Dear Barney Frank,
You've clearly established yourself as the champion of the little guy, by pushing through "the most comprehensive housing reform since the New Deal" (threw up in my mouth a little bit on that one - sorry).
In one stroke of your mighty pen, you've saved 400,000 (so we're told) poor subprime borrowers who were duped by predatory lenders, who swooped into their apartments in the dead of night and held guns to their heads while forcing them to lie about their incomes and failing to disclose the terms of the loans they used to force these poor people into houses a heck of a lot nicer than mine, where they comfortably lived - at mortgage payments less than mine - for three or four years.
Yes, you're going to save these poor folks from losing these houses they can't afford, by forcing the lenders to write down the loans to 90% of the appraised value. And again, with just one stroke of your mighty pen!
Of course, that pen being mightier than a sword, you've also disemboweled 117 million taxpayers, who'll foot the bill for this act of grace, but hey - that's your job.
Now, I'd like to call upon you, O Superhero of the Duped, to bail me out.
See, back in 1999, I was duped by a predatory car salesman into buying a gas-guzzling SUV - a Jeep Grand Cherokee Limited with pretty much every available option.
He told me I needed the towing package. (I don't have a boat or a camper.) He told me I needed the off-road package. (Dude, I live in Kansas, for crying out loud.) He told me I needed the ten-CD changer. (It crapped out after about two years.) And with all that stuff, all that added weight, of course I had to have the big 5.7 liter V8 engine, complete with Quadra-Trac full-time four-wheel-drive. (Again, I live in Kansas.)
What he didn't tell me was that gas prices would darn near triple during the time I owned the sucker.
This beast gets about 15 miles per gallon, downhill with a tailwind. I can't sell it, because the value has fallen to about half what blue book was at the end of last year (hey - just like real estate values!). Well, okay, I could sell it, but I'd take a loss. And I shouldn't have to do that, now should I? After all, it's not like I was just taking the normal risk anyone takes when they buy a car, right? I was duped!
And even if I sold the behemoth, I couldn't afford a new hybrid, because dealers are selling them for more than sticker! That's just wrong! These guys need a new regulator!
I just can't afford the gas now, Barney. Well, okay, I can afford it, but I might have to give up eating out four nights a week and drinking expensive wine, and buying new guitars and stuff, and going on trips. That's just not fair! Heck, I'm already riding the train to Chicago for my summer vacation. The train, Barney, for crying out loud! Amtrak!
So here's my idea for a new bill:
1. Until I can sell this pig, the government should issue me a gas card. I can use it at any station, like a Visa (make sure I can get pop and Skittles with it too).
2. When I do sell, the government should give me a tax rebate for the difference between what blue book was a year ago and what it is now. (I haven't driven it all that much. Okay, I did drive to New Orleans and back in June, but that was for charity work, so I still want to be able to deduct those miles on my tax return.)
3. I want a tax credit for buying a new hybrid, and I want to buy it for dealer cost plus $100. Anything more than that is excessive profit and should be outlawed. I want a government loan for the car, at 0% interest for 72 months. Hey, if Ford can do it on an F150, Toyota can do it too.
4. For all the good things I'm doing for the environment by buying a hybrid, I want Al Gore to wash the sucker every Saturday until the wheels fall off.
Thanks, Barn. You're a heck of a lawman, kind of like that other Barney - you know, the one they only allowed to have one bullet, in his pocket, where it couldn't hurt anybody.
But you don't need a bullet. Your pen is a weapon of mass destruction.
Thursday, July 31, 2008
Tuesday, July 29, 2008
Newton's Law
"Vegas will never suffer another downturn."
This bold prediction was made by a cabbie who was driving me to my hotel in Vegas on a business trip two years ago. The comment came after I questioned all the frenzied building activity that was taking place on the Strip, and elsewhere. I particularly noted the hugely expensive property that was being built across from my hotel, which was to include luxury condos, a hotel and a casino.
The cabbie's premise was based on the notion that Sin City's gambler base was sufficiently international to weather any downturn. "Our whales come from Asia, Europe, the Middle East. We're recession-proof," he proclaimed.
I remember thinking at the time, "Oh boy, another 'things are different this time' claim."
Now, Vegas is facing what one Wall Street gaming analyst calls "its most severe downturn ever.
Remember that hugely expensive property across from my hotel? The developer defaulted on his construction loan in January. The Tropicana has filed for bankruptcy, as has the entire Lake Las Vegas resort complex a half-hour from the strip, which includes a private lake, three golf courses, luxury homes, and two premier hotels - one of which, the Ritz, has separately filed for protection.
A number of other planned projects are on hold, including a re-creation of the Plaza hotel, another tower on the Trump casino and hotel, and a Boyd project. Boyd was downgraded as a result, and other gaming stocks are plunging as the casinos are losing money. Dubai World invested heavily in MGM Mirage for a new project in Vegas, but they've fallen behind in raising necessary funds, and now that too is in peril.
Of course, part of the problem has been overbuilding, of both casino/hotel/condo properties and housing. Vegas leads the nation in home price declines, with the latest S&P/Case Shiller data showing the market down 28.4% year-over-year.
Ouch.
And part of it, undoubtedly, has to do with the US recession.
But part of it, too, belies my cabbie's assertion that Vegas is inflation-proof because it's globally diversified. The problem is, it also has competition. Gaming has increased in developing meccas like Dubai, which has become the playground of the European "whales," and Macau, which has become Asia's gambling center. Huge investments by the UAE and China has led to similar frenzied building in those locations, so the whales have somewhere else to swim.
The cabbie also didn't count on one other thing: a global recession. Who says that a downturn here can't spread? It has, and the effects will be felt for several more years.
It just goes to prove that what goes up, must come down. And how appropriate that Las Vegas has proven to be a house of cards.
This bold prediction was made by a cabbie who was driving me to my hotel in Vegas on a business trip two years ago. The comment came after I questioned all the frenzied building activity that was taking place on the Strip, and elsewhere. I particularly noted the hugely expensive property that was being built across from my hotel, which was to include luxury condos, a hotel and a casino.
The cabbie's premise was based on the notion that Sin City's gambler base was sufficiently international to weather any downturn. "Our whales come from Asia, Europe, the Middle East. We're recession-proof," he proclaimed.
I remember thinking at the time, "Oh boy, another 'things are different this time' claim."
Now, Vegas is facing what one Wall Street gaming analyst calls "its most severe downturn ever.
Remember that hugely expensive property across from my hotel? The developer defaulted on his construction loan in January. The Tropicana has filed for bankruptcy, as has the entire Lake Las Vegas resort complex a half-hour from the strip, which includes a private lake, three golf courses, luxury homes, and two premier hotels - one of which, the Ritz, has separately filed for protection.
A number of other planned projects are on hold, including a re-creation of the Plaza hotel, another tower on the Trump casino and hotel, and a Boyd project. Boyd was downgraded as a result, and other gaming stocks are plunging as the casinos are losing money. Dubai World invested heavily in MGM Mirage for a new project in Vegas, but they've fallen behind in raising necessary funds, and now that too is in peril.
Of course, part of the problem has been overbuilding, of both casino/hotel/condo properties and housing. Vegas leads the nation in home price declines, with the latest S&P/Case Shiller data showing the market down 28.4% year-over-year.
Ouch.
And part of it, undoubtedly, has to do with the US recession.
But part of it, too, belies my cabbie's assertion that Vegas is inflation-proof because it's globally diversified. The problem is, it also has competition. Gaming has increased in developing meccas like Dubai, which has become the playground of the European "whales," and Macau, which has become Asia's gambling center. Huge investments by the UAE and China has led to similar frenzied building in those locations, so the whales have somewhere else to swim.
The cabbie also didn't count on one other thing: a global recession. Who says that a downturn here can't spread? It has, and the effects will be felt for several more years.
It just goes to prove that what goes up, must come down. And how appropriate that Las Vegas has proven to be a house of cards.
Sunday, July 27, 2008
Congratulations to Carlos Sastre(isk)
Another Tour de France is in the bag. Carlos Sastre is the winner. Congrats to him - really. He's a fine bike rider; I have nothing against him.
Except the fact that he rides for Team CSC, the team managed by admitted doper Bjarne Riis, who deserves to be stripped of his '96 Tour title.
So be it. Cadel Evans blew it in the final time trial. He's usually good for a two-minute whomping of the likes of Sastre. But - while Phil Liggett and Paul Sherwin on Versus kept fawning about Sastre riding outside himself - the fact is that Evans is usually good for a top-three place in the time trial, and he came in seventh. He blew it.
Had Christian Vandevelde not crashed in the mountains, he'd have likely edged out Evans for second place.
Evans needs to find another team, or get his sponsor to build a team around him winning. He was alone in the mountains, while CSC had Sastre and the Schleck brothers up until the final meters of the climbs, plus Fabian Cancellara and the indomitable Jens Voigt powering along on the lower stuff to bust up the peloton. Clearly, CSC had the best team - I'll give them that. And Riis proved to be a good tactician, sacrificing Frank Schleck's hold on the yellow jersey in favor of Sastre on the Alpe d'Huez, knowing that Schleck's time trialing skills are barely better than mine, and that Sastre provided the sponsor the best chance of yellow in Paris.
I don't begrudge Sastre. I just hate to see a Riis-led team gain any victory. As it is, they'll get the Tour win, the white jersey for the best young rider (Andy Schleck), and the team prize, which is virtually meaningless - but still, I wish they'd ride home with nothing.
The title of this thread alludes to the fact that Team Astana was excluded from this year's Tour due to the French bias against Johan Bruyneel and Lance Armstrong. Had Astana been in this race, it would have been entirely different, and Riis and Sastre know it. Just as Ullrich won in '97, and Pantani in '98, after the Festina scandal took the biggest names out of the Tour, so this year's winner has to live with the knowledge that cycling's best weren't there, due to politics.
Astana would have been the strongest team in this year's Tour, being built solely around GC contention, with no sprinters in the mix. Either Alberto Contador - last year's Tour victor - or Levi Leipheimer would have won the Tour. Leipheimer would have hung tough in the climbs, and pounded the time trials. And Contador would have dominated the mountains. As a team, Astana is stronger than CSC. As a tactician, Bruyneel makes Riis look like a piker.
Oh well. Another Tour is in the bag. Another year of French manipulation to keep the Armstrong/Bruyneel legacy at bay. So be it. The Tour made money when Armstrong was winning seven straight times; not so since. Hopefully next year the organizers wise up and invite Astana. Then, truth will out.
Meantime, congrats to Sastre. I just hope you weren't taking a page from boss Bjarne's playbook, and juicing up for the big race of truth.
Except the fact that he rides for Team CSC, the team managed by admitted doper Bjarne Riis, who deserves to be stripped of his '96 Tour title.
