FinancialSpiltMilk

Choosing Words Carefully

2011-12-14T17:34:00.000-08:00

There are few folks on Earth that choose their words more carefully than the Fed. Indeed, interpreting their verbiage is virtually a science. So when I read that the Fed told GOP senators that it does not have the intention "or the authority" to bailout Europe, you have to wonder exactly what they mean by that. Seriously, hundreds of millions of support by the Fed over the past few years directly went to assist European financial institutions. Did they lack the "authority" for that? Is support for their financial institutions not support for Europe? Does the Fed not intend to support European financial institutions if things take a dive, which odds are good they will eventually do in some countries? And are the GOP Senators asking the right questions?

http://www.washingtonpost.com/business/markets/bernanke-to-discuss-european-financial-crisis-with-republican-senators/2011/12/14/gIQAoZbEuO_story.html

So what else can I say - China real estate prices in decline (as the government there has pushed to do), old news. The shine wearing off the recent EU pact for a cure with bond rates climbing again (new news but hardly unexpected). Politicians kissing babies and otherwise in NH to get votes, an age old game.

Disclosures: None

We Are the 75%!!

2011-12-08T17:32:00.000-08:00

I attach a revisionist history from CNN.

http://finance.fortune.cnn.com/2011/12/08/blame-bankers-occupy/

The point they seek to make is that the big banks did no better than the poor in terms of government help and bailouts this past recession - seriously! They make truly stupid comments like, under the Dodd-Frank bill:

"Wall Street is now subject to the most massive new regulation to be imposed on it since the 1930s"

Now if "massive" is just a reference to the number of pages, they may be correct, but they imply it is massive in impact. The final bill was so watered down and gutted it was a waste of paper. And indeed, the financial institutions have already figured out ways around any financial impact from the bill. In the six months before Dodd-Frank, I paid virtually nothing in fees and charges to my bank for the privilege of having them hold my money pretty much interest free. In the past six months, over $150, mostly with new fees/service charges they inacted six months ago. They are making up for any losses just fine.

CNN argues that the big banks during the real estate/lending/derivative bubble were making the same they were making 15 years ago. Opps, I am sorry, not exactly what CNN said. It actually said:

"The industry has made no more money over the past five years than it was making 15 years ago, and in 2007 and 2008 it suffered the greatest losses in its history."

Now this is a bit tricky to decipher, but read it carefully. It implies that during the bubble the industry was not making any more than it did 15 years ago, but what it truly says is that over the past five years - which by definition includes the worst two in history - they still did about the same as they did 15 years ago. So you had years where the banks were gluttons preying off the gullible, off-set by the two worst years in history, to lead to results commensurate with historical earnings. Yep, the banks really paid the price for their foolish ways.

The other key point made by CNN is that the debt crises is a two-way street. You have the big banks offering no income verification loans and if you can fog a mirror you can get a loan, loans. And you have everyone who can fog a mirror getting a loan. Now let's set aside for a moment the relative financial sophistication of the big banks versus the mirror foggers, and focus on a lost fact in all this; these two groups aside there is a big group that fits neither camp. I say 75% in the title to this but it could easily be 10% higher or lower. Nonetheless, there is a majority of Americans who did not take out loans they could not afford, who had income they could prove and who are still making payments. We are not the 99% and I resent the "Occupy" crowd from lumping us in to their 99%.

The point here is that there were a lot of irresponsible folks taking loans they could not afford, many of whom not financially sophisticated enough to perhaps understand it but certainly many as well trying to game the system and play the real estate bubble, but there were also a host of big banks gaming that same bubble massively. And if CNN believes folks on the short end of the stick got relief similar to what the big banks got, they are truly smoking something good.

So both ends of the candle are to blame, but the majority of Americans sit in the middle and are paying the price. When it comes to what I am calling the "We are the 75%" neither the big banks nor the occupy crowd get to tout superiority in message. So stick that in your pipe and smoke it CNN (which I assume does not have tobacco in it.)

I think it is the 75% that need to start a revolution!

Disclosures: None.

Bubble On, Bubble Off, Bubble On, Bubble Off . . .

2011-12-07T17:32:00.000-08:00

Let's talk China. It was not so long ago that they were increasing bank reserve requirement ratios to a high 21.5% to cool an overly hot real estate market, a/k/a bubble, fueled by the same easy lending that cooked us here in the U.S. Now the economy there, rosy by most countries' standards, is too slow to support its massive population, so last week it cut the reserve requirement to 21% and is fully expected to cut more in January. This, in addition to some coordinated central bank moves in Europe and the U.S., is credited for last week's rather incredible market advance.

But here is the problem - China was right about the bubble and right to cool it. Most global investors, as it turns out, predict a banking crisis in China in the next five years - go figure - and China is now doing steps to make it worse. Makes you kind of wonder why the markets responded positively. Well, they are a tad fixated on the short term and the need for China to overheat its economy to keep the world from falling into an economic black hole. They do not care what happens there in five years as long as it moves to keep things chugging along for the next few years. Just my take, of course. Hopefully by the time their bubble bursts the rest of the world will be back on its feet and able to keep is chugging. Any takers on this prospect?

http://www.bloomberg.com/news/2011-12-07/poll-investors-predict-china-bank-crisis.html

By the way, holding your breath about the EU? Good luck with that. Read the following and get a grip.

http://www.nytimes.com/2011/12/08/business/global/as-europes-bond-market-dries-up-traders-fear-for-jobs.html

http://www.reuters.com/article/2011/12/08/us-ratings-eu-idUSTRE7B62GQ20111208

http://www.bloomberg.com/news/2011-12-07/japanese-futures-little-changed-before-summit-australian-shares-decline.html

http://www.reuters.com/article/2011/12/07/us-citi-jobs-idUSTRE7B61P720111207

I could attach a lot more, but you get the picture. Seriously, the lipstick is off these PIIGS.

Disclosures: None.

That's Going to Leave a Bruise

2011-12-05T17:29:00.001-08:00

Everything was sailing fine. Central banks circling the wagons, governments saying some smarter things, I got my closet cleaned out - everything was simply dandy. Then that old fuddy duddy S&P had to come out this evening with a credit rating watch (like expect a downgrade for some soon) on several EU countries, including France and Germany (okay, France has been suspect for a while but Germany?, seriously). I suspect the strong market gains we have seen of late are going to be shaved back a tad. Nothing too terrible, but a shave nonetheless - at least for now. Long term, I do not see a tad, but I am not about to try to predict how long the powers that be in EU can keep this ship afloat. They already surpassed my expectations by at least a year. But the darn thing will sink in time.

http://www.bbc.co.uk/news/business-16042346

Good to be Prepared

2011-11-29T17:45:00.001-08:00

Here is a nice piece on what some companies are doing to prepare for a possible collapse of the Euro, or at least certain contries perhaps leaving the EU. Good to plan, but as certain companies are finding, there is not a lot they can do. Some stuff yes, but not a lot.

http://www.reuters.com/article/2011/11/30/us-euro-zone-contingency-idUSTRE7AS0H020111130?feedType=RSS&feedName=topNews&rpc=71&google_editors_picks=true

Also worth noting is Standard & Poors downgrading of a bunch of big banks. They announced this was coming, so no surprise, but tell that to the downgraded banks.

http://www.reuters.com/article/2011/11/30/sp-ratings-idUSN1E7AS23C20111130

Housing prices also dipped in September, after months of small increases. Go figure:

http://www.latimes.com/business/realestate/la-fi-home-prices-20111130,0,3352737.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+latimes%2Fmostviewed+%28L.A.+Times+-+Most+Viewed+Stories%29

But hey, all is well, the Victoria's Secret Fashion show is on tonight:

http://popwatch.ew.com/2011/11/29/victorias-secret-fashion-show-reasons-to-watch-the-best-special-of-the-season/

"A New Plan"

2011-11-28T13:30:00.000-08:00

I am linking an article from MSNBC on why stocks are up dramatically today, but I simply have to quote here part of the first line:

"U.S. stocks jumped Monday as optimism grew that European leaders would come up with a new plan to resolve the region's debt crisis . . ."

http://bottomline.msnbc.msn.com/_news/2011/11/28/9073132-stocks-surge-amid-euro-zone-consumer-hopes

If you live in a cave, you may have missed the fact that EU has been under a good bit of financial stress for at least three years. Even I predicted in January 2009 (yes - nearly three years ago) that the EU might lose a few members, and at that time I specifically mentioned Greece, so the problems in the EU are no recent development and have been obvious for a very long time, even to me. And if you follow the press, European leaders have been flying all over the place to meet, falling over each other to throw out words of confidence and doing all that they can to right the ship. Indeed, those leaders unable or unwilling to tote the EU line are now or soon to be gone. None should ever dare put the vote of their own citizens in the line ahead of EU unity or financial interests. That would be blasphemy.

The point here being that European leaders do not have any new plan. They have no new thoughts, no new agenda, no ground breaking approach. They have nothing more for us than they did last week, last month or last year. Nor can they. There are no great or even good options for the EU. They have a list of options and the best they can do is try to pick the least painful, but due to the EU being made up with a bunch of independent countries with independent agendas and priorities, the odds of them ending up with the least painful alternatives are relatively low. A betting man might wager that the EU's fate will simply be whatever happens if they cannot agree on something else to happen, i.e. default. They cannot and will not get their collective act together, but who cares. At the end of the day a collective decision by the EU is not likely to lead to a much better outcome than a failure to act. Sovereign default in some form is in the cards for a number of members, elevated bond rates are in the cards for all members and holding the EU together (perhaps with a few less countries) is going to be probably the best they can muster out of this long term.

Let me put it this way. Any plan that calls for austerity to work and lead to a substantive reduction in debt at the PIIGS so that they can pay their debts and not default is a plan that will take over a decade to complete, if they are lucky. Seriously 2020 and beyond. Do you really think the citizens of Germany, France or the PIIGS are willing to suffer that long? Heck, I am tired of this as is everyone else following the action. Seriously EU, stick a fork in it, those PIIGS are done!

Now the other part of the article (which by the way everyone is pointing at, not just MSNBC) is that heavy Black Friday spending is spurring retail stocks. Yes baby, the consumers are back in the game! Let me hear ya' shout out!!

I know the logic here. Consumers buy stuff. Stores do well and become optimistic. Stores order more goods to fill shelves and build inventories. Manufacturers build more goods and hire people to build the goods. More people have jobs and an income and can afford to buy stuff. Repeat cycle and everything is honky dory. But let me repeat the cycle with a bit of (my sense of) reality:

Heavily indebted consumers with underwater homes buy stuff, thereby increasing their debt burden. Stores that slashed prices dramatically to draw in customers think they did well and become optimistic. Stores order more goods to fill shelves and build inventories in the hopes consumers keep up the buying. Manufacturers build goods overseas in cheap labor countries and hire people overseas to build the goods. More people overseas have jobs and an income and can afford to buy stuff overseas. Repeat cycle and everything is where we started except consumers have more debt and stores have more idle inventory.

You judge - am I a pessimist or realist?

EU Bonds

2011-11-23T18:24:00.000-08:00

One solution that seemed to make sense a couple of months ago was the EU, as a union, issuing bonds, so that those with high rates - like Italy, Greece, Spain and the like - can finance with better rates by financing with those with low rates, like Germany. Well, it seems Germany is starting to run into a smidge of a ripple in rates. Nothing too serious just yet, but bond rates is a confidence business and the minute those buying the bonds get a bit spooked, the rates go up. All this means that the prospect of a EU unified bond sale is becoming more problematic. Obviously, there is still a quantum leap between German rates and say Italian rates, but is seems to me a common EU bond will price toward the negative, like Greece, Italy and Spain, and not toward the positive. The buyers are already getting a bit edgy about Germany and the fact that its banks are heavily exposed to EU sovereign debt.

China seems to be slowing too, which is no big surprise. With its biggest export markets sucking wind and a domestic real estate bubble, hard to believe anything else will happen.

Disclosures: None.

Take Your Medicine

2011-11-23T10:40:00.000-08:00

Good things come to those who take their medicince up front and put the problem behind them as quickly as possible. Admittedly, Iceland's problems were so severe it had no other choice, but the fact it is already on the rebound is telling.

http://www.bloomberg.com/news/2011-11-23/iceland-s-outlook-revised-to-stable-by-s-p.html

Mama Needs a New Pair of Shoes!!

2011-11-21T17:20:00.000-08:00

We have been waiting, and waiting, and waiting, and waiting for that other EU shoe to drop. Perhaps it is a stylish Italian leather shoe or a spicy Spanish one with big flaps and straps sticking out. Is a French stiletto soon to be in the mix? Ireland isn't known for its shoes and I am pretty sure the same can be said for Greece and Portugal. But somewhere out there is a major shoe about to drop and - pleeeeaaassseee - let go of that sucker already, cause Mama needs a new pair of shoes.

http://www.reuters.com/article/2011/11/21/eurozone-idUSL5E7ML3UK20111121

Pressure is mounting and the chess pieces keep moving but I have yet to hear anyone (who has no direct stake in the game) say that the EU can work this out without some major defaults. It is going to happen . . . I almost hear the wind around a falling shoe shaped object. Yes Spain and Italy - as in the too big to save category - are both seeing unsupportable financing rates on their bond sales. France is facing a possible credit downgrade. New leaders in Greece are not ready to announce good plans yet (like they have one) . . . and on and on.

This side of the pond, the "not so" supercommittee failed to make their recommended cuts - surprise, surprise, surprise!! Seriously, did anyone think that a committee split between Dems and the Dem nots would agree to over a trillion in cuts. Heck, they probably cannot agree on where to order lunch.

http://nbcpolitics.msnbc.msn.com/_news/2011/11/21/8934763-panel-fails-to-cut-deficit-12-trillion

Add in Hank Greenberg (die already) suing the U.S. government for $25 billion over a loser company the U.S. spent way, way too much saving and it really is a nice mess.

http://www.businessweek.com/news/2011-11-21/greenberg-s-starr-sues-u-s-for-25-billion-on-aig-bailout.html

Perhaps China is ready to swoop in and save the day - NOT. Japan is sucking wind and where do you think emerging economies will be when the EU and US are screwed. Yep, I am seeing roses coming up everywhere - especially in New Hampshire in late November.

Disclosures: None.

FAIL ALREADY!!

2011-11-16T16:52:00.000-08:00

I for one am tired of all the blah, blah, blah about the EU failing, some of it of course from me as well. It is a story where everyone knows the ending and I am tired of hearing about it, tired of waiting for that magical moment when the cards fall down and, really, really, tired of all the false promises that a fix is in the cards. Shhhhhh... listen in closely . . . . and I will give you a deep, dark secret. Ready? THERE AIN'T NO FREAKIN' FIX.

The PIIGS are toast and everyone knows it. EU has been kicking the can hoping to save the banks, not the PIIGS, but even that is not working. Given the debt loads, they would need to kick the can for another decade just to get past the worst of it. Do you think the governments or voters in the EU countries are willing to wait this long? Are you ready to keep reading about this issue for another decade? I pause for a minute while you chew on this . . . . . . . . . . . . . . (imagine the background track from the last question in Jeopardy playing right now) . . . . . . . . . . (ding!). Your time is up. If you voted more can kicking, leave this blog now and never come back. And beware, natural selection is likely to catch up to you soon. If you voted, let the PIIGS default and deal with it (and the rest of the world deal with it of course), then you have my thanks.

Okay, it will be another major financial meltdown and it will impact all corners (like there are any on a globe) of the Earth, but better to deal with it now than lose a decade or two and then have everyone vociferating (you like it when I use big words) about how we should have pulled the plug earlier. Seriously, default is a bad word, but countries tend to get over it in time. And if your are one of many, you tend to fade to the background.

Sure some big banks in the EU and US and elsewhere will go under or need further government support (I support the former by the way) but there is plenty of capital sitting around on this globe in corporations to weather the storm. Wait another decade, I am not so sure.

So folks, I say pull the trigger, pop the bubble, yank the cord, pull the plug or whatever you catch-phrase seems to be, but let's do our best to let defaults happen, put it behind us, control the damage and move on. There simply is no better choice.

Okay, let me retract on that last statement. If the EU were to be a true union and all the countries joined together for common government financing and they agreed to print the hell out of the euro to devalue it, then maybe the EU could survive without massive defaults. But try to sell this idea to Germany.

Disclosures: None.

All Focus on EU

2011-11-10T19:47:00.000-08:00

It is the month of the EU. Sure, anyone with common sense would have focused on the EU problems for a few years now, but things are really starting to percolate. Seriously, Berlusconi and Papandreou both going down in the same month would have been unimaginable a few months ago. And why all the fuss.

Let's break it down. EU countries - focus on the PIIGS - are being required to do Severe austerity plans (that is with a capital S). Severe austerity is not conducive to growth in GDP, reduction in unemployment, or anything of the like, so these plans actually worsen their ability to pay their debts (how smart is that). It is a recipe for several hard years ahead to bring government spending within manageable means. It is a bit of a recipe for disaster as the cure is something that worsens the disease for perhaps a long time. Now I personally agree that austerity is necessary in proper measure and timing, especially for countries on the verge of bankruptcy, but I recognize it is not a cure. The better cure in my book is fessing up, defaulting, going bankrupt, and putting it behind you. Just my take. And by the way, the first ones into the default pool are likely the first ones to come out the other side cleansed of the default negativity. I mean who wants to by bonds of the last country that should default when you can buy bonds of a country that has already cleaned their debt slate. Bond investors care more about the future than the past. Your future ability to pay is all that matters.

And so the EU is still in the struggle, trying to hang on. I have no hope for a good outcome and only question the timing of when the worst will come to bear. Another unanswered question is whether all the kicking of the can has really bought any time for the banks to lower their risk. I suspect a little, but not a lot.

Disclosures: Not.

Finally

2011-11-09T19:03:00.000-08:00

On January 1, 2009, among other predictions I noted I expected the U (as in Union) to leave the EU. I got some grief in comments on that post, folks noting I had no understanding of the EU. I admit at the time I did not fully understand the financial underpinnings of the EU and still do not today, but I do understand that the entire structure is not workable. You cannot have this many countries tied together in currency and not have a common governance, if not a common authority over matters financial. You simply cannot have a common currency among countries who are so disparate in their deficits, GDP and other areas. Cannot work.

And so my prediction of now nearly three years ago is perhaps coming to fruition. I do not see the EU disappearing just yet, but I do see it restructuring in the next year or two, with some countries leaving and, perhaps, some countries joining. We will see.

Whatever happens, the EU is toast in the medium term. I say medium as they seem to have titanium tipped boots that can really kick that can down the road. But the can - as Italy with bond rates over 7.5% is seeing, there is just so far you can kick this can.

Again, in my book it is better to do the defaults now and get past the pain as fast as we can. It will happen in time whether we force them to do so now or later. Now I am not good at predicting things (or at least their timing) but I am good at knowing what will happen at the end of the day. And at the end of the day, be it months of years from now, the EU is toast in its current form.

Disclosures: None

Is Greece in or Out

2011-11-02T17:34:00.001-07:00

Only time will tell, but we should know in the next month . . .

http://www.ft.com/intl/cms/s/0/992a2cb0-0577-11e1-8eaa-00144feabdc0.html#axzz1cb8DVbTh

Put A Fork In It - Greece Seems To Be Done

2011-11-01T14:26:00.000-07:00

If you have not seen it yet, then you must be living under a rock; Greece's Prime Minister Papandreou took the nuclear option and is letting the citizens of Greece vote in a referendum on whether to proceed with the just approved bailout package.

http://online.wsj.com/article/SB10001424052970203707504577012161940303868.html?mod=googlenews_wsj

While the EU scrambles to deal with this and the markets around the globe take a dive because of it, my hat is off to him. To him (assuming he is not taken out of office before the referendum), it is a win/win situation. If the citizens vote to approve the package, the heat is off him as the bad guy and he can tell protesters that the people have spoken. If they vote against the package, Greece takes a hard default, financial repercussions ensue, Greece probably has to leave the EU and being the first in line for default may well become the first to recover from this mess. You see, those buying your bonds seem to forget pretty quickly about your default, and if the default makes you a much more solid country for paying debts in the future, all the better. They would rather lend to you after a default than before an expected default.

I view our financial morass as a lot like gangrene. Earlier efforts cut some of it away, but not nearly all of it. "Let's leave some and try to treat it with antibiotics or other treatments." Well, it has not worked and will not work and, to me, the sooner we cut it out the sooner we will be on the way to recovery. It will be quite painful, but better a few years of big pain than perhaps decades of slow pain. Not that I like either, but I think getting it over with is better. Sure, financial institutions will go under, but last I checked most corporations out there are in pretty good shape (financial institutions aside) and there is plenty of capital to fill the voids. Moreover, the big banks are not exactly doing a lot of lending or other activity to help the average Joe out, so who needs them. Seriously, $5 a month to have a debit card so you can spend your own money.

We will see what happens. I tend to doubt the referendum will ever happen and then Papandeou can point the finger at someone else for nixing it. Nevertheless, it is just a matter of time before the voters in some country get so fed up they vote in whoever is against the EU plans and this house of cards comes tumbling down. Do we really want that hanging over our heads for many more months to come?

Disclosures: None

The Easy Work in the EU is Done . . . Now for the Tough Stuff

2011-10-28T18:43:00.000-07:00

So the EU got creditors to take a 50% haircut on Greece, agreed to boost (if they can get China to fund it) their fund for saving the day and all is well in the world. The DOW is up like 1200 points in a month, which is freakin' incredible, and all our problems are behind us. Well, tell that to Italy.

http://online.wsj.com/article/SB10001424052970203554104577003401844568884.html?mod=googlenews_wsj

It seems that the sixth biggest economy and the country with the fourth most debt in the world is not quite getting the benefit of all this. Their ten year bonds are still requiring 6% and that is hardly bearable. They have relatively low unemployment, lower than the U.S., but they also have an incredibly low population percentage wanting to work, with a lot of people retiring before 50, so that artificially alters the unemployment numbers. You see, unemployment numbers are based on those who say they want to work who cannot find work. Those who have given up do not count. If they did, the U.S. rate would be well into double figures.

So let's get back to Italy. They make Greece's issues look like the flea on the tail of the dog. I mean we are talking serious dollars to bail out Italy and it just isn't going to happen (especially after Italy has been doing a good job of pissing off officials in France and Germany, who likely consider Italians lazy bastards). Even after the great EU news Wednesday, Italy has seen no relief in what they are having to pay to refinance their debt. In other words, they are still screwed. And if you think China is coming in to save the day, then you have underestimated the intelligence of the Chinese. Now I am not saying China will not do it, but if they do China will have a lot of stings attached that long term will benefit China and hurt the EU. But hey, beggars cannot be choosers.

Sure, with or without China, things will sail for a while, but that Italy ship is coming into port soon and it has a certain stench to it. Prepare thy self. I do not think China is willing to put enough at risk to stem the tide.

http://www.nytimes.com/2011/10/29/business/the-spotlight-now-shines-on-italy-common-sense.html

Disclosures, none other than I think I have some Italian shoes.

Congress Disgusts Me (and everyone else)

2011-10-21T19:10:00.000-07:00

Let me say I was disgusted when Obama hired Geitner and Summers as the heads of his financial group. Nothing like putting the foxes in charge of the hen house. When I voted for the bit O, he had Volcker on his financial recovery team, but right after election, Volcker was quickly relegated to a back seat. I like Volcker, a straight talk kind of guy who really gets what is going on here. And at last we have a regulation that bears his name; not his idea, but his name.

