No One is Listening

The government does have a handful of people worth listening to. While not always hitting the nail on the head, Sheila Bair, Chairman of the FDIC, seems to be more right than wrong, in my opinion. Now this may be a bit of Monday morning quarterbacking, but she is publicly pointing out how it would have been better to break up some of the financial institutions instead of propping them up with TARP. A wonderful idea that the Administration doesn't seem to be willing to confront. Of course, when you fill you house with people from the industry, what do you expect.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajKGz8NRQipM

Did I Mention, The Recession is Over

You probably already know this, especially if you are part of the 10.2% unemployed, but everyone seems to be saying the recession is over. The NY Times notes this in the following article.

http://www.nytimes.com/2009/11/14/business/economy/14charts.html?_r=1&ref=business

Indeed, even Europe has passed the downturn and is on the road to recovery. Don' t believe me, read this.

http://www.independent.co.uk/news/business/news/britain-the-economic-sick-man-of-europe-1820527.html

Sure, the piece is a bit down on the prospects for the UK but most of the rest of Europe is just peachy.

Yep, that decides it, the recession is over and everything is fine. Why doesn't it feel that way?

Well, for plenty of people the recession has not ended and perhaps never will. They have hunkered down and will remain in that state for some time to come. Others have learned that being frugal is not the worst thing in the world, which of course is a matter of degree. There is a difference between frugal and true poverty. But for those getting by, just more cheaply, they are learning some of the joys of doing it yourself. My wife cannot understand why I like to mow the lawn, do the fall clean up, stain the deck and do other things around the house myself. In part it is the money I save but largely I just enjoy doing it. And if you can come up with projects that the whole family can do, so much the better.

http://www.financialarmageddon.com/2009/11/new-rallying-cry-for-americans.html

Disclosures: None.

Hide Any Sharp Objects

I have not posted for a while and am not intending to do so to any extent for a while. The bubble is being inflated big time and while the stimulus from the government is almost over, I expect there will be more stimulus next year as the economy falters. Right now it is difficult to segregate what should happen in the economy versus what is happening due to stimulus. Since I expect stimulus to continue now into 2010, I am not making any short term predictions.

Medium to long term, however, we are building one hell of a big new bubble. Seriously, with unemployment over 10%, housing prices down to where a record number of houses are under water and debt at record levels with relatively minimal personal deleveraging to date (and public debt going off the charts), I see a very large bubble surrounded by pins and needles. What I do not know is when this bubble will burst. But it will and when it does God save us all.

Disclosures. None.

A Lesson Learned

I took most of the advanced classes in high school, including calculus, physics, chemistry and the like. Not a big selection, but it was the stone age so I had slim pickins. Nonetheless, there was no personal finance class available, or any finance class at all for that matter. Learning how to manage your finances, how to save for retirement, how to save for your home and how much home you can afford, were all basics not available to me in school. Sure, there were finance classes in college but those were mostly tailored to those majoring in finance and they did not focus on individual finances for the most part.

I have a daughter who just turned six and a son who is two and I fully intend to teach them how to manage their finances. My daughter gets an allowance and half goes in the spending jar, a quarter in charity and a quarter in savings. I could tax her a third to teach her that lesson but that would just be too cruel. She will learn about taxes soon enough.

I just think our schools are leaving out valuable lessons that kids need to live a happy, productive and less stressful life. Life is too short to be spending most of it worried about debt. I have a fair number of relatives who were unable to manage their credit cards as they were never shown how. When you add to that the fact that the latest generation seems to be the entitilement generation, and you have a deadly mix. Don't believe me, believe the charts. This linked post at Sudden Debt has two of the most enlightening charts you will see this year. They compare individual income and GDP to debt over the past few decades. These are not at all pretty and I hope I can teach my children to avoid this trap.

http://suddendebt.blogspot.com/2009/10/more-personal-look-at-debt.html

Disclosures: None.

115 and Counting?

If my count is right and nothing more happens this evening, the FDIC took down 9 more banks today and I believe that is 115 for the year. Three or four years back we had zero closures for the year. Quite the change. Not S&P crisis levels in quantity, but the dollar values are right up there.

http://www.fdic.gov/


Continued Real Estate Woes

Remember Fannie Mae. You should because we own it. Lest you missed the news, virtually all new mortgages issued these days are ending up with the GSEs, either Fannie, Freddie or Ginnie. In any event, it would appear they are not doing so well. Below is a chart I have borrowed from Calculated Risk and I link here the actual blog, which I highly recommend. The best real estate site out there. As you can see from the chart, things are not going as well on the real estate front as the media would have you think. I cannot recall many charts this extreme.

http://www.calculatedriskblog.com/2009/10/fannie-mae-delinquencies-increase.html

What does this mean? I think it means the market was right to go down today.