So be it. Cadel Evans blew it in the final time trial. He's usually good for a two-minute whomping of the likes of Sastre. But - while Phil Liggett and Paul Sherwin on Versus kept fawning about Sastre riding outside himself - the fact is that Evans is usually good for a top-three place in the time trial, and he came in seventh. He blew it.
Had Christian Vandevelde not crashed in the mountains, he'd have likely edged out Evans for second place.
Evans needs to find another team, or get his sponsor to build a team around him winning. He was alone in the mountains, while CSC had Sastre and the Schleck brothers up until the final meters of the climbs, plus Fabian Cancellara and the indomitable Jens Voigt powering along on the lower stuff to bust up the peloton. Clearly, CSC had the best team - I'll give them that. And Riis proved to be a good tactician, sacrificing Frank Schleck's hold on the yellow jersey in favor of Sastre on the Alpe d'Huez, knowing that Schleck's time trialing skills are barely better than mine, and that Sastre provided the sponsor the best chance of yellow in Paris.
I don't begrudge Sastre. I just hate to see a Riis-led team gain any victory. As it is, they'll get the Tour win, the white jersey for the best young rider (Andy Schleck), and the team prize, which is virtually meaningless - but still, I wish they'd ride home with nothing.
The title of this thread alludes to the fact that Team Astana was excluded from this year's Tour due to the French bias against Johan Bruyneel and Lance Armstrong. Had Astana been in this race, it would have been entirely different, and Riis and Sastre know it. Just as Ullrich won in '97, and Pantani in '98, after the Festina scandal took the biggest names out of the Tour, so this year's winner has to live with the knowledge that cycling's best weren't there, due to politics.
Astana would have been the strongest team in this year's Tour, being built solely around GC contention, with no sprinters in the mix. Either Alberto Contador - last year's Tour victor - or Levi Leipheimer would have won the Tour. Leipheimer would have hung tough in the climbs, and pounded the time trials. And Contador would have dominated the mountains. As a team, Astana is stronger than CSC. As a tactician, Bruyneel makes Riis look like a piker.
Oh well. Another Tour is in the bag. Another year of French manipulation to keep the Armstrong/Bruyneel legacy at bay. So be it. The Tour made money when Armstrong was winning seven straight times; not so since. Hopefully next year the organizers wise up and invite Astana. Then, truth will out.
Meantime, congrats to Sastre. I just hope you weren't taking a page from boss Bjarne's playbook, and juicing up for the big race of truth.
Saturday, July 26, 2008
Haste Lays Waste
I'm so mad, I could just spit. Or worse.
Even if I were a die-hard supporter of George Bush, even if I were his biggest fan, even if I thought the man could do no wrong - none of which is true - I'd hate him for signing this stupid housing bailout bill, which he's about to cop out and do.
The Congressional Budget Office has estimated this albatross could cost the taxpayer $25 billion. We're already running a record deficit, in case you hadn't heard. Honestly, if Bush really does sign this thing, I just may stop paying taxes forever. Or move to an ex-pat community someplace warm, for crying out loud.
This stupidity will supposedly help 400,000 homeowners avoid foreclosure. Plus, it'll provide $4 billion in aid to communities to fix up foreclosed properties so they'll sell. Bush was going to veto the bill on that basis, citing as his reason - correctly so - that it would aid lenders, but not homeowners.
How convenient. Homeowners are individuals. Lenders are institutions. Individuals vote. Institutions do not.
However, even on that point Bush lost his resolve. Why? Because he doesn't have the line-item veto, and the Dems cagily added Paulson's blank-check bailout request for Fannie and Freddie to their porky housing bill. So Bush acquiesced so that he can get Hank's flawed bailout plan through quickly. He's now established himself as being as big a pansy as Bernanke.
The rush to get all this done - Paulson was just conjuring up his ill-conceived Fannie/Freddie bailout plan a couple of weeks ago - hearkens to the days of the S&L crisis, when Congress rushed to provide legislative "fixes" that only made the problem worse.
All too often, a rush to judgment results in making a bad situation worse. Mark these words.
So, we're going to bail out 400,000 borrowers - irresponsible borrowers who over-leveraged themselves into mortgages they couldn't repay on houses they couldn't afford. And in case you haven't been reading this space regularly, kindly spare me the Chris Dodd crap about predatory lenders duping unsuspecting borrowers. If you're drinking that kool-aid, let me sell you some prime development land in western Kansas, complete with mountain views and white sand beaches.
We're going to bail out 400,000 irresponsible borrowers, and who knows how many rogue lenders stuck with foreclosed properties - a risk of doing the business they do. How are we going to do that? By increasing the burden on 117 million taxpayers. Yeah, that sounds fair: spare the 400,000 at the expense of the 117 million. What's that saying: "From each according to his ability, to each according to his need?" Who said that again?
This makes me want to puke. One article, in assessing the cost of this lunacy, noted that the cost of the additional borrowing the Fed has extended during this debacle is about $446 billion. The cost of increased financing to the Federal Home Loan Banks - part of Paulson's plan - is another $274 billion. The cost of shoring up Fannie and Freddie is another $621 billion. And the cost of boosting the FHA's lending authority is $90 billion.
Paulson wants a blank check for Fannie and Freddie, but says he won't need it. So why ask? It's like when I listen to the President say "your deposits are insured," then spend a weekend listening to first Paulson, then FDIC Chair Sheila Bair say the same thing. I don't remember the last time the US President, Treasury Secretary, and FDIC Chair all had to come out and reassure depositors that their money was safe. I'm guessing it might have been, oh, say 1930-something. What do they know that we don't (yet) know?
The Office of Federal Housing Enterprise Oversight - a special regulator set up just to pander to - ah, er, regulate Fannie and Freddie - recently reported: "To the extent that (other) institutions recognize losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well."
Say WHAT??
You mean Fannie and Freddie - both of which have bought some of the same subprime crap as the Wall Street firms who've taken $400 billion plus in write-downs to date - haven't yet marked their crap to market? Holy cow - these guys are likely insolvent already.
Paulson, in stumping for this socialist bailout, said "he would rather not be in the position of asking for government funds to support the GSEs," according to MarketWatch. "But," he said, "I am playing the hand that I have been dealt."
Great, Hank. But you're anteing up MY money. You'd better hope you're holding four aces, or we're all screwed.
Even if I were a die-hard supporter of George Bush, even if I were his biggest fan, even if I thought the man could do no wrong - none of which is true - I'd hate him for signing this stupid housing bailout bill, which he's about to cop out and do.
The Congressional Budget Office has estimated this albatross could cost the taxpayer $25 billion. We're already running a record deficit, in case you hadn't heard. Honestly, if Bush really does sign this thing, I just may stop paying taxes forever. Or move to an ex-pat community someplace warm, for crying out loud.
This stupidity will supposedly help 400,000 homeowners avoid foreclosure. Plus, it'll provide $4 billion in aid to communities to fix up foreclosed properties so they'll sell. Bush was going to veto the bill on that basis, citing as his reason - correctly so - that it would aid lenders, but not homeowners.
How convenient. Homeowners are individuals. Lenders are institutions. Individuals vote. Institutions do not.
However, even on that point Bush lost his resolve. Why? Because he doesn't have the line-item veto, and the Dems cagily added Paulson's blank-check bailout request for Fannie and Freddie to their porky housing bill. So Bush acquiesced so that he can get Hank's flawed bailout plan through quickly. He's now established himself as being as big a pansy as Bernanke.
The rush to get all this done - Paulson was just conjuring up his ill-conceived Fannie/Freddie bailout plan a couple of weeks ago - hearkens to the days of the S&L crisis, when Congress rushed to provide legislative "fixes" that only made the problem worse.
All too often, a rush to judgment results in making a bad situation worse. Mark these words.
So, we're going to bail out 400,000 borrowers - irresponsible borrowers who over-leveraged themselves into mortgages they couldn't repay on houses they couldn't afford. And in case you haven't been reading this space regularly, kindly spare me the Chris Dodd crap about predatory lenders duping unsuspecting borrowers. If you're drinking that kool-aid, let me sell you some prime development land in western Kansas, complete with mountain views and white sand beaches.
We're going to bail out 400,000 irresponsible borrowers, and who knows how many rogue lenders stuck with foreclosed properties - a risk of doing the business they do. How are we going to do that? By increasing the burden on 117 million taxpayers. Yeah, that sounds fair: spare the 400,000 at the expense of the 117 million. What's that saying: "From each according to his ability, to each according to his need?" Who said that again?
This makes me want to puke. One article, in assessing the cost of this lunacy, noted that the cost of the additional borrowing the Fed has extended during this debacle is about $446 billion. The cost of increased financing to the Federal Home Loan Banks - part of Paulson's plan - is another $274 billion. The cost of shoring up Fannie and Freddie is another $621 billion. And the cost of boosting the FHA's lending authority is $90 billion.
Paulson wants a blank check for Fannie and Freddie, but says he won't need it. So why ask? It's like when I listen to the President say "your deposits are insured," then spend a weekend listening to first Paulson, then FDIC Chair Sheila Bair say the same thing. I don't remember the last time the US President, Treasury Secretary, and FDIC Chair all had to come out and reassure depositors that their money was safe. I'm guessing it might have been, oh, say 1930-something. What do they know that we don't (yet) know?
The Office of Federal Housing Enterprise Oversight - a special regulator set up just to pander to - ah, er, regulate Fannie and Freddie - recently reported: "To the extent that (other) institutions recognize losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well."
Say WHAT??
You mean Fannie and Freddie - both of which have bought some of the same subprime crap as the Wall Street firms who've taken $400 billion plus in write-downs to date - haven't yet marked their crap to market? Holy cow - these guys are likely insolvent already.
Paulson, in stumping for this socialist bailout, said "he would rather not be in the position of asking for government funds to support the GSEs," according to MarketWatch. "But," he said, "I am playing the hand that I have been dealt."
Great, Hank. But you're anteing up MY money. You'd better hope you're holding four aces, or we're all screwed.
Tuesday, July 22, 2008
A Brief DeTour
Lots of Fannie/Freddie/Paulson/credit crisis stuff to write about, but it'll have to wait until the weekend, as I'm off to Alaska for a couple of days on business (and not a moment too soon, with local temps at the triple-digit mark).
But first, I want to rant a bit about this year's Tour de France. For the uninitiated, that's the world's pre-eminent professional bike race (as in bicycle, not Harley). It's three weeks of grueling racing, at average speeds of about 28mph, over some of the toughest mountains in the Pyrenees and the Alps. Each day the riders tackle at least 100 miles or so. If you want to check it out, live coverage is on Versus every morning, with a replay each evening.