You see Mr. Volcker would love a three or four page regulation prohibiting banks whose deposits are federally insured from trading for their own benefit. No trading, no derivatives, no nuttin'. It is simple in it's origins. Indeed, before 2000 it existed in the form of the Glass-Stegall Act. You see, banks since the Great Depression, i.e. 1932, were prohibited from doing the investment cha cha. They had taxpayer money and federal guarantees and had to be just banks. Boring yes, but they did not have a window to throw us into the chaos that we just suffered.

Now in 2000 Glass-Stegall, which had been around for nearly three quarters of a century was repealed. The act to do so was sponsored by three Republicans and was known as the Gramm-Leach- Billey bill. It was done under the watch of (and signed by) Bill Clinton, who I otherwise think did a good job (despite his cigar proclivity). It was torn up with great fanfare with a number of Republicans and President Clinton almost consumed in jubilation.

Well, the Volcker Rule, as it is now called, was basically meant to but Glass-Stegall back into place. What began as a three page letter by Volcker has turned into a Republican bastardized 298 page piece of legislation filled with more holes than Swiss cheese. Volcker himself is disgusted with this and you should be too. All we really needed to do is repeal the legislation that repealed Glass-Stegall. It worked for nearly 70 years and could work again. Better that than 298 pages of loopholes.

http://www.nytimes.com/2011/10/22/business/volcker-rule-grows-from-simple-to-complex.html

I have been involved in more politics lately than I would like. Given I majored in political science you would think that I would love this, but it is all about money these days. Politicians go to the highest bidder on a regular basis and I am disgusted by it all. I see it every day and yes they do go to the highest bidder. Money talks and what is right walks. The new 298 page Volcker Rule legislation is proof that money talks. And those against it will blame it on Paul Volcker, who had nothing to do with the bastardization of his very good suggestion. I am truly disgusted. And you should be too. You need to know that a lot of folks we vote for are not representing us; they are representing the big banks and corporations that provide them monetary support, either in campaigns or under the table. Absolutely disgusting.

Disclosures: I am disgusted.

Odd Thought of the Day

2011-10-12T21:08:00.000-07:00

So I am reading that we have achieved all we can with military effort in the Middle East and, indeed, are only making things worse there with our continued presence. We are beginning to build even more resentment and creating future generations of those who will hate us. So I say we get out as quickly as possible (I know Obama has a plan) and only supply the support they truly need and request.

This goes for the rest of the world. We still have bases with soldiers all over the globe and this costs a lot of dollars and puts folks in harms way. Let's shut as much as we can down within reason and this should create hundreds of billions of dollars.

Now I am not saying shutting down the military. I am saying bring our boys and girls back home and use the savings to better use. This is a long term thought, so stick with me.

We take the savings from shutting down bases and fund college research on alternative renewable fuels. Mostly through colleges but we can do viable private industry too. Catch is, for colleges that get money they do scholarships and caps on tuition increases, so kids can get an education without coming out with a mortgage. For both colleges and private companies, the government shares in the rewards. Any intellectual property developed belongs in part, perhaps large part, to the government. And they focus on fuels the government can use. The colleges and private industry can capitalize on their findings financially, but the government does too, reducing government spending.

And do not tell me the military has no need for green renewable technology. They are major consumers with ships, jets, jeeps, tanks and the like, so this will be a wise investment for them. And the results should give American companies and Universities a valuable commodity to market.

Yes I have read all the crap about how better drilling technology gives us decades more of cheap oil, natural gas and the like, but this stuff will run out and we need to spend money now to prepare for the future.

By the way, I am watching Bill Clinton on TV with David Letterman and the guy is talking smarter than any Presidential candidate I have seen. Seriously, he gets it and has some great ideas, so if you can find reruns, go for it. Worth the watch and relatively bipartisan.

He says no new taxes right now and we need to go full court against the mortgage problems in this country.

Whether you like him of not he is a very smart guy.

Chew On This

2011-10-05T06:00:00.000-07:00

China has been a major stabilizing factor in the global economy. Without its continued growth, things would have been a lot worse these past few years. Well the Hang Seng is now down roughly 35% from its peak last November.

Death, Taxes and Greek Default

2011-10-03T18:09:00.001-07:00

Two out of three of these are unavoidable. Ironically, the Greek debt problem proves that taxes are avoidable as tax evasion is apparently an art form in Greece, so that just leaves death and Greek default. Nothing new here, just folks coming to reality. Seriously, anyone with brain cells should be able to read the stats and know that Greek default is in the cards and has been for well over a year. Problem is, most people do not read the stats. Well, they are ugly - worse than even shave the dog's butt and teach him to walk backwards - ugly. It is just irrational to me that the folks in the EU are keeping it on life support. Either let it die or come together and do a Euro bond that all the EU supports (sorry Germany but it is time to decide whether to get out of the pool).

Now I am really pissed off. Five weeks ago I had to sell some put options on AMR - you know the parent of American Airlines. I had these for like a year and they were up a bit but I had to sell before I wanted as I had to pay a contractor for work on the house. Today, these options closed 157% higher than where I sold a mere five weeks ago. Unfreakin' believable! But I still have puts on Alcoa that did quite well today. Oh well.

Now here is the deal. I would assume that a Greece default is already baked in the cake on stock prices. It is not a big surprise as it has clearly been coming for over a year. I admit the fallout is what has folks disturbed and what that will be no one knows. We will see.

By the way, I have no doubt the EU will come in and save the day and not let Greece default - yet. Their banks have too much at stake and they are still in kicking the can mode. Greece will default, but probably not just yet.

Disclosures: none

"Great Prices on Stocks and Bonds"

2011-10-02T18:59:00.000-07:00

So I am watching this commercial for a brokerage company that does retirement planning and the like. You can use them to buy stocks and bonds and the like. They will hold your investments in an account and advise you on investments. In this commercial, they had some worldly guy saying that they can get "great prices on stocks and bonds."

SERIOUSLY!! You are advertising getting me good prices on stocks and bonds?!! Do you get some special deal the rest of the brokers do not get? Do y0u know something the rest of us do not know? How can you say this in a TV commercial?! These companies are idiots!

I digress from my usual programming but this commercial simply set me off a bit. People buy into this BS and it upsets me.

So I hate to say this (my son says we do not say hate) but we are very, very close to where the "can" cannot be kidked any more. Not saying it is here just yet - but I am listening for that pin to drop. It will.

Y0u are reading this thinking it is BS with no substance, I agree on no substance as I am too busy to put that in. I will in time but meanwhile, watch out.

Brief Things to Chew On

2011-09-29T20:11:00.000-07:00

So it looks like Germany approved today putting on a bigger boot and kicking that can further down the road. Now my view is that Greece and several other European countries are going to need more than just a few months to turn things around; just a gut feeling on my part. Indeed, given their economies, austeritiy measures and the like, I would hazard a guess that a decade or more is not out of the question before they get back to stable. Think about that, a decade or more for the PIIGS to perhaps turn things around. Chew on it. Think about it. Now spit it out. Not a good taste in your mouth, is it.

Just my thought for the day.

Hell of an October Ahead

2011-09-27T19:02:00.000-07:00

So EU is putting on a bigger boot to kick that can. We will see Thursday if Germany agrees to tie the laces for this to happen. I assume it will happen - as the markets are certainly assuming this to be the case - so we buy more time. That, however, is all we buy.

Listen folks, the sovereign debt problems in the EU are not going away in weeks or months, they will take many years to resolve. Kicking the can buys time but it does not buy resolution. Think about it; how many years will the voters and politicians in Germany or France support this - or for that matter the other countries in the EU. This is a union that is hardly unified. They have already had one contentious battle after another holding their union together and supporting each other. All it takes is one throwing in the towel. So you tell me, what are the odds of the sticking together for perhaps the next decade while this works itself out before anyone throws in the towel? What are the odds that voters in Germany, France or even Greece voting back in the folks trying to make this work. I personally am very tired of this hanging over the international economy and cannot imagine having to live with this for years to come. The fatigue of dealing with it will insure folks in the EU will stop dealing with it in time.

Even it you believe the countries will stick together, let's ask ourselves whether it will work even if they do. Greece and the rest of the PIIGS are broke. Severe austerity measures will only make them more broke. Many, many years will pass before they have any real chance of coming out of this. What are the chances of this happening? I think anyone with a brain realizes there will be a haircut and the banks are going to lose at least 50% on Greece. Percentages will vary with other countries. Then the question becomes the extent to which governments and voters in the EU have an appetite to support the financial institutions suffering on these haircuts. Therein lies the real problem as this could be a major issue no one can gauge.

So watching the market rebound this week was a bit interesting for me. Undoubtedly partly due to the end of the quarter and people shuffling their investments, but it seems driven by what the EU is doing, which is short term at best in my book. You may have a different book, but I am sticking with mine for now. I admit this could take many months to play out, but I am still anticipating a very interesting October, very interesting indeed.

And I read an interesting article today on real estate in China taking a dive, developers having issues and banks in China (while enjoying record profits at the moment) having sever problems going forward. Many investors are shying away from them. If this happens, look out.

Disclosures: None.

EU Splitting?

2011-09-25T22:15:00.001-07:00

A full two years ago I posted a prediction that the the EU will break up. I think I called it the time the EU losing the U. This was a post by me that got a lot of negative feedback then- as in it was an insane proposition. Let me simply say, I stand by my original proposition:

http://online.wsj.com/article/SB10001424052970204010604576592830020996482.html

EU

2011-09-25T22:15:00.000-07:00

So Where From Here?

2011-09-22T19:18:00.000-07:00

I honestly have no idea. At least short to medium term I gave up a long time ago on trying to figure it out. I focus on macro issues and the market does not. I have learned the hard way that I can be wrong for a very, very long time only to be proven right later in time after losing some money investing on my beliefs. I have made no new investments for pretty much the entire year as I am disgusted at the irrational behaviour of the markets. Ironically, I know that irrational markets are the norm so it is irrational for me to expect anything else.

So, as much as I still hope I am wrong, I fear now my macro beliefs are proving true and we have some relatively severe pain ahead. I simply see no way around it despite what our inept politicians do to stop it. More significantly - and pay attention here - I do not think we should figure out a way around it. Instead, we need to figure out a way to allow - perhaps even make- it to happen but with the least collateral damage possible. Ask Japan (my heart goes out to them with all the natural disasters this year including today) whether it makes sense to kick the can. They have been doing it for roughly 20 years, seriously 20 years. We need to take our medicine, figure a way to take out the garbage with the least pain, and move on with it. As Moody's or S&P or whoever said in its downgrade this week of the big boys - you know Bank of America, Citigroup, and WF, their downgrade was based in large part upon their belief that the U.S. government no longer considers them too big to fail and may allow them to fail in a new financial crisis; not that a new crisis will happen or the U.S. will do this but the odds have increased.

Here is my proposal, flush the toilet and get rid of the stench. Let the weak players fail and clean up the mess. When they fail, let the governments of the world build more deficits, yes more, to clean up the mess, put it behind us and let the economy start to grow again so we can put this behind us and start reducing the deficits.

And behind my recommendation is a big secret. Listen close, yes put your ear up to the screen and listen carefully as this is a major, as in do not disclose, as in Max Smart talking into his shoe phone type of secret. Ready for it, well here it is: THERE ARE A HOST OF MAJOR COMPANIES IN THIS WORLD WITH AN ABUNDANCE OF CAPITAL SITTING ON THE SIDELINES WAITING TO BE PUT TO WORK BUT THEY WILL NOT DO THIS BECAUSE THERE ARE NO GOOD PLACES TO PUT IT TO WORK. TAKE OUT THE DEAD WOOD AND LET THIS CAPITAL BE PUT TO GOOD USE. THE CREATED FINANCIAL VOIDS BY TBTF COMPANIES GOING UNDER WILL QUICKLY BE FILLED. AND, BY THE WAY, SINCE NO ONE IS BORROWING ANY MORE, TELL ME EXACTLY WHAT FINANCIAL VOID EXISTS THAT WE WILL NEED TO FILL?

Just my take, sports fans.

Disclosures: None.

Twist and Turn, Twisting in the Wind, Twist and Shout, A New Twist, Twisted Ben

2011-09-21T20:13:00.000-07:00

The headlines are flying and likely to fly more tomorrow on how my dearest friend Ben has announced his and the Feds (three dissented) to sell bonds with short term maturities and replace them with bonds with six and 30 years. In addition, mortgage backed securities they own now will be replaced with new ones to support the mortgage market. Plan is to lower long term rates below their already record lows. Every one and their brother recognizes that rates are not the problem and this is unlikely to do much, but Ben is not one to sit on his hands and the political environment is not there at the moment for more QE. Either the market did not like what is being dubbed "Operation Twist" or they did not like talk about "significant downside risks." Either way, they did a cliff dive. On the other side, they may just be waking up to the fact that there is little economically to be real happy about at the moment.

http://www.bloomberg.com/news/2011-09-22/asia-stocks-commodities-drop-on-fed-comments-bank-downgrades-won-sinks.html

I mean after all, poverty is up in the U.S., the middle class is making less than it did 10 years ago and effectively what it did 20 years ago and all the money in this country is increasingly consolidated in the very wealthy. Indeed, the collective worth in the Forbes American top 400 went up by 12% over the past year. Gates is at the top of the list followed by Warren Buffet. But here is something a bit odd, the person Forbes reported as the richest person in the world just a few months back was not on the list of the top 400 in America. I admit I did not read the entire list but back in March Carlos Slim Helu had $74 billion and I went down the Forbes 400 list to the $5 billion level and he did not appear. Either he has had a horrific six months or Forbes does not consider him an American. Last I checked America included a lot of countries and not just the U.S. Mr. Slim Helu is from Mexico, which is part of America just as much as the U.S. , Canada or a host of other countries. So maybe the list needs to be called the 400 richest people in the U.S., which I believe is what it represents. Just a thought.

Disclosures: None

Pulling a Japan

2011-09-19T17:44:00.000-07:00

So, S&P just cut the Italian sausage.

http://www.bbc.co.uk/news/business-14981718

No big deal, just fate coming down the road. Hey, the EU is going to suck wind for years to come and all the moves there and in the U.S. are simply determining how long our problems will take to work out. Unfortunately they/we are pulling a Japan, so this could take a very, very long time. We need to take some pain now and stop kicking cans but politicians cannot take pain now as they need to get elected.

Tea Party/CNN Debate

2011-09-12T20:20:00.001-07:00

Well I watched the debate, or at least most of it when I was not watching the Pats, and I must say I was not really impressed much by anyone. They all seemed to be pulling stuff out of their - hats. I had another word in mind other than hats, but you get the picture. Mind you, not a big fan of the one known as Obama, but I was seriously hoping the GOP slate could give a really good alternative. So far, ain't happening for me. Not saying I will vote for Obama, but there are certainly some on the GOP ticket I will vote against. The problem is, some of these I would vote against have a serious chance of being the Republican candidate next year.

Let me note a few things I heard worth noting. First, there was a question on how Republicans are going to garner the Latino vote. The responses immediately diverged into a discussion of illegal aliens and protecting our borders. Might I suggest that candidates realize there is a very substantial portion of our "legal" population that is Latino and ranting about illegal immigrants ain't necessarily going to win the vote of those who are legal.

One point Mr. Romney made that got some traction with me is the concept that medical care is in part expensive because after a deductible or copay the patient no longer has financial skin in the game. He did not suggest this, but let me do so; why not replace deductibles and co-pays as they now exist with insureds paying a percentage, say 10%, of every medical bill with the insurer paying the rest? Certainly would give folks financial skin in the game. Now this is done to a certain extent already. I know my co-pay varies on prescriptions, depending on whether I go name brand or generic, but I think more of this needs to be done.

There were a lot of stupid things said in the debate but the top on my list was by Ron Paul. I like the guy but he went down a rabbit hole on a hypo about a 30 year old single healthy guy deciding not to buy medical insurance. The guy gets seriously ill and cannot afford to pay for his care. Now Ron started off scoring for the Tea Party audience noting that it was this guy's choice and he should take responsibility, but he was then asked - should we just let him die? Ron's response was to note back in the day churchs would help out as well as friends and family. Excuse me, but this is absolutely stupid. Last thing I want is to have to pay the medical bills of friends and family or feel guilty for them dying. I much prefer to pay some taxes and let the government deal with it. And the last time I checked churches were not just gushing with resources to help out every Joe who either chose to or could not afford to buy insurance. And ultimately the cost is still shifted to the rest of it because we are not going to just let people die. If I were the moderator my next question would have been, let's assume there is no church, friend or family willing or able to pay the cost, do we let him die? So we let him die and there is no money to pay for a funeral, do we just leave his freakin' dead carcass rotting on the sidewalk?

Reading the surveys, most Americans agree we have no good choices right now and right now is a time when we really need some good choices. Where is the next Ronald Regan or Bill Clinton? We need a leader and we need vision. Moreover, we need the two parties to compromise for the better good. Will the next leader please step forward.

China to the rescue?

I heard that the late day rally in the U.S. market was due to Italy's request to China that it fund Italy bonds and help avoid an EU meltdown. This apparently was good news to the market, i.e. that Italy needs help from China. I guess it is possible China may do this to help the EU and protect one of the major consumers of its products, so we will see what happens, but China has a few issues of its own at the moment. If China does help Italy, however, who next? Spain, Greece, Portugal, the U.S.? China cannot save everyone and it may want to keep its resources to help its own people.

A Good Read

2011-09-10T05:57:00.000-07:00

I am not saying I agree with it all but this is a very thought provoking - and extremely well written - piece that I think everyone should read. It should at a minimum lead to some very worthwhile discussions and debates. And do not think about responding to this blog if you have not read the attached link.

http://www.truth-out.org/goodbye-all-reflections-gop-operative-who-left-cult/1314907779

Hatred and anger fueled the rise of the Nazis many years ago. Are similar emotions fueling the rise of the Tea Party today? I personally think so and it is quite disturbing.

"Sudden"???

2011-09-09T11:48:00.000-07:00

Here's a good one. In discussing what is up with the EU, USA Today noted today that there is a "sudden" realization that some EU countries may not be able to pay their debts. Heeeeeeeeeelllllllllllllllloooooooooooooo!! Where have you guys been? Seriously, this is "sudden?"

http://www.usatoday.com/money/perfi/stocks/2011-09-08-europes-debt-crisis_n.htm

Well, it is USA Today.

We Havin' Fun Yet?

2011-09-08T18:33:00.000-07:00

I missed Mr. O's big speech tonight. Not because I wanted to but I had work obligations. So I do not know what he said. Seriously, I do not. I am guessing from leading up reports it will be something like spending hundreds of billions of dollars in stimulus to create jobs. Now I have read articles claiming that the first stimulus cost over $225K per job. Okay, I did read it on Fox and we all know they are not the best friends of Obama, but they claim to have it from the CBO. Either way, I tend to doubt it is much off.

http://nation.foxnews.com/stimulus-money/2011/02/24/cbo-jobs-created-or-saved-stimulus-cost-228055-each

So spending $225K+ per job for jobs that I assume are paying less than $50K does not seem to me to be smart math, at least in the way I understand math. What me thinks the problem here is is a lack of understanding on what the problem here is. More specifically, building government deficits to throw money at problems can work in certain situations and can work on certain problems, but it is not working here. Certainly not the way we are doing it.

What we have is a debt problem. Sponsored by the US government, many folks got their collective arses in over their eyeballs in debt. We incentivized banks to give money to anyone who could fog a mirror. We allowed them to have bogus appraisals to justify such lending. We allowed credit agencies to give bogus ratings to securitize these loans. We just sat back and let it happen. And now we have a debt problem. Go figure!

While financial institutions do have somewhat of a financial problem (which they are not yet admitting), or at least a lot of them do - especially in Europe - most companies in the US are okay. They have capital, have reduced their work forces to an efficient level, etc. They simply have no customers or sales as their customers are heavily in debt, in other words, their customers are broke.

Now I read at the WSJ that companies simply want the government to get out of the way and strip out some regulations so companies can prosper and start hiring. Now I do agree with this to some degree as there are a lot of regulations on the books that only the bad players ignore and the good players spend tons on compliance (like SOX), but I do not see this needed step as necessarily what is in the way of economic growth at the moment. Removing the regulations does nothing to remove the debt of those we need to have start spending.

Perhaps we need to take the stimulus dollars and pay off some debt. I agree US debt needs to be paid off but if we are hell bent on spending tax dollars to stimulate, perhaps we should spend them by having Freddie and Fannie do loan mods that relieve debt and thinking of other ways to relieve individual debt. Perhaps we can allow consumers refinance high interest rate credit cards at lower interest rates through government programs. Perhaps we can assist loan mods at financial institutions other than Fannie and Freddie. The name of the game here is deleveraging and until we come up with a plan that does this in a serious fashion, the economy will not get back on track. No mistake here, a multi-year process, but we need to treat the cause, not the symptom.

Disclosures: None

Greek Default?

2011-09-08T14:33:00.000-07:00

It looks rather inevitable that the situation in Greece is coming to a hear over the next few weeks, if not days. So Germany, what say you? Sink or swim?

http://www.bloomberg.com/news/2011-09-08/greek-credit-swaps-surge-to-record-signal-91-chance-nation-will-default.html

Not much Obama can say tonight to change this or its impact on US jobs. Really not much anyone can do at this point to stop this train and I think a lot of folks are finally waking up to that reality. Good or bad, there is a lot of pain ahead and perhaps it is best to let it happen and get it over with as best we can.

OK - More Mojo Macro

2011-09-04T20:11:00.000-07:00

Now I am not going to do a lot of surfing to find it for the handful of people who read this, but I can if things take off on this blog and I get thousands of hits. I read recently that some group did a study that the world is operating at 150% of capacity. In other words, we are using resources to an extent that we would need another half earth to sustain our consumption. Let me repeat that so it sinks in - we are totally raping our planet and leaving it barren for future generations!

So we have millions of people being added to the world population each year, emerging economies buying all the resources that we all need and that are limited. Can we continue this path?! Please think about it.

Disclosures: None.

Macro-Macro - The Bad, The Ugly and, Perhaps, The Good

2011-09-03T19:14:00.000-07:00

I obviously focus on macro-economic trends and ideas, but let's digress just a tad and focus on super-macro or macro-macro stuff. It is out there and you can find it, but it perhaps does not get enough attention. There is plenty I can say here but I will focus on a couple of areas and follow with more later.

Demographics

Let's start with demographics, i.e. that how old are your people thingy. Now let me add that demographics means a bit more than just how many old people you have and how old they are, but from an economic perspective, that is the demographic of concern.

There are certain countries that have very poor demographics, like Japan with a pretty aged population, those with poor demographics like the US and much of the EU, with a population increasingly in retirement age in the next 20-30 years, and those not too bad like India. China has bad demographics from an age perspective and dismal demographics from a gender balance perspective due to its one child policy.

I read last week that in the U.S. stock prices can be expected to go down overall for the next 15 years or so because of demographics. Simply speaking, PE ratios tend to go down as demographics/populations age so stock prices will go down simply because the population is aging. Now I question this a bit as stock prices in US markets are increasingly tied to other economies more than the US economies (i.e. US company profits are less domestically based), so the US demographics should over time have even less impact. Nonetheless, the fact that older populations correlate to lower PE ratios is not a stat worth ignoring.

Demographics is Nothin'

While we cannot ignore demographics, if you are focusing long term, i.e. 10-30 years, there are more important things happening. A lot of folks are betting on emerging economies. Money this past decade has been going into China, India and other emerging economies to the point where some may not even be considered emerging any more. So what happens when a few billion people start being consumers? What happens when they start buying homes, TVs, cars, different food, fuel, electricity, plumbing, clean water, etc. We in the US have been greedy bastards hording an overwhelming relative percentage of the world's resources. When the rest of the world wakes up - especially countries with populations of a billion or more - and start actively trying to bring a better life-style to their citizens, then the resources that might supply such life-styles become strained.

