Yikes!

This is a fantastic piece that is a must read. Even if you do not understand it all - and I am struggling - it is persuasive and, well, quite depressing. It covers a good bit of ground and it is not a quick read, but I recommend persisting to the end. It is worth it. Bottom line to the piece, U.S. attempts at stimulus have led to a bit of a situation. Investors are starting to not listen to the explanation and are focusing more on the impact. The post calls it "rational expectation." And this may lead to some rather severe problems for our attempts to finance our recovery and to make it work. The problem is, in a recovery the government does not need us to be rational. It prefers a good dose of irrationality - like continuing spending, buying Treasuries and the like. Looks like the jig is up!

http://english.caijing.com.cn/2009-06-09/110180019.html

Debt, Debt and More Debt

I have said repeatedly that common sense (along with a lot of people I respect) tells me that replacing debt with debt only creates a new bubble and it is not a good long term plan. That kicking the can down the road thingy. So far that is exactly what we have been doing. So what happens when we catch up to the can? Well, for the dot.com bubble we kicked it harder, for the housing bubble we have given it a nice kick as well, and now when we catch this debt-laden can, we are in my opinion a bit screwed. There are no apparent bubbles to replace the last one (a good thing) and we seem to be stuck with something I like to call reality. Get used to it, it is here for a long, long time.

This link talks about our debt related problems. Indeed, I recommend the site as it is dedicated to how debt got us into this mess and it was started before most realized this issue.

http://suddendebt.blogspot.com/2009/06/where-are-profits-going.html

Many, unfortunately, still do not realize that we are well in over our heads. I have read some posts lately on our debt load when Social Security and Medicare/Medicaid are included and it is a doomsday scenario. Here is one to get you started:

http://www.nakedcapitalism.com/2009/06/means-of-deficit-reduction-medicare-and.html

Personally I think both Social Security and Medicare are going to be largely gone or seriously reduced by the time I reach retirement in 18 years or so. Indeed, I suspect you will have to be over 70 to get full Social Security benefits and Medicare expenditures will be limited to less expensive procedures. It is not what anyone wants (I am getting older and I have elderly parents, so I do not want it) but it is inevitable that, despite medical advances that can save lives, we will let older people die. The cost of extending their lives through expensive medical care for 5, 10 15, or 20 years will just be too expensive for society to withstand. I may eventually be a victim of this, but I think it is the right move. We need to first protect the interests of the young and vital and leave as a secondary consideration the interests of the old and fragile. Focus more on those starting their lives. Hard reality will be facing us in the future. For my kids, I hope we do the right thing. (And yes, some day they will read this post and tell me it is why they are not paying for some procedure I am begging them to do).

Disclosures: None.

DOW WOW!!

I posted this weekend on how well the DOW was doing. Apparently a bit premature. I did mention, however, that I was going to wait a tad before jumping into the pool. It could be a decade or a score (as in two score and four years ago) before I get in the pool. We will see.

The market down today? Big deal . . . a day, a week a month, a quarter, even a year does not the market make. I have stopped focusing on the market (at least today) and focus more on our overall economy for the long run. And folks, it ain't lookin' good. I don't know where this or any recovery is coming from. The headlines at Bloomberg are as follows:

•Asian Stocks Decline on New York Manufacturing Figures, Commodity Prices
•Fisher Says Fed Can't Counter `Flood' of Treasury Borrowing With Purchases
•Treasuries Climb as Fed's Fisher, Evans Downplay Monetization of Deficit
•U.S. Stocks Extend Global Slide; MSCI World Index Falls Most in Two Months
•`Monster' Madoff Deserves `No Hope,' Fraud Victims' Letters to Court Say
•Yosano Says Japan Government Has Absolute Trust in U.S. Treasuries, Dollar

They were worse earlier today and I still view them as overly optimistic. Let us take this one bite at a time.