First, let me explain my own relationship with cycling. In another life (and another body), I used to race, albeit without much success. I was a teenager, and couldn't afford much in the way of a bike (it can be an expensive sport, like golf, though you don't have to pay greens fees when you ride).
Then, I continued to ride recreationally until my daughter was born. After that, my riding time was nil. About 7 years ago, I had the opportunity to put together a team of riders from my church to ride the local MS150, a two-day, 150-mile charity ride to benefit the Multiple Sclerosis Society. Our team grew into the largest non-corporate team, and was among the top fundraisers.
I led the team solo for three years, then had the thrill of riding the next two years on a tandem with my daughter. She was 13 when she completed her first MS150, including 100 miles the first day. I can't think of a better way to get quality together time with a teenager than to be stuck on a bike together for hours at a time. Now, our schedules - especially hers - are such that we just don't have time to train enough to be able to do such a ride, and I really miss it.
Anyway, I digress; back to this year's Tour.
The three positive doping tests - and one admission of doping - that have marred this year's Tour are a good thing, in my opinion. True, they illustrate that doping is still a problem in cycling.
But, guess what? Doping is a much, much bigger problem in American football, baseball, etc. than in cycling.
Steroid use is so prevalent in the NFL, I'd guess that only the kickers don't juice, and even they might be suspect. Cortisone is legal in quantities that are banned in cycling. And forget about baseball, where every power hitter is on the juice.
The thing is, those sports have unions for the athletes, and they fight doping controls. Cycling has no collective bargaining, so the organizers rule the riders. So they dope-test. And again, that's a good thing. At least cycling is trying to keep its sport clean.
The other portion of my rant has to do with the French organizers (the ASO) of the Tour, and their decision to exclude the Astana team. Astana is managed by Johann Bruyneel, who managed Lance Armstrong to seven consecutive Tour victories - which pissed the French off no end (they haven't been able to win their own national Tour since 1985, since which time Americans have won 10 of the 22 Tours) - and Spaniard Alberto Contador to another Tour victory last year.
Bruyneel was then the director of the Discovery team, which was the former US Postal squad before the Postal Service dropped its sponsorship in 2004. Discovery also got out of cycling after last season. No Postal or Discovery rider was ever busted for doping, although the French accused Armstrong all along (losing several lawsuits along the way).
Bruyneel took over the Astana squad, which lost its star rider, Kazakh Alexandre Vinokourov, to a positive doping test last year. Astana wanted to gut and rebuild the team, so they brought in new management - Bruyneel - new investors, including Armstrong, and a completely new stable of riders, including Contador and American Levi Leipheimer, who finished third in last year's Tour.
But the ASO didn't allow Astana to enter this year's Tour because of the past association with Vinokourov. In a sport attempting to clean up its image, that would appear to be just. But it's not.
You see, there are other teams in this year's Tour that have completely revamped and, like Astana, committed to stringent self-testing for doping. One of them is Team Columbia (as in the US sportswear company), which features former Armstrong teammate and US rider George Hincapie.
Columbia is a phoenix that rose from the ashes of the former Telekom team, which featured Jan Ullrich, who won the Tour in 1997 and has since been exposed as a doper. Vinokourov also once rode for Telekom, and it's suspected that doping was rampant on the team.
Another supposedly revamped team is CSC, former team of Italian Ivan Basso, who left to join Discovery last year - until it was revealed he too had doped in prior years. Discovery canned him before he could ride a race for them. CSC is led by Bjarne Riis, who won the Tour in 1996, and last year admitted he had doped during that year's Tour.
Say what? Didn't American Floyd Landis lose his Tour title from 2006 because he had tested positive for testosterone? But Riis - a non-American and the only Dane to ever win the Tour, thus not a threat to French pride - was allowed to keep his. If Landis had been afforded the same clemency, Americans would have won half of all the Tours ridden since the last French victory, something ASO just couldn't allow, apparently (more on that later).
So anyway, we have a team with past doping problems, led by an admitted doper, and another team with past doping problems that has completely changed its management, riders and operations, that were allowed into the Tour. Yet Astana, another completely revamped team, is denied. Why?
Two reasons. First, the French bias against Bruyneel and Armstrong. This has nothing to do with Astana or Vinokourov and everything to do with Bruyneel and Armstrong.
Second, Leipheimer had an excellent chance to win this year's Tour. He won the Tour of California for a second straight year, was third in both the Tour de Georgia and the Dauphine Libere, a Tour warm-up, and while the Tour was being contested in his absence, won the Cascade Classic in the US. Had he ridden - and won - the Tour this year, Americans (again, if Landis' win had been counted as was Riis') would have won more than half of the Tours ridden since the last Frenchman won.
And the French simply couldn't stand that.
But first, I want to rant a bit about this year's Tour de France. For the uninitiated, that's the world's pre-eminent professional bike race (as in bicycle, not Harley). It's three weeks of grueling racing, at average speeds of about 28mph, over some of the toughest mountains in the Pyrenees and the Alps. Each day the riders tackle at least 100 miles or so. If you want to check it out, live coverage is on Versus every morning, with a replay each evening.
First, let me explain my own relationship with cycling. In another life (and another body), I used to race, albeit without much success. I was a teenager, and couldn't afford much in the way of a bike (it can be an expensive sport, like golf, though you don't have to pay greens fees when you ride).
Then, I continued to ride recreationally until my daughter was born. After that, my riding time was nil. About 7 years ago, I had the opportunity to put together a team of riders from my church to ride the local MS150, a two-day, 150-mile charity ride to benefit the Multiple Sclerosis Society. Our team grew into the largest non-corporate team, and was among the top fundraisers.
I led the team solo for three years, then had the thrill of riding the next two years on a tandem with my daughter. She was 13 when she completed her first MS150, including 100 miles the first day. I can't think of a better way to get quality together time with a teenager than to be stuck on a bike together for hours at a time. Now, our schedules - especially hers - are such that we just don't have time to train enough to be able to do such a ride, and I really miss it.
Anyway, I digress; back to this year's Tour.
The three positive doping tests - and one admission of doping - that have marred this year's Tour are a good thing, in my opinion. True, they illustrate that doping is still a problem in cycling.
But, guess what? Doping is a much, much bigger problem in American football, baseball, etc. than in cycling.
Steroid use is so prevalent in the NFL, I'd guess that only the kickers don't juice, and even they might be suspect. Cortisone is legal in quantities that are banned in cycling. And forget about baseball, where every power hitter is on the juice.
The thing is, those sports have unions for the athletes, and they fight doping controls. Cycling has no collective bargaining, so the organizers rule the riders. So they dope-test. And again, that's a good thing. At least cycling is trying to keep its sport clean.
The other portion of my rant has to do with the French organizers (the ASO) of the Tour, and their decision to exclude the Astana team. Astana is managed by Johann Bruyneel, who managed Lance Armstrong to seven consecutive Tour victories - which pissed the French off no end (they haven't been able to win their own national Tour since 1985, since which time Americans have won 10 of the 22 Tours) - and Spaniard Alberto Contador to another Tour victory last year.
Bruyneel was then the director of the Discovery team, which was the former US Postal squad before the Postal Service dropped its sponsorship in 2004. Discovery also got out of cycling after last season. No Postal or Discovery rider was ever busted for doping, although the French accused Armstrong all along (losing several lawsuits along the way).
Bruyneel took over the Astana squad, which lost its star rider, Kazakh Alexandre Vinokourov, to a positive doping test last year. Astana wanted to gut and rebuild the team, so they brought in new management - Bruyneel - new investors, including Armstrong, and a completely new stable of riders, including Contador and American Levi Leipheimer, who finished third in last year's Tour.
But the ASO didn't allow Astana to enter this year's Tour because of the past association with Vinokourov. In a sport attempting to clean up its image, that would appear to be just. But it's not.
You see, there are other teams in this year's Tour that have completely revamped and, like Astana, committed to stringent self-testing for doping. One of them is Team Columbia (as in the US sportswear company), which features former Armstrong teammate and US rider George Hincapie.
Columbia is a phoenix that rose from the ashes of the former Telekom team, which featured Jan Ullrich, who won the Tour in 1997 and has since been exposed as a doper. Vinokourov also once rode for Telekom, and it's suspected that doping was rampant on the team.
Another supposedly revamped team is CSC, former team of Italian Ivan Basso, who left to join Discovery last year - until it was revealed he too had doped in prior years. Discovery canned him before he could ride a race for them. CSC is led by Bjarne Riis, who won the Tour in 1996, and last year admitted he had doped during that year's Tour.
Say what? Didn't American Floyd Landis lose his Tour title from 2006 because he had tested positive for testosterone? But Riis - a non-American and the only Dane to ever win the Tour, thus not a threat to French pride - was allowed to keep his. If Landis had been afforded the same clemency, Americans would have won half of all the Tours ridden since the last French victory, something ASO just couldn't allow, apparently (more on that later).
So anyway, we have a team with past doping problems, led by an admitted doper, and another team with past doping problems that has completely changed its management, riders and operations, that were allowed into the Tour. Yet Astana, another completely revamped team, is denied. Why?
Two reasons. First, the French bias against Bruyneel and Armstrong. This has nothing to do with Astana or Vinokourov and everything to do with Bruyneel and Armstrong.
Second, Leipheimer had an excellent chance to win this year's Tour. He won the Tour of California for a second straight year, was third in both the Tour de Georgia and the Dauphine Libere, a Tour warm-up, and while the Tour was being contested in his absence, won the Cascade Classic in the US. Had he ridden - and won - the Tour this year, Americans (again, if Landis' win had been counted as was Riis') would have won more than half of the Tours ridden since the last Frenchman won.
And the French simply couldn't stand that.
Friday, July 18, 2008
A Penny Saved
I want to talk about saving, but first, another swipe at Hank.
Now, Paulson says we need a stronger regulator for Fannie and Freddie. (Translation: “Give me a blank check to hand over to Fannie and Freddie, THEN we’ll start overseeing them.”) His comment on the matter:
“We have long maintained that the GSEs have the potential to pose a systemic risk and worked with Congress on legislation to create a GSE regulator with authorities appropriate to the task and on a par with other financial regulators.”
Oh, really?
I must’ve missed that bill from long ago. Oh wait – you mean the recent discussions, as in just within the past week or so?
If Hank has “long maintained that the GSEs have the potential to pose a systemic risk,” he’s derelict in his duty in not having done a darn thing about it. I’m surprised no one’s calling for his head. Personally, I'm sick of seeing his name on the currency in my pocket. From now on when I go to the bank to make a withdrawal and they ask, "How do you want that?" I'm going to say "Nothing larger than a twenty, and nothing with Hank Paulson's signature on it.
