Obama is an Idiot - Confession of a Democrat

Does Austerity Equal Prosperity?

The international debate that is all the rage is whether austerity or stimulus is the right solution for governments around the world. Certainly to some extent it will depend on the country. In the past couple of years I think it is safe to say that most economically troubled countries around the world chose stimulus. The U.S. did big time, as did the EU, Great Britain and elsewhere. But as the PHIIGS have show, stimulus has its logical limits. And then comes the groveling for support for countries unable to pay or finance their debt at accptable rates and this financial support is followed by arcane austerity measures. And then there are countries not yet in severe debt crunches (at least in terms of financing their debt) deciding what to do. What to do indeed. The following Bloomberg article notes, the debate will likely escalate soon at the upcoming G-20 Conference, with the U.S. at odds with much of Europe:

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aCDrh.AWJbC8

So, you might ask, where do I stand - okay I am pretty sure no one asked this but play along for a minute. My take is that John Mauldin, another contributer at Seeking Alpha, has it right.

http://seekingalpha.com/article/210910-be-careful-what-you-wish-for

It is pretty much the Goldilocks approach - not too much and not too little. To date pretty much all countries in trouble have gone with deficit spending and stimulus or support for failing financial institutions. In my book this was overdone and more institutions should have been dismantled. Certainly we should have not supported "too-big-to-fail" institutions taking over other "too-big-to-fail" institutions, but we did and actively asked them to do so. So my preferred plan is already toast and we have to deal with what we have been dealt. Now we have made our bed, so we need to decide what to do with it.

Obama is clearly of the more stimulus school. Some would call this the Keynesian school but I consider this an insult to John Maynard so I will not call it that. I might call it the Krugman school and suspect he would not mind. Either way, stimulus these days is wasted in my opinion. I say this as we are facing a new reality, something I have written about here for a couple of years and something that the folks of PIMCO tout. The world and U.S. economies have spent about a decade living in unsustainable and foolish bubbles that should be popped. They need to go away and we need to return to reality. Reality is a lower level of spending and economic activity. So in my book the stimulus should only be designed to stabilize things, which we have already done. After that, stimulus is not needed other than in spot situations to avoid problems. We do not need to and should not promote false economic activity. A bubble/false economy built on stimulus serves no one. Yet that is what the current Administration is after.

I believe the current Administration has fools - other than Volcker - leading the ship- and if Obama does not wake up and correct the course and fire the idiots he will be a one term President who history will portray as a man with great expectations and potential but no follow through on execution. He made superbly major mistakes on Summers and Geithner and has refused to give up on them. I am a life-long Democrat (among a family of Republicans, so this was no easy course) who voted for Obama but I am switching to Independent and truly regret voting for Obama. He has proven himself an idiot in my book.



I am told by some commenters that my remarks are too general and I should stick to the law, yet others tell me to keep posting. I am posting for the latter, so if I am too general for you, please move on. Between a more than full time job and a 3 and 6 (and a half) year old, I do not get the time I would like to devote to this endeavor and I have always been focused on macro-economic ideas, so if you do not like it, tough.

Real Estate Again

Let me return for now to my choice topic of late - real estate. New stats came out today and economists where surprised - yes surprised - that existing home sales were down. I personally am surprised that they are surprised. Tax incentives ended for those not signing by the end of April, purchase mortgage applications are at a 13 year low and freakin' economists are surprised that existing home sales were down last month. How surprising is that. If you are truly following this stuff - and economists commenting on it should be - there should be no surprises here.

Once again I must refer you to my favorite real estate oriented blog - Calculated Risk. This site reports all the stats the day they come out and has very very relevant commentary that I have found unbiased and not overstated in either direction. I highly recommend it. So today, Calculated Risk had a number of noteworthy posts on real estate, which I am happy to link as follows:

The author believes given current trends that the months of supply number for real estate will undoubtedly go to double digits later this year and I have no reason to disagree: http://www.calculatedriskblog.com/2010/06/how-high-will-existing-home-months-of.html

As the author notes, generally, months of supply over 6 typically leads to price declines and under indicates increasing prices. Right now we are at 8.3 months and could well increase to over 10 or 11 months going forward. Not good.

http://www.calculatedriskblog.com/2010/06/existing-homes-months-of-supply-and.html


http://www.calculatedriskblog.com/2010/06/existing-home-sales-decline-in-may.html

Each of the linked Calculated Risk articles are well worth your time.