Let's face it, the world is incapable from a resource perspective to give everyone on Earth the life-style of the average American. We simply cannot do it. So while emerging economies strive to get to what we have, they simply make it even more impossible. We cannot all be gluttons. So, my friends, as you rush off to invest in emerging markets or you praise the life style gains in China, India and the like, keep in mind their growth helps seal every one's fate. Us gluttons need to fall back in our life styles to allow enough global resources to support their growth.

Many think we are already at peak oil. Absent some breakthrough in renewable energy, it is going to get a lot worse before it gets better.

China has been buying up precious metal supplies and has the current market cornered, which is causing a bit of an international dispute.

These and similar issues will continue to be regular headlines going forward, so get used to it.

Agriculture

To me, however, the biggest issue for the next 20-50 years will be food. The global population is still growing and we are still actively finding ways to keep people alive and for longer. While this all sounds great if you are one who was saved by medical miracles or who is living longer due to basic advances, it is not really a good thing overall just yet. Unless we can feed all these people, having more is a big problem. And from what I have seen some of the environmental changes are making sustainability - from a food source perspective - quite questionable. There are dozens of factors here from bad farming techniques - overuse of fertilizers, herbicides, insecticides, and the like - weather patterns, and short term goals for corporate farms. Overall, we have some very dangerous dynamics developing in terms of feeding the world and these are already leading to massive riots in various countries where families are literally paying over 50% of their incomes to put food on the table. This will get much worse before it gets better.

The bright side is that those looking for a job in the US may have a bright future in agriculture should they be wise enough to consider it. My maternal grandparents were farmers and it seemed family farms were a thing of the past by the time I grew up. Now I think properly run family farms that farm wisely are perhaps one of the best future industries in the US. We have the resources and if we use them wisely we can do quite well feeding a lot of the world. Unfortunately, too few are thinking this way. It is, however, a thought I hope to plant with my kids.

Disclosures: None.

No Job Creation - As in None, Nada, Zip, Forget About It!!

2011-09-02T19:19:00.001-07:00

A bit ironic that going into Labor Day weekend we have zero growth in non-farm payrolls for the first time since 1945 (though you have to acknowledge that there was a bit of a major strike in the cards here distorting the figures).

http://www.msnbc.msn.com/id/44370462/ns/business/

And the numbers for job growth the past two months were decreased somewhat significantly.

http://www.calculatedriskblog.com/2011/09/august-employment-report-0-jobs.html

This is shocking - not that it happened, just that it is shocking that many did not expect it. I have done this drill a lot, but let's repeat. Government stimulus is gone and dead and, like it or not, the Tea Party is forcing us into a deficit reduction mode whether this makes present sense or not. Deficit reduction reduces GDP - it does not increase it. And while I agree it is necessary, I recognize a genuine debate on whether right now is the time. Like it or not, I think it is happening.

QE2 also dead, and no QE3 yet announced, though I still expect it to happen. EU on the ropes (a bit more below), States cutting back, China cutting back and a bunch of other cut-backs around the globe. While I agree most U.S. companies are sitting on a lot of capital and are not going belly up, they are also not hiring as they do not know where their sales growth is coming from enough to support hiring. And I do not either.

And so we get to Europe. Oh my dear Europe. I personally do not see any realistic global recovery until the EU gets past its problems and I do not see that happening any time soon. Greek bonds, again moving sharply higher and what else would anyone expect. Just a matter of time before the EU takes its medicine and we may (as in undoubtedly will) get a foul taste from the same medicine in the U.S.

http://www.calculatedriskblog.com/2011/09/europe-update-greek-bond-yields-move.html

Now the rumors were in the market on this today and now it is news. The Federal Housing Finance Agency (FHFA) has sued 17 financial institutions over losses to Fannie and Freddie, including some officers and other individuals. Now I am sure you may have heard of a few of the institutions, such as Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, HSBC and the like. If you need it, here is the news release giving details:

http://www.fhfa.gov/webfiles/22599/PLSLitigation_final_090211.pdf

One might say that this is not a good time for this suit. I do not have the details but last I heard Fannie and Freddie (as in us taxpayers) were out about $200B on the situation, but still, many might say with the economy suffering this is the wrong time for this suit. I, on the other hand, think it is long over due. We built major moral hazard saving these institutions over the past three years and putting them to task for what they did is well over due. It may delay a recovery, but well worth the pain for the gain of damping down moral hazard of them continuing their reckless ways. Sure, they have gotten their act together on not lending to those with no credit but me thinks they are still playing fast and loose with the derivatives game and I am all for them paying the price on this. Lest you missed it the Madoff Trustee filed an $19B suit against JP Morgan Chase seeking to hold it liable for the losses to the Madoff Ponzi scheme. No comment on who wins, but moral hazard is something we need to cure before we can move forward.

Disclosures: None. Though I do personally bank with a subsidiary of RBS, which is one of the aforementioned defendants.

Read This

2011-08-30T15:14:00.000-07:00

No time to post as I am on an office off-site but please read this, it is by someone who really knows what is going on. Hunker down, my friend, hunker down

http://seekingalpha.com/article/290445-the-end-of-the-world-part-i

A ONE BILLION DOLLAR PRIZE!!

2011-08-29T18:58:00.000-07:00

I apologize to my usual audience, but I am simply doing a test to see what type of headline might get noticed. Simply research here so please go on about your usual way.

Blow the Party Horns!!

2011-08-29T12:10:00.000-07:00

Yes, consumer spending "rallied" in July!! You heard it right - it rallied by .8%!! Now if you exclude the inflationary fuel and food spending, it was just up .2% - the same as June - but baby this sucker rallied!! But wait, spending increases exceeded income increases. So what does that mean? Does it mean a highly leveraged consumer went heavier into debt, largely to buy necessities like food and gas? Does it mean, after adjustments for inflation, disposable income actually fell? Does it mean you need to know what you are reading before popping the corks?

http://www.nytimes.com/2011/08/30/business/economy/us-consumer-spending-rallied-in-july.html?google_editors_picks=true

Yes, this consumer spending increase and the news that two Greek banks are merging (two negatives apparently do make a positive) have sent the market on a tear.

http://www.nytimes.com/2011/08/30/business/daily-stock-market-activity.html?google_editors_picks=true

God forbid the market actually had something truly positive to digest.

Disclosure: Unbelievable.

INCREDIBLE!!

2011-08-29T10:31:00.000-07:00

The market is up today, continuing Friday's rise, on very low volume. This is just fantastic. I admit I did not see this coming. I mean, who could ever expect the wonderful financial news of the past few days that has inspired investors to buy in? I did not see it coming and, well, still do not see it here. Seriously, I see no significant financial or economic news to justify any market increase. If you have a clue on what is driving this then please help me out here as I have not seen any news to spur buying or negate selling. Just asking . . .

Yours, Clueless

Disclosures: None.

Ignore the Hole

2011-08-26T06:12:00.000-07:00

All eyes seem focused today on what our friend the Ben is going to say at Jackson Hole, Wyoming. Well, all signs are that it ain't going to be QE3 just yet, though I would not rule out some symbolic economic trick to try to support the markets.

The bigger question in my mind is why this is getting all the attention when our friends in Greece are on the verge of losing their battle. Seriously, they have tapped into their Emergency Liquidity Assistance (ELA) for the first time and this is not a good sign, not good at all:

http://www.telegraph.co.uk/finance/financialcrisis/8723588/Greece-forced-to-tap-emergency-fund.html

And Finland's refusal to support more aid to Greece without collateral seems to be a roadblock the EU has yet to figure its way around. Greece is not the biggest domino in this game but it may be the first with the only question being whether it is big enough to knock over the next one in line, which I will leave you to define for yourself. Indeed there are probably two separate rows of dominoes into which a Greece default will fall; first is the banks and second is other sovereigns. I suspect there is nothing Ben is going to say in the Hole that can come close to eclipsing what we are seeing in Greece.

Update: Okay, ignore what I said above about Bernanke. He came out this morning and said exactly what I thought he should say (though not necessarily what I thought he would say). No QE3 or other stimulus from the Fed presently, economy slow but moving along, and it is up to Congress and Obama to fix this mess as there is little the Fed can do. Now I think he should have been saying this a year ago when he launched QE2, but better late than never. Mind you, if Greece defaults and banks start to fail, I see a quick reversal with QE3 in our future, but for now so far so good.

Surprisingly to me, the market has taken the lack of news (which was expected) quite well. Perhaps some folks agree that there is nothing for the Fed to do and doing nothing is better than wasting resources doing stuff that does not work. Still, the market being up on nothing from helicopter Ben is a bit surprising to me. I mean, after all, you have the worsening situation in the EU (which did impact EU markets heavily today), the reduction in consumer confidence (which was expected but not quite so low), the reduction in second quarter GDP (again expected but not so low), etc., but the market is up nicely. Go figure.

Disclosures: None

So What Changed?

2011-08-24T18:40:00.000-07:00

Seriously, what changed? We went from a couple of weeks of high volatility, mostly in the down direction, to a relatively upbeat, low volume market. Spreads are down on sovereigns in Europe as well, mostly. Markets seem relatively calm. Now there is no outrageously positive news or anything to change the negative news that existed last week or the week before. So what changed?

I read that there is a Bernanke effect. He is speaking at Jackson Hole on Friday and many expect him, just like last year, to announce a new QE or some other "trick up his sleeve." I actually read someone's post today about how wonderful Bernanke is and how effective his QEs have been - seriously, I am not making this up. After noting a prediction of Ben pulling another stimulus out of his hat, the writer noted:

"The past QEs have been so darn effective! We had one of the biggest market rallies in history from March 2009 to March 2011. It's so powerful, why not use it?"

I kid you not, this is what the guy posted and while I initially thought he was being sarcastic (a concept my seven year old daughter gets), he was not in the least. This guy really believes that helicopter Ben is the next Messiah. He refers to Ben as the guy who saved us from the worst depression in history and calls him a "hero." And he apparently does not notice the coincidence between the market being oversold and down around 50% in March 2009 and then recovering somewhat, whether Ben did anything or not. I am not making this stuff up about what this guy says. He must be Ben's son or cousin or publicist or something. Don't believe me, read it for yourself:

http://seekingalpha.com/article/289499-bernanke-is-loading-his-gun

Now I believe this guy is sincere, but I also believe he has not done his math. Sure, Ben dropping money will help the market for a while but if you look the market is not significantly better than when QE2 was enacted, and it just ended a month ago. There are no discernible long term benefits from either QE. They did not solve or fix debt problems, they just provided short term liquidity. We still have a debt problem. It may turn into a liquidity problem as banks in the US and Europe soon have to struggle to survive, but it is now a debt problem (at least for the US) and QE does nothing to fix this. So Ben the hero - I think not!

Let me add a caveat here. Ben's largess supported banks in the EU as much as in the US. Governments there do not guarantee deposits like the FDIC does here. Greek banks have been having a run of people taking out their money and the concept of other banks seeing similar fate is not too far removed. If this happens, there could be liquidity issues as these banks do not have funds on hand to pay their customers back their deposits. Morgan Stanley had a similar problem in 2008. It had folks asking for cash back that it did not have on hand. It ended up borrowing over $100 billion from the Fed to fund this problem - more than even Citigroup, which is twice its size. Of course it noted this borrowing to its investors (not). So the Fed does address liquidity problems. These are problems that have and will continue to plague our financial institutions for years to come. Other than saving their collective arses and preventing a meltdown, this does not revive the economy. It simply allows a very debt ridden status quo to continue. Time to pop the corks and celebrate - not!

So I ask again, what has changed? Nothing in my book. PIIGS are still about to be slaughtered, housing in the US still is sucking wind, unemployment not better, etc. etc. So where do YOU think the markets are going in the next 12 months? Prepare yourself.

Something Fun To Do

Here is a fun suggestion I have for you. Next time your employer - assuming you have one - wants to have financial advisers come in to talk to you, do a little homework in advance. My company's retirement benefits are with Merrill Lynch, which had to be bought by Bank of America to survive, and we all know that Bank of America, after its CountryWide, purchase is doing so swimmingly well. Two years ago they had financial advisers from Merrill come in to tell me how to do my investments. I was not real happy to have a company that cannot survive financially tell me how to do so. My bank, where I have an adviser, is a subsidiary of RBS, which last I checked was down around 40% or so this past couple of months. Again, where are you getting your advice?

Point is, these people cannot keep their companies alive and they are telling you how to invest your money. So research your adviser and feel free to ask during the investment meeting questions like "Your parent's stock is down over 40% in the past two months and has serious sovereign EU exposure, so why should I follow your advice?" Not saying their advice is wrong, just play with them a bit and take their advice with a grain of salt. They do not know everything and you need to do your own homework.

Disclosures: None.

I Need Data, I Need Data . . . Beep, Beep . . .

2011-08-23T18:24:00.000-07:00

Okay, one day I read a NY Times editorial by Warren Buffet saying he is paying 17% in tax on roughly $35 million plus in income (my calculation), and then a few days later I see a former Charmian and CEO of American Express and AIG, Harvey Golub, saying he expects to pay between 80-90% in federal, state, local, Social Security and Medicare taxes this year. I am asking for more data here from anyone who knows as I a reevaluating my position on taxes but want some solid data on which to base my decision. And that I do not have.

Seriously, I am not an idiot and what I have read lately is causing me to reevaluate some things I have said here on taxes. I am not a politician so I am free to change my mind and be educated. Go figure.

I really do, as part of this education, want to better understand the differences between Buffet's 17% and Golub's 90%. I am not sure what Buffet is including in his 17%. I doubt it includes local or state taxes or real estate taxes, but cannot be sure. I am in a state with no local or state taxes, though there is a hefty real estate tax.

Still, even with these other taxes, 17% may become 30%, but no where near 80-90%. With the top federal rate at 35%, how in the hell is Golub paying 80-90%? Seriously! Maybe he is compounding the effects of income tax, capital gains taxes and estate taxes, but I would seriously like to see his calculations along with those of Buffet. Rhetoric gets us no where. And I have to believe a multi-millionaire like Golub (or billionaire)(he was after all CEO of American Express, Campbells Soup and AIG), can figure out a way to pay less than 90% in taxes, especially if Buffet is paying 17%. Seriously, Golub needs better accountants.

Now there is a lot of touting of 53% of Americans paying no tax. Here again, I would like some data. Perhaps they are making no money or not enough to be taxable. I suspect some (okay, a very small percentage) are millionaires with losses wiping out taxes or tax loopholes allowing them to pay nothing. Either way, the likes of Golub making millions saying those making a few thousand should share his pain is a bit hollow for me. Still, I want stats on how much the U.S. would make in taxes if we taxed the truly impoverished say 5% of their incomes. I have been in a place where I saved change to pay for meals and cannot imagine some in these situations (or undoubtedly much worse situations) to find 5% to pay in taxes to share the pain. They already have the pain - pain that Golub never has to feel.

Golub Challenge

Okay Mr. Gollub, here is my challenge. Let others manage your money and live in your mansion and control your money. You spend two years living off of $15,000 a year, living wherever you can afford and pay just $2000 a year to the federal government of that. If after two years of living that way - I have been there but paid more in tax - then you can decide whether those who cannot afford tax should pay it. Perhaps you have been there, but you do not act like it.

I am not saying coddle those abusing Social Security, Welfare or other programs. We need to actively investigate and end any frauds in these programs. They cannot continue with the fraud levels that exist. But fraud, tax evasion, and other illegal means of shifting the tax burdens to the honest folks need to be focused upon. Those cheating the system on both ends of the wealth spectrum need to be dealt with. But there are plenty of poor people who lived honorable lives and who have families to support and cannot help out the down and out Mr. Golub. I agree he should not pay 90% in taxes, but I have nothing that I can look at to calculate any rate for him anywhere close to this level.

And you want fairness? Well everyone pays the same rate on the same level of income, deductions and credits aside. Someone making $10,000 a year pays the same % on that $10,000 as someone making $10 million does on their first $10,000 in income. Seems fair to me.
Seriously, I DO want data on which I can analyze this issue further. I read that there are a lot of studies showing that tax increases deter economic activity. which is a proposition I do not really doubt generally. I would like stats on this and whether this still holds in the face of situations like we currently face where massive deficits are deterring economic activity. One economist I follow who bangs the bell constantly on how taxes deter economic growth is now saying we may need to bring down the deficit with higher taxes first to get our act in order. This to me spells a long slow recovery. Shh, do not tell anyone, but I have been for four years expecting a farily long recession and a very slow recovery and the government has been fighting this idea at every possible point. Indeed, they have actively been making the problem worse, so it will take longer -much longer - to fix. It is time for us to take our medicine and, unfortunately, live a decade or so healing our wounds. No one wants to face this prospect - especially with millions of baby boomers trying to retire - but sometimes the truth hurts. Open up and let it in. It will set you free.

Tell Me I Was Wrong

In February of 2009, yes well over two years ago, I supported nationalizing our big financial institutions, breaking them up and selling them off. This incuded big financial institutions like Bank of America and Citigroup. I said at the time:

http://www.blogger.com/post-edit.g?blogID=6953117324755503703&postID=8978388727868507518

Sit back and think about it. How much better off would we be if the U.S. and EU had tried to do this to the extent possible. Most of these institutions, despite trillions in liquidity support - yes I said trillions - are dead weight to the economy and their shareholders and they are still threatening economies on both sides of the pond. They still have too many bad assets, including derivatives, in their possession. We empowered moral hazard and they have not, perhaps because of it, seriously reduced their leverage and exposures. They should be gone, and this was evident well over two years ago.

Disclosures: none

QE3? Ben is an A$$

2011-08-21T19:02:00.000-07:00

I wrote a couple of months ago that I though QE3 was baked in the cake. Odd thing is that most folks thought then it would never happen but a lot more are thinking now it might or likely will happen. Funny how a lot of market turmoil can change a lot of thinking. I am thinking right now, however, it is not too likely just yet, as three of the voters on the Fed voted against the relatively benign statement of keeping interest rates low until 2013. And that is the last time three dissented in nearly 20 years. Go figure.

http://www.businessweek.com/news/2011-08-21/jackson-hole-bankers-reflect-on-qe2-amid-pressure-for-stimulus.html

Mind you, I think helicopter Ben would do QE3 tomorrow if he could but there seem to be some more reasonable folks that he needs to convince - and let's all hope his powers of persuasion are not working too well right not. QE1 and QE2 were total failures so I am not too keen on a repeat.

Still, let's not fool ourselves on Ben's plan here or what he has been doing. He does not give a rat's a&& about the regular Joe on the street. He has been all about saving the big banks and providing them with liquidity. QE2 did this and much of it supported international financial institutions, not just domestic.

Seriously, Mr. helicopter loaned out over a trillion dollars with hundreds of millions going overseas. Don't believe me, read it here:

http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

This guy was on a tear and throwing money at any bank or financial institution that moved. And we now know how well that worked out.

LET ME SAY ONE THING HERE YOU HAVE TO DO, READ THE LINKED BLOOMBERG ARTICLE ABOVE. IT IS EARTH SHATTERING IN ITS REVELATIONS ON THE FED.

Bottom line, the Fed has been more of a problem than a cure for a long time. Between Greenspan and Ben there has not been a lot of proper analysis at the helm. It is in need of serious brain power and really soon.

Disclosures: none

Country to Country Comparisons

2011-08-20T12:05:00.000-07:00

I posted the other day on how Greek and French are not as hard working as say Germans. I have heard this but I wrote it without stats. I have now looked up some stats, and here they are from CNBC:

U.S.

Average hours per week: 33.8
Per capita income: $46,400
Average vacation days; 25
Tax range: 10-35%
Statutory retirement age: 65

Germany

Average hours per week: 35.5
Per capita income: $34, 200
Average vacation days: 30
Tax range: 0-45%
Statutory retirement age: 65

China

Average hours per week: 44
Per capita income: $6,500
Average vacation days: 21
Tax range: 5-45%
Statutory retirement age: men 60 women 50

UK

Average hours per week: 37
Per capita income: $35,400
Average vacation days: 36
Tax range: 20-40%
Statutory retirement age: men 60 women 55

Greece

Average hours per week: 42.4
Per capita income: $32,100
Average vacation days: 37
Tax range: 27-40%
Statutory retirement age: 65

France

Average hours per week: 38
Per capita income: $32,800
Average vacation days: 40
Tax range: 0-40%
Statutory retirement age: 60

There are a lot more countries covered at the site, which you can find here:

http://www.cnbc.com/id/36017324/Workers_Country_By_Country

So, if these stats are accurate, the U.S. work week is pretty short compared to most (I note it has grown shorter during the recession due to part time workers and cut back hours), but we get less vacation than most and are generally forced to retire later than most, though not all. Rumors of the Greek being lazy may not be accurate, though nothing here dispels information that tax cheating is rampant there. So much for rumor or word of mouth.

Disclosures: None

Dreaming of 2008

2011-08-18T17:36:00.000-07:00

I note that the DOW was down over 400 points today but it was only the fourth largest decline this month. Lest you missed it, today was the 18th. Seems like 2008 all over again. Problem is, I think we had some advantages then over where we are today.

Let's go back in the way back machine to those frothy days in 2008. Lehman collapsed and confidence was lost. No one would lend to anyone else in the financial world and we were seemingly on the verge of complete financial meltdown. Fortunately, governments around the world had the resources to come in and save the day. They propped up failing "to-big-to-fail" institutions, gave out a lot of virtually interest free money and gave that can the biggest kick of its life.

I for one did not like the government reaction. More big institutions should have been dismantled. Some, who were pushed on other big institutions should have simply failed - just ask BofA laboring with its CountryWide acquisition. Moral hazard was not avoided; it was built up to enormous proportions. And those were the good old days.

Today, the very institutions that saved us from disaster are now the cause of the current problems. Sovereign debt is at unmanageable levels in much of the EU and getting there in the U.S. Banks, unfortunately, are still heavily exposed to losses, especially due to sovereign debt they own. This is not isolated to the EU banks. Yes, they have the direct exposure but U.S. banks have nearly as much indirect exposure on derivatives. We are all connected now.

So the banks are still in trouble and the governments that bailed them out are also in trouble. The bullets in the U.S. stimulus gun are spent (though I am still anticipating QE3, which will achieve nothing), and to add to the pain, we are cutting spending at a time when the economy is on the brink. The PIIGS, already in a recession, are being forced to do the same big time, which will certainly add to their problems over the short to mid-term. The economy in the EU is stagnant at best, with Italy showing the best performance at .3% growth. Japan - out of the question. China - cutting back. In short, trouble lies ahead however you spell it.

At its base, this is a confidence game. When the investors/speculators lose confidence, the money dries up for financial institutions and sovereign entities alike. And when that happens, it will not be pretty. I sense we are getting close. One major bad move in the EU, U.S., China or the like could push us over the line and destroy confidence, which is precarious at best at the moment. Confidence, like it or not, is fickle, and world economies being tied to it when S&P is on a downgrade tear is not a good thing. Perhaps they thought they were doing the principled thing in downgrading the U.S., but perhaps they were doing something even more stupid than giving mortgaged backed investments AAA status when they deserved FFF. S&P deserves all the government investigation they can get for their continued irresponsible ways.

Obviously part of the market turmoil today was due to Morgan Stanley saying the U.S. and Europe are on the brink of recession. Citigroup came out with a somewhat better forecast after the close, so we will see how the market digests that, though Asian markets are down as I write:

http://www.bloomberg.com/news/2011-08-19/u-s-gdp-growth-estimates-cut-at-citigroup.html

Let's Cover Some Ups and Downs Today

Unemployment up, existing housing sales down, inflation up, mid-Atlantic manufacturing down, gold up, markets down, mutual fund withdrawals up, Antartic ice down. Okay, that should be enough.