Bite One, Too Much Optimism

The market tanking a bit might fix this but I read multiple articles today by Paul Krugman and the like on the dangers of the government trying to take us off stimulus too soon because everything seems so great. Here is one:

http://www.nakedcapitalism.com/2009/06/great-depression-ii-meme.html

Now I am one that never thought the stimulus would work but I am also one that thinks we are better off with it than without it, so the thought that we do not need it anymore is dangerous. We do not need to stop the stimulus too soon. We do need to focus it more properly.

Bite Two - Manufacturing

The Empire State index came in below expectations (not below mine but below others) and it is being blamed for today's market reaction. To me, this is blaming the messenger. Go figure.

http://www.newyorkfed.org/survey/empire/Empire2009/empiresurvey_20090615.html

Bite Three, Commercial RE Still Off the Cliff

I really need to say little here; it is what it is.

http://www.calculatedriskblog.com/2009/06/fitch-us-cmbs-delinquencies-past-2.html

Bite Four - Job Losses Likely Not to Peak Until 2014

http://www.sacbee.com/1098/story/1936416.html

Bite Five - It is the Debt Silly

I have a lot more bites but it is getting late so let me cut to the chase.
We are way - way - too over our heads in debt. We are swimming in it and we will for years to come. It will not fix itself overnight.

http://www.financialarmageddon.com/2009/06/ball-and-chain.html

Disclosures: None

Congratulations DOW!!

The DOW has now erased its earlier 25% decline for 2009, which it reached on March 9, just over two months ago. Bravo!! Bravo!!



http://www.bloomberg.com/apps/news?pid=20601087&sid=aXT58pDbyVa8



It is the last major average to erase its declines for 2009. Obviously we are now off to the races!! What with the S&P trading at an average PE of 33 on projected 2009 earnings, job losses still increasing (though at perhaps a slower rate), housing still in the dumps, commercial real estate falling off a cliff, overall US debt still at record highs (both nominally and as a percentage of GDP), the World Bank worsening its prediction for economic decline this year and financial institutions being allowed to hide toxic assets on (or off) their books, I am thinking of putting all my retirement into equities. Then again, perhaps I will just wait a tad.

The single biggest factor that in my mind still spells trouble for this economy for a long time is overall US debt. Even if you ignore Social Security and Medicare issues, US debt is massive. And wages, on average, adjusted for inflation, have been declining for decades in the US. This is why we have been building debt to maintain our standard of living. We have also gone from the one spouse working model to both working (some two jobs) to survive.

During the same time, a significant part of our GDP, roughly 30%, became tied to the financial sector. But - let me tell you a secret - despite government support, that sector is toast. It is not just toast because of past bad bets. Yes, trillions in derivatives still hang over their heads, but I suspect at the moment the government will help this sector overcome those issues. The real problem is that they have no good game plan going forward. They made money on derivatives but that horse has left the barn. They are not likely to make a lot on mortgages with the housing market down and rates low. They are not likely to make much on anything else for a while. Long story short, there are way too many large financial institutions trying to share what is now a very small pie. We got into this mess largely because they created increasing sophisticated (as in stupid) means to make money out of thin air. Surprise, this does not work. Now that they need to make money the old fashion way, they are truly screwed. You tell me how they are going to all make money, repay their debt to the government and still provide 30% of GDP. Go ahead, I am all ears. When you have the answer, I will reconsider my stance on this rebound, but right now I am just sitting here shaking my head.

http://blogs.ft.com/maverecon/2009/06/the-fiscal-black-hole-in-the-us/

I have not seen a lot else out there worth noting, though it does seem that a trend is building on tearing down old cities, like Flint, and this is getting some press.

http://www.calculatedriskblog.com/2009/06/cities-downsize-to-survive.html

http://www.nakedcapitalism.com/2009/06/low-interest-rates-lead-to-overbuilding.html

Did I mention the median home price in Detroit is $6,000. No, I did not leave off any zeros. Homes there cost just a bit more than my 1995 Explorer, and it has 175,000 miles on it.