************
Now, on to the topic at hand. Yesterday I pointed out that the failure of Fannie and Freddie might be a good thing in that it would usher in greater financial responsibility on the part of not only lenders, but households as well. A recent Bloomberg story agrees:
“The US housing crisis may accomplish what years of parental hectoring couldn’t: Turn Americans from spenders into savers. Spending will fall because homeowners can no longer use rising real estate values to borrow cash - $837.5 billion in 2006 … (and) with mortgage lenders requiring down payments of 20%, the average household, which puts away less than 1% of after-tax pay, will have to save 10% for ten years to buy a home.”
And that’s a very, very, very good thing.
You see, savings – not spending – is the engine of economic growth, in spite of the kool-aid that’s been flowing from Washington and Wall Street since – well, since Alan Greenspan (aka “Mr. Bubble”) became Fed Chair.
For evidence, look at two things: recent economic growth in China, India and the US along with their respective savings rates, and long-term patterns of stock market appreciation, along with the savings rate, in US history.
Regarding the former, China – and until recently, India – have been posting double-digit output growth rates for several years now, and both countries enjoy double-digit savings rates as well. All that savings provides the capital that is the true engine of growth. In the US, where the savings rate has been near nil for years, the economy is built on a mountain of debt, which produces sustainable growth averaging below 5%, and with the always-looming threat of the house of cards collapsing, which is beginning to happen.
As for the latter, examining long-term stock market behavior follows Kondratieff Wave Theory, for those familiar with it, which is a study of long-term cycles.
If we look at the stock market over its history, it tends to move in long-term (15 years or so) cycles, either up or sideways. The cycles are driven by different factors, but share some commonalities: they begin with a sustainable, reasonable pace of appreciation, then begin to become increasingly speculative, with historically above-norm, unsustainable returns, almost always culminating with a bubble, which then bursts, and the sideways trend begins.
During the sideways cycles, sure, there are ups and downs - opportunities to make and lose money, if you’re a market timer. But from beginning to end, there’s little to no appreciation in the market during those cycles. And market timers tend to lose money more often than make it.
Back in 2001 I looked at the S&P 500 from 1930 to present, and observed the following cycles. (For the record, at that time I predicted, based on this cyclical behavior, that stocks would trade sideways for about 12-15 years, beginning from March 2000 when the dot-com bubble burst.)
The first, from 1930 to 1946, was a flat cycle (let's call it F1). Then, from 1947 to 1966, we had an up cycle (U1). Then, from 1966 to 1982, another flat cycle (F2). Then, from 1982 to 2000, another up cycle (U2). And now, from 2000 to present, another flat cycle is in its second half (F3). We’ll examine each of these in turn.
F1 was brought on by the Depression, and it was only World War II that ultimately pulled us out - not the New Deal, which failed. (Wry side note: the creation of Fannie Mae and Freddie Mac was part of the New Deal.) The S&P 500 began and ended this period at about 15.
U1 resulted largely from the post-war industrialization and innovation, as well as population demographics. The first six years were marked by steady, sustainable growth in the S&P of about 10% a year. The next eight years brought returns of about 25% a year, and the increased volatility one would expect with such speculative returns.
That occurs because increasing numbers of untrained speculators enter the market (think day traders more recently; back then it was everybody and his brother becoming a stockbroker), and they kid themselves into believing that “things are different this time” (remember how technology was supposed to have killed the business cycle as we know it, during the dot-com bubble? or how home prices were supposed to go up forever?).
But there are occasional big sell-offs when the smart money sees that things are overdone, which results in higher volatility. After that eight-year stretch of 25% returns, we got a 23% correction in six months in early 1962, then a 69% gain in 3.5 years - fueled by strong, but ultimately unsustainable growth in profit margins, a bubble that formed because people thought those margins were sustainable long-term, and used them in their valuation calculations.
F2 then began a 16.5-year period of sideways but volatile trading, with the S&P rising, beginning to end, just 12 points or so, for an average annual return of about 1% during a time when bank CDs averaged almost 8%. The primary culprits were fiscal policy blunders, oil shocks, and hyperinflation.
U2 kicked in around mid-1982. The baby boomers and the tech revolution helped drive average annual returns of about 20% a year for the first 12 or so years (even that is historically above the norm), also aided by the expansion of credit through securitization. There were major corrections in ‘87 and ‘90.
Then, the dot-com bubble kicked in, along with Alan “Mr. Bubble” Greenspan’s easy-money policies, and we had returns of about 40% a year from 1995 through 2000.
There was a 19% correction in six weeks in late 1998. During the second quarter of that year, based on the indicators I follow, I started predicting a recession, and economic performance headed that way. But the Fed threw me a monkey wrench when Greenspan cut Fed funds 75 basis points in six weeks due to the Long-Term Capital Management hedge fund melt-down - a previously unthinkable government bailout of bad investment decisions (that has since been repeated by Mr. Bubble’s successor, Helicopter Ben, and his pal Paulson). So the rally continued, with increased volatility, until the 2000 bursting of the bubble.
The initial driver behind the current sideways trend, which has seen the S&P fall from about 1500 in mid-2000 to about 1250 now, was the bursting of the dot-com bubble and the resulting recession. We climbed out of that on the back of more easy money - a Fed funds target kept too low too long - and financial chicanery on Wall Street that enabled widespread lending “innovation” (an aside: wasn't the SEC supposed to have tightened things up in the wake of the dot-com bubble's corporate and accounting fraud? weren't the ratings agencies supposed to have improved their game? and calling subprime lending “financial innovation” is like calling the development of ricin “chemical innovation”).
But a housing bubble can't produce real, strong, sustainable economic growth - look at most economic indicators, and by the housing peak in 2005-06, we hadn’t gotten nearly as strong as we were before the last recession.
So what, you ask, does all this have to do with the topic of today's post - namely, saving?
One commonality of all the up cycles discussed above is the savings rate, which began each up cycle around 8-10%, and dissipated as the cycle ran its course. At the beginning of U1, it was high because of the Depression and the war, both of which encouraged thrift. At the beginning of U2, it was high due to the previous decade’s hyperinflation.
Now, it’s been all but eradicated by broader stock market participation (I actually heard a fellow CFA charterholder say, in 1998 or so, “Why should I put money in a savings account at 3% when I can buy stock mutual funds and get 30%?”) and easy credit with no money down.
Tightening of home equity lending standards (I’m all for banning them altogether, along with 401k loans), requiring higher down payments on all kinds of loans, reducing credit card lines, returning to verified income and using debt-to-income ratios instead of FICO scores as the basis for lending, shortening auto financing terms – all of these things may come to pass as part of the fallout from the housing bubble and subsequent credit crisis.
And that’s a good thing, a thing that could end the sideways trend we’re in now, if the result is an increase in the savings rate to about 8-10%. But history – and what we know today about how long it’ll take for the fixes to work through the system – tell us that’s a few years off yet. The workout of the housing bubble and the global credit crisis, which is far from over, won't come until late 2009 or perhaps 2010 to 2012. That means the sideways trend we're in today will persist until several years beyond that - say, 2012 to 2015 at least.
Now, Paulson says we need a stronger regulator for Fannie and Freddie. (Translation: “Give me a blank check to hand over to Fannie and Freddie, THEN we’ll start overseeing them.”) His comment on the matter:
“We have long maintained that the GSEs have the potential to pose a systemic risk and worked with Congress on legislation to create a GSE regulator with authorities appropriate to the task and on a par with other financial regulators.”
Oh, really?
I must’ve missed that bill from long ago. Oh wait – you mean the recent discussions, as in just within the past week or so?
If Hank has “long maintained that the GSEs have the potential to pose a systemic risk,” he’s derelict in his duty in not having done a darn thing about it. I’m surprised no one’s calling for his head. Personally, I'm sick of seeing his name on the currency in my pocket. From now on when I go to the bank to make a withdrawal and they ask, "How do you want that?" I'm going to say "Nothing larger than a twenty, and nothing with Hank Paulson's signature on it.
************
Now, on to the topic at hand. Yesterday I pointed out that the failure of Fannie and Freddie might be a good thing in that it would usher in greater financial responsibility on the part of not only lenders, but households as well. A recent Bloomberg story agrees:
“The US housing crisis may accomplish what years of parental hectoring couldn’t: Turn Americans from spenders into savers. Spending will fall because homeowners can no longer use rising real estate values to borrow cash - $837.5 billion in 2006 … (and) with mortgage lenders requiring down payments of 20%, the average household, which puts away less than 1% of after-tax pay, will have to save 10% for ten years to buy a home.”
And that’s a very, very, very good thing.
You see, savings – not spending – is the engine of economic growth, in spite of the kool-aid that’s been flowing from Washington and Wall Street since – well, since Alan Greenspan (aka “Mr. Bubble”) became Fed Chair.
For evidence, look at two things: recent economic growth in China, India and the US along with their respective savings rates, and long-term patterns of stock market appreciation, along with the savings rate, in US history.
Regarding the former, China – and until recently, India – have been posting double-digit output growth rates for several years now, and both countries enjoy double-digit savings rates as well. All that savings provides the capital that is the true engine of growth. In the US, where the savings rate has been near nil for years, the economy is built on a mountain of debt, which produces sustainable growth averaging below 5%, and with the always-looming threat of the house of cards collapsing, which is beginning to happen.
As for the latter, examining long-term stock market behavior follows Kondratieff Wave Theory, for those familiar with it, which is a study of long-term cycles.
If we look at the stock market over its history, it tends to move in long-term (15 years or so) cycles, either up or sideways. The cycles are driven by different factors, but share some commonalities: they begin with a sustainable, reasonable pace of appreciation, then begin to become increasingly speculative, with historically above-norm, unsustainable returns, almost always culminating with a bubble, which then bursts, and the sideways trend begins.
During the sideways cycles, sure, there are ups and downs - opportunities to make and lose money, if you’re a market timer. But from beginning to end, there’s little to no appreciation in the market during those cycles. And market timers tend to lose money more often than make it.
Back in 2001 I looked at the S&P 500 from 1930 to present, and observed the following cycles. (For the record, at that time I predicted, based on this cyclical behavior, that stocks would trade sideways for about 12-15 years, beginning from March 2000 when the dot-com bubble burst.)
The first, from 1930 to 1946, was a flat cycle (let's call it F1). Then, from 1947 to 1966, we had an up cycle (U1). Then, from 1966 to 1982, another flat cycle (F2). Then, from 1982 to 2000, another up cycle (U2). And now, from 2000 to present, another flat cycle is in its second half (F3). We’ll examine each of these in turn.
F1 was brought on by the Depression, and it was only World War II that ultimately pulled us out - not the New Deal, which failed. (Wry side note: the creation of Fannie Mae and Freddie Mac was part of the New Deal.) The S&P 500 began and ended this period at about 15.