I am on the sidelines and plan to stay there for a while. After all, how many people are currently anticipating that the economy will take off and the stock market will climb significantly? Seriously, how many?

Disclosures: I have no positions in anything mentioned herein and do not anticipate taking any for at least 72 DAYS.

Disclosures: None

Is It Gerance or Framany?

2011-08-17T00:02:00.000-07:00

Germany and France have been talking a lot and have a lot of talking to do. They are discussing closer ties in the EU, especially among the two of them as they seem to be largely calling the shots. Yet they are not yet proposing a single Euro bond to support the spending needs of all countries in the EU. In other words, the voters in Germany and France will vote their leaders out if such an overt move is made toward their countries bearing the burden for those PIIGS. Now I realize that folks in Germany may view Greeks as being lazy and over paid, but the French have never hit me as the hardest working individuals. I am not meaning this as an insult as long lunches, lots of vacation and a more relaxed work environment are perhaps beneficial to doing good work, but it is hard for the French to look upon the Greek as lazy.

We had an office in France and sent a manager over from the U.S. to figure out what was going on there. After a year, he could not figure out at all what three people did in the office. We closed it, even though that cost more than keeping it open due to French laws on what we had to pay to those we laid off. All the work from dozens of people in that office was transferred to another office and they did not have to hire anyone to take it. Just saying . . .

It is stuff like this that drives voters crazy in Germany. I just read today that jobs paying 70,000 euros in Germany pay 100,000 euros in Greece, and the Germans do a better job. Imagine that German worker now being asked to support the higher paid Greek when the higher paid Greek is complaining about perhaps having to deal with longer hours, less pay, fewer benefits, later retirement and the like (all of which are categories where the German worker is already behind the higher paid Greek). And it is no small secret that cheating on taxes is rampant in Greece. If we had a state in the U.S. that did this and looked to the federal government to be bailed out, I think a lot of other states would revolt.

Okay, let's visit this last thought for a moment. As I write this I am sitting in a house in Del Mar, California, that my family and some friends are renting for the week. Very reasonable at $1500 for the week. The house across the street with no ocean views is for sale for $2.3 million. Probably one out of five cars in this area cost over $50,000. The streets are clean as they clean them. Every major road has bike lanes. They have beautifully maintained parks and beaches. I have never seen so many cars in my life and so little public transportation. Indeed, I was in a traffic jam the other night on a highway that had eight - yes EIGHT - lanes going in my direction and it jammed as these were going down to seven. A fair percentage of these people have a fantastic life, but they also have a state deficit well north of $10 billion (assuming the revenues are as rosy as predicted).

So how would I feel if I were asked to have my tax dollars help bail out California? I would be totally pissed off, that is how. I know there is more wealth within 15 miles of me than in my entire state of New Hampshire, and this is not an overstatement in the least. Within 15 miles of me is San Diego, La Jolla, Del Mar and a host of other southern CA locations. San Diego alone has over three million people, which is nearly three times the number in all of New Hampshire and I suspect the real estate value of San Diego exceeds that of the entire state of New Hampshire by multiples - seriously.

Now if you are from California and fuming at my words, let me lay a bit more stuff on you to ponder. We do not have many bike lanes in NH, though we do have a lot of hiking and bike trails to use, numerous 4000+ foot mountains to climb, ski resorts, lakes, etc. We do not have hundreds of miles of beaches to visit, just 16 miles of coastline and access to Maine and Massachusetts coast. We have no income taxes and no sales tax, other than on prepared food. And you can get an excellent house in the best towns with the best schools, with a few acres to play on, for under $500,000. I dare say that the average citizen in NH gets by on half as much as the average citizen in CA, when you price in government spending.

So if we in the Granite State, with our great median income, low poverty, low unemployment and a well managed deficit, are called upon to help California, well they need to build into this package some hefty future paybacks. I look at this as akin to the relationship between Germany and Greece. Not saying the folks in California are like the Greek as I know they work hard, but their public spending is through the roof and I am not about to pay for it. I am not willing to pay for their lavish lifestyle.

Of course some of this is tongue-in-cheek. I have plenty of friends in California who work hard for modest lives and have no more to do with the CA deficit than I do with the federal deficit. Still, you can see where some in Germany or France are taking offense to supporting their less prudent neighbors.

I suspect folks in other states feel the same in dealing with the states that had the massive real estate and debt problems. Not our problem.

I guess therein lies the rub. It is in fact our problem. We can go down with the ship even if we did what we were supposed to do. And so, the sound thing to do is support our brethren - despite their foolish ways - and expect them to do the same for us, or perhaps somehow repay us in time, for our generosity. Germany and France have taken this attitude to date - because it serves their self-interests - but they are quickly butting up against sentiment that recognizes (or at least believes) they may weather the storm better without the weak links in the EU. I suspect this game ends relatively soon. This will not stretch out for decades as it has in Japan.

Disclosures: None

Tired of that Kicking the Can thingy

2011-08-15T23:55:00.001-07:00

Okay, I have used the phrase several times myself, but I am sick and tired of everyone referring to economic strategy around the world as kicking the can down the road. I have read it a hundred times this month. It is driving me crazy. Not because it is being repeated so much, but because it is true.

We all know where this will end up. If you do not, let me link here a nice discussion of it by John Mauldin - or you can buy his book on it.

http://seekingalpha.com/article/287238-europe-unraveling-u-s-on-the-edge-of-yet-another-recession

He seems to know what he is talking about. Let me point out what I think is one of the more meaningful aspects of his article; another, perhaps worse, recession is coming and virtually inevitable, but no one can say exactly when. As he points out, Japan dealt with a similar - though internal - situation and was able to kick the can for a couple of decades so far. But the current problem for the U.S. is international and interconnected and none of the other affected countries have the savings rate of the Japanese, so I would not expect decades to elapse before we catch up to this can. Indeed, it could well happen this year and I will be surprised if we do not get there by the end of 2012. Nonetheless, there is no way to time this too well. Just know it is coming, for largely the reasons I have noted here and summarized in John Mauldin's linked article.

Blame it on China - Not

There has been a good bit of China bashing over the past few years and many are pointing to China as a source of some of our economic woes. After all, they stole all our jobs - right? Well I read a study yesterday in the L.A. Times noting that a whopping 2.7% of our personal comsuption spending in the U.S. is on Chinese made goods. Virtually all we spend, as in over 88%, is domestic in origin. So get over it.

http://www.reuters.com/article/2011/08/16/us-markets-global-idUSTRE7725BC20110816?feedType=RSS&feedName=topNews&rpc=71

Moreoever, as noted in John Mauldin's article linked above, China has been allowing its currency to increase in value, which helps us, the EU and other struggling economies, while at the same time achieving the goal there of cooling its economy a tad. Short story, China is a part of the puzzle but not as big as some might think in terms of what has caused our problems.

Disclosures: None

This Guy Could Be Your Next President?!

2011-08-15T23:27:00.000-07:00

I admit that I am no friend of the Fed or helicopter Ben. I would not eliminate the prospect of some political agenda either, but have seen no evidence of same to date. And I am not in favor of what the Fed did leading up to the recession in 2008 or what it has done in response (though the former was worse than the latter and the former is mostly on Greenspan). Still, for Texas Governor Rick Perry, the latest to throw a hat into the presidential ring, to say it would be treasonous for Ben to do anything to stimulate the economy between now and the election - over a year from now - is in itself treasonous. Seriously, I do not like Ben or his policies but he should be free to do what he sees best to do to fit his mandate. Trying to exert political pressure on him to do otherwise is the pot calling the kettle black.

http://www.businessweek.com/news/2011-08-16/perry-says-fed-spending-before-election-would-be-treasonous-.html

Keep in mind that Ben was Chairman of Bush's Council of Economic Advisors and then became head of the Fed while W was in charge. I really do not think he has a political agenda (at least not one supporting Obama), but cannot speak for others in the Fed. I do think he is doing what he thinks he needs to do to stabilize, if not stimulate, the economy. While I disagree with the approach, I would not consider him continuing the approach he has done for nearly three years to be a politically motivated endeavor. Perry apparently feels otherwise.

Perry, I noted, unlike Ron Paul, is not promoting the idea of doing away with the Fed. Still, it is apparent he does not like them. I do not like certain members or what they have been doing, but I think they serve an important purpose if done right, so I think they are a necessary evil.

The point here is it is a bit disappointing for him to be playing the Fed as a political card and trying to stop them from doing what they think is right. It almost seems he is afraid the Fed will do something to actually improve the economy and hurt his chances of election. If that is his reason, how screwed up is that?

Disclosures: None.

What He Said . . .

2011-08-15T09:15:00.000-07:00

Hey, if Buffet says we should raise his taxes, who am I to disagree.

http://www.reuters.com/article/2011/08/15/us-buffett-tax-idUSTRE77E13V20110815?feedType=RSS&feedName=topNews&rpc=71

Note, he focuses on the super rich and not just those over $250,000. While it will raise less money, raising some is better than raising none, and given the vast disparity in wealth these days, with the squeeze on the middle-class, I suspect you would still get a lot of money raising taxes on those making over $1 million a year or companies making over $5 million a year. I am not saying go over board but when billionaires are paying just 17% I think getting them up to paying what the rest of us are paying makes some sense. Seriously, Buffet paying perhaps 30% to 35% might be fair, and he agrees. Certainly this move would be much tougher for the Tea Party to oppose and justify and it would erode a lot of the Republican base.

Disclosures: None.

Excuse Me Sir, But Do You Want Another Dip With That Recession?

2011-08-13T23:15:00.001-07:00

I am on vacation and not about to do a long post, but I just read this nice piece and thought I would pass it on; it is about the prospect of a double-dip recession. Apparently economists are now up into the 30-40% range of expecting it and only a few months ago were around 15%. Seriously? I never went below 50%, though my timing has been off a smidgen.

http://finance.fortune.cnn.com/2011/08/12/recession-forecasts-economists/

Indeed, I, for one, do not believe we ever got out of the last recession. The surge we have seen has been stimulus spending, QE and QE2, not to mention the effects of stimulus and the like in other countries. In other words, it has been a manufactured economic bounce from the recession and I do not count that in my books. Had it worked in stimulating new growth, that may have been another story, but it did not work, so we really never recovered from the last recession. It was just masked over by government actions.

So where do I stand on the odds of a double-dip (assuming we ever really came out of the first one)? I side with Mr. Rosenberg in the linked article. He seems to not be wearing rose colored glasses. I think the double-dip has already arrived. All we need now is the sprinkles.

Disclosures: None.

Holy &*$%! Batman!!!

2011-08-08T17:58:00.000-07:00

Well I suggested last Friday that the first ever downgrade of U.S. credit would be ugly, but I did not see it being this ugly. I mean shave that dog's butt and teach it to walk backwards ugly. I mean, if ugly Betty were this ugly no one could bear to watch the show. I mean . . . well you get the point, damn ugly!

Oh my God, we are back to the level the markets were at - 10 months ago!!! Oh no, we lost 10 months of growth!! The end is here!! Run for your lives!!

Wait a second, did I say just 10 months of growth? Now I realize the 2008 rescession wiped out a good decade and the last 10 months of growth was cherished by many looking to retire, but it is not a game ender. We are just shocked with the speed that 10 months evaporated in a couple of weeks.

In my view, the sell off is perhaps too ugly. Despite the downgrades people are selling their equities and buying what - you guessed it, Treasuries. So they are running to the debt that just had a credit downgrade, and no one really believes the U.S. cannot finance its debt payments. This results in rates going down for Treasuries, which means loans tied to same are also reduced, so even if the gap for loans between Treasuries and loan rates widen due to this, they are widening against a lower base - at least for the moment.

You also have oil that dipped below $80 a barrel today, so that will help a lot of folks.

And U.S. corporations are still doing quite well. Berkshire announced a 74% increase in profits last week. Most U.S. corporations have plenty of cash and decent looking profits. Sure, this is coming from off-shore profits in emerging markets, but base case they are doing pretty well, so a sell off in the equities is perhaps not justified to the extent or at the rate it has happened.

Still, as I write over seas equities are taking a big dive, U.S. futures are showing another 2% down in the morning and the uglieness continues. It will, however, stabilize. Keep the faith.

This is not to say all is fine on the western front. Corporate profits aside, the U.S. is likely entering a new recession. House prices, unemployment, deficit reduction and other factors are a deadly brew making it inevitable in my book. Now I suspect in time QE3 will slow the rescession. It is not here yet and the Fed is not likely to go there tomorrow, but it is coming. I wrote in July that it was baked in the cake at a time when something like 85% of the economists were saying it would never happen. I think that percentage has now changed just a tad. Perhaps still only 50/50 or so, but I am winning converts.

Don't get me started, however, on the EU. I predicted at the beginning of 2009 that the EU may lose the U, or at least some members, and it seems I am starting to get some traction on this prediction. Yes, PIIGS get slaughtered.

Disclosures: I do own some U.S. Treasuries but otherwise hold no investments discussed here and do not intend to buy any in the next 72 hours.

Ugly Ahead - Hold On To Your Seats

2011-08-05T18:13:00.000-07:00

Here are a few things you need to know about today. The employment numbers were resoundingly stated as being "good" by every source I read, up 117,000, which is better than expected. Problem is we need roughly twice that many new jobs to start seriously reducing unemployment.

But wait, you say, unemployment went down today from 9.2% to 9.1%, so we are making improvements, right? And here my friends is a reason to understand the figures. The "official" unemployment numbers can go down a number of ways, even aside from government manipulation. One way is for enough jobs to be created to lower the ranks of unemployed - and that did not happen. Another is for a lot of people to give up looking so they are no longer officially considered among the unemployed - and that is what happened. Yep, the number of people seeking jobs decreased over 150,000. In other words, 150,000+ simply gave up looking, which I take as a sign of how bad things are out there.

http://www.foxnews.com/politics/2011/08/05/when-good-news-is-bad-unemployment-rate-drops-as-workers-bolt-labor-force/

So the "good" numbers are simply better than expected and not so good. Just be prepared.

I have triple A (as in the auto related company) and the U.S. government (as in the rating) does not!

Well, S&P just downgraded the U.S. credit rating below AAA. Now folks are saying there should not be too much market reaction:

http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-view-idUSTRE77504J20110806

But the first downgrade in, well, forever, is no big deal, really? S&P also says there may be further cuts if we do not do the deficit reduction that we are anticipating. I have to think this is a big deal, even if not unexpected as S&P has been calling for this for a while.

The postal service losing $3 billion and being on the verge of bankruptcy also cannot help this situation. It has been coming for a while, which has me questioning why the postal union is running radios ads on how the service is self-sufficient and not dependent on taxpayer dollars, but what do I know.

http://content.usatoday.com/communities/ondeadline/post/2011/08/postal-service-warns-of-default/1?csp=34news

Billionaires in the News

Now I could say all is terrible but Mr. 3 in the Fortune 100 list is having a good day. Berkshire Hathaway just announced profits up like 74%, so Buffet is having a pretty good day.

http://www.google.com/hostednews/ap/article/ALeqM5hRxPM2hW1icxgY27a45VveGoGUgQ?docId=938006f20797466e944d2c9206e06b83

But Mr. 1, a Mr. Slim from Mexico who has had the number 1 rank for two years in a row, is having a smidge of issues. I read yesterday that this past week he has lost $8 billion in his portfolio. Ouch!! I once lost $8 billion, and though it was not in nearly that short of a period of time, it really hurt. Now Slim only has a little over $63 billion left to survive on, and my heart really goes out to the guy. What can he do, where will he eat?

Other than this, everything is fine. Everything in Europe will be fine next week. Citizens are not still protesting in the streets in Greece and they are not quickly taking all their money out of the banks. Spain is fine. Italy just swallowed the pill and will be fine. The PIIGS are back in their safe pens and no problems exist. And before you act on this paragraph, note that not a lick of it is true.

Okay, I wish that were true, but as I said yesterday, PIIGS get slaughtered. It is just a matter of time. And this is despite whatever spending reductions the ECU requires. Did I mention that reductions in deficit spending hurt the GDP and worsen recessions? A worsened GDP is all the EU needs right now, but I agree deficits need to come down. Not an easy choice.

Disclosures: I do not own any equities mentioned in this piece and do not intend to buy any in the next 72 hours.

Silver Lining

2011-08-04T19:20:00.000-07:00

Okay, I am the first to admit that I have been a sky-is-falling kind of guy for quite a while, which is against my optimistic grain. Despite the negativity of my posts of late (for three years), I have to say that the market dump today took me off guard. Yes, I had some put options in place and actually made money today, but I was not expecting what happened.

Here is the deal. The bigger international companies in the U.S. are making their money overseas, largely in emerging markets. For the most part, their earnings and profits are not suffering too bad, so for them to take a big hit in the market is, perhaps, not justified. I say "perhaps" as the problems in the EU and U.S. can bleed over to emerging markets readliy but they are not suffering just yet, have a fair amount of cash and, I think, are not deserving just yet a 5% stock hit. But I am not making any stock recommendations.

That said, in time I think these international companies and emerging economies have to be affected by what is going on in the EU, US and elsewhere. We are their prime markets and in time their economies will have to react.

And big corporations still doing well is not necessarily a benefit for U.S. workers. Jobs are being shipped overseas, the growth is overseas and everything else seems to be overseas. It is not leading to U.S. job creation and it will not going forward. So the good news is that the big corporations may still be making money but the bad news is that it is not supporting the U.S. economy. So, judge for yourself, what this means in terms of silver lining. The U.S. will suck wind for years to come in economic conditions even if some companies will dodge the bullet due to emerging market prospects.

Disclosures: I have some put options that I have had for over a year and they did well today, but they are all down over 50% and will likely remain so despite what the market does in weeks to come. I just kept them in the chance that what is happening now would happen.

PIIGS Get Slaughtered

2011-08-04T11:32:00.000-07:00

Not a big post at the moment, but if you have not seen it, the letter from the President of the European Commission, Jose Manuel Barroso, is worth your consideration. It goes a long way toward explaining the downward spiral of global markets today:

http://www.calculatedriskblog.com/2011/08/european-commission-president-crisis-no.html

Disclosures: None

Really - Trust Me

2011-08-03T19:41:00.000-07:00

I posted yesterday on a host of headwinds. I did not link a lot of support but based it on what I have been reading. A host of stuff I read today further supports what I said so let me link some of it in case you think I was making it up. First, I noted China is not going to pull us out of the current economic demise as it is now having problems of its own. Don't believe me, read this:

http://seekingalpha.com/article/284142-china-s-economy-train-wreck-waiting-to-happen

I noted that I had been reading a lot about layoffs, more than usual. Today I read that layoffs have risen to a 16 month high:

http://www.latimes.com/business/la-fi-jobs-20110804,0,5481757.story

I talked about continuing and worsening problems in the EU, which is discussed further here:

http://www.nytimes.com/2011/08/04/business/global/europes-banks-struggle-with-weak-bonds.html?_r=1

I am not making this stuff up and while it sounds like I am repeating myself - well - I am. The problems have not changed much other than for the most part getting worse. I again think we will have some short term stabilization and that we are looking at QE3, which will boost the markets for a few months, but in the end - PIIGS get slaughtered!

Disclosures: None

You Ain't Seen Nuttin' Yet

2011-08-02T18:53:00.000-07:00

I will be the first to note that the markets will likely calm down in the short term and recover a bit. But it is going to be very interesting for the rest of this year, and perhaps for a few years to come. Let's consider what keeps me, and the markets, awake at night:

It is clear the U.S. economy is slowing down to near a dead stop. GDP numbers are not good at all. The question is, what will bring them back? I am asking as I do not know.

There are a host of reports I have seen this past week on U.S. companies laying off thousands of employees. Some are moving them overseas and some simply cutting back, especially large banks.

One salvation in this past recession was continued growth in China. China is pulling back to avoid a real estate bubble of its own (and related bubbles) and with major export destinations being stressed is facing great difficulty going forward. Don't believe me, look at the Hang Seng for the past three months, it is not doing well. And that is just the start. China also has horrific demographics. Lots of old people there (as in more old people there than the U.S. population) and the one child policy, whether wise or not, has led to a total male/female imbalance. It also has horrific environmental problems. China definitely has its challenges going forward. Challenges aside, as they slow down the economic train to avoid a bubble bursting they will not be the driver out of the next recession. I am looking to India to perhaps be the engineer on that train, if there is one.

Housing is still in the doldrums. Still a lot of houses on the market and a lot of shadow inventory. I like that banks, the FHA and others are doing a lot to clear out the old stuff including donating it to charity and paying to have it demolished. Still, millions of houses will take a long while to clean off the slate and we are not there yet.

Did I mention unemployment? As noted above, there are a lot of recent announcements on cut backs and I think the unemployment numbers will suck wind for many months to come.

Okay, you say, enough. Yet I say, I have not even touched the main headwinds that we face, which are:

We have a major deficit problem that we need to deal with now. Reducing deficit is not something that sits well with economic growth. The just approved budget, which I still need to study more, is only the beginning. We will be pulling back on spending for at least the next decade and pulling back on spending is not good for GDP. If we add tax increases, which I believe we must, that too is a GDP damper. Can the U.S. economy thrive through this, cut backs in China, Japan's issues and what I talk about next - EU, I have my doubts?;

Then there is the EU. I will not linger here too much as I have written about it a lot. The 10 year spread between Italy and Germany and Spain and Germany are at new highs as we speak. "Hogs get slaughtered and PIIGS get fed" only works for so long. Eventually, PIIGS get slaughtered too. The technical "default" in Greece will be followed next year by real defaults, if not sooner.

That is what keeps me awake at night. It appears the markets are starting to realize there are not enough engines of growth in the world right now to support those out of gas.

On a final note, I attach an article in the WSJ related to what is said above. Can't say I disagree with anything said in it.

http://wallstreetpit.com/80719-the-problem-is-too-much-debt

Disclosures: None.

WE HAVE - Something

2011-08-01T20:16:00.001-07:00

Well it is not the best of deals, not the worst of deals, though pretty darn close to the latter. As both sides realized, however, a deal of some sort given the consequences was better than none at all. There are no revenue increases, which I think are needed, but it is possible (though not likely) that the new super committee responsible for the next step will actually recommend revenue increases. Without a future agreement there are across the board cuts in the next phase and both sides of the isle have sacred cows they want to save from this, i.e. Medicare, Social Security and military spending. With China drastically increasing military spending, some think the last category should not be cut. With an aging population, some think the former two should not be cut. So where do we give - perhaps with some revenue increases. So be it.

In any event, we avoided something worse than no deal. Obviously no guarantee that the credit rating agencies will not still downgrade us. I actually think it is likely as the deficit reduction is way too low and taking way too long. It is wimpy to say the least and I know some credit rating agencies are likely to give a thumbs down, so some of the consequences we sought to avoid here are likely not avoided.

And I read that the pressure is increasing on the Fed to do a further move, with little definition around that. I wrote a couple of months ago that QE3 is baked in the cake. Not going to happen just yet, but it will happen. Mark my words. Probably be close to the end of the year, but it will happen in one shape or another, even if not labeled QE3.

Have a good night.

This Is Stupid

2011-07-29T11:06:00.000-07:00

Now Boner has changed his bill to include a Constitutional Amendment on a balanced budget so that he can garner the necessary tea party votes to get it passed in the House. Obviously, his only interest is in getting his bill passed in just the House and not in reaching concessions to get the debt ceiling raised in time to avoid default. This is totally politics at work, with nothing to do with what is needed for this country right now.