Disclosures: None

Wait for Late August or September

A couple of months ago I made a rather generalized prediction that the markets would suffer a lot this fall. I based this largely on option ARM resets but there are a lot of other factors at play here. For one, the markets often do well in the summer only to collapse in the fall, especially in October. I personally do not think we will make it that far. I suspect by mid-to-late August and early September at the latest things will come to a head and we will see markets retesting their lows in March of 2009. So why, you ask.

I return to real estate first. Things seemed pretty good through the first quarter this year but folks were taking advantage of a rather significant tax credit (don't get me started on how much this benefit cost the rest of us). That credit is gone now and we front loaded a lot of sales. Don't take my word for it, purchase mortgage applications were at a 13 year low last month after the expiration of the credit and lumber prices this past month are down 30%. Not signs that real estate is on a sustained recovery.

Still on real estate, we have a lot of adjustable rate mortgages (ARMsO) resetting this fall. Now I know that a lot of people who could, refinanced to a fixed rate, that the resets for most will not be that bad as rates are low and many of those with ARMs have already defaulted, so the impact is muted, but there are still plenty out there and the defaults will likely peak in the last half of this year. Some option ARMs allowed buyers to only pay interest so even with low rates the resets will now require payments on principal, which will increase payments. Between that, homes under water, and high unemployment in a lot of states where the option ARMs were pushed, you have a toxic mix.

Let's go beyond real estate. In the U.S. the stimulus in many sectors is ending about now and the impacts of that will really start to hit home this fall. Now I suspect the administration may seek to prime the pump a bit more with more stimulus but the soveriegn debt problems in the EU will lead to a lot of second thoughts on that and, at a minimum, will lead to less drastic stimulus. Governments have a new focus on deficits after the problems in the EU and rightly so. The economy in the U.S. and a good part of the world for the past year or so has all been stimulus, so when it is gone we will have to face reality and reality is not real pleasant just yet. I suspect it will not be approaching pleasant for a generation or two, but what do I know.

Let's talk about banks. We bailed out the big players that delivered us to this mess and that in my book was a major mistake. I am of the Austrian school and believe we should have dismantled the culprits (I was tempted to use a less family friendly word). Nonetheless, despite all the government support and the big press about how the key players have repaid the government we nonetheless have some facts to face:

• First, the big banks are looking good financially because the government has sanctioned them hiding a lot of the debt on their balance sheets. If they truly had to reflect assets at value - even difficult to value assets like mortgage backed securities - they would be screwed;
• Second, local and regional banks that were not the recipients of government support are aching, in part because of government support of their corrupt competition. Some have significant commercial real estate loans, which are still peaking in terms of defaults, and virtually none have the government BS support the big boys received. Between 2000 and 20006 only 24 banks failed in the U.S., with none failing in 2005 or 2006. This year to date -as of today - we are up to 83. These are local and regional banks, but it shows the banks lending to small businesses and individuals are having problems. Indeed, the problem bank list continues to grow significantly, which cannot be a good sign. http://www.calculatedriskblog.com/2010/06/unofficial-problem-bank-list-increases.html What I have seen is that banks, big and small, are really not lending a lot of money. Credit continues to be frozen in many sectors. The big players who got all our support to start lending are locked shut for anyone less than stelllar wanting credit.. ;
• Third, is the EU. It is going to melt down late this year or next year. I am not expecting this to reach peak this fall but it well could in the fourth quarter or early next year. There are just too many issues there for them to continue as a union. I predicted the EU having these issues a year and a half ago and I still stand by my original prediction;
• Fourth, to the limited extent that China has been a safe harbor in this storm, it is certainly entering into its own storm. It's GDP has always been too small in this economic crisis to have much impact but what little impact it has had - largely emotionally for the markets - is soon going the disappear as it lacks the real, sustained, economic activity it needs to continue; and
• Fifth, debt! I keep going back to this. Debt in the U.S. on a personal level and government level is way too high, even before you factor in Social Security and Medicare. Debt on a personal level and sovereign level in the EU is obviously too high for the vast majority of countries there. The economy for a generation was built off debt and it will take a generation or two to get us off of our addition.

This list is a lot longer than I have posted but I am tired and these are enough to chew on for now. I am sticking by my prediction that the markets are in for a world of hurt this fall

Disclosures: None.

Real Estate Bubble - China?

You have heard it before, there is a real estate bubble in China. Now you would think that a country where the government calls the shots would be able to stop bubbles in their tracks. Well, apparently it cannot. This is not to say the government in China will not eventually be successful, but their initial measures have fallen short so far. And the fear is that enacting measures that might be needed will be overkill and lead to the very result China is trying to avoid, i.e. a popping of the bubble.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHmZ.NWuCybc&pos=4

So let's step back. We have an economy that many have thought to be the saving grace for the world - our crutch, if you will, as the rest of the world labors to recover economically. Well, I read an article last week showing that the GDP of China is a relatively small percentage of the U.S. and EU GDP, showing even a hot economy in China has no real chance of leading to a global rebound. So let's not put our chips on that bet. And even for those making that bet, the inevitable popping of the China real estate bubble will lead to the opposite result, as other real estate bubbles around the world have proven well in the last few years.