Disclosures: None

Deleveraging? - Not!

This post from OptionARMageddon has some rather sobering charts. While individuals are deleveraging, the first chart shows that we as a nation are still increasing overall debt. Now before you start talking about how we can handle it because it is all relative, check out the second chart on debt as a percentage of GDP. Yes it is all relative and right now it is looking relatively terrible compared to where we were in the not too distant past. As a percent of GDP, U.S. debt is well over twice as much as it was when I graduated high school. I won't tell you when that was but you can make a good guess from the chart. Let's just say I had never seen a computer in person before my high school graduation. More disturbing, it is up - as a percentage of GDP - more than a third this millennium alone. This is not a good sign for those that think we are on the road to recovery. We are, my friends, on the road to a stark new reality.

http://www.nakedcapitalism.com/2009/06/guest-post-what-de-leveraging.html

OptionARMageddon is not the only site to notice the debt load. Sudden Debt has a nice piece on it today. As this site also observes, a true economic recovery will need us to reduce this debt load but so far the government has not figured out (or accepted) this painful fact. The government probably realizes this but hopes it is not true as the reality is it will take many years, perhaps over a decade, for deleveraging to get us to where we need to be and no politician (facing reelection in the not to distant future) wants to tell his or her constituents this reality.

Yet hey, what do I know. The stock market seems to have a perpetual upward movement and daily I scratch my head (and other parts) trying to figure out why.

http://suddendebt.blogspot.com/2009/06/deflation-v-inflation.html

Defining Irony

I love to go and listen to presentations by financial planners. They pretty much all say the same thing on asset allocation and the like and they all try to pretend the last two years did not happen. Yes they will pay lip-service to it, but they will not address how their out-of-the-book recommendations are tied to models that ignore fat tails like we have just been through. Indeed, I read a couple of months ago a nice piece on how according to many of these models certain financial market changes were so extreme that the models would not have predicted them happening in the entire history of the planet Earth, yet they happened three times in a single month last year. Yet we still depend on these same old approaches because historically they "usually" work. I guess at the moment you could say the past two years are behind us so the models should work better now going forward.

I headed this topic in terms of irony as I was sitting today listening to a representative from Merrill Lynch tell me how to invest for my retirement. All I could think of while I sat there was how Merrill Lynch almost bit the big one (and would have if BofA and not bought it) and how Lewis has this week been testifying how he got strong-armed a bit into buying Merrill Lynch. Yet here I was having them explain to me how to diversify and allocate among different retirement investments. Basically they said they would look at my age, my savings, my savings rate, my income, my target retirement age and a few other factors to properly allocate my retirement dollars between equities, bonds, fixed income, etc. What they were not saying was that this was based on a computer model that invests on historical norms and that does not adjust at all based upon current economic conditions or fundamentals. It only adjusts for the most part based on my age. Maybe this works for most people but I still prefer to control my fate and base it at least in part on what I see to be economic conditions and fundamentals. My retirement account presently is larger than it was two years ago so I do not think I am totally off base with this philosophy because I am pretty sure the woman presenting today has significantly less in her retirement than two years ago. My approach is obviously not for everyone, but if you spend 2-5 hours a day or more reading up on financial matters, you may be better off to at least in part call your own shots.

http://www.nakedcapitalism.com/2009/06/ken-lewis-points-finger-at-bernanke-and.html

Mortgage Madness

Mish provides in the linked post some additional details on how mortgage rates have skyrocket in the past few weeks, and, as a consequence, new mortgages and refinancings are frozen. I noted yesterday my own experience with rates up 1% in a month. My lock at 5% was good for 30 days and the appraisal, which came in close to 15% lower than I thought it would, did not come in until a few days before the lock expired. The mortgage company probably would not have done the deal had I not had cash available to pay down my existing mortgage so that I could reduce the principal needed for the refi loan and keep my LTV at an acceptable level. The lender also add a quarter point to my closing costs, but given that I was shaving over a full percentage point off my rate, it was still a deal. Not everyone can do this and a lot of refinancings in the works are tanking, after folks have already incurred the cost of an appraisal.