U1 resulted largely from the post-war industrialization and innovation, as well as population demographics. The first six years were marked by steady, sustainable growth in the S&P of about 10% a year. The next eight years brought returns of about 25% a year, and the increased volatility one would expect with such speculative returns.
That occurs because increasing numbers of untrained speculators enter the market (think day traders more recently; back then it was everybody and his brother becoming a stockbroker), and they kid themselves into believing that “things are different this time” (remember how technology was supposed to have killed the business cycle as we know it, during the dot-com bubble? or how home prices were supposed to go up forever?).
But there are occasional big sell-offs when the smart money sees that things are overdone, which results in higher volatility. After that eight-year stretch of 25% returns, we got a 23% correction in six months in early 1962, then a 69% gain in 3.5 years - fueled by strong, but ultimately unsustainable growth in profit margins, a bubble that formed because people thought those margins were sustainable long-term, and used them in their valuation calculations.
F2 then began a 16.5-year period of sideways but volatile trading, with the S&P rising, beginning to end, just 12 points or so, for an average annual return of about 1% during a time when bank CDs averaged almost 8%. The primary culprits were fiscal policy blunders, oil shocks, and hyperinflation.
U2 kicked in around mid-1982. The baby boomers and the tech revolution helped drive average annual returns of about 20% a year for the first 12 or so years (even that is historically above the norm), also aided by the expansion of credit through securitization. There were major corrections in ‘87 and ‘90.
Then, the dot-com bubble kicked in, along with Alan “Mr. Bubble” Greenspan’s easy-money policies, and we had returns of about 40% a year from 1995 through 2000.
There was a 19% correction in six weeks in late 1998. During the second quarter of that year, based on the indicators I follow, I started predicting a recession, and economic performance headed that way. But the Fed threw me a monkey wrench when Greenspan cut Fed funds 75 basis points in six weeks due to the Long-Term Capital Management hedge fund melt-down - a previously unthinkable government bailout of bad investment decisions (that has since been repeated by Mr. Bubble’s successor, Helicopter Ben, and his pal Paulson). So the rally continued, with increased volatility, until the 2000 bursting of the bubble.
The initial driver behind the current sideways trend, which has seen the S&P fall from about 1500 in mid-2000 to about 1250 now, was the bursting of the dot-com bubble and the resulting recession. We climbed out of that on the back of more easy money - a Fed funds target kept too low too long - and financial chicanery on Wall Street that enabled widespread lending “innovation” (an aside: wasn't the SEC supposed to have tightened things up in the wake of the dot-com bubble's corporate and accounting fraud? weren't the ratings agencies supposed to have improved their game? and calling subprime lending “financial innovation” is like calling the development of ricin “chemical innovation”).
But a housing bubble can't produce real, strong, sustainable economic growth - look at most economic indicators, and by the housing peak in 2005-06, we hadn’t gotten nearly as strong as we were before the last recession.
So what, you ask, does all this have to do with the topic of today's post - namely, saving?
One commonality of all the up cycles discussed above is the savings rate, which began each up cycle around 8-10%, and dissipated as the cycle ran its course. At the beginning of U1, it was high because of the Depression and the war, both of which encouraged thrift. At the beginning of U2, it was high due to the previous decade’s hyperinflation.
Now, it’s been all but eradicated by broader stock market participation (I actually heard a fellow CFA charterholder say, in 1998 or so, “Why should I put money in a savings account at 3% when I can buy stock mutual funds and get 30%?”) and easy credit with no money down.
Tightening of home equity lending standards (I’m all for banning them altogether, along with 401k loans), requiring higher down payments on all kinds of loans, reducing credit card lines, returning to verified income and using debt-to-income ratios instead of FICO scores as the basis for lending, shortening auto financing terms – all of these things may come to pass as part of the fallout from the housing bubble and subsequent credit crisis.
And that’s a good thing, a thing that could end the sideways trend we’re in now, if the result is an increase in the savings rate to about 8-10%. But history – and what we know today about how long it’ll take for the fixes to work through the system – tell us that’s a few years off yet. The workout of the housing bubble and the global credit crisis, which is far from over, won't come until late 2009 or perhaps 2010 to 2012. That means the sideways trend we're in today will persist until several years beyond that - say, 2012 to 2015 at least.
Thursday, July 17, 2008
Hank Gets Spanked
Apparently I'm not the only one who didn't like Paulson's lame Fannie/Freddie bailout plan. In fact, I don't know of anyone who did like it, except Hank.
Congress pretty much handed Hank his arse on this one, from both sides of the aisle. Seems they just don't have enough faith in Hank to want to write him a blank check - and that's a pretty sad note, when a bunch of free-spending pork-happy crooks don't trust you with money that isn't theirs anyway.
Sen. Richard Shelby (R-AL) said, "I think you are risking taxpayer dollars here." And Sen. Robert Menendez (D-NJ) added, "How is it that we can tell the taxpayers that there is no way (they) are going to be put on the hook here?" (I'm frankly surprised that Hank didn't just shrug and respond, "Lie to them - it always works for me.")
But the best exchange came between Hank and Kentucky Republican Jim Bunning:
Bunning: "When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. You want an unlimited amount and some of us at this table don't like an unlimited amount of federal dollars. Do you really think we can believe exactly what you are saying, Secretary Paulson?"
Paulson: "I believe everything I say. I've been around markets for a long time." (Note: just because Paulson believes everything he says is no reason the rest of us should be so naive.)
Bunning: "So have I. Where will the money come from if, in fact, we have to use the backstop?"
Paulson: "From the government."
Bunning: "And who is the government?" (Note: this reminds me of the classic line, "And what is the magic word, Dr. Venkman?" from "Ghostbusters.")
Paulson: "The taxpayer." (Owned.) Paulson goes on to tell Bunning if he doesn't like the plan, he should vote against it.
Bunning: "I will do everything I can to stop it."
Paulson: "And maybe you can come up with a better plan."
The situation is so screwed up that President Bush finds himself having to rely on Democrats to get the plan pushed through. The Dems see an opening there, and are going to attach it to their pet housing bill, adding in the part that has led Bush to threaten a veto: $4 billion to fix up homes in foreclosure to help them - and other homes in their neighborhoods - sell. Bush has argued, correctly, that the money would be a windfall to the lenders that own the homes, not to homeowners themselves.
So we'll see what the final bill looks like, and whether it gets passed. My guesses on those two questions are "Frankenstein" and "no."
I've already weighed in on why I think extending more credit to Fannie and Freddie is stupid, so I won't subject you to more of that rant. But on a related note, Paulson has said the government would use the backstop funding and buy the companies' stock "only if necessary."
Give me a break, for crying out loud.
To use my earlier analogy, if you tell a crack addict you have more crack available, he's going to make sure he gets it. Fannie and Freddie will simply leverage themselves further, ensuring the "necessity" of additional credit. Giving these guys more credit without raising their capital requirements is borderline criminal. Granted, they couldn't raise more capital if they tried (without the government providing it, of course) - which is exactly why they should be allowed to fail.
And what if they did? Well, yes, mortgage credit would get a lot more expensive. Banks would have to accept the risks of the loans they underwrite, because they'd hold them on their books. In hindsight, given the subprime debacle, that would be a good thing.
For banks to be able to live with that risk, they'd hold more capital themselves. That would also be a good thing. And they'd tighten their underwriting standards - another good thing.
Tighter underwriting standards and higher credit cost would mean a decline in homeownership, which Washington views as a bad thing. But what it would mean is that people would save more and keep their credit records cleaner, and be more responsible with their money, and that only those responsible, thrifty people who'd saved for a reasonable down payment and could afford the monthly tab would become homeowners.
And that's a very, very good thing. More on that later.
Congress pretty much handed Hank his arse on this one, from both sides of the aisle. Seems they just don't have enough faith in Hank to want to write him a blank check - and that's a pretty sad note, when a bunch of free-spending pork-happy crooks don't trust you with money that isn't theirs anyway.
Sen. Richard Shelby (R-AL) said, "I think you are risking taxpayer dollars here." And Sen. Robert Menendez (D-NJ) added, "How is it that we can tell the taxpayers that there is no way (they) are going to be put on the hook here?" (I'm frankly surprised that Hank didn't just shrug and respond, "Lie to them - it always works for me.")
But the best exchange came between Hank and Kentucky Republican Jim Bunning:
Bunning: "When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. You want an unlimited amount and some of us at this table don't like an unlimited amount of federal dollars. Do you really think we can believe exactly what you are saying, Secretary Paulson?"
Paulson: "I believe everything I say. I've been around markets for a long time." (Note: just because Paulson believes everything he says is no reason the rest of us should be so naive.)
Bunning: "So have I. Where will the money come from if, in fact, we have to use the backstop?"
Paulson: "From the government."
Bunning: "And who is the government?" (Note: this reminds me of the classic line, "And what is the magic word, Dr. Venkman?" from "Ghostbusters.")
Paulson: "The taxpayer." (Owned.) Paulson goes on to tell Bunning if he doesn't like the plan, he should vote against it.
Bunning: "I will do everything I can to stop it."
Paulson: "And maybe you can come up with a better plan."
The situation is so screwed up that President Bush finds himself having to rely on Democrats to get the plan pushed through. The Dems see an opening there, and are going to attach it to their pet housing bill, adding in the part that has led Bush to threaten a veto: $4 billion to fix up homes in foreclosure to help them - and other homes in their neighborhoods - sell. Bush has argued, correctly, that the money would be a windfall to the lenders that own the homes, not to homeowners themselves.
So we'll see what the final bill looks like, and whether it gets passed. My guesses on those two questions are "Frankenstein" and "no."
I've already weighed in on why I think extending more credit to Fannie and Freddie is stupid, so I won't subject you to more of that rant. But on a related note, Paulson has said the government would use the backstop funding and buy the companies' stock "only if necessary."
Give me a break, for crying out loud.
To use my earlier analogy, if you tell a crack addict you have more crack available, he's going to make sure he gets it. Fannie and Freddie will simply leverage themselves further, ensuring the "necessity" of additional credit. Giving these guys more credit without raising their capital requirements is borderline criminal. Granted, they couldn't raise more capital if they tried (without the government providing it, of course) - which is exactly why they should be allowed to fail.
And what if they did? Well, yes, mortgage credit would get a lot more expensive. Banks would have to accept the risks of the loans they underwrite, because they'd hold them on their books. In hindsight, given the subprime debacle, that would be a good thing.
For banks to be able to live with that risk, they'd hold more capital themselves. That would also be a good thing. And they'd tighten their underwriting standards - another good thing.