Now we all know what happens when a real estate bubble pops as most the folks in the U.S. and Europe have seen it first hand. Thank goodness all that is past us here in the U.S. Well, then again, perhaps not. I posted a couple of weeks ago on how new mortgage applications fell to a 13 year low after the government tax incentive ended. Most builders were somewhat up beat in the past month or two. Now, at least one builder has changed its tune recently. Apparently things since May have been a tad worse than last year (a very bad year) for Toll Brothers. They seem to blame it in no small part on the oil spill situation in the Gulf, which they fail to note was in full swing when they were rather up beat toward the end of May.

http://www.calculatedriskblog.com/2010/06/toll-brothers-demand-choppy-sales-down.html

BP Coming to the Confessional

And talking about the oil spill situation in the Gulf, I have not read all the articles but it appears BP is maybe about to do something right. It is a long time past due for BP to come to Jesus and save what little is left of its image. It could be the stock price, folks avoiding their stations or other problems but they finally have decided to do what they should have done a long time ago and made their peace with Obama. They are suspending dividends and agreeing to a $20B fund for the cleanup. Dollar short and a day late, as they say.

Disclosures: None.

Rubber Meetin' Road Time

I read a good bit this weekend and I am convinced that we are in for a world of hurt. Perhaps not this week, month or year - perhaps not even next year - but it is coming. Financial institution problems started the cascade, governments came to the rescue and now the governments are in trouble. International organizations are coming to the rescue, but we are now down to our last bluff, or nearly so. Well, things are looking pretty bad and I see no real answer in sight. I do think there are some smart things the U.S. could do but I have no expectation that the government will. I continue to be wholly disappointed with its response to this crisis to date. Not enough to join the Tea Bagger party (with even worse ideas), but I am disenchanted.

Enough said. I have little more to say so let me provide you with the best stuff I read this weekend. I read quite a bit - it rained all day today - so I can assure you these are worth the time to read. The first provides a lot of up-to-date stats that are quite disturbing. The other two are more general but they are by two of the greatest investment minds around today. Enjoy!

http://seekingalpha.com/article/208622-there-s-a-slow-train-coming?source=dashboard_macro-view

http://www.sprott.com/Docs/MarketsataGlance/05_10%20A%20Busted%20Formula.pdf

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Bill+Gross+June+2010+Investment+Outlook.htm

Disclosures: I have a lot of my retirement money with PIMCO. Otherwise, none.

Vindicated?

A dear friend who is responsible for me starting this blog a little over a year and a half ago asked me today if I feel vindicated by the market downturn the past several weeks. Two years ago I was simply emailing friends in my office about the approaching calamity and this friend referred to me as Chicken Little. As the sky began to fall in keeping with my predictions, he suggested I start blogging. He follows what I write - and undoubtedly is the first one reading these words - and knows that I am among the few that maintained a bearish stance over the past year as the markets rebounded. I told him no, I do not feel vindicated. But I have to admit, perhaps a bit. But I am not enjoying it. So why did I tell him no?

First of all, it is a bit early to get cocky here. A few weeks of downturn does not a bear market make. I certainly see no near term reason for things to reverse themselves from a bearish direction in any great way, but I have given up on predicting market direction. I am simply sticking to fundamentals and the belief that in the long term the market has to reflect them. I view the markets as possibly beginning to reflect reality at the moment, though would not be too surprised to see some major stimulus packages being announced in the U.S., EU or elsewhere soon to bring the markets back from the brink. I will comment on this possibility more below.

Second, I do not want to be right in my doom-and-gloom. I see no alternative given debt, unemployment and everything else on a world scale, but I would still love to be wrong. I have a three year old, a six year old, parents on Social Security, in-laws on Social Security and a host of other reasons I would love to see the economy rebound. Nonetheless, I have been planning my finances according to the fundamentals and reality - as I see it- and I do not see fundamentals as good for a very long time. If you see things the same way you may want to do the same.

Governments Between a Rock and a Hard Place.