http://globaleconomicanalysis.blogspot.com/2009/06/mortgage-market-remains-solidly-frozen.html

I wrote a few weeks ago on how I suspect a lot of banks are going to take it on the chin with the low rates that existed here for the past few months. Looking at Treasury auction action, more than a few players are betting on inflationary times ahead - despite current deflationary pressures. If inflation goes to seven or eight percent, my new mortgage company will be paying me to borrow money. And if this apparent recovery does take hold (I don't think it will for a couple of years, but who knows) then the record breaking stimulus dollars globally could lead to high inflation rates. Either way, those institutions giving 4.5-5.0% loans that are fixed for 25-30 years are truly taking a big risk. My first mortgage in 1991 was at 10.5% and that was an ARM. I considered it a good rate as rates had been over 15% not too many years before then. I am not saying rates will go there again any time soon, but they do not have to go up too much from where they are today for some institutions to be kicking themselves on the low rates of the past few months, which is undoubtedly why many institutions are looking for any excuse to get out of locked in rates.

Disclosures: None

"Beige Shoots"

I would like to say the title is my original thought but I borrowed it from Calculated Risk, which is why I put it in quotations. The Fed came out with its Beige Book today and according to some mainstream press it showed that the downturn is "moderating." Now you really need to carefully consider the words chosen and what they mean. One thing is for sure, everything will not go to zero. Housing will not become worth zero, employment will not go to zero, GDP will not fall to zero and so forth and so on. So the pace of decline has no choice but to eventually moderate. This is not a positive sign, just a less pessimistic one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqcOKnqxzW5E

Not all the information in the report terrible but it is hard to describe any of it as rosy. Commercial real estate in particular is rather ugly. As the folks at Calculated Risk (an excellent site on real estate) have repeatedly noted, CRE cliff diving commonly follows residential real estate cliff diving and this time is no exception.

http://www.calculatedriskblog.com/2009/06/feds-beige-book-econditions-remained.html

Calculated Risk has some other data that is not too rosy worth consideration. First, California is simply running out of money - very quickly. What happens when it cannot pay its bills? I guess we may all find out soon.

http://www.calculatedriskblog.com/2009/06/california-state-controller-out-of-cash.html

More disturbingly, mortgage rates are back up again. A good friend of mine owns a title company, does real estate closings and, in fact, I just closed on refinancing with her tonight. Last month I locked in my rate at 5% and just missed getting 4.75% because an error on my credit report delayed my lock in on the rate. In any event I am quite pleased at 5%. My friend - let's just call her Ann - told me rates on 30 year mortgages hit 6% today, just a month after I locked in 5%. Did I mention I am very happy with 5%?

I have not seen stats on this but have to believe that rates being quite low for the past few months have had a major economic benefit on main street. Certainly the people who can refinance is a limited crowd due to homeowners under water, unemployment and other factors, but for each household that was able to refinance, it probably means hundreds a month in more disposable cash, which is a major benefit that is (a) where it needs to be to stimulate our economy, (b) long term and (c) not coming out of taxpayer dollars. This was one of the better things I have seen for the economy this year and it now seems to be coming to a close rather quickly. And this is not just a refinancing issue, of course. The Beige Book noted that housing sales seemed to be stabilizing in many regions but that was in part due to low rates, which are now disappearing. Other factors are at play but the influence of low rates is at least for now going or gone.

http://www.calculatedriskblog.com/2009/06/mortgage-rates-and-ten-year-yield.html

Another worrisome factor is the quickly rising price of gasoline. I do not see the rise as sustainable and, from what I have read, it has some suspect origins, yet the price has been rising and that is not a favorable factor - at least in the short term - for any economic recovery.