He knows there is no way a bill of this sort will pass the Senate or get signed by Obama. That has been made abundantely clear to him, so all he is doing is passing a bill that will not fly so he can stand on his political stump and point fingers at the Senate and Obama for not getting it done. If he really cared about the US he would have changed his plan to concede more to the left, get votes from the left, pass and hopefully have something the Senate and Obama can live with. I am not saying big concessions were needed but he did need to get rid of the stupid "let's do this again in six months" provision. Seriously, do we need or want to do this again in six months? But no, he gives in to the conservative right simply to get a bill passed for political points for next years election. I suspect it will backfire as we are not idiots and will not vote to return idiots to office next year.

Mind you, I am no Obama fan but think he has moved more towards concessions to get this done than Boner head and now Boner is going the opposite direction. In a negotiation, such a move simply ends the discussion.

Usual Programming

2011-07-28T18:04:00.000-07:00

I apologize for the political bent the past few days but it directly affects the economy and if we get to next Tuesday with no approved bill, hold your hats. One last point to note. Those who might get taxed more and who are complaining about it may want to think about how much more they might make if the economy were doing better. Moreover, they should think about how much worse they will do financially if the U.S. defaults, interest rates go up and the economy goes into another recession. See, some tax increase is not looking so bad right now.

And one last political spot for the night. I am not saying this info in the Washington Post is wholly accurate, as I have no idea on how to verify, but if it is, it is very interesting in terms of where current debt arose.

http://www.washingtonpost.com/blogs/ezra-klein/post/obamas-and-bushs-effect-on-the-deficit-in-one-graph/2011/07/25/gIQAELOrYI_blog.html

But let's look at something more positive, like housing:

http://www.calculatedriskblog.com/2011/07/feds-williams-economic-outlook.html

Oops, that was a mistake. Seems the San Fran Fed President does not see it getting much better until the oversupply is taken care of 3-4 years from now, or perhaps 7 or more if things do not go so well. Yep, that's a bright note.

There were a couple of passing positive notes, like the best in four months in terms of new unemployment claims reported today, but these are highly variable so I, and apparently the markets, are paying little attention.

Disclosures: none

Let's Try This Again

2011-07-27T18:11:00.000-07:00

I have kids, ages 4 and 7, and I am embarrassed that I am leaving them a country that is heavily in debt and it got there because of idiotic policies, rampant financial institutions with too few controls, idiot borrowers who borrowed more than they could afford simply because a bank would lend it, etc. etc. The list is very long but the bottom line is we pretty much all were very stupid financially since the turn of the millennium and the odds are pretty good that our children, grandchildren and perhaps beyond will have the suffer the consequences.

At the same time the disparity, commonly called the gap, between rich, middle-class and poor as well as between white, Hispanic and black has grown leaps and bounds. The medium net worth of Hispanics is down over 60% in the past several years with this recession and for blacks over 50%, whereas for whites it is down less than 20%.

http://pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-between-whites-blacks-hispanics/

More disturbing is that the aggregation of wealth in the top 10% of the wealthy versus what the rest of us make are making is widening drastically. The top .1% of the folks making money saw incomes go up nearly 400% between 1970 and 2008; the lower 90% only 1%.

http://blog.reidreport.com/2011/06/the-rich-vs-the-rest-americas-huge-and-growing-wealth-gap/

So I say as a compromise, Obama limit his tax increase to those over $1million or so a year, versus $250,000, and limit increases in corporate tax increases or end of credits to those businesses over say $5 million. These are just ball parks that the pros can figure out. Small businesses build the most jobs and I would think most are under $5 million but someone who study this should set the bar where small businesses by and large are safe and the big boys pay the price a bit.

Now I say this with a couple of thoughts in mind. As mentioned, small businesses build the jobs in the U.S. and protecting them from tax increases makes sense so we can spur economic development. It makes sense and I am all for it. In terms of taxing the big boys, go for it. Most of big corporate America is doing pretty well and has a good amount of money in the bank. Big Ben in the helicopter rained down a lot of money on this group and a lot of it went out of the U.S. A good bit went to improving productivity so big corporations could cut jobs too. Moreover, a lot of the jobs and investments for these companies are leaving our shores, so them having to pay just a tad more in taxes to thank us taxpayers for all of our help in saving their collective arses seems pretty simple. Yes, their profits are increasingly coming from outside the country, but they need to pay their taxes and politicians need to know - despite the campaign contributions - their current status is in no small part due to the U.S. taxpayers funding a recovery from the spoils of the past.

http://seekingalpha.com/article/281944-u-s-corporate-profits-are-being-earned-offshore?source=email_authors_alerts

And for the individual tax category, who - other than those in this category, who are contributing to politicians - can complain about a tax increase for those individuals making over a million a year. Sure, the deficit reduction will be less than under the Reid proposal, but let the Republican right justify protecting individuals making over a million a year and corporations over $5 million. They will lose a lot of public support and it will still raise a lot of tax revenue. I am not saying here we should tax them at 70%, but increasing rates for these categories by say 5-10 percent should not force them to cut back too much.

And let me note this. Republicans are running with the deficit reduction banner, but because they are not including tax increases the Democratic Reid plan in the Senate actually achieves far more deficit reduction than the Boner proposal in the House. Go figure.

At the other end of the candle is spending cuts. Reality tells us that entitlements need some work. I have plenty of relatives dependent on them but a shot needs to be shot across the bow that folks need to not depend on them in the future. I am not saying to end them or reduce them now but we need to be honest with people with the fact that at some point we will not be able to afford them and they will be reduced - probably significantly. People need to know now, so they can, if possible, prepare.

And here is the last thing I have to say. High schools and colleges need to start forcing students to take classes in personal finance, which includes managing debt, retirement planning, estate planning, and the like. This is stuff vital to someone entering the work force and we are sending these kids into the world with no understanding of how to financially survive. I know I was sent in as a:

financial virgin

financial idiot

financial target

financial failure

You pick, they all apply. I knew crap about what really matters in terms of living a comfortable stress free life. People do not need to be millionaires to achieve this status but they certainly need the tools to financially plan out what they can and cannot afford and what they need to put away for their financial future and for their kids. This is essential stuff and we really do not teach it like we need to teach it. It should be mandatory, especially for budding politicians.

Disclosures: None

What Else

2011-07-26T19:38:00.001-07:00

Okay, all that anyone is talking about - well not all but pretty much - is the failure of the U.S. politicians to so far reach a compromise on the raising of the debt limit. There is, however, very good news on the horizon. According to an article in the NY Times, the government has all the way to August 10, not August 2, before we hit the brick wall. Well, that extra 8 days of free spending makes me fell all giggly inside personally.

http://www.nytimes.com/2011/07/27/us/politics/27date.html

There are, however, a couple of problems with this. First, some could call the failure to do it by August 2 a credit downgrading event that could lead to interest rate increases for thousands (as in 7000) municipalities, counties and states, not to mention the U.S. Many, like California, which is working out a $5billion bridge loan, are getting ready for the storm. Second, who the hell says things will be better eight days later. Seriously, call your politicians - I have - and tell them to make the necessary compromises. There needs to be some serious reductions - as in trillions - in spending, including our precious entitlements, AND there needs to be some tax increases. Both sides need to give some on their sacred cows. This candle needs to be burnt on both ends and if your politician is not willing to compromise, he or she is an idiot and will lead this country to a great deal of financial pain. We are seriously about to shoot ourselves in the foot and this is that very, very last thing we need right now.

Disclosures: I am an U.S. taxpayer and I am pissed off

I Can Still See That Can

2011-07-25T19:30:00.000-07:00

EeeeUuuuu

Not a good kick by the EU. That heavily dented can is not much further down the road than it was. Not surprising that rates for some itty bitty EU countries like Spain and Italy have resumed their rise.

http://www.calculatedriskblog.com/2011/07/update-on-europe.html

Those who know better than me say it will not work - other than for a short while. Not saying I told you so, but . . .

http://seekingalpha.com/article/281337-kicking-the-can-down-the-road-one-more-time

Obamarama

I watched Obama tell us why we are screwed when we do not reach a deal on the budget by next week. Nice speech I thought. Better than Bonner's presentation. Obama has the advantage of the majority of Americans agreeing with the balanced approach, i.e. lots of cuts but some tax increases for those that can afford it. I think the cuts should be tailored to avoid small businesses if possible as they provide the jobs that we desperately need, but I do not see that as happening. In any event, this could get very interesting if the U.S. enters into a default situation.

This takes me back to a post I did like over a year ago. What would happen if everyone in the world, including governments, defaulted on all their risk at once and created a clean slate? Now I know a lot of the U.S. debt is owed to SS, so that would be bad, but without the $14 or so trillion in debt, we could afford SS and the other entitlements. Sure, all the big banks would fail, as would other financial institutions. I am holding back the tears. The whole world it seems is crippled with debt but if we called it all gone at once we would have a big mess but a better base from which to build (okay, not all of us, but most of us). None of us are looking at a good few decades ahead either way.

Disclosures: None.

The Good, The Bad, The Greek Debt

2011-07-21T19:34:00.000-07:00

Okay, I have not had a lot of time to analyze it but it appears the the EU is bailing out Greece yet allowing a limited default. Now even if this is simply a credit agency limited default, some financial instruments - protections - will be triggered. Now all the talk about this being nothing but technical is all good, but those exposed to the debt may want, desire, to call on whoever is backing them t0 pay up even on a technical default. Stayed tuned for more details.

That Teet is Dry

2011-07-18T19:51:00.000-07:00

While I have on a fairly regular basis been pessimistic about the U.S.economy - and various others -for the past three years, I think looking back that I was not off the mark. The stock markets by and large rebounded a good bit but economies world wide have not really done so. And now I am sounding a few alarm bells. We were suckling off of government stimulus for a few years and all seemed well, but you need to now pull away from that teet as it is dry. Government deficits are simply too high so the stimulus is no longer flowing.

Let's start with the U.S. First, QE2 is done. I personally think we are just a few months from QE3, but that will require the financial environment allowing dear Ben to justify doing so. It will happen, but it will take a several months for Mr. helicopter to refuel.

Then there are the U.S. deficit problems. They are real and not going away. I appreciate politicians of both parties finally waking up to the need to deal with the mess. I am not, however, doing cartwheels over how entrenched the sides seem to be in what is needed to fix the problem. The polls show that the vast majority of the population is fully in favor of using both expense reduction and tax increases to deal with it, which I personally favor. Time to burn this candle at both ends. Indeed, even the majority to Tea Party folks agree with this approach. Kind of a share the pain approach. Voters want this done but the politicians cannot get it done because of - you got it - politics.

I am sure they will do this in some shape or form eventually, but let's please vote them all out the first chance we get. In any event, prepare yourselves. It will be painful however it is done. Not as painful as Greece is suffering, but painful. And if we do not do it now we will suffer Greece's fate or worse. The pain will be severe and it will make a significant hit on GDP, which I do not think is yet worked into the stock markets, so prepare yourself there as well. With stimulus ending and austerity and debt reduction (okay, there is no way we are reducing debt, but we need to slow the increase) we are in for a several anemic years, if not worse. It is in the cards.

And then there is the E.U. Greece has laid down the gauntlet. They are done their pain and the rest of the countries in the EU need to fill in the void. They are simply not going to take it any more for the rest of the EU. Greece and other PIIGS, such as Ireland, finally realize they have leverage. They have had this leverage all along but are just now figuring it out. The point is that Germany and France need to save their own banks who have exposure to the PIIGS. They have been supporting Greece and the others for this reason and this reason alone. But from Greece's perspective, f they default now - first in line - they will get it over with and probably fair this storm pretty well. They have been doing severe austerity for the likes of German and French banks (and U.S. on an indirect derivative basis) and the are fed up. More to a point, the politicians are going to be voted out if they do not take a stand. So the rest of the EU needs to decide if they will fill in the void. It should be interesting. Financially, Greece, and probably then Portugal, are not a big deal, but Germany and others need to consider the knock on effects to other PIIGS, as in Spain and Italy. This will be interesting.

So I say, hunker down. It is getting very ugly out there - and I have not even mentioned problems in China and India.

Disclosures: None

Very Interesting - Indeed

2011-07-13T17:47:00.000-07:00

Things are getting really interesting on several fronts. Let's start with talks about the U.S. raising its debt limit. Not there yet and odds are increasing they may not make it by the August 2 deadline. Obama walked out of a meeting today - one of the first smart moves in a while - and the proposals on the table aren't really jelling for most folks.

http://www.bloomberg.com/news/2011-07-12/mcconnell-said-to-propose-three-stage-process-for-raising-u-s-debt-limit.html

This is serious enough that credit rating agencies are watching and warning of downgrades to U.S. debt if action is not taken in time.

http://www.bloomberg.com/news/2011-07-13/u-s-debt-rating-placed-on-review-for-downgrade-by-moody-s-as-talks-stall.html

This is in addition to possible downgrades to thousands of municipalities. Indeed, this should be interesting.

Now let's move on to my favorite, the EU. Think about it, even saying EU, doesn't sound good or project confidence. It is the sound you make when entering a room with stench. It is perhaps appropriate at the moment as these PIIGS have a lot of stench. Greece is bankrupt and has been for years, but this fact is just now sinking in for the politicians with steel-toed shoes who have been kicking that can for a long time. Portugal is close behind. Obviously, more disturbing are Spain and Italy, with a default by either having major repercussions on banks, both in Europe and the U.S. The first wave will be European banks but we in the U.S. have many billions in indirect exposure through default protection we sold those European banks. And with trillions in such layers of protection circulating the globe, any default in Europe could take many years to unwind.

This blog began in part as I was fascinated how derivatives resembled reinsurance spirals I dealt with many years ago. One company buys the risk and then places a lot of it with another who then packages that with other risks and places them with another, who then does the same and so forth and so on to the extent where the first company eventually ends up with the risk coming back to it after spiraling through many other companies. It is the last company in this upward spiral who is usually the worst stuckee. With tens of trillions in such spirals now constructed, it should be interesting, very interesting indeed.

We lawyers will be mighty busy.

Disclosures: None.

Please Compare

2011-07-04T13:27:00.000-07:00

Folks seem to be at opposite ends of the spectrum - so what else is new. With the passage this past week of the latest aid to Greece, some are saying markets are undervalued, even after a strong week of gains. Don't believe me, read here:

http://www.bloomberg.com/news/2011-07-04/european-stock-futures-trade-little-changed-after-greek-aid-approval-by-eu.html

But then again, some people I highly respect are a bit more reserved in their forecasts over the next six months. John Mauldin, for example, sees some serious risks, which he spells out well in the next linked article. Pay attention to the graphs. They are quite telling, you might even say, quite graphic:

http://seekingalpha.com/article/277731-focus-on-the-next-half-year-less-certainty-than-ever

I tend to agree with John that there is more uphill than downhill for the remainder of the year (and probably next). We will see.

Either way, it is good to be free and have freedom of thought and speech. Enjoy your 4th of July!!!

Disclosures: None.

Bill, Bill, Bill . . .

2011-07-03T19:18:00.000-07:00

Okay, I like Bill Clinton. He was a fun President and he did it in a fun time. He may have just been lucky in getting into office at an optimal time, but his eight years was a great ride for the U.S. The economy grew, the deficit was cut and all looked well. Sure he lied about having "sex with that woman" but I try to separate the personal issues (so long as no crime is committed) from the political achievements.

But while things went quite well during his tenure, he did make one massive mistake - beyond Monica. He signed into law the repeal of the Glass-Stegal Act. The repeal was known as the Gramm-Leach-Bliley Act, which was signed into law in November of 1999. This basically ended limitations between banks doing traditional banking business and doing more investment type activities. I attach an article I found from the time:

http://www.ratical.com/corporations/DErulesUD.html

Bill was quoted as saying:

"This legislation is truly historic," President Clinton told a packed audience of lawmakers and top financial regulators. "We have done right by the American people."

Now do not just blame him, it passed the Senate 90 to 8 and House 362 to 57. Someone did quite the sell job. Note as well how the article states that financial company winners that day in the stock market included the likes of J.P. Morgan, Citigroup and Merrill Lynch, companies that needed taxpayer support in the last crisis, one of which being bought out to survive.

Perhaps the most significant quote in the article, however, is as follows:

"'With this bill,'" Treasury Secretary Lawrence H. Summers said, 'the American financial system takes a major step forward toward the 21st Century -- one that will benefit American consumers, business and the national economy.' Opponents said it would have the opposite effect, creating behemoths that will raise fees, violate customers' privacy by sharing and selling their personal data, and put the stability of the financial system at risk."

Wait a second, isn't this Summers the same idiot that Obama hired as the Director of his National Economic Council? Well yes it is. Why the hell would Obama hire as one of his key economic advisers someone who praised the bill that made the whole mess possible in the first place? Why would he hire someone who did not see the train wreck coming and indeed told the engineer to heap on more coal to get that engine running? WHY?? Seriously - I REALLY REALLY WANT TO KNOW AS IT SIMPLY SHOCKED ME AND STILL DOES TO THIS DAY THAT OBAMA WOULD HIRE SUCH A STUPID IDIOT!!!

Now I voted for Hillary Clinton in the primary and think she would have done a much better job. I voted for Obama for President as he seemed to have good intellect, McCain seemed to be bending over too far for the far right and I did not want Palin one bullet from running the country. But now I am wondering if Palin would perhaps have done a better job than Obama. I think she is not nearly as intelligent, but someone of lesser intelligence doing nothing (or even the wrong thing) is better than someone of enhanced intelligence doing the wrong thing. In my book, Obama was a fool to follow the advice of Geitner and Summers. So far, the proof of this is in the pudding.

I really have no idea who I will vote for next election. I have voted Republican before and suspect I will this time if the Republican candidate is not a worse fool than Obama. I simply am horribly disappointed in Obama. And so I must say I am also horribly disappointed in Bill for supporting him still, which he does here:

http://www.bloomberg.com/news/2011-07-01/bill-clinton-predicts-speedier-unemployment-drop-will-aid-obama.html

Still, I cannot say I am surprised. His wife, after all, works for the guy.

Let me end by noting that while some barriers have been put up to prevent the problems we saw this past decade, I think we need to fully reinstate the Glass-Stegal Act. It is kind of like the Constitution; the folks that put it together had learned some very hard lessons, hand-in-fire, and they sought to protect future generations from the pain they had suffered. We repealed it and - surprise - we felt their pain. We should bow down to their intelligence in enacting it in the first place and reenact it in full.

Disclosures: None

Oh Tay Buckwheat!!

2011-06-27T18:44:00.000-07:00

All is fine and well in the world of the euro. Greece seems to be getting its big ass payday (assuming their austerity passes, which seems in the cards), its creditors are seemingly willing to roll over debt (assuming that is not called a default) and all is well again in the world. Time to celebrate - and the markets are doing just that. Yep, all that is wrong in Greece and the rest of Europe is gone and all is fine and well. Yep, just honky dory. No need to worry about a thing, man, no need to worry about a t'ing.

http://www.bloomberg.com/news/2011-06-27/euro-rises-on-optimism-greek-debt-to-be-rolled-over-budget-cuts-will-pass.html

And the U.S. is also honky dory. Sure consumer spending is a bit stagnant, wages are stagnant, the housing market wishes it was as good as stagnant, etc. etc., but the sun will come up tomorrow - tomorrow.

Well, maybe not tomorrow as QE2 is ending this week. That's right shoppers get your blue light specials now as the sale is almost over. Now the sale did not really do much other than provide reserves to banks so the FDIC could do a more orderly wind down of insolvent institutions. I consider that is/was a good reason for it, which unfortunately continues to exist. If spurring economic growth was the reason, well it was a total failure. A lot of the money went to foreign bank reserves, it did not really spur lending or spending, and, well, it was mostly just for show anyway.

I wrote last month I think QE3 is baked in the cake. It will be a while before the cake cools and is ready for icing, but me thinks late fall or winter will be a good time for that treat. Ben needs a bit of time to save face and come up with some new economic distress (and lack of inflation) to justify another bold move. But hey, he is the man of bold moves (just look at that beard). It will take time for him to convince others on the Fed to do it and they all voted against QE3 this past week (can you say strong fake sign of support for continued growth in the economy). Their mood will change pretty quickly in my mind, but it could well be early 2012 before they break down and do the next round. If I really believed the economy was on its way to recovery - albeit in a slow fashion - I would predict otherwise, but I think we are about to do the double on the old double-dip.

So you know what is really encouraging about the current economic climate? Honestly, I am asking you as I do not know. Okay, from the optimist side of me, let me note that a lot of corporations are sitting on pretty good stashes of cash - enough to get them through several more bad years. They have also continued to increase productivity and efficiency, which unfortunately sometimes leads to reduced workforce and increased unemployment.

Strange cycle, ain't it. People need to buy stuff for companies to make money, people need to have money to buy stuff, people need jobs to make money and companies are cutting jobs to be more efficient so people can afford their stuff. This economics stuff really sucks wind. Seems we need to devalue the dollar so other poor souls will buy our crap and we can create jobs. Hey, I think we are secretly doing that (shhh, don't tell China).

So the long slog continues and it will for a while.

Disclosures: None.

I Am an Optimist!!

2011-06-22T19:34:00.000-07:00

Seriously I am. I am the half glass full kind of guy. I frustrate my wife with my up beat view on things. Yet for three or so years I have been "a the sky is falling" kind of guy on the economy. Now I am looking at long term fundamentals and will be the first to admit my timing on what is going to happen has sucked big time. This is why, in part, I have posted little in the past couple of years as the markets have not behaved rationally given what I view as reality. But I would be remiss to diss the markets when nonsense is boosting them.

I have begun posting again as I think things have finally gotten to a critical stage where the positive hype is not going to win the day and my predictions are coming to the front, perhaps later than I expected. Let me spell out a few factors here:

housing in the U.S. is still sucking wind and with shadow inventory will likely do so for a couple of years;

China is trying to cool down real estate and other bubbles forming there (my hat is off to them for trying to do so) so its economy is bound to cool a bit, which will have a chilling effect on the world economy;

Greece and the other PIIGS have really no alternative in the long run other than to default (but I have no doubts they (as in EU and IMF) may kick this can for a few years before their toe hurts);

unemployment is not improving in any significant way soon (Ben supports me on this)

the economy is sluggish at best and will continue so this year (Ben agrees); and

Ben ain't doing squat to support us for now (I do however see QE3 late this year or early next)

All said and done, the next six months are difficult at best. It will be interesting!

Disclosures: None.

Buy on the Rumor sell on . . .

2011-06-22T06:26:00.000-07:00

If you have not heard, Papandreou got his vote of confidence last night. Really folks, does anyone truly have confidence he can pull this off. The markets were up yesterday on the prospect of this happening, but now that it has happened they are pretty lackluster today. Perhaps this is because the vote of confidence is not the final say even for this go around of EU/IMF support (bailout). Greece still has some tough austerity issues to pass in the next week. I agree it seems likely these will pass now, but the protests in Greece continue and passage is not a sure thing. Either way, passage just buys more time and pain.

Hark back to last year when a package of austerity measures were passed to get the initial bailout package. Unemployment in Greece was a mere 11.6%. It now stand at 16.2% and this decline is in large part due to the austerity measures. Now Greece is going to compound this with further austerity measures, which undoubtedly will worsen an already very weak economy and employment picture. Add to that no reduction in debt, the bailout being lent a relatively hefty interest rates (albeit far below what they could get otherwise) and the need for a lot more bailout money next year and you have a real mess on your hands. The only good news I have read is that the new austerity measures include a crack down on tax cheats in Greece, where cheating on taxes seems to be a national past time for the rich.