I noted above that I would not be surprised if the U.S., EU or other governments came out with stimulus soon to bring the markets back to life. Okay, I may have fibbed a bit. The EU just did its nuclear option to address the Greece situation and probably is not anxious to do much more to address the Hungarian situation today. They would probably like to do something but have nothing left in the arsenal that they think would work, so they are stuck. After using it once, the nuclear option is no longer an option, and I suspect before doing it that was a topic of discussion, i.e. "If it does not work, we cannot do it again. We are screwed." From my perspective, it did not work and they are screwed.

The same is close to happening for the U.S. The U.S. still has a few bullets left but Obama and company have to be wondering how well their bullets will work and, at least for now, they probably want to keep their powder dry. The real devil in the details is debt. Greece, Hungary, Spain, Italy . . . etc. are largely in the mess they are in because the governments there are too far in debt. They spent their bullets - and then some - and have few alternatives left. They do not have the tax revenues to pay the debts. More stimulus will only add to the public debt problem. And the austerity measures currently being imposed on them will merely lead to economic stagnation/depression, which will further deplete GDP and tax receipts, only enhancing their problems. It is a vicious cycle that will undoubtedly lead to restructuring of debt or default. The elephant in the room that everyone needs to address is that it makes sense to restructure or default sooner, not later. We only add to the problems by waiting and throwing more money at it.

The U.S. will hopefully learn this lesson. Rather than spending trillions propping up too big to fail financial institutions and transferring massive amounts of money from taxpayers to the perpetrators who brought the pain, we would have been better served by biting the bullet, dismantling these companies and paying the price up front. Instead, we spent the bank saving them and promoting them merging with each other to build even bigger too big to fail institutions. The question now becomes, is the U.S. too big to fail. If it keeps up with idiotic moves, I am abstaining from the vote on this question.

PIMCO - The Voice of Reason

I admit a lot of my retirement is with PIMCO. Nonetheless, tooting their horn will not lead to any gain for me personally - that I am aware of - so here goes. Bill Gross and others at PIMCO seem to have their act together better than any other place you can put your money. They see a world of hurt ahead in the EU, a very slow recovery with a lot of unemployment issues (and a new normal) in the U.S. and they are warning investors that for the foreseeable future they need to learn to live with annual returns in the low single digits. They also caution that the alternative to low single digits - for those chasing more -could easily be losses. These, folks, are sound words. It is not a time now to be chasing gains. It is a time to hunker down and be happy with less.

Now Bill Gross and Mohamad El-Erain of PIMCO are both referring to our current economy as the "new normal," as in expect less spending and economic growth for now.

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

We have spent most the past couple of decades in one bubble or another - tech, real estate and such - so the "new normal" may actually simply be normal, i.e., without bubbles. I posted several times last year on what I was then calling the "new reality," which is the same concept, slightly different name.

http://financialspiltmilk.blogspot.com/2009/08/new-reality.html

Indeed, my first post on this, as I just found, was January 31, 2009. I attach the entire post here and will let you decide whether I was right or wrong.

http://financialspiltmilk.blogspot.com/2009/01/new-reality.html

As I described the new reality then, I simply noted we had for years, perhaps decades, lived beyond our means, accumulating debt to pay for it, and we were simply reverting to mean - perhaps below mean to pay off debt.

Worse Than the New Normal

My real concern at the moment has nothing to do with reversion to mean; nothing to do with the new normal or new reality; my concern right now is some level of meltdown. We averted for now a financial meltdown but in doing so may have set up sovereign meltdowns, which could have signifiantly worse percussions, including leading to new financial meltdowns as the financial institutions hold the sovereign debt. Now some of the sovereign problems -probably many - were due to countries not properly managing their spending or their economies/taxes not supporting government needs. Be it that or massive government deficit spending to deal with the recent recession, governments are in a world of hurt. I see defaults and restructuring coming and the real question is how the world governments deal with it.

On one front they can do as they have by throwing money at it and imposing austerity measures, which is wortheless. On the other, they can start affirmatively dealing with restructuring to avoid defaults and put a plan in place to deal with the ramifications of restructuring. The sooner the better.

Disclosures: I am heavily invested in PIMCO. Otherwise, none.

Signs are Mixed - To Say the Least

Let's begin with the markets and a man named Fink. The markets in the U.S. were up roughly 2.5% today based - according to Bloomberg - on good housing numbers. Meanwhile, Fink - the name says it all - head of BlackRock, says stocks in the U.S. are ready to "rock." Do you get it . . . Black"Rock" ready to "rock." He is not so positive on the EU, but who is. By the way, BlackRock manages over $3 trillion in investments (yes, that is with a T) so he arguably has good street cred. So it is with great difficulty that I have to build a case to disagree. (My six year old daughter would say to me that I am being sarcastic at this point).

http://www.bloomberg.com/apps/news?pid=20601110&sid=aRyKXyGE.xUY

Let's start with the housing numbers. At least Bloomberg acknowledged that the pick up in sales was due to the end of an $8000 tax credit promotion at the end of April. Nonetheless, I saw numerous headlines, analysts and commentators today touting the good housing numbers, which according to most of what I read is responsible for the good market numbers today and good numbers so far in the market in Japan. Don't believe me, listen to Bloomberg in this attached link.