Overall, the green shoots seem limited, the brown shoots are still there and now we have a lot of beige shoots. I still do not see a lot of cause to celebrate. Nonetheless, the market rebounded well today from some significant drops mid-day. I have read some posts about some suspicions on perhaps some entities painting the tape. Volume has been light so it is something that could happen. We will see if these conspiracy theories play out.

Thank You for 100

Lest my editor at Seeking Alpha consider this post not worthy, this should be my 100th article for Seeking Alpha. I do greatly appreciate being able to contribute and hope I have added to the overall equation. For those that have read me, thank you. I especially have appreciated all the thoughtful commentary (and even some of the less thoughtful commentary).

Disclosures: None.

That Jet Lag Thingy

My last time to China I recovered rather quickly from the flight. This time I did well on the way over but coming back the recovery has been very slow. I have been back six days and still woke up at 4:30 and am now feeling the best I have all day - just as I need to think about going to bed. Still, with my day-long zombie haze lifting, I thought I would sneak in a short post.

Yves at Naked Capitalism, likely in the interest of a balanced approach, today presented some competing posts; one that sees a recovery in place and one that questions the green shoots we are seeing. I link them both here:

http://pensionpulse.blogspot.com/2009/06/full-steam-ahead.html

http://www.nakedcapitalism.com/2009/06/more-data-casting-doubts-on-green.html

Both are well written and worth the read. What strikes me is the divergence in focus, which I am noticing a lot these days. Those seeing the recovery in place and the worst behind us tend to look at "indicators." They see the market up as a good sign, commodities rebounding as a good sign, Paul Krugman more upbeat as a good sign and so forth and so on. What many of these articles and posts lack are analysis of data - the fundamentals. The anecdotal "indicators" can be manipulated and misread. Moreover, they might just tell you what people want to hear versus reality. If you look at the less optimistic piece posted above, it focuses on data; data on unemployment, commodities and the like. It looks at why the indicators are misleading. To me, it focuses on reality. I could be all wrong (it won't be the first time) but I prefer the data focus. In the long run, data should win.

So here is more data:

• Surveys, including a fairly reliable Manpower survey, show employers are still not planning on hiring any time soon, so they are either not buying into the green shoots theory or - as in most recessions recently - waiting until the proof is absolutely clear before hiring;http://www.calculatedriskblog.com/2009/06/weak-hiring-and-jobless-recovery.html
• Commercial real estate loans are suffering big time, which will have a significant impact on regional and local banks. Some suspect the government stress tests did not adequately allow for this;http://www.calculatedriskblog.com/2009/06/commercial-mortgage-defaults-seen.html
• While the TARP panel chair is recommending rerunning the stress tests, no way, no how. We all knew they were bogus to begin with so why repeat the sham; http://www.calculatedriskblog.com/2009/06/tarp-panel-chair-suggests-running.html
• It is hardly surprising that a lot of banks are wanting to repay the TARP funds to get the government off their backs on compensation and bonuses - especially when they can get just as much government support through PIPP and government guarantees: http://www.calculatedriskblog.com/2009/06/treasury-ten-large-banks-can-repay-68.html
• Has anyone noticed the massive debt the goverment is running up - not to mention others around the world. If you have not noticed, we also have massive health care and retiring baby boomer issues to consider. Yep, everything alright here.

Disclosures: None.

Unintended Consequences

For every good (or well intentioned) deed there seems to be an unintended consequence. Let me put aside for now my criticism of the focus of government stimulus spending to date and focus instead on some side-effects of it even if it were to work as planned. What happens when the government spends a boat load of our taxpayer dollars supporting companies that probably should fail? Answer: the government weakens the companies that did the right thing and that should survive. Supporting the weakest link creates government supported competition for the companies that did the right thing. Those that did what they should are being punished by government support for the competition. This is one hell of a way to fix an economy in my opinion.