere, Americans were making more - adjusted for inflation - than they are today. Despite us shifting more of our economy into services and financial we made less more recently. I do not have the answer here but I suspect we had a lot of people working retail selling to that two thirds of the GDP tied to retail and retail does not pay a lot.

Personally, I worked a number of factory jobs in Indiana growing up during summers while in college and I enjoyed it. There is a certain satisfaction from building something. I was not good at it, but I enjoyed it. And it paid the most money I made for that period and for many years into my professional career. Many of my high school classmates were making more at factories than I did as a lawyer out of law school. When you consider my seven years in college and law school and the costs of same, it undoubtedly took me 12-15 years after high school just to break even with those who went into factory work straight out of high school. So factory jobs are not a terrible place. I am not thinking we are going there just yet, but we should become more competitive in the years to come, so it could become part of the dynamic.

So where does this lead us - I have no idea. Truth is, as you should know by now, no one does. The next few decades for this country are, in my opinion, going to be something totally different than what we have grown up with the past few. My fear is it will be a rough time for all.

The China Syndrome

I read an interesting piece last week and for the life of me cannot find it. It noted that while Chinese officials are bashing the dollar a bit and calling for a new reserve currency, this seems to be a distraction from what they are really doing. They are quietly reducing their purchases of Treasuries (and domestic demand is so far filling the void) and they are buying commodities. This is significant for a few reasons. First, it shows that our biggest foreign buyer of Treasuries is now not so hot on doing so. With dollar devaluation likely, China is not going to hang around for it. Second, they do not need the commodities now but commodities are a nice place for China to put its reserve dollars for future keeping. After all, the dollar can get toasted and Treasury reserves follow (and why buy Treasuries when the U.S. is not buying your products much), so better to use the money to buy copper, zinc and the like. The commodities are in limited supply and eventually everyone will need them. So China has been putting increasing dollars into purchasing ore companies and the like. I think it is a brilliant move on their part, yet you need to realize that this is part of what has been driving up commodities lately. It is not like China needs these now, it just is buying while the price is low and while the old investments make no sense, so the rebound in commodities seems to be a false indicator.

That is all I have tonight.

Disclosures: None.