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

So where, might you ask, lies the problem? Let's start with the prospect that on housing we have paid it forward big time and are in for a world of hurt the next few months. And I mean a serious world of hurt. Let me just say new mortgage applications, since the lapse of the home buyer tax break, have gone down just a tad - AS IN THE LOWEST LEVELS SINCE 1997!! Did I say a world of hurt?!

http://www.calculatedriskblog.com/2010/06/mba-mortgage-purchase-applications.html

How on Earth can the markets react so positively on this artificial housing number? I think because market wise we are down 10-11% in a matter of weeks and money is itching for an excuse to come back in. Money just chose today a poor excuse to come in.

Now it is not like housing is showing a great resurgence because foreclosures or defaults are down. Yes, for those companies now owning most of the mortgages in this country -Fannie, Freddie and FHA - delinquencies are down, but perhaps only because they are being more aggressive in pursuing foreclosures. The REO numbers for this trio continue to set new records each and every month, and we are talking about a staggering increase of REO inventory among them, increasing roughly 50% between second quarter 2009 and fourth quarter 2009. With all these foreclosed properties coming on the market I do not see much in terms of a RE bounce this year.

http://www.calculatedriskblog.com/2010/06/fannie-mae-serious-delinquencies.html

Now I would be remiss not to note that auto sales are posting some strong gains YOY and there are other signs of recovery, but a lot of this seems to be companies finally filling in historic low levels of inventory. Exports are up in the U.S. but how long can this last as the dollar continues to strengthen - especially against the Euro. Bottom line, with overburdened individuals and governments in terms of debt levels there is just so far this run can go.

I could be wrong on my expectations but the fundamentals still do not lead me to trust a Fink.

Disclosures: None.

Not So Silly After All

A few weeks back I wrote a post on the situation in the EU and how, for once in my life, I nailed it in terms of predictions. That is not why I am linking that post.

http://financialspiltmilk.blogspot.com/2010/04/tootin-my-own-horn.html

At the very end of the post I posited what I called a "silly" proposition of a worldwide declaration that all debt - both public and private - is cancelled. It is still obviously a silly idea, but perhaps not as silly as I thought at the time. Some folks are noting that the best way out of our debt doldrums may well be default. Wipe the slate clean and start over instead of years or decades of digging out. In the linked post the author notes, as many have of late, that jingle mail, bankruptcy and they like may not be the worst alternative. Now as an attorney I am certainly not advising anyone to do anything. You need some serious counsel before doing any of this as there are financial, credit and TAX consequences to some of them you may not expect. Nonetheless, the prospect of a few years of credit rating pain versus many years of suffering under massive debt is something that many folks I am sure are considering.

http://www.nakedcapitalism.com/2010/06/guest-post-default-please.html

And little did I know but Christian societies many centuries back had a debt Jubilee every 30 years, apparently doing what I suggested, erasing all debt. Now I still think the idea is a bit silly but I can guarantee you folks in the EU are starting to consider some silly alternatives.

Wait - All is Well on the Western Front

Before you run off and consider bankruptcy or jingle mail, think again. Analysts - 2000 of them in the aggregate - think we have some good times ahead. Indeed, they think the S&P will gain 27% over the next year. That is incredible!!! Now I define incredible as being something that is not credible, but you can reach your own conclusion.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aD8QSy9AdOtc&pos=10

And all this gain must be in part due to the financial institutions being more sound. Banks are, after all, more sound in terms capital, profit, reserves and everything else - right? Well, think again. It seems some of this may be accounting slight of hand, all signed off on by government powers that be.

http://www.nakedcapitalism.com/2010/05/economist-declares-mission-accomplished-on-repairing-bank-balance-sheets.html

If you do not believe accounting is hiding some weakness, consider the fact that we are up to 78 banks failing this year and being taken over by the FDIC, five last Friday alone.

http://www.calculatedriskblog.com/2010/05/bank-failure-78-sun-west-bank-las-vegas.html

And the FDIC list of problem banks is getting much worse rather quickly. It went from 737 to 762 in the past week. Go figure.

http://www.calculatedriskblog.com/2010/05/unofficial-problem-bank-list-increases.html

Disclosures: None.