Tighter underwriting standards and higher credit cost would mean a decline in homeownership, which Washington views as a bad thing. But what it would mean is that people would save more and keep their credit records cleaner, and be more responsible with their money, and that only those responsible, thrifty people who'd saved for a reasonable down payment and could afford the monthly tab would become homeowners.
And that's a very, very good thing. More on that later.
Tuesday, July 15, 2008
And Another Thing -
I’m not done ranting about the Fannie/Freddie bailout yet. My wife and I were discussing it last night, and she said, “Isn’t increasing their credit lines like somebody getting a credit card with a $10,000 limit, and they charge it up to the limit, then the bank sends them a letter telling them that it’s increasing the limit to $15,000?”
Which, of course, happens all the time, so ingrained in our collective psyche is debt addiction, so it’s little wonder that it extends all the way to our institutions, which, after all, are run by people.
“Yes,” I said, “but in this case, the letter is sent after the cardholder has not only charge up the balance to the max, but has started missing payments.”
Perhaps a better analogy is a crack addict who’s admitted to the hospital after a near-fatal overdose. After saving his life, the doctor asks who his dealer is, and how he can contact him. So the doc calls the dealer and asks him to up the addict’s daily supply of crack. When the dealer asks who will pay, the doc says, “Don’t worry, the hospital will cover it – we’ll just raise the prices we charge everybody else for medical care.”
Apparently the markets don’t like the bailout either. In fact, I have yet to hear of anyone who does.
************
Here’s an interesting item: a credit strategist at Deutsche Bank has come up with a pretty intuitive reason why total financial losses are likely to hit a trillion dollars or more (they’re currently at $400 billion, and I’ve seen estimates ranging from $1.2-1.6 trillion).
He notes that since the dot-com bubble, the US financial sector has seen annualized profit growth well in excess of nominal GDP growth. Based on that, he concludes that the sector has earned $1.2 trillion in “excess” profits, unless one can demonstrate that “the financial sector has seen a sustainable structural change in its business model over the last decade or that it is uniquely positioned to exploit strong global growth.”
Now, I could possibly buy into the latter, at least to a limited degree, but I know for a fact the former is not the case. He goes on to conclude that “mean reversion would suggest that $1.2 trillion of profits needs to be wiped out before the US financial sector can be cleansed of the excesses of the last decade.”
This may seem an over-simplification, and those who choose to look at the world through rose-colored glasses will, of course, reject the notion. But on what basis? The tired argument that “things are different this time?” “We’re in a new economy?”
I said it in 1998, and I said it again last year, and I’ll say it now, and until I’m blue in the face: We have not been in a “new economy” since we were all wearing animal skins and trading rocks.
I’m a big believer in mean reversion. I used the same logic to look at excess home building above long-term demand projections from the beginning of the decade to the peak of the housing bubble in 2005. I concluded that builders had built 1.4 million excess homes relative to demand. Based on that analysis, in mid-2007 I predicted that housing starts would fall to less than 700k annualized over the next two to three years. At the time of my prediction, starts were at 1.3 million annualized. As of May – about a year after my prediction – they were 975k, or about halfway there.
Like it or not, some things are indeed mean-reverting.
************
One more sign of the times: I saw an ad on CNBC this morning for some ambulance-chaser law firm saying, "Did your broker sell you auction-rate municipal bonds? You may have a claim!" That was a new one on me.
Which, of course, happens all the time, so ingrained in our collective psyche is debt addiction, so it’s little wonder that it extends all the way to our institutions, which, after all, are run by people.
“Yes,” I said, “but in this case, the letter is sent after the cardholder has not only charge up the balance to the max, but has started missing payments.”
Perhaps a better analogy is a crack addict who’s admitted to the hospital after a near-fatal overdose. After saving his life, the doctor asks who his dealer is, and how he can contact him. So the doc calls the dealer and asks him to up the addict’s daily supply of crack. When the dealer asks who will pay, the doc says, “Don’t worry, the hospital will cover it – we’ll just raise the prices we charge everybody else for medical care.”
Apparently the markets don’t like the bailout either. In fact, I have yet to hear of anyone who does.
************
Here’s an interesting item: a credit strategist at Deutsche Bank has come up with a pretty intuitive reason why total financial losses are likely to hit a trillion dollars or more (they’re currently at $400 billion, and I’ve seen estimates ranging from $1.2-1.6 trillion).
He notes that since the dot-com bubble, the US financial sector has seen annualized profit growth well in excess of nominal GDP growth. Based on that, he concludes that the sector has earned $1.2 trillion in “excess” profits, unless one can demonstrate that “the financial sector has seen a sustainable structural change in its business model over the last decade or that it is uniquely positioned to exploit strong global growth.”
Now, I could possibly buy into the latter, at least to a limited degree, but I know for a fact the former is not the case. He goes on to conclude that “mean reversion would suggest that $1.2 trillion of profits needs to be wiped out before the US financial sector can be cleansed of the excesses of the last decade.”
This may seem an over-simplification, and those who choose to look at the world through rose-colored glasses will, of course, reject the notion. But on what basis? The tired argument that “things are different this time?” “We’re in a new economy?”
I said it in 1998, and I said it again last year, and I’ll say it now, and until I’m blue in the face: We have not been in a “new economy” since we were all wearing animal skins and trading rocks.
I’m a big believer in mean reversion. I used the same logic to look at excess home building above long-term demand projections from the beginning of the decade to the peak of the housing bubble in 2005. I concluded that builders had built 1.4 million excess homes relative to demand. Based on that analysis, in mid-2007 I predicted that housing starts would fall to less than 700k annualized over the next two to three years. At the time of my prediction, starts were at 1.3 million annualized. As of May – about a year after my prediction – they were 975k, or about halfway there.
Like it or not, some things are indeed mean-reverting.
************
One more sign of the times: I saw an ad on CNBC this morning for some ambulance-chaser law firm saying, "Did your broker sell you auction-rate municipal bonds? You may have a claim!" That was a new one on me.
Monday, July 14, 2008
Outrageous!
Hank Paulson has recently been making sense. That confused me. Thanks, Hank, for returning to form and ending my head-scratching.
Hank has now bailed out Fannie Mae and Freddie Mac. The bailout plan includes opening the Fed's discount window to the two mortgage insurers (more on that later). In addition, Hank will ask Congress to approve increasing the Treasury's lines of credit to them, and buying Freddie and Fannie stock.
Wait - didn't Hank say over the weekend that a rescue plan shouldn't benefit Fannie and Freddie's shareholders? How does providing bid support for the stock not benefit them? The shareholders should be at risk, Hank. That's the nature of an equity investment. Taxpayers shouldn't be shareholders unless they want to be - I have no desire to be a shotgun bride to those two outfits. Hank is a pinko.
As for Bernanke opening the discount window, just how deep is the window, anyway? We's better find out soon, because the banks are going to start hitting it hard, now that IndyMac's gone down (more on that later, too). And he's already opened the window to investment banks. And he said not too long ago that they might keep it open to investment banks next year, even though the original plan was just to give them access this year.
Detour: Of course, that was predicated on the foolish belief that the credit crisis would be over by then. Let me stand on my desk and shout:
THE CREDIT CRISIS WILL NOT END BEFORE THE END OF 2009.
Perhaps not even then, because every move the Fed and the Treasury make just makes it worse. They respond to panic with things that will just extend and exacerbate the problems people are panicking over. And they reward the wrong behavior. So the crisis may not end until it reaches catastrophic proportions.
Back on course: So now, we're opening the discount window to Freddie and Fannie. Who's next? MBIA, FGIC and Ambac? S&P? Moody's? How long before the window runs dry, and we have to start printing money, sending inflation even higher? How long before the dollar becomes the new peso? (To quote Marty Feldman, "Oops - too late!") How long before we have to seek capital infusions from foreign nations, like Wall Street has? (Repeat the Feldman quote.)
Now, on IndyMac. Why was Bear too big to fail, and IndyMac's not? Ostensibly because if Bear fell, Lehman would follow, then Merrill, then ... Ben (who's a pansy, by the way) and Hank didn't want to start a domino effect.
And the IndyMac failure won't trigger the same in the banking sector? Do you know how many headlines I've read today alluding to that very outcome, or predicting the next name to go belly-up? Me neither; I've lost count. But WaMu's down 35% today, National City's down 15%, Zions Bank (my personal bet for the next shoe to drop) is off 23%, SunTrust is down 9%, and Wachovia fell 15%.
Jim Rogers - who's right a lot more than he's wrong - called the Fannie/Freddie bailout "an unmitigated disaster," and he accused Ben and Hank of bailing out their Wall Street cronies. He may be right.
************
Two more outrageous items. First, I read this morning that Citi has about $1.1 trillion off-balance sheet - about half its total balance sheet size. The money is in various shadowy financing vehicles, some 7,000 different ones. As it takes more and more of them back onto its books, its losses are mounting.
Now, the Financial Accounting Standards Board (FASB) wants the big financials to value off-balance sheet assets and liabilities every quarter.
Citi's deputy controller sent FASB a letter objecting to that requirement, saying "We would not be able to perform this analysis given the resources we currently have."
There are two things wrong with this picture. First, when an authority requires you to do something, not being able to do it is not a tenable defense, last time I checked. (But in case it now is, hey, IRS, I can't figure out how much tax I owe you.)
Second, and far more ominous, is the notion that the largest financial institution in the world can't value what it owns - more than a trillion dollars worth (well, we think) of what it owns. The translation of the quote above is, "We have no earthly clue what this crap is worth."
The last bit of outrageousness today is a quote from a mortgage broker commenting on the impact of the Freddie/Fannie fallout on mortgage lending. "Some lenders are really pulling in their horns," he says. "They're demanding really clean loan applications with every i dotted and every t crossed."
I'm going to shout again: IF THEY'D DEMANDED REALLY CLEAN LOAN APPLICATIONS WITH EVERY I DOTTED AND EVERY T CROSSED IN THE FIRST PLACE, AS THEY SHOULD HAVE, WE WOULDN'T BE IN THIS FREAKING MESS TODAY!!
There, I feel better.
Hank has now bailed out Fannie Mae and Freddie Mac. The bailout plan includes opening the Fed's discount window to the two mortgage insurers (more on that later). In addition, Hank will ask Congress to approve increasing the Treasury's lines of credit to them, and buying Freddie and Fannie stock.
Wait - didn't Hank say over the weekend that a rescue plan shouldn't benefit Fannie and Freddie's shareholders? How does providing bid support for the stock not benefit them? The shareholders should be at risk, Hank. That's the nature of an equity investment. Taxpayers shouldn't be shareholders unless they want to be - I have no desire to be a shotgun bride to those two outfits. Hank is a pinko.