Disclosures: None.

One Year Down

Happy Anniversary!

This week marks the one year anniversary of my blog. To celebrate, for those (two or three) of you that might be interested, here is a link to my very first post. Not too bad, if I say so myself:

http://financialspiltmilk.blogspot.com/2008/10/bad-october-bad-bad-october-go-sit-in.html

Looking back in retrospect, much of what I said - or at least repeated from others - was dead on. Okay, enough patting myself on the back, it's time to get on to other matters.

He is Sprott On - Dollar Destruction

One of the folks I like to follow is Eric Sprott. He does not do a blog or seek a lot of publicity, but he has had some of the best performing funds in Canada for many years running, so I like to occasionally go to his company's site (Sprott Private Wealth, LP) to read his monthly thoughts and those of his colleagues. Indeed, his group for at least the past year and a half has actively been recommending investing in gold and it just so happens that gold is setting records recently, so they hit that one on the head. Don't believe me, look at the articles by John Embry at the Sprott company site. He has for a long time been the biggest gold bull around, and apparently for good reason.

http://www.sprott.com/main3.aspx?id=55

Here is a link to Eric Sprott's September report on the U.S. dollar. Eric makes a very persuasive case for the dollar being toast. It seems we have been actively building our debt to the level we cannot hope to support even the interest payments in the future, especially when you throw in unfunded Social Security and Medicare obligations, so we have no reasonable alternatives. Bernanke is simply going to need to keep that printing press running full time, which will eventually and, probably, inevitably, lead to the dollar losing its status as the reserve currency. The value will continue to fall as well. This is no doubt why many are still recommending gold as a place to put your money.

Now, of course, I must add a caveat. Sprott has undoubtedly a lot of investments tied to the value of gold and the devaluation of the U.S. dollar, so keep this in mind in reading his thoughts.

http://www.sprott.com/Docs/MarketsataGlance/09_09_MAAG.pdf

And as Eric points out in his October report, the foreign appetite for U.S treasury purchases is decreasing sharply such that the Fed is becoming "the" market for treasuries, which is dangerous indeed.

http://www.sprott.com/Docs/MarketsataGlance/MAAG_10_2009.pdf

(Update: Save your comments about how the dollar index was strengthening today, up .4% as I write, and how gold is down. It does not change the long term fundamentals discussed above.)

Survey Says . . . (cont.)

Just yesterday I noted how people continue to survey economists for their predictions and economists continue to be too optimistic. So much so that on several recent forecasts not a single surveyed economist was sufficiently pessimistic to predict the correct result. Well, it happened again today on the housing numbers for new home sales. Forecasts ranged from 412,000 to 460,000 and the actual result was 402,000. Time to wake up and smell reality.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiUI.AF0m0.0

Now tomorrow we get government preliminary figures on third quarter GDP growth. The median economist forecast is 3.2%. Now I cannot wholly dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but I think I am going to go out on a limb here and say 2.6%. Of course I should not ignore the fact that this will be a government preliminary number and some believe (you can guess where I stand) that the government cooks the books on the numbers. Nonetheless, 2.6% is where I stand. Feel free to add your vote. The winner will get special mention in my next post.

That Stock Thingy

I am shocked and dismayed. After a global 68% run in stocks and seven months of straight increases in the market we may - please, say it isn't so - have a month that ends down just a tad. Not a significant tad so far, but a tad nonetheless. How can it be?! The market can actually go down again?

I love this quote in the linked Bloomberg article that "The doubt and pessimism just won't go away." Seriously, we narrowly avoided a total financial meltdown seven short months ago and this is what this supposedly knowledgeable - quotable - person has to say. Unless Bloomberg is shooting for comedic relief, they need to be quoting better sources.

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

So back to the question of why the market after seven months of going up, some months significantly, might actually now have a slightly down month. Heeellllooooo! Why shouldn't it. Let me count, just a few of the ways (hold on to your hats):