Things will undoubtedly get much more dire in Greece before they get better and this can will easily need to be kicked for a good 5-10 years for a default to be avoided. I have a nagging sense that neither the voters in Greece nor the voters in France or Germany are likely to have the appetite for it going on that long. Frankly, no one does.

Disclosures: None (though I do have a Greek friend)

Spin Doctors

2011-06-21T07:34:00.000-07:00

So CNNMoney is reporting that the market is up due to hopeful expectations on a vote of confidence in Greece and, I qoute:

"a smaller-than-expected decline in existing home sales."

Okay, the decline was to 4.81 million units and the expectation was 4.8 million units. What really happened here is the number for May was revised downward so that the percentage decline from May to June was less than expected. Slap me in the face here! How is it good news that the decline was smaller because last month's number was wrong to the up-side? Isn't a revision down to last month's number bad news?

Greece On, Greece Off, Greece On, Greece Off

2011-06-20T17:48:00.000-07:00

It seems markets around the world are still quite focused on Greece to see what will happen. The same thing happened last year, they were bailed out and the can was kicked. Here we are again and Greece is, if anything, worse off than it was a year ago. So they may get another bail out for a while to ward off the evil spirits, but only to temporarily delay the pain. We will get there (i.e. haircuts or perhaps Greece leaving the EU so it can devalue its own currency), the math makes any other alternative virtually impossible to conceive, but the EU is putting its head in the proverbial sand and hoping that day never comes.

I could link articles but they are everywhere these days on Greece's problems and how it is just the first domino in the PIIGS game. Curiously, what I am not seeing in the press is the well recognized problem in Greece that a significant number of citizens there that make big dollars are not paying the taxes they owe. One might think that cracking down on tax cheats when cheating is rampant might help a tad in their fiscal issues. And for you idiots in Greece not paying your taxes, you will soon pay the price for it. Seriously, the goverment cannot survive for free and the poor being the only ones paying what is due will not make ends meet. I take solace that the tax cheats in Greece may end up paying the price in time, and I think they will. Perhaps better now to save the country and themselves from something worse they should start paying up and consider paying off some back taxes. Just a suggestion.

Greeece's debt will undoubtedly get funded for now and push the press coverage on its problems off until the fall, when once again the markets will focus on the default risks. And by then many others in the chain will have their credit downgraded and the problems simply keep getting worse. Personally I am simply tired of this axe hanging over the world economy. It has been there well over a year and is not going away. It is like unemployment and housing issues in the U.S.

QE2 is coming to a close and we are really not much better off than when it started. This summer looks likely a replay of last summer with the economy cooling, unemployment continuing, markets struggling, housing still in the dumper and Bernanke and Obama trying to explain why their moves to date have not worked as planned. When the PIIGS finally go under, things will get worse - for a while - but letting them hang on with no real hope is simply agonizing for everyone.

So if anyone living in the PIIGS is listening, let me ask one quesiton: do you think the first country to default or the last will do the best? If you have a doubt, ask Iceland.

Disclosures: None

Default, It's Greek to Me

2011-06-16T19:21:00.000-07:00

Back at the beginning of 2009 I did some predictions. The one that led to the most offense to some commenters was that the EU would in time lose members, though I did not expect it to happen that year, 2009. I personally am surprised they have held their act together this long. Their model is broken as such diverse countries and economies need diverse currency and ability to react to economic downturns, which is currently being highlighted for the EU.

Though my prediction was in 2009, things are this year, at the latest next year, coming to a head. It is somewhat of the immovable object versus the irresistable force story. The force is the EU and the current object is Greece and its citizens. You see the citizens of Greece seem to be a bit unwilling to take the dive for all of Europe - surprise, surprise! Yes, the austerity that is being required of Greece for it to further kick the can down the road is not popular with the citizens of Greece, who are violently protesting. I am with the citizens as even with kicking the can it is virtually inevitable there will be a default eventually, so let's get it over with now and move on. Oddly, on this point, I am finally in agreement with Alan Greenspan.

http://www.bloomberg.com/news/2011-06-16/default-by-greece-almost-certain-greenspan.html

Now I read an article today that said this would not have any substantial impact directly on U.S. banks, but I also read an article earlier this week that noted U.S. banks have over $40 billion in exposure to Greece on indirect CDS positions for European banks. Go figure.

Some say this will be equivalent to the Lehman Brothers collapse and the connected financial collapse. I tend to think not. Yes, it will lead to a double dip and very well could lead to limited defaults by the likes of Italy, Spain, Portugal and Ireland, but I think most investors are already assuming this is likely. Greece presently is viewed by those who issue CDSs on its debt as having a 78% chance of default, so that is already baked in the cake. Do not get me wrong, default will be a major event and undoubtedly will lead to a double dip rescesssion, but I think it needs to happen, so do it and get it over with.

Here is the kicker. Banks around the world that we, the taxpayers, just saved a couple of years ago, are still making stupid investments in derivatives. They have not learned thanks to the willingness of the government to step in and save them. Can you say moral hazard? Say it with me again loudly - MORAL HAZARD!!!

The CEOs there want big bonuses and they will not get them being conservative. So they continue to have an investment bank side and they continue to take stupid chances with our money. I, for one, want the governments of the world to say screw you and the ship you came in on. Let the banks go belly up. Better for the government to directly do lending for a while than for spoiled brat banks to take advantage of our graces. Let them fail. Just like a default from Greece, we will survive after a period of severe pain.

So here is what I see happening. I have written about it multiple times before but it now seems to be coming to a head. Greece will not, at some point, be able to pass necessary austerity measures or make needed payments and it will default. The ratings, and cost of borrowing, will escalate for the rest of the PIIGS immediately and this will lead to some restructuring on their part as well. The citizens in these countries understand they are being asked to take the pain for banks in Germany, France and the US and they are to the point where they will say no, so banks in Germany, France and the US will once again look to the government to save them. When they do, what will we do this time? You know where I stand.

Disclosures: None

We Are Going To Have a Soft Restructuring of Our Reprofiled Debt and Remind Everyone How Rebankrupt We Really Are

2011-05-30T07:06:00.000-07:00

http://www.reuters.com/article/2011/05/30/us-eurozone-idUSTRE74Q1YV20110530

QE3?

2011-05-17T15:51:00.000-07:00

I think everyone will generally agree that the economy continues to struggle in the U.S., the EU is struggling with some members seriously considering the option of restructuring debt, Japan is simply out of the picture for now, China is doing its best to avoid a real estate bubble of its own and overall things are not so honky dory economically for the world. Certainly looking better than say 2007 or 2008, but not out of the woods yet by any means. And so as QE2 comes to an end next month, the question must be, what will the Fed do?

Let me start by noting I was no fan of QE or QE2 and am not supporting any QE3, but last I checked Bernanke is not reading my blog so what I think is in some respects irrelevant. I am a fan of taking our pain now, getting it out of the way and not saddling generations ahead with massive debt. Now I have to note a caveat here. I am financially OK and I know that most in the U.S. are not, so saying take the pain now is much easier for me to say than for many others. I think the pain, accordingly, needs to not all come at once and needs to be taken over time, but I do think it is better to take it now to the extent we can and not simply delay it, which makes it worse for everyone. With that aside, let's discuss a minute whether there will be QE3.

I think there will be QE3. QE2 is coming to a close next month. It has been a resounding failure in my view. Note that this view is tied to its publically announced purpose,, not its real purpose, but from the perspective of the announced purpose it has done nothing. Big banks are still not lending, it is not helping the average American and it is worthless. Now I am not dismissing the prospect that there was a covert purpose here of propping up problematic big banks to help them weather the storm, but that was not the announced official purpose.

So will there be QE3? Well, since QE2 did not work, why the hell not. After all, if it does not work the first or second time the third should be a charm. I am sure there are those in the Fed against QE3 but I suspect Ben has enough natural charm to get the votes he needs for QE3, which will be announced to great fanfare in July. His job is no longer jobs or inflation, it is stock prices and he will do what he needs to support them. Presently he has plenty of ammo to defend such a decision. The economy is still sluggish, jobs are not coming back fast enough, real estate is not rebounding like it should, inflation is still low (if you look at core CPI), and the like. So in my book QE3 is in the cards. I think it will in the long term do much more harm than good, but I think this cake is already baked. Thanks Ben - NOT!

Disclosures: None

The Ss of Investing

2011-03-24T20:22:00.000-07:00

I just thought I would touch on some Ss of investing. Let's start with S number one:

1. Sucking Wind: In this category we place housing in the U.S., both existing and new. Both are down significantly, both in terms of sales and median price. Foreclosures, under water homes, unemployment and the like will make this category suck wind for the rest of this year and a bit into 2012, at a minimum.
2. Sucking Wind: Effective wages are stagnant or going down and employment is stabilizing but not rebounding to any degree.
3. Sucks: Inflation is showing its ugly colors. Even the false core inflation numbers are on the rise due to commodities being up significantly - and soon due to Japan related issues. When you figure in fuel and food, we are looking at inflation that is getting significant. One reason for economic/political strife in Europe and the Middle East is that regular folks cannot afford food and other basics.
4. Sucking Wind: Portugal is sucking wind and will need assistance sooner than later. It joins the likes of Greece and Ireland and will also join the list of countries that may ultimately give the finger to the EU.
5. Suspect: China has a real estate bubble that it is doing its best to slowly deflate. Even if it succeeds it will slow China's economic growth, which has greatly assisted the global recovery. If it fails, well we have seen what happens when a bubble bursts. By the way, farm real estate in the U.S. is experiencing a bit of a bubble, probably due to food inflation, and it will likely get much larger in the next couple of years.
6. Sucks: Japan has problems that will drag it down for years, even beyond those that have been dragging it down for a couple of decades already. There will be a trickle effect in numerous respects. Short term supply and manufacturing problems are just the beginning.

There is a lot more Ss out there but this will do for now. Yet the market is up the past few days. Those predicting it to continue in this mode I would put into my last S category- Sophists.

Disclosures: None

Short Sighted

2011-03-04T10:33:00.000-08:00

I have taken a step back from posting over the past few months as I have viewed the situation in the U.S. and most other places as temporarily stable. There has been nothing short term to sound alarm bells and I realize my concerns have increasingly become long term. Still, in time, the long term does become the short term, so I offer some thoughts on the long term.

First, let me observe that the government in the U.S. (and especially the Fed) has absolutely no long term planning. It is all about the here-and-now and how to win the next election. It is all about improving current employment numbers, stock values, real estate values and the like, with little to no consideration of what is right for us in the medium and long term. Replacing old debt with more new debt seems to be no issue at all, despite its foolishness from a long term perspective. And it is not just the government. Some prominent economists are on board with this. Just check out Nobel Prize economist Paul Krugman, who is all in favor of throwing more money at the current economy to improve short term numbers:

http://www.nytimes.com/2011/03/04/opinion/04krugman.html

He is critical of any austerity at this point and in favor of throwing more money at the situation. He points out that austerity measures, according the the IMF, do not support "economic activity in the short term." Freakin' A they don't!! Austerity measures are not about short term economic benefit - they are about avoiding longer term massive deficits that lead to much larger problems!!!! Duh, get a handle on this Paul. And the money Republicans are talking about saving in austerity measures, roughly $60 billion last I saw, is laughable. For true austerity to have and impact, it would have to be many, many times that amount. Keep in mind that the extended tax cuts and other measures agreed to by the Administration and (newly
Republican controlled) Congress in December are going to be roughly ten times what Republicans are seeking to cut in these austerity measures. So as they pound their swords on their shields and claim success, I for one am marking the fact that they demanded in the first instance to keep tax cuts in place for the really wealthy that wholly outstrip and austerity they have suggested.

This is not to say the Democrats are doing better. Yes, we would be better off if the extension of tax cuts was not extended to the really rich, but compromising as they did was the worst long term solution possible. And, unlike the Republicans, they are unwilling to make other budget cuts to make up for this mistake. Indeed, given our mess I would support an end to all the Bush tax cuts at all levels to help the deficit, but those seeking reelection in the future would never bite this bullet.

Having cleared this off my chest, let me give a very brief overview of what should be keeping you awake - not today or tomorrow necessarily, but certainly over the next decade:

1. As noted above, the US deficit is at a critical level and getting out of control. This is leading to a serious devaluation of the dollar and, as the dollar gradually loses its reserve currency status, will lead to major financing woes for the US. The Fed is the last major buyer and when QE2 is done later this year there will likely be serious issues that will require real austerity measures instead of the minimal stuff suggested to date.
2. Inflation is in the cards whether you like it or not. Initially people feared all the Fed and government stimulus would lead to inflation, but it did not as it did not really do much to revive the economy. Nope, inflation is due to increased overseas demand, especially China, agricultural issues in various countries, civil uprisings in the Middle East and idiot speculators driving up the prices on some commodities. It will lead to further problems in our economic recovery (if you want to call it a recovery).
3. The EU problems have faded recently but have certainly not gone away. Recent elections in Ireland could lead to a new round of intense negotiations between it and the EU and IMF. Citizens of Ireland are rightly questioning why they should go through decades of recession to pay back debts, at 6%, they incurred to the EU to save Irish banks that owed tons to other EU banks. In other words, "why am I paying through years of recession to save the bastards that caused the problem. Those lending to Irish banks during the bubble should be paying the price instead." I for one share tne sentiment in the U.S. as that is precisely what the government here has done (save the bastards with our tax dollars) but we inconveniently do not have an easily identifiable target like the EU with which to renegotiate.
Now this could get to be rather a sticky situation. Ireland will undoubtedly use the threat of all out default to renegotiate something better than 6%. After all, something like 10% of the national income for the country is going to interest payments alone. So, at a minimum, you can expect them to seek a much lower interest rate if not no interest at all, with deferred payments. With the default hammer, the EU will have to listen.
You think, however, that default is not an option. Well, ask Iceland or Argentina. It turns out it is not that bad of an option, assuming everyone is not doing it at the same time. You see lenders do not look too much at a country's FICO score. They concentrate more on future ability to pay debts. And defaulting on past debt means you are a risk but it also means you have a great deal more capacity to pay off new debt. Now there are other nasty repercussions to default that will likely keep Ireland from going there, but they most certainly will be looking to strike a much better deal with the IMF and EU. And if they do, the other PIIGS will be close behind. For a better discussion of this I highly recommend John Mauldin:

http://seekingalpha.com/article/255652-when-irish-eyes-are-voting

4. The Middle East - need I say more. Who knows what is going to happen there and what impact it will have on oil prices or other economic factors. At a minimum the situation there will be very volatile for several years to come (more so than usual that is).

5. Global Climate - This is probably very long term but we are in the midst of a shift in our climate. I am not just talking global warming here. Our magnetic north is shifting and at a sharply increasing rate, roughly 40 miles a year toward Russia due to core flux. Scientists are speculating on the implications of this for global weather but most do not see it as beneficial. This does not keep me awake at night too much but I thought I would add something to the mix that you have not perhaps already read about.

Disclosures: none.

Sorry So Silent for Sooo Long

2011-01-27T17:39:00.000-08:00

I have been radio silent for a very long time as the economy here and elsewhere has largely focused on monetary policy, exchange rates and the like, which is not an area where I feel any confidence in posting. Those issues are still front page, but I thought I would add a few thoughts to the discussion.

First, I will truly be surprised if Greece and/or Ireland do not leave the EU this year so they can establish (and devalue) their own currency and at least partially default on some sovereign debt. Iceland did and is already on the road to recovery. Lenders, it seems, have no long term memory.

I expect Ireland to go first as it has political changes early in the year. Sure, there will be EU pressures on them to not do this, but what is good for the EU is not necessarily what is good for Ireland and Greece. The EU is supporting them simply because banks in Germany, France, the UK and other EU associated countries have too much bank debt tied to their sovereign debt. If the EU really cared and wanted to help, the loans from the EU would not be around 6-8% - they would be interest free to help these coutries in need. The people in these countries are not stupid and will figure out in the first six months of this year that their citizens are better off leaving the EU, establishing their own soon to be devalued currency and restructuring debt so that the issues rest with the banks that took the risk and not with the taspayers. I only wish more countries, including my own, put the pain to those who knew they were taking an investment risk instead of taxpayers and our childred, grandchildred and yet to be born future generations who will be stuck with this mess.

Again, I vote for an international procolmation that all debt in the world is extinguished and we deal with the mess and start over. The folks opposing this the most will likely be those that caused our recent mess to begin with and I am fine with that.

Obama

Okay, I like the guy and think he is trying but he still is surrounded by fools. Moreover, I, at this point, see no route for him out of this. He touts "innovation" as our national way out but we have had plenty of that over the years. We simply export all the labor of implementing innovation to other coutries. This is why U.S. companies (with the help of trillions of government support) are doing well while the U.S. population is still struggling - innovation here and production there. Apple is making tons of money but its IPods and IPads are assembled in China in a factory with nearly a half a million workers (and a high suicide rate). Innovation will not change the export of labor.

I have no good answers myself, just the reality that where we are today is not likely to change too much for individuals. Companies and the top paid individuals will do well this year with all the governmnet tax breaks and QE2 support but this will not add many jobs and will add drastically to the deficit. It will take dollars out of the pockets of individuals and put them in the pockets of corporations and their executives (including big banks) who will spend these dollars on foreign labor. Our children are screwed and other than fighting for education spending to not be reduced I am not sure what we can do to save our childrens' future. Otherwise, stupid is as stupid does.

Let me just say I am a bit outraged. I read that the wage freeze Obama announced in his address will save $400 billion over ten years. Compare that to the CBO estimate the next day 0f $1.5 trillion deficit this year. Yes, with over ten years in frozen wages in the federal government we may offset less than 30% of this single year's deficit. Bring out the band.

I am 51 years old and my current retirement plan is finding another country where it makes sense to retire. Ask me if I am kidding . . .? NOT!! The U.S. and most of the EU is truly screwed for a generation or two to come so I am weighing the options for me and my family. Nothing immediate, but probably in the next 10 years. I am serious and you should start evaluating this prospect too.

Disclosures: None.

Unemployment

2010-09-22T19:32:00.000-07:00

I have just a short observation tonight. I read an article today predicting that companies have ringed as much as they could out of productivity enhancements and should soon be forced into more hiring. I only wish that were true. I left a comment to the article with two main points.

First, I contend that there is a fairly significant level of shadow inventory out there. Official unemployment numbers do not count those that have given up, but this does not mean they will not try again if there is any sign of decent jobs becoming available. If you read the numbers properly you will see that several percent of the employable population has simply given up. They are down, but not necessarily out.

Second, and more importantly, the employed workers have during the last few years had their hours cut rather significantly. This means, despite all the firing, employers have done what they can to keep a staff around should things rebound. And if they rebound, they have a lot of room to take in significant new levels of work without adding to ranks. After all, why hire new workers and pay benefits to new people if you current work force is underemployed. Just getting over folks working short hours will take a good bit of time, even assuming the article I read is correct that companies have already done what they can on productivity enhancements, which is a suspect proposition given the rate of tech innovation these days.

Disclosures: None.

"Surge"

2010-09-21T17:25:00.001-07:00

Let's talk real estate for a moment. CNNMoney today ran a headline that housing starts had "surged" in August. Yes they said "surge." I just went to the site and now they are down playing the situation just a tad. The current headline notes the housing market is showing a "glimmer" of hope. From "surge" to "glimmer" in one day.

http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/

Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."

http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html

Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.

You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.

I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?

http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html

So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.

I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.

Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.

http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all

Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.

None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.

http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html

http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html

Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.

Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.

Disclosures: None.

Get Ready

2010-09-14T18:00:00.000-07:00

This is short, very short. All I have to say is the market this far into September is up the most for the start of September since 1939. I am seeing a lot, and I mean a lot, of mixed data. Nothing great and nothing terrible (at least not terrible by recent standards), so I am not expecting doom-and-gloom but I also see little to justify this month's gain on very low volume. We will see, but I do not have a good feeling about the rest of the month as little really explained the recent gains. Without good support, what goes up must come down.

Disclosures: None.

Pesky Questions

2010-09-09T19:05:00.000-07:00

I am breaking from my usual format tonight (like I have one) to simply ask some questions that I think are worth asking. Things that may have no answer but are I think worth chewing on. You decide. Feel free to posit any answers in comments. So here we go:

Private debt reached all time highs in the past couple of years no matter how you measure it, but it has been coming down. I think it will take through 2012 at least to get back to historic norms but there are a host of variables impacting that time frame that are difficult to predict. Now there are various ways to reduce debt with the leading two being paying it down and default. Given unemployment, the markets being down drastically, home prices being down and the like, did the reduction in private debt to date in the U.S. for the past couple of years come mostly from people being frugal and paying it off or people defaulting? I have not seen stats on this so if you have I would appreciate seeing them.
Related to the last point, you have people saving more (though still not enough), some debt being paid off, unemployment high and everything else I said above, so where is consumer spending, which is around 70% of GDP, going to come from for the next year or two?
I just got a rescue dog recently and he takes a leak in the house every time I come home from work (really), so what can I do to stop this?
If the level of economic activity in this country for the past 10 years or more was built largely on easy credit and the resulting increased debt instead of people actually being able to afford what they could buy at the time they buy it, and if people are making less today collectively than they used to make due to unemployment, debt reduction and the like, where is the economic recovery coming from other than people foolishly returning to debt-laden ways if they are allowed to do so (as in a new bubble)?
Why do I always have to move toys to pull into my garage space at home?
If we do recover but in fact live within our means, instead of off debt, how much will that reduce GDP versus where it was in its debt-fueled days?
How does infusing banks with money (in multiple ways) so they can lend lead to a recovery when people have no way to pay the debt they already have and are becoming more frugal?
On a related note, what sense does it make to try to spur a heavily debt-laden country into spending again?
If Republicans in large part caused this mess and Democrats apparently failed miserably in fixing it, who the hell do you vote for?
We have massive excessive factory capacity in this country, so why would you give tax benefits to companies to spend more on factories and equipment?
Houses are selling in many markets for less than it would cost to build them and excess capacity along with shadow inventory will keep this so for a long time, so exactly how do we help builders by giving folks credits to buy houses they would buy anyway?
The stock market is up the past couple of days on very low volume on news that was mediocre at best, can it, will it, continue?
Do you double down on 7s when the dealer has 16 showing?
Everyone now, including those doing the tests, acknowledge that the EU bank tests really did not test everything they needed to test and major capital infusions are likely needed there (even if there is no sovereign defaults). And the spreads there for the PIIGS are at, above or near record highs reached in May, so what does the bond market there know that the stock markets seem to be ignoring?
Why is the toilet paper roll always empty when I go to take a dump?

Disclosures: None.

The Jones Factor

2010-09-08T18:19:00.000-07:00

I have read a lot recently but have not read anything on the potential impact of this idiot Terry Jones with a church in Florida burning the Koran (Quran if you prefer) on the economies of the world. Now I am not expecting an immediate response economically but this jerk could easily cause a massive uptick in religious and political tensions, which last I checked is not good for economies. Last thing we need here is more troops going into the Middle East because some idiot in Florida wanted to make a name for himself. But it can happen and it can have a high cost - on many levels - to many countries, in terms of lives, in terms of folks having to serve time away from home, in terms of kids missing their mom or dad and in economic terms. Personally, the economic terms are the lowest consequence on my list but they are still there.

Even more personally, I vote for the U.S. making an exception, drafting the bastard Jones and sending his ass to Iraq. He wants to take a stand, let him do it next to those risking their lives. Indeed, better yet, he says he wants us to "stand up, confront terrorism," then give him and all those that support him the opportunity to go to Iraq, Iran, Afghanistan or the "evil" country of their choice with guns and let them "stand up" to terrorism personally and on their own. That should solve the issue. It is easy to sit behind a desk in Gainesville, FL, pontificate about standing up and burn some books for attention; it is different to actually put your life on the line for your country every day. I apologize for the less than PG fodder, which I truly do try to avoid, but this jerk has me really pissed off.