As for Bernanke opening the discount window, just how deep is the window, anyway? We's better find out soon, because the banks are going to start hitting it hard, now that IndyMac's gone down (more on that later, too). And he's already opened the window to investment banks. And he said not too long ago that they might keep it open to investment banks next year, even though the original plan was just to give them access this year.
Detour: Of course, that was predicated on the foolish belief that the credit crisis would be over by then. Let me stand on my desk and shout:
THE CREDIT CRISIS WILL NOT END BEFORE THE END OF 2009.
Perhaps not even then, because every move the Fed and the Treasury make just makes it worse. They respond to panic with things that will just extend and exacerbate the problems people are panicking over. And they reward the wrong behavior. So the crisis may not end until it reaches catastrophic proportions.
Back on course: So now, we're opening the discount window to Freddie and Fannie. Who's next? MBIA, FGIC and Ambac? S&P? Moody's? How long before the window runs dry, and we have to start printing money, sending inflation even higher? How long before the dollar becomes the new peso? (To quote Marty Feldman, "Oops - too late!") How long before we have to seek capital infusions from foreign nations, like Wall Street has? (Repeat the Feldman quote.)
Now, on IndyMac. Why was Bear too big to fail, and IndyMac's not? Ostensibly because if Bear fell, Lehman would follow, then Merrill, then ... Ben (who's a pansy, by the way) and Hank didn't want to start a domino effect.
And the IndyMac failure won't trigger the same in the banking sector? Do you know how many headlines I've read today alluding to that very outcome, or predicting the next name to go belly-up? Me neither; I've lost count. But WaMu's down 35% today, National City's down 15%, Zions Bank (my personal bet for the next shoe to drop) is off 23%, SunTrust is down 9%, and Wachovia fell 15%.
Jim Rogers - who's right a lot more than he's wrong - called the Fannie/Freddie bailout "an unmitigated disaster," and he accused Ben and Hank of bailing out their Wall Street cronies. He may be right.
************
Two more outrageous items. First, I read this morning that Citi has about $1.1 trillion off-balance sheet - about half its total balance sheet size. The money is in various shadowy financing vehicles, some 7,000 different ones. As it takes more and more of them back onto its books, its losses are mounting.
Now, the Financial Accounting Standards Board (FASB) wants the big financials to value off-balance sheet assets and liabilities every quarter.
Citi's deputy controller sent FASB a letter objecting to that requirement, saying "We would not be able to perform this analysis given the resources we currently have."
There are two things wrong with this picture. First, when an authority requires you to do something, not being able to do it is not a tenable defense, last time I checked. (But in case it now is, hey, IRS, I can't figure out how much tax I owe you.)
Second, and far more ominous, is the notion that the largest financial institution in the world can't value what it owns - more than a trillion dollars worth (well, we think) of what it owns. The translation of the quote above is, "We have no earthly clue what this crap is worth."
The last bit of outrageousness today is a quote from a mortgage broker commenting on the impact of the Freddie/Fannie fallout on mortgage lending. "Some lenders are really pulling in their horns," he says. "They're demanding really clean loan applications with every i dotted and every t crossed."
I'm going to shout again: IF THEY'D DEMANDED REALLY CLEAN LOAN APPLICATIONS WITH EVERY I DOTTED AND EVERY T CROSSED IN THE FIRST PLACE, AS THEY SHOULD HAVE, WE WOULDN'T BE IN THIS FREAKING MESS TODAY!!
There, I feel better.
Wednesday, July 9, 2008
Another Bipolar Rally and Other Stuff
Stock traders didn't let us down yesterday. Oil fell more than $5/barrel, to a little more than $136.
Wait - isn't that still really expensive? When oil was rising through that level, just a couple of weeks ago, the Dow was shedding more than 250 points over about a four-day period. Yesterday, we get a 150-point rally for hitting that level.
Oh, and why did oil fall? Reduced concerns that Iran might threaten Israel.
So what's Iran up to today? Oh, just testing a little long-range missile - one that can easily reach Tel Aviv or Jerusalem. So oil's up, and stocks are down.
************
Here's more nonsense from a Bloomberg story: "Treasuries fell as stocks rose and concern eased that mortgage-related losses at banks and financial companies will widen."
Oh, really? If those concerns have abated, then why are mortgage spreads widening back out to the 22-year highs they reached in March before the Bear Stearns bailout? The widest spreads since we've had a secondary mortgage market ought to tell us something, as should a doubling of the credit default swap spreads on Fannie Mae and Freddie Mac.
The financials have written down about $400 billion thus far, right? Every estimate out there is that credit market losses will ultimately hit anywhere from $1.3 trillion to $1.6 trillion. So we're only about a quarter to a third of the way through this mess. Trust me, the losses will widen (especially with rates now rising).
A bond trader interviewed for the article said, "Financials have hit bottom or are close to it. The Fed has a grip on the financial downside."
Riiiiight.
************
We now turn our attention from nonsense to good sense, and from a most unlikely source: Hank Paulson. The architect of the monumentally silly "HOPE NOW" plan said, "Many of today's unusually high number of foreclosures are not preventable. There is little public policymakers can, or should, do to compensate for untenable financial decisions." (Emphasis added.)
Wow.
Don't get me wrong, I don't disagree. In fact, this is probably one of the first times I've found myself in complete agreement with Hank. It's just something of a shock coming from him.
Wait - isn't that still really expensive? When oil was rising through that level, just a couple of weeks ago, the Dow was shedding more than 250 points over about a four-day period. Yesterday, we get a 150-point rally for hitting that level.
Oh, and why did oil fall? Reduced concerns that Iran might threaten Israel.
So what's Iran up to today? Oh, just testing a little long-range missile - one that can easily reach Tel Aviv or Jerusalem. So oil's up, and stocks are down.
************
Here's more nonsense from a Bloomberg story: "Treasuries fell as stocks rose and concern eased that mortgage-related losses at banks and financial companies will widen."
Oh, really? If those concerns have abated, then why are mortgage spreads widening back out to the 22-year highs they reached in March before the Bear Stearns bailout? The widest spreads since we've had a secondary mortgage market ought to tell us something, as should a doubling of the credit default swap spreads on Fannie Mae and Freddie Mac.
The financials have written down about $400 billion thus far, right? Every estimate out there is that credit market losses will ultimately hit anywhere from $1.3 trillion to $1.6 trillion. So we're only about a quarter to a third of the way through this mess. Trust me, the losses will widen (especially with rates now rising).
A bond trader interviewed for the article said, "Financials have hit bottom or are close to it. The Fed has a grip on the financial downside."
Riiiiight.
************
We now turn our attention from nonsense to good sense, and from a most unlikely source: Hank Paulson. The architect of the monumentally silly "HOPE NOW" plan said, "Many of today's unusually high number of foreclosures are not preventable. There is little public policymakers can, or should, do to compensate for untenable financial decisions." (Emphasis added.)
Wow.
Don't get me wrong, I don't disagree. In fact, this is probably one of the first times I've found myself in complete agreement with Hank. It's just something of a shock coming from him.
Tuesday, July 8, 2008
Barack Obama: A Man of His Word
I truly believe that - honest. Throughout this campaign, Obama has promised "Change you can believe in." And I think he'll deliver on that promise. In fact, he already is.
He's changing positions on everything from the economy to (gasp!) Iraq, the topic on which supposedly he and he alone was steadfast from the get-go.
And he's doing so only in part, methinks, for the reason all politicians do when they switch from primary to general election mode; that being the tendency to run toward the middle come general race time.
I believe the other reason - the more ominous reason - for the waffling is that the relatively inexperienced Obama is feeling his way on these topics, testing the economic winds, realizing that many of his initial pie-in-the-sky idealistic visions are simply unworkable in practice.
And I believe - I believe that is the real Barack Obama. I believe sitting at the big desk in the Oval Office would expose his inexperience painfully, and we'd get more switching of gears. And I don't think we want that soft underbelly exposed to potential nuclear rivals like Korea and Iran, nor to economic rivals like Russia and China.
************
Lest I be accused of partisanship, McCain is playing his own tricks. Demonstrating his firm establishment as a Washington insider, part of The System, The Machine, he's promised to balance the budget by ... 2013.
Brilliant. One of the oldest campaign gambits in the book. "I promise that if you elect me - then re-elect me - one year into my second term I'll deliver the goods." But there's the rub - you gotta promise two terms, or it won't get done.
Besides it being an old political gambit, in this instance it's just plain impossible. No way is the US budget balanced by 2013, I don't care who's President. I liked McCain better when he was saying the cure for the housing crisis was time.
************
One more politician in my sights today: Bill Clinton, who stooped to what is, even for him, a new low. He was talking about Nelson Mandela's captivity, and managed to segue that into a general observation about POWs: that at some point, their experience will come back to haunt them, and they'll snap.
Poppycock. We've all seen Bill Clinton snap, plenty of times, and he wouldn't have lasted a day as a POW. He'd have given up every secret he knew, from military intel to the phone numbers of every intern in the Beltway.
He's changing positions on everything from the economy to (gasp!) Iraq, the topic on which supposedly he and he alone was steadfast from the get-go.
And he's doing so only in part, methinks, for the reason all politicians do when they switch from primary to general election mode; that being the tendency to run toward the middle come general race time.
I believe the other reason - the more ominous reason - for the waffling is that the relatively inexperienced Obama is feeling his way on these topics, testing the economic winds, realizing that many of his initial pie-in-the-sky idealistic visions are simply unworkable in practice.
And I believe - I believe that is the real Barack Obama. I believe sitting at the big desk in the Oval Office would expose his inexperience painfully, and we'd get more switching of gears. And I don't think we want that soft underbelly exposed to potential nuclear rivals like Korea and Iran, nor to economic rivals like Russia and China.
************
Lest I be accused of partisanship, McCain is playing his own tricks. Demonstrating his firm establishment as a Washington insider, part of The System, The Machine, he's promised to balance the budget by ... 2013.
Brilliant. One of the oldest campaign gambits in the book. "I promise that if you elect me - then re-elect me - one year into my second term I'll deliver the goods." But there's the rub - you gotta promise two terms, or it won't get done.
Besides it being an old political gambit, in this instance it's just plain impossible. No way is the US budget balanced by 2013, I don't care who's President. I liked McCain better when he was saying the cure for the housing crisis was time.
************
One more politician in my sights today: Bill Clinton, who stooped to what is, even for him, a new low. He was talking about Nelson Mandela's captivity, and managed to segue that into a general observation about POWs: that at some point, their experience will come back to haunt them, and they'll snap.
Poppycock. We've all seen Bill Clinton snap, plenty of times, and he wouldn't have lasted a day as a POW. He'd have given up every secret he knew, from military intel to the phone numbers of every intern in the Beltway.