1. Home building by any standard has well exceeded usual norms, compared to population and income, over the past several years - significantly. We are just now getting back to levels that are more sustainable, but we have the inventory overhang, increasing unemployment, existing housing sales and foreclosures, and multiple other problems facing home builders. Did I mention shadow inventory? If you do not know what that is, it is basically banks and homeowners who want to sell - foreclosure properties or otherwise - who are holding homes off the market. Look it up as some estimates of this shadow inventory are staggering. I refer you to Calculated Risk, the best site I know on real estate issues, both private and commercial.
2. Debt, debt and more debt. I refer you to one of my favorite blogs, Sudden Debt, that focuses on this issue. To put it short, under Greenspan and Uncle Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Boy is that a wakeup call. How did we do that?
3. I have written a lot lately about the financial bastards that brought us here. While I need not say more, I feel I must. The problem now is moral hazard. These institutions - according to numerous reports I have read of late - are returning to their risk taking ways. They are most certainly returning to rewarding officers and executives with handsome pay and bonus programs, despite these same individuals nearly causing the financial meltdown of the entire world. How can this be so soon - like less than a year - after we teetered on the edge of financial Armageddon? It is because the government stepped in with little to no conditions. And I suspect this was largely due to us letting wolves from the industry (who took on key government jobs, e.g. Paulson) guard us (taxpayer) chickens. You reward, or save, idiots for their idiotic behaviour and they will not only repeat it but build upon it. We folks, are building a much bigger bubble. In a few years you can quote me on that. And hey, I am not even an economist. No one surveys my opinion.
4. As suggested above, the government is making a substantial number of wrong moves. For one, they need to take apart the too-big-to-fail institutions. Instead they promoted them getting bigger and now we do not know what to do with them. I had the same advice in my very first blog a year ago, linked above, and stand by it. Take them apart and let the officers and shareholders share the pain. Do not support them at taxpayer cost. Now I see a lot more other commentators, including many who know more than me, giving the same advice.
5. Let me mention commercial real estate. One stat I read this year is that we have in the U.S. roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.
6. And did I mention adjustable rate mortgages (ARMs). I read a report this past week that over 90% of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A lot of these will reset in 2010 and 2011, so we will see.
7. Shipping (Baltic dry index), trucking, port activity, shipping rates, and so on and so forth are all pointing to economic activity being negative. Not diving like we were earlier this year, but not rebounding.
8. Unemployment still increasing, not as fast but still increasing, and this has run on effects on retail spending, real estate and several other areas. As a side note I have to mention that a number of the bottom line improvements for companies this past quarter have been largely due to cost cutting (like layoffs) as opposed to increased sales. This does not spell recovery.

I could go on and on and in posts to come will do so, but the bottom line is that fundamentals are pretty much the worst they have been in my life time. Debt, government and private, continues to be my primary concern and you can easily see how many of the other areas noted above are closely tied to and - feeding or being fed by - that situation. Please feel free to add your thoughts, but I still have trouble sleeping at night - mostly because of my kids needing to deal with the stuff we are leaving for them.

Disclosures: None.

More of the Same - But Perhaps Some Are Listening?!

Finally, an honest banker among the big boys. Okay, he is retired, but that makes him a tad less biased, and as a former Chairman of Citigroup, the guy has major street cred and mojo, whatever that means. In any event, he agrees with Volcker - something I have been recommending for many months - that there needs to be a division between traditional banking and those that deal primarily with capital markets. And he agrees that more demanding capital requirements would help. Go figure?
http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=2

Hang Him High

If you ask me Stephen Friedman, who benefited by millions off taxpayers through what appears to be conflict of interest should repay it all. And the company for which he is a director should give us back around $14 billion. See, it turns out that Goldman made about $14 billion off of AIG's demise and that money came from the folks on the street - as in us taxpayers. Now they probably would have done okay without us, but that does not change the fact that they did even better with our money, just in time to start paying record bonuses again. Disgusted, I am, and I hope the prosecutors figure out a way to get the bucks back from Goldman one way or another. Friedman, on he other hand, deserves to be in jail in my opinion. He was playing both sides of the fence - director for the Fed of NY who approved AIG payments to Goldman and also director for Goldman - and to add insult to injury added his own multi-million dollar investment in Goldman before the Fed payment was announced to make sure he made out personally. I am ill again. Then again, I have been ill a lot lately. He claims he is being falsely portrayed, which is easy for someone with many millions of new found dollars to say.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

Must Read of the Month

And here is the must read of the day, week and month. I have mentioned before Jeremy Grantham of GMO. He is one advisor who understands what is going on. He is now out with his latest quarterly report. It is a long read - 14 pages - but do not skip to the ending. The tale is best read from cover to cover. Well worth the read and I highly recommend it.

http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf

Disclosures: None.

Survey says . . .

The consumer confidence numbers came out this morning and they unexpectedly (depending on your expectation) dropped. Indeed, not one economist, of the 79 surveyed, was as pessimistic as the actual result - not one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_xPp7Pzgs5E

I noted earlier this month how not one out of 80 economists surveyed was right or pessimistic enough on the jobs report on October 2 - not one.

http://www.google.com/hostednews/afp/article/ALeqM5jNat8FSYDU-6wVcrkdfTsuIylT4g

How is it we keep listening to these people? Very few of these "experts" forecast our current situation, yet we still like to survey them and some seem willing to believe them. Face it folks, the job market is in shambles, debt is off the charts (both public and private) and the current stimulus is running out of steam. What is there to be confident about? I am confident we are in for more pain, I just do not know when the markets will wake up to this fact and react.

Disclosures: None.