Rage aside, I return to the thought that this headline seeking A-hole will lead to a possible ignition of global repercussions, but nothing I have read is talking about this. As Taleb might say, this is in the fat tail of unexpected consequences. We will see, perhaps in as little as two days.

P.S. I wish all these generals and politicians would stop making speeches on how terrible the whole Quran burning thing is and simply call Jones and try to convince him to lay off. He is obviously just doing it for the publicity and headlines about Obama saying this, Hillary saying that, one general saying this and another general saying that, are only fueling the flames here. Note, I recognize the bit of irony in me doing a blog post on this and then saying folks should stop building press over it, but I tend to think the three of four people who read this post will not give Terry Jones a big head.

P.S.S. I read an Obama interview where he said Jones is causing a recruitment bonanza for al Qaeda but also noted there is nothing legally we can do about it because it is First Amendment protected free speech. Now I am a big fan of the Constitution and I know religious and political speech are in highly protected categories, but there are still limits. Remeber the whole "you cannot shout 'fire!' in a crowded theater" thingy? Well, you cannot hide behind the First Amendment and incite violence or support terrorists. I know Jones is not intending to support terrorists, but it is pretty blatant that he is doing precisely that. I doubt there is any one thing a Taliban leader could do to inspire so many to join his cause moreso than what Jones is doing. So yes, Jones is supporting terrorism. And he will incite people to commit murder. I do not view this as a First Amendment protected act.

Disclosures: None.

Build It and They Will Come

2010-09-07T17:55:00.000-07:00

You see, once again the Administration takes a bass ackwards approach to fixing things. Now they want to front load for companies their ability to write off expense on investments in plants and equipment through 2011 instead of the over a longer period. In other words, the Administration is saying to companies go ahead and use some of the capital on your books to build plants and buy new equipment and we will provide billions in up front tax breaks instead of billions in over time deductions. Obviously the Administration thinks such spending will help spur the economy.

Only problem is that companies right now have more plants and equipment than they can use. Sure, maybe some equipment is a bit old and needs to be replaced but I suspect companies with the capital to do it are not holding off on needed purchases, and a tax break ain't going to get them spending capital on unneeded stuff. I just do not see it happening. Companies want solid proof that the economy is going to improve in a significant and sustained way before they spend, and they are not seeing it yet. With talk of double-dip, the EU having numerous countries in doubt and plenty of folks talking about Japan style stagnation in the U.S. for years, companies know that cash is king.

The other problem, as pointed out in this linked post, is that offer by the government really is very little financial incentive to them. If they have the money to spend in the first place they are not needing an instant deduction and with rates low waiting to get the deduction over time is not a big problem.

http://www.calculatedriskblog.com/2010/09/reactions-to-obamas-business-tax-break.html

This program is similar to what the Administration has tried with housing and cars; they incentivize folks to spend with tax credits or direct financial support but all they achieve is (1) giving breaks to those who would have bought anyway - including me on cash-for-clunkers and (2) front loading expenditures to the detriment of later spending. They consistently fail to realize that this is a debt driven recession and it can only end when debt is paid down, which will take a long time to achieve.

Don't Shed a Tear

Meredith Whitney believes Wall Street has some tough times ahead and she expects them to cut 80,000 jobs over the next 18 months. She expects 2010 bonus payouts to be down drastically and then the cuts. Now you might think good riddens but I suspect those being cut are not the idiots that produced this mess. Those idiots are still getting the big bonuses and are off thinking up new fleecing techniques to rebuild company profits. No, the 80,000 that may be let go are likely the folks at the other end of the totem pole.

http://www.bloomberg.com/news/2010-09-07/wall-street-firms-will-cut-up-to-80-000-jobs-over-18-months-whitney-says.html

Knock, Knock, Knocking at Greece's Door

The price to protect debt for the PIIGS is again reaching the record heights it saw in May. I noted a week and a half ago that the EU problems had been off the radar screen for a while but they were still there and would in time become the focus again. Well, it seems that this week they are back in focus. So what will the EU do for its next hat trick?

http://www.bloomberg.com/news/2010-09-07/u-s-stock-futures-decline-bank-of-america-citigroup-alcoa-shares-drop.html

http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html

Disclosures: None

Double Dip Not Likely?

2010-09-02T05:36:00.000-07:00

According to some folks interviewed by Bloomberry, a double dip is not likely in large part because things are already terrible and it has not happened yet.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aXNpH2TK4EJI&pos=1

While I see their point, they seem to ignoring the fact that we are just now weaning ourselves off of trillions in government stimulus, which is the only thing that brought us out of a recession in the first place. Without trillions more a double dip is certainly a possibility and I do not see the government going that extreme with more stimulus. The amazing part is the bounce from the last recession was so anemic despite the government pouring trillions into the system. Accordingly, I am of the mind a double dip (which is really dependent on how you define things as I do not think we ever came out of the recession) is not only possible but likely.

Disclosures: None.

September Will Be Interesting

2010-08-31T16:49:00.000-07:00

Markets were pretty much down, up, down, up, down up, side-ways all day. Consumer sentiment, while very low, still better than expected. Housing prices up but that is due to the tax credit so the other direction is to be expected in upcoming reports. FOMC minutes, not so good. Overall, mixed news and nothing too significant. And August was not such a good month to speak of for the market. Will September be better?

I have read several pieces today saying October is known for the steeper drops but September overall is the bigger month for being down. We will see. I have for some time predicted a bad Fall for the U.S. and if you predict enough stuff you will eventually be right and then get to say afterwards how intelligent you are for your predictions, so if September sucks wind I will be shouting from the roof tops how intelligent I am. If not, expect silence. I have done it before and am not beyond doing it again. It is a secret of the blogger trade.

Not in the Mood(y)

Apparently SEC is not in the mood to sue Moody's over bogus ratings during the crisis. Now I am certain this has nothing to do with Buffet being a shareholder and there are certainly no politics behind this decision. It has to be totally above board.

http://www.bloomberg.com/news/2010-08-31/sec-says-it-declined-to-sue-moody-s-for-fraud-over-company-s-cdo-ratings.html

Good Luck With That

Bloomberry reports that Emirates is needing to raise $28 billion to build its aircraft fleet through 2017. They are seeking to compete with other airlines by adding 45,000 more seats. At a time when many airlines are idling airplanes to lessen seats and improve pricing this just seems to be a bit against the grain of what is going on elsewhere in the industry. Go figure and good luck with that.

http://www.bloomberg.com/news/2010-08-31/emirates-to-raise-28-billion-for-fleet-expansion-seeks-majority-in-debt.html

Not Eating Our Way Out of This One

In another sign that consumers are cutting back, restaurant spending has contracted for a fourth month in a row. Face it folks, despite consumers showing a slight uptick in spending in the latest figures they need to deleverage big time. Savings are up but need to go up more to be at historic norms and with incomes down and debt maintenance payments high any expectations of higher savings rates need to be tempered. This will take years to correct and the government just needs to stabilize as minimally as they can while it happens.

http://www.calculatedriskblog.com/2010/08/restaurant-index-shows-contraction-in.html

Just my take.

Disclosures: None

Just Precious

2010-08-27T17:08:00.000-07:00

I think it is just precious that Bernanke can speak at some conference out in the Hole, reference that things are not going so swimmingly - at least not as swimmingly as he and the main-stream economist crowd had predicted - and that QE2 is in the offing. And the market bounces big time with no real positive news. Now reading between the lines there is a bit of dissent at the Fed on what to do and QE2 may not be in the cards as readily as Mr. Ben says, but what the hell, let's have a market rally on speculation that the Fed might do more easing, effective or not. Bartender, another round for my friends - and I think we need a cab for Ben as he has obviously had too much of his own rhetoric to understand reality.

And oh, what a difference a weekend can make. Ben gets to sober up, as do his friends, and all does not look so great in the sober light of day. At least that is what the markets suggested today. So what happened, what caused the drop today - nothing.

Seriously, nothing happened. Trillions of dollars in stimulus flushed and nothing much happened. Unemployment stays stubbornly high, housing still in a funk (with strong signs the borrow-it-forward stimulus approach does not work), folks are still paying off debt (very slowly), incomes are not increasing as much as hoped (for those who have jobs), and, well, folks are still in the doldrums facing the new reality. So nothing happens at a time when investors are desperately seeking something to hang their hat on, even if it is just Ben in the Hole speaking without actually saying anything.

Stupid is as Stupid Does

So HUD Secretary Donovan comes out and indicates they are going to do everything they can to help support the housing market. Calculated Risk does a nice analysis that I will not repeat.

http://www.calculatedriskblog.com/2010/08/lawler-hud-secretary-may-have-just-made.html

The point here is you do not suggest the possibility of another home buyer tax credit and expect that to help stabilize anything. First of all, the prior credit was a total disaster to the point where one major home builder in their recent results asked that the government stop doing things to try to help. Credits front load sales and now the prospect of more down the road could very well dampen sales while people wait and see. It is very hard to plan your business as a builder if the government keeps meddling in things.

Second, as noted, the credit did not work. You are just giving money to people who by and large would have bought anyway. Third, there ain't nothing wrong with renting. Renting has a certain freedom to it. Sure you are stuck for the term of the lease but after that you are free to walk, move across the country, live in a cave, whatever, without having to worry about selling the house. And you never have to worry about your house being under water as it is not your house. I can guarantee you there are millions of people out there wishing they had never bought and for whom the American Dream is their worst nightmare. I know people struggling to make payments on homes they cannot sell and it is a terrible situation. The dream for them would have been to rent and not buy. Fourth, there is already too much supply and that will take time to adjust. There is absolutely nothing the government can due to fix this other than to simply help those with homes they cannot afford get by. Promoting more sales is the wrong thing to do.

Immigrants - Good For Business?

A study by the Fed finds that immigrants do not take jobs from U.S. born workers and indeed serve to stimulate the economy and lift wages. This is obviously going to be highly controversial - especially in certain states like Arizona.

http://www.bloomberg.com/news/2010-08-30/immigrants-don-t-take-jobs-away-from-americans-fed-study-finds.html

Now if this study is true, we have an interesting situation; the U.S. just started using unmanned drones to help protect our borders so these illegal immigrants cannot come into the country and boost our economy. Yes, the government is actively protecting us from a better economy and, I might add, at great cost. Go figure.

http://www.reuters.com/article/idUSTRE67T5DK20100830

Disclosures: None

Can - Road - Down

2010-08-26T17:44:00.000-07:00

Obviously the numbers out this week show that residential real estate is on life support. The scary part is that things could be worse. For a long time now a lot of lenders have been holding off on foreclosing on homes and even for those they now own have been holding off on putting them on the market. I have reported on this numerous times before but the situation is very much still continuing, and perhaps in some respects getting worse.

http://www.americanbanker.com/issues/175_165/foreclosures-modifications-california-1024663-1.html

The GSEs have picked up the foreclosure rates a bit of late and real estate prices will likely suffer more over time for it (the median was down even more in this week's report), but if the banks start foreclosing and stop kicking the can, then all hell will break loose. The market is collapsing, sales are at record lows despite record low mortgage rates and prices are continuing to fall, yet there are over four million homes over 90 days delinquent and the banks are holding off on foreclosing big time. There are a number of "possible" reasons for this including the banks not wanting to come clean on the impact of their problem loans. What this will do is prolong the housing crisis for a very long time. I thought we would come out of the forest on residential RE next year but am now having second thoughts.

Not helping things is the percentage of homes under water. We are talking 11 million, or 23% of all homes with mortgages, are under water. That is a tad better than last quarter but largely because of foreclosures taking homes off the list. Think about that - 23%. That kind of pain will take a very long time to heal as house prices are not likely to recover to any significant degree for quite a while - not with all the foreclosures that will come on the market.

http://www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CL_Q2_2010_Negative_Equity_FINAL.pdf

Mind you, housing in most areas is priced below what it costs to build new housing and expectations are for further drops in prices. It could take a long time for home builders to be competitive and other than certain folks who insist on new homes, they probably have a few more tough years ahead.

Commercial real estate is no better off and it will likely suck wind for at least a couple of years too. In some markets there are improvements, but the reality is that malls are still overbuilt, consumers are continuing to cut debt (thank goodness), which does not bode well for malls and the like, businesses have rebuilt profitability by letting people go, which does not bode well for commercial RE, and so forth and so on. Did you know that the U.S. has 50% more retail space than the second closest country? Go figure. Really, go figure what that means for commercial RE when consumers are cutting back, facing high unemployment, homes under water and the like. Ain't pretty at all.

Most recessions were fixed by housing rebounds and/or consumer spending. This recession is not going to be fixed by either. So what will fix it? I am still trying to figure this out myself.

Across the Pond

Not a lot to say here but I just need to send out a reminder that the EU has a bunch of problems. After the EU went nuclear with it massive rescue effort, the problems in the PIGS - then PIIGS - were quickly forgotten, which is exactly what officials in the EU wanted. I do not want to burst their bubble, but getting people to forget about it for a while does not make the problem go away. Ask Ireland - Irish debt was just downgraded by S&P and it came at a very improvident time as Irish banks are in the process of trying to roll over 30 billion euros in debt. The downgrade makes this difficult to do and may force them to the ECB, which draws more attention to their problem, which may lead to more lenders being concerned and more downgrades and so forth and so on.

http://www.independent.co.uk/news/business/news/irish-debt-downgrade-raises-fears-of-international-deflation-spiral-2062136.html

My point is that EU problems have not gone away and with their lust to cut debt as a percentage of GDP, their economies are definitely going to be challenged for the next few years. Double dip, quite possibly. As I noted the other day, Stiglitz, the Nobel Prize economist, thinks this will happen. Either way, it is just a matter of time before the world will again focus on the EU problems. And focus they will because the EU collectively has the world's largest economy, ahead of the U.S. and China (Japan just got relegated to not getting to stand on the medal stand). When the next wave of problems surface in the EU (they are there just not to the surface yet) it will be problematic for us here in the U.S. as well. Just one more thing to worry about.

I promise I will try to think of something more optimistic to report; as long as I believe what I am reporting I have no problem with it - really.

Survey

Help me out here. I have had a significant up tick in folks visiting this site. The two or so regulars I had are I assume still around but I am really seeing an up tick. So do me a favor and tell me why. Here are the reasons I can assume:

I am posting on a more regular basis
The economy is sucking wind so doom-and-gloomers like me are getting more attention
Someone somewhere linked me or recommended me
I suddenly became a much better writer than I was
I have actually been more right than most folks of late
It is a direct correlation to increases in population
It is off season for most TV shows and you are tired of reruns
My friends are paying you to mess with me

Please let me know. Vote now and vote often.

Disclosures: None.

Economist's Says . . .!

2010-08-25T07:02:00.001-07:00

A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

I cannot take credit for the joke but the best part is I think it reveals a bit of truth; economists give us what we want to hear, and right now that is anything but reality. Their jobs may be short-lived if they spoke the truth. For example:

The durable goods orders came out this morning and the bookings increased .3 percent, which is just a smiiiiiidge below (as in one tenth of) the 3% median of economists' forecasts based on a Bloomberry survey of 75 economists.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=acPSIQI5pXfw&pos=2

Indeed, it was just a smiiiidge below every single economist forecast of the 75 surveyed by Bloomberry, who ranged from 1.2 to 6.8%. Imagine that, even the most pessimistic economist was off by 400%. I wish they would post the names of the surveyed economists as I would sure like to see who said 6.8%. He got some splainin' to do.

So you think this is an isolated incident, well let's talk about the new housing sales number out today. Sales fell 12% to an annual pace of 276,000. I like the Bloomberry headline:

"Sales of U.S. New Homes Unexpectedly Declined to a Record Low Last Month"

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aMPHz7m3ZYq0&pos=2

So this was "unexpected"? By who, might you ask. Well, you got it, economists. Bloomberry surveyed 74 on this topic and the median was 330,000, just a smiiidge over 276,000. Now, admitedly, it would be rare for an economist to predict a number that would be the worst ever result on record. So rare, in fact, that not one of the 74 surveyed economist was even close. The lowest forecast was 291,000. And some economist who apparently lives in a cave with no access to the outside world forecast 355,000.

By the way, henceforth I am referring to Bloomberg as Bloomberry. I like the sound of it.

Update: Out this morning is the weekly jobless claims report came in with initial applications at 473,000. Econmists predicted a worse number. So I suspect an apology is in order. But before I do so, let me note that every one of the 48 economists surveyed by Bloomberry had more pessimistic numbers than what was being reported, though one economist at 475,000 was darn close. So I apologize. Let me also note the weekly numbers are quite volatile and most folks prefer to focus on the four week moving average.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aIdbC83.n6KM&pos=1

Disclosures: None.

Clouds Forming

2010-08-24T17:20:00.000-07:00

What a difference a few weeks makes. Some disappointing news on the jobs front, disappointing consumer sentiment reports, disappointing housing numbers and, before you know it, everyone is a doom and gloomer. Even folks from the Fed are becoming more reserved in their carefully worded presentations. And the chief economist (I love economists) at the S&P is now fearful that the U.S. has a realistic prospect of stagnation, Japan style.

http://www.bloomberg.com/news/2010-08-24/u-s-has-realistic-chance-for-japan-style-stagnation-s-p-s-wyss-says.html

Negative pundits are cropping up every where, and some who were never too optimistic to begin with are getting even a bit more pessimistic. Take Joseph Stiglitz, for example, this Nobel Prize winning economist (I found one I like) thinks Europe has a serious threat of a double-dip recession due to its attempts to reign in government deficits to be less than 3% of GDP per year, a target he considers arbitrary and an objective he considers ill-conceived in the current environment.

http://www.bloomberg.com/news/2010-08-24/stiglitz-says-government-cuts-set-to-push-europe-into-double-dip-recession.html

I frankly agree with him. I am not a big fan of stimulus spending beyond what is need to maintain stability (and I have problems with where much of it is spent) but a heavy attack on government deficits at the moment is not the solution. Yes, to the extent a given sovereign is perceived by its lenders as problematic to the point it can no longer borrow on reasonable terms, that is a problem that might need to be attacked with austerity measures, but otherwise the goal should be to stabilize the economy with some government dollars and let it fix itself. Withdrawing government dollars now only worsens the GDP (ask Ireland) and exasperates the sovereign debt issues by lowering taxes and increasing unemployment. And when this takes place in multiple economically connected countries in the EU all at the same time there is a real chance of a nasty spiral effect throughout the entire EU, which may explain why investor confidence in Germany, a pretty well off country financially, is the worst it has been in 16 months.

Given that the EU is the largest single economy on earth if you treat it as one union, then you can see where it heading into a double-dip is not good for the rest of the world. Unless you still believe that decoupling thingy, we can all be in for a world of hurt if the EU has significant problems - i.e. above and beyond the problems we are facing here as well. And even though China has now passed Japan in terms of the size of their economies, now third to the EU and the U.S., it is still not nearly big enough to lift all these boats.

Refinance Debate

Okay, no real debate here; with mortgage loans at historic lows - 30 years fixed below 4.5% and adjustables under 4% - there is no question that if your rate is more than a couple of years old you should consider refinancing if you can. Sure, every one's situation is different. If your loan is close to being paid off or if monthly payments are already pretty small because you bought cheap, the savings may not pay the closing costs off very quickly or at all. But most folks looking at it would like to refinance if they can.

There are plenty of folks who cannot refinance for a multitude of reasons. These include:

they are underwater on their homes or at least do not have enough equity to qualify;
they have no job;
they have poor credit;
they cannot afford the closing costs; or
they do not expect to be in their homes long enough for it to make sense.

Some of these reasons have no easy cure. If your credit rating is too low you need to do what you can to improve it and that can take time. No job - well you have worse things to worry about than refinancing. You cannot afford closing costs is one that is not a big problem. So long as you have enough equity and decent credit there are plenty of low to no closing costs options still available, so start looking and do the math. The problem I am personally dealing with is that due to price decreases, I do not believe I have 80% equity in my home. Absent 80%, I am looking at higher rates and/or PMI, which takes the benefit out of refinancing.

So here is the debate, do I take money out of my investments to increase my equity to 80% so I can refinance. I have come to the conclusion that I should, but this is personal to me and my situation. Let's say that I need around $10,000 to bring my house back up to the 80% mark. Add to that probably a couple thousand in closing costs and you have $12K up front to refinance. I calculate that refinancing will save me around $150 a month in payments. Accordingly, some would say, don't do it, it will take around eight years just to break even. But I do not see it that way.

Here is my logic. I figure the $10,000 more I sink into my house I will not lose unless my house somehow becomes worth less than $10,000. Barring a nuclear war, I do not see this happening. Sure, my house could lose $10,000 more in value but that loss will happen whether I put $10,000 more in or not. It has nothing to do with the $10,000 I put in. Accordingly, from my view, my principal, the $10,000, is about as safe as it can get locked up in my house.

Now I say "locked up" as that is the major issue with putting it into my house. Assuming you have the money, the question is whether you want to make it illiquid, perhaps very illiquid, by locking it up in your house. You need to consider how much savings you have, how many months you need to have set aside, etc. But if the money is not for liquidity needs but rather for long term investment, I propose that shifting it into the house - if needed to refinance - is not the worst investment you can make.

Back to my example, I am hypothetically putting $12 K up front into refinancing. $2000 of that is for closing costs, so that is out the window until I recoup it through reduced payments. With payments going down $150 a month, I will recoup that in just over a year, so not a big problem. If recouping it will take years, I would need to consider various other issues, including the years left on my existing loan, the years I plan to be there, etc. I am okay on these fronts.

But recouping the whole $12 K will take over 12 years and I do not plan on being in my current house 12 years, so does it make sense? I think for me it does. After a year the closing costs are paid off. After that I am getting an $1800 return on my $10,000 investment and, as explained above, the invested principal is very safe, though very illiquid. So I have to ask, where else can I get a guaranteed annual return of 18% (assuming I keep my house and do not default)? I am reducing my interest tax deduction minimally on the one hand but the 18% is in after tax money on the other, so the real return is much more than 18%. And so, I ask my readers, what am I missing here?

I know I need to consider the pros and cons of replacing a loan with a remaining term under 30 years with a loan with a 30 year term. Another alternative, however, is to cut several years off the loan term and keep my payments the same. My returns at that point are in eventual increased equity that is harder to quantify, but it should still be a good return that is quantifiable. Either way, I think I can trade in a very uncertain return on the $10,000 invested in equities for an investment with a defined very good return and very low risk to principal.

Obviously, few people are probably in my situation and everyone's situation is different, so everyone has different considerations they need to consider, but for me, when I figured out I could take some long term holdings I do not need to be liquid and turn them into a guaranteed high rate of return, it seems like a no brainer. The point being, if your home is below the 80% LTV figure and you think it makes no sense to refinance, you should look at other holdings, do the math, and see what works for you.

Disclosures: None.

Yeah, We Sure Showed Those Credit Card Companies

2010-08-23T18:02:00.000-07:00

So the government beats its chest and enacts legislation to show how it is whipping those credit card companies and banks into shape, saving the consumer and making life good for us all. So the credit card companies respond and beat their chests and raise rates to the highest level in nearly a decade even though their borrowing rates are at record lows, thanks to our government (namely us taxpayers). Nice pay back.

http://www.nakedcapitalism.com/2010/08/credit-card-companies-jack-up-rates-despite-flagging-economy-super-low-funding-costs.html

Wanna' guess what this will do to the 70% of the GDP represented by consumer spending or the impact on small businesses that rely on credit cards to cover expenses? Go ahead, guess. Yep, not good.