Thursday, July 3, 2008
Another Brainless Rally (and Other Stuff)
Stock traders are a funny lot. Tuesday we learn that GM's sales are down 18%, but GM leads the market from a triple-digit loss to close modestly higher. Wednesday, sanity returned, as a Merrill Lynch analyst downgrades GM's stock, reporting the company needs to raise about $15 billion to avoid bankruptcy. GM falls, as does the rest of the market, with the Dow retreating more than 165 points into official bear-market territory, closing more than 20% below October's high.
So this morning, following a report that payroll losses for June exceeded the forecast, and with May's job losses revised higher, plus unemployment insurance claims spiked to near a cyclical high and the service sector contracted, what happens?
GM leads stocks about 70 points higher. Go figure. The only explanation is that most of the traders were gone early for the holiday, as evidenced by the light volume. Apparently only the dumb ones stuck around.
************
Moody's is going to examine its computer models to make sure they accurately assess risk, after discovering a glitch in one of them that resulting in rating about $1 billion in complex structured debt AAA, when it should have been rating lower.
Let me repeat that first part: Moody's, one of the big three ratings agencies, is going to examine its computer models to make sure they accurately assess risk.
Are you kidding me?? Shouldn't this have been done before the models were used to assess risk and assign ratings? Can we believe anything the ratings agencies say anymore?
************
Memo to Hank Paulson (to steal a film title from The Talking Heads): stop making sense. Seriously, you're scaring me. You've never made sense before. Are you well?
Hank recently expressed the opinion that the government should not be in the business of bailing out big financial firms. Some notable quotes: "We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm ... Two concerns underpin expectations of regulatory intervention to prevent a failure. They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so - and that requires that we reduce the likelihood that it is so."
I wholeheartedly agree, as a free-market guy. It's just a shame Hank didn't hold these views when he and his pal Helicopter Ben put taxpayers' money on the line to bail out Bear Stearns.
Hank now says he thinks presidential approval should be required for such action. I know that he, Ben, New York Fed Bank President Tim Geithner, and Jamie Dimon, CEO of JP Morgan Chase (which received a windfall when it got Bear for a song and at the same time got to off-load $30 billion of Bear's most toxic waste to a shell company created by the Fed and funded by taxpayers), were all in on the talks to rescue Bear. I don't recall hearing anything about the President being consulted.
************
Another sign of the times: arson is up this year. Why? Home foreclosures. There were four suspicious fires that destroyed foreclosed homes in New Bedford, Massachusetts in April alone. Fire chiefs in hard-hit states like California, Nevada, Massachusetts and Ohio are seeing more foreclosed houses burn, as the defaulted owners seek to collect insurance money or thrill seekers set empty houses ablaze.
Wow.
On that note, have a safe Fourth of July, and remember why you're celebrating. Freedom isn't free.
So this morning, following a report that payroll losses for June exceeded the forecast, and with May's job losses revised higher, plus unemployment insurance claims spiked to near a cyclical high and the service sector contracted, what happens?
GM leads stocks about 70 points higher. Go figure. The only explanation is that most of the traders were gone early for the holiday, as evidenced by the light volume. Apparently only the dumb ones stuck around.
************
Moody's is going to examine its computer models to make sure they accurately assess risk, after discovering a glitch in one of them that resulting in rating about $1 billion in complex structured debt AAA, when it should have been rating lower.
Let me repeat that first part: Moody's, one of the big three ratings agencies, is going to examine its computer models to make sure they accurately assess risk.
Are you kidding me?? Shouldn't this have been done before the models were used to assess risk and assign ratings? Can we believe anything the ratings agencies say anymore?
************
Memo to Hank Paulson (to steal a film title from The Talking Heads): stop making sense. Seriously, you're scaring me. You've never made sense before. Are you well?
Hank recently expressed the opinion that the government should not be in the business of bailing out big financial firms. Some notable quotes: "We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm ... Two concerns underpin expectations of regulatory intervention to prevent a failure. They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so - and that requires that we reduce the likelihood that it is so."
I wholeheartedly agree, as a free-market guy. It's just a shame Hank didn't hold these views when he and his pal Helicopter Ben put taxpayers' money on the line to bail out Bear Stearns.
Hank now says he thinks presidential approval should be required for such action. I know that he, Ben, New York Fed Bank President Tim Geithner, and Jamie Dimon, CEO of JP Morgan Chase (which received a windfall when it got Bear for a song and at the same time got to off-load $30 billion of Bear's most toxic waste to a shell company created by the Fed and funded by taxpayers), were all in on the talks to rescue Bear. I don't recall hearing anything about the President being consulted.
************
Another sign of the times: arson is up this year. Why? Home foreclosures. There were four suspicious fires that destroyed foreclosed homes in New Bedford, Massachusetts in April alone. Fire chiefs in hard-hit states like California, Nevada, Massachusetts and Ohio are seeing more foreclosed houses burn, as the defaulted owners seek to collect insurance money or thrill seekers set empty houses ablaze.
Wow.
On that note, have a safe Fourth of July, and remember why you're celebrating. Freedom isn't free.
Wednesday, July 2, 2008
Here's Your Sign
Stocks continue to ignore what the rest of the world is telling them. Yesterday’s auto sales report should have sent the Dow, which at one point during the day was trading off nearly 150 points, reeling further. Instead, GM of all companies led a rally to close up almost 35 points. The rationale? GM's 18% year-over-year sales drop could have been worse.
This morning, stocks are again trading higher in spite of the ADP report, with the financials leading the way on “speculation that banks have raised enough capital to weather credit-market losses,” according to Bloomberg. Given that there’s been no concrete information reported to substantiate that speculation, the rally is obviously of the “we want a rally, so let’s create a reason for one” sort. The only news from the financials is that Merrill Lynch’s quarterly loss estimate from subprime-related write-downs was revised higher.
The market seems loathe to break into the technical definition of a bear market, which happens about 60 points below where the Dow’s currently trading. It’s off 19.5% from October’s highs already; really, how significant is that half-point difference? We’re in a bear market, folks. And it's going to get worse. One money manager noted this morning, "The market will be dictated by the financials." In that case, brace yourselves.
************
Another reason things will get bumpier is that the trickle-down from subprime defaults is now spreading into other debt sectors, including home equity lines of credit (HELOCs) and credit cards. Delinquent payments on the latter have reached the highest point in 2006, according to the American Bankers' Association, and HELOC delinquencies increased at their fastest pace since 1987. Given the heavy use of HELOCs in the most recent cycle as compared to the '80s, that's an ominous signal.
************
The reason for the title of today's post - borrowed from comedian Bill Engvall - is three economic signs of the times I've recently run across, one of which I read about and two of which I observed.
Let me state emphatically that the one I read about is that brothels in Nevada, which allows legalized prostitution in certain counties, are offering gas cards to their customers. Apparently truckers comprise the bulk of their business, and with soaring fuel costs they're not leaving the highway to stop at the brothels. A few of the "ranches" also offered a two-for-one promotion for customers who brought in their tax rebate checks. Stimulus, indeed.
The second sign came from a clothing catalog I receive regularly, from a company called The Territory Ahead. I like their stuff, but it's a bit pricey for my tastes. I've never seen them offer deep discounts - the occasional "10% off a purchase of $100 or more" at Christmas, but that's about it. Their latest catalog offers a number of sizeable discounts, however, and not just on the stuff that you knew would wind up in the bargain bin due to its ugliness, or on out-of-season stuff. One particularly attractive short-sleeved shirt, originally priced at $45, is going for $19.99. Gotta compete with the Wal-Marts of the world, which are the only retailers doing well these days.
The final sign came from a visit to Chipotle. Higher food costs have not resulted in price increases at the popular fast-food chain, I'm happy to report. However, they have resulted in smaller portions. I noticed when they made my Burrito Bol they put in about two-thirds the rice they used to start with, and a scant few onions and peppers (for the fajita version). The chicken was skimped on as well. So inflation is with us, in the form of not only higher prices but reduced servings. Looking at my waistline, that may not be a bad thing - a little deflation there is in order.
This morning, stocks are again trading higher in spite of the ADP report, with the financials leading the way on “speculation that banks have raised enough capital to weather credit-market losses,” according to Bloomberg. Given that there’s been no concrete information reported to substantiate that speculation, the rally is obviously of the “we want a rally, so let’s create a reason for one” sort. The only news from the financials is that Merrill Lynch’s quarterly loss estimate from subprime-related write-downs was revised higher.
The market seems loathe to break into the technical definition of a bear market, which happens about 60 points below where the Dow’s currently trading. It’s off 19.5% from October’s highs already; really, how significant is that half-point difference? We’re in a bear market, folks. And it's going to get worse. One money manager noted this morning, "The market will be dictated by the financials." In that case, brace yourselves.
************
Another reason things will get bumpier is that the trickle-down from subprime defaults is now spreading into other debt sectors, including home equity lines of credit (HELOCs) and credit cards. Delinquent payments on the latter have reached the highest point in 2006, according to the American Bankers' Association, and HELOC delinquencies increased at their fastest pace since 1987. Given the heavy use of HELOCs in the most recent cycle as compared to the '80s, that's an ominous signal.
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The reason for the title of today's post - borrowed from comedian Bill Engvall - is three economic signs of the times I've recently run across, one of which I read about and two of which I observed.
Let me state emphatically that the one I read about is that brothels in Nevada, which allows legalized prostitution in certain counties, are offering gas cards to their customers. Apparently truckers comprise the bulk of their business, and with soaring fuel costs they're not leaving the highway to stop at the brothels. A few of the "ranches" also offered a two-for-one promotion for customers who brought in their tax rebate checks. Stimulus, indeed.
The second sign came from a clothing catalog I receive regularly, from a company called The Territory Ahead. I like their stuff, but it's a bit pricey for my tastes. I've never seen them offer deep discounts - the occasional "10% off a purchase of $100 or more" at Christmas, but that's about it. Their latest catalog offers a number of sizeable discounts, however, and not just on the stuff that you knew would wind up in the bargain bin due to its ugliness, or on out-of-season stuff. One particularly attractive short-sleeved shirt, originally priced at $45, is going for $19.99. Gotta compete with the Wal-Marts of the world, which are the only retailers doing well these days.
The final sign came from a visit to Chipotle. Higher food costs have not resulted in price increases at the popular fast-food chain, I'm happy to report. However, they have resulted in smaller portions. I noticed when they made my Burrito Bol they put in about two-thirds the rice they used to start with, and a scant few onions and peppers (for the fajita version). The chicken was skimped on as well. So inflation is with us, in the form of not only higher prices but reduced servings. Looking at my waistline, that may not be a bad thing - a little deflation there is in order.
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