That Real Estate Drum Keeps Pounding

Here is some hot off the presses news from Bloomberg - housing is putting a drag on our recovery from the recession.

http://www.bloomberg.com/news/2010-08-23/housing-slide-in-u-s-may-drag-economy-into-recession-as-foreclosures-rise.html

Glad they are on top of things.

Seriously though, they are right about it, just the news seems a bit old. Anyone really paying attention to real estate has seen this coming for a very long time and has known it is a key fundamental precluding the recovery so many economists envisioned. Then again, economists are a bit delusional (okay, a lot delusional). But I have had that rant here before. For a good gauge on where RE is and is heading, I recommend this link to Calculated Risk, where the author also seems to think the economist consensus is off the mark just a tad:

http://www.calculatedriskblog.com/2010/08/lawler-existing-home-sales-consensus-vs.html

Anyone want to bet on whether the mean economists' number from Bloomberg is too optimistic tomorrow?

Update 10/24: If you took the bet you can send your check to me. As expected, the delusional economists were once again with their heads in the clouds or the sand (your pick). The sales of existing homes number for July came out this morning and it was bugly. A drop of over 27% in the annual sales rate and inventories rising to 12.5 months, the highest in over a decade. Moreover, of the 74 economists surveyed by Bloomberg how many do you think either got it right or were even more pessimistic than the actual number in their forecast? If you guessed the big old goose egg, as in zero, zip, nada, you are correct. Seriously, not a one. The lowest of the 74 was at 3.96 million sales and the actual number was at 3.83 million. One "economist" predicted 5.3 million sales and he should have stayed home today. And it seems reality is setting in for the markets. When it sets in for economists, we are all in trouble.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aTa9xAXkpKaU

Disclosures: None.

And Another One Down

2010-08-20T21:16:00.000-07:00

Now I am not sure my count is totally correct but if I am correct FDIC took down another 8 banks today. Friday is bank take down day and this Friday is the worst in terms of number of banks that I can remember. Certainly bigger dollars have been involved in past take downs but eight in one day is truly impressive. They are:

Sonoma Valley Bank, Sonoma, CA
Los Padres Bank, Solvang, CA
Butte Community Bank, Chico, CA
Pacific State Bank, Stockton, CA
ShoreBank, Chicago, IL
Imperial Savings & Loan Association, Martinsville , VA
Independent National Bank, Ocala, FL
Community National Bank of Bartow, Bartow, FL

Now if you place close attention you will see a pattern here. Go ahead and look, I will wait. Ding, ding, ding, you have it. Yes the taken down banks are by-and-large in states that built the real estate bubble. Go figure.

Disclosures: None.

Tootin' New Hampshire's Horn

2010-08-19T19:39:00.000-07:00

A site called Daily Beast has released a survey ranking the states in terms of most corrupt to least. Most corrupt was a surprise to me - Tennessee. I have not had a lot of contact with that state but certainly have not read a lot about corruption there. Frankly, I thought Louisiana would lead the list. I apologize to some friends of mine from that state but I have read, and had experience with, regular stories out of Louisiana on corruption, both public and private, including a story this week on some official hiring his live-in girlfriend for a big job over many more qualified folks. In any event, Louisiana still ranks up there.

I am happy to note I am from New Hampshire and it ranked as the least corrupt state. And so, let me take a few paragraphs to sing the praises of my home state for the past 8 years.

NH is often noted as one of the states with the lowest tax burdens, which is probably due to no income tax and no sales tax (other than on prepared food). I am not sure why there is a tax on prepared food. You can buy a car and pay no tax but if you buy a burrito, watch out. There is a real estate tax, but after living in NY it does not seem too bad to me. Indeed, I moved here after 17 years in NYC and cannot believe how well NH does with so little after seeing how poorly NY does with so much.

Now part of this may be due to NH being a state among the highest median incomes in the country, and at least one year since I have been here the highest, but since income is not taxed, median income should not really impact how well the state does that much.

Somehow, NH has mastered the art of doing more with less. The state motto is live free or die, which probably initially meant personal freedom but these days stands as a very prominent anti-tax motto. Any politician not running on an anti-tax motto will not get elected. Despite having one of the lowest tax burdens in the country, us here in NH want even a lower burden.

Now I am not one to complain about paying taxes. I do appreciate that we need government and the services it supplies. I also appreciate that taxes are in some respects a redistribution of wealth, and that does not really bother me. But while I do not mind paying taxes, or even more taxes if it makes sense, I get a bit outraged if I think my tax money is being put to bad use. I will not go on further on this point other than to note Obama has given most of my tax dollars to support undeserving financial institutions who are in large part to blame for our problems and that outrages me. Moral hazard be damned. Again, taxes do not bother me nearly as much as tax money being wasted. Thus, I am happy to live in a state with low taxes with low corruption where I can see my dollars doing what they should do. If only every state could be this efficient. If only the federal government could be this efficient.

This Economy is Coming Home to Roost

Well, today was an interesting day. The trickle of bad economic news seems to have become more of a steady flow and the markets did not like it, not one bit. If you are reading this you already undoubtedly know about the bad unemployment numbers out today, worse than any of Bloomberg's surveyed economists predicted. Ask me if I am surprised? The "economists" being surveyed have been too optimistic on 18 of 21 of the most recent unemployment reports. Are these people paid to be wrong? Well, quite possibly.

The Philly manufacturing index down as well, from positive territory to negative in one fell swoop. Economists really did not see that one coming either.

Now you cannot say I have not been telling you about this. My timing has not necessarily been the best but I have been saying consistently for a year and a half that the fundamentals are simply not there. Stimulus certainly glossed over this fact but the fact is still there and now that stimulus is fading fast the reality is setting in equally fast.

Now I know I sound like a broken record as I keep spouting off the same stuff (which is a major reason I have been posting less of late) but the fundamentals are again worth noting, with a few more linked stats to support the situation:

Tonight I will limit myself to real estate. There is way too much property under water, unemployment continues to lead to more foreclosures, more foreclosures lead to more REOs sold at depressed prices, which in turns further lowers the price of RE, which puts more folks underwater on their mortgages, which leads to more foreclosures, and so forth and so on. Interesting cycle. As you can see in this link, the number of foreclosures continues to increase. Fannie, Freddie and FHA had an increase of 22% in Q1 versus the prior quarter, which is an increase of 59% versus Q1 2009, when RE was already sucking wind:

http://www.calculatedriskblog.com/2010/05/fannie-freddie-fha-reo-inventory-surges.html

Now some of this may be due to ARMs resetting, some due to unemployment, some due to continuing declines in RE prices in some areas, but some are due to banks, Fannie, Freddie and others holding off on foreclosures in the past and spreading them out. This was not just something they decided to do on their own, as now we learn the official government objective was to spread out foreclosures to give financial institutions time to deal with them. Call it extend and pretend or kicking the can, either way something right now is coming home to roost. I get this inside line from John Lounsbury who had the opportunity to hear it first hand from Geithner earlier this week.

http://seekingalpha.com/article/221249-further-thoughts-on-my-treasury-meeting?source=dashboard_macro-view

There is, however, a prospect for foreclosure rates to slow if the courts continue to hold that the mortgage industry screwed itself through MERS, an electronic recording system developed during the frantic housing bubble to make it easier for financial institutions to securitize mortgages and not bother with pesky time consuming and costly recording requirements. As it turns out, some courts are saying using MERS not only saved on fees but it ventured outside of certain legal requirements for documenting things properly. In short, there could be 62 million properties in this country where the current financial institution holding the mortgage cannot legally prove it - as in the homeowner could be free and clear on their mortgage whether they know it or not. This is by no means a legal certainty in any jurisdiction, but it is getting the attention of a few courts. For a lot more detail on the situation, I recommend the following link:

http://seekingalpha.com/article/221344-homeowners-rebellion-could-62-million-homes-be-foreclosure-proof?source=dashboard_macro-view

If the trend in courts continues, many financial institutions could once again find themselves on the rope.

Disclosures: None.

Resources

2010-08-18T19:13:00.000-07:00

Let me address a topic I do not believe I have ever touched upon but that I do like to follow, and that is resources, as in the stuff we use. This includes fuels, metals, precious gems and pretty much anything you can dig up, pump up or shovel up. China has over the past decade been on a rampage buying all this stuff up. Indeed they have at least at the moment cornered the market on rare Earth metals (which are not so rare but difficult to process - and it takes many years to build the infrastructure to process them). We cannot compete with China but there are some investments we can still capitalize upon. Let me give a few options for you to chew upon:

renewable energy is all the rage but most, if not all, cannot presently economically compete with oil. This will eventually change and the range of estimates on oil supplies is all across the board. Yet investing in some alternative energy areas can make money in the long term. Research it and pick your own entry point. I personally believe algae has the most promise. Yet there still needs to be a lot of research to make it work.
Biofuels are another topic related to the last. A lot of issues were created when we tried to use crop land needed for food to make fuels. Food needs will win out in time so it is better to focus on biofuels that can be made without using crop acreage, crop water or crop fertilizer. By the way, algae meets these requirements
Crops, by the way, are a very very important resource. Right now they are mostly grown with a host of fertilizers and water that is needed for other purposes. Thus, this week's multi-billion dollar bid for Potash. But there is so far you can go with fertilizer and water. Both are limited resources. In time we need to grow crops and feed an increasing population without them. And that will be difficult.

Disclosure: I have a few thousand, much less than I initially invested, in Valcent Technologies. It was in the algae field but has not done anything there for a while. It is more into hydroponic crops in vertical systems that use less water, fertilizer and the like. The crops can also be grown in urban areas, saving fuel. I have money in them because I believe in the idea but it could clearly be decades before it becomes popular.

Nationalize Mortgage Lending

2010-08-17T18:34:00.000-07:00

Bill Gross, you know the big PIMCO guy, came out at a government sponsored idea-fest and recommended a novel idea - "full-nationalization" of the mortgage finance system. Now I agree with Bill much more than I disagree and I like to think that the feeling is mutual (or that he has ever read anything I have written), but on this one I am a bit mystified.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aQrLLpgud3rI

I am mystified because I thought our mortgage finance system was already pretty much nationalized. Seriously, there is no securitization market outside of Fannie Mae and Freddie Mac and banks simply are not lending unless they can pass the risk on to the Fannie or Freddie or they have insurance against loss from FHA. Fannie, Freddie and FHA represent 90-95% of all mortgages now being given and these entities are all government based mortgage finance. This will change in time but right now it appears that Gross has what he wants. Now he may want these government institutions to lower lending standards to support more mortgage lending, but that ain't happening, and it should not. Housing, whether the government supports lending or not, is going to take a few years to rebound. It is over-built, inventory is soon to go back to over a year, foreclosures are near all time highs, unemployment is a problem, underwater homes prevent people from selling and moving up (or down) and lending standards are much tighter than they used to be (including very conservative - newly so - folks doing appraisals). A housing recovery is not, and should not be, in the cards.

And let me add one more factor I have NOT read about; I do not think most people (other than investors) want to buy a house. Now I know housing prices have fallen drastically, interest rates are at record lows and it is in many respects an ideal time to buy. But there are some respected folks predicting a further decline in prices, foreclosures are at very high levels, folks see nightmares (not American dreams) among those that bought before and lending standards are much more conservative. For buyers on the edge who see what has happened financially to a large percentage of the population who are underwater, I have to think they are saying to themselves they are better off to rent. This seems to be proven in part by low home sales, I might add. Sure there are plenty of reasons to dispute this and say it is a good time to buy, but I am not about to argue with them. After all, rental rates are low too and with housing prices down they will need to continue to drop to compete. We will see.

Industrial Production Up

So the markets in the U.S. and, as I write, in Asia are up on unexpectedly high U.S. production numbers, not to mention decent results by WalMart and Home Depot. Add in a little bump by a purchase bid for Potash (I thought about buying some months ago, darn it) and you get a good bounce. Now I admit I would not expect a U.S. production bounce, not with poor economics, low consumer spending, the EU in doldrums, unemployment and inventory corrections largely done, but hey, what do I know. I do know that fundamentals, while gradually improving or at least stabilizing, have a couple of years to get there. Maybe a melt-down is not in the cards (though I predict a pretty big down-turn this fall absent major stimulus delaying same), yet even with no down-turn I do not see any real support for a major bounce or sustained rally from here either. Friday, with options expiring, should be interesting.

Disclosures: None.

Across the Pond

2010-08-16T18:14:00.000-07:00

I raise the EU as things have been a bit silent on the EU front for a while. Seriously, they do a few hundred billion in emergency funds, tie it to some extreme austerity measures, hide the EU bank stress tests from any implication of sovereign debt issues and then cross their fingers and pray people ignore them for a very very long time. Because if people pay attention then they will notice things the EU does not want them to notice.

They will start seeing that austerity is extremely painful - on private and governmental basis. Extreme austerity, which is being required in Greece and certain other EU countries, can quite easily lead to significant GDP reductions. Don't believe me, ask Ireland, which has been seeing negative GDP due to its extreme austerity. The good news is that if you survive you will come out of the tunnel and be ahead of the game. In that respect it may make some sense, like Ireland, to dive in the pool early and get it behind you. The bad news is that if too many countries dive into the pool at the same time, especially a lot of politically and economically connected countries, then all boats take on water at the same time and no one is around to through the life ring. And so we wait and we will see.

Then again there are a number of countries, like Hungary, who said no. Yes, they said no. No to austerity and the authorities can take their emergency measures and shove them. We will see.

Now some of these problems have been building for a very long time. EU has certain sovereign debt versus GDP ratios that are required for memebership. As it turns out, various EU countries, with the assistance of certain financial institutions, have been hiding their financial issues for many years. And yet, right now, things seem a bit quite there. I suspect there are some major rumblings behind those closed doors.

http://www.nakedcapitalism.com/2010/08/satyajit-das-grecian-derivative.html

I have no new negative news on the EU to pass on just at the moment, but wait, it will come. Here is a piece on the EU bank stress tests not really doing much and how things might just do a little more poorly there than the tests suggests:

http://www.calculatedriskblog.com/2010/08/sovereign-debt-part-5d-european-banks.html

And here on this side of the pond, at least one well respected expert expects housing inventory to shoot up, perhaps to a year of inventory. Boy, that is going to suck.

http://www.calculatedriskblog.com/2010/08/one-year-supply-of-houses-and-other.html

Negative

2010-08-15T06:20:00.000-07:00

I am just passing on a post I just read from Calculated Risk noting some negative news expected out. Before going there, this blog also has a nice, unofficial, problem bank list. While the FDIC has only taken down a couple of banks the past couple of weeks - well off their YTD average - that does not mean things are improving as the problem bank list ain't shrinkin'! Okay, that last sentence had just a tad of flashback to my wife's reunion recently in WV. It was a three day reunion and included one night with both of us and our two kids in the ER (though everything turned out fine.) But I digress. Back to the post of the negative news, which is mostly focused on real estate. As the link notes, expect some bad number in that category in the weeks and months to come. Also, expect a major downward revision to the second quarter GDP estimates. I have seen another article calculating that the GDP - originally estimated at 2.4% - will be reduced to 1.2% due in large part to the new trade deficit numbers out this week. Undoubtedly, when it is officially announced the market will react, but the numbers are already in so the result is expected.

http://www.calculatedriskblog.com/2010/08/negative-news-flow.html

I may post a bit more later.

Disclosures: None

My Own Two Cents

2010-08-11T18:48:00.000-07:00

I typically try to pass on to readers the best - in my opinion - of what I am reading to share the information. But after reading a lot sometimes the temptation is too much not to share my own view, for the two cents it is worth. I am not an economist and do not have any formal education in economics or finance and so this post is certainly not to be viewed as anything other than the views of another by-stander, though I hope from one who has followed the economy more closely than most other by-standers. So here I go:

I have read a lot of very convincing posts and articles on the need for austerity here in the U.S. to reduce government debt and the need for massive additional government spending to stimulate us back to growth. I have read equally convincing articles and blogs on deflation on the horizon and inflation, indeed hyper-inflation, on the horizon. I spend hours daily reading this stuff and find myself more confused than ever. One thing I do know is that fundamentals, economically, are messed up here in the U.S., in the EU, increasingly in China and - by default - in many other countries. The economy is global now and while some countries are not suffering like the EU and U.S., they nonetheless are not immune to what is happening. After looking at where all these countries stand, you certainly realize there is a very mixed bag of problems. So what do we do now?

I hear the arguments of those supporting massive stimulus. To them I must say we have already done that and, frankly, it did not work. It may have briefly brought us out of the recession and it may have helped to significantly stabilize a very volatile situation in our economy, but at the end of the day stimulus will not cure massive personal debt, housing problems more pervasive than we have ever seen and unemployment that simply will not go away. Stimulus, beyond stabilizing an economy on the edge of the abyss simply is not doing anything in this situation. Don't get me wrong, there may still be a need for stimulus here and there, but it is a bandaid, not a cure.

The other side of the coin is austerity. I am convinced from what I have read that the U.S. has spent massively but not to the point where it is a material problem. In other words, the extreme austerity measures being enacted in Greece and many other EU countries is not wise for the U.S.. Ireland is a prime example of how extreme austerity can lead to extreme recession. Our current debt levels in the U.S. are not a significant isssue at the moment, though they need to be addressed before our country's demographics push a host of folks onto Social Security and Medicare. In any event, government debt does not need to be the top priority at the moment, though it does need to be considered and dealt with in time. Again, I am not saying austerity in certain EU countries was not needed. Sovereign debt was becoming radioactive in certain countries so extreme measures were probably needed to renew confidence and keep banks supporting sovereign debt. Yet, the austerity will lead to significant recessions in the EU for years to come, which will certainly spill over to other countries, but perhaps this is the medicine they need.

The current course for the U.S. in my view is to have enough government stimulus or support to avert any melt downs but otherwise let nature take its course. We have years ahead, perhaps over a decade, where personal debt levels need to normalize, also called deleveraging. It is happening, but with unemployment, houses under water and the like, it will take a long time for folks to deleverage. We have a similar time period for housing prices to get normalized. Foreclosures are a significant issue for the next couple of years. Lenders are holding most REOs off the market, on a massive scale, and the market will take years to correct. The same goes for commercial real estate. I read a few months back that the U.S. has 50% more CRE than the second closest country. With 70% of our GDP from consumer spending, no wonder. Well, that consumer spending piggy bank (be it due to unemployment, housing prices down where folks have no money to take out of their homes or tight credit standards that are taking hold) is gone forever and CRE will face years of doldrums. The same issues hold true for retailers. Yep, 70% of the GDP is on hold for a long time to come. Years of debt reduction are needed to repair this situation.

The bottom line in my book is enough stimulus to keep the world from falling apart but not enough to build a new bubble or inspire more debt. Years are needed for us to correct to a sustainable level, probably over five and perhaps much more. It will be a boring half decade or decade financially speaking, the stock market will suck or be stagnate, housing prices will likely fall further, more businesses will fail or cut back, and we will not have a lot of fun, but we will survive and get back to a place where we can sustain our activity. This is my prescription for success. Not very exciting, is it?

Disclosures: None.

Tick, tick, tick . . .

2010-08-10T19:05:00.000-07:00

In my opinion, our current situation is a time bomb ticking away. The Fed's -totally expected - announcement today on the minimal relief they will provide was simply an inept attempt to diffuse the bomb, and it did not work (it only muffled the ticking sound). Yet the clock continues to tick. Mind you, it is a clock of undetermined length and the explosion when it stops ticking will likely be more like one of those snake fireworks that you light and they burn and grow for a long time, but the clock will eventually get there. So why the snake analogy? Well, I do not see the market or the economy falling off a cliff when reality sits in. Folks will figure out that we are in for a long period of a stagnant economy and things will get to a sustained long downward direction. The direction will be down for a long sustained period and, while it will have a lot of violent bounces, will over time (a long time) trend downwards.

It may be like Japan but I suspect it will not last as long. Japan is working on over two decades of stagnation and no relief is in sight. The U.S. has problems but the U.S. bubbles were not that extreme. I remember at one point, at the height of the Japan real estate bubble, an article proclaimed that the many acres of, I believe it is called, the Royal Palace in Japan, was alone worth more than all the real estate in the U.S. Now I never saw any verification of this, but it is clear that RE in Japan set a new standard in insanity. Now Japan has set a new insanity in terms of the poster child of what can go wrong. And this, my friends, is what we have to fear.

The FOMC results today were totally expected. I think the Fed is out of any big bullets and reality is about to set in. The next 12 months will not be a happy time - and you can quote me on that or shove it in my face a year from now to tell me how wrong I am. I have been for some months predicting a problematic third and fourth quarter. More specifically I have been expecting a very trying September and October and have not changed my opinion. I thought briefly in June that the market had reacted negatively before I expected but a nice 10% or so bounce over the past month and a half have given me the expectation my timing was right.

Many months ago I noted some option mortgage issues peaking this fall and now you have many banks, Fannie Mae and Freddie Mac accelerating foreclosures on what happened earlier this year and last. REOs are shooting through the roof, employment sucks wind, saving rates are going up, companies are cutting back and, well, it is time to get out of the pool. Good luck if you decide to stay in for a while. I am on the side-lines and have been mostly for two and a half years. Being on the side-lines helped me miss the big drop and the big run-up since March of 2009. But I sleep at night. And I am still going to sleep well the rest of this year as I sit on the side-lines waiting to see if I am right or wrong. I rest much better knowing that the market has had an incredible run the past year and a half that was not at all based on fundamentals. So I ask myself, is there more upside potential or downside potential? Good question to ask yourself at the moment. And remember, while you are pondering that question, the clock continues to tick.

Update 8/11/10 at 9:35: Then again, given the market dive this morning, it looks like we may not make it to September.
Disclosures: None

Unemployment blues!

2010-08-08T19:32:00.000-07:00

I just got back from a long weekend visiting former neighbors. They live on a lake and have a boat. Proves that it is great to have friends in high places. We had a great time and their son, who turned 7 this weekend, had a great time with my kids. In any event, great time but little to no time for reading up on stuff and posting. Still, I have found a nugget or two in late night reading. Let's start with this interesting piece and a very interesting chart on unemployment. Pay particular attention to the percentage unemployed over 27 weeks, which would simply represent those still looking. I do not think this needs explanation.

http://www.calculatedriskblog.com/2010/08/duration-of-unemployment.html

Commercial RE Numbers are down big time in June:

http://www.calculatedriskblog.com/2010/08/costar-commercial-real-estate-prices.html

And consumer credit continues to decline:

http://www.calculatedriskblog.com/2010/08/consumer-credit-declines-in-june.html

But the good news is that only one more bank failed last week. Mind you that we went a couple fo back-to-back years this decades with no bank failures but only one last week - 109 this year to date - is not an improvement.

http://www.calculatedriskblog.com/2010/08/bank-failure-109-ravenswood-bank.html

Unless you are asleep, all the links have been from Calculated Risk, one of my favorite sites and a good one to follow for weekly stats and good, I think unbiased, commentary on where things stand. In any event, the next few months will be very interesting.

P.S. Let me add one more tidbit today from Calculated Risk - Freddie Mac ROEs are up 79% - yes 79% - YOY. Lest you forget, last year was not a good year in terms of foreclosures and RE either. Fannie and Freddie, however, held off for a long time doing foreclosures in an apparent attempt to help families live the American Dream. Now they are ramping up the foreclosures big time, so forecasts - like that of Merridth Witney predicting another 10% drop in house prices this year - seem to have some basis.

[Okay, you will have to go to Calculated Risk to find the intended link as, apparently, I linked an article about early puberty in girls, which was not quite on point.

Disclosures: None.